Determinants of price elasticity of supply

The first determinant of price elasticity of supply is the existence of spare capacity. If there is high unit of stock in a company, it is able to respond to the change in demand quickly by supplying the stock to the market without raising the price. Then, the supply will be elastic. As example, the stocks in warehouse. It can be supply to the market quickly when the demand changes.

The second determinants of price elasticity of supply is the length of the production period .The faster a good is to produce, the easier it will be to respond to a change in price. Supply in manufacturing is usually more price elastic than agriculture. As example, we produce toys by machines in efficient way .It is fast in producing goods compare to agriculture. Agriculture depends on weather and did not depend on machine much. That is why the price elasticity of supply of manufacturing is more elastic than agriculture.

Reference: http://tutor2u.net/economics/content/topics/elasticity/elasticity_of_supply.htm

Part B

The elasticity of price in supply will affects the price of goods and the output change in a market.Therefore, a business will consider using this concept to get the maximum profit. It is because this concept has few determinants which can maximize the profit. The elasticity of price is depends on customer because they are sensitive with the price of goods and therefore affects the quantity supplied of the good too. When the value of elasticity of supply is positive, it shown that an increase in price is likely to increase the quantity supplied to the market and vice versa.

An equation is use to determine the elasticity of the curve in supply, it is shown below:

Elasticity of supply = percentage change in quantity supplied / percentage change in price

elastic supply .jpg

Graph 1.1

The graph 1.1 shows the elastic supply curve. If a change of supply affects the changes of quantity supplied in a big amount, the supply curve will appears flatter and considered as elastic.Thus, the elasticity will be greater than one.

inelastic supply.jpg

Graph 1.2

The graph 1.2 shows the inelastic supply curve. If there is a big changes and only affects the small amount of quantity supplied, then the supply curve will appears steeper and considered as inelastic.Thus,the elasticity will be lesser than one.

For a business which does not want to have loss, a few significant factors are considered by the film in affecting the price elasticity of supply. First and foremost, the spare capacity of the film. If the company has ready stock, so no matter what changes in price, they are still able to produce the stock and increase the output for customers without raising the price. Then, the supply will be elastic.

Secondly, the factor is substitute of goods. The sudden demand from customers happens if there is lack of resources will cause the supply to increase rapidly too.Therefore,a company should ready a substitute good to make sure the changes of supply of goods will not decrease and at the same time without rising the cost.

Thirdly, the time period affects the price elasticity of supply. Supply is likely to be elastic; a longer period may help a film to adjust its production. If there’s a short run happens, the film will not able to get input immediately and produce good in a short period especially agriculture industries. The supply from agriculture industries is usually fixed due to the climate changes and the plan of planting at the period before supply.

Reference:

http://tutor2u.net/economics/content/topics/elasticity/elasticity_of_supply.htm

http://www.investopedia.com/university/economics/economics4.asp

Question 3

Part A

The factor that affects the supply of a product increases is expected future prices. If the price of a good is expected to fall, the return from selling the good in the future is lower than it is today.Therefore, the supply increases today and decreases in future.

Another factor of the supply of a product increases is the number of suppliers. The larger the number of firms produces a good; the greater is the supply of the good. As well as industry, when the firms enter an industry, the supply in that industry increases .When the firm leaves the industry, the supply in that industry decreases.

Technology is also the factor of increases the supply of a product. Positive technology is able to increase the supply .As example; a toy firm discovers a new technology in their industry for the following toys produced .Thus, the supply of toys increases as the technology used.

Part B

The price floors are the government or a big company to decide the lowest price that they can charge of a product. For a price floor to be effective, it must be greater than the equilibrium price.

To determine the effectiveness of price floor, a market price is set under the demand and supply curve which shown in graph 1.8.A price floor is set below the free market equilibrium price.

price floor.jpg

Graph 1.8

Graph 1.8 shows an ineffective price floor. This shows that there is no effect on price floor. It is because the market price doesn’t exceed the equilibrium price. As example, government has set the market price lower than equilibrium point, but the market has bears higher value.

price floor effective.jpg

Graph 1.9

Graph 1.9 shows an effective price floor. This shows that there is an effect on price floor. It is because the market price has exceeded the equilibrium price.So, there is an impact in the market. It ensures the product increases by the rises of price.

A price ceiling is defined as a government-imposed limit on the price charged for a product. It is set well by the government on the price of product to protect them from the condition of scarce.

