IAI Actuarial Core Principles · Business Economics · How competitive markets operate
A Pune manufacturer finds that when the price of its steel components rises from Rs 500 to Rs 550, quantity supplied rises from 2,000 to 2,300 units. Using the simple percentage-change method, what is the price elasticity of supply?
The price elasticity of supply is 1.5. Quantity supplied rises 15 per cent, from 2,000 to 2,300 units, while price rises 10 per cent, from Rs 500 to Rs 550. Dividing 15 by 10 gives 1.5, so supply is elastic.
- A0.67
- B1.0
- C1.5Correct
- D3.0
- 0.15
Explanation
Percentage change in quantity supplied = 300/2,000 = 15%. Percentage change in price = 50/500 = 10%. Elasticity = 15/10 = 1.5, so supply is elastic. The value 0.67 results from inverting the ratio, and 0.15 from using only the quantity change.
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