ECO Chapter 91

 What is elasticity? It is “Ability to change”.
It is a measure of a variable's sensitivity to a change in

another variable.
Most commonly this sensitivity is the change in price (or
Income or other factors) relative to changes in other
factors (Demand, Supply).
How much change in price

will cause
How much change in Supply.
 The responsiveness of supply to a change in price.
Example: If price increases from 10 taka to 20 taka the
supply will rise from 200 units to 300 units.
So before = when each unit price was10 taka
Supply was 200 units.
After = when each unit price is 20 taka. Supply is 300
units.
When
Price increased by 10 taka per unit
Supply rise by 100 unit.
Price Inelastic Supply Perfectly Inelastic (Supply)
Change in price results smaller change Change in price causes no change in
in quantity supplied.
quantity supplied. “Fixed supply”.
If price rises supplier will increase supply
If price rises/ falls supplier will supply same
but in low amount. Due to Shortage of
quantity.
resources. Depends on natural factors.
Example: Land, platinum, oil, Movie/match
Example: Fruits, crops, fish, meat nuclear
tickets, Hotel rooms.
power,
Price Elastic Supply Perfectly elastic (Supply)
An increase in price will result in
Change in price results Bigger change in
quantity supplied. unlimited quantity of supply.
If price rises supplier will increase supply If price rises Supplier will supply as much as
in high amount. Manufactured in factories they want.
Example: Flats, electronic goods. Example: Chocolate, pizza, plastic toys, cloths
Price Inelastic Supply Perfectly inelastic (supply)

 Formula of PES:
Price Inelastic Supply Perfectly Inelastic (Supply)
PES < 1 PES= 0

Smaller change in quantity supplied. No change in Supply. “Fixed supply”.
Example =Value of PES calculation using
formula will be 0.9, 0.0001
PES > 1 PED = ∞ infinity.

Bigger change in quantity supplied.
Example= Value of PES calculation using Unlimited quantity of supply.
formula will be 1.2, 1.7, 2, 10
Unitary elasticity
 The responsiveness of Supply is proportionately equal to the
change in price.
 PES = 1
 Example = When price of a cake was $2, Supply is 2 units.
When price become $4 for each cake Supply become 4 units.
 PES =
 New supply – previous supply

New price – Previous price
 4-2/4-2
 = 2/2
 =1
Calculating PES ( page 58)
 Product A 25% increase in price resulted in a
12.5% increase in quantity supplied.
 PES = 12.5% / 25% = 0.5 <1 so inelastic supply.

 Product B 25% increase in price causes 100%
increase in quantity supplied.
 PES = 100%/ 25% = 4 > 1 so elastic supply.
 Factors of production: supply of a product depends on
availability of factors of production that are land, labor, capital.
 Availability of stocks: Perishable goods such as fruits, dairy
product, vegetable cannot be stocked for long.
 Space capacity: If space capacity is high supply will be elastic. If low
than inelastic supply. Varies according to inventory management ability of
supplier.
 Time: Bicycle can be produced in short time so supply is elastic (high
quantity can be supplied in short time). On the other hand the supply of
aircraft will be inelastic as it takes time to produce and supply.
 Manufactured goods: that are produced in factories such as
garments, electronics appliances can be supplied in high quantity with more
labor and capital so supply is elastic.
 Primary goods: Agricultural products cannot be supplied at any time

and at any quantity as it depends on natural factors. So supply of primary
goods are inelastic. Fresh mangos cannot be supplied in winter season
whatever the price is.
Case Study: Ampat Holdings
 1. Calculate PES for the replica shirts in this
case.
Answer: The supply has reduced from 1.6 million 1.2 million.
Price has declined from BDT 800 to BDT 640
 New Supply – Previous Supply = 1.2 – 1.6 = - 0.4

 Calculating % change in demand (-0.4/1.6) × 100 = -25%
 New price – Previous price = BDT640 – BDT800 = -160.
 Calculating % change in Price (-160/800) × 100 = -20%
 PED = - 25% / -20% = 1.25
Case Study: Ampat Holdings
 What is meant by elastic supply? Use this case as
an example in your explanation?
Answer: Price Elastic Supply = Change in price results Bigger
change in quantity supplied. If price rises supplier will increase supply in high
amount. If Price falls supplier will supply very less quantity. Manufactured in
factories.
Here PED value is 1.25>1 so supply is elastic. So Ampat holdings in
Chittagong Bangladesh will drop supply of replica shirts due to the decline in
price. Suppliers are profit oriented so when price drops, they tend to supply
less.

ECO Chapter 91

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 What is elasticity? It is “Ability to change”.

It is a measure of a variable's sensitivity to a change in

How much change in price

Price Elastic Supply Perfectly elastic (Supply)

Price Inelastic Supply Perfectly Inelastic (Supply)

PES < 1 PES= 0

PES > 1 PED = ∞ infinity.

 New supply – previous supply

 PES = 12.5% / 25% = 0.5 <1 so inelastic supply.

 Primary goods: Agricultural products cannot be supplied at any time

 New Supply – Previous Supply = 1.2 – 1.6 = - 0.4

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