Price Elasticity of Supply

Business Economics (MBA Morning)

Assignment No # (1-5)

Name : Parwaiz Ali Jiskani

Reg. no : 7241

Class : MBA(Morning)

Class Day: Wednesday

(12:00 to 3:00)

Date of submission: Oct. 29, 2008

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SUBMITED TO:

MR. Asif QureshiElastic Supply :

If there is one percent changes in price the impact of this change on quantity

supplied will be greater than one percent is called Elastic Supply.

PES > 1

Formula:

Ignore all negative signs.

In formula the symbols stands for.

PES : Price Elasticity of Supply

∆ : Delta Stands for “change in”

∆Q : Change in Quantity Supply

∆P : Change in Price

Q1 : Initial Quantity Supplied

Q2 : Current Quantity Supplied

P1 : Initial Price

P2 : Current Price

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Examples for Elastic Supply.

Example no:1

If the price of book increased by $150 to $185 the quantity Supplied by suppliers

will also be increased according to the law of supply.

If the supply increased by more than 1% than the price increased called elastic

supply.

Schedule for Elastic Supply: (BOOK)

Price ($) Quantity (books)

P1 P2 Q1 Q2

150 185 10000 14000

Calculations:

PES = ( Q1-Q2 ) ÷ ( P1-P2 )(Q1+Q2)/2 (P1+P2)/2

PES = ( 10000-14000 ) ÷ ( 150-185 ) (10000+14000)/2 (150+185)/2

PES = 4000 ÷ 35_ 24000/2 335/2

PES = 4000 ÷ 35_ 12000 167.5

PES = 0.3333 ÷ 0.2089

PES = 1.59 ( Elastic Supply )

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Graph for Elastic Supply

Quantity

Price

$185

$150

10000 14000

BOOK

Supply

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Example no:2

If the price of Pepsi increased by $30 to $35 the quantity Supplied by suppliers

will also be increased according to the law of supply.

If the supply increased by more than 1% than the price increased called elastic of supply.

Schedule for Elastic Supply: (PEPSI)

Price ($) Quantity (million bottle)

P1 P2 Q1 Q2

30 35 8 10

Calculations:

PES = ( Q1-Q2 ) ÷ ( P1-P2 )(Q1+Q2)/2 (P1+P2)/2

PES = ( 8-10 ) ÷ ( 30-35 ) (8+10)/2 (30+35)/2

PES = 2 ÷ 5_ 18/2 65/2

PES = 2 ÷ 5_ 9 32.5

PES = 0.2222 ÷ 0.153846

PES = 1.44 ( Elastic Supply )

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Graph for Elastic Supply

Quantity(million)

Price

$35

$30

8 10

Pepsi

Supply

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Inelastic Supply:

If there is one percent changes in price the impact of this change on quantity

Supplied will be lesser than one percent is called Inelastic Supply.

PES < 1

Formula:

Ignore all negative signs.

In formula the symbols stands for.

PES : Price Elasticity of Supply

∆ : Delta Stands for “change in”

∆Q : Change in Quantity Supply

∆P : Change in Price

Q1 : Initial Quantity Supplied

Q2 : Current Quantity Supplied

P1 : Initial Price

P2 : Current Price

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Examples for Inelastic Supply.

Example no:1

If the price of Mangoes increased by $20 to $30 per Kg the quantity Supplied by

suppliers will also be increased according to the law of supply.

If the “supply increased by less than 1%” than the price increased called inelastic

supply.

Schedule for Inelastic Supply: (Mangoes)

Price ($) Quantity (bags)

P1 P2 Q1 Q2

20 30 5000 6000

Calculations:

PES = ( Q1-Q2 ) ÷ ( P1-P2 )(Q1+Q2)/2 (P1+P2)/2

PES = ( 5000-6000 ) ÷ ( 20-30 ) (5000+6000)/2 (20+30)/2

PES = 1000 ÷ 10_ 11000/2 50/2

PES = 1000 ÷ 5_ 5500 25

PES = 0.181818 ÷ 0.4

PES = 0.45 ( Inelastic Supply )

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Graph For inelastic Supply

Quantity

Price

$30

$20

60005000

SupplyMangoes

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Example no:2

In Short Run if the price of Cars increased by $350000 to $425000 the quantity

Supplied by suppliers will also be increased according to the law of supply.

If the supply increased by less than 1% than the price increased called inelastic of

supply.

