Price Elasticity of Supply

Definition

Price elasticity of supply measures the responsiveness of the quantity supplied of a good or service to a change in its price. It quantifies the degree to which suppliers adjust the amount they are willing to sell in response to price changes in the market.

5 Must Know Facts For Your Next Test

1. Price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price.
2. Goods with a high price elasticity of supply have a large change in quantity supplied in response to a price change, while goods with a low price elasticity of supply have a smaller change.
3. Factors that affect the price elasticity of supply include the ability to adjust production, the availability of inputs, and the time horizon considered.
4. Price elasticity of supply is an important concept in understanding how markets reach equilibrium and how changes in supply and demand affect prices.
5. Knowing the price elasticity of supply can help producers and policymakers make more informed decisions about pricing, production, and market interventions.

Review Questions

• Explain how price elasticity of supply relates to the concept of supply and equilibrium in markets.
  • Price elasticity of supply is directly connected to the concept of supply and equilibrium in markets. The price elasticity of supply measures how responsive the quantity supplied of a good or service is to changes in its price. Goods with a high price elasticity of supply will see a large change in quantity supplied when prices change, while goods with a low price elasticity of supply will see a smaller change. This responsiveness of supply to price changes is a key factor in how markets reach equilibrium, where the quantity supplied equals the quantity demanded at the equilibrium price.
• Describe how price elasticity of supply relates to the pricing decisions of producers and the impact on consumers.
  • The price elasticity of supply is an important consideration for producers when making pricing decisions. Producers of goods with a high price elasticity of supply can increase prices significantly without seeing a large decrease in quantity demanded, as suppliers are able to readily adjust the quantity they are willing to sell. Conversely, producers of goods with a low price elasticity of supply have less flexibility in raising prices, as consumers will be less responsive to price changes. Understanding the price elasticity of supply allows producers to make more informed decisions about pricing that balance their own profit margins with the impact on consumers.
• Evaluate how price elasticity of supply can be used to analyze the effects of government policies or other external factors on market outcomes.
  • Price elasticity of supply is a crucial concept for analyzing the impact of government policies or other external factors on market outcomes. For example, the imposition of a tax or subsidy will have different effects on equilibrium price and quantity depending on the price elasticity of supply. In markets with a high price elasticity of supply, producers will be more responsive to these policy changes, adjusting their quantity supplied more significantly. Conversely, in markets with a low price elasticity of supply, producers will be less responsive, and the burden of the policy change will fall more heavily on consumers. By understanding the price elasticity of supply, policymakers and analysts can better predict and evaluate the effects of interventions in the market.

Related terms

Supply: The quantity of a good or service that producers are willing and able to sell at various prices during a given time period.

Elasticity:

A measure of the responsiveness of one economic variable to changes in another, often expressed as a ratio or percentage change.

Equilibrium Price:

The price at which the quantity supplied equals the quantity demanded, where the market clears.