Unit 2: Elasticity of Demand and Supply

▪ Concepts and types of price, income, and cross elasticity of demand

▪ Measurements of price, income and cross elasticity of demand
▪ Uses of price, income, and cross elasticity of demand
▪ Concept of elasticity of supply and its measurement
2.1 Prerequisite
(A) Law of Demand
▪ The law of demand shows the direction of the relationship between the
quantity of a commodity demanded (Qx) and the price of the same
commodity (Px), ceteris paribus.
▪ Here, the ceteris paribus tells us to keep other independent variables
affecting the quantity demanded (Qx)—such as a person's income (Y),
the price of related goods like substitutes and complements (Py), and
so forth—constant.
(B) Demand Function
Demand Function

(1) a short-run demand function (2) a long-run demand function

Qx = f (Px, Py, Y)

(a) a linear demand function (b) a nonlinear demand function

𝑎
Qx = f (Px), ceteris paribus Qx = 𝑃
𝑥
10
Qx = a – b Px Qx = 𝑃
𝑥
Qx = 10 – 2 Px

Px Px

Qx

Qx Qx
Figure 2.1 Figure 2.2
▪
Elasticity (e)

(1) Elasticity of (2) Price

Demand (𝑒𝑄 ) Elasticity of
Supply(𝑒𝑄𝑥 .𝑃𝑥 )

(ii) Income ii) Cross

(i) Price Elasticity of Elasticity of
Elasticity of Demand (𝑒𝑄.𝑌 ) Demand (𝑒𝑄𝑥 .𝑃𝑦 )
Demand
(𝑒𝑄𝑥 .𝑃𝑥 )
 Elasticity of Demand (𝒆𝑸 )
▪ The 𝑒𝑄 is divided into three parts: the price elasticity of demand (𝑒𝑄𝑥.𝑃𝑥 ), income
elasticity of demand (𝑒𝑄.𝑌 ), and the cross elasticity of demand (𝑒𝑄𝑥.𝑃𝑦 ).
(a) Concepts and Types of Price, Income, and Cross
Elasticity of Demand
The Concept and Types of Price Elasticity of Demand (𝒆𝑸𝒙 .𝑷𝒙 )
The Concept of Price Elasticity of Demand (𝒆𝑸𝒙 .𝑷𝒙 )
▪ The law of demand shows the only direction of the relationship between the quantity
of a commodity demanded (Qx) and the price of the same commodity (Px), ceteris
paribus.
▪ But the price elasticity of demand(𝑒𝑄𝑥.𝑃𝑥 ) shows not only the direction but also the
degree (the quantity) of the relationship between the quantity of a commodity
demanded (Qx) and the price of the same commodity (Px) in terms of percentage,
ceteris paribus. Price elasticity of demand (𝑒𝑄𝑥.𝑃𝑥 ) is computed by this formula:
 the percentage change in the quantity demanded of a commodity x
𝑒𝑄𝑥.𝑃𝑥 =
the percentage change in the price of the commodity x

% ∆Q𝑥
=
%∆P𝑥

∆Q𝑥
ൗQ
= ΔP 𝑥
ൗP
𝑥
𝑥

∆Q𝑥 P𝑥
= .
Q𝑥 ΔP𝑥

∆Q𝑥 P𝑥
= .
ΔP𝑥 Q𝑥

∆Q𝑥 P𝑥
=− . ∵ Insert a minus sign because of the negative relationship between Px and Qx.
ΔP𝑥 Q𝑥
Q. Compute 𝑒 𝑄𝑥.𝑃𝑥 for the movement from points A to C from the following table
Table 2.1
Points A B C

𝑃𝑥 (in Rs.) 𝑃0 = 10 20 𝑃1 = 30

𝑄𝑥 (in units) 𝑄0 = 600 400 𝑄1 = 200

Ans.
∆Q𝑥 P𝑥 −400 10
𝑒𝑄𝑥 .𝑃𝑥 = − . =− . ≃ 0.33
ΔP𝑥 Q𝑥 20 600
∵ 𝑃𝑥 = 𝑃0 = 10; 𝑄𝑥 =𝑄0 = 600
Δ𝑄𝑥 = 𝑄1 − 𝑄0 = 200 – 600 = – 400
Δ𝑃𝑥 = 𝑃1 − 𝑃0 = 30 − 10 = 20
1= new; 0 = initial (old)
Interpretation: a 1% rise price level reduced the quantity demanded by about 0.33%.
Types of Price of Price Elasticity of Demand

