Price Elasticity of Supply

It compares the percentage change in quantity supplied with the percentage change in price. If producers can quickly increase output when prices rise, supply is elastic. If output is hard to change, supply is inelastic.

For example, if the price of a product rises by 10% and producers increase the quantity supplied by 15%, the price elasticity of supply is 1.5, so supply is elastic. If quantity supplied rises by only 3%, the elasticity is 0.3, so supply is inelastic.

Several factors affect it. Supply is more elastic when production can be increased easily, when spare capacity or stocks are available, when inputs are easy to obtain and over longer periods. Supply is less elastic for goods that take a long time to produce or that depend on fixed resources.

For instance, the supply of new housing in a city is usually inelastic in the short term, because building takes years and land is limited. That is why rising demand for homes often leads mainly to higher prices rather than many more homes in the short run.