Elasticity of Supply

What is it and how is it measured?

Elasticity Defined
 Elasticity is defined by Amosweb.com as “The
relative response of one variable to changes
in another variable”.
 For our purposes, the two variables are:
 The quantity supplied
 Price
Elasticity can take three forms:
 Elastic:
 When the quantity supplied is very sensitive to
price
 Inelastic:
 When the quantity supplied is not very
sensitive to price
 Unitary Elastic
 When the quantity supplied moves in lock-step
with price change
Elasticity is calculated as follows:
 1. Calculate the percentage change in Quantity
Supplied
 Absolute value of [(Initial Quantity – New Quantity) /
((Initial Quantity + New Quantity)/2))] * 100 =
percentage (%) change of quantity supplied
 2. Calculate the percentage change in Price
 Absolute value of [(Initial Price – New Price) / ((Initial
Price + New Price)/2))] * 100 = percentage (%) change
of price
 3. Calculate the Elasticity
 % change of Quantity / % change of Price = Elasticity
What do the numbers mean?
 If the result of the Elasticity calculation is
greater than 1, the relationship is said to be
Elastic.
 If the result of the Elasticity calculation is less
than 1, the relationship is said to be Inelastic.
 If the result of the Elasticity calculation is
exactly 1, the relationship is said to be Unitary
Elastic.
Elastic Supply
 When Supply is Elastic, price has a large
impact on the supply for a good.
 Elastic Supply often reflects a longer period of
time as Supply is often difficult to change in
the short term as many production factors
must be considered.
 Put simply, if a Producer can collect a large
price for an item, they will supply more of it –
as soon as they can.
Inelastic Supply
 When Supply is Inelastic, price does not have
a large impact on the supply for a good.
 Inelastic Supply generally reflects a short
period of time as Supply is often difficult to
change quickly as many production factors
must be considered.
 Essentials, such as food, are generally
Inelastic.
Unitary Elastic Supply
 When Supply is Unitary Elastic, price and
quantity demanded move in lock step.
 This indicates that the percentage change in
the price of the good will equal the
percentage change in the demand for the
good.
 This is a special case scenario.