1.2.5 Elasticity of supply

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    a) Understanding of price elasticity of supply
    Price Elasticity of Supply – measure of the responsiveness of quantity supplied to changes in the price of that good or service
    It is the ease in which a producer is able to increase the supply of a good or service following a rise in its price
    Price inelastic and elastic of supply

    b) Use formula to calculate price elasticity of supply
    Calculating Price Elasticity of Supply
    PED = Percentage Change in Supply / Percentage Change in Price
    E.g. Price increases from £4.75 to £5 and Supply increases from 240,078 to 262,087
    • 0.25/4.75 = 0.053 • 22009/240078 = 0.092 • 0.092/0.053 =1.74 – elastic
    c) Interpret numerical values of price elasticity of supply:
    Perfectly and relatively elastic, and perfectly and relatively inelastic
    Price inelastic = between 0 and 1 (perfectly inelastic = 0)
    Price elastic = between 1 and infinity (perfectly elastic is infinity)
    Unit elastic = 1

     

     

     

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