Factors That Influence The Elasticity Of Supply Economics Essay

The elasticity of supply (PES) is to calculate the responsiveness of the supply to a change in price. The factors that influence the elasticity of supply are the resource substitution possibilities and time frame for the supply decision. It can be calculated by using a formula.

Percentage change in quantity supplied

Elasticity of supply =

Percentage change in supplied

Resource substitution possibilities are defines as some goods and services can be produced only by using some special or rare productive resources. These goods have a low n even zero in the elasticity of supply. Other goods that can be produce by using the normal resources that could be allocated to a wide variety of alternative tasks. Such goods will be having a high elasticity of supply. For example, a Van Gogh painting is a good with a vertical supply curve and zero elasticity of supply. At the other side, wheat can be grown on land that is almost equally good for growing corn, so it is just as easy to grow wheat as corn. The opportunity cost of wheat in terms of forgone corn is almost constant. As a result, the supply curve of wheat is almost horizontal and its elasticity of supply is very large. Similarly, when a good is produced in many different countries (for example, sugar and beef), the supply of the good is highly elastic. The second factor is time frame for the supply decision. There are three categories of the time frames of supply, such as momentary supply, long-run supply, short – run supply. Firstly, momentary supply defines as when the prices of a good increase or decreases, it also will shows the response of the quantity supplied immediately following the price change. Goods that have a perfectly inelastic momentary supply are fruits and vegetables. It will appear a vertical supply curve. For example, every day the farmer have to plan and provided the fruit to the market. The momentary supply will be a vertical curve because no matter what the price of the fruits change, it also changed the output of the producer. They have to supply the fruit to the market everyday and the quantity of the fruits that available tat day is always fixed.

S1

Price

Elasticity of supply = 0

0

Quantity

Perfectly inelastic supply

Besides that, some of the goods have a perfectly elastic supply. Long distance phone call is an example of the perfectly elastic supply. In this century, all of the people also need to use phone to make a call for a business purpose or for other purpose and this will be affected the quantity of supplied increases, but the price will be remain constant.

Price

Elasticity of supply = ∞

Perfectly elastic supply

0

Quantity

Not only that, the long-run supply curve will be shows the response of the quantity supplied to a price change after all the technologically possible ways of adjusting supply have been exploited. For example, the long run is the time it take to grow the fruit to a full maturity and it take about a several month, because of this, the long run adjustment occurs only after a completely produce other new plant and workers have been trained to operate it.

Other than that, the short-run supply curve will also shows how to quantity supplies response to the price change when only some of the technologically possible adjustments to production have been made. If wanted to increase the output in the short run, firms work their labor force overtime and perhaps hire additional workers. If to decrease the output of the firm in the short run, the firms can either lay off workers or reduce their hour of work.

Part B

Many businesses are used concept price elasticity to decide on their pricing strategy. Most of the business is use the average price and average quantity to decide on their pricing strategy. We do this because it gives the most precise measurement of elasticity— at the midpoint between the original price and the new price. If the price falls from $20.50 to $19.50, the $1 price change is 4.9 percent of $20.50. The 2 pizza change in the quantity is 22.2 percent of 9 pizzas, the original quantity. So if we use these numbers, the price elasticity of demand is 22.2 divided by 4.9, which equal to 4.5. By using the percentages of the average price and average quantity, we will get the same value for the elasticity.Price Elasticity of Demand – Welker’s Wikinomics Page

Each demand illustrated here has a constant elasticity. The demand curve in the inelastic demand illustrates the demand for a good that has a zero elasticity of demand. The demand curve of the unit elastic illustrates the demand for a good with a unit elasticity of demand and the demand curve in the elastic demand illustrates the demand for a goods with an infinite elasticity of demand.

Question 3

Part A

The definition of the supply is the quantity/ amount of a good that existing suppliers or would be supplier would want to produce for the market at different price at a given time period. There are many factors that can affect to supply of a product change and this is known as the change in supply. The reason that the supply of a product will increase is due to the factors that affected it.

The first factor that affected to supply of a product increase is the price obtainable for the good. The price of a good increase, the quantity supplied will be increase also, if all the other conditions that will affected the goods are remain unchanged. For example, an increase in the price of chicken, will increase the quantity supplied for the chicken. It will occur an upward movement along the supply curve of the chicken.

Supply curve

0

Quantity supplied

Price

S

The other reasons that the supply of a product increase is because of the price of related goods produced affected it. The prices of the related goods that the firms produced will influence the supply. For example, if the prices of the coffee decrease, the firm will switch to produce tea rather than produce coffee. The supply of tea will increase. It is because these two products are substitute goods.

