Elasticity=Percent Change in Quantity Supplied

Percent Change in Prices

Elasticity= (Q_s2- Q_s1/(Q_s2+Q_s1)/2

P₂-P₁/(P₁+P₂)/2

E_s>1 ElasticE_s<1 inelasticE_s= 1 Unit Elastic

Sample Computation: For example, due to Avian flu, the market price for chicken went down to P60 per kilo, from P100 per kilo, while, chicken output went down to 80,000 kilos from 100,000 kilos of chicken meat. elasticity of supply for poultry raiser in response to the price change is0.44, less than 1, apriceinelastic supply.(Again, in price elasticity, signs are disregarded (absolute values are used) , to compare quantities. The interpretation is that a 1% decrease in the price change of chicken meat, led to a 0.44 % decrease in the quantity supplied.

Computation is as follows:

Elasticity=Q_d2- Q_d1/(Q_d2+Q_d1)/2=(80-100)/ (80+100)/2

P₂-P₁/(P₁+P₂)/2(60-100)/(60+100)/2

=-20/90or 0.444 <1, inelastic supply

-40/80

Elasticity=Percent Change in Quantity Demanded

Percent Change in Prices

Elasticity=Q_d2- Q_d1/(Q_d2+Q_d1)/2

P₂-P₁/(P₁+P₂)/2

E_d>1 ElasticE_d<1 inelasticE_d= 1 Unit Elastic

Sample Computation: For example, if a banana cue vendor raises his price from P8 to P10, then, his sales changed from 40 piecesto 20 pieces, his elasticity of demand for banana cue in response to the price change is3, greater than 1, aprice elastic demand.(In price elasticity, signs are disregarded (absolute values are used) , to compare quantities. The interpretation is that a 1% change in the price of banana cue, led to a 3 % decrease in the quantity sold of banana cues.

Computation is as follows:

Elasticity=Q_d2- Q_d1/(Q_d2+Q_d1)/2=(20-40)/ (20+40)/2

P₂-P₁/(P₁+P₂)/2(10-8)/(8+10)/2

= -3, E_d= 3 > 1, elastic demand

Application for Business

Producers must be knowledgeable about the elasticity of supply for their goods to calibrate their response to market changes. While price trend is directly related to quantity supplied, thus, earnings or losses are expected, price elasticity related to time factor is important to consider.

From the example about the poultry farm, the poultry raiser, was able to do some adjustment in production, from 100,000 to 80,000, thus, lowering his losses from lower price of chicken meat. Better way to explain is the time element.(See Figure 10 Time and the Elasticity of Supply.)Economists pointed out three periods to see the effect on price elasticity of supplythe immediate market period, the short run and the long run period.

The immediate market period just occurs right after the price change, wherein the producer has too little time to respond. (This is shown by a vertical supply, or perfectly inelastic supply, Es=0) The short run is a period insufficient for the firm to change plant capacity, but long enough to use theresources more or less intensively. (It is shown by an inelastic supply curve. The long run is a period, long enough for the business enterprise to adjust its plant size and for new firms to enter or leave the industry. (It is illustrated by an elastic supply curve).In the example, the short run period enabled the poultry raiser toadjust his resources, like less number of chicks, and less feeds to buy, to partly lower his production of chicken meat in response to price cuts of chicken meat in the market.

EXERCISE 3Price Elasticity of Foreign Demand

A.Fresh mangoes are sold from the Philippines to the United States. At P250 per kilogram, mango exports reached 10,000 kilos. If export price increased to P300 per kilogram, foreign demand for mangoes was reduced to 8,000 kilos. Compute for price elasticity of foreign demand (Ed) of US buyers. Classify elasticity as elastic, inelastic or unit elastic. Also, compute for the change in Total Revenues (TR).

B.Philippine coconut oil is exported to Japan. The initial price of coconut oil is P180 per bottle and export sales is 70,000 bottles. Then, the price of coco oil is raised to P 210 per bottle and foreign demand was reduced to 50,000 bottles. Compute for price elasticity of demand (Ed) of Japanese buyers.Classify elasticity as elastic, inelastic or unit elastic. Also, compute for the change in Total Revenues (TR).