The price elasticity of supply (SPI) measures how producers respond to changes in prices. A higher SPI indicates greater sensitivity to price changes, while a lower SPI indicates little or no effect on the quantity of goods produced. Manufacturers use SPI to determine how much they can charge for products without negatively impacting sales figures.
Sometimes referred to simply as SPI, the price elasticity of supply has to do with how producers respond to changes in the prices of the goods and services they offer. A higher value indicates greater sensitivity as an increase in prices is likely to lead to an increase in available supply. A lower value indicates that a change in price could have little or no effect on the quantity of goods and services produced and made available to consumers. From this perspective, the price elasticity of supply helps determine how supply is affected by an upward or downward change in price.
To understand the price elasticity of supply, it is important to consider what happens when a price change occurs with goods considered essentials rather than luxuries. For example, if the seller of a line of high-quality branded men’s suits chooses to increase the cost of those suits by 20%, it is likely that consumer interest in the products will shift to lesser-known brands that are to be of similar quality and also be less expensive. Here, the price is considered inelastic, as the change in price causes supply to increase as sales of the overalls begin to decline.
At the same time, the price elasticity of supply for goods and services that consumers deem essential may experience little change in supply as a result of a price increase. A company producing a popular line of canned vegetables may choose to increase the cost per box by 10% and see little or no change in the quantity of units sold. Here the price elasticity is considered to be higher, as the price increase has had no real effect on consumers’ buying habits.
Manufacturers pay close attention to the price elasticity of supply as a means of determining how much they can charge for various products without negatively impacting sales figures and finding themselves with more inventory or supply on hand than is deemed fair. In addition to using this approach to evaluate prices, correctly determining the price elasticity of supply is useful for adjusting price quotes to match expected demand for a product. This means that if a manufacturer finds a way to significantly reduce the cost of producing a particular item and chooses to reduce the unit price for consumers, the impact that reduction will have on demand can be predicted. In turn, the producer can adjust the production rate so that an adequate supply is available to take advantage of the increased demand.
Protect your devices with Threat Protection by NordVPN
