The price of a product increases by 20% which leads to a short-run increase in quantity supplied of 5%. What is the elasticity of supply for this product
The elasticity of supply for this product is 0.25.
Elasticity of supply measures the responsiveness of quantity supplied to a change in price. In this case, a price increase of 20% leads to a quantity supplied increase of 5%. The elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price, resulting in an elasticity of 0.25 (5% / 20%).
An elasticity of 5 would imply that a 1% increase in price results in a 5% increase in quantity supplied, indicating a highly elastic supply. However, with only a 5% increase in quantity supplied from a 20% price increase, this option overestimates the responsiveness of supply.
This value accurately reflects the calculated elasticity of supply, which shows that for every 1% increase in price, the quantity supplied increases by only 0.25%. This indicates inelastic supply behavior, as the change in quantity supplied is relatively small compared to the change in price.
An elasticity of 0.01 suggests that a 1% increase in price would result in only a 0.01% increase in quantity supplied, indicating extremely inelastic supply. This is not consistent with the observed 5% increase in quantity supplied from a 20% price increase.
An elasticity of 4 implies a very elastic supply, where a 1% price increase would lead to a 4% increase in quantity supplied. This option misrepresents the actual result, as the supply is not responding significantly enough to warrant such a high elasticity.
The elasticity of supply is a critical economic measure that indicates how responsive quantity supplied is to price changes. In this instance, the calculation confirms an elasticity of 0.25, signifying inelastic supply. Understanding this elasticity helps in analyzing market behavior and forecasting how suppliers will react to price fluctuations.
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