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Chapter 2

Question 5

PES

Suppose a supplier is currently supplying 1,000 units of a product in response
to a market price of $75. The market price then rises to $80 and the supplier
increases supply to 1,100 units. Calculate the price elasticity of supply using:

(1) the non-average arc method

(2) the average arc method

Solution (1) the non-average arc method

Percentage change in price = ($80 – $75)/$75 × 100 = +6.67%

Percentage change in demand = (1,100 – 1,000)/1,000 × 100 = +10%

PES = +10/+6.67 = +1.50

Solution (2) the average arc method

Average price = ($75 + $80)/2 = $77.50

Average demand = (1,000 + 1,100)/2 = 1,050

Percentage change in price = ($80 – $75)/$77.50 × 100 = +6.45%

Percentage change in demand = (1,100 – 1,000)/1,050 × 100 = +9.52%

PED = +9.52/+6.45 = +1.48

Illustrations and further practice

Now try TYUs 1 – 10 from Chapter 2

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