Relationship between Price and Quantity Supplied

Keywords: relationship between price and supply

The price elasticity of supply measures the responsiveness of a change in price and the corresponding change in quantity supply.The elasticity of supply is a positive coefficient.This is because positive relationship between price and the quantity supplied.The determinant is Time Frame for the supply decision (long -run supply and short-run supply) and The quantity product increase,the cost will increase.

(i)Time Frame for the supply decision

Long-run supply

The long-run supply is when the prices increases,the producer have long time to increase the product.For example,in the case of oranges,the long-run is the time to take new plantings to grow to full maturity-about 15 years.

Short-run supply

The short-run supply is the supplier can not increase to produced at the short time.This is response of the quantity supplied to a price change only when the technologically is good.The slope will upward because the faster change the quantity supplied in response in the price change.

(ii)The quantity product increase,the cost will increase

Increase the quantity product can make the cost high,the elasticity of the supply is small.The cost is increase because the quantity product are increases,this is the burden on manufacturers.The firm not enough money in this business activity,so the price will increase.

PART B

The price elasticity of supply is defined by the percentage change in quantity supplied divide by the percentage change in price.Does not have negative sign .The supply will always be positive.If more productive activity,the production will change faster if the cost change, it is because the time.After the price change ,the firm will not expand rapidly.If the demand increases,the equilibrium price rises and the equilibrium quantity increases.When the price increase from RM20 to RM30, the price is increase RM10 and the average price is RM25,the price already increase 40%of the average price.The quantity increases from 10 to 13 an hour.

(i) Inelastic Supply

The price of the good or services is increase or decrease in the market will happen the ratio of quantity supply is less than the price.For example,when the price decrease 20%,the quantity supply just only increase 10%.The product like rice,if the price is decrease but the consumer just can eat 10KG in a month so can not buy more because will destroy.The Inelastic Supply Curve is a oblique curve.

(ii) Elastic Supply

The Elastic Supply Curve is a flat curve,the elasticity of supply is big which is Es > 1, % change in quantity > % change in price.For example,Mercedes S-class is a high-tech car and the price is expensive.Just only the rich people can spent money to buy this kind of car.The price of the car is more expensive that can show off how rich you are.

(iii) Unit Elastic Supply

To defined as a numerical measure of the responsiveness of the quantity supplied of product(A) to a change in price of product (A) alone.For example, if, in response to a 20% rise in the price of a good, the quantity supplied increases by 20%, the price elasticity of supply would by 20% over 20% = 1.The Unit Elastic Supply Curve is a Es = 1, % change in quantity = % change in price.

QUESTION 3

PART A

There are three reason why supply of a product increases.

(1) Taxes

Taxes are a production cost to the company.Taxes influence supply.If the governments reduced taxes or increasing subsidies,this can reduce the burden on producers because will decrease the cost of production.The supply will increase.

(2) Technology

The technology change is because the new method is discovered that lowers the cost to producing the product and the supply increase.The new method occur can produce more.Technology progress also can improve the quality of the product.

(3) Supplier Input Prices

If the output supplier production such as (price of the material,wages,rental fees,interest) decrease,the production costs will decrease.The profit will increase and the company will increase the supply.

PART B

The purpose of the government to implement the price ceiling to protect the interests consumers.OP0 is equilibrium price.Government believes that the free market price mechanism set prices too high.The government prevent prices rising again, so set OP1 is the price ceiling.At this price level,the quantity supplied is OQ1,the quantity demanded is OQ2.For the shortage occurred Q1Q2 when the price ceiling is set below the equilibrium.A ceiling also support illegal trading in a black market,the equilibrium price exceeds the price ceiling in the market.The way to remedy is ration limit people to buy.If set the price ceiling will increased demand and decreased supply.The producer will lose money in doing business because just received the lower price.

The purpose of the government to implement the price floor to protect the interest producer.OP0 is the free market price determined by supply and demand.The government set the price floor at the above equilibrium, which is OP1.For the surplus occurred Q1Q2.The way to remedy is (i)limit production (ii)stimulate demand (promotional products). The surplus phenomenon is because benefit of the supplier, so the suppliers produce over the quantity demanded.The suppliers must reduce the quantity supplied.Surplus also can cause unemployment.The government according with the price floor to acquisition of surplus products for export and for future use.

QUESTION 5

PART A

The decrease of quantity demand is the particular price of the good will change and effect the change of quantity demand.There is an inverse relationship.The quantity demand is the consumer plan to buy at a particular price.If the price is increases,the quantity demand will decrease.

This demand schedule is talking about the customer willing to buy and able to buy the quantity of the product.If the price at P0,the quantity demand is Q0.If the price P0 increase to P1,the quantity demand Q0 decrease to Q1.

The decrease of demanded.Relaxing the ceteris paribus assumption.A change in demand is not change in particular price, the other factor effect change the quantity demand.

