The price elasticity of supply and the elasticity of demand are interrelated and used together to understand market production and purchasing. These measurements are both economic means of understanding price and demand sensitivity. Price elasticity expresses how much the price of a good or service is sensitive to supply.
Price Elasticity of Supply Versus Elasticity of Demand
Inelastic pricing does not change significantly whenever supply changes. That is, if supply increases or decreases, the price remains about the same. The elasticity of demand is expressed through a similar concept. That means inelasticity of demand refers to a product or service that does not respond much in demand to a change in price.
The two concepts differ in whether supply or demand is being considered. A change in price that does not cause a significant change in demand is an example of inelasticity of demand. Price inelasticity occurs when a change in supply does not significantly change prices.
Economists measure the elasticity of demand and price elasticity of supply using ratios that illustrate the intimate connection between price, demand and supply. When the elasticity of demand ratio is valued near or at zero, the product is said to be inelastic, while values closer to one are elastic. The price elasticity of supply ratio has a coefficient that expresses elasticity. When values exceed one, the product supply is elastic. Meanwhile, inelastic values fall below one.
Demand elasticity is influenced by factors such as brand loyalty, necessity, and the use of substitute items. Supply elasticity is impacted by factors such as the availability to manufacturers of raw materials, adequate product transportation, inventories and production complexity.