Examine The Price Elasticity Of Supply Economics Essay

Price elasticity of supply defined as a measure of responsiveness of a good quantity supplied to change the price of the good. The price elasticity of supply was the percentage change in quantity supplied of a good divided by the percentage changed in the price of that good, everything else remains constant.

Price elasticity of supply = Percentage change in quantity supplied

Percentage change in price

The price elasticity of supply was likely to be a positive number because the quantity supplied will rise when the price rises. When percentage change in quantity supplied was more than percentage change in price, it was said to be elastic supply which is the price elasticity of supply greater than 1. When percentage change in quantity supplied was less than percentage change in price, it was said to be inelastic supply which is the price elasticity of supply smaller than 1. When percentage change in quantity supplied was equal to the percentage change in price, it was said to be unitary elastic supply which is the price elasticity of supply equal to 1. There were some types of goods for which supply cannot increase whatever the price is offered. For this type of good, the price elasticity of supply is zero and name as perfectly inelastic supply. There were some special types of goods for which supply cannot change no matter the length of time allowed for change. For examples, the supply of tickets for musical location or sport, and the short run supply of agricultural goods. On the other hand, perfectly elastic supply shows that some goods for which quantity supplied was unrestricted at the given price; an extremely small price change would lead to an infinite change in quantity supplied. For instance, during past century, the production of food had raise terrifically while the price remained same.

There were two issues that influence the arithmetical value of the price elasticity of supply. One of the issues was the availability of substitutes. The simplicity with which sellers can found substitutes of production will affects the price elasticity of supply. The common rule was the greater availability of substitutes of that goods were more sensitive to the changes in price. Sellers can simply respond to price changes with more substitutes available. For instance, the production of Subway Sandwiches. This sandwich had lots of very strict substitutes because the resources used for sandwich can be switch among the disparate goods with ease. The man who slices tomatoes for Subway Sandwiches can easily switch to sell waffle at the stadium. The amount of available substitutes creates the price elasticity of supply tremendously elastic. Another issue was time period of analysis. The time period of analysis longer, the more responsiveness quantities were to price changes. Sellers will not enough time to alter the judgment of production to price changes if the short time period was given. Time is needed for sellers to find the resources used in production of the goods. If a longer time periods allowed, sellers had enough time to make choice. For instance, the supply of the luxurious car was not very elastic for a short period. The resources used in production cannot easily change to other goods. Conversely, enough time given such as a year or more, resources can move among the production, consequence a more elastic supply.

PART B

Price elasticity of demand indicates measures of the responsiveness of quantity demanded of a good to change in price with all other factors held constant. As the price of good rises, the quantity demanded of good will decrease and vice versa. The price elasticity of demand, PED, is the percentage change in quantity demanded over the percentage change in price. If price elasticity of demand less than one, it is inelastic demand. That means consumers are less responsiveness to a change in price. For instance, a 30% decrease in price will only lead 15% rise in quantity demanded. Besides, in inelastic demand, when price increase, total revenue (TR) also will increase. (TR = P x Q). For example, if price increase by 15% and quantity sold decrease less than 15%, as a result, total revenue will rise. For unitary elastic demand, the price elasticity of demand is equals to one. For example, a 15% decrease in price will lead also 15% rise in quantity demanded. While if price increase by 15% and quantity sold decrease by 15%, total revenue will remain unchanged. Elastic demand is where the price elasticity of demand greater than one. In this condition, consumers are very responsiveness to a change in price. For instance, a 20% decrease in price will lead to 30% rise in quantity demanded. Furthermore, in elastic demand, when price increase by 15% and quantity sold decrease more than 15%, as a result, total revenue will falls. For example, every 1% increase in price on Thailand airline ticket, the quantity of ticket demanded will decline 2.5%. If a Thailand trip airline ticket was RM350 at past and the quantity of ticket demanded is 1500per day. Nowadays the price of airline ticket is increase 10% and the airline ticket price is RM385. In this case, the quantity of ticket demanded also decline by 25%. The quantity of ticket demanded decrease from 1500 per day to 1125 per day. Thus, the total revenue also decreases from RM525, 000.00 to RM433, 125.00. In conclusion, price elasticity of demand of product is in elastic region, supplier have to decrease the price of production in order to increase the total revenue. In addition, the price at unitary demand can be taken as a selling price to maximize the total revenue.

