When change in quantity supplied is greater than the change in price in percentage terms supply is said to be?

You may be asked "Given the following data, calculate the price elasticity of supply when the price changes from $9.00 to $10.00" Using the chart on the bottom of the page, I'll walk you through answering this question.

First we need to find the data we need. We know that the original price is $9 and the new price is $10, so we have Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity supplied (make sure to look at the supply data, not the demand data) when the price is $9 is 150 and when the price is $10 is 110. Since we're going from $9 to $10, we have Q Supply(OLD)=150 and Q Supply(NEW)=210, where "Q Supply" is short for "Quantity Supplied". So we have:

• Price(OLD)=9

• Price(NEW)=10

• QSupply(OLD)=150

• QSupply(NEW)=210

To calculate the price elasticity, we need to know what the percentage change in quantity supply is and what the percentage change in price is. It's best to calculate these one at a time.

Calculating the Percentage Change in Quantity Supply

The formula used to calculate the percentage change in quantity supplied is:

[QSupply(NEW) - QSupply(OLD)] / QSupply(OLD)

By filling in the values we wrote down, we get:

[210 - 150] / 150 = (60/150) = 0.4

So we note that % Change in Quantity Supplied = 0.4 (This is in decimal terms. In percentage terms it would be 40%). Now we need to calculate the percentage change in price.

Calculating the Percentage Change in Price

Similar to before, the formula used to calculate the percentage change in price is:

[Price(NEW) - Price(OLD)] / Price(OLD)

By filling in the values we wrote down, we get:

[10 - 9] / 9 = (1/9) = 0.1111

We have both the percentage change in quantity supplied and the percentage change in price, so we can calculate the price elasticity of supply.

Final Step of Calculating the Price Elasticity of Supply

We go back to our formula of:

PEoS = (% Change in Quantity Supplied)/(% Change in Price)

We now fill in the two percentages in this equation using the figures we calculated.

PEoD = (0.4)/(0.1111) = 3.6

When we analyze price elasticities we're concerned with the absolute value, but here that is not an issue since we have a positive value. We conclude that the price elasticity of supply when the price increases from $9 to $10 is 3.6.

Five Types of Elasticities of Supply: (adsbygoogle = window.adsbygoogle || []).push({});

1. Unit Elastic Supply: When change in price of X brings about exactly proportionate change in its quantity supplied then supply is unit elastic i.e. elasticity of supply is equal to one, e.g. if price rises by 10% and supply expands by 10% then, change in the quantity supplied the supply is relatively inelastic or elasticity of supply is less than one.

Es = % change in Quantity Supplied of X

% change in price of X

2. Relatively Elastic Supply: When change in price brings about more than proportionate change in the quantity supplied, then supply is relatively elastic or elasticity of supply is greater than one.

3. Perfectly Inelastic Supply: When a change in price has no effect on the quantity supplied then supply is perfectly inelastic or the elasticity of supply is zero.

4. Perfectly Elastic Supply: When a negligible change in price brings about an infinite change in the quantity supplied, then supply is said to be perfectly elastic or elasticity of supply is infinity.

All the five types of Elasticities of supply can be shown by different slopes of the supply curve. Fig. (1) Shows the supply is unit elastic because change in price from OP to OP1 brings about exactly proportionate change in the quantity supplied of commodity X viz., from OM to OM1. In this case Es = 1.

Learning Objectives

• Calculate the price elasticity of supply

The price elasticity of supply measures how much quantity supplied changes in response to a change in the price. The calculations and interpretations are analogous to those we explained above for the price elasticity of demand. The only difference is we are looking at how producers respond to a change in the price instead of how consumers respond.

Price elasticity of supply is the percentage change in the quantity of a good or service supplied divided by the percentage change in the price. Since this elasticity is measured along the supply curve, the law of supply holds, and thus price elasticities of supply are always positive numbers.

Recall that there are two ways to calculate elasticities: the point elasticity approach and the mid-point elasticity approach. The point approach computes the percentage change in quantity supplied by dividing the change in quantity supplied by the initial quantity, and the percentage change in price by dividing the change in price by the initial price. Thus, the formula for the point elasticity approach is [(Qs2 – Qs1)/Qs1] / [(P2 – P1)/P1]. The more accurate mid-point formula divides the change in quantity supplied and price by their average values (Qs2 – Qs1)/[(Qs2+Qs1)/2] and (P2 – P1)/[(P2+P1)/2]. Thus, the formula for the mid-point elasticity approach is (Qs2 – Qs1)/[(Qs2+Qs1)/2] / (P2 – P1)/[(P2+P1)/2].

We describe supply elasticities as elastic, unitary elastic and inelastic, depending on whether the measured elasticity is greater than, equal to, or less than one.

Assume that an apartment rents for $650 per month and at that price 10,000 units are offered for rent, as shown in Figure 2, below. When the price increases to $700 per month, 13,000 units are offered for rent. By what percentage does apartment supply increase? What is the price sensitivity?

Figure 2. Price Elasticity of Supply. The price elasticity of supply is calculated as the percentage change in quantity divided by the percentage change in price.

Step 1. We know that

[latex]\displaystyle\text{Price Elasticity of Supply}=\frac{\text{percent change in quantity}}{\text{percent change in price}}[/latex]

Step 2. From the midpoint method we know that

[latex]\displaystyle\text{percent change in quantity}=\frac{Q_2-Q_1}{(Q_2+Q_1)\div{2}}\times{100}[/latex]

[latex]\displaystyle\text{percent change in price}=\frac{P_2-P_1}{(P_2+P_1)\div{2}}\times{100}[/latex]

Step 3. We can use the values provided in the figure in each equation:

[latex]\displaystyle\text{percent change in quantity}=\frac{13,000-10,000}{(13,000+10,000)\div{2}}\times{100}=\frac{3,000}{11,500}\times{100}=26.1[/latex]

[latex]\displaystyle\text{percent change in price}=\frac{700-650}{(700+650)\div{2}}\times{100}=\frac{50}{675}\times{100}=7.4[/latex]

Step 4. Then, those values can be used to determine the price elasticity of demand:

[latex]\displaystyle\text{Price Elasticity of Supply}=\frac{26.1\text{ percent}}{7.4\text{ percent}}=3.53[/latex]

Again, as with the elasticity of demand, the elasticity of supply is not followed by any units. Elasticity is a ratio of one percentage change to another percentage change—nothing more—and is read as an absolute value. In this case, a 1% rise in price causes an increase in quantity supplied of 3.5%. Since 3.5 is greater than 1, this means that the percentage change in quantity supplied will be greater than a 1% price change. If you’re starting to wonder if the concept of slope fits into this calculation, read on for clarification.

Watch this video to see a real-world application of price elasticity.

You can view the transcript for “Elasticity and Slave Redemption” here (opens in new window).

These questions allow you to get as much practice as you need, as you can click the link at the top of the first question (“Try another version of these questions”) to get a new set of questions. Practice until you feel comfortable doing the questions.

elastic supply: supply responds more than proportionately to a change in price; i.e. the percent change in quantity supplied is greater than percent change in price inelastic supply: supply responds less than proportionately to a change in price; i.e. the percent change in quantity supplied is less than percent change in price price elasticity of supply: percentage change in the quantity supplied divided by the percentage change in price unitary elastic supply: supply responds exactly proportionately to a change in price; i.e. the percent change in quantity supplied is equal to the percent change in price

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