Income

Reducing income usually leads to decrease the demand of good, these are called normal goods.The inferior goods is reduced demand as income rises.Whether goods are normal or inferior, the point is that income changes will typically shirt demand,usually positive is a normal goods and sometimes negative is inferior goods.

Number of people

The demand for a good or service is about the consumer population.If the populations are decrease, so not enough people to buy the product already.The quantity of demand will decrease.

PART B

Income Elasticity of Demand is a consumer responsiveness of the demand in a good or service to a change the income.Besides that,the pricing of goods is maintain on other situation(ceteris paribus).Greater than one is normal good,positive and less than one is normal good,the negative is inferior good.For example:the response increases 20% in income, the demand of the good will increase 30%.

The three degrees of income elasticity of demand is (1)Inferior Goods, (2)Normal Goods,(3)Luxury Goods.

(1) Inferior Goods

The price and other situation are maintain (ceteris paribus),consumer demand for inferior goods will change and also the consumer’s own income is change in the same direction.The income elasticity of demand is negative,Ey<0.A worker,before increasing the salary,the customer will buy shrimp for the dinner but after increasing their salary,the customer will buy prawns for dinner.The lower income consumer buy most of these goods such as potatoes.

(2) Normal Goods

The normal goods is when the income increases ,the demand will increase but the price are constant.This is a positive value in the Income Elasticity of Demand or a coefficient of elasticity is N(coefficient)>0.The normal good also can is a elastic or inelastic.If in elastic normal good has a positive coefficient is greater than 1, N>1.Besides that,also can is a inelastic normal good has a positive coefficient less than 1,coefficient 0<N<1.The formula of the Income Elasticity of demand is in below:

% change in quantity demanded

Income Elasticity of Demand:____________________________

% change in income

(3) Luxury Goods

Luxury goods have a high Income Elasticity of Demand.If the people are rich so he will buy more luxury goods.For example: the wealthier will buy the Mercedes-Benz S-class,this kind if car is comfortable compare with other small car.Other way aslo can showoff to other people.If the price is decrease 10% the quantity demand will increase 20%.

QUESTION 6

PART A

British economics Alfred Marshall propose the concept of the consumer surplus.The consumer surplus is talking about the customer willing to pay is over than a actually pay.The customer benefit is because the willing to pay is more than the actually pay.

Hypothesis Lisa’s consumer go to a coffee shop to buy some coffee.She buy the first cup of coffee she willing to pay is RM2.50 but the market prices just only 0.60sen,so the consumer surplus is RM1.90.If Lisa’s consumer is already buy 5 cup of coffee,the amount she willing to pay is RM7.50,but she actual to pay the price is RM3.00,so the consumer surplus is RM4.50.After Lisa’s consumer drink 5 cups of coffee the marginal utility is already lower than market price,there is no longer consumer surplus.The buyer willing to spend the price at P1 but the actual price is P0.However,the buyer pay only in area B, the consumer surplus is in area A.

Producer Surplus = actual income – minimum income required

The worker hope can obtain the salary RM1,0000,but the company willing to pay him RM1,200, so the producer surplus is RM200.

 

The price of labour is RM10 in an hour,the labour supply 6 hours in a day;when the price is RM20 in a hour, the labour supply 7 hours in a day;when the price is RM30 in an hour,the labour supply 8 hours in a day.If the market wages is RM30 for an hour the labour will spend 8 hours in their activities,the actual income is RM240,but the labour willing to get RM110,so the producer surplus is RM130.

PART B

In economics the Production Possibilities Frontier (PPF) also ca called Production Possibilities Curve.The curve shows the maximal combine the two goods that can produced by fixed resources and technology.If increase to produced one more unit of the economic goods in product A, have to give up or reduce to producing other economic goods in product B.This is opportunity cost.PPF normally is concave, linear or convex depend on the number of factor.Besides that,economic concepts using the PPF such as scarcity of resources (that is fundamental economic problem all societies face), opportunity costs, productive efficiency.It is because limited resources so happen the scarcity and choice.The customer wants is unlimited,but the resources is limit.

We just consider to produce just only two product which is DVD players in Y- axis and MP3 players in X-axis.If the producer use all the economy’s resources such as capital, land, labour to produce the DVD players,that mean none of MP3 players would be produce which is at point A.In the other hand, imagine transferred all the resources to produce MP3 players which is in point F.The MP3 players would be produce but DVD players not enough resources to produce.All the points (A,B,C,D,E,F) on their frontier is to be productively efficient.Finally in this economic social the producing in DVD players will move to producing MP3 players.The point H can not obtain this is because the resources is limited.Besides that,the point G is obtain, this kind of thing is mention have not finish to use the resources and can happen unemployment.The point G is not a good to produce, the best is in PPC.