Price ceiling can be set above or below the equilibrium price. To ensure the price ceiling to be effective, there will be a non-binding price ceiling which is above the equilibrium price. In this case, there will be no effect on the market. It is because the government has set a maximum market price but the market price is concluding below the market price which set by government. It is shown in graph 2.0.

price ceiling effective.jpg

Graph 2.0

If there is a binding price ceiling which is place below the equilibrium price, then the price ceiling for it is ineffective. There are many effects due to ineffective price ceiling. Supplier cannot get back what had they been.Thus; there are supplier drop out from the market and results the decreases of supply. It also affects the consumers’ choice. When the supply decreases, the quantity demanded increases. The two actions cause the demand exceeds the supply which causes the shortage of products.

Reference:

1) http://en.wikipedia.org/wiki/Price_ceiling

2) http://en.wikipedia.org/wiki/Price_floor

Question 5

Part A

A point on the demand curve shows the quantity demanded at a given price. Therefore, a movement along the demand curve shows a change in the quantity demanded.

If the price of a good changes but everything else remains the same, then there is a movement along the demand curve when the quantity demanded has changes. A shift in demand curve shows a change in demand.

The shift of demand curve is in the direction of left and right. A change in demand as a shift of the demand curve. As the price of good falls when everything else remains constant, there will be shift movement of the demand curve.Therefore; a decrease in demand is shift leftward of the curve. The graph 1.3 shows the decrease in demand:

demand curve.jpg

Graph1.3

There are a few of determinants of demand which will affect the market demand curve. They are:

The price of related goods (substitute and complement goods)

The future expectation

Number of buyers in the market

Income of customer

The shifting taste of the market

The price of related goods is between substitute and complement goods which affect the demand for a product. As example, if the price of orange falls in a certain season, then we will expect the customers to buy more orange in that certain period even though they used to buying kiwi.Thus,the kiwi industry will suffer due to the customers will rather buy orange than kiwi because of the low price.

Expectation to the future is also affecting the demand of product or service. As example, if we expect to earn more money in the future, we are likely to control of spending in the current time.Thus; it also means that we expect the price of petrol in the future will be increase if the market has a sudden high demand.

Next, the number of buyers in the market is also has effect on demand of product because the buyers of the market are manipulated variable for the production of goods. The price of the goods is dependent on the demand which is depending on these buyers.

As the customer’s income rises, the demand of their goods and services increase on normal goods and luxury goods. Besides that, when the customer’s income rises, the demand of their goods and services decreases but on inferior goods. The demands fall because the customers will rather buy better goods.

The shifting taste of the market will affect the demand of products too. For example, if we prefer Nike shoes than Adidas shoes, the demand for Nike will increase. As well as bags, if Prada bags weren’t as fashion as LV bags, eventually the demand for Prada bags will decrease.

The movement of demand curve is in the direction of up and down. A change in quantity demanded as a shift of the point on the demand curve. As the price of good rises when everything else remain constant, the quantity demanded of that good decreases, therefore there will be movement up the demand curve.Therefore,a decrease in quantity demanded is point move upwards on the demand curve. The graph 1.4 shows the decrease in quantity demanded:

quantity demand curve.jpg

Graph 1.4

Vice versa of the curve above due to the law of demand which states that as the price of good rises, the quantity demanded of the good falls.

Reference:

http://ezinearticles.com/?Determinants-of-Demand&id=884585

Part B

Income elasticity of demand means the responsiveness of the demand for a good to the change in the income of the people. It is also defined as the ratio of the percentage change in quantity demanded to the percentage change in income.

There are 3 degrees for income elasticity of demand (YED) which is the value of YED are in positive (YED>1), positive (0<YED<1) and negative (YED<0).

Positive YED is when its value is greater than 1 (YED>1) or greater than 0 but less than 1(0<YED<1).It means when the income rises, the demand rises too. For YED>1, as income increases, the quantity of demanded good increases faster than income.Thus, the demand for the good above is income elastic. The goods for this category usually are luxury goods. As example, jewellary, branded cars and branded clothes.

For 0<YED<1, it is also quantity demanded increases as income increases, but income increases faster than the quantity demanded.Thus, the demand for the good is income elastic. The goods for this category usually are normal goods. As example, food, clothing and newspaper.

The third degree for YED is negative. The YED value is less than zero. The quantity demanded decreases as the income increases. Goods in this category are called inferior goods. As example, cigarette, bus service and low quality products.