What is Price Elasticity of Supply?

The response of product supply to change in price is called price elasticity of supply. The supply curve slopes upward because higher prices mean higher profits for the suppliers, so they supply high. It continues to the level when marginal benefit exceeds the marginal cost.

For a profit-maximizing supplier, the profit would be higher for every unit if marginal revenue (MR) is higher than marginal cost (MC). The seller will continue supplying up to the point where MR=MC. If marginal revenue is less than the marginal cost, the seller can’t afford to supply a single product.

In real life, we may see a change in demand very quickly for many reasons. High demand for a product calls for a high price. The seller of an elastic product can maximize profits just be increasing or decreasing the supply according to the demand trends. However, the supplier of the inelastic product shall take a long time to respond to the price changes.

The price elasticity of a product is expressed with E. To distinguish it from price elasticity of demand; it may be denoted as Es.

To calculate the price elasticity of supply we use following formula:

Es= ∆Q/∆P x P/Q

How?

supply elasticity formula

Measurement of Perfect Price Elasticity of Supply

The perfect elastic supply is expressed graphically as a horizontal supply curve. In this graph, the seller is ready to sell an infinite number of product items for $35.00 or more. However, a slight fall (infinitely small) in price can reduce the supply to zero.

The perfect elasticity of supply is expressed with value of Es=∞

The symbol of infinity is an expression of a hugely significant number which may increase to infinity. For example in case of our graphical presentation, if we decrease price only one cent, the product is no more profitable to the seller as every unit costs him more than the revenue. He can stop the production to zero without wasting any time.

Why Infinity Symbol is used?

The symbol infinity (∞) is used to understand a huge plus or negative number for which a lot of calculations can’t be made. Otherwise the infinity is a bad number being merely a concept. It creates problems in calculations.

In our model, it has a few characteristics of a real number, yet it can be considered any imaginable or unimaginable number or none of them. We can’t surely say what number is this. So it can only be taken as a concept.

Can we calculate it?

Perhaps yes or no…!

We can apply for as many finite numbers with the infinity as we like. But the result is going to be an infinity regardless of minus or plus symbols.

So, instead of calculating infinity, we take the symbol as a concept to visualize infinitely small or large numbers. You can find out some results by calculating infinity with finite numbers. You need to keep in mind:

1- Infinity applied with any positive number results into infinity.

2- Zero divided by infinity yields a zero.

3- Infinity can’t be divided by a zero.

4- Application of a minus number with infinity results into a negative infinity.