Examples Of Determinants Of Elasticity Of Suppl Economics Essay

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Part A

The percentage change in quantity suppliedPrice elasticity of supply (PES) shows the amount of supply that gives respond to the changes in price. PES measures the ratio of the percentage change in quantity supplied to the percentage change in price. It can be conclude by using the formula:

The percentage change in price

PES =

These are some example of determinants of elasticity of supply. The First is spare production capacity. If there is plenty of spare capacity for a product, then the business will be able to increase its output without raising the cost and therefore supply will be elastic in respond to a change in demand. The supply of goods and services is of goods and services is often most elastic in a recession, when there is many spare labor and capital resources available to step up output as the economy recovers. Hence, when there are a few of spare labor and capital resources available to set up output the supply will be inelastic.

The second determinants of elasticity of supply are Time horizon. There are Long run period and short run. The longer the suppliers to respond toward the change in price the supply is more elastic which means long run is elastic while short run is inelastic. The reason long run is elastic because the suppliers have more time to consider and give respond toward the change in price. For example, the price of noodle drop, the producer will need long period time to think, they will probably stop the production of noodle and choose to produce ‘kueytiow’ if noodles give them a less profit. So supply is said to be elastic In a short run, when the price of the noodles drop, the producers will still continue to produce noodles in the market although the products give them a lesser profit compared to last time. In this case, supply is said to be inelastic.

. Part B

To start a good business, we must know how to decide the price of the goods according to the elasticity of the goods they wanted to sell. There are five types of price elasticity. One of the five is inelastic. The good which is inelastic is the goods percentage change of quantity demand is less than percentage change in price, that the price elasticity is 0<PED<1. So the business will not make the price of the good lesser to gain more profit. For example shampoo is a good which its price elasticity is inelastic. Producers or supplier will not lower the price of soap to attract more customers to buy it, because there will no effect on it to get more profit.

The second price elasticity is elastic where the percentage change in quantity is greater than the percentage change in price. And its price elasticity is more than one (PED>1). The supplier or producer will lower the price of a good when the goods is elastic because the small percentage of price will affect big percentage change of the quantity such as luxury goods. For instance, when the price of Nike sport shoe is decrease the profit of the business will increase. It is because small changes in price will helps to increase more in quantity demanded and total revenue.

Thirdly is a unitary elastic that show percentage of change in price is same as the percentage change in quantity demanded. Example when supplier or producer supply any amount of goods, the consumer will also willing to buy that goods, in that case this is best situation for supplier and consumer

The last two price of elasticity is the perfectly inelastic and perfectly elastic. Perfectly inelastic is the percentage change in quantity is equal to zero while perfectly elastic is change in quantity is equal to infinite. For example, agriculture goods is perfectly inelastic, which means no matter what is the price of goods the amount that produce still zero, because it need time to respond. For the perfectly elastic, the price is already fixed. Supplier or producer produce nothing in any price value above and below the fixed price.

Question 3

Part A

Supply is a schedule or curve showing the amount of a good that producer are willing and able to produce for the market during a specific period at a different price.

There are some reason why supply of a product will increase. The product will effected by the resource prices. The price of the resources used in the production will determine the cost of the production by producer. Example, when the prices of the resources prices drop the profits of a good will increase and this reason, the supply of the good will increase. For example a decrease in the price of glass will in crease the supply of big-screen television sets.

The other reason that will affect the supply of a product will increase is the changes in technology. Improvements in technology help firms to produce more with fewer resources. This will decrease the cost each unit of a good. Example, technological advance producing cotton greatly reduced their cost. So the supply of the pillow will increase.

The third reason that affects the increase of supply of product is subsidies. Subsidies are counted one of the profits of a business. If the government subsidizes the production of a good, it will effect lower the producers cost and will increase the supply. Example, the government subsidizes Rm1 to each product the firm will confirm earn Rm1 per product this will make the firm to increase the supply of the product.

Part B

The government may get involved into the market and sets a maximum price or minimum price which is price ceiling and price floor for a good or service.

A price ceiling can be define as a price that set in the maximum limit below the equilibrium price in order to lower the price of the good. Therefore, the goods are affordable for the customers. The price ceiling is as the diagram below:

Price

Diagram 1: Price Ceiling (Maximum Price)

S

Pe

D

Price ceiling (Max. price)

Quantity

(diagram)

Diagram 2: Price Floor (Minimum Price)On the other hand, there is a different situation in price floor where the price set in the minimum price and above the equilibrium price. The government increases the price of the good or serve is to ensure that some suppliers or producers may gain minimum profits in this price floor. The price floor is as the diagram below:

Price

S

Price floor (Min. price)

Pe

D

Quantity

Question 5

Part A

Demand refers to individuals that willing to buy the quantity of goods and be able to buy in a different price level.