The price elasticity of demand (𝑒𝑄𝑥.𝑃𝑥 ) divided into five parts:

(i)Relatively Elastic Demand (𝒆𝑸𝒙.𝑷𝒙 > 1)
▪ Here, (% Δ𝑄𝑥 > % Δ𝑃𝑥 ) ⇒ (𝑒𝑄𝑥.𝑃𝑥 > 1) ⇒ (a flatter demand curve)
▪
(ii) Relatively Inelastic Demand (𝒆𝑸𝒙.𝑷𝒙 < 1)
▪ Here, (% Δ𝑄𝑥 < % Δ𝑃𝑥 ) ⇒ (𝑒𝑄𝑥.𝑃𝑥 < 1) ⇒ (a steeper demand curve)
▪
(iii) Unitary Elastic Demand (𝒆𝑸𝒙.𝑷𝒙 = 1)
▪ Here, (% Δ𝑄𝑥 = % Δ𝑃𝑥 ) ⇒ (𝑒𝑄𝑥.𝑃𝑥 = 1) ⇒ (e.g., a rectangular hyperbolic demand curve)
▪
(iv) Perfectly Elastic Demand (𝒆𝑸𝒙.𝑷𝒙 = ∞)
▪ Here, (% Δ𝑃𝑥 = very small) ⇒ (% Δ𝑄𝑥 = ∞) ⇒(𝑒𝑄𝑥.𝑃𝑥 = ∞) ⇒ (a horizontal demand
curve)
▪
(v) Perfectly Inelastic Demand (𝒆𝑸𝒙.𝑷𝒙 = 0)
▪ Here, (% Δ𝑃𝑥 = 10, e.g.) ⇒ (% Δ𝑄𝑥 = 0) ⇒(𝑒𝑄𝑥.𝑃𝑥 = 0) ⇒ (a vertical demand curve)
▪
 The Concept and Types of Income Elasticity of Demand (𝑒𝑄.𝑌 )
The Concept of Income Elasticity of Demand (𝑒𝑄.𝑌 )
▪ The income elasticity of demand(𝑒𝑄.𝑌 ) shows the relationship between the quantity of a commodity
demanded (Qx) and the income of a person (Y) in terms of percentage, ceteris paribus. The income
elasticity of demand (𝑒𝑄.𝑌 )is computed by this formula:

