Elastic Supply: When Quantity Can't Wait to Respond
The Core Concept: What is Price Elasticity of Supply (PES)?
Imagine you have a small bakery. If the price of your cupcakes doubles, would you try to bake more? How many more could you bake? The answer to "how many more" is what economists call the Price Elasticity of Supply (PES)[1]. It is a number that measures the responsiveness of the quantity supplied of a good to a change in its price.
The formula for PES is:
Where $\% \Delta Q_s$ is the percentage change in quantity supplied, and $\% \Delta P$ is the percentage change in price.
The result of this calculation tells us the type of elasticity:
- Elastic Supply (PES > 1): The percentage change in quantity supplied is greater than the percentage change in price. A 10% price increase might lead to a 25% increase in supply.
- Unitary Elastic Supply (PES = 1): The percentage changes are equal. A 10% price increase leads to a 10% increase in supply.
- Inelastic Supply (PES < 1): The percentage change in quantity supplied is less than the percentage change in price. A 10% price increase might only lead to a 4% increase in supply.
This article focuses on the first case: elastic supply ($PES > 1$). It's a common scenario for many everyday goods and services where producers can ramp up production without too much trouble.
What Makes Supply Elastic? The Key Determinants
Not all supplies are created equal. Several factors determine whether a producer can easily increase output when prices rise. Think of these as the ingredients for elastic supply.
| Determinant | Why It Creates Elastic Supply (PES > 1) | Real-World Example |
|---|---|---|
| Availability of Inputs | If raw materials, labor, and machines are easy to get and not already in short supply, a firm can quickly acquire more to increase production. | A t-shirt factory can order more cotton fabric and hire temporary workers if demand spikes. |
| Time Horizon | Supply is more elastic in the long run. Given enough time, firms can build new factories, develop new technology, or enter the market. | If the price of solar panels stays high, new companies will enter the market over a few years, greatly increasing total supply. |
| Flexibility of Production | If a production line can be easily adjusted or scaled up (e.g., using existing machines for longer hours), supply responds faster. | A bakery can add an extra evening shift to bake more bread. A software company can allow unlimited downloads of its app. |
| Excess Capacity | If a factory or service is not running at full capacity, it has immediate room to increase output without major new investment. | A hotel with many empty rooms can easily accommodate more guests if a big event comes to town, allowing it to raise prices. |
| Storage Possibility | Goods that can be stored cheaply and for long periods allow producers to release stockpiled goods when prices rise, creating instant supply. | Companies that mine metals like copper or zinc can hold inventory in warehouses and sell it when market prices are favorable. |
From Theory to Reality: Elastic Supply in Action
Let's see elastic supply at work through a few concrete examples that connect the determinants from the table to real-life situations.
Example 1: The Handmade Bracelet Business. Maria sells friendship bracelets online. Her main inputs are colorful threads, which are cheap and easy to buy in bulk. She works from home in her free time. When a social media influencer features her bracelets, demand soars and Maria can raise her price. Because her production is flexible (she can spend more hours braiding) and inputs are available, her supply is very elastic. A $20\%$ price increase might lead her to double her output, a $100\%$ increase in quantity supplied! This gives a PES of $100\% / 20\% = 5$, which is clearly greater than 1.
Example 2: Taxi Rides vs. Ride-Sharing Apps. In a city with only traditional taxis, the supply of rides is inelastic in the short term. There are a fixed number of licensed cabs. During a rainstorm, prices can't easily call more drivers to the road instantly. Now, consider a ride-sharing app like Uber or Lyft. When demand spikes (e.g., after a concert), the app uses surge pricing (higher fares). This higher price acts as a signal to drivers who are off-duty or in other parts of the city. Because the app taps into a large pool of drivers with flexible schedules (excess capacity), the supply of rides is much more elastic. More drivers log on, responding strongly to the higher price.
