Economics Elasticity Of Supply Questions Long
The concept of cross elasticity of supply formula is a measure of the responsiveness of the quantity supplied of a particular good to a change in the price of another related good. It measures the percentage change in the quantity supplied of one good in response to a percentage change in the price of another good.
The formula for cross elasticity of supply is:
Cross Elasticity of Supply = (% Change in Quantity Supplied of Good A) / (% Change in Price of Good B)
In this formula, the numerator represents the percentage change in the quantity supplied of Good A, while the denominator represents the percentage change in the price of Good B.
The cross elasticity of supply can be positive, negative, or zero. A positive cross elasticity of supply indicates that the quantity supplied of Good A increases in response to an increase in the price of Good B. This suggests that the two goods are substitutes, as producers are willing to allocate more resources to the production of Good A when the price of Good B increases.
On the other hand, a negative cross elasticity of supply indicates that the quantity supplied of Good A decreases in response to an increase in the price of Good B. This suggests that the two goods are complements, as producers are willing to allocate fewer resources to the production of Good A when the price of Good B increases.
Lastly, a zero cross elasticity of supply indicates that the quantity supplied of Good A remains unchanged regardless of changes in the price of Good B. This suggests that the two goods are unrelated, and the production of Good A is not influenced by the price of Good B.
The cross elasticity of supply is an important concept in economics as it helps to understand the relationship between different goods in the market. It provides insights into how producers respond to changes in the prices of related goods and helps in making decisions regarding resource allocation and production planning.