Economics · Ch 4 — Supply

Measurement of Price Elasticity of Supply

Two methods are commonly used to compute price elasticity of supply.

1. Percentage (proportionate) method. Elasticity is worked out directly as the ratio of the percentage change in quantity supplied to the percentage change in price:

E_s = \frac{\Delta Q / Q_1 \times 100}{\Delta P / P_1 \times 100} = \frac{\Delta Q}{\Delta P} \times \frac{P_1}{Q_1}

2. Geometric (point) method, using where the straight-line supply curve cuts the axes. For a linear supply curve, a useful shortcut based on the intercept avoids computing percentages at all:

Where the straight supply line meets an axis	Elasticity
Passes through the origin	$E_s = 1$ (unitary) at every point on the line
Cuts the price axis (positive price-intercept, above the origin)	$E_s > 1$ (relatively elastic) at every point
Cuts the quantity axis (positive quantity-intercept, to the right of the origin)	$E_s < 1$ (relatively inelastic) at every point

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