When the change in quantity supplied is proportionate to the change in price it is?

6 Pages Posted: 25 Sep 2013

Date Written: August 25, 2013

Abstract

Principles of micro-economics and their application in economic analysis of law. Kindly view the other chapters, also uploaded on SSRN for a detailed disccussion on economic analysis of law.

Keywords: principles of microeconomics

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Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table summarizes.

Elastic, Inelastic, and Unitary: Three Cases of Elasticity

If . . .	Then . . .	And It Is Called . . .
% change in quantity>% change in price	% change in quantity% change in price>1	Elastic
% change in quantity=% change in price	% change in quantity% change in price=1	Unitary
% change in quantity<% change in price	% change in quantity% change in price<1	Inelastic

Before we delve into the details of elasticity, enjoy this article on elasticity and ticket prices at the Super Bowl.

To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price. This is called the Midpoint Method for Elasticity, and is represented in the following equations:

% change in quantity=Q2–Q1Q2+Q1/2  × 100% change in price=P2–P1P2+P1/2 × 100

The advantage of the Midpoint Method is that one obtains the same elasticity between two price points whether there is a price increase or decrease. This is because the formula uses the same base (average quantity and average price) for both cases.

Calculating the Price Elasticity of Supply (adsbygoogle = window.adsbygoogle || []).push({});

You may be asked "Given the following data, calculate the price elasticity of supply when the price changes from $9.00 to $10.00" Using the chart on the bottom of the page, I'll walk you through answering this question.

First we need to find the data we need. We know that the original price is $9 and the new price is $10, so we have Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity supplied (make sure to look at the supply data, not the demand data) when the price is $9 is 150 and when the price is $10 is 110. Since we're going from $9 to $10, we have Q Supply(OLD)=150 and Q Supply(NEW)=210, where "Q Supply" is short for "Quantity Supplied". So we have:

• Price(OLD)=9

• Price(NEW)=10

• QSupply(OLD)=150

• QSupply(NEW)=210

To calculate the price elasticity, we need to know what the percentage change in quantity supply is and what the percentage change in price is. It's best to calculate these one at a time.

Calculating the Percentage Change in Quantity Supply

The formula used to calculate the percentage change in quantity supplied is:

[QSupply(NEW) - QSupply(OLD)] / QSupply(OLD)

By filling in the values we wrote down, we get:

[210 - 150] / 150 = (60/150) = 0.4

So we note that % Change in Quantity Supplied = 0.4 (This is in decimal terms. In percentage terms it would be 40%). Now we need to calculate the percentage change in price.

Calculating the Percentage Change in Price

Similar to before, the formula used to calculate the percentage change in price is:

[Price(NEW) - Price(OLD)] / Price(OLD)

By filling in the values we wrote down, we get:

[10 - 9] / 9 = (1/9) = 0.1111

We have both the percentage change in quantity supplied and the percentage change in price, so we can calculate the price elasticity of supply.

Final Step of Calculating the Price Elasticity of Supply

We go back to our formula of:

PEoS = (% Change in Quantity Supplied)/(% Change in Price)

We now fill in the two percentages in this equation using the figures we calculated.

PEoD = (0.4)/(0.1111) = 3.6

When we analyze price elasticities we're concerned with the absolute value, but here that is not an issue since we have a positive value. We conclude that the price elasticity of supply when the price increases from $9 to $10 is 3.6.

Five Types of Elasticities of Supply:

1. Unit Elastic Supply: When change in price of X brings about exactly proportionate change in its quantity supplied then supply is unit elastic i.e. elasticity of supply is equal to one, e.g. if price rises by 10% and supply expands by 10% then, change in the quantity supplied the supply is relatively inelastic or elasticity of supply is less than one.

Es = % change in Quantity Supplied of X

% change in price of X

2. Relatively Elastic Supply: When change in price brings about more than proportionate change in the quantity supplied, then supply is relatively elastic or elasticity of supply is greater than one.

3. Perfectly Inelastic Supply: When a change in price has no effect on the quantity supplied then supply is perfectly inelastic or the elasticity of supply is zero.

4. Perfectly Elastic Supply: When a negligible change in price brings about an infinite change in the quantity supplied, then supply is said to be perfectly elastic or elasticity of supply is infinity.

All the five types of Elasticities of supply can be shown by different slopes of the supply curve. Fig. (1) Shows the supply is unit elastic because change in price from OP to OP1 brings about exactly proportionate change in the quantity supplied of commodity X viz., from OM to OM1. In this case Es = 1.

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