Price Elasticity of Supply
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What Is Price Elasticity of Supply?
Price elasticity of supply measures how responsive the quantity supplied of a good is to a change in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. Because supply obeys the law of supply, the value is normally positive: a higher price draws out more output. Supply is elastic when the value exceeds 1, meaning producers respond strongly, and inelastic when it falls below 1, meaning output changes little as price moves. Elasticity of supply depends heavily on time and on how easily producers can adjust inputs, expand capacity, or shift resources into producing the good.
Why It Matters
Price elasticity of supply captures how quickly and fully producers can react to price signals, which shapes how markets respond to demand changes. When supply is inelastic, as with goods that need long lead times, specialized inputs, or fixed capacity, a jump in demand raises price sharply because output cannot expand fast. When supply is elastic, the same demand increase mostly raises quantity, with little price movement. Elasticity of supply also determines tax incidence alongside demand elasticity: the more inelastic side of the market bears the larger share of a per-unit tax. Because supply generally grows more elastic over time as firms build capacity and new firms enter, short-run and long-run responses can differ dramatically.