Video:What is the Price Elasticity of Supply?
with Ronnie GarrisonLearning about the price elasticity of supply can help you to gain an understanding of how supply and demand works. Here, learn the details about price elasticity of supply.
Transcript:What is the Price Elasticity of Supply?
The Price Elasticity of Supply measures the rate of response of quantity demand due to a price change.Calculating the Price Elasticity of Supply
We calculate the Price Elasticity of Supply by the formula % change in quantity supplied divided by % changed in price. Calculating the Price Elasticity of SupplyYou may be asked the question "Given the following data, calculate the price elasticity of demand when the price changes from $9.00 to $10.00" We know that the original or OLD price is $9 and the new price is $10. The quantity supplied when the price is $9 is 150 and when the price is $10 is 210. Since we're going from $9 to $10, we have SupplyOLD=150 and QSupplyNEW=210, where "QSupply" is short for "Quantity Supplied".What Is Needed to Calculate the Price Elasticity of Supply?
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. Calculating the Percentage Change in Quantity SupplyThe formula used to calculate the percentage change in quantity supplied is: QSupplyNEW - QSupplyOLD / QSupplyOLD 210 - 150 / 150 = 60/150 = 0.4 So we note that % Change in Quantity Supplied = 0.4, which in percentage would be 40%.Calculating the Percentage Change in Price
The formula used to calculate the percentage change in price is the new price minus the old price, divided by the old price. That is 10-9/9, which is equal to 0.11 or 11%.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 SupplyWe 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 We conclude that the price elasticity of supply when the price increases from $9 to $10 is 3.6.
Purpose of Price Elasticity
The price elasticity of supply is used to see how sensitive the supply of a good is to a price change. The higher the price elasticity, the more sensitive producers and sellers are to price changes. A very high price elasticity suggests that when the price of a good goes up, sellers will supply a great deal less of the good and when the price of that good goes down, sellers will supply a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on supply. Generally:- If PEoS > 1 then Supply is Price Elastic or sensitive to price changes •If it is = 1, then Supply is Unit Elastic
- If PEoS < 1 then Supply is not sensitive to price changes Recall that we always ignore the negative sign when analyzing price elasticity, so PEoS is always positive.