Cross price elasticity of demand measures the responsiveness of demand of a product to a change in price in another product with others factors held constant. Cross price elasticity of demand also define as the percentage change in quantity of good A demanded divided by the percentage change in price of good B. If cross price elasticity of demand greater than zero, the goods are categories as substitutes goods. For example, if a 1% increase in price of coca-cola leads 3% increase in quantity of 100plus, thus coca-cola and 100plus are substitutes. If cross price elasticity of demand less than zero, the goods are complements. For example, if a 1% decrease in price of cornflakes leads 3% increase of milk, thus cornflakes and milk are complements. If cross price elasticity of demand equals to zero, that means both of the goods are not related. The result is that company could be capable to charge a higher price, raise their profit and turn consumer surplus into higher income.

Question3

PART A

Firstly, supply of product increase when the cost of production falls. Lower cost of production means that at each price, a business can supply more compare to high cost of production. Besides, a business will make more profit when cost of production is low. Thus, supply will increase in order for a business to earn more profit.

Secondly, change in production technology also will vast impact on supply to increase. This is because technology can process more rapidly comparing to artificial, so the different between the supplies by technology and artificial is in evidence. For instance, in agriculture, a harvester use to crops the yield has increase the harvest of yield by 70% compare to previous which is harvest by artificial.

Thirdly, the quantity of supply of production also affected by the price of related products. For example, a farmer has plat two types of vegetables in his land which are tomato and cabbage. Nowadays, the market price of tomato is rise. An increase in price of tomato may cause the farmer to shift acreage out of cabbage production into tomato production. With this, an increase in tomato price leads an increase in supply of tomato.

Price

S0 S1

0 Quantity

PART B

Price floor is a minimum selling price and the price is not suppose to fall because it is a lowest price limit set up by government. For an efficient price floor, the price has to more than equilibrium price. There is a surplus or quantity supplied more than quantity demanded when price floor is above the equilibrium price. Minimum wage is one of the example of price floor, it is the floor set for the price of labor. Under federal law, the wages that employers pay for employees are not allowed to be less than RM50 per day. Since the minimum wage is above equilibrium, it will cause a lot of unemployment. At the wage of RM50, the quantity of employers is less than employees. Thus, when a price floor is set above equilibrium, there will be an excess supply.

Price ceiling is a maximum selling price and occurs when government set a highest limit of price of a product can be sold. For an efficient price ceiling, the price has to less than the equilibrium price. There is a shortage or quantity supplied less than quantity demanded when price floor is set below the equilibrium price. Inefficiency occurs when quantity supplied the marginal benefit more than the marginal cost at price ceiling. If a price ceiling is set, there are some ways to allocate the low supply. One of the ways is lottery which is a situation whose success or result is based on luck. Second way is black market which is an illegal form of trade in which for foreign money that are difficult to obtain. Third way is historical use which is sometimes government will give permission for historical consumers to continue consuming. The low supply will even leave some of historical consumers wanting.

Question 5

PART A

Demand is the quantity of a product that people are willing and able to buy at each price during a given time period. But, quantity demanded is the quantity of a product that people are willing and able to buy at a fixed price. Change in demand is affected by factor other than price of the product itself such as expectation, taste or preference and price of other products. For instance, when decrease in preference, it also will cause decrease in demand. For example, the consumers now are buying less hamburgers causing the demand curve to shift leftward. Besides, if a product expects its prices will fall in future, demand today also decrease. While change in quantity demanded is affected by only one factor which is the price of product itself. For example, when price of product decreases, the quantity demanded also decrease. There are different factor that affects the change in demand and the change in quantity demanded. Moreover, there is also different movement of demand curve when a change in demand and a change in quantity demanded. When a decrease in demand, the demand curve will shift leftward from D0 to D1 as shown in figure 1. When a decrease in quantity demanded, there is an upwards movement along the demand curve from A to B as shown in figure 2. When the price of an orange increase from RM2 to RM3, the quantity demanded will move from Q0 to Q1. This will cause the curve to move upward.

