Measurements of Price Elasticity of Supply:
We know that supply of a commodity is directly related to the price of the commodity. It means that quantity demanded of a commodity changes with the change in its price positively. When the price increases the supply will also be increased and when price decreases, the supply will be decreased.
The price elasticity of supply is the measure of responsiveness of the quantity supplied of a particular good to a change in price. The intent of determining the price elasticity of supply is to show how a change in price impacts the amount of a good that is supplied to consumers.
Economists have developed different methods of measurement of price elasticity of supply. They are as follows :
1. Percentage / Proportion Method
2. Point / Geometric Method
1. Percentage / Proportion Method:
The percentage method of measuring price elasticity of supply is based on the definition of elasticity means, the ratio of percentage change in quantity supplied to a given percentage change in its price.
Therefore, the formula for measuring price elasticity of supply is :
es = Percentage Change in Quantity Supplied / Percentage Change in Price
es = (∆Q / Q × 100) / (∆P / P × 100)
es = (∆Q /∆P ) × (P/ Q)
Where, es = elasticity of supply
Q = initial quantity
∆Q = change in quantity supplied
P = initial Price
∆P = change in Price
Example :
Question : When the price of a commodity rise from Rs 10 to Rs 11 per unit, its quantity supplied rises by 100 units. Its price elasticity of supply is 2. Calculate the quantity supplied at the increased price.
Answer: Here, P = 10, ∆P = (11 – 10 )= 1 , es = 2,
∆Q = 100 units
In order to calculate the quantity supplied at increased price we have to calculate the initial quantity Q first.
es = ( ∆Q / ∆P) × (P / Q)
2 = ( 100 / 1) × ( 10 / Q)
Q = 500
Thus, the quantity supplied at initial price is 500 units.
New Quantity = Q + ∆Q
= (500 + 100)
= 600 units.
Therefore, 600 units will be supplied at Rs 11 per unit.
Question : With a fall in the price of a commodity from Rs 10 per unit to Rs 8 per unit, the quantity supplied of the commodity falls by 500 units. The price elasticity of supply is 2. Calculate the quantity supplied of this commodity at the price of Rs 8 per unit.
Answer :
Here, P = 10, P1 = 8, ∆P = (10 – 8) = 2 units,
∆Q = 500 units, es = 2
es = (∆ Q/∆P) × (P/ Q)
2 = (500 / 2) × (10/ Q)
Q = 1250
Therefore,
quantity supplied at the price of Rs 8 per unit = (Q – ∆ Q)
= 1250 – 500
= 700 units.
2. Point / Geometric Method:
Geometric method is used to measure the elasticity of supply at a given point on the supply curve. Thus it is known as the point method of measuring elasticity of supply.
This method is related to the measurement of responsiveness of quantity supplied to change in the price of the product if they are changed by a small amount.
The method of measurement of price elasticity of supply under point method in different cases are as follows :
1.When the Linear Supply Curve has X – Internet:
Linear Supply Curve with X intercept
In the given figure suppose we want to measure price elasticity of supply at point K on the supply curve SS.
Point K indicates that at OP price the quantity supplied is OB. Extend supply curve SS downward so that it meet X – axis at point A.
Now the elasticity of supply at point K on the supply curve SS is measured by the formula
es = OA / OB
Therefore,
es = ratio of horizontal segment AB divided by the quantity supplied OB at point K
In the given figure it is clear that AB is smaller than OB, therefore the supply elasticity AB/ OB is less than unity (es<1).
2. When the Linear Supply Curve has Y – Intercept:
Linear Supply Curve with Y intercept
In the given figure, if the price elasticity of supply is calculated at point K, where at OP price the quantity supplied is OB.
The supply curve S1S1 is extended downward to meet X axis to the left of the point of origin.
This way AB is greater than OB. Therefore, the elasticity of supply AB/ OB is greater than unitary (es >1).
3. When Linear Supply Curve Passes through the origin:
Linear Supply Curve passing through the Origin
In the given figure, the price elasticity of supply is calculated at point K, where at OP price the quantity supplied is OB.
The supply curve S2S2 when extended, meets the X axis at the point of origin so that AB = OB.
Therefore at point K on S2S2, the elasticity of supply AB/ OB will be equal to one (es =1).
4. When the Supply Curve is Non – Linear :
The geometric method of measurement of price elasticity of supply is also applicable to measure the elasticity of supply at a point on a non- linear (curve type) supply curve. For this purpose the same general principle and method is used.
At any point on the non linear supply curve, a tangent is drawn. The supply elasticity is measured by the tangent on that given point.
Measurement of Elasticity of Supply on non Linear Supply Curve
In the given figure, supply elasticity is to be estimated at point K on the non linear supply curve SS.
First, we draw a tangent tt at point K on the supply curve.
Then, this tangent is extended downward to meet the X axis at point A. At point K, the slope of the supply curve is equal to the slope of the tangent tt. Therefore elasticity of supply at point K on the supply curve will be obtained by using the same formula
es = AB / OB
Since AB is smaller than OB, the elasticity of supply here is less than unitary.
This way we can estimate the point elasticity on any other point on the supply curve by drawing a tangent at it.
If the tangent draw at any point an a supply curve intersects the X axis, the elasticity of supply at this point is less than unity.
If the tangent passes through the origin, elasticity of supply at that point of tangency is equal to unity.
If the tangent intersects the Y axis, elasticity of supply is more than unity.