Price elasticity of supply (PES) helps us understand how much the quantity supplied of a good responds to changes in its price. This concept is crucial in analyzing how firms adjust their production and how markets behave when there are shifts in demand or cost structures.
What are the ranges of price elasticity of supply?
Price elasticity of supply is measured using the following formula:
PES = (% change in quantity supplied) / (% change in price)
The value of PES tells us how responsive producers are to price changes. Economists group PES values into three broad categories, known as ranges of elasticity. These are:
Elastic supply (PES > 1)
Inelastic supply (PES < 1)
Unit elastic supply (PES = 1)
Each range indicates a different level of responsiveness and has unique implications for how supply reacts in various industries. Understanding these categories helps explain how different types of goods are affected by price changes and how producers make decisions about output.
Elastic supply (PES > 1)
Definition
When the price elasticity of supply is greater than 1, supply is considered elastic. This means that the percentage change in quantity supplied is greater than the percentage change in price. Producers in this situation are able to adjust their output levels easily in response to changes in price.
For example, if the price of a good increases by 10% and the quantity supplied increases by 20%, the PES would be:
PES = 20% / 10% = 2
Since 2 is greater than 1, this supply is elastic.
Characteristics of elastic supply
Producers respond quickly to price changes by increasing or decreasing their production.
The production process is flexible, meaning it’s relatively easy to add more resources or scale back.
Inputs are readily available, allowing firms to adjust output without significant delays.
There is often spare capacity in production facilities or labor that can be employed as needed.
Graphical representation
An elastic supply curve is relatively flat or horizontal. This shape indicates that small changes in price lead to large changes in the quantity supplied.
Real-world example: manufactured goods
Manufactured goods often have elastic supply. This is because producers can adjust output more easily due to the standardized nature of production and availability of machinery, labor, and materials.
Example: Plastic bottles
If a company producing plastic bottles sees an increase in market price, it can rapidly boost output by running machines longer, hiring more workers, or using existing stockpiles of materials. These adjustments can happen in the short term, making supply more responsive to price changes.
Other examples:
Smartphones
Clothing and textiles
Packaged food products
These industries often have elastic supply because they are not limited by natural constraints and can scale production up or down with relative ease.
Inelastic supply (PES < 1)
Definition
When the price elasticity of supply is less than 1, supply is inelastic. This means that the percentage change in quantity supplied is less than the percentage change in price. Producers cannot quickly or easily change the quantity they supply in response to price shifts.
For example, if the price increases by 15% but the quantity supplied increases by only 5%, the PES is:
PES = 5% / 15% = 0.33
Since 0.33 is less than 1, supply is inelastic.
Characteristics of inelastic supply
Producers face constraints such as limited resources, time, or capacity.
Production may involve natural limits, like growing seasons, space, or specialized labor.
Firms cannot adjust output quickly, especially in the short run.
Often involves long-term investments or time-sensitive inputs that can’t be scaled easily.
Graphical representation
An inelastic supply curve is steep or vertical in shape. This shows that even with large changes in price, the quantity supplied doesn’t change much.
Real-world example: agricultural products
Most agricultural goods have inelastic supply, particularly in the short term. Farmers must plan and plant crops in advance, and they cannot instantly increase output in response to rising prices.
Example: Oranges
If the price of oranges rises, a farmer cannot immediately grow more oranges because:
The planting season may have already passed.
Orange trees take time to mature and produce fruit.
Land and labor may not be available on short notice.
As a result, the quantity of oranges supplied remains mostly fixed, even if prices go up significantly.
Other examples:
Fishing (due to seasonal limits)
Mining (due to fixed resource extraction rates)
Housing (due to time-consuming construction processes)
These industries face constraints that limit how quickly they can adjust output.
Unit elastic supply (PES = 1)
Definition
When the price elasticity of supply equals 1, supply is said to be unit elastic. This means that the percentage change in quantity supplied is exactly equal to the percentage change in price.
For example, if the price of a product rises by 10% and the quantity supplied increases by 10%, the PES is:
PES = 10% / 10% = 1
This indicates a perfectly balanced, proportional response.
