# Price Elasticity Of Supply Commerce Essay

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The percentage change in quantity supplied/Price elasticity of supply is the responsiveness of quantity to changes in price. Price elasticity of supply measures the ratio of the percentage change in quantity supplied to the percentage change in price.

One of the determinants of price elasticity of supply is time period, it can be divided into two groups, one is long period and one is short period. It is the time period that being concerned. Normally, in the long period, the quantity supplied is elastic supply, which gave the supplier a longer time to respond to the change of the price. By comparing to short period, long period is usually more elastic, because in the short period, supplier have not enough time to react to the change in the price. For examples, when in the short period of time, there is a decrease in the price of bread, the producer will continue to produce the bread even the producer earn a lesser profit. This is inelastic supply. However in the long period of time, there is a decrease in the price of bread, the producer of bread will have more time to think and consider about whether to continue the production of bread, probably producer will stop producing the bread. Because producer want to earn a maximum profit. Producer will try to produce substitute good of the bread, that is cake. Because producer try to earn more profit. This is elastic supply.(Stephan L.Slavin 2009)

The other determinant of price elasticity of supply is the stock of finished product and components. A high level of finished product and component will help the producer to react to the demand for the product, this will increase the supply of the product. This in elastic supply. Beside that, if there is a low level of finished product and component, the producer unable to supply the product into the market. So, the production of the product are limited, this is inelastic supply.

PART B

Price elasticity of supply is the responsiveness of quantity to change in price. Business use the concept price elasticity to decide on their pricing strategy. The elasticity of supply will always be positive value, it states that it is a positive relationship between price and quantity supplied, this due to the law of supply.

First is inelastic supply, it stated the percentage change in quantity supplied is less than the percentage change in price. Supply is not sensitive to price changes. The amount of inelastic is positive, that is larger than 0, smaller than 1.

Second is elastic supply, it stated the percentage change in quantity supplied is larger than the percentage in price. The amount of elastic is also positive, that is larger than 1. Supply is sensitive to price changes.

Thirdly is unitary elastic supply, it stated the percentage change in quantity supplied is equal to the percentage change in price. The amount of unitary elastic supply is equal to 1.

Fourth is perfectly inelastic supply, it stated the percentage change in quantity supplied is zero due to the change in price.

The last is perfectly inelastic supply, it stated the percentage change in quantity supplied is infinite compared to the percentage change in price.

QUESTION 3

PART A

Supply is the quantities of a good or service that people are willing and able to sell at different prices. The law of supply shows that as the price of a good increase, the quantity supplied of the good increases. It states that it is a positive or direct relationship between price and quantity.

## Change in supply- Increase in supply

Quantity supplied

Price

So

S1For examples, as price rises, quantity supplied rises; as price falls, quantity supplied falls. The objective of supplier is try to maximum their profit. One of the reason why supply of a product increases is Changes in the cost of production. The main reason for changes in supply is changes in the cost production. A supplier needs raw material to produce the product that the business sell. If the price of the raw material falls, supplier would able to buy more quantity of raw material to produce more product to sell. This will cause the supply of the product increase. For example, if the price of the rubber latex falls, the quantity supplied of the tires will increase respectively. So, supplier will increase the supply of the tire.

Second reason is Changes in technology. A technological improvement will reduce the costs of production and it also increase the productivity. This will increase the quantity supply of the good at every price level. For example, last 10 years, the productivity of supply a car is slow, because last time they don't have efficient machine to produce car, they just can do it by labours. But nowadays, industry had developed efficient machine to produce cars, and the productivity of supply a car is fast, this have increased the supply of cars.

The last reason is Expectation of future price changes, if producer predict that the price of the product will rise in the future, producer will increase the productivity of the product now by earning a higher profit in the future. When the price actually increase, producer will decrease the productivity. For example, the price of flour will rise in the future, it will reduce the supply of flour for now.

PART B

By the government intervention, they had set the price ceiling and price floor. Price ceiling is the maximum price set below the equilibrium price. The low price of the good attract customers and benefit to the customers. It result in shortages. Besides, price floor is the minimum price set above the equilibrium, the purposes of government increase the price is to let the supplier have a minimum profit earning for each product they sell. It result in

surplus. The price of both supply and demand is set at which both consumers and producers are willing to pay for it. Both price floors and price ceilings are to stifle the rationing function of price and distort resource allocation.

Price

(Min price)

PE

Quantity

S

D

Price

PE

(Max price)

S

D

Quantity

## Price Ceiling

Price Floor Price floors is the price set by government to ensure the producer to earn a minimum profit, it know as minimum price, which result in surplus between demand and supply. The price floor must set above the equilibrium price. For examples, the equilibrium price of good A is \$10, government set the price floors of good A at \$20, this result in surplus for good A. But there is still have some buyers buy the good A, instead all buyers are willing and able to pay \$20 to buy for good A. Similarly, all producers are willing and able to sell this product at \$20, and vice versa. The producer can increase the price, but there will be a decrease in demand for good A. This result in stifle the rationing function of prices and distort resource allocation.

Price

PE

S

D

Quantity

Price Floor

Surplus

Price ceiling is know as the maximum price set by the government, it ensure that the buyer didn't buy any too expensive goods. It result in shortage between demand and supply. For example, the equilibrium price for good B is \$15, government set the price ceiling at \$5 for good B, all the consumer are able to buy good B for a lower price. In this case, the supplier are not willing to produce many product, because the price ceiling had stifle the rationing function of prices and distort resource allocation, and it had decrease the profit earning for good B to the supplier. This result in shortage for good B, because the demand for good B is more than the supply.

