Price Elasticity of Demand and Supply
Price elasticity is the ratio of the percentage change of a given quantity demanded or supplied, and the corresponding percentage change in price. Price elasticity of demand gives the economic measure of the change in the quantity demanded of a given product in relation to the price change. The price elasticity of supply, on the other hand, is expressed as the ratio of the percentage change in quantity supplied and the percentage change in price. This paper will give an example of the price elasticity of demand and an example of supply elasticity.
Example of price elasticity of demand
We suppose the price of pineapples falls by $10 from the previous price set at $70. As a result, people who deal with grocery businesses are likely to increase the quantity of pineapples they purchase to $3000 from the previous quantity at $ 2800. To calculate the price elasticity of the pineapples’ demand, we would divide the percentage change in quantity demanded of the pineapple by the percentage change in price. The percentage change in quantity would be (3000-2800)/((3000 + 2800)/2) *100=6.9. The percentage change in price would be (60-70)/((60+70)/2) *100= -15.4. The price elasticity of demand would be 6.9/-15.4= 0.45, which implies that the demand is inelastic.
Example of price elasticity of supply.
We consider the supply price of a pair of shoes increased by $5 from the previous price of $60. As a result, the supplier increases the quantity of shoes supplied by 400 pairs from the previous supply set at 500 pairs of shoes. To calculate the price elasticity of supply, we need to calculate the percentage change in quantity supplied and divide it by the percentage change in supply price. Percentage change in quantity supplied= (900-500)/((900 + 500)/2)*100= 57.14 Percentage change in supply price= (65-60)/((65+60)/2)*100= 8. Thus price elasticity of supply= 57.14/8= 7.14, which implies that a 1% rise in the price increase the quantity supplied by 7.14%.
References
Dean, E., Elardo, J., Green, M., Wilson, B., & Berger, S. (2020). Price Elasticity of Demand and Supply. Principles of Economics: Scarcity and Social Provisioning (2nd Ed.).