Fundamentals of Business Economics and Management · Theory of Demand and Supply

Law of Supply and Elasticity of Supply Explained

Q: What are the exceptions to the law of supply?

Supply may not rise with price for agricultural goods that depend on seasons, perishable goods, rare articles with fixed supply, and goods where sellers expect prices to rise further. Labour supply can also bend backwards at very high wages.

Q: What is the difference between the law of demand and the law of supply?

The law of demand says quantity demanded falls when price rises, so the relationship is inverse and the curve slopes downward. The law of supply says quantity supplied rises when price rises, so the relationship is direct and the curve slopes upward.

Q: What is the difference between change in supply and change in quantity supplied?

A change in quantity supplied is caused only by the good's own price and is a movement along the same supply curve. A change in supply is caused by other factors such as cost or technology and shifts the whole curve.

Q: What is the formula for elasticity of supply?

Es = percentage change in quantity supplied ÷ percentage change in price. You can also write it as (ΔQ ÷ ΔP) × (P ÷ Q), using the original price and quantity.

Updated 10 October 2026 · Fact-checked

The law of supply says that, other things equal, a higher price leads to a larger quantity supplied, and a lower price to a smaller quantity. Elasticity of supply measures how much quantity supplied changes for a given percentage change in price: Es = % change in quantity supplied ÷ % change in price.

Understand Law of Supply and Elasticity of Supply

Supply is the quantity of a good that sellers are willing and able to offer at a given price in a given period. It is not what they own. It is what they plan to sell at that price.

The law of supply says: other things remaining the same, when the price of a good rises, the quantity supplied rises. When the price falls, the quantity supplied falls. Price and quantity supplied move in the same direction. The reason is simple. A higher price means a higher profit per unit, so producers are keen to produce and sell more. A supply curve therefore slopes upward from left to right.

The phrase "other things remaining the same" matters. Cost of production, technology, taxes, subsidies, prices of related goods and the number of sellers are held constant. If any of these change, the whole supply curve shifts. That is a change in supply. A change in the good's own price only moves you along the same curve. That is a change in quantity supplied (extension or contraction).

Exceptions to the law of supply are cases where a higher price does not bring more supply. Common ones are: agricultural goods, where output depends on the season and weather and cannot be raised quickly; perishable goods, which must be sold even at low prices; a seller who expects prices to rise further and holds back stock; rare articles such as old paintings or antiques, whose supply is fixed; and a labour supply that may bend backwards when wages become very high, because workers choose more leisure.

Elasticity of supply tells you how responsive quantity supplied is to a change in price. If a small price rise leads to a big rise in supply, supply is elastic. If supply barely moves, it is inelastic. Supply is usually more elastic in the long run, because firms have time to expand capacity.

Key formulas to remember

Law of supply: Price ↑ ⇒ Quantity supplied ↑ (other things equal); Direct relationship. The supply curve slopes upward.
Elasticity of supply (percentage method): Es = (% change in quantity supplied) ÷ (% change in price); Es is normally positive, since price and quantity supplied move together.
Elasticity of supply (using values): Es = (ΔQ ÷ Q) ÷ (ΔP ÷ P) = (ΔQ ÷ ΔP) × (P ÷ Q); Here P and Q are the original price and quantity. ΔQ and ΔP are the changes.
Types of elasticity of supply: Es > 1 elastic; Es < 1 inelastic; Es = 1 unitary; Es = 0 perfectly inelastic; Es = ∞ perfectly elastic; A vertical supply curve means Es = 0. A horizontal one means Es = ∞. A linear supply curve through the origin has Es = 1 at every point. A linear curve that meets the price axis (positive intercept) has Es > 1. One that meets the quantity axis has Es < 1.

How to solve Law of Supply and Elasticity of Supply questions

Use this method for any question on the law of supply, its exceptions, shifts or elasticity.

1Read the question and decide the type: definition or statement, exception, shift versus movement, or numerical elasticity.
2For a statement question, check the direction: price and quantity supplied move in the same direction when other things are equal.
3For shift versus movement, ask what changed. If it is the good's own price, it is a movement along the curve. If it is cost, technology, tax, subsidy or other prices, the curve shifts.
4For elasticity, write down original price, new price, original quantity and new quantity.
5Find the change in each: ΔP = new price − old price and ΔQ = new quantity − old quantity.
6Compute the percentage changes using the original values, then divide: Es = %ΔQ ÷ %ΔP.
7Classify the result: above 1 elastic, below 1 inelastic, equal to 1 unitary.
8Match your answer to one of the four options and check that the sign and the type agree.

