If the price of a commodity increases by $50 %$ and its supply increases by 25% then calculate the price elasticity of supply following the percentage method. Identify the degree of price elasticity.

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Solution

Price Elasticity of a supply Es = (Percentage change in the quantity of supply) Qs/ (Percentage change in the price of the commodity) Ps.
Qs = 25 % since there is a change in the quanity of supply by 25 %
Ps = 50% since there is a change in the price of the quantity by 50 %
Thus, Es = 25/50 = 0.5.
Since, Es is less than 1 but not equal to 0 it is inelastic which is also the degree of price elasticity.

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