The price elasticity of demand ad supply

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INTRODUCTION

The principle of elasticity help to understand how the market works . Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. Sometimes a business needs to have a good idea of what part of a demand curve looks like if it is to make good decisions. Suppose you are the owner of Rick's Pizza .You are considering raising the prices by ten percent, and you wonder how the consumers will react and what will happen to the revenues? The answer depends on how consumers will respond. Will they cut back purchases a little or a lot? (Robert Schenk, 2007).

In my opinion I think it's very important to determine the price elasticity of demand. It help us to understand the market more clearly and also make more precisely and efficient pricing decisions in given time of period.

PRICE ELASTICITY OF DEMAND

Price elasticity of demand measures the effect of price changes on  quantity demanded. People will buy more goods at a lower prices and buy less goods at a higher prices. For example, people might buy several pairs or several packages of socks on sale instead of just a pair. A person with a higher income is thought to have higher price elasticity, since he can afford to spend more. However, even a consumer with low price elasticity is usually willing to pay higher prices if there is a high demand of goods. .( Tricia Ellis-Christensen and O. Wallace, 2010).

Demand remains constant in spite of high prices in the condition of no substitute. It's also true for gasoline and water which have a few or no substitutes. demand was thus considered inelastic . Usually, competition in the marketplace keeps prices lower and more flexible. Generic equivalents of certain items have lowered the demand for brand name items, thus lowering their price. .( Tricia Ellis-Christensen and O. Wallace, 2010).

Elasticity of demand can be quantified and be illustrated in a formula:

Elasticity of demand

The more sensitive customers are to price, the larger in the price elasticity of demand. In other words, a larger price elasticity of demand indicates a product whose demand is more elastic. In the short term demand is usually more inelastic because it takes time to find alternatives. The price elasticity of demand will be used to calculate selling price that maximizes the profits of the company.

+ Demand is elastic if a change in price leads to a bigger % change in demand, the price elasticity of demand will therefore be greater than 1.

The following characteristics of goods which are elastic tend to have

They are luxury goods

They are expensive and a big percentage of income .For example, sports cars and holidays

Goods with many substitutes and a very competitive market. For example if Simsbury's put up the price of its bread there are many alternatives, so people would be very sensitive to the price

They are bought frequently

+ Demand is inelastic if a change in price leads to a smaller % change in demand; the price elasticity of demand will therefore be less than 1.

Goods which are inelastic tend to have some or all of the following features:

They have few or no close substitutes, for example: petrol, cigarettes.

They are necessities

They are addictive

They cost a small percentage of income or are bought infrequently

Demand is unitary elastic if a change in price have no effect to a change in demand; the price elasticity of demand will equal 1.( Tricia Ellis-Christensen and O. Wallace, 2010).

There are many factor influencing the price elasticity of demand :

1. Number of close substitutes within the market: The more (and closer) possible substitutes available in the market the more elastic demand will be in response to a change in price. In this case, the substitution effect will be quite strong.

2. Degree of luxuries or necessities: luxury goods and services tend to have greater elasticity whereas necessities tend to be more inelastic.

3. Percentage of income spent on a good : products requiring a larger portion of the consumer's income tend to have greater elasticity.

4. Habit forming goods - Goods such as cigarettes and drugs tend to be inelastic in demand. They have habitually consumed and have a little effect on the price changes.

5. Time period under consideration - Demand tends to be more elastic in the long run because consumers have more time to adjust their behavior to the price changes (2007).

PRICE ELASTICITY OF SUPPLY

Price elasticity of supply measures the effect of price changes on  quantity supplied. People will offer more goods at a higher prices and offer more goods at a lower prices.

The formula for the price elasticity of supply is:

Elasticity of supply = Percentage change in quantity supplied / Percentage change in price (Mike Moffatt, 2009).

Factors that Affect Price Elasticity of Supply:

+ Spare production capacity

If there is plenty of spare capacity then a business should be able to increase its output without a rise in costs and therefore supply will be elastic in response to a change in demand. The supply of goods and services is often most elastic in a recession, when there is plenty of spare labour and capital resources available to step up output as the economy recovers.

+ Stocks of finished products and components

If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand quickly by supplying these stocks onto the market - supply will be elastic and vice versa.

+ The ease and cost of factor substitution

If both capital and labour resources are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily and quickly be switched

+ Time period involved in the production process

Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels (2007).

MARKETS AND ADJUSTMENT OVER TIME

Price expectations and speculation:

Look at two graphs above, we can see that prices always change, they do not stay at the same. They can go up or come down. Due to prices tend to change in the future, it will affect on the demand and supply now. For example, it is now, iPhone 3GS have just appear, you are thinking of buying a new iPhone 3GS, you might to decide to wait until the price of iPhone 3GS fall slightly when iPhone 4G is sold on the market. On the other hand, if the price of iPhone 3GS come down in the short run, you might well buy it now because they fear that the price will have gone up by then. When people believe that the price will go up, it causes them to buy now, in contrast, when people believe that the price will come down, it causes them to wait. For seller, if they are thinking of selling their stocks, while prices are falling, they will want to sell it as soon as possible. On the other hand, if prices are rising gradually, they will want to keep it as long as possible in order to get the best price. Thus a belief that the price will go up or come down will cause people to sell or wait. Speculation is the behavior of looking into price in the future and affecting buying and selling decisions based on their anticipations. Speculation is applied in many markets such as the stock exchange, the foreign exchange market, the gold market and the housing market, ect.

