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  Price Elasticity of Supply
  The concept of price elasticity of supply is similar to the concept of price elasticity of demand. The price elasticity of supply is a number used to measure the sensitivity of changes in quantity supplied to given percentage changes in the price of a good, other things being equal. Price elasticity of supply indicates the percentage change in quantity supplied resulting from each 1 percent change in price. It can be calculated by dividing the percentage change in quantity supplied by the percentage change in price that caused it, given all other supply determinants:
     
 

Price elasticity of supply

     
  For example, if a 10 percent increase in price results in a 20 percent increase in quantity supplied, the price elasticity of supply is
     
 

     
  As supply curves generally slope upward, supply elasticity tends to be positive. An increase in price tends to generate an increase in quantity supplied, while a decrease in price tends to generate a decrease in quantity supplied. In the equation for price elasticity of supply, the signs of the numerator and the denominator are the same. The ratio, therefore, has a positive sign.
     
  As with demand, be sure you remember that the slope of a supply curve is an unreliable measure of its elasticity. The price elasticity of supply is related to, but isn't the same as, the slope of the supply curve.
     
The price elasticity of supply ranges from 0 to infinity. An elastic supply prevails when the price elasticity of supply is greater than 1. If the price elasticity of supply is equal to or greater than 0, but less than 1, an inelastic supply prevails. Finally, when the price elasticity of supply is just equal to 1, a unit elastic supply prevails. Box 7 summarizes the relationship between percentage changes in price and quantity supplied for various cases. The greater the price elasticity of supply of an item, the more responsive, or elastic, is the quantity supplied to given percentage price changes.
 
 
     
  Determinants of Price Elasticity of Supply
  In general, a good's price elasticity of supply depends on the extent to which costs per unit rise as sellers increase output. If unit costs of production rise only slightly as output expands, small percentage increases in price will result in large percentage increases in quantity supplied. Under such circumstances, supply will be very elastic, because small increases in price will allow sellers the possibility of large additional gains.
     
  When the price of an item increases, not only do existing firms tend to produce more, but additional firms are attracted to production of the item. However, it often takes a considerable amount of time for new firms to start producing an item. For this reason, supply tends to become more elastic over time, as the lure of profits attracts more sellers.
     
  For example, rising petroleum prices in the 1970s led to new exploration and development of previously unprofitable sources of oil. Over time, the quantity of petroleum products supplied increased substantially. After the sharp increase in the price of crude oil in 1973, oil reserves from the North Sea, Alaska, and Mexico were slowly developed. High oil prices slowly, but surely and massively, resulted in a response by suppliers. The sharp increase in crude oil prices that occurred between 2005 and 2008 encouraged more oil exploration and development of new technology for extracting known oil reserves over a long period of time. The high oil prices provide incentives to develop new technologies and alternative sources of energy. Higher gasoline prices lead to investment in new refineries. However, an immediate response is impossible because of the time required to develop new petroleum resources and energy alternatives. And when oil prices fall, as they did in late 2008 and early 2009, incentives to make investments in development of new energy sources also is diminished. The time necessary to gear up and make new supplies available varies from industry to industry. This variation in response time is an important determinant of variations in the price elasticity of supply among industries.
     
  The supply of housing also tends to become more elastic over time. For example, suppose rent controls, like those described in the chapter Using Supply and Demand Analysis, reduce market rents to 20 percent lower than they would be without the controls. Over a short period, the rental housing supply is likely to be quite inelastic, say 0.7. We can easily calculate the reduction in rental housing in the short run caused by the 20 percent reduction in market rents:
     
 

     
 

% change in quantity supplied = -14%

     
  Let's assume that, over 10 years, the price elasticity of supply of rental housing is higher, say, equal to 2. In this case, the percentage reduction in the quantity of rental housing supplied ultimately resulting from the 20 percent decline in rents will be:
     
 

     
 

% change in quantity supplied = -40%

     
  Landlords' reaction to rent controls will therefore intensify as time goes by. This implies that the shortage resulting from rent controls will become more acute over time.
     
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