Chapter 48, Problem 3CYU

To determine

Price elasticity of supply by using midpoint method when the per hour price rises from $100 to $500 and the supply increases by number of hours from 300,000 to 500,000 hours.

Explanation of Solution

  $\begin{array}{c}\text{Price elasticity of supply = }\frac{\frac{\left({\text{S}}_2-{\text{S}}_1\right)}{(\frac{{\text{S}}_2{\text{+S}}_1}{\text{2}})}}{\frac{\left({\text{P}}_2-{\text{P}}_1\right)}{(\frac{{\text{P}}_2{\text{+P}}_1}{\begin{array}{l}\text{2}\\ \end{array}})}}\\ \text{= }\frac{\frac{\left(\text{150}-\text{100}\right)}{(\frac{\text{150+100}}{\text{2}})}}{\frac{\left(\text{500,000}-\text{300,000}\right)}{(\frac{\text{500,000+300,000}}{\begin{array}{l}\text{2}\\ \end{array}})}}\\ \text{= }\frac{\text{0}\text{.4}}{\begin{array}{l}\left(\text{0}\text{.5}\right)\\ \end{array}}\\ \text{= 0}\text{.8}\end{array}$

Here,

S₂ is the new supplied quantity, S₁ is the old supplied quantity,

P₁ is the old price and P₂ is the new price

Price elasticity of supply is 0.8 which is less than one. It means the supply is inelastic.

Economics Concept Introduction

Introduction: Price elasticity of supply refers to the measure how the supply is sensitive to price or how the change in supply affects the price of the good.

Midpoint method is used to calculate elasticity by using the average percentage change in quantity and average percentage change in price.