Example 3: Digital Goods – The Ultimate Elastic Supply. Consider a mobile video game or an e-book. The cost of producing one more copy is virtually zero. Once the game or book is developed, the company can supply an almost infinite number of copies instantly through downloads. If the price drops by $50\%$, the quantity supplied doesn't change—it's still infinite. But more interestingly, if the price increases and remains profitable, the company can still supply to everyone who wants it without any physical limit. While this is a special case (often called perfectly elastic), it highlights how technology has created some of the most elastic supplies in history.
Contrasting Elastic and Inelastic Supply
Understanding elastic supply becomes clearer when we contrast it with its opposite. Let's compare two classic examples: bottled lemonade and vintage wine.
Bottled Lemonade (Elastic Supply): A beverage company produces lemonade. The ingredients (water, sugar, lemon flavoring) are readily available. The bottling plant can run an extra shift. If the price of lemonade goes up $10\%$ in the summer, the company can quickly increase production by $30\%$ by using existing resources more intensively ($PES = 3$).
Vintage 1990 Wine (Inelastic Supply): The quantity of a specific vintage wine from 1990 is fixed. No matter how high the price goes, producers cannot go back in time to make more of that exact wine. If the price rises by $50\%$, the quantity supplied might increase only slightly as some collectors sell from their cellars, perhaps by $5\%$. This gives a PES of $0.1$, which is highly inelastic ($PES < 1$).
This comparison shows that time and nature of the good are crucial. Manufactured goods often have elastic supplies, while unique, agricultural, or fixed-quantity goods tend toward inelastic supply.
Important Questions
Q: Can the elasticity of supply for the same product change?
Absolutely. The most important factor is time. In the market period (immediate term), a strawberry farmer bringing goods to a morning market has a perfectly inelastic supply. Once the berries are on the stall, they cannot increase quantity if the price rises. In the short run, the farmer can hire more workers to pick berries more carefully from existing plants, making supply somewhat elastic. In the long run, the farmer can plant more strawberry fields, making supply very elastic ($PES > 1$). So, for most goods, supply elasticity increases with time.
Q: Why is elastic supply important for consumers?
Elastic supply acts as a stabilizer for prices and availability. When demand for a product increases (like umbrellas during a rainy season), an elastic supply means producers can quickly make more. This prevents severe shortages and stops prices from skyrocketing. Consumers benefit from more stable prices and reliable access to goods. In markets with inelastic supply (like tickets to a popular concert), high demand leads directly to huge price spikes and shortages because the quantity simply can't increase.
Q: How do you calculate PES with real numbers?
Let's say a pizza shop sells $100$ pizzas a day at $\$10$ each. When they raise the price to $\$12$, they are able to supply $140$ pizzas by preparing more dough in advance.
1. Calculate $\% \Delta P$: Price change = $\$12 - \$10 = \$2$. Percentage change = $(2 / 10) \times 100 = 20\%$.
2. Calculate $\% \Delta Q_s$: Quantity change = $140 - 100 = 40$. Percentage change = $(40 / 100) \times 100 = 40\%$.
3. Calculate PES: $PES = 40\% / 20\% = 2$.
Since $2 > 1$, the supply of pizzas from this shop is elastic.
Conclusion: The Power of Responsiveness
Elastic supply ($PES > 1$) is a fundamental concept that reveals how markets adapt. It highlights the dynamic side of production, where businesses are able to respond to price signals from consumers by increasing output. This responsiveness relies on flexible production systems, available resources, and, most importantly, time. From the digital apps on your phone to the extra shifts at a local factory, elastic supply is all around us, helping to balance what we want with what is available. Understanding it provides a clearer picture of how our everyday economy works, from the price of a pizza to the availability of a ride home.
Footnote
[1] PES (Price Elasticity of Supply): The full English term is "Price Elasticity of Supply." It is a numerical measure of the responsiveness of the quantity supplied of a good to a change in its price, calculated as the percentage change in quantity supplied divided by the percentage change in price.