Introduction to price elasticity of supply | APⓇ Microeconomics | Khan Academy

We've done many videos on the price elasticity of demand. Now we're going to focus on the price elasticity of supply, and it's a very similar idea; it's just being applied to supply.

Now, it's a measure of how sensitive our quantity supplied is to percent changes in price, and we will calculate it as our percent change in quantity supplied for a given percent change in price. Now, to make this a little bit more tangible, let's look at a simple market.

Let's say this is the market for apples right over here, where our vertical axis is price (and this could be thousands of dollars per ton), and then our horizontal axis is quantities (and maybe this isn't tons per day). This supply schedule and this supply curve are essentially describing the same data.

So, let's think about our price elasticity of supply as we go from point A to point B. Well, on the supply schedule, point A is this point right over here; our price is four, our quantity is one, and point B is right over here.

So, let us calculate from point A to point B our price elasticity of supply. First of all, what is going to be our percent change in price? Well, we're going from four to six, so it's an increase of two. So, our percent change in price is going to be equal to 2, which is how much we increase from a base of four, times one hundred percent. That, of course, is going to be equal to a 50 percent increase in price.

And then, what is going to be our percent change in quantity? Well, we're going from one to two, so we're starting at a base of one; we are increasing by one, and then multiply that times one hundred percent. That gives us one hundred percent.

So, when we have a fifty percent increase in price, that resulted, going from point A to point B, in a hundred percent increase in quantity supplied. So, 100 percent divided by 50 percent, that is going to give us, this is going to be equal to 2.

Now, what if we go from point B to point C? So, this is point C right over here. I encourage you to pause this video and see if you can calculate the price elasticity of supply when going from point B to point C.

Well, we're going to do a similar calculation. Our change, our percent change in price, we start at a base of 6, and we are increasing by two, so we're going to multiply that times 100 percent. So that is approximately, this is one-third times 100; it's approximately 33.3 percent.

And then, what is our percent change in quantity supplied? Well, we are going to go from two to three, so we start at a base of two, we increase by one, so plus one, and multiply times one hundred percent. And so that's going to be given; it's going to be equal to 50 percent.

So, when we have a one-third increase or 33.3 percent increase in our price, we have a 50 percent increase of our quantity supplied when we go from point B to point C right over here.

One way to think about it is 50 percent divided by a third is the same thing as 50 times 3, and so this is going to be equal to, this is going to be equal to 1.5. So, just as we saw when we calculated price elasticity of demand, even when you have a linear curve here, your price elasticity of supply can change; it is not the same thing as slope.

Now, another thing to keep in mind is the way that I calculated price elasticity of supply in this video, which is arguably the simplest way. You would not get the same value when you're calculating the magnitude going from A to B than if you went from B to A. There are slightly more advanced techniques, the midpoint technique for example, that will give you the same answer regardless of which direction you go in, but that's beyond the scope of this first video.

Now, just as we discussed in the demand case, there are cases that you would consider to be more inelastic supply and cases where you would consider to be more elastic supply. One way to think about it is if the magnitude of your price elasticity of supply is less than one (and of course this is magnitude, so it's going to be greater than or equal to zero), well then you're talking about inelastic price elasticity of supply.

Inelastic, that's a situation in which our quantity supplied is not going to change so much depending on, is not going to be so sensitive to our change in price. Now, if our price elasticity of supply is greater than one, that's generally considered to be elastic. For a given percent change in price, you're getting a larger than that percent change in quantity supplied.