Price Elasticity of Supply

The law of supply shows there is a direct or positive relationship between the price of a product and the quantity of that product supplied by producers. That is, when the price of a product increases, the quantity supplied by producers also increases. But when the price of a product falls, the quantity supplied also tends to fall.

The price elasticity of supply measures the impact of a price change on the quantity supplied of a product. The supply for the product is elastic when even a small change in the price of the product causes a larger change in the quantity supplied. Conversely, the supply of a product is inelastic when even a relatively large change in the product's price causes a smaller change in the quantity supplied. The price elasticity of supply is affected mainly by time.

The supply of a product tends to be elastic over a longer period of time or—to be more precise—in the long run. The long run is defined as the amount of time it takes for firms to change any resource used in production. In the long run firms are able to change the number of workers at the plant, the amount of raw materials or semifinished goods used in production, and even the size of the plant itself. Further, in the long run additional firms can enter into the industry or exit from the industry. Recall that the price elasticity of supply measures how responsive the quantity supplied of a product is to a change in its price. When a product's price increases, firms in the long run can devote more resources—workers, materials, capital goods, even a larger production facility—to the production of these products. Conversely, when the product's price falls, firms can decrease production by removing resources, closing plants, or exiting the industry. Thus, given enough time to adjust production levels, firms have the ability to respond to price changes.

The supply of a product tends to be inelastic for a shorter period of time, or the short run. In the short run, only certain resources can be changed, mainly the number of workers, the materials used to make the product, and some of the capital equipment within the plant. The plant size, however, cannot be changed in the short run. Moreover, in the short run additional firms are not able to enter the industry. What this means for firms is that they do not have sufficient time to adjust their level of output significantly. As a result, a change in the price of a product will have a smaller impact on the quantity supplied in the short run.

One special case is worth noting with regard to price elasticity of supply—products with a perfectly inelastic supply. A perfectly inelastic supply means that the supply is fixed or unchangeable regardless of a change in the price. While this may seem like an extreme situation, it is not all that uncommon. The number of beachfront properties along a certain stretch of sandy shoreline is perfectly inelastic. The number of seats available at a sports arena or stadium is perfectly inelastic. Individual works of art by Van Gogh, Rembrandt, or Picasso have a perfectly inelastic supply—there is just one original copy of each piece of artwork.

Items with a perfectly inelastic supply often command a high price when demand for the item is high. In 2012, for example, an Edvard Munch painting, The Scream, sold for a record $120 million at auction.[1] Many collectables also are in perfectly fixed supply. Collectibles include baseball cards, record albums, jewelry—even comic books! In 2010 a rare 1938 edition of Action Comics No. 1, which introduced Superman to the world, sold at auction for $1.5 million.[2]

  • [1] Caleb Melby, “The Top 10 Art Auction Sales Ever, Including Record $120 Million for Munch’s ‘The Scream,’ ” Forbes, May 3, 2012
  • [2] CNN, “Rare Comic of Superman Debut Fetches $1.5 Million,” CNN Entertainment, March 30, 2010
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