CA Foundation · Business Economics · Theory of Demand and Supply
When the price of a handloom saree rises from ₹800 to ₹1,000, a weavers' cooperative increases its supply from 400 sarees to 480 sarees per month. Using the percentage (simple) method, the price elasticity of supply is:
The elasticity of supply is 0.80. Price rises by 25 percent (200 on 800) while quantity supplied rises by 20 percent (80 on 400). Dividing the percentage change in quantity by the percentage change in price gives 0.8, so supply is relatively inelastic.
- A0.80Correct
- B1.25
- C0.20
- D1.00
Explanation
Percentage change in price = 200/800 × 100 = 25%. Percentage change in quantity = 80/400 × 100 = 20%. Elasticity = 20/25 = 0.8. The value 1.25 arises from inverting the ratio, which is a mistake.
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