01 / 22

Price Elasticity
of Supply

Understand how responsive producers are to price changes, measured by the percentage change in quantity supplied relative to the percentage change in price.

AP Microeconomics

What Is Elasticity?

In economics, elasticity measures how much one variable responds to a change in another variable. When we talk about the supply side, we want to know: if the market price rises or falls, how much does the quantity supplied change?

Defining Price Elasticity of Supply

Price Elasticity of Supply (\( E_S \)) measures the percentage change in quantity supplied in response to a percentage change in price. It tells us how flexible producers are in adjusting output.

Why Does PES Matter?

Tax Incidence
When supply is inelastic, producers bear more of a tax burden because they cannot easily reduce output.
Market Adjustment
Elastic supply means markets respond quickly to demand shocks, stabilizing prices faster.
Policy Design
Governments use PES to predict how subsidies, price floors, and regulations affect output.

The PES Formula

$$ E_S = \frac{\%\;\Delta\;Q_S}{\%\;\Delta\;P} = \frac{\dfrac{\Delta Q_S}{Q_S}}{\dfrac{\Delta P}{P}} $$

The Midpoint Method

$$ E_S = \frac{\dfrac{Q_2 - Q_1}{\frac{Q_1 + Q_2}{2}}}{\dfrac{P_2 - P_1}{\frac{P_1 + P_2}{2}}} $$

Visualizing Supply Elasticity

Quantity Price Perfectly Elastic Elastic Unit Elastic Inelastic Perfectly Inelastic

Elastic vs. Inelastic Supply

Elastic (\( E_S > 1 \)) Inelastic (\( E_S < 1 \))
Producer Response Large change in \( Q_S \) Small change in \( Q_S \)
Curve Appearance Flatter Steeper
Time Horizon Long run Short run
Example Manufactured goods Rare minerals, land

PES vs. PED: Key Distinction

Price Elasticity of Supply Price Elasticity of Demand
Measures Producer responsiveness Consumer responsiveness
Sign Positive (\( E_S \geq 0 \)) Negative (often shown as absolute value)
Curve Supply curve (upward) Demand curve (downward)
Key Determinant Time, spare capacity Substitutes, necessity

Determinants of PES

1
Time horizon: In the long run, firms can build factories and hire workers, making supply more elastic.
2
Spare capacity: Firms with unused resources can ramp up production quickly.
3
Factor mobility: If labor and capital can be easily redirected, supply is more elastic.
4
Ability to store inventory: Storable goods can be released to market quickly when prices rise.
5
Nature of the product: Agricultural goods (seasonal) tend to be inelastic; manufactured goods tend to be elastic.

How to Calculate PES

1
Identify the two points: Note the initial price \( P_1 \) and quantity \( Q_1 \), then the new price \( P_2 \) and quantity \( Q_2 \).
2
Compute changes: Find \( \Delta Q_S = Q_2 - Q_1 \) and \( \Delta P = P_2 - P_1 \).
3
Choose your base: Use the midpoint method for consistency: average \( \frac{Q_1 + Q_2}{2} \) and \( \frac{P_1 + P_2}{2} \).
4
Divide: Compute \( E_S = \frac{\%\;\Delta\;Q_S}{\%\;\Delta\;P} \).
5
Interpret: If \( E_S > 1 \): elastic. If \( E_S < 1 \): inelastic. If \( E_S = 1 \): unit elastic.

Example 1: T-Shirt Factory

A t-shirt factory raises its price from \$10 to \$12. Quantity supplied rises from 500 to 700 units.

Quantity Price ($) A (500, $10) B (700, $12) 500 700 $10 $12

Example 2: Oil Production

Oil price rises from \$80 to \$100 per barrel. Production increases from 1,000 to 1,050 barrels per day.

Quantity (barrels/day) Price ($) A (1000, $80) B (1050, $100) 1,000 1,050 $80 $100 Steep = Inelastic

Example 3: Perfectly Inelastic

Suppose there are exactly 100 acres of beachfront land in a town. No matter what the price is, the quantity available remains 100 acres.

Quantity (acres) Price S
\(P_1\)
\(P_2\)
\(P_3\)
 100

Time and PES

Quantity Price Momentary Short Run Long Run

Common Mistakes

✕ Confusing PES with PED
PES measures producer responsiveness. PED measures consumer responsiveness. They use the same formula but apply to different curves.
✕ Forgetting the midpoint method
Using the simple percentage method gives different answers depending on direction. The AP exam expects the midpoint method for consistency.
✕ Saying PES is negative
Since supply curves slope upward, price and quantity move in the same direction. PES is always zero or positive: never negative.

Summary of PES Ranges

Value of \( E_S \) Classification Supply Curve
\( E_S = 0 \) Perfectly Inelastic Vertical
\( 0 < E_S < 1 \) Inelastic Steep
\( E_S = 1 \) Unit Elastic Through origin (linear)
\( E_S > 1 \) Elastic Flat / Gentle
\( E_S = \infty \) Perfectly Elastic Horizontal

Question 1 of 5

If the price of a good increases by 10% and the quantity supplied increases by 25%, what is the price elasticity of supply?

Question 2 of 5

A perfectly inelastic supply curve is:

Question 3 of 5

Using the midpoint method, if price rises from \$20 to \$30 and quantity supplied rises from 100 to 150, what is \( E_S \)?

Question 4 of 5

Which factor is most likely to make the supply of a good more elastic?

Question 5 of 5

If the government imposes a per-unit tax on a good with highly inelastic supply, who bears most of the tax burden?