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.

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