Measuring Price Elasticity of Supply

Price elasticity of supply refers to the degree of responsiveness of supply to a change in the price of the commodity. It is used to explain the quantitative changes in the supply of a commodity due to a change in its price.

Methods for Measuring Price Elasticity of Supply

There are two methods for measuring price elasticity of supply –

  • 1] Percentage Method and
  • 2] Geometric Method.

Percentage Method

The most commonly used method for measuring price elasticity of supply is the Percentage Method, also known as the Proportionate Method. This method measures elasticity as the ratio of the percentage change in the quantity supplied to the percentage change in the price.

The formula for this method is:

Es = Percentage change in quantity supplied / Percentage change in price

Where: Percentage change in quantity supplied = (Change in quantity supplied / Initial quantity supplied) * 100 Percentage change in price = (Change in price / Initial price) * 100

Example: Suppose a firm supplies 50 units of a commodity at a price of $10 per unit. When the price rises to $12 per unit, the firm increases its supply to 70 units.

Percentage change in quantity supplied = (70 – 50) / 50 * 100 = 40% Percentage change in price = (12 – 10) / 10 * 100 = 20%

Price elasticity of supply = 40% / 20% = 2

Note: Price elasticity of supply always has a positive sign as it reflects the direct relationship between price and quantity supplied.

Geometric Method

The Geometric Method, also known as the Arc Method or Point Method, measures elasticity at a given point on the supply curve. It uses the change in quantity supplied and price to calculate the elasticity of supply.

The formula for this method is:

Es = ΔQ / ΔP * P / Q

Where: Q = Initial quantity supplied ΔQ = Change in quantity supplied P = Initial price ΔP = Change in price

This method is illustrated in a graph, where a supply curve shows the relationship between price and quantity supplied. The elasticity of supply is calculated at a given point on the curve, taking into account the changes in price and quantity supplied.

The Geometric Method has three different cases: Highly Elastic Supply, Unitary Elastic Supply, and Inelastic Supply. These cases are determined by the slope of the supply curve and the magnitude of the elasticity of supply.

In conclusion, the Percentage Method and the Geometric Method are the two methods used to measure price elasticity of supply. Both methods provide valuable insights into the responsiveness of supply to changes in price, helping businesses and economists make informed decisions.

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