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Price Elasticity of Demand and Supply: Question 7

Syllabus 2.7

Structured 8 marks

An orange grower who supplies crates of oranges to wholesalers reduces the price per crate from $50 to $40. As a result, the quantity of crates the grower supplies each week falls from 600 to 480.

(a) Calculate the percentage change in price and the percentage change in quantity supplied. [2]

(b) Calculate the price elasticity of supply (PES) for the oranges, showing your working, and state whether supply is price elastic, price inelastic or unitary. [3]

(c) State and explain one determinant of price elasticity of supply that could help explain why supply of oranges might have an elasticity like this. [3]

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Worked solution

Part (a): Percentage changes in price and quantity supplied

Percentage change in price, using the original price of $50 as the base: %ΔP=40−5050×100=−1050×100=−20%\%\Delta P = \frac{40-50}{50}\times100 = \frac{-10}{50}\times100 = -20\%

Percentage change in quantity supplied, using the original quantity of 600 as the base: %ΔQs=480−600600×100=−120600×100=−20%\%\Delta Q_s = \frac{480-600}{600}\times100 = \frac{-120}{600}\times100 = -20\%

Part (b): Calculating and classifying PES

PES=%ΔQs%ΔP=−20−20=1.0PES = \frac{\%\Delta Q_s}{\%\Delta P} = \frac{-20}{-20} = 1.0

Both the percentage change in price and the percentage change in quantity supplied are −20%-20\%: price and quantity supplied have moved together, in the same direction, so PES is positive. Since PES =1.0= 1.0 exactly, supply of oranges is unitary in elasticity, the proportionate change in quantity supplied exactly matches the proportionate change in price, neither more nor less.

Part (c): A determinant of PES

One determinant of price elasticity of supply is the ability to store the good. Oranges are a perishable crop: once picked, they cannot be kept in storage indefinitely, so the grower cannot simply release stored stock onto the market when the price is more attractive, or hold unsold crates back when the price falls. Goods that can be stockpiled cheaply tend to have a more elastic supply, because producers can quickly release stock to meet a higher price; a perishable good like oranges, with little scope for holding stock, tends to have a more restricted supply response, which is consistent with the unitary, rather than highly elastic, value found in part (b).

Final answers

  • (a) %ΔP=−20%\%\Delta P = -20\%, %ΔQs=−20%\%\Delta Q_s = -20\%
  • (b) PES=1.0PES = 1.0. Supply is unitary
  • (c) Perishability and limited ability to store the crop restricts how far the grower can change supply in response to a price change