Economics Elasticity Of Supply Questions Long
The concept of income elasticity of supply formula measures the responsiveness of the quantity supplied of a good or service to changes in income. It helps to understand how sensitive the supply of a particular product is to changes in consumer income.
The formula for income elasticity of supply is as follows:
Income Elasticity of Supply = (% change in quantity supplied) / (% change in income)
To calculate the income elasticity of supply, we need to determine the percentage change in quantity supplied and the percentage change in income.
The percentage change in quantity supplied is calculated by taking the difference between the initial and final quantity supplied, dividing it by the initial quantity supplied, and then multiplying it by 100. Mathematically, it can be represented as:
% change in quantity supplied = ((Q2 - Q1) / Q1) * 100
Where Q1 is the initial quantity supplied and Q2 is the final quantity supplied.
Similarly, the percentage change in income is calculated by taking the difference between the final and initial income, dividing it by the initial income, and then multiplying it by 100. Mathematically, it can be represented as:
% change in income = ((I2 - I1) / I1) * 100
Where I1 is the initial income and I2 is the final income.
Once we have calculated the percentage changes in quantity supplied and income, we can substitute these values into the formula to find the income elasticity of supply.
The income elasticity of supply can take three possible values:
1. Positive income elasticity of supply: If the income elasticity of supply is positive, it indicates that the quantity supplied of a good or service increases as income increases. This suggests that the good is a normal good, and as consumers' income rises, they are willing and able to supply more of the product.
2. Negative income elasticity of supply: If the income elasticity of supply is negative, it indicates that the quantity supplied of a good or service decreases as income increases. This suggests that the good is an inferior good, and as consumers' income rises, they tend to shift their consumption towards other, higher-quality goods.
3. Zero income elasticity of supply: If the income elasticity of supply is zero, it indicates that the quantity supplied of a good or service remains constant regardless of changes in income. This suggests that the supply of the product is income-inelastic, meaning that producers are not responsive to changes in consumer income.
In conclusion, the income elasticity of supply formula helps us understand the relationship between changes in income and the quantity supplied of a good or service. By calculating the percentage changes in quantity supplied and income, we can determine whether a good is normal, inferior, or income-inelastic.