Answer.3b.

MEANING:

The price elasticity of supply (PES) measures the responsiveness of the quantity supplied to a
change in the price of a good, with all other factors remaining the same.

As demand for a good or product increases, the price will rise and the quantity supplied will
increase in response. How fast it increases depends on the elasticity of supply.

TYPES:

1. Inelastic supply- This occurs when an increase in price leads to a smaller % change in
demand. Therefore Price Elasticity of Supply (PES) is less than 1. i.e. (PES< 1).
2. Elastic supply- This occurs when an increase in price leads to a bigger % increase in
supply, therefore Price Elasticity of Supply is greater than 1. i.e. (PES >1).

SIGNIFICANCE:

Elasticity of supply determines the rate of how fast supply responds to quantity demand and
price increase.

For instance, if there is shortage of supply of a popular product, the price may rise. The
manufacturers of that product will increase the supply to keep up with the demand. The higher
the elasticity of supply, the faster the supply will increase when demand and price increase.

For instance, limited tickets to a concert may have a very inelastic supply. The price of the
concert tickets can be raised to any amount, but because there is a fixed number of seats and
tickets, the supply may not be increased by much if at all.
 CASE STUDY:

 Given Information:

Change in the price of product X = rupees 40 per unit to rupees 45 per unit.

Change in total supply of product X = 1000 units to 1200 units.

 Formula:

Price elasticity of supply can be calculated by using:-

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

 Solution:

(1200−1000)
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 1000
∗100 20
Elasticity of supply = = (45−40) = = 1.6
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 12.50
40 ∗100

 Conclusion:

As calculated above, the coefficient of elasticity of supply is 1.6 which is greater than one i.e.
PES is elastic. It means the percentage change in quantity i.e. 20 % is greater than percentage
change in price which is 12.50%.

In other words, a small change in price can bring a big change in supply. For instance, in above
example a small change in price of product X from rupees 40 per unit to rupees 45 per unit
resulted in big change in quantity supplied of X from 1000 units to 1200 units.

It is desirable to be highly responsive to changes in price and other market conditions. This will
give a competitive advantage over rivals. This is because a high price elasticity of supply of a
product allows the firm to generate more revenue and profits.