Price of a hamburger

D1 D0

Quantity demanded of hamburger

Figure 1

Price of a orange / RM

Demand

3 B

2 A

Quantity demanded of orange

Q1 Q0

Figure 2

PART B

Income Elasticity of demand is the responsiveness of demand to a change in incomes and the calculation for income elasticity of demand is the percentage change in quantity demanded divide by the percentage change in income.

Income elasticity of demand = the percentage change in quantity demanded

The percentage change in income

Normal goods are goods which income elasticity of demand is greater than zero (positive). It states that increase in income will leads to increase the demand of good. While the goods which income elasticity of demand is greater than 1 is considered as luxury goods. For instance, this year, Jane’s salary has 20% increases compare with the salary of previous years which is RM60, 000.00. Therefore, Jane’s able to air travel twice per year rather than once per year as previous. In this case, the income price elasticity of demand of Jane’s is 5 which is very high elastic, so it is considered as luxury good. Moreover, when income elasticity of demand less than zero (negative), the goods is inferior goods. For example, if income of consumers increases, most of them will reject inferior goods. This is because some of them think that inferior goods such as second hand shirts are for the people, who have low level of income, so when their income rise, they will give up the inferior goods and find the high quality shirt. When income elasticity of demand equal to zero, the goods is necessity. Necessity is quantity demanded will remain unchanged even though income of consumers increases. Examples of the goods are rice, electricity, gas and drugs.

Question 6

PART A

Price of pepsi per tin / RM

5.00

3.00

1.00 D

0 Quantity of pepsi demanded 3 7

Consumer surplus is a measure of the difference between the price that consumers willing and able to pay for a good and the market price which actually have to pay for the good. Consumer surplus occurs when the price which consumers are willing and able to pay for a good more than the current market price that actually pay for. Figure 1 shows the demand curve of consumer — Alice for Pepsi. For example, when the price of a tin of Pepsi is RM1, Alice is willing and able to buy 8 tin of Pepsi per week. When the price of a tin of Pepsi is RM3, Alice is willing and able to buy 3 tin of Pepsi per week. The difference between the maximum price that consumers are willing and able to pay and the price that consumers actually pay for is consumer surplus.

Price of pen / RM

Supply

8

5

0 Quantity of pen

50 80

Producer surplus is the difference between what the producer is willing and able to supply at the price that producer receives from a product and the lowest price that producer is willing to accept for the product. The more the producer surplus, the more benefit producer gets. For instance, when the price of a pen is at RM5, producers are willing and able to supply 50 pens. When the price of a pen is at RM8, producers are willing to supply 80 pens. The marginal cost of a pen for produce 50 pens is RM5 while the marginal cost of a pen for produce 80 pens is RM8. Thus, the producer surplus is RM3. Therefore, producer surplus is the area above the supply curve.

PART B

Scarcity means that limited resources which is not enough to satisfy for everyone who wants. Thus, everything with scarcity is name as economic good. Economic good is includes goods and services. Examples of goods are paper, pen and food, while services are tuition, haircut, and electricity repair. Resources are the good use to produce the other good. The good produce called goods. In economics, resources are classified into three categories, which are land, labor and capital. All of the natural resources are integrated in land such as water. Labor refers to the persons in making some goods or services. The person is paid wages such as teacher and waiter. Capital refers to the manufacture products which use for production. With scarcity, people have to make choices in order to obtain the limited goods that more satisfy their wants. When they make a choice, they must forgo the other goods. Opportunity cost refers to what is given up and forgo after making decisions. It is direct insinuation of scarcity. For instance, a chocolate factory produces white chocolate and black chocolate to sell. If the factory produces 1000 of black chocolate, none of white chocolate can be produce. If the factory produces 800 black chocolate, 200 of white chocolate are willing to produce. Thus, there is 200 of black chocolate become opportunity cost. If the factory produces 500 of black chocolate, 500 of white can be produce. In this case, the opportunity cost is 500 of black chocolate.

Quantity of black chocolate

1000

800

500

0 Quantity of white chocolate

200 500