Microeconomics Essentials: Elasticity of Supply and Short-Run vs Long-Run Adjustment

Price Elasticity of Supply (PES): What It Measures

Price elasticity of supply measures how responsive the quantity supplied of a good is to a change in its price, holding other factors constant (technology, input prices, number of sellers, etc.).

It is defined as:

Price Elasticity of Supply (PES) = % change in quantity supplied / % change in price

Interpretation:

• PES > 1: supply is elastic (quantity supplied responds strongly to price changes).
• 0 < PES < 1: supply is inelastic (quantity supplied responds weakly).
• PES = 0: supply is perfectly inelastic (quantity supplied does not change at all).
• PES → ∞: supply is perfectly elastic (suppliers will provide any amount at a given price, but none at a lower price).

Why Supply Elasticity Depends on “Flexibility”

Supply elasticity is largely about how easily producers can adjust output when price changes. Four practical drivers are especially important: inventories, spare capacity, production time, and input flexibility.

1) Inventories (Can You Sell More Without Producing More?)

If firms have finished goods in stock, they can increase quantity supplied quickly when price rises by releasing inventory. This makes supply more elastic in the short run than it otherwise would be.

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• Event tickets: there is no “inventory” of extra seats for a sold-out concert. Once the venue is full, quantity supplied cannot rise at any price.
• Manufactured products: retailers often hold inventory (e.g., smartphones, shoes). A price increase can lead to more units supplied immediately by drawing down stock.

2) Spare Capacity (Can You Produce More With Existing Facilities?)

Spare capacity means machines, workers, or store hours are not fully utilized. With spare capacity, firms can raise output quickly (extra shifts, longer hours), increasing short-run elasticity.

• A factory running at 60% capacity can ramp up production faster than one already running 24/7.
• A restaurant with empty tables can serve more meals if prices rise; a fully booked restaurant cannot.

3) Production Time (How Long Until Output Can Increase?)

Some goods take time to produce. When production time is long, supply is less responsive in the short run.

• Agricultural goods: planting and growing take months. A higher wheat price today cannot create more wheat next week.
• Manufactured goods: production can often be scaled faster than agriculture, but still may require ordering parts, scheduling labor, and meeting quality checks.

4) Input Flexibility (Can You Get More Labor/Materials Easily?)

Even if a firm wants to produce more, it may be constrained by inputs.

• If skilled labor is scarce, output cannot rise much without large wage increases.
• If a key component is backordered (e.g., microchips), supply becomes less elastic.

Short Run vs Long Run: Why Supply Usually Gets More Elastic Over Time

Supply is typically more inelastic in the short run and more elastic in the long run because firms have more time to adjust capacity and inputs.

Extreme Case: Perfectly Inelastic Supply in the Very Short Run

When quantity supplied is fixed no matter what price is, supply is perfectly inelastic (a vertical supply curve). This often happens when:

• The good is tied to a fixed capacity (stadium seats, hotel rooms in a city during a major event).
• The good is perishable and already produced (fresh fish landed this morning; the catch is fixed for the day).

Event tickets example: A venue has 20,000 seats. For a specific concert, quantity supplied is 20,000 tickets (or fewer if the artist withholds seats). If demand surges, price may rise dramatically on resale markets, but the number of tickets cannot increase.

Extreme Case: More Elastic Supply Over Time

Over time, firms can expand capacity, new firms can enter, and supply chains can adjust. Even for goods that are very inelastic today, supply can become more elastic later.

• Agriculture: next season, farmers can plant more acres if prices stay high.
• Manufacturing: firms can invest in new equipment, sign new supplier contracts, or relocate production.

How to Calculate PES Using the Midpoint Method

Elasticity should not depend on whether you measure the change from the first point to the second or vice versa. The midpoint method solves this by using averages in the denominator.

Midpoint formulas:

%ΔQs = (Qs2 - Qs1) / ((Qs2 + Qs1)/2) × 100%  %ΔP  = (P2 - P1) / ((P2 + P1)/2) × 100%  PES = (%ΔQs) / (%ΔP)

Practice 1: Manufactured Product With Some Spare Capacity

Scenario: A gadget producer raises price from $50 to $60. Quantity supplied rises from 1,000 to 1,300 units per week.

Step 1: Compute % change in quantity supplied (midpoint).

Qs1 = 1000, Qs2 = 1300  ΔQs = 300  Average Qs = (1000 + 1300)/2 = 1150  %ΔQs = 300 / 1150 = 0.2609 = 26.09%

Step 2: Compute % change in price (midpoint).

P1 = 50, P2 = 60  ΔP = 10  Average P = (50 + 60)/2 = 55  %ΔP = 10 / 55 = 0.1818 = 18.18%

Step 3: Compute PES.

PES = 26.09% / 18.18% ≈ 1.44

Interpretation: Supply is elastic. The firm can expand output relatively easily (inventory, overtime, spare capacity, flexible inputs).

