Question

With a 10% increase in the price of a dairy products, the number of units supply rises from 

20 to 25. Determine the price elasticity of supply. State whether the supply for the product

is elastic or inelastic.

Answer 1

Price elasticity of supply$=\frac{Percentage\ change\ in\ quantity}{Percentage\ change\ in\ price}$

$\%\ Change\ in\ quantity=\ \frac{Q_2-Q_1}{(Q_2+Q_1)/2}\times100$

In this case,$\ Q_2=25,\ Q_1=20.$

Therefore, $\frac{25-20}{(25+20)/2}\times100$

$=\ 22.22$

$\%\ Change\ in\ price=10\%$

Price elasticity of supply$=\frac{22.22}{10}$

$=2.22$

The supply for the product is elastic because the elasticity is greater than 1 (>1) which indicates high responsiveness to changes in price.