Determinants Of THE PURCHASE PRICE Elasticity Of Supply Economics Essay

The price elasticity of source is the measurement of the responsiveness of companies on the changes in the purchase price. The determinants of price elasticity of source include time frame and the presence of extra capacity.

The first determinant is time period. Providers usually cannot provide more supply of their product in a brief time frame immediately. The longer the period of time, the greater product will be provided. For example, a business which produces 5000 containers of milk monthly. If the demand increases out of the blue, government suggests to produce 10000 bottles of milk per month. The industry is not able to change their productivity in a short time of period. Perhaps after couple of weeks, they are just in a position to produce the quantity which is necessary by the marketplace.

For long run, the suppliers will be able to find an alternative supply of enough resources or recycleables used to produce the goods. Thus, more goods will be produce easily. The supply therefore is vey elastic.

However, brief run means that the providers need to supply more in a brief time period to attain the volume demand of the market. In cases like this, suppliers are extremely difficult to provide more because they do not have sufficient time to prepare for this. Hence, the supply will become very inelastic as need to supply more in a short time of period.

The second determinant is existence of spare capacity. If the capability of a firm of industry is greater, more stock can be retained inside. At the same time, suppliers have the ability to source more. In this condition, the supply will become more elastic. Like a restatement, the bigger the capacity, a lot more elastic the resource is.


For an example, Mr Leong has started a small business on selling cell phones. Its elasticity coefficient is predicted as +10. The business enterprise programs to increase its gross annual quantity of cell phones by 10%. The price tag on the products must drop in order to increase the amount to be sold. Price elasticity of demand notion will be used to analyze the percentage reduction in price of the mobile phones

( percentage change in number demand ) / ( percentage change in cost )

= elasticity of demand

= 10 / X = +10

X = 1

As a summary, the price needs to decrease by 1% to increase the volume to be sold by 10%.

Businesses use price elasticity to ascertain their prices strategy. If the demand for a good is flexible, producers will try to lessen down the purchase price in order to maximise the total income in a business. For example, the demand for nike shoes is elastic. Therefore, companies will lower the price of nike shoes to raise the total revenue at the end. That's the reason mega sales are organised each year all over the place to earn additional profit.

However, if an inelastic product has been produced by a producer, he or she will try to raise the price to protect his or her loss. This is because the responsiveness of the consumers is hardly any if the product is inelastic, although the purchase price has dropped. For example, swatch designer watches are inelastic products. Makers will raise the price to get more revenue, instead of decreasing the price tag on product to increase the variety to be sold.



Supply of something will increase as the determinants of supply changed. One of the determinants is cost of production. Cost of development is sum of money or assets used to produced a good. When it reduces, the supply of the good increase. This is because producers are willing to produce more as the price of production is leaner.

For example, Mr Wong is a vase manufacturer. He usually produces 30 vases monthly. Unfortunately, the price of raw material which is utilized to create vases has decreased. At the same time, cost of development raises. Hence, Mr Wong, as a maker willing to create more under lower cost of development, but to earn more profit than before.

Besides that, the improvement of technology can cause the supply of a product raises. Nowadays, technology is increasing and in a position to invent machine or use lesser time and resources to increase the productivity of something. Thus, a big amount of product can be produced throughout a short period of your energy, so the supply increase.

For illustration, nowadays technology allow to raise the efficiency of vehicles as machines are developed. Therefore, lesser time is used through the producing process. However, more products have been produced. Supply of something is therefore increased.

Finally, the expectation of producer will cause the supply of something to increase. When a producer expect the price tag on a product increase in the foreseeable future, the producer will take the chance to increase the way to obtain the product to be able to earn much more profit when the expected price actually increased.

For instance, the price tag on salt is likely to raise in the future. Manufacturers will produce more now to be able to get additional profit in the future. Hence, supply of a product increases.


Rationing function of price is the ability of the competitive makes of source and demand to a price at which buying and selling decisions are constant. It occurs to ensure that no surplus or lack appeared in market. While reference allocation is the way the resources are completely used while creating a product to increase the profit but minimise the expense of production at the same time.

Price floor surfaces is the minimum amount price above the equilibrium price which set by the federal government. The objective of setting price surfaces by the federal government is to protect only the manufacturer but also the consumer. Producers will receive the minimum income as the poor or average consumers is affordable to choose the product. However, if the price flooring surfaces is too low, shortage will happen at that one of time. Residences is one of the nice examples. If the purchase price floors establish by the federal government is too low, many consumers have a tendency to buy more but the producers are not willing to produce more because the price is low. In this example, quantity demand surpasses quantity source, therefore shortage occurred. Moreover, manufacturers will allocate more resources on other more valuable product rather than creating a house. Hence, the resources aren't allocating in an equilibrium and proper way. Finally, it triggers inefficiency in resources allocation. Perhaps some resources will be squandered.

