Price elasticity of supply
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In economics, the price elasticity of supply is defined as a numerical measure of the responsiveness of the quantity supplied of product (A) to a change in price of product (A) alone.
(Percentage change in quantity supplied)/(Percentage change in price).
For example, if, in response to a 10% rise in the price of a good, the quantity supplied increases by 20%, the price elasticity of supply would be 20%/10% = 2. (Case & Fair, 1999: 119).
When there is a relatively inelastic supply for the good the coefficient is low,; when supply is highly elastic, the coefficient is high. Supply is normally more elastic in the long run than in the short run for produced goods. As spare capacity and more capital equipment can be utilised the supply can be increased, whereas in the short run only labor can be increased. Of course goods that have no labor component and are not produced cannot be expanded. Such goods are said to be "fixed" in supply and do not respond to price changes.
The quantity of goods supplied can, in the short term, be different from the amount produced, as manufacturers will have stocks which they can build up or run down.
The determinants of the price elasticity of supply are: The existence of the naturally occurring raw materials needed for production; the length of the production process; the production spare capacity (the more spare capacity there is in an industry the easier it should be to increase output if the price goes up); the time period and the factor immobility (the ease of resources to move into the industry); the storage capacity of the merchants (if they have more goods in stock they will be able to respond to a change in price more quickly);
Various research methods are used to calculate price elasticity:
- Test markets
- Analysis of historical sales data
- Conjoint analysis
