How to Calculate Price Elasticity of Supply: Midpoint Method & Example
The price elasticity of supply formula helps measure how much the quantity supplied of a product changes when its price changes. This concept is essential for students in school and competitive exams, and is also used frequently in real business analysis. Understanding it builds a strong foundation for grasping economic responsiveness and making better business decisions.
| Type of Elasticity | Description | Elasticity Value |
|---|---|---|
| Perfectly Elastic Supply | Any small price change leads to a huge change in quantity supplied | Infinity (∞) |
| Elastic Supply | Quantity supplied changes more than the price change | > 1 |
| Unitary Elastic Supply | Quantity supplied changes exactly as much as the price change | = 1 |
| Inelastic Supply | Quantity supplied changes less than the price change | < 1 |
| Perfectly Inelastic Supply | Quantity supplied does not change at all, no matter the price | 0 |
Price Elasticity of Supply Formula
The price elasticity of supply formula shows how responsive the quantity supplied is to a change in price. It is a key metric used in Economics for both theory and practical numerical problems. This formula can be easily applied in Class 12 exams, and is also relevant for business planning.
| Method | Formula | Where Used |
|---|---|---|
| Basic/Point Method | Elasticity = (ΔQ / Q1) ÷ (ΔP / P1) | Small changes, starting value as base |
| Midpoint (Arc) Method | Elasticity = (Q2-Q1)/[(Q2+Q1)/2] ÷ (P2-P1)/[(P2+P1)/2] | Larger changes, more accurate average |
| Derivative Method | Elasticity = (dQ/dP) × (P/Q) | Instantaneous, calculus-based |
Steps to Calculate Price Elasticity of Supply
To solve elasticity problems, follow these steps. This process ensures accuracy for school or competitive exams and helps in business scenarios involving supply responsiveness.
- Identify the initial and new quantity supplied (Q1, Q2) and prices (P1, P2).
- Find the change in quantity (Q2 - Q1) and change in price (P2 - P1).
- Calculate the average quantity and average price for the midpoint method.
- Use the formula:
Elasticity = (Q2-Q1)/[(Q2+Q1)/2] ÷ (P2-P1)/[(P2+P1)/2] - Interpret the obtained value (is it elastic, inelastic, or unitary?).
Worked Example: Price Elasticity of Supply
Let's calculate the price elasticity of supply using the midpoint method – a common exam and real-world approach. Suppose a product's price rises from Rs. 100 to Rs. 120, and the quantity supplied rises from 400 units to 480 units. Find the elasticity.
Stepwise Solution
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Initial quantity supplied (Q1) = 400, New quantity supplied (Q2) = 480
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Initial price (P1) = 100, New price (P2) = 120
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Change in quantity = 480 – 400 = 80
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Average quantity = (400 + 480) ÷ 2 = 440
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Change in price = 120 – 100 = 20
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Average price = (100 + 120) ÷ 2 = 110
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Elasticity = (80 ÷ 440) ÷ (20 ÷ 110) = 0.1818 ÷ 0.1818 = 1
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Interpretation: Elasticity is unitary (value 1), so percentage change in quantity supplied equals percentage change in price.
Interpretation and Types of Supply Elasticity
Elasticity values give clear meaning for exams and real-life business analysis. Always consider these when interpreting supply responses:
- Elastic (>1): Supply responds strongly to price changes.
- Inelastic (<1): Supply responds weakly to price changes.
- Unitary (=1): Supply changes exactly in proportion to price.
- Perfectly Elastic (∞): Any small price change leads to massive change in supply.
- Perfectly Inelastic (0): Supply does not change at all, no matter the price.
Graphical Illustration of Supply Elasticity
Graphically, elasticity affects the slope of the supply curve. A flatter curve means supply is elastic; a steeper curve means inelastic. In school and board exams, you may need to sketch or interpret such curves, as shown below.
- Elastic Supply: Supply curve is relatively flat.
- Inelastic Supply: Supply curve is steep.
- Perfectly Elastic: Horizontal line.
- Perfectly Inelastic: Vertical line.
Such diagrams are vital for quick revision. To learn more, see Changes in Supply and Law of Supply on Vedantu.
Extension: Derivative Method and Calculators
Advanced students and business analysts may use calculus for more precise calculations. Using the derivative method: Elasticity = (dQ/dP) × (P/Q). Online calculators are also available to compute supply elasticity quickly when datasets are large or functions are non-linear.