Schedule for Inelastic Supply: (Suzuki Motors Car)

Price ($) Quantity (thousands)

P1 P2 Q1 Q2

350000 425000 7600 8550

Calculations:

PES = ( Q1-Q2 ) ÷ ( P1-P2 )(Q1+Q2)/2 (P1+P2)/2

PES = ( 7600-8550 ) ÷ ( 350000+425000 ) (7600+8550)/2 (350000+425000)/2

PES = 950 ÷ 75000_ 16150/2 775000/2

PES = 950 ÷ 75000_ 8075 387500

PES = 0.11768 ÷ 0.1935

PES = 0.607 ( Inelastic Supply )

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Graph For inelastic Supply

Quantity

Price

$425000

$350000

85507600

SupplyCars

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Unit Elastic Supply.

If there is one percent changes in price the impact of this change on quantity

supplied will be equal to one percent is called Unit Elastic Supply.

PES = 1

Formula:

Ignore all negative signs.

In formula the symbols stands for.

PES : Price Elasticity of Supply

∆ : Delta Stands for “change in”

∆Q : Change in Quantity Supply

∆P : Change in Price

Q1 : Initial Quantity Supplied

Q2 : Current Quantity Supplied

P1 : Initial Price

P2 : Current Price

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Examples for Unit Elastic Supply.

Example no:1

If the price of Video Games increased by $300 to $330 the quantity Supplied by

suppliers will also be increased according to the law of supply.

If the supply increased by same % as the % increase in price called Unit elastic

supply.

Schedule for Unit Elastic Supply: (Video Games)

Price ($) Quantity (units)

P1 P2 Q1 Q2

300 330 4000 4400

Calculations:

PES = ( Q1-Q2 ) ÷ ( P1-P2 )(Q1+Q2)/2 (P1+P2)/2

PES = ( 4000-4400 ) ÷ ( 300-330 ) (4000+4400)/2 (300+330)/2

PES = 400 ÷ 35_ 8400/2 630/2

PES = 400 ÷ 35_ 4200 315

PES = 0.952 ÷ 0.952

PES = 1 (Unit Elastic Supply )

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Graph for Unit Elastic Supply

Quantity

Price

$330

$300

44004000

SupplyVideo games

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Example no:2

If the price of Cigerate increased by $25 to $32.5 per packet the quantity Supplied

by suppliers will also be increased according to the law of supply.

If the supply increased by same % as the % increase in price called Unit elastic

supply.

Schedule for Unit Elastic Supply: (Cigerate)

Price ($) Quantity (dozen box)

P1 P2 Q1 Q2

25 32.5 180 234

Calculations:

PES = ( Q1-Q2 ) ÷ ( P1-P2 )(Q1+Q2)/2 (P1+P2)/2

PES = ( 180-234 ) ÷ ( 30-32.5 ) (180+234)/2 (30+32.5)/2

PES = 54 ÷ 7.5_ 414/2 57.5/2

PES = 2 ÷ 7.5_ 207 28.75

PES = 0.26086 ÷ 0.26086

PES = 1 (Unit Elastic Supply )

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Graph for Unit Elastic Supply

Quantity(Box)

Price

$32.50

$25

234180

SupplyCigerate

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Perfectly Elastic Supply:

If there is percent change in price impact of the change will be very huge in

quantity Supplied called Perfectly Elastic Supply.

PES ∞ (infinity)

Formula:

Ignore all negative signs.

In formula the symbols stands for.

PES : Price Elasticity of Supply

∆ : Delta Stands for “change in”

∆Q : Change in Quantity Supply

∆P : Change in Price

Q1 : Initial Quantity Supplied

Q2 : Current Quantity Supplied

P1 : Initial Price

P2 : Current Price

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Examples for Perfectly Elastic Supply.

Example no:1

In Long Run the price of TV sets increased by $18000 to $20600 the quantity

Supplied by suppliers will also be increased according to the law of supply.

If the “supply increased by Huge Quantity as compare to % change in the price

increased called perfectly elastic supply.

Schedule for Perfectly Elastic Supply: (T-V)

Price ($) Quantity (Units)

P1

Quantity

P1

P2

Q1

Q2

1800

0

1850

0

5000

1200

0

Calc

ulatio

P2 Q1 Q2

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ns:

PES

=

( Q1-

Q2 )

÷

( P1-

P2 )

(Q1+

Q2)/2

(P1+

P2)/2

PES

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=

( 500

0-

12000

) ÷

( 1800

0-

18500

)

(5000+

12000)

/2

(18000

+1850

0)/2

PES

=

7000

÷

500_

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17000/

2

36500/

2

PES

=

7000

÷

500_

8500

18250

PES

=

0.8235

2 ÷

0.0273

PES

=

30.58

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( Perfe

ctly

Elastic

Supply

)

Graph

for

Perfect

ly

Elastic

Supply

Examp

le no:2

In

Long

Run

the

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price

of

Compu

ter sets

increas

ed by

$1400

0 to

$1500

0 the

quantit

y

Suppli

ed by

supplie

rs will

also be

increas

ed

accordi

ng to

the law

of

supply.

