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According to (HASHIM ALI,1999, page 40),price elasticity of supply is basically means the responsiveness of the quantity supplied due to a change in price.
The factors that affecting elasticity of supply are whether the product is perishable or not. In other words, if the product is perishable, therefore when there is change in price, it won't affect the quantity supplied. Hence, the supply is inelastic
For example: fruits, it is because fruits are perishable.
The second determinant is the time. There are two time of time which are the short run and the long run. In the short run, the supply will be inelastic. It's because, the supplier can't increase the supply of a product immediately due to a change in price. Where by in the long run, suppliers are able to increase their product, because they have more time to produce more. And therefore the supply is elastic.
For example: in the short run, the price of the laptop increase in the market price. However, the supplier of laptop cant increase their supply immediately due to a short run.
In the long run, the supplier have more time to produce more laptop due to more time to produce laptop.
Businesses can use price elasticity to decide on their pricing strategy.
By using the price elasticity, they can know whether the goods that they are selling is elastic or inelastic. If the good that they are selling is inelastic, for example: necessities, therefore they can set a higher price. It is because if the good is inelastic, the change in price won't effect the change in demand. In other words, consumers are not that responsive due to a change in price.
And if the good is elastic, such as luxuries goods or goods that have several substitutes, therefore the supplier can't set a high price. It is because the price is elastic, in other words the consumers are responsive due to a change in price of the good.
That's how the business use the elasticity concept to decide the pricing strategy.
Supply of a product will increases caused by the technology are getting more advance. As technology has increases, therefore to produce a good will be easier and faster, hence to higher supply of that particular product.
For example: a textile company used to produce their goods by manually (by human or workers) and they manage to produce 100pcs of the good per month. In the future, as the technology increases, the quantity of the good produced increases to 300pcs each month.. hence the supply of the good increases.
Second reason that might affect the supply of a good will increase is the intervention from the government by giving subsidies to the suppliers. By giving subsidies to the suppliers, it tends to reduce their cost of production. Therefore, higher profit will earned and motivate the suppliers to supply more of the good.
For example: a cost of production to produce a good is RM500, the company manage to sell at RM550 each good and earned RM50 for profit this is before any subsidies from government. After a while, the government decided to give subsidies to the business. Hence, the cost of production of the good decreases to RM450. the business still sell the product for RM550 but now, RM100 is earned for the profit. Therefore, the higher the profit, will motivate the supplier to supply more.
Third reason that will increase a supply of a product is the price of the good it self. When the price of the good increases in the market, therefore the supplier motivated because no they can earn more revenues and get higher profit compared to before the price increased.
For example: the price of a chair was RM100 in 2009 and the supplier of the chair supply at 100 quantities and earn RM10,000 revenues. In 2010, the price if the chair has increases to RM120. now while the price increased, the supplier will definitely increase their quantity supplied of chair maybe to 130(or more) and they can get RM15,600 revenues which is much more compared to the previous quantity.(HASHIM ALI,1999,PAGE 37)
Price floor is a price that set by the government above the equilibrium price and the price set b the suppliers are not legal if they set lower than the price the set by the government.. it's actually to help those suppliers to get higher income. Because of the price of the good is higher now, and therefore the supplier will produce more. However, at the end, the demand for the good will decrease and therefore, surplus occur. This is how it's effect the rationing function of prices and distort resource allocation. The graph below will shows the surplus caused by the price floor.
The graph above shows that when there is price floor set by the government, the demand will stop until Qd and there fore surplus occur. Hence this occur, supplier cant manage to sell all their product, and therefore, black market will occur(sell lower price illegally).
Whereby price ceilings is also price that set by the government. It's the maximum price that seller can charge to consumers. Lower than the price ceiling is legal and otherwise is not. The objectives of government by doing this is to help those consumers that cant afford to buy their essential good. The graph below will shows the price ceiling.
The graph above shows that when there is a price ceiling(Pc) set by the government, the price is under the equilibrium price. in other words, the price is cheap at the moment. however, because of the price has reduced, the suppliers will feel that it's not profitable and therefore they are not motivated to produce more. Therefore the quantity supply stops at Qs. Hence, lack of supply and high demand due to a shortage.(McConnell,2009,page 59-62)
Consumer surplus is basically means it's benefit for the consumers, as they are able to pay higher price for a particular good, but in fact the actual price is lower than what they willing to pay. In other words, the consumers are able to pay above the equilibrium price. For example: john willing to buy a sport shoes at RM200, whereby the actual price of the sport shoes is RM150, and there fore RM200-RM150= RM50 is john's surplus as consumer.
