Introduction

After you have worked through this section of the learning unit, you should be able to:

  • describe price elasticity of supply and the measurement of price elasticity of supply
  • differentiate between different price elasticity of supply using diagrams
  • identify and describe the different factors that have an impact on the price elasticity of supply

When we looked at supply, we saw that there is a positive relationship between price and quantity supplied. In other words, an increase in price will lead to an increase in the quantity supplied, while a decrease in price will result in a decline in the quantity supplied.

Study the following supply curve and answer the questions:

 

 

  • If the price increases from P3 to P4, the quantity supplied will (increase/decrease) from Q3 to Q4.
  • If the price decreases from P4 to P2, the quantity supplied will (increase/decrease) from Q4 to Q2.
Click to Show Answer

If the price increases from P3 to P4, the quantity supplied will increase from Q3 to Q4.
If the price decreases from P4 to P2, the quantity supplied will decrease from Q4 to Q2.

The question we wish to answer now is – By how much would the quantity supplied change if the price were to change? In other words, we wish to measure the impact of a change in the price on the quantity supplied.

The price elasticity of supply measures how sensitive or responsive the quantity supplied is to a change in the price of a good or service and can be defined as the ratio between the percentage change in quantity supplied of a product and the percentage change in its price, that is:

$$\text{Price elasticity of supply} = {\text{% change in quantity supplied} \over \text{% change in price}}$$

Select the answer you think is correct:

The price elasticity of supply is

Correct. The price elasticity of supply is positive, since an increase in price leads to an increase in quantity supplied and a decrease in price leads to a decrease in quantity supplied.

Think again. The price elasticity of supply is positive, since an increase in price leads to an increase in quantity supplied and a decrease in price leads to a decrease in quantity supplied.

Because price and quantity supplied change in the same direction, the value of the elasticity coefficient is positive.