A company decided to increase its supply from 300kg to 350kg per day due to government intervention. The government intervention increases the price for the product from K8 to K9. Calculate the price elasticity of supply and interpret the elasticity in one simple sentence
To calculate the price elasticity of supply, you need to know the percentage change in quantity supplied and the percentage change in price.
The percentage change in quantity supplied is [(350kg - 300kg) / 300kg] * 100% = (50kg / 300kg) * 100% = 16.67%.
The percentage change in price is [(K9 - K8) / K8] * 100% = [(K9 - K8) / K8] * 100%.
It's unclear whether K8 and K9 are whole numbers, decimals, or percentages, so we'll leave it in the form [(K9 - K8) / K8] * 100%.
Assuming you have the actual values for K8 and K9, you can substitute them into the formula.
The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price, which can be represented as:
Elasticity = (ΔQ / Q) / (ΔP / P)
So, the price elasticity of supply = [16.67%] / [(K9 - K8) / K8] * 100%.
To interpret the elasticity, we need to look at its magnitude.
If the elasticity is less than 1, it is inelastic, indicating that the percentage change in quantity supplied is less than the percentage change in price. This means that the supply of the product is less responsive to changes in price.
If the elasticity is equal to 1, it is unitary elastic, indicating that the percentage change in quantity supplied is equal to the percentage change in price. This means that the supply of the product is proportionally responsive to changes in price.
If the elasticity is greater than 1, it is elastic, indicating that the percentage change in quantity supplied is greater than the percentage change in price. This means that the supply of the product is highly responsive to changes in price.
So, by calculating the price elasticity of supply, you can determine how responsive the supply of the product is to changes in price.
Interpret in one simple sentence
The price elasticity of supply measures the responsiveness of the product's supply to changes in price, helping us understand how much the quantity supplied will change relative to a given price change.
To calculate the price elasticity of supply, we need to know the percentage change in quantity supplied (Qs) and the percentage change in price (P). The formula for calculating price elasticity of supply is:
Price Elasticity of Supply = Percentage change in quantity supplied / Percentage change in price
Let's use the given information to calculate the price elasticity of supply.
Quantity supplied before intervention = 300 kg
Quantity supplied after intervention = 350 kg
Percentage change in quantity supplied:
= [(Quantity supplied after intervention - Quantity supplied before intervention) / Quantity supplied before intervention] × 100
= [(350 - 300) / 300] × 100
= (50 / 300) × 100
= 16.67%
Price before intervention = K8
Price after intervention = K9
Percentage change in price:
= [(Price after intervention - Price before intervention) / Price before intervention] × 100
= [(9 - 8) / 8] × 100
= (1 / 8) × 100
= 12.5%
Now, let's plug these values into the formula to calculate the price elasticity of supply:
Price Elasticity of Supply = 16.67% / 12.5%
= 1.33
Interpreting the elasticity:
The price elasticity of supply is 1.33, which indicates that the supply is elastic. This means that a 1% increase in price will result in a 1.33% increase in quantity supplied. In simpler terms, supply is relatively responsive to changes in price.