Definition
Price Elasticity of Supply
Price elasticity of supply measures how much the quantity producers offer changes when the price changes; supply is elastic if output responds strongly, inelastic if it barely moves.
Supply is elastic when producers can quickly ramp output as prices rise (factory goods) and inelastic when they cannot (farm crops mid-season, real estate, mined commodities with long lead times).
In India, agricultural supply is highly price-inelastic in the short run because crops take a season to grow, which is why food prices can spike sharply when demand or weather shifts. Inelastic supply combined with inelastic demand makes prices very volatile.
Related terms
- CPI InflationConsumer Price Index inflation measures the change in retail prices of a basket of goods and services that households typically buy.
- Agri Commodity FuturesAgri commodity futures are contracts on farm products like soybean, cotton, guar and spices, traded mainly on NCDEX to help manage price risk and discover fair prices.
- Cobweb ModelThe cobweb model explains recurring price and output cycles in markets such as Indian agriculture, where supply responds to prices with a time lag because producers plan output on the basis of last season's prices.
- Price Elasticity of DemandPrice elasticity of demand measures how sharply the quantity people buy responds to a change in price; elastic goods react strongly, inelastic ones barely react.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.