Question

When the price of an item is $20, there are 500 units produced. When the price of that same item decreases to $12, there are 400 units produced. Answer the following:

1. Calculate the elasticity of supply at these price levels

2. Does the law of supply hold?

3. Is supply of this item elastic, inelastic or unit elastic?

Answer 1

Ans. 1) Price (P) Quantity of goods Produced (Qs)

$20 500 units

$12 400 units

Note: To calculate the elasticity of supply over this price range, Using the Midpoint method.

% change in price = change in price/ average price x 100

= ( $12 - $20 )/ ($20 + $12 )/2 x 100

= - 50%

and

% change in Quantity = change in quantity/average quantity x 100

= (400 - 500)/ ( 500 + 400)/2 x 100

= - 22.22 %

now,

The elasticity of supply = % change in quantity / % change in price

= ( - 22.22 %)/ (- 50 %)

= 0.44

Hence, the elasticity of supply is 0.44.

2) Yes, the positive value of the elasticity denoted that there is a positive relationship between price and quantity supplied of an item.

3) Since the value of the elasticity of supply is 0.44 which is less than one. Therefore, the elasticity of supply of this item is inelastic.