Price Elasticity of Supply Formula (Table of Contents)
What is the Price Elasticity of Supply Formula?
The term “price elasticity of supply” refers to the metric that evaluates the change in the supply of goods and services due to changes in its price during a certain period of time. In other words, price elasticity of supply measures the responsiveness of the supplier’s quantity due to changes in price. The formula for price elasticity of demand can be derived by dividing the percentage change in the supply quantity of the good (∆S/S) by the percentage change in the price of the good (∆P/P). Mathematically, it is represented as,
However, the formula for price elasticity of supply can be further expanded as,
where,
- S0 = Initial Supply Quantity of the Good
- S1 = Final Supply Quantity of the Good
- P0 = Initial Price of the Good
- P1 = Final Price of the Good
Examples of Price Elasticity of Supply Formula (With Excel Template)
Let’s take an example to understand the calculation of Price Elasticity of Supply in a better manner.
Price Elasticity of Supply Formula – Example #1
Let us take the example of a burger sale in the small town of Timbuktu. During the last five years, the inhabitants of this town have increased their consumption of burgers that has resulted in its price increase of 70%. As a result, the supply of burgers has also surged in the area to increase by 63% during the period. Calculate the price elasticity of the supply of the burger in the town based on the given information.
Solution:
Price Elasticity of Supply is calculated using the formula given below
Price Elasticity of Supply = [(∆S/S)] / [(∆P/P)]
- Price Elasticity of Supply = 63% / 70%
- Price Elasticity of Supply = 0.90
Therefore, the burger supply in the town exhibits slightly inelastic characteristics (since it is less 1).
Price Elasticity of Supply Formula – Example #2
Let us take another example of a company engaged in the supply of fruit drinks. Last year the company sold 200,000 bottles of soft drinks price at $4 per bottle. However, due to the replacement of the fruit drinks by energy drinks in the current year the prices have plummeted to $3 per bottle. Consequently, the company has reduced its supply to 180,000 bottles in the current year. Calculate the price elasticity of the supply of the fruit drinks based on the given information.
Solution:
Price Elasticity of Supply is calculated using the formula given below
Price Elasticity of Supply = [(S1 – S0) / (S1 + S0)] / [(P1 – P0) / (P1 + P0)]
- Price Elasticity of Supply = [(180,000 – 200,000) / (180,000 + 200,000)] / [($3 – $4) / ($3 + $4)]
- Price Elasticity of Supply = 0.37
Therefore, the fruit drinks supply exhibits inelastic supply characteristics.
Explanation
The formula for price elasticity of supply can be derived by using the following steps:
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Step 1: Firstly, determine the initial price of the good or service and the quantity supplied at that price that is denoted by P0 and S0 respectively. Similarly, determine the final price and the quantity supplied at that price denoted by P1 and S1 respectively.
Step 2: Next, calculate the change in the supply quantity by subtracting the initial supply quantity from the final supply quantity. Now, calculate the average supply quantity during the period adding initial supply quantity and final supply quantity and multiply it by 2. Now, the percentage change in supply quantity is derived by dividing the change in supply quantity by the average supply quantity.
Percentage in Supply Quantity = 2 * (S1 – S0) / (S1 + S0)
Step 3: Next, calculate the change in price by subtracting the initial price from the final price. Now, calculate the average price during the period adding the initial price and final price and multiply it by 2. Now, the percentage change in price is derived by dividing the change in price by the average price.
Percentage in Price = 2 * (P1 – P0) / (P1 + P0)
Step 4: Finally, the price elasticity of supply can be derived by dividing the percentage in supply quantity (step 2) by percentage in price (step 3) as shown below.
Price Elasticity of Supply = [(S1 – S0) / (S1 + S0)] / [(P1 – P0) / (P1 + P0)]
or
Price Elasticity of Supply = [(∆S/S)] / [(∆P/P)]
Relevance and Uses of Price Elasticity of Supply Formula
From the point of view of a production manager, it is very important to understand the concept of price elasticity of supply because it governs the dynamics between the price of a good and the supplier’s willingness to supply at that price. If the percentage change in the quantity supplied of the good is higher than the percentage change in its price, then the good is said to be exhibiting the elastic characteristic. This type of often trait is seen in the case of popular goods or services. On other hand, if the percentage change in the quantity supplied of the good is less than the percentage change in its price, then the product is said to be exhibiting inelastic characteristic which is seen in case there is a limited supply of the goods or services and so the suppliers can’t supply despite higher prices.
Price Elasticity of Supply Formula Calculator
You can use the following Price Elasticity of Supply Formula Calculator
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