According to John Sloman, speculation can either support to reduce price fluctuations or make them get worse: it can be stabilizing or destabilizing.

Stabilizing speculation:

When suppliers and demanders believe that a change in price occurs only in short run, speculation wil tend to have a stabilizing effect on price fluctuations.

For instance, an increase in demand is the reason why price rise. In the graph above, demand has shifted from D1 to D2. Equilibrium has moved from point a to b, price has increased from P1 to P2. People believe that price will rise just in temporary, before price fall again, suppliers bring their goods to market now. Thus shifts from S1 to S2. In contrast, demanders will wait until price does fall again. Demand shifts from D2 to D3. The equilibrium moves to point c, and price falling to P3. (Sloman 2007, p69)

Destabilizing speculation:

When suppliers and demanders believe that a change in price expectations similar changes to come, speculation will tend to have a destabilizing effect on price fluctuations.

For example, an increase in demand is the reason why the price does rise. In the graph, demand curve has moved from D1 to D2, price has risen from P1 to P2. In this time, price have tend to rise, suppliers want to wait until the price rise further. Thus, supply moves from S1 to S2. In contrast with suppliers, demanders buy now before a rise in price is higher. Demand move from D2 to D3 and price rise to P3. (Sloman 2007, p69)

MARKETS WHERE PRICES ARE CONTROLLED

Equilibrium means a state fair or a state of balance between market demand and supply. Without a change in demand and / or would provide no change in market value. In the diagram above, demand and supply at price P1 is equal. At any price above P1, supply exceeds demand and at a price below P1, demand exceeded supply. In other words, the price where supply and demand are out of balance points is called disequilibrium. (Jacks,John,2007, p57)

Changes in the conditions of demand or supply changes on demand or supply curves . This will cause changes in the equilibrium price and quantity in the market

Price floor is a legal minimum on the price at which a good can be sold.

Price ceiling is a legal maximum on the price at which a good can be sold.

Minimum Price ( Price floor):

An ineffective price floor, below equilibrium price. A price floor can be set above the free-market equilibrium price. In the graph above, price floor set below the free-market price. In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears a higher price.

An effective price floor, causing a surplus (supply exceeds demand). Conversely, in the graph Monday, dashed green line represents a price floor placed on the free market price. In this case, the floor price is a measurable impact on the market. It sure prices stay high for the product can continue to be made. (Jackson, John, 2007, p84)

Effect on the market

A price floor set above the equilibrium price the market has some side effects. Consumers now find they must pay higher prices for the same product. The result, they reduce their purchases or drop out of the market completely.

Meanwhile, vendors are sure to find a new higher price before they were charged. As a result, they increase production. Taken together, these effects mean there is now an excess supply (known as a surplus) of the product in the market.

To maintain the price floor over the long term, the government may need to take action to remove it.

Minimum wage

A historical and current example of the floor price is the minimum wage law, the law specifies the lowest wages a company can pay an employee (employees are suppliers of labor and company as a consumer ).

When the minimum wage is set higher than the equilibrium market price for unskilled labor, unemployment is created because many people are looking for jobs than there are jobs available.

A minimum wage above the equilibrium wage will cause employers hired fewer workers as well as causing more people to enter the labor market, resulting in a surplus in the amount of labor available. Workers a wage equilibrium will depend on the employee's skills with market conditions. (Robert 2006, p262)

For example: This is common in agriculture. Often the government wants to maintain high prices of agricultural commodities to keep a large number of farmers working. To limit redundancy, however, governments often must pay some farmers not to plant crops, which may be known as a subsidy check.

Maximum Price (Price ceiling):

A price ceiling set below the market price of freedom is more effective. Providers find they can not be responsible for what they were. As a result, some suppliers drop out of the market. This reduced supply. Meanwhile, consumers find they can now buy products for less, so demand increases. Two causes of action exceed the supply demand, which causes a lack of distribution-unless the consumer or other controls are enforced. It can also lead to other forms of non price competition to supply can meet demand. (Jackson, John, 2007, p83)

Reduced Quality

To supply demand in lawful rates, the most obvious approach is lower cost. However, in most cases, lower costs mean lower quality. During World War II, for example, the food operation by reducing the size of the ceiling and used cheaper materials (e.g., fat, flour, etc.). It can also be seen in the maintenance of reduction of rent-controlled apartment

Some scholars, however, suspect that one set price ceilings drive quality down in case of a monopoly. They argue that with few competing companies lower the ceiling, a company's low-end market must find ways to achieve better quality without increasing cost.