the percentage change in the quantity demanded of a commodity x

𝑒𝑄.𝑌 =
the percentage change in the income of a person

% ∆Q𝑥
=
%∆Y

∆Q𝑥
ൗQ
= ΔYൗ
𝑥

∆Q𝑥 Y
= .
Q𝑥 ΔY

∆Qx 𝑌
= .
ΔY 𝑄𝑥
Types of Income Elasticity of Demand (𝑒𝑄.𝑌 )
▪
▪
The Cross Elasticity of Demand (𝒆𝑸𝒙.𝑷𝒚 or 𝒆𝒙𝒚 )
Concepts of the Cross Elasticity of Demand
▪
▪
▪
Types of the Cross Elasticity of Supply (𝒆𝒙𝒚 )
▪
 (b) Measurements of Price, Income, and Cross Elasticity
of Demand
Measurements of Price Elasticity of Demand (𝑒𝑄𝑥.𝑃𝑥 )
The price elasticity of demand (𝑒𝑄𝑥 .𝑃𝑥 ) is measured in three ways: (1) a total outlay
method, (2) a point elasticity method, (3) an arc elasticity method.
(1) Total Outlay Method to Measure (𝑒𝑄𝑥 .𝑃𝑥 )
The total outlay method for measuring 𝑒𝑄𝑥 .𝑃𝑥 , developed by Marshall, compares
price change (Δ𝑃𝑥 ) with the total-outlay change (∆E): 𝑒𝑄𝑥 .𝑃𝑥 < 1 in case of their
relationship in the same direction, 𝑒𝑄𝑥 .𝑃𝑥 > 1 in case of their relationship in the
opposite direction, and 𝑒𝑄𝑥 .𝑃𝑥 = 1 in case of no change in the quantity
demanded (∆E).
(a)Using Calculus
Total Outlay = Price × Quantity
E = P × Q … … … … … … … … … … (i) ∵ Q = Q(P)
Differentiating E with respect to P
𝑑𝐸 𝑑 (𝑃𝑄)
=
𝑑𝑝 𝑑𝑝
𝑑𝐸 𝑑(𝑃) 𝑑(𝑄)
= Q + p
𝑑𝑝 𝑑𝑝 𝑑𝑝
𝑑𝐸 𝑑𝑄
= Q + p
𝑑𝑝 𝑑𝑝
𝑑(𝑄)
∵ =?
𝑑𝑝
𝑑𝑄 p
e = − 𝑑𝑝 𝑄 where e ≡ 𝑒𝑄𝑥 .𝑃𝑥
𝑑𝑄 𝑒.𝑄
∴𝑑𝑝 = − 𝑝
𝑑𝐸 𝑒.𝑄
= Q + p (− )
𝑑𝑝 𝑝
𝑑𝐸
𝑑𝑝
= Q − 𝑒 .𝑄
𝑑𝐸
∴𝑑𝑝 = Q (1 − 𝑒) … … . … … … … (ii) ⇒
 From Equation (ii), we obtain these three types of relationships:
e = Price Elasticity of Demand ≡ 𝑒𝑄𝑥.𝑃𝑥
E = Expenditure = Total Outlay = P × Q
Q = the quantity of a commodity demanded
Equation (iii) says that
𝑑𝐸
(a)If > 0, that is, if there is a relationship between P and E in the same direction, then
𝑑𝑝
e < 1;
𝑑𝐸
(b)If < 0, that is, if there is a relationship between P and E in an opposite direction,
𝑑𝑝
then e > 1;
𝑑𝐸
(c)If = 0, that is, if there is no change in E despite a change in P, then e = 1.
𝑑𝑝

(b) Tabular Method

Based on Equation (iii), the following table uses the direction of P and E (i.e., Columns 1
and 3) and shows these three types of relationship: e < 1, e = 1, and e > 1, shown in
Column 6.
Table 2.2
Total Outlay Method to Measure 𝑒𝑄𝑥.𝑃𝑥

▪
(c) Graphic Method (Total Outlay Method to Measure 𝒆𝑸𝒙.𝑷𝒙 )

Figure 2.16
Measuring e by Total Outlay Method
▪ In Figure 2.16, the DC part of the line is positively sloped, and this part shows the relationship
between Px and E in the same direction; hence, the part DC is related to e < 1.
▪ The BC part of the line is vertical, and this part shows no change in E despite a change in Px; hence,
the part BC is related to e = 1.
▪ Finally, the BA part is negatively sloped, and this part shows the relationship between Px and E in
an opposite direction; hence, the part BA is associated with e > 1.

(2) Point Elasticity Method to Measure 𝒆𝑸𝒙 .𝑷𝒙

There are two parts of this point method to measure 𝑒𝑄𝑥 .𝑃𝑥 :
(a) the 𝑒𝑄𝑥 .𝑃𝑥 for a linear demand curve and
(b) (b) the 𝑒𝑄𝑥 .𝑃𝑥 for a nonlinear demand curve. Let 𝑒𝑄𝑥 .𝑃𝑥 ≡ e for the sake of the simplicity in the
notation.
𝑑𝑄 p
Here, the absolute value of the elasticity is used for a comparison purpose: | e | = .
𝑑𝑝 𝑄
(a) Measuring the Elasticity (e) of a Linear Demand Curve
At first, we use a geometric (point) method to measure e at a single point C in Figure 2.16
on a linear demand curve drawn from Table 2.3
Figure 2.16
Point Method to Measure E At Point C on A Linear Demand Curve
 ∆𝑄 𝑃 𝑁𝑀 𝑁𝐶 𝑁𝑀 6000
|e| = = = = =3
∆𝑃 𝑄 𝑁𝐶 𝑂𝑁 𝑂𝑁 2000

