ECON101: Principles of Microeconomics (2021.A.01)

Assume that an apartment rents for $650 per month and at that price 10,000 units are rented as shown in Figure 5.3. When the price increases to $700 per month, 13,000 units are supplied into the market. By what percentage does apartment supply increase? What is the price sensitivity?

Using the Midpoint Method,

$\begin{aligned} \% \text { change in quantity } &=\frac{13,000-10,000}{(13,000+10,000) / 2} \times 100 \\ &=\frac{3,000}{11,500} \times 100 \\ &=26.1 \\ \% \text { change in price } &=\frac{\$ 700- \$ 650}{(\$ 700+\$ 650) / 2} \times 100 \\ &=\frac{50}{675} \times 100 \\ &=7.4 \\ \text { Price Elasticity of Supply } &=\frac{26.1 \%}{7.4 \%} \\ &=3.53 \end{aligned}$

Again, as with the elasticity of demand, the elasticity of supply is not followed by any units. Elasticity is a ratio of one percentage change to another percentage change – nothing more – and is read as an absolute value. In this case, a 1% rise in price causes an increase in quantity supplied of 3.5%. The greater than one elasticity of supply means that the percentage change in quantity supplied will be greater than a one percent price change. If you're starting to wonder if the concept of slope fits into this calculation, read the following Clear It Up box.