Economics Elasticity Of Supply Questions Medium
The concept of price elasticity of supply refers to the responsiveness of the quantity supplied of a good or service to changes in its price. It measures the percentage change in quantity supplied in response to a one percent change in price.
Price elasticity of supply is calculated using the formula:
Price Elasticity of Supply = (% Change in Quantity Supplied) / (% Change in Price)
There are three main categories of price elasticity of supply:
1. Elastic supply: When the percentage change in quantity supplied is greater than the percentage change in price, supply is considered elastic. In this case, a small change in price leads to a relatively larger change in quantity supplied. For example, if the price of a product increases by 10% and the quantity supplied increases by 20%, the supply is elastic.
2. Inelastic supply: When the percentage change in quantity supplied is less than the percentage change in price, supply is considered inelastic. In this case, a change in price has a relatively smaller impact on the quantity supplied. For example, if the price of a product increases by 10% and the quantity supplied increases by only 5%, the supply is inelastic.
3. Unitary elastic supply: When the percentage change in quantity supplied is equal to the percentage change in price, supply is considered unitary elastic. In this case, the change in price has an equal impact on the quantity supplied. For example, if the price of a product increases by 10% and the quantity supplied also increases by 10%, the supply is unitary elastic.
The price elasticity of supply is important for producers as it helps them understand how changes in price will affect their ability to supply goods or services. It also helps in determining the optimal pricing strategy and production levels.