Measuring Price Elasticity of Supply: Percentage and Geometric Method
What is price elasticity of supply?
Price elasticity of supply is a measure of the degree of change in the supplied amount of commodity in response to the change in the commodity’s price. In simple words, it can be defined as the rate of change in supply in response to a price change. It is denoted as PES or Es.
Methods for Measuring Price Elasticity of Supply
Basically, price elasticity of supply can be measured by two methods. These methods are
Percentage method or proportionate method is the commonly used method of measuring price elasticity of supply.
According to this method, elasticity is measured in terms of rate of percentage change in supplied quantity to percentage change in price.
Under this method, price elasticity of supply can be measured
Percentage method of calculating price elasticity of supply can be converted into proportionate method under following steps
For an example: A firm supplies 50 units of a commodity at Rs 8 per unit. When the price rises to Rs 11, the firm increased its supply to 75 units. Here, price elasticity of supply can be measured as
Unlike price elasticity of demand, price elasticity of supply is always a positive number. It is because quantity supplied and price of the commodity share direct relationship.
Geometric method is the technique of measuring price elasticity of supply at any given point on the supply curve. This method is also known as arc method or point method.
Given below is an illustration of measuring price elasticity of supply from a supply curve.
Figure: supply curve
From percentage method, we have known that
ΔBAC and ΔALQ1 are similar triangles in account of AAA property. Therefore, ratio of their sides will be equal.
Now, substituting (iii) in (ii),
From equation (iv), five different degrees of price elasticity of supply can be explained. They are
- Relatively elastic supply, when PES > 1
- Relatively inelastic supply, when PES < 1
- Unitary elastic supply, when PES = 1
- Infinite elastic supply, when PES = ∞
- Zero elastic supply, when PES = 0