Price Elasticity of Supply

and its Determinants

MARIA JC EMMANUELLE O. MOMBLAN

MA. BEATRIZ S. PAHUNAO
 The elasticity of supply establishes a quantitative
relationship between the supply of a commodity
and it’s price. Hence, we can express the numeral
change in supply with the change in the price of a
commodity using the concept of elasticity. Note
that elasticity can also be calculated with respect
to the other determinants of supply.

 The price elasticity of supply is the ratio of the

percentage change in the price to the percentage
change in quantity supplied of a commodity.
Formula of Price Elasticity of
Supply
 Price Elasticity of Supply Example
Problem
 Given the following data for the
supply and demand of movie
tickets, calculate the price
elasticity of supply when the price
changes from $9.00 to $10.00.
 So we have:
 Price (Old) = $9
Price (New) = $10
Quantity Supplied (Old) = 75
Quantity Supplied (New) = 105
 Calculating the Price Elasticity of
Supply
Calculating the Percentage Change in Quantity Supply

The formula used to calculate the percentage change in quantity supplied

is:
[Quantity Supplied (New) –Quantity Supplied (Old)] /Quantity Supplied (Old))
[105 – 75] / 75 = (30/75) = 0.4
So we note that % Change in Quantity Supplied = 0.4
Now we need to calculate the percentage change in price.
Calculating the Percentage
Change in Price
The formula used to calculate the percentage change in price is:

[Price (New) – Price (Old)] /Price (Old))

By filling in the values we wrote down, we get:
[10 – 9] / 9 = (1/9) = 0.1111
We have both the percentage change in quantity supplied and the
percentage change in price so that we can calculate the price
elasticity of supply.
 The Final Step

PES = (% Change in Quantity Supplied)/(% Change in Price)

We now fill in the two percentages in this equation using the figures we
calculated.
PEoD = (0.4)/(0.1111) = 3.6
We get the price elasticity of supply when the price increases from $9
to $10 is 3.6. So for movie tickets, the price is elastic and thus supply is
very sensitive to price changes.
 Five Determinants of Price Elasticity
of Supply
1) Marginal Cost

If the cost of producing one more unit keeps rising as output rises
or Marginal Costs (which is the increase in cost by producing just
one more unit) rises rapidly with an increase in output, then the rate
of output production will be limited, i.e., Price Elasticity of Supply will
be inelastic, which basically means that the percentage of quantity
supplied changes less than the change in price. If Marginal Cost
rises slowly, then supply will be elastic.
Five Determinants of Price Elasticity
of Supply
2.) Time

Over time price elasticity of supply tends to become more

elastic, which means that producers would increase the
quantity supplied by a larger percentage than an increase
in price.
Five Determinants of Price Elasticity
of Supply
3. Number of Firms

The larger the number of firms, the more likely

the supply is elastic. This is because other firms
can jump in to fill in the void in supply.
Five Determinants of Price Elasticity
of Supply
4. The Mobility of Factors of Production

If factors of production are mobile, then the price

elasticity of supply tends to be more elastic. This
means labor and other manufacturing inputs can be
brought in from other location to increase capacity
quickly
Five Determinants of Price Elasticity
of Supply
5. Capacity

If firms have spare capacity, the price elasticity of

supply is elastic. The firm can increase output without
experiencing an increase in costs, and quickly with a
change in price.
Five Types of Price Elasticity of
Supply
Perfectly Inelastic
Supply

(PES = 0), The Quantity

Supplied doesn’t change as
the price changes.
 Five Types of Price Elasticity of
Supply
Relatively Inelastic
Supply

(0 < PES < 1), Quantity Supplied

changes by a lower
percentage than a percentage
change in price.
 Five Types of Price Elasticity of
Supply
Unit Elastic
Supply
(PES = 1), Quantity
Supplied changes by
the same percentage
as the change in
price.
 Five Types of Price Elasticity of
Supply
Relatively Elastic Supply
(1 < PES < ∞), The Quantity
Supplied changes by a larger
percentage than the percentage
change in price.
 Five Types of Price Elasticity of
Supply
Perfectly Elastic
Supply

(PES = ∞), Suppliers will be willing

and able to supply any amount at
a given price but none at a
different price.