Elasticity of supply is the amount a price changes based on changes in supply. An elastic good's price will change as the price changes. If the good is inelastic, as the supply of the product changes, the price does not change. Inelastic curves are very straight up and down. Elastic curves are straight horizontally. Elasticity of supply is an important factor for business managers. Business managers want to know how the price they offer for their product will change based on how much they produce.
Determine the original supply and the current supply and the original price and the current price. For example, Firm A made 1,000 widgets and sold them for $4. Currently, Firm A is producing 1,400 units and selling them at $4.50.
Subtract the original supply from the current supply, then divide by the original supply. This is the percent change of supply. In the example, 1,400 minus 1,000 equals 400. Then, 400 divided by 1,000 equals 0.4.
Subtract the original price from the current price, then divide by the original price. This is the percent change of price. In the example, $4.50 minus $4 equals $0.50. Then $0.50 divided by $4 equals 0.125.
Divide the percent change of supply by the percent change of price to find the elasticity of supply. In the example, 0.4 divided by 0.125 equals 3.2.