Price Elasticity of Supply and Its Determinants

1 year ago
Atiqur Rahman
4 minutes

Price Elasticity of Supply

Price elasticity of supply is defined as the percentage change in the quantity supplied divided by the percentage change in the price of the commodity. Algebraically:

Es = Percentage change in quantity supplied/Percentage change in price

Price elasticity of supply also shows the responsiveness of the change in the quantity supplied (Qs) of a product due to the change in its price.

The above equation can be written as:

Es = (∆Qs/Qs*100)/(∆P/P*100)

Es= (∆Qs/Qs)/(∆P/P)

Es = (∆Qs/∆P) * (P/Qs) …………………………………………..(1)

Now since there exists a direct relation between the price and quantity supplied of a product, therefore, as the price increases, the quantity supplied also increases. Therefore, the value of price elasticity of supply will always be positive.

Determinants of Price Elasticity of Supply

  • Time Factor: In a short period, the supply of a good is fixed and inelastic. However, in the long run, it tends to be elastic because the long run provides opportunities for the suppliers to increase their production, investment, technology and all.
  • Law of Diminishing Returns: If the law of diminishing returns comes at an early level of production, then the cost of production will increase rapidly. As a result, supply of the good will tends to become less and less elastic.

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