Price Elasticity of Demand vs Price Elasticity of Supply
Price Elasticity of Demand and Price Elasticity of Supply are two Elasticity concepts in AP Economics that students often mix up. Price elasticity of demand measures how responsive quantity demanded is to a change in the good's price. Price elasticity of supply measures how responsive the quantity supplied is to a change in price. Here is how they compare side by side.
It is the percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value is greater than 1 and inelastic when it is less than 1. Goods with many substitutes, that take a large share of income, or judged over a longer time horizon tend to be more elastic.
It is calculated as the percentage change in quantity supplied divided by the percentage change in price. Supply is considered elastic if the ratio is greater than 1, meaning the quantity supplied changes more than the price. Supply is inelastic if the ratio is less than 1.
Price Elasticity of Demand vs Supply: Same Formula, Opposite Sign
| Price Elasticity of Demand | Price Elasticity of Supply | |
|---|---|---|
| Sign of the raw answer | Negative, since price and quantity demanded move in opposite directions, then reported as an absolute value | Positive, since price and quantity supplied move together |
| What makes the number large | Close substitutes, a big share of the budget, a luxury rather than a necessity, and time to switch | Spare capacity, cheap storage, easy entry by new firms, and time to build |
| Behavior along a straight line | Changes at every point, from very large near the price intercept to zero at the quantity intercept | A straight line through the origin is unit elastic at every point, however steep it looks |
| Total revenue test | Works, since a price rise raises revenue when demand is inelastic and lowers it when demand is elastic | Does not exist, since a higher price lifts both price and quantity supplied, so seller revenue always rises |
| Effect of a longer time horizon | More elastic, because buyers find substitutes and change the habits built around the good | More elastic, and by more, because output can be almost fixed on the day and highly responsive once firms retool or new firms enter |
| Role in tax incidence | Inelastic demand pushes the burden onto consumers | Inelastic supply pushes the burden onto producers |
| Most common exam error | Treating -2 as smaller than -0.5 instead of comparing absolute values | Judging elasticity from steepness, which fails for every line drawn through the origin |
Only one of the two comes out negative, and the reporting convention hides it
Both elasticities divide a percentage change in quantity by a percentage change in price, and both normally use the midpoint formula so the answer does not depend on which point you start from. The arithmetic is identical. The sign is not. Demand slopes down, so a price rise produces a fall in quantity demanded and the raw ratio comes out negative. Supply slopes up, so its ratio comes out positive. Because almost every textbook reports demand elasticity as an absolute value, a student who keeps the minus sign and then compares it against 1 reaches the wrong verdict. A value of -2 is elastic and a value of -0.5 is inelastic, even though -2 sits lower on a number line. Strip the sign first, then compare against 1. Supply needs no such step, and a negative supply elasticity should make you stop and check the arithmetic. The one standard case of a higher price bringing out less is an individual's supply of labor, where above some wage the income effect of the extra pay outweighs the substitution effect and the curve bends backwards.
A straight supply line through the origin is unit elastic however steep it looks
Steepness misleads on both curves, but it fails for supply in a very specific way. Draw any straight supply curve that passes through the origin. Whatever its slope, the percentage change in quantity always equals the percentage change in price along it, so elasticity is exactly 1 at every point. A near-vertical line through the origin and a near-horizontal line through the origin are equally elastic. What decides the answer is the intercept. A straight supply curve meeting the price axis above the origin is elastic everywhere along it, and one meeting the quantity axis to the right of the origin is inelastic everywhere along it. Demand behaves differently again. Along a straight downward-sloping demand curve, elasticity slides from very large near the price intercept, through exactly 1 at the midpoint, down to zero at the quantity intercept, so the same line is elastic on its upper half and inelastic on its lower half. One curve, two verdicts, which is why an elasticity question has to name the point being measured.
Tax incidence is the one calculation that needs both numbers at once
Work an example where the two are measured in the same market. Price moves from $8 to $12, so the midpoint percentage change in price is $4 over $10, or 40 percent. Quantity demanded falls from 90 to 70, a midpoint change of 20 over 80, or 25 percent, giving a demand elasticity of 0.625 in absolute value, which is inelastic. Quantity supplied rises from 60 to 100, a midpoint change of 40 over 80, or 50 percent, giving a supply elasticity of 1.25, which is elastic. Now add an excise tax of $3 a unit. The share borne by consumers equals the supply elasticity divided by the sum of the two, which is 1.25 over 1.875, or two thirds. Consumers absorb $2 of the tax through a higher price, producers absorb $1 through a lower net price, and the side that could respond least ends up paying most. Neither elasticity settles that on its own, which is the practical reason the two are taught side by side.
Frequently asked questions
Can price elasticity of supply be negative?
Price elasticity of supply is positive in nearly every case, because a higher price makes selling more attractive and firms respond by producing more. The standard exception is an individual's supply of labor, where above some wage an extra dollar an hour leads a worker to work fewer hours, since the income effect of the higher wage outweighs the substitution effect that pulls toward more work. Outside that case, a negative answer on a problem set almost always means the two quantities were entered in the wrong order rather than a genuine economic result.
Which elasticity decides who pays an excise tax?
Both elasticities decide it, and only their ratio matters. The side of the market with the lower elasticity carries the larger share, because that side has fewer alternatives and cannot dodge the tax by changing quantity. Consumers pay the fraction given by the supply elasticity divided by the sum of the two elasticities. With a demand elasticity of 0.625 and a supply elasticity of 1.25, consumers carry two thirds of a $3 tax, which is $2, and producers carry $1. Make demand perfectly inelastic and the consumer share becomes the whole tax. Make supply perfectly inelastic and producers carry all of it.
Does the total revenue test work for supply as well as demand?
Total revenue tests apply to demand only. Along a demand curve a price rise raises revenue when demand is inelastic and lowers it when demand is elastic, because price and quantity pull in opposite directions and the larger percentage change decides the outcome. Along a supply curve no such tension exists, since a higher price raises quantity supplied as well, so revenue rises whatever the elasticity is and the test tells you nothing. Supply elasticity earns its keep elsewhere, in tax incidence and in explaining how quickly a market clears after a shock.
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