Q 4. The price of a product has increased by 3% over a period of time,...
Q 4. The price of a product has increased by 3% over a period of time, while the quantity supplied has increased by 5%. Determine the coefficient of price elasticity of supply. Is the supply elastic or inelastic in the part of the supply curve? Explain.
Homework Answers
Coefficient of Price Elasticity of Supply (PES)
= % Change in Quantity Supplied / % Change in Price
= 5 / 3 = + 1.67
The positive sign reflects the fact that higher prices will act an incentive to supply more. Because the coefficient is greater than one, PES is elastic and the firm is responsive to changes in price. This will give it a competitive advantage over its rivals.
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