The graph below will show where is the consumer surplus:
For good Z
Price for good Z
The graph above shows the consumer surplus at the triangle shape where
The actual price is at P0, and even though the price is suppose to be at P0,the consumers are willing to pay above the P0 which is higher and therefore, consumers surplus occur.
Producer surplus is actually a benefit to the producer of a particular good to earn more than what they plan to earn. For example: suppose to be good A is at RM5 in market price, but john only plan to sell good A for only RM3(has cover the cost of production). therefore RM5-RM3=RM2 is john's producer surplus as an producer.
Price for good Z
Quantity supply for good Z
Equilibrium price = P0
The graph above shows that the producer surplus is actually under the equilibrium price which means the producers are willing to sell at lower price but in fact, the equilibrium price for good Z is at P0, and therefore, the producers surplus occur.(McConnell,2009,page 126-127).
According to(HASHIM ALI,1999, page 2-3) basically there are three economic concepts. Which are scarcity, choice and opportunity cost. Where as the PPF or production possibilities frontier is to shows a possible combination with in two goods.
The PPF graph below will explain the 3 economic concepts.
1 2 3 5 6 7
FBasically, scarcity means there are unlimited wants and limited resources. And to explain this concept by using this Production Possibilities Frontier(PPF), the graph shows that it is impossible to actually produce 7 sugar and 10 laptop. because when 7 sugar is produced there is only 1 laptop can be produced and it's caused by the limited resources. Which at the end will bring to a choice. Choice means, the consumer will to chose to have more on sugar or laptop. if they want more sugar, lesser laptop they will get and otherwise. Due to this the third concept will occur where by opportunity cost means something has to be forgone in order to get the best alternative. For example, in this graph, if the consumers want to get 6 of sugar not 5, there fore he/she has to forgone 1 laptop in order to get 6 sugar. The forgone 1 laptop is the opportunity cost.
A decrease in demand will SHIFT the demand curve to the left, there are several factors that will decrease the demand. Taste and fashion, a change in income, changes in population, changes in price of related goods(either complementary goods or substitutes goods), increase of advertisements, introduction of new product, social and economic conditions, festive seasons, speculation.
Price of good A
D1Quantity demanded for
The graph above shows the decrease in demand. The demand curve SHIFTED to the left from D0 to D1 and it is caused by the factors that mentioned earlier.
Where as the decrease in quantity demanded will caused the MOVEMENT along the demand curve to move upward which means not a shift. The ONLY factor that will move the demand curve upward is the price of the good it self.
Quantity demanded for good A
Price for good A
The graph above shows that when there is a decrease in quantity demanded, this is ONLY caused by the PRICE of good A has increased from P0 to P1 therefore caused the quantity demanded to decreased from Q0 to Q1 as well as the movement upward from point A to point B. The ONLY factor that due to this movement along the demand curve is the PRICE of the good it self. (HASHIM ALI,1999, page 22-25)
According to (HASLIM ALI, 1999, page 32) Income elasticity of demand basically means the measure of the responsiveness of demand in a particular good due to a change in income of the consumers.
the income elasticity of demand is measured by percentage. Here is the formula to calculate income elasticity of demand:
income elasticity of demand: the change in quantity demanded over the change in
income of the consumers.
--------- x 100( change in quantity demanded)
------- x 100(change in income of the consumers)
Keys: Q1( new quantity demanded)
Q2(original quantity demanded)
Y1(new income of consumers)
Y0(original income of consumers)
There are 3 degrees or responses of income elasticity:
The positive degree of income elasticity of demand can be describe more or classified into 3 more parts: elastic (YED or income elastic of demand is > 1), unit(YED=1), and inelastic(YED<1).
When the income elasticity of demand is Elastic or more than 1, means when there is a small change in income of the consumers will due to a more change in demand of particular good. For example: luxurious goods, or branded.
Whereby when the income elasticity of demand is Inelastic or less than 1, means when there is a change in income for the consumers, will due to less change in demand of particular good. For example: necessities good( food) or for those smokers cigarette is their necessities.
When the income elasticity of demand is Unit or = to 1, means there is a positive relationship between the change in income and the change in demand. In other word, when there is increase of income by 10%, the increase of demand of the good will increase by 10% as well.
The negative degree of income elastic of demand means when there is negative relationship between the change in income and the change in demand of particular good. In other words, when the income is RM1, the amount of quantity demanded of that particular good is 2. And when the income increase to RM2, the quantity demanded for that particular good will reduce to 1 as there is negative relationship between the two.
The zero income elasticity of demand means there is no relationship between the change in income and the demand. In other words, when there is change in income either increase or decrease, the quantity demanded for a particular good will remain in the same quantity. For example: basic necessities(sugar).