Quickest way: Fast elasticity check

When to use it: Use it for numerical MCQs where prices and quantities are simple numbers.

Convert both changes to percentages of the original values in your head.
Divide the quantity percentage by the price percentage.
If the quantity percentage is larger than the price percentage, supply is elastic. If smaller, inelastic.
For concept MCQs, remember the cues: vertical curve means zero elasticity, horizontal means infinite. A linear supply curve through the origin has Es = 1 at every point; one that meets the price axis (positive intercept) has Es > 1; one that meets the quantity axis has Es < 1. Do not treat every straight line as unitary.
Eliminate options that give a negative Es for a normal upward-sloping supply curve.

Common mistakes in Law of Supply and Elasticity of Supply

Treating a rise in supply caused by a price rise as a shift of the supply curve.
Students hear "supply increased" and assume the curve moved.
Fix: If the good's own price caused it, say extension of supply, a movement along the curve. Shifts need a change in another factor.
Using the new price and quantity as the base in the elasticity formula.
Students divide the change by the final figure instead of the original one.
Fix: Always divide the change by the original price and original quantity unless the question asks for the arc method.
Confusing the law of demand with the law of supply.
Both laws talk about price and quantity, so the directions get mixed.
Fix: Demand: price and quantity demanded move in opposite directions. Supply: they move in the same direction.
Mixing up perfectly elastic and perfectly inelastic supply.
Students memorise the words without the curve shapes.
Fix: Vertical curve: quantity does not respond to price, so Es = 0. Horizontal curve: supply responds without limit, so Es = ∞.
Listing a rise in input cost as a cause of a movement along the supply curve.
Students forget that only the good's own price causes a movement.
Fix: A rise in input cost raises the cost of production and shifts the supply curve to the left, meaning a decrease in supply.

Worked examples

Example 1

When the price of a notebook rises from ₹20 to ₹25, a shop's quantity supplied rises from 400 to 600 notebooks. Find the elasticity of supply and state its type.

Show the solution

Change in price ΔP = 25 − 20 = ₹5. Percentage change in price = 5 ÷ 20 × 100 = 25%.
Change in quantity ΔQ = 600 − 400 = 200. Percentage change in quantity = 200 ÷ 400 × 100 = 50%.
Es = 50% ÷ 25% = 2.
Since 2 is greater than 1, supply is elastic.

Answer: Es = 2, so supply is elastic.

Example 2

A farmer sells 500 kg of tomatoes at ₹40 per kg. After the price rises to ₹50 per kg, he sells 550 kg. Which statement is correct? (a) Es = 0.4 and supply is inelastic (b) Es = 0.5 and supply is inelastic (c) Es = 2.5 and supply is elastic (d) Es = 1 and supply is unitary

Show the solution

ΔP = 50 − 40 = 10. Percentage change in price = 10 ÷ 40 × 100 = 25%.
ΔQ = 550 − 500 = 50. Percentage change in quantity = 50 ÷ 500 × 100 = 10%.
Es = 10% ÷ 25% = 0.4.
Since 0.4 is less than 1, supply is inelastic. Option (a) matches.

Answer: Option (a): Es = 0.4, supply is inelastic.

Exam tips

Questions often ask you to pick the exception to the law of supply. Think of agricultural goods, perishables, rare items and backward-bending labour supply.
In shift-versus-movement questions, look for the word that names the cause. Own price means movement. Anything else means shift.
For numerical items, calculate percentages from the original values and check your answer against the type of elasticity.
Learn the five elasticity types with the curve shape for each.
There is no negative marking, so attempt every question and eliminate options that give the wrong direction.

Practice questions from Theory of Demand and Supply

Law of Supply and Elasticity of Supply in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Law of Supply and Elasticity of Supply: frequently asked questions

What are the exceptions to the law of supply?

Supply may not rise with price for agricultural goods that depend on seasons, perishable goods, rare articles with fixed supply, and goods where sellers expect prices to rise further. Labour supply can also bend backwards at very high wages.

What is the difference between the law of demand and the law of supply?

The law of demand says quantity demanded falls when price rises, so the relationship is inverse and the curve slopes downward. The law of supply says quantity supplied rises when price rises, so the relationship is direct and the curve slopes upward.

What is the difference between change in supply and change in quantity supplied?

A change in quantity supplied is caused only by the good's own price and is a movement along the same supply curve. A change in supply is caused by other factors such as cost or technology and shifts the whole curve.

What is the formula for elasticity of supply?

Es = percentage change in quantity supplied ÷ percentage change in price. You can also write it as (ΔQ ÷ ΔP) × (P ÷ Q), using the original price and quantity.