Price elasticity of supply — practice questions

(a) Calculate PES ΔP = ($240 − $200)/$220 × 100 = 18.2% (midpoint method) ΔQ = (550 − 500)/525 × 100 = 9.5%

PES = 9.5% ÷ 18.2% = 0.52 (inelastic — quantity responds less than price)

(b) Tax incidence Supply is inelastic (PES = 0.52) and demand is elastic → producers bear most of the tax.

Reason: producers cannot easily reduce output, so they absorb much of the tax in lower post-tax revenue; consumers with elastic demand would buy much less if the full tax were passed on.

(a) Calculate PES

Step 1: Calculate the percentage change in price (%ΔP) %ΔP = [(New Price - Old Price) / Old Price] * 100 %ΔP = [($1.80 - $1.50) / $1.50] * 100$ %ΔP = [$0.30 / $1.50] * 100 = 20%

Step 2: Calculate the percentage change in quantity supplied (%ΔQs) %ΔQs = [(New Qs - Old Qs) / Old Qs] * 100 %ΔQs = [(15,000 - 10,000) / 10,000] * 100 %ΔQs = [5,000 / 10,000] * 100 = 50%

Step 3: Calculate PES PES = %ΔQs / %ΔP PES = 50% / 20% = 2.5

(b) Interpret the result The PES value is 2.5. Since 2.5 > 1, the supply is price elastic.

This means that the percentage change in quantity supplied (50%) is greater than the percentage change in price (20%). The manufacturer is highly responsive to the price change, likely because they have spare production capacity or can easily acquire more resources to increase output.