Black Market

Goods purchased illegally take one of two rates:

They may be cheaper than the legal market. Suppliers do not have to pay for production costs or taxes. This is usually the case in the underground economy. Criminals to steal goods and sell them under the legal market price, but no receipts, guarantees, and so on .

They may be more expensive than legal market prices. This product is difficult to obtain or produce, dangerous to handle or not easily available legally, if at all. If goods are illegal, such as certain drugs, their prices can be vastly higher production costs.

Black markets can form part of the commercial border near the border of neighboring jurisdictions border control with little or negligible if there are different tax rates, or in cases where goods are measures on one side of the border but not on others. Products like these are often smuggled, including alcohol and tobacco. However, all border trade is not illegal. (Jackson, John, 2007, p84)

CAUSE THE REAL ESTATE MARKET OF VIET NAM

As we know, each country's population is increasing. In Viet Nam, the annual population increase of about 1,1 million people. While land resources are limited. Therefore, the demand of real estate market is increasing and people need to find a comfortable accommodation, modern infrastructure and peaceful living environment. This is main reason to effect of real estate Market in Viet Nam. Typical is the key issue of real estate market in Ho Chi Minh city and we are going to find out the reasons.

Price Expectation and Destabilizing speculation

The reasons stated on the description of the real estate should be investors expect the price is always increasing in the future so they want to wait the best price and best profit. This is the reason to make of the fever in real estate from 2007 to 2009.

What cause " Fever"

There are three basic cause leading fever in real estate market.

First, Viet Nam's population increased about 1,1 million people and income of almost people to high accelerated and to make demand of house to increase.

Second, at the stock market. Stock price Index after date of 6 August 2007 was 883,9 point and to rise considerably over 1,100 point on 3 October 2007 so investors has boosted sales and many investment funds have been profit for over a month. Then they were intended to move capital investment into real estate market.

Last of all, housing policies for overseas Vietnamese and foreigners were committed more open and almost of banks create were opportunity of borrows in real estate for investment. (vnEconomy 2007)

As a result, there were strong speculations for investment or supplier in real estate since 2007.

"The fact that, land and house in urban areas like The Manor and Phu My Hung are rising "fever" and " burning in". Owner or investors, who still need a great bought. The person who living The Manor said, types of apartments from 106-206 m2, guests were wanted. This type of apartment sale price had increased by 50%-60% up from 1000 USD/m2 to 1,650 USD/m2" (VnEconomy 2007)

With the fact just mentioned, the real estate is always unstable and tends to go up strong demand and supply support to each other.

Dealing with uncertainly and risk

Because almost of Banks have easy loans in real estate from 2007 to 2008. Therefore, it made the State Bank of Viet Nam has issued directives 10259/ NHNN- CSTT to limited inflation on the real estate market and credit lenders and starting implementation since 2008(sbv.gov. nd)

Moreover, total capital investment banks in real estate in 2009, was approximately 166,500 billion VND to nearly 9, 10 billion USD ( 18,279 VND exchange rate/ USD) Ho Chi Minh city has about 51% the property outstanding and Ha Noi capital has about 15%.That is the reasons the government made the decision to deal with uncertainty and risk when the real estate is in the fever period( Doanh nhan 360, 2009)

In we view of real estate market is huge profit and market opportunity for participle investors. So it has created a wave of speculation and price expectation of speculator. Besides that, the factors of population growth . There are ease for banks' loan in real estate market and housing policy for overseas Vietnamese and foreigners have formed a new market supply and demand price in the property market in Viet Nam today.

CONCLUSION

Elasticity refers to the reaction or response of the consumers to change in prices of goods and services. Elasticity of demand also may depend on the relative change in quantity and price. Buyers may tend to reduce their purchases as price increases, and tend to increase their purchases when price decreases. The change in price is not the only factor that may change the reaction of consumers. The nature of the product (similarity to what he uses) and the particular needs of the consumer (whether important or not) may also affect the change in the reaction or response of consumer. Demand may be elastic or inelastic. Demand is likely to be elastic when: want is not urgent, close substitutes are available, goods is durable or repairable, goods has multiple uses. On the other hand, demand is likely to be inelastic when: want is urgent, good substitutes are unavailable, wanted jointly with some complementary item. (Anna C. Bocar, 2008)

The price elasticity of supply reflects the law of supply relation between price and quantity. An elastic supply means that the quantity supplied is relatively responsive to changes in price. An inelastic supply means that the quantity supplied is not very responsive to changes in price.

According to the law of supply, higher supply prices are related to larger quantities supplied. As such, the numerator and denominator of this formula always have the same signs--if one is positive, the other is also positive. If the supply price increases and the percentage change in price is positive, then the quantity supplied increases and the percentage change in quantity supplied is also positive. When calculated, the price elasticity of supply, therefore, is always positive. There are four main factors that influence the PES: Spare production capacity, Stocks of finished products and components, The ease and cost of factor substitution, Time period involved in the production process. (Pepijn van Eck, 2009)

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