The Elasticity of Supply
The concept of price elasticity also applies to the elasticity of supply. It is a degree of responsiveness of the quantity supplied of a good or service to the change in its price. If the quantity supplied by producers is relatively responsive to price changes, supply is said to be elastic. If it is relatively insensitive to price changes, supply is said to be inelastic.
The degree of price elasticity of supply depends primarily upon how easily and quickly producers can shift resources between alternative uses to change the production of a good. The easier and more quickly that the resource can be transferred, the greater is the price elasticity of supply.
The formula for the elasticity of supply is:
Elasticity of Supply = %∆ Quantity supplied / %∆ Price.
Consider a manufacturer of shirts. The manufacturer supplies 5000 shirts per year at a price of $8 per shirt. Assume that the price of the shirts rises to $10 per shirt. As a result, the firm increases the supply to 6000 shirts. Using the midpoints formula, the elasticity coefficient would be:
For the numerator: [(6000 – 5000)] / [(6000+5000)/2] = 1000/5500 = .1818
For the denominator: [(10 – 8)] / [(10 + 8)/2] = 2/9 = .2222
So, .1818 /.2222 = .8181
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