Determinants In Price Elasticity Of Supply Economics Essay

(Geoff Riley et al. 2006) There are determinants in price elasticity of supply. One of the determinants is time period. In time period, it is divided into short run and long run. Short run is meant by a period of time short enough so that the quantity of one or more factors of production used to produce a specific good cannot be changed. The place capacity of individual producers and of the industry is assumed unchanged. Therefore, the short run is a stage of time that is too short to let the quantities of all the phenomena of the production to be changed. For example, the supply in apples is shown by Ss in Figure 2.1. The rise in demand is met through a bigger quantity changes (Q1 to Q2) and a smaller price changes (P1 to P2) than in the market period; price is as a result smaller than in the market period. The long run means that a period of time that all the necessary changes to phenomena of production is available. Therefore, all phenomena are variable in long run. For example, in apples industry, the individual farmer can use new equipment. Then, more farmers may be interested to apples production by rising up the demand and raise the price of apples. These changes mean an even bigger supply response; that means the supply curve SL is more elastic. The lower price that causes the price (P0 to P1) but the bigger result (Q0 to Q1) in response to the determined increase in demand. This is shown in Figure 2.2.

Next, another determinant is degree of substitutability. The producer will be interested to produce more of the goods when the price of the goods increases. The superior the degree of the substitutability factors of production process of one good and the production processes of other goods, the greater the elasticity of supply of that good. For example, field that is able to produce paddy can be use easily when the price of rice increases. The greater the substitutability of field and paddy will increase the quantity of paddy supplied in response to any given increases in price.

Part B

There are ways of strategy for a business to decide on their pricing strategy by using the concept price elasticity. The first way is the pricing of the substitute goods. If the other producer decrease the price of their product, the firm will used the cross-price elasticity of demand to determine the quantity demanded of the product and the total revenue the firm will obtain. For example, two company selling hotdog as their manufactured goods. In order to attract more customers, the two companies are competing to reduce their price in order to attract more customers. Meanwhile, businesses normally use pricing plan for complementary goods to come to a decision on their product price. For example, tire and cars are strongly complements good. So, elasticity will definitely have a negative value. In addition, marketing and advertising is one of the strategies for businesses to make a decision on their product price. In highly viable markets where luxury goods carry widespread value, many businesses spend large amounts of money every year on persuasive marketing and advertising. This reduce the amount of the substitution result following a price change and makes demand less reactive to price. The effect is that firms could be able to increase the price of the product. Meanwhile, raise their total revenue and turn consumer surplus into higher earnings.

Relation between two complement goods

Price of Good N

An increase in the price of good N will lead to decrease in

P2 demand for good M

P1

Demand for Good M

Quantity

0 Q2 Q1

Relation between two substitute goods

Price of Good B

Demand for Good A

P2

P1 An increase in the price of good B will

leads to the increase of good A

Quantity

0 Q1 Q2

Question 3

One of the reasons about why supply of a product increases is improvement in technology. When the technology is advance, the firms might be able to produce more units of production with lesser capital. The firms are able to produce more output or fasten the period of production in order to maximize their profit. For example, the vehicle company, when the company introduce in the latest technology of machine, the company can increase the output of units or shorten the time period of producing the outputs. Therefore, with the help of technology, the producers are able to maximize their supply in order to maximize their profit too.

Secondly, supply of product might increase when the producers make expectation about prices of their products might increase in the future. When they expect their price of goods will increase in the future, the producers might increase their goods in either output or price in order to maximize their profit. For example, when the expectation in increasing of price of goods is made by the firm’s economist, the producers will increase their supply so that they can achieve more profit during the harvest period.

Thirdly, the change in prices of other goods might increase the supply of either one goods. Let’s assume that goods A and goods B are substitution goods. When price of goods A increase, the demand of goods B will increase, nevertheless, this will also lead to a increase in supply of goods B because the quantity demanded for goods B had increased. Therefore, the producer can maximize their profit in supplying more goods B to the industry that might decrease the price of goods B again.

Figure 3.1

Price

S

P1

P0

S0 S1

Quantity supplied

The figure 3.1 above shows that the increase in price of goods will lead to a rise in product supplied to the firm.

