When the price of a commodity changes from Rs. 4 per unit to Rs 5 per unit, its market supply rises from 100 units to 120 units. Calculate the price elasticity of supply. Is supply elastic? Give reason.
PRICE | QUANTITY SUPPLIED |
4 | 100 |
5 | 120 |
Price elasticity = Percentage change in Qs/Percentage change in P
= (ΔQs/ΔP)*(P/Qs)
= (20/1)*(4/100) = 0.8
The price elasticity of supply of the commodity is 0.8. The supply is inelastic in nature. When the change in price results in a less than proportionate change in the quantity supplied, the supply is considered as inelastic. The elasticity coefficient of inelastic supply will be less than 1 (Es<1). Graphically, it will be a steep upward sloping curve.
E.g., Gasoline
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