Not only that, the reason that will affect the supply of the goods increase is the change in the technology. It will affect to production of a good. Technology can reduce the cost of production of a good and this will increase the quantity of supply of a good at every price level. For example, there is a new method to produce more bread at a time and this will be increase the supply of a product.

Part B

S

Excess supply Sometimes governments establish a price floor, which is the minimum permissible price that can be charged for a particular good or service. A price floor that is set at or below the equilibrium price has no effect because the free-market equilibrium remains attainable. If, the price floor is set above the equilibrium, it will raise the price, in which case it is say to be blinding. The consequences of excess supply differ from product to product. If the product is labor, subject to a minimum wage, excess supply translates into people without jobs (unemployment). Figure below is show that a blinding price floor leads to excess supply. The free-market equilibrium is at E, with price p0 and quantity q0. The government now establishes a blinding price floor at p1. The result is excess supply equal to q1 q2

P1

Price Floor

Q1 Q0 Q2

D

Po

P0

By the way, a price ceiling is the maximum price at which certain goods and services may be exchanged. Price controls on oil, natural gas, and rental housing have been frequently imposed by federal and state government. If price ceiling is set above equilibrium remains attainable. If, the price ceiling is set below the free market equilibrium price, the price ceiling lowers the price and is said to be binding or effective.

http://upload.wikimedia.org/wikipedia/commons/thumb/6/6c/Binding-price-ceiling.svg/300px-Binding-price-ceiling.svg.png

Question 5

Part A

Demand can be defined as the quantity of a good that potential buyers would be willing and able to buy or attempt to buy at different price level. Besides that, quantity demanded is refers to the number of units of a good that individuals are willing and able to buy at a particular price during a given time period. The difference between a decrease in demand and decrease in quantity demanded is the demand curve will be shifting to the left when the demand decrease and the movement of the quantity demand along the demand curve will move upward if the quantity demand decrease. The quantity demand will decrease because the price of the good increase. The example of the demand is a decrease in price of Samsung mobile phone will decrease the demand for Sony Ericsson mobile phone. Hence, the quantity demanded for the Samsung mobile phone will increase, depicted as a movement downward along the same demand curve. Demand for Sony Ericsson mobile phone will fall depicted as a leftward shift of the entire demand curve to the left.

Price of Sony Ericsson

Change in demand

D0

D1

Quantity of Sony Ericsson demanded

The example of the change in quantity demanded is a movement downward along the demand curve as the diagram below from A to B shows an increase in quantity demanded for watermelon due to a fall in price of watermelon from $6.50 to 4.30.

Change in quantity demanded

Price of watermelon per kg ($/kg)

6.50

A

4.30

B

Quantity of watermelon demanded (kg)

100

40

As a conclusion, the difference between a decrease in demand and decrease in quantity demanded is there will appear a shift of the demand curve to the left if the demand decrease and the it will appear a movement along the demand curve to upward if the quantity demanded decrease it is because the price of the good increase.

Part B

The one important determinant of demand is the income of the customers. Income elasticity of demand can be defined as the responsiveness of demand to changes in income and is symbolized as (YED). Income elasticity of demand is the ratio of the percentage change in the quantity demanded of a good or service to a given percentage change in income.

YED = Percentage change in quantity demanded

Percentage change in income

YED =

Qd0

X 100 Qd1- qd0

X 100

Y1- y0

Y0

Qd1 is the new quantity demanded

Qd0 is the initial quantity demanded

Y1 is the new income level

Y0 is the initial income level

Income elasticity of demand can be positive or negative and they can be separate in to three degrees of income elasticity of demand, such as positive YED, negative YED and YED that equal to zero. Positive YED is when income elasticity is greater than 0 (YED > 0). Demand rises as income rises. It can further categorised into two types, such as income elastic (0 < YED <1) and income elastic (YED > 1). Income inelastic means if the quantity demanded rises by a smaller percentage then the rise in income, the goods is known as a normal good. For example, clothes, food and travel. Besides that, income elastic means if the quantity demanded rises by a larger percentage than rise in income, the good is known as a luxury good. For example, Designer clothes, branded watches, and luxury cars. It is mean that if the income elasticity of demand is positive but less than 1, demand is income inelastic. The percentage increase in the quantity demanded is positive but less than the percentage increase in income.

