What does it mean if the price elasticity of supply is 2.5? | Homework.Study.com (2024)

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What does it mean if the price elasticity of supply is 2.5? | Homework.Study.com? ›

Answer and Explanation:

If the cross-price elasticity of demand for good X with respect to the price of good Y is 2.5, this means that a 1% increase in the price of good Y will lead to a 2.5% increase in the quantity demanded of good X.

A price elasticity supply greater than one means supply is relatively elastic, where the quantity supplied changes by a larger percentage than the price change. An example would be a product that's easy to make and distribute, such as a fidget spinner.

A price elasticity of demand of 2 means that for every 1% increase in price, the quantity demanded will fall by 2%. Thus, for a 10% increase in price, we expect the quantity demanded to fall by 20%.

If the price elasticity of demand for a good is 2, then a 10 percent decrease in the quantity demanded must be the result of - a 5 percent increase in the price. Since price and quantity demanded are inversely related, if price increases, quantity demanded will fall and vice versa.

It shows the change in quantity supplied with 1% change in price of a commodity will be Es% So if the price elasticity of supply is 2.5, then it means that if prices changes by 1%, quantity supplied will change by 2.5% in same direction.

If the price elasticity of supply is 2.5, it means that the supply is relatively elastic.

Key Takeaways

If price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic. If a good's price elasticity is 0 (no amount of price change produces a change in demand), it is perfectly inelastic.

What Does a Price Elasticity of 1.5 Mean? If the price elasticity is equal to 1.5, it means that the quantity of a product's demand increased by 15% in response to a 10% reduction in price (15% ÷ 10% = 1.5).

A good with an elasticity of −2 has elastic demand because quantity demanded falls twice as much as the price increase; an elasticity of −0.5 has inelastic demand because the change in quantity demanded change is half of the price increase.

What if price elasticity is more than 1? ›

Price elasticity of demand is an indicator of the impact of a price change, up or down, on a product's sales. If the price elasticity of demand is greater than 1, it is deemed elastic. That is, demand for the product is sensitive to an increase in price.

A price elasticity of demand of 2.3 implies "demand is elastic". The correct option is D. The elasticity measures the responsiveness of quantity demanded to changes in price. A value of 2.3 means that for every 1% increase in price, quantity demanded will decrease by 2.3%.

So, a 2 means that a 1% change in price creates a 2% change in quantity demanded. And, a 3 means that a 1% change in price creates a 3% change in quantity demanded, other things being equal. So, 3 is more responsive or more elastic to a change in price.

What Does a Price Elasticity of 1.5 Mean? If the price elasticity is equal to 1.5, it means that the quantity of a product's demand increased by 15% in response to a 10% reduction in price (15% ÷ 10% = 1.5).

Answer and Explanation: A cross-price elasticity of demand between Good A and Good B equal to 3 means that the two goods are substitutes.

We determine whether goods are complements or substitutes based on cross price elasticity - if the cross price elasticity is positive the goods are substitutes, and if the cross price elasticity are negative the goods are complements.

A price elasticity of -3.5 means that a 1% decrease in the price will lead to a 3.5% increase in the quantity demanded of good X. The fall in price induces a decrease in total revenue (price effect). In contrast, the quantity rise generates an increase in total revenue (quantity effect).