Price Elasticity of Supply

A bakery can hire another worker and buy more flour this week, so its output bends easily when the price of bread rises. An oil field cannot conjure new wells overnight; drilling, permits, and geology take years. That difference in flexibility is exactly what price elasticity of supply captures: the percent change in quantity supplied divided by the percent change in price. When that ratio is above 1, supply is elastic — producers ramp up output fast. Below 1, supply is inelastic — output barely budges even when price jumps.

The midpoint formula keeps the measurement consistent whether price is rising or falling. Take the change in quantity divided by the average of the two quantities, then divide by the change in price divided by the average of the two prices. For a price rise from 10 to 12 dollars and output rising from 500 to 650: percent change in quantity is 150 divided by 575, about 26.1 percent; percent change in price is 2 divided by 11, about 18.2 percent. Divide those and elasticity is about 1.43 — elastic.

Time horizon drives elasticity more than almost anything else. In the immediate run, a farmer's crop is already in the ground, so supply is close to fixed. Over a year, that farmer can plant more. Over a decade, whole new farms and technologies emerge, so supply becomes far more elastic. This connects directly to what a tax or price control does to markets: the more elastic supply is, the more producers can escape a tax burden by cutting output, shifting more of the burden onto buyers instead.