Practical Applications and Exam Importance
Understanding price elasticity of supply helps students answer MCQs and problem-solving questions in Class 12 exams, commerce entrance exams, UPSC, and business certifications. For businesses, it guides inventory and production decisions, especially in volatile markets. For a deeper grasp, compare this with Price Elasticity of Demand and review Measurement of Price Elasticity for various supply and demand scenarios.
At Vedantu, we simplify complex Commerce and Economics concepts with clear explanations and real-world examples, helping you succeed in exams and understand practical business scenarios. Study consistently, work through stepwise examples, and use internal links for deeper learning.
In summary, the price elasticity of supply formula is an essential Commerce concept that measures how suppliers respond to price changes. Understanding its types, formulas, and practical applications boosts student performance in school, competitive exams, and real-world business decision making.
FAQs on Price Elasticity of Supply Formula Explained
1. What is the price elasticity of supply formula?
The price elasticity of supply formula measures the responsiveness of quantity supplied to price changes. It's calculated as the percentage change in quantity supplied divided by the percentage change in price. The midpoint method is commonly used for accuracy.
2. How do you calculate price elasticity of supply using the midpoint method?
The midpoint method provides a more accurate price elasticity of supply calculation, especially for larger price changes. The formula is: Elasticity = [(Q2 - Q1) / ((Q2 + Q1) / 2)] / [(P2 - P1) / ((P2 + P1) / 2)], where Q represents quantity supplied and P represents price. This method uses the average of the initial and final values to calculate the percentage changes.
3. Can you give an example calculation for elasticity of supply?
Let's say the price of a good increases from $10 to $12, and the quantity supplied increases from 100 units to 120 units. Using the midpoint method: Elasticity = [(120 - 100) / ((120 + 100) / 2)] / [(120 - 100) / ((120 + 100) / 2)] = 1. This indicates unitary elasticity of supply.
4. What does it mean if elasticity of supply is greater or less than 1?
If the price elasticity of supply is greater than 1, it's elastic, meaning a small price change leads to a large quantity supplied change. If it's less than 1, it's inelastic, implying a small quantity supplied response to price changes. Unitary elasticity means a proportional response.
5. How is price elasticity of supply important in business or economics exams?
Understanding price elasticity of supply is crucial for business decisions like pricing strategies and production planning. In economics exams, it tests your comprehension of supply responsiveness and ability to apply formulas and interpret results, often appearing in numerical problems and conceptual questions.
6. How to calculate the price elasticity of supply?
To calculate price elasticity of supply, use the formula: Percentage change in quantity supplied / Percentage change in price. Remember to use the midpoint method for greater accuracy, especially with larger changes in price and quantity.
7. What is the price elasticity of supply class12?
In Class 12 economics, price elasticity of supply is a key concept, covering its calculation using different methods (midpoint method, point elasticity), interpretation of results (elastic, inelastic, unitary elastic), and its application in real-world scenarios.
8. What is the basic formula for price elasticity?
The basic formula for price elasticity (whether of supply or demand) is: Percentage change in quantity / Percentage change in price. However, the midpoint method is preferred for accuracy.
9. Is PED = -2.5 elastic or inelastic?
PED (Price Elasticity of Demand) of -2.5 is elastic. The negative sign indicates an inverse relationship between price and quantity demanded. The absolute value (2.5) being greater than 1 signifies elastic demand—a price change causes a proportionally larger quantity demanded change.
10. What is the price elasticity of supply formula example?
An example of the price elasticity of supply formula in action: If a price increase from $5 to $7 leads to a quantity supplied increase from 100 to 150, using the midpoint method, the elasticity would be calculated as follows: Elasticity = [(150-100)/((150+100)/2)] / [(7-5)/((7+5)/2)] = 2.5, indicating an elastic supply.
11. How does elasticity appear on the supply curve?
The slope of the supply curve visually represents elasticity. A flatter curve shows elastic supply (high responsiveness to price changes), while a steeper curve indicates inelastic supply (low responsiveness).
12. What are common mistakes when applying the price elasticity of supply formula in numericals?
Common mistakes include incorrect calculation of percentage changes (not using the midpoint method), misinterpreting the sign of the elasticity value, and failing to understand the economic significance of elastic vs. inelastic supply in different contexts.