Not only that, YED also can be negative. If the YED is negative, demand falls as income rises. The good is known as inferior. The quantity demanded of an inferior good and the amount spent on it decrease when income increase. Example: low quantity goods, second-hand goods and bus travel. Most of the low-income consumers will buy most of these goods. Besides that, YED also can be equal to zero, the quantity demanded does not change as income changes. The good is known as a necessity. Example: rice, salt and toothpaste.

Question 6

Part A

The concept of consumer of consumer surplus is requires that we can make a clear distinction between a marginal and total utility. This will help us to understand and resolve a famous paradox box in the history of economic theory. Consumer surplus is the difference between the total value that consumers place on all the units consumed of some product and the payment they actually make to purchase that amount of the product. For example, suppose that you would be willing to pay as much as $100 per month for the two gallons of gourmet ice-cream that you now consume, rather than do without it. Further suppose that you actually buy those two gallons for only $40 instead of $100. You have to pay $600 less than the most of you were willing to pay. Actually, this sort of bargain occurs every day in the economy. Indeed, it is so common that the $600 “saved” in the example has been given a name; consumer surplus. Defining consumer surplus

For another example, suppose that Peter wanted a chair and it worth $100 and Joe is the one who owns it, values it at only $20. Joe agrees to sell it to Peter for $50.00. We have seen that the value Peter gets but than he does not pay for the amount that they have agreed before that, $50.00 in the situation.

Besides that, the definition of the producer surplus is the difference between the amount that a producer receives by selling a good and the lowest amount that producer is agree to accept for that good. The greater the difference between the two prices, the greater the benefit to the producer. On graph of supply and demand, the producer surplus is found above the supply curve and below the point at which the supply and demand curves intersect. For example, as the example above, there are $30.00 of value Joe gets because he sold something worth only $20.00 to him for $50.00? There is a surplus appear in this situation, and it is called producer surplus. Producer surplus appear when usual price exceeds the minimum price sellers will accept. Producer surplus is something that slightly same as profit, but usually it is a different form. For another example, usually the price of durian is $20.00 per kg. Then it rises to $30.00 per kg and it remains there. This higher price will need more land to produce durian, but this change if no importance here. Interest is what happens to the farmers who were producing durian at $20.00 per kg and now find that they can sell durian at $30.00. It certainly exists that these farmers are better off because the producer surplus of $10.00 per kg appeared that was not there before.

Price

Surplus consumer

Quantity

Part B

Production possibilities frontier is also known as (PPF). The definition of the (PPF) is a curve that compares the trade off between two goods produced by an economy in order to demonstrate the efficient use of resources. The points along the curve are regarded efficient and obtainable, and show the maximum amount of a good that can be produced in relation to another. Points inside the curve are regarded as obtainable but it is inefficient. Points outside the curve are considered impossible to obtain. For an example, economy that can produce either guns or butter, and shows how a government can spend a limited amount of resources on guns (defence), butter (non-defence) or a combination of the two.

There are three types of economic concept such as scarcity, opportunity cost and choice. Our inability to satisfy all our wants is called scarcity. All of the people will be facing the scarcity, no matter he is rich or poor. For an example, Ali wants to buy a book and it is cost for $15 and one box of pencil and it is cost for $2, but he only have $2 in his pocket. Now he is faces the scarcity. It will also happen on someone who is really rich. Besides that, Ali would have to choose one to buy because of the lack of money. He can only choose one and this have appear an economic concept call choice. Ali just can choose to buy a box of pencil rather than the book because he has not enough money.

Besides that, the definition of the opportunity cost is the benefit, profit or value of something that must be given up to acquire or achieve something else. Since every resource can be put to alternative uses, every action, choice, or decision has an associated opportunity cost. Opportunity costs are fundamental costs in economics.

The decision of the opportunity cost is based on what we have to give up due to the lack of money. Those decision that involve a choice between two or more option have an opportunity cost. In this century, it shows that the firm can produce two goods pencil and book, we can get a better idea of what choices they have for production. When the resources are used to their full potential they can produce 100 million pencils (point A) a year or they can produce 4 million pairs of books (point B). They just can chose either one of the good for their production and not both.

http://www.moneyinstructor.com/images/lesson/economics/ocpic1.jpg

The line that connects points A and B is called a production possibilities frontier (PPF).  It represents all of the possible combinations of production possibilities available to it. If the economy decides that it needs pencils and shoes it can choose to produce at any point along the production possibilities curve.  If they choose to produce at point C they are making a combination of let’s say shoes 3.5 million shoes and 50 million pencils. At this time, we have give up 50 million pencils.  Opportunity cost is always shows in terms of what we gave up in order to get something else.  In this case we gave up 50 million pencils so we could move some resources in to the production of shoes.