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Elasticity of Supply: Definition & Formula

Instructor: Tara Schofield
Is a product in high demand? Or are consumers not concerned about inventory amounts? Elasticity of supply explains how availability of a product affects consumer behavior. This lesson explains how elasticity of supply works.

What is Elasticity of Supply?

In business, you often hear the term 'elasticity' used in regards to supply and demand. But what does it mean?

Elasticity explains how sensitive a consumer is to a change. It is the reaction of consumers based on something that affects the product they want to buy. Elasticity can be affected by price, the features of a product, other products on the market, and the inventory or supply of a product. Elasticity explains how much these factors will cause consumers to change their behavior.

In terms of elasticity of supply, consumer behavior is affected by how much inventory of a product is available. The greater the inventory, the less responsive a consumer will be. The higher the elasticity of supply, the more anxious consumers will be to purchase a product when it is available.

Companies use elasticity of supply to help build excitement for new releases and highly demanded products. However, not having enough inventory can also backfire. If consumers want a product and cannot get it, they may find a substitute for that item and not purchase it again when it does become available. Understanding elasticity of supply is important in managing inventory and handling supply and demand.

Example of Elasticity of Supply

A perfect example of elasticity of supply is the release of Apple's first iPhone. Consumers wanted the product. They were willing to pay top dollar to have the phone on the day of release. Consumers also knew there would not be enough phones to meet demand, thus creating a waiting list for customers who did not get the phone on the first release.

Because the stock was very limited, price became irrelevant. If someone was lucky enough to purchase an iPhone on release day, they could easily sell that same phone for two or three times the amount they paid for it. The lack of supply increased consumer demand. The elasticity of supply was in full-force. Consumers weren't concerned about price, they were concerned about product availability.

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