Consider the market for a natural resource, where the price is initially $20,000 per ton and 40,000 thousand tons are supplied. Suppose the price of the resource falls to $18,000 per ton, at which price the market supplies 39,500 thousand tons. What is the price elasticity of supply between these prices?

The price elasticity of supply will be 0.125 (inelastic).

Explanation:

Supply price elasticity is a measure of the sensitivity of supply for goods and services to the change in market price of these goods. The calculation of the price elasticity of supply consists in dividing the variation of the quantity offered by the variation of the price of the products. When the result is greater than 1, we say that the supply is elastic (price sensitive). Thus, the higher the price, the greater the supply. On the contrary, when elasticity is less than 1, we say that supply is inelastic (little price sensitive). Thus, changes in price tend not to affect supply considerably.

Let Q1 and Q2 be the quantities offered in both periods. Let P1 and P2 be the price in both periods.

We first calculate the percentage change (▲ Q) that occurred in the offer:

▲ Q = (Q2 - Q1) / Q1 = (39,500 - 40,000) / 40,000 = - 500 / 40,000 = - 0,0125

Let us calculate the price change (▲ P) in the two periods: ▲ P = (P2 - P1) / P1 = (18,000 - 20,000) / 20,000 = - 2000 / 20,000 = - 0,1

Note: The percentage change in quantity / price is calculated by the difference between quantity / price between periods divided by the quantity / price of the initial period.

The elasticity will be: ▲ Q / ▲ P = - 0.0125 / - 0.1 = 0.125

The price elasticity of supply will be 0.125. This is less than 1. Therefore, we say that supply is price inelastic.