Pralhada Baidar

Lecturer, PYC
Price Elasticity of Supply (Point Elasticity of Supply):

Suppose that the supply function is given by Q = f (P).

Let, P be a change in price and Q be the corresponding change in
quantity supplied.
The price elasticity of supply is denoted by s and defined by
% change in quantity supplied
s = % change in price
% Q
=
%P
Q P
s=  (positive)
P Q
This is also known as point elasticity of supply.
For the linear supply function, P = c + dQ,
P
Slope= =d
Q
Q 1
or, = >0
P d
1 P
 s = 
d Q

Coefficient of Price Elasticity of Supply

i. If s > 1, then the supply is elastic.

That is the percentage change in quantity supplied is greater than the
percentage change in price.
ii. If 0 < s < 1, then the supply is inelastic.
That is the percentage change in quantity supplied is less than the
percentage change in price.
iii. If s = 1, then the supply is unit elastic.
That is percentage change in quantity supplied is equal to the percentage
change in price.

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Arc Price Elasticity of Supply
Let (P1, Q1) and (P2, Q2)
The arc price elasticity (or mid-point elasticity) of supply is denoted by
arc s and defined by
Q P1 + P2
arc s =  where Q = Q2 – Q1 and P = P2 – P1
P Q1 + Q2
For a linear supply function P = c + dQ, the arc price elasticity of supply is
given by
Q P1 + P2
arc s = 
P Q1 + Q2
1 P1 + P2 Q 1
 arc s =  [Since = ]
d Q1 + Q2 P d

Income Elasticity of Demand:

Income elasticity of demand measures the responsiveness of the quantity
demanded for a good to a change in the income of the people demanding
the good. It is denoted by Y and defined by
% change in quantity demanded
Y = % change in income
% Q
=
%Y
Q Y
Y = 
Y Q
i. If y > 1, then the good is superior. That is demand rises as income rises
and vice-versa for luxury good.
The percentage change in quantity demanded is greater than the
percentage change in income of consumer.
ii. If y < 0 then the good is inferior. That is demand falls as income rises
and vice-versa for the inferior good.
iii. If 0 < y < 1, then the good is normal. That is demand rises as income
rises and vice-versa for the stable (normal) good.
The percentage change in quantity demanded is less than the percentage
change in income of consumer.

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Arc Income Elasticity of Demand:

Let (Y1, Q1) and (Y2, Q2)

Q Y1 +Y2
arc Y =  ,where Q = Q2 – Q1 and Y = Y2– Y1
Y Q1 + Q2

Example 1:
The supply function for a good is given by P = 40 + 0.5Q.
a. Calculate the elasticity of supply at P = Rs. 100
b. Interpret the result obtained.
c. Calculate the percentage change in quantity supplied at P = Rs.
100 if the price of goods increases by 15%.
Solution:
Here, P= 40 + 0.5Q
P
Slope, = 0.5
Q
Q 1
 = =2
P 0.5

a. When P = Rs. 100

100 = 40 + 0.5Q
or, 0.5Q = 60
or, Q = 120
Q P 100 5
Elasticity of supply s=  = 2× 120 = 3 = 1.67
P Q
Since, s = 1.67 > 1, the supply is elastic.
b. Interpretation:
As s =1.67, this indicates that at price P = Rs. 100, 1% increase (decrease)
in price will cause 1.67% increase (decrease) in quantity supplied.
c. Here, %P =15%, %Q =?
% Q
We know, d =
%P
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%Q = d  %P =3 15 =25%

Example 2:
When income of the consumer increases from Rs. 5,000 to Rs. 10,000,
quantity demanded increases from 500 units to 800 units, find the
income elasticity of demand and interpret the result.
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Solution:
Here, Y1 = Rs. 5,000, Q1 = 500 units
Y2 = Rs. 10,000, Q2 = 800 units
Income elasticity of demand, Y =?
Now, Q = Q2 – Q1= 300 units
Y = Y2– Y1 = Rs. 5,000
We have,
Q Y1 +Y2 300 5000+ 10000 9
arc Y =  =  500 + 800 =13
Y Q1 + Q2 5000
9
 arc Y = 13 = 0.69

Since, Y = 0.69  1, the good is normal (stable).

Interpretation:
As Y = 0.69, this indicates that 1% increase (decrease) in income of
consumer will cause 0.69% increase (decrease) in quantity
demanded.