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The responsiveness
of quantities
demanded ans
supplied to changes
in price
Price Elasticity of
Demand
% change in quantity
Coefficient of
demand elasticity = Demanded / = E
d = Q / Pd
d
% change in Price
About the change
Inelastic coefficient:
A % change in price results in a smaller %
change in Quantity Demanded
Others to consider
0 = Perfect inelasticity
Infinity = Perfect elasticity
New Revenue
= $25 X 50
= $1250
% change in quantity
Coefficient of
supply elasticity = Supplied / = E
s = Q / Ps
s
% change in Price
Example
Toy store
Sells Teddy Bears for $20
Quantity supplied is 100
Store raises price to $25
Quantity supplied increases to 105
What is the price elasticity of supply?
Solution
% change in quantity supplied / % change in price
= ((Qn – Qo)/ (Qn+Qo)/2) / ((Pn – Po)/(Pn+Po)/2)
= ((105 – 100)/(205/2)) / ((25 – 20) / (45/2))
= (5/102.5) / (5/22.5)
= .05/.22
= .227
Elasticity types
Elastic coefficient:
A % change in price results in a larger %
change in Quantity Supplied
Inelastic coefficient:
A % change in price results in a smaller %
change in Quantity Supplied
Factors affecting Supply
Elasticity
Time
The longer a time period a seller has to
increase production, the more elastic
the supply will be
Ease of Storage
If product can be stored, supply
becomes more elastic
Cost
Some products are difficult to increase
the supply of quickly, such as cars and
homes
Others to consider
0 = Perfect inelasticity
Infinity = Perfect elasticity