Price

S0 S1 Figure 3.2

Quantity supplied

The figure 3.2 above shows that the increase in supply whereby one of the determinants of supply changes.

Lastly, to sum up everything, the higher the price of the goods, the more the producers would supply it. This is because the more the quantity they supplied, the more the profit they gain. The graph of supply curve is always upward sloping curve.

Part B

( Campbell R. McConnell et al. 2009 ) stated that the price floors is meant by it is a minimum price given by the government and it is use to help the producers. Effective price floors lead to unrelenting product surpluses; the government must either buy the product or abolish the surplus by having presence of restrictions on production or rising up the private demand. Then the price ceiling is defined as the maximum price given by the government and is use to help the consumers. Effectual price ceilings make the product shortage under control and if an evenhanded allocation of the good is required, the government must quota the goods to purchasers. Next, both of this price floors and ceilings are meant by the economists to prevent the equalization of the competitive market and to eradicate surpluses and shortages through differences in prices and also prevent it from giving an false on distribution of resources.

Question 5

( Jonathan Kwok CY 1991) Differences between demand and quantity demanded. Demand is define as the willingness and ability of a purchaser to purchase a good at a specific price. Moreover, the demand curve might be changing when one of the determinants of demand distorted. Examples of determinants of demand are income of the consumers, taste and preference of the consumers, expectation of the future price and prices of other goods. As a result, when the demand curve shifts leftward, this is meant that the demand had decreased. The law of demand stated that, when the demand decreases, the demand curve will shift leftward. And when the price of a good increase, the demand curve will move upwards. Next, the factors of movement and shifting in demand curve. One of the determinants, expectation of the future price. When there is some expectation about the price of Toshiba Computer will fall in the coming month, the consumers will delay to buy until the price fall. This shows that, the demand for the present month will fall when there is an expectation about falling in price of a good next month. The figure 5.1 below shows the change in demand curve about determinants of expectation of the future price value. Shifting from D0 to D1.

Figure 5.1

Price of Toshiba Computer

D0

D1

Quantity of Toshiba Computer

Besides, another determinant is the taste and fashion, also known as the preference. Let’s assume that the fashion of shoes this month is Nike, automatically the demand of substitute good, Adidas, will decrease. When the demand of Adidas shoes decreased, the demand curve of Adidas shoes will shift leftward from D0 to D1. The figure 5.2 below shows the demand curve of Adidas shoes.

Figure 5.2

Price of Adidas Shoes

D0

D1

Quantity of Adidas Shoes

Next, the quantity demanded. The difference between the demand and quantity demanded is quantity demanded is able to be altered through price of the good itself. Besides, the changes for quantity demanded is movement along the demand curve in either moving upward or downward. For example, when the price of Iphone 3Gs increased from RM1800 to RM 2000, the quantity demanded of Iphone 3Gs will decreased from 200 to 150 and will result in moving upward along the demand curve. The figure 5.3 below shows that the increasing in price of Iphone 3Gs will result in decreasing in quantity demanded of Iphone 3Gs.

Figure 5.3

Price of Iphone 3Gs (RM)

2000 B

1800 A

D

150 200

Quantity Demanded of Iphone 3Gs

Part B

Income elasticity of demand is defined as the proportion change in quantity demanded response to a percentage change in income. Then, the degree of income elasticity of demand in separated into three types of degrees. Firstly, the income elasticity of demand is accurately zero (YED = 0 ), in this case, the goods are known as the necessity goods. This is meant, no matter how the income revolutionizes, the quantity demanded for necessity goods will not be affected. Examples of necessity goods are shampoo, tables, cooking utensils, rice, sugar and etc.

Next, the inferior goods are the goods when income elasticity of demand is lower than 0, the negatives, (YED < 0 ). It is meant that when the household income rises, the demand are still falling. Examples of inferior goods are secondhand cars, photocopied text book or things that are lower in quality.

