CONTINUATION NOTES ON SUPPLY - III (PRICE ELASTICITY OF SUPPLY)

PRICE ELASTICITY OF SUPPLY

Definition of es

It refers to a degree of responsiveness or change in quantity supplied of a commodity due to change in its price. OR it is defined as the proportionate change in quantity supplied of a commodity divided by a given proportionate change in its price. Thus:

CATEGORIES (DEGREES) OF PRICE ELASTICITY OF SUPPLY

ü  There are FIVE categories of es:

1.      Perfectly Elastic Supply

2.      Perfectly Inelastic Supply

3.      Unitary Elastic Supply

4.      Elastic Supply

5.      Inelastic Supply

1.      Perfectly Elastic Supply

ü  If a small change in the price leads to an infinite change in quantity supplied. Thus, es = α   

2.      Perfectly Inelastic Supply

ü  If the quantity supplied does not change with the change in price. Thus, es = 0                                    

              

3.      Unitary Elastic Supply

ü  When the percentage change in the quantity supplied is equal to the percentage change in its price. Thus, es = 1

4.      Elastic Supply

ü  When the percentage change in the quantity supplied is greater than the percentage change in its price. Thus, es > 1    

5.      Inelastic Supply

ü  When the percentage change in the quantity supplied is less than the percentage change in its price. Thus, es < 1  

                                                                                                    

MEASUREMENT OF ELASTICITY OF SUPPLY

ü  The Elasticity of Supply can be measured by TWO methods:

1.      Percentage / Proportionate Method.

2.      Geometric / Point Method.

1.      Percentage / Proportionate Method.

ü  The percentage / proportionate method is the ratio of proportionate change in quantity supply of a commodity to the proportionate change in its price. Thus;

Where;

ü  P – Initial Price.

ü  Q – Initial Quantity.

ü  ∆P – Change in Price.

ü  ∆Q – Change in Quantity Supplied.

Example 1: An increase in the price of the commodity from Nu. 10 to Nu. 15 increases the quantity supplied from 500 to 750 units. Calculate the elasticity of supply and comment on the type of elasticity. [Note: Leave space for Solution]

Example 2:  A producer supplies 200 units of a good at Nu. 10 per unit. Price elasticity of supply is 2. How many units will the producer supply at Nu. 11 per unit.  [Leave space for Solution]  

2.      Geometric / Point Method.

The elasticity of supply at different points on the supply curve can be measured by geometric / point method as:       1. On a Straight Line Supply Curve

2.      On the Non-Linear Supply Curve