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Write formula for calculation of elasticity of supply by using average method.

Write formula for calculation of elasticity of supply by using average method.

Solution

The average (arc) method measures supply elasticity using the averages of the two prices and two quantities as the base, and its formula is:

  1. Formula: Es = [ΔQ / (Q₁ + Q₂)] ÷ [ΔP / (P₁ + P₂)], where ΔQ = Q₂ − Q₁ is the change in quantity supplied, ΔP = P₂ − P₁ is the change in price, and (Q₁, Q₂) and (P₁, P₂) are the two quantities and two prices.
  2. Note: because it uses the midpoint as the base, it gives a consistent (same) value in both directions along the supply curve.

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