The table below gives part of the supply schedule for personal computers in the
ID: 1191772 • Letter: T
Question
The table below gives part of the supply schedule for personal computers in the United States. Calculate the price elasticity of supply when price rises from $900 to $1,100 using the arc elasticity formula (the midpoint method). b) Now suppose that technology changes such that at every price, 1000 more computers are supplied. Now, as prices rise from $900 to $1,100, is the elasticity of supply smaller than, larger than, or equal to the elasticity in part a)? c) Does the change in b) change the slope of the supply curve? Are slope and elasticity the same thing? Explain.Explanation / Answer
Price elasticity of supply is a measure of the relationship between a change in the quantity supplied of a good and a change in its price. The formula for price elasticity of supply (arc method) is ---
Ed = Percentage Change in Quantity / Percentage Change in Price
Ed = (Q2-Q1 / (Q2+Q1/2)) / (P2-P1 / (P2+P2/2))
Q2 = New Quantity
Q1 = Old Quantity
P2 = New Price
P1 = New Price
a) Putting values into the formula
Ed = ( (12000-8000) / 10000 ) / ( ( 1100-900) / 1000 )
= 0.4 / 0.2
= 2 %
So price elasticity of supply using arc method is 2%.
b) Price elasticity of supply after technology change ---
Ed = ( (13000-9000) / 11000 ) / ( ( 1100-900) / 1000 )
= 0.36 / 0.2
= 1.8 %
So after technology change Price elasticity of supply is 1.8%. Price Elasticity after technology change is smaller than Price Elasticity before technology change.
c) Slope of supply curve can be calculated using the formula ---
m = Change in Price / Change in Quantity
Slope of Supply curve before technology change ---
m = ( 1100 - 900 ) / ( 12000 - 8000 )
= 0.05
Slope of Supply curve after technology change ---
m = ( 1100 - 900 ) / ( 13000 - 9000 )
= 0.05
So the change in b) did not change the slope of the supply curve.
No slope and elasticity is not the same thing. The slope of the supply curve shows change in price divided by change in quantity, Its like asking the question - by how much does an item's price need to change for customers to demand one more unit of it?. Price elasticity quantifies the responsiveness supply to changes in price. Its like asking the question - by how much does the quantity demanded of an item change in response to a change in price? The Price elasticity is calculated as changes in quantity divided by changes in price rather than slope which is calculated as changes in prices divided by changes in quantity.
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