3.11:
Elasticity of Supply Through Percentage Method
The price elasticity of supply measures how responsive the quantity supplied of a good or service is to changes in price.
The percentage method is a way to measure this elasticity. It is calculated by taking the ratio of the percentage change in quantity supplied to the percentage change in price.
For example, if a toy car sells for $10, the factory produces 1000 cars. If the price increases to $12, the factory may increase production to 1200 cars.
Then, the percentage change in quantity supplied is calculated from the change in quantity and is equal to 20 percent.
Similarly, the percentage change in price is calculated from price change and equals 20 percent.
The ratio of these quantities gives the elasticity which is equal to one.
Unitary elasticity represents that the percentage change in quantity supplied is precisely equal to the percentage change in price.
3.11 Elasticity of Supply Through Percentage Method
The elasticity of supply (Es) quantifies how responsive the quantity supplied is to changes in price. It is calculated as the ratio of the percentage change in quantity supplied to the percentage change in price.
For example, if the price of a product increases by 10%, and as a result, the quantity supplied increases by 20%, the Es would be 2 (20% change in quantity supplied divided by 10% change in price).
This method helps determine whether supply is elastic, inelastic, or unit elastic. If Es is greater than 1, supply is elastic, meaning a slight change in price leads to a proportionally larger change in quantity supplied. If Es is less than 1, supply is inelastic, indicating that the quantity supplied changes less than proportionately to a change in price. If Es equals 1, supply is unit elastic, meaning the percentage change in quantity supplied equals the percentage change in price.
Understanding Es through the percentage method is crucial for businesses to anticipate how price changes affect their production decisions and overall market dynamics.