Supply elasticity is defined as the percentage change in quantity supplied divided by the percentage change in price. It is calculated as per the following formula:
Formula 3.3

The calculation of elasticity of supply is comparable to the calculation of elasticity of demand, except that the quantities used refer to quantities supplied instead of quantities demanded.

Factors that influence the elasticity of supply include the ability to switch to production of other goods, the ability to go out of business, the ability to use other resource inputs and the amount of time available to respond to a price change.

Over a short time period, firms may be able to increase output only slightly in response to an increase in prices. Over a longer period of time, the level of production can be adjusted greatly as production processes can be altered, additional workers can be hired, more plants can be built, etc. Therefore, elasticity of supply is expected to be greater over longer periods of time.

We would expect the supply elasticity of wheat to be very high as farmers can easily switch land that is used for wheat over to other crops such as corn and soybeans. On the other hand, an oil refinery cannot easily switch its production capacity over to another product, so low oil-refining margins do not reduce the quantity supplied by very much. Due to high capital costs, higher refining margins do not necessarily induce much greater supply. So the supply elasticity for oil refining is fairly low.
Marginal Benefit and Marginal Cost

Related Articles
  1. Insights

    What's Demand Elasticity?

    Demand elasticity is the measure of how demand changes as other factors change. Demand elasticity is often referred to as price elasticity of demand because price is most often the factor used ...
  2. Investing

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  3. Insights

    Calculating Income Elasticity of Demand

    Income elasticity of demand is a measure of how consumer demand changes when income changes.
  4. Insights

    Why We Splurge When Times Are Good

    The concept of elasticity of demand is part of every purchase you make. Find out how it works.
  5. Insights

    Explaining Quantity Demanded

    Quantity demanded describes the total amount of goods or services that consumers demand at any given point in time.
  6. Insights

    Introduction To Supply And Demand

    Find out all about supply and demand and how it relates to your daily purchases.
  7. Insights

    What is a Normal Good?

    A normal good is any good or service that sees an increase in demand due to an increase in income.
  8. Insights

    Explaining Aggregate Supply

    Aggregate supply is the total supply of goods and services an economy produces in a given time period.
Frequently Asked Questions
  1. How do I calculate a discount rate over time, using Excel?

    Learn how to calculate discount rate in Microsoft Excel and how to find the discount factor over a specified number of years.
  2. How long will it take for a bond to reach its face value?

    Learn when different savings bonds reach face value, and determine the best time to cash them in to get the highest return ...
  3. What's the difference between bills, notes and bonds?

    Treasury bills (T-Bills), notes and bonds are marketable securities that the U.S. government sells in order to pay off maturing ...
  4. What is the difference between yield to maturity and the coupon rate?

    A bond's coupon rate is the actual amount of interest income earned on the bond each year based on its face value.
Trading Center