3.11 : Elasticity of Supply Through Percentage Method

The elasticity of supply (Es) quantifies how responsive the quantity supplied is to changes in price. It is calculated as the ratio of the percentage change in quantity supplied to the percentage change in price.

For example, if the price of a product increases by 10%, and as a result, the quantity supplied increases by 20%, the Es would be 2 (20% change in quantity supplied divided by 10% change in price).

This method helps determine whether supply is elastic, inelastic, or unit elastic. If Es is greater than 1, supply is elastic, meaning a slight change in price leads to a proportionally larger change in quantity supplied. If Es is less than 1, supply is inelastic, indicating that the quantity supplied changes less than proportionately to a change in price. If Es equals 1, supply is unit elastic, meaning the percentage change in quantity supplied equals the percentage change in price.

Understanding Es through the percentage method is crucial for businesses to anticipate how price changes affect their production decisions and overall market dynamics.