Price Elasticity of Supply, (η), known more simply as the elasticity of supply, denotes the extent to which shifts in the price of a good change the quantity supplied of the good.
Suppose that the given supply curve of a particular good is represented by the linear equation, Qs = C + Dp, where C represents the intercept of the supply curve, D represents the slope of the supply curve, and p represents the given equilibrium price of the good. For example, if the supply curve for oil can be represented by the linear equation,
Qs = 300 + 10.1p
and the price of oil is determined to be, p = $68, under the given supply and demand conditions.
The following would be inputted into the equation calculator above to determine the price elasticity of supply (η) for this particular good;
| C | 300 |
|---|---|
| D | 10.1 |
| p | 68 |
Using the equation and calculator above, you are able to calculate the price elasticity of supply (η). In inputting the numbers above we get that η = 0.70, what this represents is that for every 1% increase in the price of oil you can expect a proportional increase of 0.70% in the quantity supplied of the good. The price elasticity of supply (η) can be characterized even further based on what the elasticity value is calculated to be.
If η = 0, it can be said the supply for the good is 'perfectly inelastic'
0 < η < 1, supply for the good is 'inelastic'
η = 1, supply for the good is 'unitary elastic' which means proportional changes in supply in regards to changes in price
η > 1, supply for the good is 'elastic'
η = ∞, eg. 1000, supply for the good is 'perfectly elastic'
Perloff, Jeffrey. Microeconomics. Boston, MA: Pearson Education, 2011. Print.