The supply of product X is elastic if the price of X rises by 3 percent and quantity supplied rises by 4 percent. 2 percent and quantity supplied rises by 1 percent. 2 percent and quantity supplied remains the same. 9 percent and quantity supplied rises by 9 percent.
The Correct Answer and Explanation is:
Let’s analyze the concept of price elasticity of supply and apply it to each scenario to find out which one indicates elastic supply.
Definition of Price Elasticity of Supply (PES):
Price elasticity of supply measures how much the quantity supplied of a good changes in response to a change in its price. It is calculated as: PES=% change in quantity supplied% change in price\text{PES} = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}
- If PES > 1, supply is elastic (quantity supplied changes more than price).
- If PES = 1, supply is unit elastic (quantity supplied changes proportionally with price).
- If PES < 1, supply is inelastic (quantity supplied changes less than price).
Analyzing each option:
- Price rises by 3%, quantity supplied rises by 4%
PES=4%3%=1.33>1⇒Elastic supply\text{PES} = \frac{4\%}{3\%} = 1.33 > 1 \Rightarrow \text{Elastic supply}
- Price rises by 2%, quantity supplied rises by 1%
PES=1%2%=0.5<1⇒Inelastic supply\text{PES} = \frac{1\%}{2\%} = 0.5 < 1 \Rightarrow \text{Inelastic supply}
- Price rises by 2%, quantity supplied remains the same (0%)
PES=0%2%=0⇒Perfectly inelastic supply\text{PES} = \frac{0\%}{2\%} = 0 \Rightarrow \text{Perfectly inelastic supply}
- Price rises by 9%, quantity supplied rises by 9%
PES=9%9%=1⇒Unit elastic supply\text{PES} = \frac{9\%}{9\%} = 1 \Rightarrow \text{Unit elastic supply}
Correct answer:
The supply of product X is elastic if the price of X rises by 3 percent and quantity supplied rises by 4 percent.
Explanation (300 words):
Price elasticity of supply (PES) quantifies the responsiveness of the quantity supplied of a good to a change in its price. It provides crucial insights for producers and policymakers about how supply can adjust in response to price fluctuations. The elasticity value is computed as the percentage change in quantity supplied divided by the percentage change in price.
When the percentage change in quantity supplied is greater than the percentage change in price (PES > 1), supply is said to be elastic. This means producers are able to significantly increase production when prices rise, often because resources are readily available, production processes are flexible, or goods can be stored and released quickly.
Conversely, if the quantity supplied changes less than the price change (PES < 1), supply is inelastic. This typically occurs in situations where production capacity is limited, inputs are difficult to obtain, or production takes a long time to adjust.
In the given options:
- When price rises 3% and quantity supplied rises 4%, the PES is 1.33, which means quantity supplied responds more than proportionally to price changes — this represents elastic supply.
- When price rises 2% but quantity supplied rises only 1%, the PES is 0.5, indicating inelastic supply.
- When price rises but quantity supplied does not change at all, the PES is zero, representing perfectly inelastic supply.
- When price and quantity supplied both rise by the same percentage (9%), the PES is exactly 1, representing unit elasticity.
Understanding elasticity is important because it affects market dynamics and pricing strategies. For example, when supply is elastic, a small increase in price can lead to a large increase in quantity supplied, preventing extreme price fluctuations. For producers of product X, knowing that their supply is elastic in the first scenario suggests they can scale production efficiently when prices rise, capitalizing on potential profits.
If you’d like, I can also help explain how elasticity affects revenue or market equilibrium!