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Price Elasticity of Supply Calculator

Price Elasticity of Supply Formula

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1. What is the Price Elasticity of Supply Calculator?

Definition: The Price Elasticity of Supply Calculator measures how responsive the quantity supplied is to a change in price by calculating percentage changes.

Purpose: Helps businesses and economists assess supply flexibility and pricing strategies.

2. How Does the Calculator Work?

The calculator computes the price elasticity of supply using the following formulas and steps:

Formulas:

\( \Delta P\% = \frac{P_2 - P_1}{P_1} \times 100 \) (Standard)
\( \Delta Q\% = \frac{Q_2 - Q_1}{Q_1} \times 100 \) (Standard)
\( \Delta P\% = \frac{P_2 - P_1}{(P_1 + P_2)/2} \times 100 \) (Midpoint)
\( \Delta Q\% = \frac{Q_2 - Q_1}{(Q_1 + Q_2)/2} \times 100 \) (Midpoint)
\( PES = \frac{\Delta Q\%}{\Delta P\%} \)
Where:
  • \( P_1, P_2 \): Price in Period 1 and Period 2 (dollars)
  • \( Q_1, Q_2 \): Quantity supplied in Period 1 and Period 2 (units)
  • \( \Delta P\% \): Percentage change in price (%)
  • \( \Delta Q\% \): Percentage change in quantity supplied (%)
  • \( PES \): Price elasticity of supply (unitless)

Steps:

  • Step 1: Select Method. Choose between Standard or Midpoint method.
  • Step 2: Input Period Values. Enter prices and quantities for Period 1 and Period 2.
  • Step 3: Calculate Percentage Changes. Compute \( \Delta P\% \) and \( \Delta Q\% \) based on the selected method.
  • Step 4: Calculate PES. Divide \( \Delta Q\% \) by \( \Delta P\% \).

3. Importance of PES Calculation

Calculating PES is crucial for:

  • Pricing Strategy: Determines how supply adjusts to price changes.
  • Market Analysis: Assesses supply elasticity for goods like potatoes or cell phone frequencies.
  • Policy Planning: Informs taxation or subsidy effects on production.

4. Using the Calculator

Example (Standard): \( P_1 = 5 \), \( P_2 = 5.5 \), \( Q_1 = 100 \), \( Q_2 = 110 \):

  • Step 1: Method = Standard.
  • Step 2: \( P_1 = 5 \), \( P_2 = 5.5 \), \( Q_1 = 100 \), \( Q_2 = 110 \).
  • Step 3: \( \Delta P\% = \frac{5.5 - 5}{5} \times 100 = 10\% \), \( \Delta Q\% = \frac{110 - 100}{100} \times 100 = 10\% \).
  • Step 4: \( PES = \frac{10}{10} = 1 \).
  • Results: \( \Delta P\% = 10\% \), \( \Delta Q\% = 10\% \), \( PES = 1 \).

Example (Midpoint): \( P_1 = 5 \), \( P_2 = 5.5 \), \( Q_1 = 100 \), \( Q_2 = 110 \):

  • Step 1: Method = Midpoint.
  • Step 2: \( P_1 = 5 \), \( P_2 = 5.5 \), \( Q_1 = 100 \), \( Q_2 = 110 \).
  • Step 3: \( \Delta P\% = \frac{5.5 - 5}{(5 + 5.5)/2} \times 100 \approx 9.52\% \), \( \Delta Q\% = \frac{110 - 100}{(100 + 110)/2} \times 100 \approx 9.52\% \).
  • Step 4: \( PES = \frac{9.52}{9.52} \approx 1 \).
  • Results: \( \Delta P\% = 9.52\% \), \( \Delta Q\% = 9.52\% \), \( PES = 1 \).

These results indicate unit elastic supply in both methods.

5. Frequently Asked Questions (FAQ)

Q: What is price elasticity of supply?
A: PES measures how much the quantity supplied changes with a change in price.

Q: What does a PES of 1 mean?
A: A PES of 1 indicates unit elastic supply, where quantity supplied changes proportionally to price.

Q: Why might \( \Delta P\% \) and \( \Delta Q\% \) differ between methods?
A: The midpoint method uses average values, reducing bias from the initial point compared to the standard method.

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