Characteristics of unit elastic supply
The change in output is directly proportional to the change in price.
Rare in practice, but may occur in some well-regulated, flexible industries.
Indicates a balanced production environment, where firms are able to respond to price changes at an even rate.
Graphical representation
A unit elastic supply curve is a straight line that passes through the origin (0,0). This represents a one-to-one relationship between changes in price and quantity supplied.
Real-world example: specialized manufacturing
In some cases, unit elasticity may be found in industries with well-managed inventories and consistent access to resources. A factory with a perfectly scalable production line and flexible labor scheduling may be able to maintain unit elasticity for a certain range of output.
Example: Car parts manufacturer
A company producing standardized car components might be able to respond to price changes in a way that the output increase matches the price increase proportionally — especially if production is modular and scalable.
Other examples (rare but possible):
Firms with exact capacity planning
Automated production systems with real-time resource adjustments
Visualizing the ranges of PES on a graph
Understanding how each range appears on a graph helps students visualize the differences:
Elastic supply: The supply curve is flatter, indicating high responsiveness. Small changes in price cause large changes in quantity supplied.
Inelastic supply: The supply curve is steep, indicating low responsiveness. Even large changes in price cause only small changes in quantity supplied.
Unit elastic supply: The curve is diagonal and straight from the origin, showing proportional changes in supply and price.
These visual patterns are essential for interpreting graphs on exams and applying the concept to real-world problems.
Real-world scenarios comparing different elasticity ranges
Understanding the ranges of PES becomes easier when linked to real-world contexts. Different products and industries face different supply conditions, which influences how elastic their supply is.
Scenario 1: Farming vs. electronics
Farming (inelastic supply): A wheat farmer plans production months in advance. Even if prices double due to increased demand, the quantity supplied will not increase until the next planting season. In the short run, supply is highly inelastic.
Electronics manufacturing (elastic supply): A smartphone manufacturer can increase production in a matter of weeks by adding labor shifts or purchasing more components. If the price of smartphones rises, supply can expand quickly. This makes supply elastic.
Scenario 2: Housing supply
In the short term, housing supply is inelastic. It takes time to get permits, secure financing, and build homes.
In the long term, supply may become more elastic as construction projects finish and land use policies adapt.
Scenario 3: Face masks during a health crisis
Initially inelastic supply: At the start of a sudden health crisis, supply of masks is limited due to stock constraints and production bottlenecks.
Becomes elastic over time: As firms retool operations and governments intervene, production increases and supply becomes more elastic.
These comparisons highlight how time, industry structure, and input availability determine where a product or service falls on the PES spectrum.
Why understanding elasticity ranges is important
Knowing the range of supply elasticity allows economists, businesses, and policymakers to predict how supply will behave under different market conditions.
In markets with inelastic supply, prices tend to fluctuate more because supply cannot respond quickly to demand changes.
In markets with elastic supply, prices are more stable, as supply adjusts smoothly to shifts in demand.
Policymakers must consider PES when designing tax policies or subsidies, as the burden of a tax will fall differently depending on supply elasticity.
This knowledge helps guide decision-making in production planning, inventory management, and long-term investment strategies.
FAQ
Yes, the elasticity of supply for a good or service can change significantly over time, especially between the short run and long run. In the short run, firms may face rigid constraints such as fixed production capacity, limited labor availability, or access to inputs, making supply more inelastic. However, in the long run, firms have more flexibility to adjust all factors of production. They can invest in new machinery, train additional workers, expand facilities, or adopt new technologies. These long-term adjustments make it easier to respond to changes in market price, increasing the price elasticity of supply. For instance, a company producing solar panels may have limited ability to increase output immediately, but over time, it can expand its production lines or build new factories. As a result, a good that is inelastically supplied in the short run may become more elastic in the long run as firms have time to adapt to changing market conditions.