Although the value of the slope remains the same between any two points along a linear demand curve,
the value of the price elasticity of demand (e) differs at every point even along the same demand curve
(see Table 2.4 and Figure 2.17).
Table 2.4
Price Elasticity of Demand Differing at Every Point Even of the Linear Demand Curve
Figure 2.17
Measuring e at points D, C, F, H, and A
(b) Measuring the elasticity (e) of a Nonlinear Demand Curve
To find elasticity (e) at a point (e.g., point D in Figure 2.18) on a nonlinear demand curve Dy, we draw a
tangent line (e.g., the RL tangent in Figure 2.18) at that point D on the curve, the curve that was derived
from Table 2.5. The other method of finding e is the same as in Figure 2.17.
Table 2.5
Demand Schedule

1250 3250
Measurements of Income Elasticity of Demand (𝒆𝒀 )

Measuring 𝑒𝑌 is also divided into two parts: (a) measuring 𝑒𝑌 of a linear

income-demand curve and (b) measuring 𝑒𝑌 of a nonlinear income-demand
curve.
(a)Measuring 𝒆𝒀 of a Linear Demand Curve
Measuring 𝑒𝑌 of a linear income-demand curve is further divided into three
parts: (i) a linear income-demand line touching the horizontal axis to the
left of the origin, (ii) a linear income-demand line touching the horizontal
axis at the origin, and (iii) a linear income-demand line touching the
horizontal axis to the right of the origin.
i) A Linear Income-Demand Line Touching the Horizontal Axis to the Left of The
Origin
Figure 2.19
Measuring 𝑒𝑌 at Point R (a Point Method)
∆𝑄 𝑌 𝑁𝑀 𝑀𝑅 𝑁𝑀
|e| = = = >1 [∵ |NR | > |OM|
∆𝑌 𝑄 𝑀𝑅 𝑂𝑀 𝑂𝑀
Y
𝑁𝑀 Qx
|𝑒𝑌 | = >1 ∵ NM > OM
𝑂𝑀

∆Y

N o M Qx
∆ Qx
ii) A Linear Income-Demand Line Touching the Horizontal Axis to the Right of The
Origin
Figure 2.20
Measuring 𝑒𝑌 at Point R (Point Method)
Y Qx
𝑁𝑀
|e| = 𝑂𝑀 < 1 ∵ NM < OM

∆Y

o N M Qx
∆ Qx
iii) A Linear Income-Demand Line Touching the Horizontal Axis at the Origin
Figure 2.21
Measuring 𝑒𝑌 at Point R (Point Method)
Y Qx
𝑂𝑀
|e| = 𝑂𝑀 = 1 ∵ OM = OM

∆Y

o M Qx
∆ Qx
(b) Measuring 𝒆𝒀 of a Nonlinear Demand Curve
In the case of a nonlinear income-demand curve, we should draw a tangent line at a point
on the demand curve (see Figure 2.22).
Figure 2.22
Measuring 𝑒𝑌 at Points A and C of a Nonlinear Demand Curve (Point Method)
Measurement of Cross Elasticity of Demand
The cross elasticity of demand (exy) is calculated in these two ways:
(a)Percentage or Proportionate Method
the percentage change in the quantity demanded of a commodity 𝑥
𝑒𝑥𝑦 =
the percentage change in the price of a commodity 𝑦

% ∆Q𝑥
= ∵ 𝑃𝑦 = an original price of y
%∆Py

∆𝑃𝑦 = the change in price of y

∆Q𝑥
=
ൗQ
𝑥
𝑄𝑥 = an original quantity demanded of x
ΔPy
ൗ𝑃𝑦 ∆Qx = the change in quantity demanded of y
𝑃𝑦
=
∆Q𝑥
. (𝑒𝑥𝑦 < o) → x and y are complements like sugar and tea
Q𝑥 ΔPy
(𝑒𝑥𝑦 > o) → x and y are substitutes like tea and coffee
∆Qx 𝑃𝑦 (𝑒𝑥𝑦 = o) → x and y are independent (unrelated)
= .
ΔPy 𝑄𝑥
(b) Arc or Average Method

the percentage change in the quantity demanded of a commodity 𝑥

an average quantity demanded of a commodity 𝑥
𝑒𝑥𝑦 =
the percentage change in the price of a commodity 𝑦
an average price of a commodity 𝑦

