Topic 2.4 Notes – Price Elasticity of Supply

1. Price Elasticity of Supply

You already know the law of supply. Higher price gives producers an incentive to supply more.
Price elasticity of supply (PES) tells you how much more they supply.

It is the percentage change in quantity supplied divided by the percentage change in price:

$$\text{PES} = \frac{\%\Delta Q_s}{\%\Delta P}$$

Because price and quantity supplied move in the same direction, PES is usually positive, so you do not take absolute value like you do with demand.

How to Calculate It

Suppose price rises from 20 dollars to 25 dollars, and quantity supplied rises from 100 units to 130 units.

1. % change in quantity supplied
   $$\frac{130 - 100}{100} \times 100 = 30\%$$

2. % change in price
   $$\frac{25 - 20}{20} \times 100 = 25\%$$

3. Divide
   $$\text{PES} = \frac{30}{25} = 1.2$$

That supply is elastic because the response in quantity (30%) is larger than the change in price (25%).

On tests, you may:

• Pull numbers from a table
• Estimate from a graph
• Calculate and then interpret the result in words

Interpretation is often where students lose points. Always state whether it is elastic, inelastic, or unit elastic and what that means in context.

2. Types of Elasticity of Supply

The benchmark is 1. Compare %ΔQs to %ΔP.

In perfect competition, each firm faces a perfectly elastic supply of inputs and is a price taker. That horizontal line shows up again later in Unit 3.

Supply curves can be perfectly inelastic (vertical), inelastic (steep upward sloping), unit elastic (moderate upward slope), elastic (flatter upward slope), or perfectly elastic (horizontal).

Steeper means more inelastic. Flatter means more elastic.

Elasticity is measured over a range of change, not at a single point unless specifically told.

3. What Determines Price Elasticity of Supply

Producers respond to incentives, but they face constraints.

Time Horizon (MostImportant)

• Short run → more inelastic
  Firms cannot change plant size.
• Long run → more elastic
  Firms can build factories, hire workers, enter or exit.

Classic example:

• Oil supply after the 1973 oil embargo was very inelastic in the short run.
• Over time, new drilling and alternative energy made supply more elastic.

Production Flexibility

If firms can switch production easily, supply is more elastic.
A factory that can shift between producing laptops and tablets responds faster than a highly specialized plant.

Availability and Mobility of Inputs

If inputs are easy to obtain, supply is more elastic.
If inputs are scarce or specialized, supply is more inelastic.

This includes the price of alternative inputs. If steel becomes expensive, car producers may not expand output much even if car prices rise.

Storage Possibilities

• Canned goods → more elastic (can store and release later)
• Fresh strawberries → more inelastic (perishable)

4. Elasticity and Total Revenue

Total revenue is:

$$\text{TR} = P \times Q$$

When price rises:

• If supply is inelastic, quantity rises only slightly. Revenue tends to rise because price increases more than quantity.
• If supply is elastic, quantity rises a lot.

In real markets, total revenue depends on both supply and demand, but AP questions may isolate supply responsiveness in a scenario.

Important distinction:
Elasticity is not the same as slope. A straight-line supply curve does not have constant elasticity. That mistake shows up on multiple-choice questions every year.

5. Reading Elasticity on a Graph

When comparing two supply curves on the same graph:

• The flatter curve is more elastic.
• The steeper curve is more inelastic.
• A vertical line is perfectly inelastic.
• A horizontal line is perfectly elastic.

Elasticity describes responsiveness within the specific price range shown. If a graph shows a large price increase and only a tiny quantity increase, that supply is inelastic in that range.