AP® Microeconomics review sheet from Aim for Five (aimforfive.com/micro/units/2/2-4)
Unit 2 · Topic 2.4
2.4 Price Elasticity of Supply
Price elasticity of supply measures how strongly quantity supplied responds to a change in price. Supply is more elastic when producers can easily get more inputs and when they have more time to adjust. It helps explain who bears a tax and how prices respond to demand shifts.
Key terms
- price elasticity of supply
- elastic supply
- inelastic supply
- perfectly inelastic supply
- time to adjust
The formula
Price elasticity of supply (Es) = % change in quantity supplied ÷ % change in price.
Price and quantity supplied move in the same direction, so Es is positive. No minus sign to drop.
| Value of Es | Name | Shape of the supply curve |
|---|---|---|
| Greater than 1 | Elastic | Relatively flat |
| Less than 1 | Inelastic | Relatively steep |
| Exactly 1 | Unit elastic | (any straight line through the origin is unit elastic) |
| Zero | Perfectly inelastic | Vertical: quantity is fixed |
| Infinite | Perfectly elastic | Horizontal at one price |
What makes supply elastic
- Time to adjust: usually the biggest factor. Right away, a farmer can't grow more apples; over a few years, she can plant more trees. Supply is more elastic in the long run than in the short run.
- Easy access to inputs: if a firm can quickly hire workers or buy materials without driving up their prices, supply is elastic.
- Spare capacity: a factory running at half capacity can increase output quickly; one already running around the clock can't.
- Ability to store goods: a firm with inventory in a warehouse can respond to a price rise by selling more right away.
- Inputs that can switch between uses: a bakery that can easily switch ovens from cakes to bread has more elastic bread supply.
Three time frames
It helps to picture supply over three time frames. In the immediate period (today), the amount for sale is whatever is already made, so supply is close to perfectly inelastic: a vertical line. In the short run, firms can add workers and run machines longer but can't build new factories, so supply is somewhat elastic. In the long run, firms can build new plants and new firms can enter, so supply is most elastic: a much flatter line.
That's why a sudden jump in demand for something like face masks or concert tickets first sends prices way up, and why prices often ease later as production catches up.
Why it matters
Supply elasticity decides how a demand shift splits between price and quantity. If supply is very elastic (flat), an increase in demand mostly raises quantity with little price change. If supply is very inelastic (steep), the same increase mostly raises price.
The extreme case is perfectly inelastic supply, a vertical line. Think of seats in a sold-out stadium on game night: there are only so many. If demand rises, the price rises and the quantity stays exactly the same.
Supply elasticity also shapes tax incidence in topic 2.8: the side of the market that's less elastic ends up paying more of a tax.
Worked examples
Try each one yourself first, then open the solution.
- Example 1Calculator allowed
Calculating Es
When the price of handmade mugs rises from $20 to $25, a potter increases the number she makes each month from 100 to 110. Calculate the price elasticity of supply (from the starting values) and classify it.
Show the solutionHide the solution
- Step 1: % change in quantity supplied = (110 − 100) ÷ 100 = 10%.
- Step 2: % change in price = (25 − 20) ÷ 20 = 25%.
- Step 3: Es = 10% ÷ 25% = 0.4.
- Step 4: 0.4 is less than 1, so supply is inelastic: handmade mugs take time and skill, so output can't jump quickly.
Answer: Es = 0.4, inelastic.
- Example 2
Short run vs. long run (classic trap)
A new study makes avocados much more popular. Describe what happens to price and quantity right away and after several years, using the idea of supply elasticity.
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- Step 1: Demand shifts right in both cases.
- Step 2: Right away, avocado supply is very inelastic: trees take years to mature. The steep supply curve means the demand increase mostly raises price, with only a small rise in quantity.
- Step 3: Over several years, growers plant more trees, so supply becomes more elastic (flatter). The same demand increase now shows up more as higher quantity and less as higher price.
- Step 4: The trap: treating supply elasticity as fixed. Time to adjust is the biggest factor.
Answer: Short run: a large price rise and a small quantity rise. Long run: supply is more elastic, so quantity rises more and the price rise is smaller.
Common mistakes
- Putting a minus sign on Es. Quantity supplied and price move together, so Es is positive.
- Forgetting time. Supply is almost always more elastic in the long run than in the short run.
- Confusing a vertical supply curve (perfectly inelastic, quantity fixed) with a horizontal one (perfectly elastic, price fixed).
On the exam
- Questions often describe a product (concert seats, rare paintings, mass-produced T-shirts) and ask whether its supply is elastic or inelastic; give the reason, usually time or input availability.
- When a free-response question says supply is perfectly inelastic, describe a vertical supply curve and remember that a demand shift then changes only the price.
Connected topics
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Check yourself
4 questions on 2.4 Price Elasticity of Supply. Pick an answer to see if you got it, and why.
When the price of lumber rises by 20 percent, the quantity of lumber supplied rises by 10 percent. The price elasticity of supply is
The supply of a farm crop is usually more elastic five years after a price change than one month after because
A concert hall has exactly 2,000 seats, and the number can't change for tonight's show. If demand for tickets increases, what happens to the price and number of tickets sold, assuming the price can adjust freely?
Which of the following goods most likely has the most price-elastic supply?
0 of 4 answered