Perishable goods typically have lower price elasticity of supply because their nature limits the producer’s ability to store or delay their sale in response to price changes. Since these goods spoil quickly—such as fresh fruits, vegetables, or dairy products—producers must sell them within a narrow time frame, regardless of market price. Even if prices increase sharply, the window for increasing production or preserving the good is limited, making supply inelastic. Additionally, growing or producing perishable goods often requires significant lead time, and it is not possible to instantly expand output. For example, a spike in demand for strawberries due to a health trend won’t lead to an immediate supply increase because the berries must still be planted, grown, and harvested in season. In contrast, non-perishable goods like canned foods or electronics can be stored, and firms can adjust output or inventory levels over time, giving them a more elastic supply response.
Storage plays a critical role in determining the price elasticity of supply, especially for goods that are durable or can be held in inventory. When producers have access to storage facilities, they can withhold or release stock in response to price changes, making the supply more elastic. For instance, if prices rise, a firm with stored inventory can quickly release additional units into the market, increasing quantity supplied without needing to increase current production. This immediate response to higher prices reflects a high elasticity of supply. Conversely, if storage options are limited or unavailable—due to costs, spoilage, or logistical constraints—producers may be forced to sell goods regardless of market conditions, reducing their ability to adjust supply based on price changes. This situation leads to inelastic supply. Therefore, the easier and cheaper it is to store a product, the more elastic its supply tends to be, especially in the short run where production adjustments are harder.
Some services have perfectly inelastic or highly inelastic supply in the short run due to fixed and immovable constraints such as licensing, time, and the availability of skilled professionals. For example, the supply of surgeries performed by a specific surgeon is highly inelastic in the short run. The surgeon can only perform a limited number of procedures per day, regardless of changes in the price or demand for their services. Similarly, services provided by professionals with extensive training—such as lawyers, engineers, or specialized consultants—cannot be expanded quickly because of the time and certification required to enter the profession. Additionally, services are often time-based and cannot be stored. A missed hour of labor is lost forever, unlike goods that can be inventoried. Because of these limitations, many personal and professional services exhibit inelastic supply in the short run, with minimal responsiveness to price changes until more labor or capacity can be developed over time.
Technological advancement significantly increases the price elasticity of supply for most goods by making production processes more efficient, flexible, and scalable. When firms adopt new technologies, they can produce more output with the same or fewer inputs, often at a faster rate. This improved productivity allows firms to respond more rapidly to price increases, increasing the quantity supplied without facing substantial cost increases. For instance, automation in manufacturing enables a plant to increase production with fewer workers and shorter lead times. Similarly, innovations in agriculture—such as genetically modified seeds or precision farming tools—allow farmers to increase yields and shorten production cycles, making agricultural supply more elastic over time. Technology can also streamline logistics and supply chains, reducing delays and improving inventory management. All these improvements reduce the rigidity in the production process and enhance firms' ability to react to market signals, thereby increasing the elasticity of supply across both the short and long term.
Practice Questions
A company that manufactures phone cases is able to double its production within a week in response to a 25% increase in market price. Explain which range of price elasticity of supply this scenario falls into and justify your answer using economic reasoning.
This scenario falls under elastic supply, where the price elasticity of supply (PES) is greater than 1. The company’s ability to double production in a short period of time in response to a relatively moderate 25% price increase indicates a highly responsive quantity supplied. Elastic supply is typical in industries with flexible production processes, available inputs, and quick adjustments. Because the firm can increase output significantly and efficiently, the percentage change in quantity supplied exceeds the percentage change in price, satisfying the condition for elastic supply (PES > 1).
Explain why the short-run supply of agricultural goods tends to be inelastic, and identify the range of price elasticity of supply this situation represents.
Agricultural goods often have inelastic supply in the short run, meaning PES is less than 1. This is because farmers cannot quickly adjust the quantity of crops they produce due to constraints like growing seasons, weather conditions, land availability, and time-intensive cultivation. Even if prices rise sharply, the output cannot be increased until the next season, limiting the responsiveness of supply. Since the percentage change in quantity supplied is smaller than the percentage change in price, this situation falls into the inelastic supply range. These supply constraints make short-term agricultural production less responsive to price fluctuations.
