Economics Elasticity Of Supply Questions Medium
The concept of cross elasticity of supply refers to the measure of how the quantity supplied of a particular good or service changes in response to a change in the price of another related good or service. It measures the responsiveness of the supply of one good to changes in the price of another good.
Cross elasticity of supply is calculated by dividing the percentage change in the quantity supplied of one good by the percentage change in the price of another related good. The resulting value can be positive, negative, or zero.
A positive cross elasticity of supply indicates that the two goods are substitutes in production, meaning that an increase in the price of one good leads to an increase in the supply of the other good. For example, if the price of coffee increases, the supply of tea might increase as producers switch to producing more tea instead of coffee.
A negative cross elasticity of supply indicates that the two goods are complements in production, meaning that an increase in the price of one good leads to a decrease in the supply of the other good. For example, if the price of beef increases, the supply of leather might decrease as fewer cows are slaughtered for meat, resulting in less leather production.
A zero cross elasticity of supply indicates that the two goods are unrelated in production, meaning that a change in the price of one good has no effect on the supply of the other good. For example, if the price of smartphones increases, the supply of bicycles would not be affected as they are unrelated goods in production.
Understanding the concept of cross elasticity of supply is important for businesses and policymakers as it helps them analyze the relationships between different goods and make informed decisions regarding production and pricing strategies.