Supply Elasticity

Similar to demand elasticity, supply elasticity describes an economic concept based on changes to price.   In the case of demand elasticity, we look at how much a price will affect quantity demanded and measure its elasticity. In cases where the divided percentages of change, in relation to price and quantity demanded, are above 1.0 we label it as elastic; whereas, when the quotient is less than 1.0 we call it inelastic. But what does it mean for a supply to be elastic or inelastic?

Suppliers will respond to market price changes. Or in other words, the law of supply states that when market prices increase, then so will a suppliers willingness to provide that good or service to market to capture that available profit. Suppliers however, do not always respond the same to price fluctuations. This is where we make the determination between elastic and inelastic supply.

When a price increase does not affect supply by much we say it is inelastic. For example, if you were the president of a large irrigation district and responsible for selling water to farmers, your supply will probably not change by much according to price fluctuations. Either way the water comes down from the mountains, and the farmers are going to need that water to grow crops. The supply in this case is inelastic.

On the other hand, a price increase can have a large impact on supply when the good or service is elastic. For example, if a teenage trend occurred which increased the demand of a type of shoe, and the price of that type of shoe increased, a supplier would try to increase his or her supply by a larger factor to capture that potential profit. There would be tons of that type of shoe available because of the change in price and because of the business owner's profit motive. Why are there so many different types of basketball shoes? Because teenagers will beg their parents to spend ridiculous amounts of money on making their feet look cool. Again in this case the shoe company has an elastic supply because of the high price for basketball shoes. The shoe company wants to make as much money as possible by increasing their supply of basketball shoes.

To calculate whether a good / service and its corresponding price is elastic, unitary elastic, or inelastic you use the following formula.