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2. long-run supply. - The more time that passes after a price change, the greater is the elasticity of supply. 1. is relatively inelastic. 2. is relatively elastic. elasticity of supply. a units-free measure of the responsiveness of the quantity supplied of a good or service to a change in its price. -we can compare the responsiveness of the ...
- Overview
- Key points
- What is price elasticity?
- Using the midpoint method to calculate elasticity
- Using the point elasticity of demand to calculate elasticity
- Calculating price elasticity of demand
- Calculating the price elasticity of supply
- Summary
- Self-check questions
- Review Questions
How do quantities supplied and demanded react to changes in price?
•Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.
•Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very responsive.
•Elastic demand or supply curves indicate that the quantity demanded or supplied responds to price changes in a greater than proportional manner.
•An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.
•Unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied.
•Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.
•Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very responsive.
•Elastic demand or supply curves indicate that the quantity demanded or supplied responds to price changes in a greater than proportional manner.
•An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.
Both demand and supply curves 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.
Elasticities can be usefully divided into five broad categories: perfectly elastic, elastic, perfectly inelastic, 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. An inelastic demand or inelastic supply is one in which elasticity is less than one, indicating low responsiveness to price changes. Unitary elasticities indicate proportional responsiveness of either demand or supply.
Perfectly elastic and perfectly inelastic refer to the two extremes of elasticity. Perfectly elastic means the response to price is complete and infinite: a change in price results in the quantity falling to zero. Perfectly inelastic means that there is no change in quantity at all when price changes.
To calculate elasticity, instead of using simple percentage changes in quantity and price, economists sometimes use the average percent change in both quantity and price. This is called the Midpoint Method for Elasticity:
Midpoint method for elasticity=Q2−Q1(Q2+Q12)P2−P1(P2+P12)
A drawback of the midpoint method is that as the two points get farther apart, the elasticity value loses its meaning. For this reason, some economists prefer to use the point elasticity method. In this method, you need to know what values represent the initial values and what values represent the new values.
Point elasticity =new Q−initial Qinitial Qinitial P−new Pinitial P
Let’s apply these formulas to a practice scenario. We'll calculate the elasticity between points A and B in the graph below.
First, apply the formula to calculate the elasticity as price decreases from $70 at point B to $60 at point A :
% changeinquantity=3,000–2,800(3,000+2,800)/2 × 100=2002,900 × 100=6.9%changeinprice=60–70(60+70)/2 × 100=–1065 × 100=–15.4Price elasticity of demand= 6.9%–15.4%=0.45
The elasticity of demand between point A and point B is 6.9%–15.4% , or 0.45. Because this amount is smaller than one, we know that the demand is inelastic in this interval.
[Wait a minute! Shouldn't the price elasticity of demand be negative here?]
This means that, along the demand curve between point B and point A , if the price changes by 1%, the quantity demanded will change by 0.45%. A change in the price will result in a smaller percentage change in the quantity demanded. For example, a 10% increase in the price will result in only a 4.5% decrease in quantity demanded. A 10% decrease in the price will result in only a 4.5% increase in the quantity demanded.
Now let's try calculating the price elasticity of supply. We use the same formula as we did for price elasticity of demand:
Price elasticity of supply=% change in quantity% change in price
Assume that an apartment rents for $650 per month and, at that price, 10,000 units are rented—you can see these number represented graphically below. When the price increases to $700 per month, 13,000 units are supplied into the market.
By what percentage does apartment supply increase? What is the price sensitivity?
We'll start by using the Midpoint Method to calculate percentage change in price and quantity:
% change in quantity=13,000–10,000(13,000+10,000)/2 × 100=3,00011,500 × 100=26.1% change in price=$700–$650($700+$650)/2 × 100=50675 × 100=7.4
•Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.
•Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very responsive.
•Elastic demand or supply curves indicate that the quantity demanded or supplied responds to price changes in a greater than proportional manner.
•An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.
Using the data shown in the table below about demand for smart phones, calculate the price elasticity of demand from point B to point C , point D to point E , and point G to point H . Classify the elasticity at each point as elastic, inelastic, or unit elastic.
[Show solution.]
Using the data shown in in the table below about supply of alarm clocks, calculate the price elasticity of supply from: point J to point K , point L to point M , and point N to point P . Classify the elasticity at each point as elastic, inelastic, or unit elastic.
[Show solution.]
•What is the formula for calculating elasticity?
•What is the price elasticity of demand? Can you explain it in your own words?
Lesson 1: Price elasticity of demand. Introduction to price elasticity of demand. Price elasticity of demand using the midpoint method. More on elasticity of demand. Determinants of price elasticity of demand. Determinants of elasticity example. Price Elasticity of Demand and its Determinants. Perfect inelasticity and perfect elasticity of demand.
The magnitude of the elasticity has increased (in absolute value) as we moved up along the demand curve from points A to B. Recall that the elasticity between these two points was 0.45. Demand was inelastic between points A and B and elastic between points G and H.
Aug 28, 2019 · 28 August 2019 by Tejvan Pettinger. Price elasticity of supply measures the responsiveness of quantity supplied to a change in price. The price elasticity of supply (PES) is measured by % change in Q.S divided by % change in price. If the price of a cappuccino increases by 10%, and the supply increases by 20%. We say the PES is 2.0.
Let us make an in-depth study of the Elasticity of Supply. After reading this article you will learn about: 1. Meaning of Elasticity of Supply 2. Types of Elasticity of Supply 3. Measurement 4. Determinants. Meaning of Elasticity of Supply: The law of supply indicates the direction of change—if price goes up, supply will increase. But how much supply will rise in response to an increase in ...
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Step 2: Calculate the percentage change in both quantity supplied and price. Apply the formula: Percentage change = Final Value - Initial Value Initial Value × 100 Step 3: The Price Elasticity of Supply formula is then applied: P E S = % Change in Quantity Supplied % Change in Price Step 4: Interpret the coefficient.
