formula for and calculation of price elasticity of supply

📈 Price Elasticity of Supply

What is it?

Price elasticity of supply (PES) tells us how much the quantity supplied of a good changes when its price changes. Think of it as a “responsiveness meter” for producers.

The Formula

$$E_s = \frac{\%\Delta Q_s}{\%\Delta P}$$

• ΔQs = change in quantity supplied
• ΔP = change in price
• Both changes are expressed as percentages.

How to Calculate?

1. Find the initial price (P₁) and quantity supplied (Q₁).
2. Find the new price (P₂) and new quantity supplied (Q₂).
3. Calculate the percentage change in price: $$\%\Delta P = \frac{P_2 - P_1}{P_1} \times 100\%$$
4. Calculate the percentage change in quantity supplied: $$\%\Delta Q_s = \frac{Q_2 - Q_1}{Q_1} \times 100\%$$
5. Divide the two percentages: $$E_s = \frac{\%\Delta Q_s}{\%\Delta P}$$

Example: Farmer’s Wheat

Imagine a wheat farmer. The price of wheat rises from $10 to $12 per bushel.

Percentage change in price: $$\frac{12-10}{10}\times100\% = 20\%$$

Percentage change in quantity: $$\frac{140-100}{100}\times100\% = 40\%$$

Elasticity: $$E_s = \frac{40\%}{20\%} = 2$$

Because $E_s > 1$, the supply is elastic – farmers can quickly increase production when prices rise.

Interpretation Guide

• $E_s > 1$ – Elastic supply (big response to price changes)
• $E_s = 1$ – Unitary elastic (proportional response)
• $E_s < 1$ – Inelastic supply (small response to price changes)

Quick Analogy: The Rubber Band

Imagine the supply curve as a rubber band stretched between price and quantity. If the band stretches easily when you pull (price rises), the supply is elastic. If it resists and barely stretches, the supply is inelastic.

Your Turn! 🚀

Try calculating PES for a toy that goes from $5 to $7 and its supply goes from 200 to 260 units. What does the result tell you about the toy’s market?