## Formula to Calculate Price Elasticity of Supply

Price Elasticity of Supply can be defined as sensitivity in supply by manufacturers and producers that changes in supply by them due to changes in prices. So, below is the formula is used to calculate price elasticity of supply.

**Price Elasticity of Supply = ((Q**

_{1}– Q_{0}) / (Q_{1}+ Q_{2})) ÷ ((P_{1}– P_{0}) / (P_{1}+ P_{2}))Or

**Price Elasticity of Supply = % Change in the Quantity Supply (ΔQ) / % Change in the Price (ΔP)**

### Steps to Calculate Price Elasticity of Supply

**Step #1:**Identify P_{0}and Q_{0S}which are the initial price and initial quantity supplied respectively and then decide on the target quantity to be supplied and based on that the final price point which is termed as Q_{1S}and P_{1}respectively.**Step #2:**Now, work out the numerator of the formula which represents the percentage change in quantity supplied. It is arrived at by dividing the difference of final and initial supply quantities (Q_{1S}– Q_{0S}) by summation of the final and initial supply quantities (Q_{1S}+ Q_{0S}) which is represented as (Q_{1S}– Q_{0S}) / (Q_{1S}+ Q_{0S}).**Step #3:**Now, work out the denominator of the formula which represents the percentage change in price. It is arrived at by dividing the difference of final and initial prices (P_{1}– P_{0}) by summation of the final and initial prices (P_{1}+ P_{0}) i.e. (P_{1}– P_{0}) / (P_{1}+ P_{0}).**Step #4:**Finally, this is calculated by dividing the expression in Step 2 by expression in Step 3 as shown below.

### Examples

Below are the examples of the calculation of price elasticity of supply.

#### Example #1

**Suppose that due to a surge in prices of apple phones for 20%, there is an increase in quantity supplied by 25%. You are required to calculate the Price Elasticity of Supply.**

**Solution:**

Use the following information for the calculation of Price Elasticity of Supply.

Now, the Price Elasticity of Supply for apple phones can be calculated as,

- Price Elasticity of Supply = 25% / 20%

**Price Elasticity of Supply will be –**

**Price Elasticity of Supply = 1.25**

The Price Elasticity of Supply will be 1.25 which indicates a positive relationship between Quantity supplied and Price.

#### Example #2

**There has been a concern on rising of global warming and the government was concerned as their country was declared as one of the most polluted nations. It was further noticed that there were more petrol vehicles running on the streets. The government since then decided to start putting bans on the old models that run on petrol and gave a boost to the companies who are producing electric vehicles. Because of this step, there was a drastic movement in the supply and price of electric vehicles. An electric model which was supplied 10,000 units when the price was $5,000 per unit and now because of the announcement the prices have shot up to $7,000 per unit and also the supply has been increased to 15,000 units. **

**You are required to calculate the Price Elasticity of Supply based on the below data.**

**Solution:**

As it can be noted that there is an increase in the supply of the electric vehicle when there was an announcement of a ban over petrol vehicles and increase in electric vehicles. Let’s calculate its Price Elasticity of Supply using above given formula:

Now, the price elasticity of supply for electric vehicles can be calculated as,

- Price Elasticity of Supply = (15,000 – 10,000) / (15,000 + 10,000) ÷ (7,000 – 5,000) / (7,000 + 5,000)
- = (5,000 / 25,000) ÷
__(__2,000 / 12,000)

**Price Elasticity of Supply will be-**

**Price Elasticity of Supply = 1.20**

The Price Elasticity of Supply will be 1.20 which indicates a positive relationship between Supply of electric vehicles and the price of the electric vehicle.

#### Example #3

**M&M is in the business of selling bicycles. One of the monopoly model ZXR was the highest price product which cost around $10,000 and the units that were kept for sell were 2,000 units. After a couple of months the competitor came up with a new model to compete with ZXR and because of this their business got impacted and hence M&M decided to reduce the price from $10,000 to $7,000 in order to compete in the market and make their product still relevant. Because of this step, their units in showroom decreased to 1,400 units. **

**You are required to calculate the Price Elasticity of Supply based on the below data.**

**Solution:**

Now, the Price Elasticity of Supply for ZXR can be calculated as,

- Price Elasticity of Supply = (1400 – 2000) / (1400 + 2000) ÷ (7000 – 10000) / (7000 + 10000)
- = (-600/3400 ) ÷ ( -3000/17000)

**Price Elasticity of Supply will be-**

**Price Elasticity of Supply = 1.00**

The price elasticity of supply for ZXR is unitary elastic as the changes in price affected equivalent changes in quantity supplied.

### Relevance and Use

The concept of Price Elasticity of Supply is widely used majorly by the producers of the goods in their planning for sales forecast or while taking the impact of price changes. The Price Elasticity of Supply can be said to be elastic when the quantity supplied changes more than the changes in the prices and its inelastic when the supply of the quantity changes less than the changes in the prices and its unitary elastic when the changes in quantity supplied is equivalent to changes in the prices of the goods.

This concept majorly is the reflection of the willingness of the manufacturer or the producer of the goods to supply certain units at a certain price and make changes accordingly. That is quite natural that at a higher price the producer will be willing to supply more and at a lower price the producer will be willing to supply less.

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