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How to calculate price elasticity of supply

Divide the percentage change in quantity supplied by the percentage change in price, then use the result to classify supply as elastic, unit-elastic or inelastic.

Daniel Okafor

By Daniel Okafor · Business Editor

3 min read

Calculate price elasticity of supply by dividing the percentage change in quantity supplied by the percentage change in price. Lumen Learning defines the measure as a unitless ratio showing how quantity supplied responds to a price change.

For two observations, use either an initial-value formula or a midpoint formula and label the method. The midpoint method uses the average of both observations, so reversing the comparison produces the same result.

Formula

Let Q1 and Q2 be quantity supplied at the first and second observations, and let P1 and P2 be the corresponding prices.

Initial-value formula

PES = [(Q2 − Q1) / Q1] ÷ [(P2 − P1) / P1]

  1. Subtract Q1 from Q2, then divide by Q1.
  2. Subtract P1 from P2, then divide by P1.
  3. Divide the quantity-supplied percentage change by the price percentage change.

For example, if price rises from $20 to $25 and quantity supplied rises from 500 to 600 units, quantity supplied changes by 100 ÷ 500, or 20%. Price changes by 5 ÷ 20, or 25%, making PES 20% ÷ 25% = 0.8.

Midpoint formula

PES = [(Q2 − Q1) / ((Q1 + Q2) / 2)] ÷ [(P2 − P1) / ((P1 + P2) / 2)]

Lumen Learning’s midpoint approach calculates each percentage change using the average of the two values. Use the same method for both percentage changes; the initial-value and midpoint approaches can produce different results.

Worked example: midpoint price elasticity of supply

In Lumen Learning’s apartment example, monthly rent rises from $650 to $700 and the quantity of apartments offered rises from 10,000 to 13,000.

  1. Midpoint quantity: (10,000 + 13,000) ÷ 2 = 11,500.
  2. Quantity-supplied change: (13,000 − 10,000) ÷ 11,500 = 0.2609, or 26.1%.
  3. Midpoint price: ($650 + $700) ÷ 2 = $675.
  4. Price change: ($700 − $650) ÷ $675 = 0.0741, or 7.4%.
  5. PES: 26.1% ÷ 7.4% = 3.53, after rounding.

The result is elastic because 3.53 is greater than 1: quantity supplied changed by a larger percentage than price.

How to read the result

  • PES below 1: inelastic supply. Quantity supplied changes by a smaller percentage than price.
  • PES equal to 1: unit-elastic supply. Quantity supplied changes by the same percentage as price.
  • PES above 1: elastic supply. Quantity supplied changes by a larger percentage than price.
  • PES equal to 0: perfectly inelastic supply, where quantity supplied does not change when price changes.

Lumen Learning says supply elasticities measured along a supply curve are positive. If price and quantity supplied both fall, both percentage changes are negative and their ratio is positive.

Why supply responsiveness can differ

Economics Help says spare capacity, available inventories, time to vary capital and easier access to inputs can make supply more responsive. Firms operating near capacity, with little stock or with limited ability to add capital or skilled inputs may have less responsive supply.

Frequently asked questions

What is the midpoint formula for price elasticity of supply?

The midpoint formula is [(Q2 − Q1) / ((Q1 + Q2) / 2)] ÷ [(P2 − P1) / ((P1 + P2) / 2)]. It calculates each percentage change using the average of the two observations, according to Lumen Learning.

How do you interpret a price elasticity of supply below or above 1?

A result below 1 is inelastic: quantity supplied changes by a smaller percentage than price. A result of 1 is unit-elastic, while a result above 1 is elastic, meaning quantity supplied changes by a larger percentage than price.

Why can price elasticity of supply be more elastic in the long run?

Economics Help says more time can allow firms to vary capital. Spare capacity, inventories and easier access to inputs can also make output more responsive to price.

Sources