Change in demand means the demand curve will shift rightwards if there is increase change of demand and shift leftwards if there is a decrease in change in demand. If there is any determinants of demand other than the price of the good will shift the demand curve. Example of determinants demand is substitute goods, complementary goods, taste and fashion and expectation. Coca-cola is substitute goods so a decrease in price of Pepsi will decrease the demand for Coca-cola. Hence, demand for Coca-cola will decrease and a shift leftward to the demand curve shown in Diagram 1.

D0

D1

Diagram 1

Change in quantity demanded is a movement that will move upward or downwards when there is a change in quantity demanded. The only factor to cause the demand curve to move is only when there is a change of price of the good itself. Example, a movement upward along the demand curve will be seen in diagram 2. When the point B move to A shows an decease in quantity demanded from 2000 to 1000 for ice cream because of a increase in price of ice-cream from Rm5 to Rm10.

5 A

4 B

1000 2000

Diagram 2

Part B

Income elasticity of demand is the ratio of percentage change in quantity demanded of a good or services to a give percentage change in income. Income elasticity also can write as YED and indicates the responsiveness of demand change in household income.

There are 3 degrees of YED. One of the degrees is when income elasticity is greater than 0 (YED>0) it will show a positive YED. Demand will rises as income of household rises and it can categorized into two types. When (0<YED<1) it show a income inelastic which means that if the quantity demanded rises by a smaller percentage than the rise in income of household, when it the income is inelastic the good is a normal good. Example of normal goods is shoe and food.

The second degree is when YED is negative (YED<0) which means when there is a demand fall as the income of household increases. When this situation happen the good is an inferior good. Example of inferior goods is low quality of shirt, train ticket and pencil.

The third degree is When YED is exactly zero (YED=0) which means the quantity demanded does not change as income of household changes. The good is a necessity good. Example of necessity goods is sugar, oil and fuel.

Question 6

Part A:

Consumer surplus defined as the price that consumers are willing and able to pay for a good is higher than the selling price of the good which means that this is the advantage to the purchasers or buyers. This is because; consumers only need to pay a lesser pricing for the product compare with the price that that they are willing to pay. For example, Ali is willing to pay RM 50 for a shoe, but the price of the burger cost him for RM27.00 only. This means that Ali paid RM13.00 lesser than the price he willing to pay for it. The Diagram below consumer surplus can be seen at the shaded region part at the diagram.

Price of the shoe

S

50

27

D

Quantity of shoe

Producer surplus can be defined as the price that producer actual sales for a good is higher than their prediction price for the good. This means that the price producer receive after selling the product is more than their prediction at first where this is the advantage to the producers. They can earn more profile for each product they supply because they are receiving more than the price they predicted. For example, Producer KWC predict that they can only sell their goods(pencil) at the price of RM1, but there is consumer are willing to pay more and bought the pencil with the price of RM2. This means that the producer receive extra RM1 for the pencil as his profit. The diagram below show the shaded region is the producer surplus.

Price of pencil

D

S

RM2

RM1

Quantity of pencil

PART B

PPF is a graph that shows the various maximum combinations of two outputs that the economy can possibly produce given the available factors and production technology. There are several assumption will set the stage or our illustration. One of it is in economy we must assume that we are producing two goods. Second is an efficient production. The economy is operating fully employment and achieving full production, which means to produce greatest output without any waste. Third is fixed resources, the available supplies of factors of production remain unchanged both quantity and quality in that period. Lastly is fixed technology which technology fixed create limits or constraint on the amount of type of good any economy can produce.

There is two goods that one of the good will be choose for a firm to produce. In that case when the firm choose to produce good A none of good B will be produce

Combinations

Butter

Margarine

A

0

20

B

2

18

C

7

13

D

13

7

E

20

0

The diagram above shows a firm that want to produce either one of the good butter or margarine in a time. So when a firm wanted to produce 20 margarine, they need to forgo 20 butter at the same time. Which means the firm is facing three simple concepts of economics which is scarcity, choice and opportunity costs. So when the assumption is set in the PPF it occur the scarcity of resources. Example when the resources is just only enough to produce 20 margarine. But if they want to produce 7 units of butter ,the scare of resources will happened in order to produce two goods. So the producer need to choose the most profitable to maximized the producer’s satisfaction. In that case, when one of the goods have been choose to produce the other need to sacrifices(opportunity costs) .According to these, the three basic economics concepts are being explained using the PPF.

Butter

B

A

20

13

18

C

D

7

E

2

0

Margarine

20

13

7

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