∆𝑄𝑥
(𝑄0+ 𝑄1)
൘
𝑒𝑥𝑦 = ∆𝑃𝑦
2

(𝑃0+ 𝑃1 )ൗ
2

∆𝑄𝑥 𝑃𝑦0 + 𝑃𝑦1

𝑒𝑥𝑦 = .
∆𝑃𝑦 𝑄0 + 𝑄1
 (b) Uses of Price, Income, and Cross Elasticity of
Demand
Uses of Price Elasticity of Demand ( 𝒆𝒙 )
The 𝑒𝑥 has the following uses (importance) in understanding economic problems and formulating economic problems. This rule is related
here: more elastic demand→ less price, but less elastic demand → more price.
(1) To determine monopoly price. If 𝑒𝑥 < 1, then a monopolist charges a higher price and get more profit.
(2) To determine price under discriminating monopoly. A discriminating monopolist tends to charge a higher price in the market
having 𝑒𝑥 < 1. Likewise, the monopolist tends to charge a lower price in the market having 𝑒𝑥 > 1.
(3) To determine prices for public utilities. If the demand for public services (e.g., internet, telephone, water, electricity, etc.) is
inelastic (𝑒𝑥 < 1), then public authorities may charge higher prices; on the other hand, if 𝑒𝑥 > 1, then they may charge lower prices for the
public utilities.
(4) To determine the price of joint products. These are some example of joint products: sheep and wool, and paddy and straw. The
cost of these joint products cannot be counted separately. Therefore, the sellers take the help of the elasticity to determine the price of
these joint products: (𝑒𝑥 < 1) → more price of the joint product (either sheep or wool, for example), but 𝑒𝑥 > 1→ less price of the joint
product (either sheep or wool, for example).
(5) To determine wage. If the demand for laborers is more elastic (𝑒𝑥 > 1), then employers may force the laborers to accept lower wages. If
the demand for laborers is less elastic (𝑒𝑥 < 1), then employers may be obliged to pay higher wages to laborers.
(6) To gain from international trade. If the goods to be exported to other countries are less elastic (𝑒𝑥 < 1), the exporting country gains
profits from charging higher prices for its goods.
(7) To impose taxes. The government is like to impose higher customs duties to the goods with a large number of substitutes because of an
unrestricted import of these goods.
Uses of Income Elasticity of Demand (𝒆𝒚 )
▪ The 𝒆𝒚 has the following uses.
(1) Useful for business persons in trade cycle. During prosperity, consumers' income rises
continuously. Therefore, the demand for luxurious goods become elastic (𝑒𝑦 > 1). Hence,
producers may gain from selling the luxurious goods in this period. But the sellers will not
benefit from selling necessary goods during the prosperity period because 𝑒𝑦 < 1 with a rising
income in this period.
(2) Useful for classifying goods.
If 𝑒𝑦 > 0, then a good is called a normal good, but if 𝑒𝑦 < 0, the good is called an inferior good.
(3) Useful for gaining from advisement.
Firms look at 𝑒𝑦 > 1 and adverse their luxurious goods to benefit from high-income groups.
(4) Useful for planners in forecasting the required amount of a good.
The 𝑒𝑦 is also useful for planners in estimating how much amount of a commodity to produce
Uses of Cross Elasticity of Demand (𝑒𝑥𝑦 )

The income elasticity of demand (𝑒𝑥𝑦 ) is useful, especially for producers and business
persons as mentioned below.
(1) To classify goods. if 𝑒𝑥𝑦 > 0, then x and y are substitutes. if 𝑒𝑥𝑦 < 0, then x and y
are complements.
(2) To classify markets. if 𝑒𝑥𝑦 = ∞, then the market is called perfectly competitive; if
𝑒𝑥𝑦 → 0, the market is called a pure monopoly.
(3) To determine the price of a joint product produced by a firm. If the cross
elasticity of demand (0 < 𝑒𝑥𝑦 < 1) for any one of the joint products (e.g., either
toothbrush or toothpaste) is less elastic, then the producer of these products may
charge a higher price.
 Price Elasticity of Supply (𝒆𝒔 )
d. Concept of Price Elasticity of Supply (𝒆𝒔 ) and its
Measurement
The 𝑒𝑠 is defined as the percentage change in the quantity supplied of a commodity as a result of a given
percentage change in its price, ceteris paribus. It is computed by using this formula:
the percentage change in the quantity supplied of a commodity 𝑥
𝑒𝑠 =
the percentage change in in the price of a commodity 𝑥
% ∆Q𝑥
=
%∆Px

