CA Foundation · Business Economics · Theory of Demand and Supply
When the price of a handloom shirt rises from ₹400 to ₹500, a Surat manufacturer increases quantity supplied from 800 shirts to 1,000 shirts. Using the percentage (initial value) method, the price elasticity of supply is:
The elasticity of supply is 1.0. Quantity supplied rises by 25 percent (200 on 800) and price rises by 25 percent (100 on 400), so dividing the two percentage changes gives unit elasticity.
- A0.8
- B1.0Correct
- C1.25
- D0.5
Explanation
Percentage change in quantity = 200/800 x 100 = 25%. Percentage change in price = 100/400 x 100 = 25%. Elasticity = 25/25 = 1, so supply is unit elastic. Using the new values as the base for either change would give a wrong ratio such as 0.8.
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