Theory question 102
ElasticityThe table below presents the price and quantity supplied by a palm oil producer. Use the information in the table to answer the following questions.
Price ($) | Quantity Supplied (gallons)
6 | 200
12 | 300
18 | 400
20 | 500
24 | 600
(a) If the price of palm oil falls from $20.00 to $18.00, calculate the price elasticity of supply.
(b) Interpret your answer in question 2(a) above.
(c) Study the extract below and answer the following questions.
The price of palm oil remains at $6.00 per gallon and an increase in the price of a related product causes an increase in the supply of palm oil.
(i) Give a graphical presentation to illustrate this change; (ii) Indicate the type of supply for the two products.
(d) State three reasons that can cause a change in supply.
Show the model answer
(a) % change in quantity = (400 − 500)/500 × 100 = −20%; % change in price = (18 − 20)/20 × 100 = −10%; Es = 20 ÷ 10 = 2
(b) Supply is elastic (Es > 1): a 1% change in price causes a 2% change in quantity supplied.
(c)(i) Supply curve shifts to the right (S0 to S1); at the unchanged price of $6.00 the quantity supplied rises from 200 gallons to a larger quantity; label axes, curves and quantities.
(ii) Joint supply: the related product (e.g. palm kernel) and palm oil are produced together, so a higher price of one raises the output of both.
(d) Any three: change in cost of inputs; change in technology; prices of related goods; weather/natural conditions; government taxes and subsidies; number of producers; expectations of future prices.
Use the old values ($20, 500 gallons) as the base.