Question

The market price of a good increases from Rs. 10 to Rs. 25. Therefore, the quantity supplied by the firm increases from 15 to 20 units. Calculate the price elasticity of supply.

Hint:

Price Elasticity of Supply (PES) measures how responsive the quantity supplied is to a change in price. A PES value greater than 1 indicates elastic supply, while less than 1 indicates inelastic supply.

Answer 1

Step 1: Formula for Price Elasticity of Supply.
The formula for Price Elasticity of Supply (PES) is given by: \[ PES = \frac{%\text{ Change in Quantity Supplied}}{%\text{ Change in Price}} \]
Step 2: Calculate Percentage Change in Quantity Supplied.
The initial quantity supplied is 15 units, and the final quantity supplied is 20 units. The percentage change in quantity supplied is: \[ %\text{ Change in Quantity Supplied} = \frac{20 - 15}{15} \times 100 = \frac{5}{15} \times 100 = 33.33% \]
Step 3: Calculate Percentage Change in Price.
The initial price is Rs. 10, and the final price is Rs. 25. The percentage change in price is: \[ %\text{ Change in Price} = \frac{25 - 10}{10} \times 100 = \frac{15}{10} \times 100 = 150% \]
Step 4: Calculate Price Elasticity of Supply.
Now, substitute the values into the formula for PES: \[ PES = \frac{33.33%}{150%} = 0.222 \]