Moreover, when the income elasticity of demand is positive, the elasticity is greater than 0 (YED > 0). And it is divided into two more types, income inelastic and income elastic. In income inelastic (0<YED<1), the percentage changes in quantity demanded and percentage changes in the increase in income is slightly different. Which mean percentage in quantity demanded increased less than percentage increased in household’s income. In this case, the goods are called normal goods. Examples of normal goods would be begs, mobile phones, books or shoes. In income inelastic, the normal goods are not that responsive to the changes in quantity demanded of the goods.

Then, the income elastic, which income elasticity of demand is positive and bigger than 1 (YED > 1) whereby the quantity demanded increases more than the rise in income. The goods in this category is known as luxury goods. For example, the luxury goods are branded items and expensive goods.

Question 6 Part A

A consumer surplus means that the differences between the willingness of the customers to pay at the utmost price of the product and the price that the customer actually pay for the product. Figure 6.1 shows Anthony’s demand curve for Pepsi. Anthony will buy 3 cups of Pepsi if the price of the Pepsi is $4.00 per cup. So, if the price of a Pepsi is fall to $3.00 per cup, Anthony will buy 4 cups per weeks. So, the extra consuming by Anthony is known as marginal benefit. The difference between the maximum price a customer satisfying to pay and the price the customer actually pay are known as consumer surplus. The demand curve shows that the willingness of the customer to pay for the goods at different prices. This is shown in Figure 6.1.

Price of a Pepsi (per cup) $

8.00

4.00

Figure 6.1

3.00

Demand

Quantity (cups per week)

0 3 4

Producer surplus means that the price the suppliers willing to obtain compare to the amount that the suppliers actually receive. Marginal cost is known as the extra profits to a company to supply more item of a good or service. For instance, F&N is willing to supply 50 cans of 100Plus at the price of $3.00 per can, so the 50th cans must have a marginal cost of $3.00. Besides, the F&N is willing to supply 40 cans of 100Plus at the price of $2.50 per can. So, the marginal cost for 40th cans is $2.50. This $0.50 is the producer surplus on each can of 100Plus. So, the region above the market supply curve is same to the sum amount of producer surplus in a market. This is shown in Figure 6.2.

Price of 100Plus (per can)

3.00 Supply

2.50

Figure 6.2

Quantity (cups per week)

0 40 50

Part B

(Statemaster, 2010) Scarcity, choice and opportunity cost are the three economic concepts. Scarcity occurs because consumers have boundless needs but only limited resources that obtainable to convince those needs. Goods and services are known as scare too. Moreover, factors of production such as natural resources, workers, capital, and industrial activity or economics resources are used to make them. Time is also known as scare. The problem will resolve if the choice are made by the consumers. The solving of an economic problem gives increase to a benefit and a cost. Opportunity cost is the choices that are given up when one act is taken. For instance, a bakery produces tart and cookies to sell to the costumers every day. But he only willing produces 800 tarts if he produces none of a cookie. But if he produces 700 of tarts, then he willing to produces 100 of cookies. So, the opportunity cost is 100 pieces of tarts. If he bakes 300 pieces of tarts then the opportunity cost for cookies is 300. This is as shown in Figure 6.2.

Quantity of tarts

800

700

300 Figure 6.2

Quantity of cookies

0 100 400 800

Referencing

Campbell R. McConnell, Stanley L. Brue, Sean M.Flynn, 2009, Economics 18th edition, McGraw-Hill, New York.

Geoff Riley, Eton College, September 2006, AS Markets & Market Systems, online, retrieved 17 May 2010, http://tutor2u.net/economics/revision-notes/as-markets-price-elasticity-of-supply.html.

Jonathan Kwok CY, 1991, Difference between change in demand and quantity demand?, online, retrieved 16 May 2010, http://wiki.answers.com/Q/Difference_between_change_in_demand_and_quantity_demand.

Geoff Riley, Eton College, September 2006, Consumer & Producer Surplus, online, retrieved 18 May 2010, http://tutor2u.net/economics/revision-notes/a2-micro-consumer-producer-surplus.html.

Statemaster, 2010, Production possibility frontier, online, retrieved on 17 May 2010, from http://www.statemaster.com/encyclopedia/Production-possibility-frontier.