∆Q𝑥
ൗQ
= ΔPx
𝑥

ൗ𝑃𝑥

∆Q𝑥 𝑃𝑥
= .
Q𝑥 ΔPx
∆Qx 𝑃𝑥
= . … … … … … … (i)
ΔPx 𝑄𝑥
 Where 𝑃𝑥 = an original price of x
∆𝑃𝑥 = the change in price of x
𝑄𝑥 = an original quantity demanded of x
∆Q x = the change in quantity demanded of x
𝑒𝑠 = the price elasticity of supply ≡ 𝐸𝑠

Table 2.6
Supply Schedule
Ans.
Types of Price Elasticity of Supply (𝒆𝒙 ≡ 𝒆𝒔 ≡ 𝑬𝒔 )
The types of 𝑒𝑠 is divided into five parts.
1. Perfectly Elastic Supply (𝑬𝒔 = ∞)
The supply is said to be 𝐸𝑠 = ∞ if the quantity supplied of the commodity x (≡ 𝑄𝑥 ) changes
at an infinite percentage for a ver small percentage change in the price of the commodity
x (≡ 𝑃𝑥 ). That is, (% ∆𝑃𝑥 = very small) ⇒ (∆𝑄𝑥 → ∞). The 𝐸𝑠 = ∞ is illustrated in Figure 2.23.

Figure 2.23. The perfectly elastic supply (𝐸𝑠 = ∞).

2. Perfectly Inelastic Supply (𝑬𝒔 = 0)
The supply is said to be 𝐸𝑠 = 0 if there is no change in the quantity supplied of the
commodity x (≡ (i.e., ∆𝑄𝑥 = 0) for a given percentage change in the price of the
commodity x (i.e., ∆𝑃𝑥 = 1%). That is, (∆𝑃𝑥 = 1%, for example) ⇒ (∆𝑄𝑥 = 0). The 𝐸𝑠 = 0 is
illustrated in Figure 2.24.
Figure 2.24
The Perfectly Inelastic Supply (𝐸𝑠 = 0)
3. Unitary Elastic Supply (𝑬𝒔 = 1)
The supply is said to be 𝐸𝑠 = 1 if the quantity supplied of the commodity x and its price
change at the same percentage. That is, (∆𝑃𝑥 = 1%, for example) ⇒ (∆𝑄𝑥 = 1%). The 𝐸𝑠 = 1
is illustrated in Figure 2.25.
Figure 2.25
Unitary Elastic Supply (Es = 1)
4. Relatively Elastic Supply (𝑬𝒔 > 1)
The supply is said to be 𝐸𝑠 > 1 if the percentage change in the quantity supplied of the
commodity x is greater than a given percentage change in the price of the commodity x.
That is, (∆𝑃𝑥 = 1%, for example) ⇒ (∆𝑄𝑥 > 1%). The 𝐸𝑠 > 1 is illustrated in Figure 2.26.
Figure 2.26
Relatively Elastic Supply (𝐸𝑠 > 1)
5. Relatively Inelastic Supply (𝑬𝒔 < 1)
The supply is said to be 𝐸𝑠 < 1 if the percentage change in the quantity supplied of the
commodity x is less than a given percentage change in the price of the commodity x.
That is, (∆𝑃𝑥 = 1%, for example) ⇒ (∆𝑄𝑥 < 1%). The 𝐸𝑠 < 1 is illustrated in Figure 2.27.
Figure 2.27
Relatively Inelastic Supply (𝐸𝑠 < 1)
Measurement of Price Elasticity of Supply (𝒆𝒔 )
Three methods have been mentioned to measure 𝑒𝑥 .
1. Percentage Method
The following formula is used to compute 𝑒𝑥 under the percentage method.
the percentage change in the quantity supplied of a commodity 𝑥
𝑒𝑠 =
the percentage change in in the price of a commodity 𝑥

