Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Elasticity of Supply

What it is:

The elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good, with all other factors remaining the same.

How it works (Example):

The formula for elasticity of supply is:

Elasticity of Supply = (% change in quantity supplied) / (% change in price)

As demand for a good or product increases, the price will rise and the quantity supplied will increase in response. How fast it increases depends on the elasticity of supply.

Let's look at an example. Assume when pizza prices rise 40%, the quantity of pizzas supplied rises by 26%. Using the formula above, we can calculate the elasticity of supply.

Elasticity of Supply = (26%) / (40%) = 0.65

Why it Matters:

Elasticity of supply tells us how fast supply responds to quantity demand and price increase.

When there is a popular product that is in short supply for instance, the price may rise as a result. The manufacturers of that product will increase output (the supply) to keep up with the demand. The higher the elasticity of supply, the faster the supply will increase when demand and price increase.

Some goods/services are more supply inelastic however, whenever there is a supply shortage. Limited tickets to a concert may have a very inelastic supply. The price of the concert tickets can be raised to any amount, but because there is a fixed number of seats and tickets, the supply (of tickets sold) may not be increased by much if at all.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...