If the

“suppl

y

increas

ed by

Huge

Quanti

ty as

compa

re to %

change

in the

price

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increas

ed

called

perfect

ly

elastic

supply.

Schedu

le for

Perfect

ly

Elastic

Supply

:

Price

($)

Quanti

ty

(thousa

nds)

P1

P2

Q1

Q2

14000

14500

3500

15000

Calcul

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ations:

PES

=

( Q1-

Q2 )

÷

( P1-

P2 )

(Q1+Q

2)/2

(P1+P

2)/2

PES

=

(3500-

15000)

÷

( 1400

0-

14500

)

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(35000

+5000

0)/2

(14000

+1450

0)/2

PES

=

11500

÷

500_

18500/

2

28500/

2

PES

=

11500

÷

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500_

9250

14250

PES

=

1.6216

2

÷

0.035

PES

=

46.332

( Perfe

ctly

Elastic

Supply

)

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Graph

for

Perfect

ly

Elastic

Supply

Perfect

ly

Inelasti

c

Supply

:

If there

is

percent

age

change

in

price

impact

of the

change

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on

quantit

y

Suppli

ed

would

remain

same

or

quantit

y of

supply

remain

s same

called

perfect

ly

inelasti

c

Supply

.

PES =

0

Formul

a:

Ignore

all

negativ

e

signs.

In

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formul

a the

symbol

s

stands

for.

PES

:

Price

Elastic

ity of

Supply

∆

:

Delta

Stand

s for

“chan

ge in”

∆Q

:

Chan

ge in

Quant

ity

Suppl

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y

∆P

:

Chan

ge in

Price

Q1

:

Initial

Quant

ity

Suppl

ied

Q2

:

Curre

nt

Quant

ity

Suppl

ied

P1

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Initial

Price

P2

:

Curre

nt

Price

Exa

mple

s for

Perf

ectly

Inel

astic

Sup

ply.

Exa

mple

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no:1

If the

price

of

Beac

h

Front

Land

is

increa

sed

by

$501

700

to

$603

400

there

will

be no

chang

e in

suppl

y.

I

f the

“supp

ly

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n

same

and

%

chang

e in

the

price

increa

sed

called

perfe

ctly

inelas

tic

suppl

y.

Sche

dule

for

Perfe

ctly

inelas

tic

Supp

ly:

(Beac

h

Front

Land______________________________________________________________________________________

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)

Price

($)

501700 603400 100000 100000

Calculations:

PES = ( Q1-Q2 ) ÷ ( P1-P2 )(Q1+Q2)/2 (P1+P2)/2

PES = ( 100000-100000 ) ÷ ( 501700-603400 ) (100000+100000)/2 (501700+603400)/2

PES = 0 ÷ 101700_ 200000/2 1105100/2

PES = 0 ÷ 101700_ 100000 552550

PES = 0 ÷ 0.1840

PES = 0 (Perfectly Inelastic Supply)

Graph for Perfectly inelastic Supply

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$603400

$501700

Supply

1000000 Quantity

PriceBeach Front Land

Example no:2

If the price of Fuel increased by $105per barrel to $200 per barrel the quantity

Supplied by PSO to the Railways will remain same.

If the “supply remain same and no change in supply called perfectly inelastic

supply. ______________________________________________________________________________________

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Schedule for Perfectly Inelastic Supply:

Price ($ per barrel) Quantity (barrel)per day

P1 P2 Q1 Q2

105 200 300 300

Calculations:

PES = ( Q1-Q2 ) ÷ ( P1-P2 )(Q1+Q2)/2 (P1+P2)/2

PES = (300-300) ÷ ( 105-200 ) (300+300)/2 (105+200)/2

PES = 0 ÷ 95_ 600/2 305/2

PES = 0 ÷ 95_ 300 152.5

PES = 0 ÷ 0.6229

PES = 0 ( Perfectly inelastic Supply )

Graph for Perfectly inelastic Supply

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$200

$105

Supply

3000 Quantity(barrel)

Price Fuel to Railway

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