Price Elasticity of Supply
Price
elasticity of supply is defined as the degree of responsiveness of sellers to
changes in the price of the commodity. The coefficient of price elasticity of
supply measures the percentage change in the quantity supplied per unit of
time, brought about by a given percentage change in the price of the commodity.
The interpretation of supply elasticity is
similar to those of price elasticity of demand.
Interpreting the Coefficient of Elasticity
When supply is elastic and the
elasticity coefficient is greater than 1, the percentage change in quantity
supplied is larger than the percentage change in price
When the supply is inelastic, the
elasticity coefficient is less than 1. this is because a percentage change in
price results in a smaller percentage change in quantity supplied
When supply is unitary, the
elasticity coefficient is 1. this is
because a percentage change in price results in an equal percentage change in
quantity supplied
Economic Approach
Coe= QS2 - Qd1 P2 - P1
------------- X ---------
QS2 + Qd1 P2 +
P1
------------- ---------
2
2
Whereas:
QS1 - original
quantity supply
QS2 - new quantity
supply
P1 - original
price
P2 - new price
Example:
The
price of a pencil rises from its original price of P4.50 to P6.25. The producers
automatically increase their supply of pencils from 35,250 to 41,350 pieces per
week. What is the response of in quantity supplied to the change of price?
Economics method
Solution:
41,350-35,250 6.25-4.50
------------------- ÷
----------------
41,350+35,250 6.25+4.50
------------------- --------------
2 2
= 6,100 1.75
--------------- ÷ -----------
38,300 5.375
= 6,100 1.75
----------- X
--------
38,300 5.375
= 32,787.5
-------------
67,025
= .48 inelastic
Statistic Approach
Δ in
QS Δ
in Price
------------------- ÷ ----------------------
Q1 P1
Whereas:
Δ in QS - QS2-QS1
Δ
in Price - P2-P1
=
6,100 1.75
--------- ÷
-------
35,250 4.50
= 6,100 1.75
--------- X
-------
35,250 4.50
= 27,450
-----------
61,687.5
= .44 inelastic
Related Topics
·
Introduction of Microeconomics
·
Scarcity
·
Production possibilities
·
Basic Economic Problem
·
Circular
flow of Economic Activity
·
Common
types of Economic System
·
Economic resources
·
Demand supply and markets
·
Demand
·
Supply
·
Elasticity of demand and supply
·
Market
·
Surplus
·
Shortage
·
Laws
that aim to protect consumers.