Principles of Microeconomics / Unit 4 MIC 0317 worked example, 60 to 90 seconds
Computing a Price Elasticity of Supply
The idea
The method is the midpoint method again. Divide the change in quantity supplied by the average quantity, divide the change in price by the average price, and divide the first percentage by the second. The sign is positive and stays. Classify as before, and note what a high number means: a small price rise brings a large quantity response, so a demand shift in that market moves price little and quantity much.
In practice
Worked example: at a rent of one thousand dollars, landlords in a town offer five thousand units, and at one thousand one hundred they offer five thousand five hundred. The quantity change is five hundred over an average of five thousand two hundred fifty, about nine point five percent. The price change is one hundred over an average of one thousand fifty, about nine point five percent. The elasticity is about one: unit elastic supply.
Where people slip
Do not reuse a demand elasticity for the supply side; they are different curves with different responses. And a supply elasticity measured over months is smaller than one measured over years, so state the horizon with the number.
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