% ∆Q𝑥
=
% ∆Px

∆Q𝑥
ൗQ
= ΔPx
𝑥

ൗ𝑃𝑥

∆Q𝑥 𝑃𝑥
= .
Q𝑥 ΔPx

∆Qx 𝑃𝑥
= . … … … … … … (i)
ΔPx 𝑄𝑥
 Where 𝑃𝑥 = an original price of x
∆𝑃𝑥 = the change in price of x
𝑄𝑥 = an original quantity demanded of x
∆Q x = the change in quantity demanded of x
𝑒𝑠 = the price elasticity of supply.
2. Arc or Average Method
The following formula is used to compute 𝑒𝑠 under the arc method.
𝑡he percentage change in the quantity supplied of a commodity 𝑥
an average quantity supplied of a commodity 𝑥
𝑒𝑠 = the percentage change in the price of a commodity 𝑥
an average price of a commodity 𝑥

∆𝑄𝑥
(𝑄0+ 𝑄1)
൘
2
∵ 𝑃0 = an original price of x
𝑒𝑠 = ∆𝑃𝑥 𝑃1 = a new price of x
(𝑃0+ 𝑃1 )ൗ
2 𝑄0 = an original quantity of x
𝑄1 = a new quantity of x
∆𝑄𝑥 𝑃0 + 𝑃1 𝑒𝑠 ≡ 𝑒𝑥 ≡ 𝐸𝑠 = the price elasticity of supply
𝑒𝑠 = … … … … …(ii)
∆𝑃𝑥 𝑄0 + 𝑄1
▪

Table 2.7
Supply Schedule

The above solution number (C) is called Arc Method to compute the elasticity of supply. But the
solution numbers (a) and (b) are called Percentage Method.
3. Point (Geometric) Method to Measure 𝒆𝒔

The point method here is divided into two parts: (1) measuring 𝑒𝑠 for a linear supply
curve and (2) measuring 𝑒𝑠 for a nonlinear supply curve.
(1)Measuring 𝒆𝒔 for a Linear Supply Curve
Just like the income elasticity of demand (𝑒𝑌 ), the 𝑒𝑠 is also further divided into three
parts:
(i) a linear supply curve touching the horizontal axis to the left to the origin,
(ii) a linear supply curve touching the horizontal axis to the right of the origin, and
(iii) a linear supply curve touching the point of origin.
(i) A Linear Supply Curve Touching the Horizontal Axis to the Left to the Origin
Figure 2.28
∆𝑄 𝑌 𝑁𝑀 𝑀𝑅 𝑁𝑀
Measuring 𝑒𝑠 at Point R ( Point Method) |e| = = = > 1 ∵ |NM| > |OM|
∆𝑌 𝑄 𝑀𝑅 𝑂𝑀 𝑂𝑀

P
𝑁𝑀 Qx
|𝑒𝑠 | = 𝑂𝑀 > 1 ∵ NM > OM

∆Y

N o M Qx
∆ Qx
(ii) A Linear Supply Curve Touching the Horizontal Axis to the Right of The Origin
Figure 2.29
Measuring 𝑒𝑠 at Point R (a Point Method)
P Qx
𝑁𝑀
|e| = 𝑂𝑀 < 1 ∵ NM < OM

∆Y

o N M Qx
∆ Qx
(iii) A Linear Supply Curve Touching the Horizontal Axis at the Origin
Figure 2.30
Measuring 𝑒𝑠 at Point R (a Point Method)
P Qx
𝑂𝑀
|𝑒𝑠 | = 𝑂𝑀 = 1 ∵ OM = OM

∆Y

o M Qx
∆ Qx
(2) Measuring 𝒆𝒔 of a Nonlinear Supply Curve
In the case of a nonlinear supply curve, we should draw a tangent line at a point on the
supply curve (see Figure 2.31).
Figure 2.31
Measuring 𝑒𝑠 at Points A and C for a Nonlinear Supply Curve (a Point Method).