Question

What is the price elasticity of supply? Can you explain it in your own words?

Short answer

The price elasticity of supply (PES) measures the responsiveness of a supplier to changes in the price of a good. It is calculated using the formula: \[PES = \frac{% \text{change in quantity supplied}}{% \text{change in price}}\] A high PES indicates that suppliers are more responsive to price changes, while a low PES indicates the opposite. PES is important for businesses and policymakers as it helps them make optimal pricing decisions and assess the possible impact of taxes or subsidies on the market.

Step-by-step solution

Define the Price Elasticity of Supply

The price elasticity of supply (PES) is a measure that calculates the proportionate change in the quantity supplied of a good in response to a proportionate change in its price. In simpler terms, it measures the responsiveness of a supplier to a change in the price of the good. A high PES indicates that suppliers are more responsive to price changes, while a low PES indicates the opposite.

Explain the Concept of Price Elasticity of Supply

The PES can range from 0 to infinity. It is considered elastic if the absolute value is greater than 1, which means that the percentage change in the quantity supplied is greater than the percentage change in price. A PES less than 1 means the supply is inelastic, and the percentage change in the quantity supplied is less than the percentage change in price. If the PES is exactly 1, the supply is unitary elastic, meaning the percentage change in quantity supplied is equal to the percentage change in price. PES is important for businesses and policymakers because it helps them understand how sensitive producers are to price changes. This information can help them make optimal pricing decisions and assess the possible impact of taxes or subsidies on the market.

Calculate the Price Elasticity of Supply

To calculate the PES, we use the following formula: \[PES = \frac{% \text{change in quantity supplied}}{% \text{change in price}}\] To calculate the percentage change, we use: \[\text{% change} = \frac{\text{new value - old value}}{\text{old value}} \times 100\] Let's assume, for example, that the price of a good increases from \(5 to \)6, and the quantity supplied increases from 100 to 120. We can then calculate the PES as follows: 1. Calculate the percentage change in the price \[\text{% change in price} = \frac{6 - 5}{5} \times 100 = 20\%\] 2. Calculate the percentage change in quantity supplied \[\text{% change in quantity supplied} = \frac{120 - 100}{100} \times 100 = 20\%\] 3. Calculate the PES using the changes in price and quantity supplied \[PES = \frac{20\%}{20\%} = 1\] In this case, the PES is 1, which indicates that the supply is unitary elastic. This means that suppliers are equally responsive to the price changes, and a percentage change in price will result in the same percentage change in the quantity supplied.