Practice 2: Agricultural Good in the Short Run

Scenario: A drought pushes the market price of tomatoes from $1.00 to $1.40 per pound. In the short run, quantity supplied only rises from 10,000 to 10,500 pounds per week (farmers can harvest slightly more intensively, but cannot instantly grow more).

Step 1: %ΔQs (midpoint).

Qs1 = 10000, Qs2 = 10500  ΔQs = 500  Average Qs = (10000 + 10500)/2 = 10250  %ΔQs = 500 / 10250 = 0.04878 = 4.878%

Step 2: %ΔP (midpoint).

P1 = 1.00, P2 = 1.40  ΔP = 0.40  Average P = (1.00 + 1.40)/2 = 1.20  %ΔP = 0.40 / 1.20 = 0.3333 = 33.33%

Step 3: PES.

PES = 4.878% / 33.33% ≈ 0.15

Interpretation: Supply is very inelastic in the short run because biological growing time and land constraints limit adjustment.

Practice 3: Event Tickets (Very Short Run)

Scenario: A venue has 20,000 seats. Price rises from $100 to $150 due to a surge in demand, but quantity supplied remains 20,000 tickets.

Qs1 = 20000, Qs2 = 20000  %ΔQs = 0  PES = 0 / %ΔP = 0

Interpretation: Supply is perfectly inelastic in the very short run.

Reading PES in Real Situations: What to Look For

• Is output capped by capacity? If yes, supply is inelastic (tickets, hotel rooms, parking spaces).
• Can firms draw down inventory? If yes, supply is more elastic immediately (retail goods).
• How long is the production cycle? Longer cycles mean inelastic short-run supply (crops, livestock).
• Can new firms enter or existing firms expand? Entry/expansion makes long-run supply more elastic (many manufactured goods).

Combining Demand and Supply Elasticities: Who Bears the Burden of Market Changes?

When market conditions change (a demand surge, a supply disruption, or later a tax), the side of the market that is less elastic tends to bear more of the burden because it adjusts quantity less and therefore absorbs more of the adjustment through price.

Think in terms of “who can more easily walk away or adjust?”

• If demand is inelastic (buyers must have it), buyers end up paying a larger share of price increases.
• If supply is inelastic (sellers can’t adjust output), sellers bear more of the burden when prices are pushed down or when costs rise and they cannot reduce quantity much without large losses.

Burden From a Demand Increase (e.g., sudden popularity)

Event tickets: Demand becomes very high near the event date. Supply is perfectly inelastic (fixed seats). Result: most adjustment happens through higher prices, not higher quantity. Buyers bear the burden of the demand surge via higher prices.

Manufactured products: If a new gadget goes viral, supply may be somewhat elastic (overtime, extra shifts, inventory). Result: quantity rises more, price rises less than it would with fixed capacity.

Burden From a Supply Decrease (e.g., input cost shock)

Suppose a key input becomes more expensive, shifting supply inward. The price tends to rise and quantity tends to fall. Who is hit harder depends on demand elasticity:

• Inelastic demand (e.g., a staple food in the short run): consumers keep buying nearly the same amount, so prices rise a lot; consumers bear more of the burden.
• Elastic demand (e.g., a discretionary product with many substitutes): consumers cut back strongly, so quantity falls a lot; producers bear more of the burden through lost sales.

A Simple “Incidence Intuition” Checklist (No Tax Yet, Just Burden)

Use this checklist whenever you compare two markets facing a similar shock:

• More inelastic demand + more elastic supply → price changes are large; buyers absorb more of the impact.
• More elastic demand + more inelastic supply → quantity changes are large; sellers absorb more of the impact.
• Both inelastic → price changes can be very large; quantity changes small.
• Both elastic → quantity changes large; price changes smaller.

Mini-Example: Same Demand Shock, Different Supply Elasticity

Shock: A big sports win increases local demand for a celebratory item.

Step-by-Step Skill Builder: Interpreting “More Elastic Over Time” With Numbers

Consider a crop where farmers cannot change acreage immediately but can next season.

Short run (this month)

Price rises from $2.00 to $2.40. Quantity supplied rises from 5,000 to 5,200.

Average Q = 5100, ΔQ = 200 → %ΔQs = 200/5100 = 3.92%  Average P = 2.20, ΔP = 0.40 → %ΔP = 0.40/2.20 = 18.18%  PES ≈ 0.216

Supply is inelastic.

Long run (next season)

With time to plant more, price rises from $2.00 to $2.40 and quantity supplied rises from 5,000 to 6,500.

Average Q = 5750, ΔQ = 1500 → %ΔQs = 1500/5750 = 26.09%  %ΔP = 18.18%  PES ≈ 1.44

Supply becomes elastic because producers can adjust acreage, equipment use, and labor plans.