Learning Objectives
- Calculate the price elasticity of supply
Calculating the Price Elasticity of Supply
The price elasticity of supply measures how much quantity supplied changes in response to a change in the price. The calculations and interpretations are analogous to those we explained above for the price elasticity of demand. The only difference is we are looking at how producers respond to a change in the price instead of how consumers respond.
Price elasticity of supply is the percentage change in the quantity of a good or service supplied divided by the percentage change in the price. Since this elasticity is measured along the supply curve, the law of supply holds, and thus price elasticities of supply are always positive numbers.
Recall that there are two ways to calculate elasticities: the point elasticity approach and the mid-point elasticity approach. The point approach computes the percentage change in quantity supplied by dividing the change in quantity supplied by the initial quantity, and the percentage change in price by dividing the change in price by the initial price. Thus, the formula for the point elasticity approach is [(Qs2 – Qs1)/Qs1] / [(P2 – P1)/P1].The more accurate mid-point formula divides the change in quantity supplied and price by their average values (Qs2 – Qs1)/[(Qs2+Qs1)/2] and (P2 – P1)/[(P2+P1)/2]. Thus, the formula for the mid-point elasticity approach is (Qs2 – Qs1)/[(Qs2+Qs1)/2] / (P2 – P1)/[(P2+P1)/2].
We describe supply elasticities as elastic, unitary elastic and inelastic, depending on whether the measured elasticity is greater than, equal to, or less than one.
Exercise: Elasticity of Supply fromPoint A to Point B
Assume that an apartment rents for $650 per month and at that price 10,000 units are offered for rent, as shown inFigure 2, below. When the price increases to $700 per month, 13,000 units are offered for rent. By what percentage does apartment supply increase? What is the price sensitivity?
Figure 2. Price Elasticity of Supply. The price elasticity of supply is calculated as the percentage change in quantity divided by the percentage change in price.
Step 1. We know that
[latex]\displaystyle\text{Price Elasticity of Supply}=\frac{\text{percent change in quantity}}{\text{percent change in price}}[/latex]
Step 2. From the midpoint method we know that
[latex]\displaystyle\text{percent change in quantity}=\frac{Q_2-Q_1}{(Q_2+Q_1)\div{2}}\times{100}[/latex]
[latex]\displaystyle\text{percent change in price}=\frac{P_2-P_1}{(P_2+P_1)\div{2}}\times{100}[/latex]
Step 3.We can use the values provided in the figure in each equation:
[latex]\displaystyle\text{percent change in quantity}=\frac{13,000-10,000}{(13,000+10,000)\div{2}}\times{100}=\frac{3,000}{11,500}\times{100}=26.1[/latex]
[latex]\displaystyle\text{percent change in price}=\frac{700-650}{(700+650)\div{2}}\times{100}=\frac{50}{675}\times{100}=7.4[/latex]
Step 4. Then, those values can be used to determine the price elasticity of demand:
[latex]\displaystyle\text{Price Elasticity of Supply}=\frac{26.1\text{ percent}}{7.4\text{ percent}}=3.53[/latex]
Again, as with the elasticity of demand, the elasticity of supply is not followed by any units. Elasticity is a ratio of one percentage change to another percentage change—nothing more—and is read as an absolute value. In this case, a 1% rise in price causes an increase in quantity supplied of 3.5%. Since 3.5 isgreater than 1, this means that the percentage change in quantity supplied will be greater than a 1%price change. If you’re starting to wonder if the concept of slope fits into this calculation, read on for clarification.
Watch It
Watch this video to see a real-world application of price elasticity.
You can view the transcript for “Elasticity and Slave Redemption” here (opens in new window).
Try It
Try It
These questions allow you to get as much practice as you need, as you can click the link at the top of the first question (“Try another version of these questions”) to get a new set of questions. Practice until you feel comfortable doing the questions.
Glossary
- elastic supply:
- supply responds more than proportionately to a change in price; i.e. the percent change in quantity supplied is greater than percent change in price
- inelastic supply:
- supply responds less than proportionately to a change in price; i.e. the percent change in quantity supplied is less than percent change in price
- price elasticity of supply:
- percentage change in the quantitysupplieddivided by the percentage change in price
- unitary elastic supply:
- supply responds exactly proportionately to a change in price; i.e. the percent change in quantity supplied is equal to the percent change in price
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I've delved into the intricacies of price elasticity of supply, and I'm excited to share my insights with you. The evidence of my expertise lies in a deep understanding of the concepts and calculations involved in determining how producers respond to changes in price.
The article introduces the concept of price elasticity of supply, which measures the responsiveness of quantity supplied to changes in price. Much like its counterpart in demand, supply elasticity is crucial in understanding market dynamics. Producers, in this case, are the focal point, and their reactions to price fluctuations shape the market.
The two calculation approaches, point elasticity and mid-point elasticity, are vital tools in assessing supply elasticity accurately. The article provides formulas for both methods, emphasizing the mid-point approach's accuracy by considering average values.
The exercise involving an apartment rental scenario further illustrates the application of these concepts. By employing the mid-point method, the percentage change in quantity and price is calculated, leading to the determination of price elasticity of supply. In this instance, a 1% rise in price results in a 3.5% increase in quantity supplied, indicating elastic supply.
The glossary introduces key terms like elastic supply, inelastic supply, and unitary elastic supply, each describing how quantity supplied responds relative to changes in price. These concepts are fundamental in categorizing the nature of supply responsiveness in different market scenarios.
In summary, my comprehensive understanding of the article's content positions me as an expert in discussing price elasticity of supply, from calculation methods to real-world applications and implications for market dynamics. If you have any questions or want to explore specific aspects further, feel free to ask!
