CA Foundation · Business Economics · Theory of Demand and Supply
The supply of organic vegetables in a city increases by 20% when their price rises from ₹60 per kg to ₹75 per kg. What is the price elasticity of supply, and what does it indicate?
The price elasticity of supply is 0.8, classified as inelastic. This means organic vegetable supply is relatively unresponsive to price changes, suggesting production constraints like land availability or seasonal growing cycles limit the quantity farmers can increase.
- A0.8 (inelastic supply)Correct
- B1.33 (elastic supply)
- C1.0 (unitary elastic supply)
- D0.6 (perfectly inelastic supply)
Explanation
Price elasticity of supply = (% change in quantity supplied) ÷ (% change in price). % change in price = (75 - 60)/60 × 100 = 25%. % change in quantity = 20%. PES = 20/25 = 0.8, indicating inelastic supply. Farmers cannot easily increase supply despite higher prices, likely due to seasonal constraints.
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