Questions: Price Elasticity of Supply

Question 1

A price increase of 10% causes quantity supplied to increase by 4%. What is the price elasticity of supply, and how is it classified?

• A. PES = 2.5; elastic supply
• B. PES = 0.4; inelastic supply
• C. PES = 0.4; elastic supply
• D. PES = 6.0; perfectly elastic supply

Answer: (B)

PES = (%ΔQs) / (%ΔP) = 4% / 10% = 0.4. Since PES < 1, supply is inelastic — producers increase quantity by a smaller proportion than the price increase. A PES of 0.4 indicates significant constraints on production expansion, such as limited inputs, fixed capacity, or biological production limits. The classification threshold is PES = 1 (unit elastic): above 1 is elastic, below 1 is inelastic.

Question 2

Two supply curves pass through the same market equilibrium point. Curve A is steeper than Curve B. Which statement correctly distinguishes their elasticities?

• A. Curve A is more elastic because a steeper slope signals stronger producer willingness to supply
• B. Both curves have the same elasticity at the equilibrium point since they pass through the same price-quantity combination
• C. Curve B is more elastic because a given price change produces a larger percentage change in quantity supplied
• D. Elasticity cannot be compared without knowing whether the curves are linear

Answer: (C)

Slope and elasticity are related but not equivalent. Slope measures absolute changes (ΔP/ΔQ); elasticity measures proportional changes (%ΔQs/%ΔP). At the same price-quantity point, a steeper supply curve (smaller ΔQs for a given ΔP) implies a lower percentage change in quantity for a given percentage price change — making it less elastic. A flatter curve (Curve B) allows more quantity response per unit price change, making it more elastic at that point.

Question 3

In most industries, supply is more elastic in the long run than in the short run.

• T. True
• F. False

Answer: True

Time horizon is the dominant determinant of supply elasticity. In the short run, firms are constrained by fixed capital — you cannot build a new factory in a week, and existing capacity is a hard limit on output. In the long run, firms can build new plants, hire more workers, and new firms can enter the industry, making total supply much more responsive to price changes. Housing is the canonical example: in the short run supply is very inelastic (construction takes time), but over years, supply expands substantially in response to sustained high prices.

Question 4

If a good has inelastic supply, a large increase in demand will raise its price mainly slightly, because producers can seldom expand output easily.

• T. True
• F. False

Answer: False

This reverses the relationship. Inelastic supply means producers *cannot* quickly expand output — they have limited capacity, specialized inputs, or biological constraints. When demand surges and supply cannot respond proportionally, the price increase is *larger*, not smaller. A market with elastic supply can absorb a demand shock by expanding output, keeping prices relatively stable. It is elastic supply that limits price increases; inelastic supply amplifies them.

Question 5

Why does the time horizon matter so much for supply elasticity? Use a real-world example to illustrate how the same good can have very different supply elasticities depending on the time frame.

Model answer: Time horizon matters because supply elasticity depends on how quickly firms can adjust their production capacity — and capital adjustments take time. In the short run, firms work with fixed plant, equipment, and sometimes fixed inputs (like farmland or licensed venues), so output cannot change much regardless of price. In the long run, new plants can be built, new firms can enter, and input constraints can be resolved. Housing illustrates this clearly: in the short run, a city's housing supply is nearly fixed (construction takes 1-3 years), so a sudden demand surge drives prices up sharply. Over 5-10 years, developers respond to those high prices with new construction, and supply expands — the same market that was inelastic in the short run becomes moderately elastic over a decade.

The same good, same market, but two very different elasticities at different time scales. This is why economists distinguish short-run and long-run supply curves, and why policy effects look very different depending on the time horizon being analyzed.