Edited by Paul Elegbeleye and Toluwalase Solanke
Table of Contents
Introduction
Price Elasticity of Supply (PES) measures the responsiveness of the quantity supplied of a good or service to a change in its price.
It is calculated as the percentage change in quantity supplied divided by the percentage change in price. PES can be perfectly inelastic (0), where quantity supplied does not change regardless of price; inelastic (between 0 and 1), where quantity supplied changes by a smaller percentage than price; unitary elastic (exactly 1), where both change by the same percentage; elastic (greater than 1), where quantity supplied changes by a larger percentage than price; or perfectly elastic (infinity), where suppliers will supply any amount at a given price.
The main factors affecting PES include the time period under consideration (supply is more elastic in the long run than in the short run), the availability of spare production capacity, the ease of shifting factors of production between uses, the ability to store goods, and the length and complexity of the production process.
A high PES means producers can quickly increase output when prices rise, while a low PES indicates significant constraints on expanding production.
PES=% Change in Quantity Supplied% Change in Price
Factors Affecting Elasticity of Supply
1. Time Period
The time period available for producers to respond to a price change is the most important factor affecting the elasticity of supply.
In the immediate short run (market period), supply is perfectly inelastic because firms cannot change output at all, for example, fresh fish already caught or tickets for a concert tonight. In the short run, supply is inelastic because some factors are fixed (e.g., factory size), so firms can increase output only slightly by hiring overtime or using more raw materials.
In the long run, however, supply becomes elastic or even perfectly elastic because all factors are variable; firms can build new factories, train more workers, and enter or exit the industry freely. Therefore, the longer the time period, the more elastic the supply.
2. Spare Production Capacity
Spare capacity refers to the amount of output a firm can produce without expanding its existing facilities.
If a firm has significant spare capacity, such as idle machinery, unused factory space, or underemployed workers, it can quickly increase production when prices rise, making supply elastic.
For example, a hotel with empty rooms can easily offer more rooms if prices go up.
Conversely, if a firm is already operating at full capacity (e.g., a factory running 24/7), it cannot increase output immediately without investing in new equipment, making supply inelastic in the short run.
3. Ease and Cost of Factor Substitution
Factor substitution means replacing one input (e.g., labour) with another (e.g., machinery) to increase production.
If a firm can easily and cheaply switch between inputs, for instance, using part-time workers or renting additional machines, then supply will be elastic. However, if production requires specialised, unique inputs that are difficult to obtain quickly (e.g., rare minerals, highly skilled surgeons), then supply will be inelastic.
The lower the cost and difficulty of substituting factors, the more responsive supply becomes to price changes.
4. Storage Ability and Perishability
The ability to store goods affects supply elasticity because stored goods can be released quickly when prices rise.
Non-perishable goods like rice, beans, cement, or electronics can be stored for long periods, so suppliers can hold inventories and increase supply immediately when prices go up, making supply elastic. In contrast, perishable goods like fresh tomatoes, milk, or flowers cannot be stored for long.
Farmers must sell them quickly before they spoil, so supply is inelastic or even fixed regardless of price changes. Also, if storage costs are very high, supply becomes less elastic.
5. Length and Complexity of Production Process
Goods that take a long time and many stages to produce have inelastic supply because output cannot be changed rapidly.
For example, producing cars, ships, aeroplanes, or cocoa (which takes years from planting to harvest) involves long production cycles. Even if prices rise sharply today, producers cannot increase supply tomorrow or next month.
On the other hand, goods with short, simple production processes, such as handmade crafts, fast food, or haircuts, allow for quick output adjustments, making supply elastic.
6. Mobility of Factors of Production
Factor mobility refers to how easily land, labour, capital, and entrepreneurship can move from one use or location to another.
If workers can easily retrain and move to a different industry, and machinery can be adapted for different products, then supply is elastic because resources can be reallocated quickly to produce the good whose price has risen. For example, a tailor can switch from making shirts to making face masks relatively easily.
However, if factors are immobile, such as specialised oil drilling rigs that cannot be used for farming, or workers with unique skills, then supply becomes inelastic.
7. Natural Constraints
Some industries face natural supply limits that cannot be overcome quickly. Agricultural supply is often inelastic in the short run because planting decisions are made months in advance based on expected prices, and weather, diseases, or pests can limit output.
Similarly, mining and extraction (e.g., crude oil, gold) face geological constraints; extracting more may require drilling new wells, which takes time and a huge investment.
Even if prices rise, supply remains inelastic until new sources are developed. These natural constraints make supply less responsive to price changes.
8. Number of Producers and Ease of Entry
If there are many producers in an industry and new firms can easily enter the market (low barriers to entry), then supply tends to be elastic.
When prices rise, existing firms expand output and new firms quickly join to profit from higher prices, for example, in retail trade, food catering, or small-scale manufacturing.
Conversely, if the industry is dominated by a few large firms with high barriers to entry (e.g., licences, patents, huge capital requirements), supply becomes inelastic because new competitors cannot enter quickly to boost total market supply.
Price Legislation (Government Intervention)
When the government imposes a maximum price (price ceiling) below equilibrium, such as rent controls or price caps on essential food items, it creates excess demand (shortage), often leading to rationing, black markets, and queuing.
Conversely, when it imposes a minimum price (price floor) above equilibrium, such as agricultural price supports or minimum wage, it creates excess supply (surplus), forcing the government to buy the excess output or store it, which can lead to wastage.
While price legislation aims to ensure affordability or fair income, it often results in market distortions, reduced efficiency, and unintended consequences like illegal trading or reduced producer incentives.
Final Thoughts
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Price is set by the interaction of demand (buyers) and supply (sellers) in a free market.
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Equilibrium price: Quantity demanded = Quantity supplied (no surplus/shortage)
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Disequilibrium: Shortage (price too low) or Surplus (price too high)
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Types of Supply: Individual, Market, Joint (together), Composite (same good, different sources), Short-run, Long-run
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Factors Affecting Elasticity of Supply: Time, spare capacity, factor substitution, storage, production length, factor mobility
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Price ceiling (max price below equilibrium) → Shortage
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Price floor (min price above equilibrium) → Surplus
Also Read: Concept Of Supply