Price

PE

Price Ceiling

Shortage

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Quantity

## Price Ceiling

QUESTION 5

PART A

Change in demand Demand is the quantities of a good or service that people are willing and able to buy at different price level. The law of demand shows that there is a negative relationship between the price and quantity demanded. There are two types of demand. First is change in demand, it refers to the demand curve shift leftward or rightward when there is a change in demand. The determinants of demand will lead to a shift of the demand curve, other than the price of the good itself. The determinant are substitute goods, complements goods, income of household, tastes and fashion and expectation. A decrease in demand means that the demand curve will shift leftward. Diagram below shows a leftward shift for decrease in demand. For example, if consumer knows that the price of Toyota car will falls in the future, this is lead to a fall of the demand for Toyota car now.

Price of Toyota Car

Quantity of Toyota Car Demanded

D1

D0

Second is change in quantity demanded, it is a movement along the demand curve, that is moving upward and downward. The only factor that can effect the quantity demanded is the change in the price of the good itself. A decrease in quantity demanded means that there is a upward movement along the demand curve. Diagram below show that a movement upward along the demand curve. For example, according to the law of demand, when the price increase, it will lead to a decrease in quantity demanded. So, when the price of Nissan car increase, the quantity demanded for Nissan car will decrease and there is a upward movement along the demand curve.

## Change in quantity demanded

Price of Nissan car

Quantity of Nissan Car Demanded

D

P1

P0

QD1

QD0

PART B

The percentage change in quantity demanded Income elasticity of demand is to calculate the percentage change in the quantity demanded of goods or services respond to the percentage change in income. It stated the responsiveness of demand to change in household income. Income elasticity of demand is defined as the quantity demanded divided by the percentage change in income. The formula of income elasticity of demand is

The percentage change in household's income YED=

The degree of income elasticity of demand is when the demand rises as the income of household rise, it can be define into three types, that is positive, negative and exactly equal to zero. First is positive income elasticity of demand, it is the income elasticity of demand is larger than zero. Positive income elasticity of demand can be divide into two main group which is income inelastic and income elastic. Income inelastic happens when the quantity demanded increase by a smaller percentage than the increase in income, it can say that the good is a normal good. The examples of normal goods are stationery, food and clothes. Income elastic happen when the quantity demanded increase by a larger percentage than the increase in income, it can say that the good is a luxury good. The examples of luxury goods are branded bags, sports car and luxury houses. Next is the negative income elastic of demand, it happens when income increase, it will affect the demand to decrease. It can be say that the good is inferior good. The examples of inferior goods are second hand cars and low quality product. The demand of inferior good will increase when the income of household decrease. The last degree of income elasticity of demand is exactly equal to zero, it happens when the quantity demanded does not change as income changes. It can be say the good is necessity. The examples of necessity goods is rice and clothes. No matter there is an increase or decrease in the household income, they still have to pay to for the necessity goods for their daily life, so the change in household's income does not effect the demand.

QUESTION 6

PART A

Surplus is an excess of quantity supply that supplied by the supplier between supply and demand. In order to overcome, supplier needs to cut down the supply of the product and reduce the price to encourage sales.

Consumer surplus is the benefit surplus in the market received by consumer. It is defined that the difference between the maximum price that a consumer is willing to pay for a product and the actual price. There is a negative relationship between the equilibrium price and the consumer surplus. For example, the buyer's maximum willingness to pay for good C is \$20, and the equilibrium price of good C is \$12. The consumer surplus for buying good C is \$8, because consumer willing to pay \$20 for good C, and the actual price for good C is \$12, consumer can save \$8 for buying good C, this is a benefit for the consumer.

## Consumer surplus

Price

Quantity

S

Consumer

Surplus

P1

Q1

Next is producer surplus, it is the difference between the actual price producers receive for a product and the lower minimum payments they are willing to accept. Producer also receive benefit surplus in market. There is a positive relationship between equilibrium price and the amount of producer surplus. For example, the minimum acceptable payment for good E is \$5, and the equilibrium price of good E is \$10, the producer surplus for obtain good E is \$5,because producer will receive extra revenue as their benefits.(Stephan L.Slavin 2009)

Producer

Surplus

Price

Quantity

D

P1

Q1

## Consumer surplus and Producer surplus

Price

Quantity

S

D

Pe

Qe

Consumer

surplus

Producer

surplus

PART B

The production possibilities frontier is the graph that represent a combination of two goods at full employment. In the PPF graph, there are three economic concepts, that is scarcity, choices and opportunity cost. Scarcity is a situation that there is not enough resources to produce as many goods that people want, demand of a people is unlimited. Choices is a concept that related to scarcity, because scarcity force people to make choice between their unlimited wants in order to maximise their satisfaction. Last is opportunity cost, it defined as when one action is taken, another choice must be sacrificed. The production possibilities frontier represent computer and butter, the producer have scarcity resource that can only produce one product, but the producer is confronted with two choices, it can produce only computer or butter. The more computer it produces, the less butter it can produce. It is a vice versa. There is an opportunity cost between these two product, if the producer use all the resource they have, e.g: land, capital, labour, entrepreneurship to produce computer, they would not able to produce any of the butter. The opportunity cost of producing the computer is butter.