Price Elasticity of Supply

Price elasticity of supply (PES) is a measure used to determine the responsiveness of the quantity supplied of a good or service to a change in its price.

Formula for PES

The formula to calculate PES is:

PES = (% Change in Quantity Supplied) / (% Change in Price)

Calculation of PES

In this case, the price of the good has increased from Rs. 20 to Rs. 30, which is a 50% increase. The producer has increased supply by 20% in response to this price increase.

So, the % change in quantity supplied is:

% Change in Quantity Supplied = (New Quantity Supplied - Initial Quantity Supplied) / Initial Quantity Supplied x 100
% Change in Quantity Supplied = (120 - 100) / 100 x 100
% Change in Quantity Supplied = 20%

And the % change in price is:

% Change in Price = (New Price - Initial Price) / Initial Price x 100
% Change in Price = (30 - 20) / 20 x 100
% Change in Price = 50%

Using the formula for PES, we get:

PES = (% Change in Quantity Supplied) / (% Change in Price)
PES = 20% / 50%
PES = 0.4

Interpretation of PES

The PES is 0.4, which means that the quantity supplied of the good is relatively unresponsive to changes in price. In other words, a 50% increase in price only leads to a 20% increase in supply, indicating that the producer is not able to increase production significantly in response to the higher price.

Conclusion

Thus, the PES in this case is 0.4, which indicates that the quantity supplied of the good is relatively unresponsive to changes in price.

Step 1
Suppose quantity supply is 100 when price is 20
now 20% increase by supplier when price is 30
so 100/20%= 120
so 120-100/100=0.2
30-20/20=0.5
finally 0.2/0.5
answer is 0.4