Price Elasticity of Supply

The Price Elasticity of Supply is the percentage change of supply when the price increases by 1%. $$\epsilon = \frac{d Q_S}{d P} \frac{P}{Q_S}$$

Example

The supply curve for bananas follows the equation Q_S = 3 P + 2.

The Price Elasticity of Supply is $$\epsilon = \frac{d Q_S}{d P} \frac{P}{Q_S} = 3 \frac{P}{Q_S} = 3 \frac{P}{3 P + 2}$$

If the price of a banana is $1, the Price Elasticity of Supply is \frac{3}{5} = 0.6. A 1% price increase (P =$1.01) leads to a 0.6% increase of banana supply (Q_S = 5.03).

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