On the other hands, price ceilings is the maximum price which place by the government. It seemed to protect the consumers and also prevent the producers from providing a product at a very high price to attain a higher profit. In cases like this, manufacturers only can sell their products below or at the price ceilings. Average and poor consumers will manage to consume a high quality product but under less price at the same time. However, if the price ceilings placed by the federal government is too much, a situation called surplus will appear. On the economical viewpoint, producers are willing to produce more as the price is high. But less consumers are willing to buy the product because of the same reason again. For instance, brought in vehicles are very costly for the common consumers. But makers have a tendency to produce more as the price is greater than local vehicles. Many citizens are not affordable to buy imported vehicles. Quantity resource exceeds amount demand. Scarcity is therefore occurred. It is also an imbalance in resources allocation if lack happened. Resources used to create an imported vehicle is more than the resources used to create local vehicles. Smaller resources are being used to produce other goods. Inefficiency in resources allocation took place.

As a conclusion, government have to discover a way to create the price tag on something, not too much however, not too low also in order to protect both sides that happen to be consumers and manufacturers.



Decrease popular is a transfer of leftward on the demand curve while reduction in quantity demand is an upward movement across the demand curve. Reduction in demand induced by the changes of determinants. As the determinants changed, they will affect the change of demand curve. The determinants which can cause decrease in demand include flavour, income, range of consumers, consumers' expectation as well as others.

For example, style of consumers has transformed suddenly. They do not like apple but prefer orange. Therefore, the demand of orange will reduce. A leftward move will took place on the demand curve. Others determinants stay constant.

Furthermore, income of consumer also counted as a determinant. When income of consumers diminishes, the demand of something also will decrease. For illustration, Mr Hong's salary has been deducted into RM1500 monthly. He usually purchases 10 oranges weekly. However, he has decided to buy 5 every week. The demand of orange decrease and alter the demand curve left on the demand curve. Others determinants stay constant.

Besides that, consumers' objectives will cause changes on demand curve. For example, consumers expect the price tag on car will land by 10%, the demand for car will lower. Hence, a leftward shift will be observed on the demand curve. Others determinants continue to be constant.

On the other side, the sole determinant which can cause the amount of demand to diminish is price of the good. When price raises, the number demand will reduce. The higher the price, the lesser the quantity demand. Consumers are not willing to buy something when the purchase price is not fair. Therefore, volume demand lessens, a upward motion will take place on the demand curve.

Examples or tow different demand curve are as below


Quantity demand

A leftward transfer from D0 to D1 on the demand curve. ( reduction in demand )


Quantity demand

A upward movements over the demand from point A to point B. ( decrease in volume demand )


Income elasticity of demand is the measurement of responsiveness to a big change in incomes by purchasing more or less at a specific good. The method for determining income elasticity of demand ( YED ) is as below

YED= the ratio change in number demanded / the percentage change in household's income

Three examples of income elasticity of demand include negative, positive and zero. A positive value shown in income elasticity of income means that the partnership between amount demand of any good and income is positive. When income increases, the quantity demand of the good will increase. Additionally, it can further categorised into tow types

If the worthiness of income elasticity of demand is from 0 to 1 1, this means that percentage change in number demanded of an good is smaller than the ratio change in income. In this example, when income boosts, quantity demand of a good only increase by a small amount. Types of the good include food, toothbrush, bus ticket and others. It does not imply that consumers will buy more when their income increases. Those goods are called normal goods.

However, when the value of income elasticity of demand is bigger than 1, this means that percentage change in amount demanded of the good is greater than the percentage change in income. In this case, an obvious increase in quantity demand of the good is seen easily when income increases. For instance, brand name cloths, brand name shoes, branded pcs and so forth. It means that great responsiveness can be seen on amount demand when income boosts but only a little amount. Those goods are called luxury goods.

When the value of income elasticity of demand is smaller than 1 this means negative, the number demand comes as the income boosts. When consumers' earnings increase, they are able to buy top quality, trusted product instead of poor product such as second-hand cellular phone, brandless tissue yet others. Those goods are called substandard goods.

When the worthiness of income elasticity of demand is zero, the number demand will stay unchanged as the income altered. Consumers won't ingest more for something although their income has changed. For illustration, rice, salt, sugar and much more. It generally does not imply that consumers will buy more when their incomes increase. Those goods are called necessity.



Price of seafood ( per kg ) RMConsumer surplus is the huge benefits received by consumers. The power is the difference between your price for consumers eager to cover something and the actual price of the product.

Quantity demand of seafood (units)

The graph of consumer surplus has been shown as above. This example happens when the price for consumers happy to pay is higher than the equilibrium price. The idea E1 symbolizes equilibrium price. While the shaded area, B1 is the consumers surplus. The graph demonstrates consumers are ready to pay greater than the purchase price, P1 ( equilibrium price ) for a product. The equilibrium price is currently lower than the purchase price which consumers happy to pay. Hence, consumers gained consumer surplus by paying less but also get the same product. For example, individuals are only willing to cover a seafood ( per kg ) is RM5. However, the equilibrium price which both consumers and makers have agreed with is RM3. Therefore, the consumers can save RM2 for purchasing the same good.

Price of household slippers ( per couple ) RMOn the other hands, producer surplus also will occur in the market. Consumer surplus is the huge benefits received by consumers. The benefit is the difference between your price for manufacturers willing to market and the actual price of the merchandise.

Quantity demand of seafood (units)

For example, Mr Chan expected to earn RM5 for his product, house shoes. But the selling price is greater than his expected price, which is RM20. Therefore, he attained maker surplus by RM15.


Books ( products )

Computers ( devices )

( Graph of production opportunity frontier ( PPF ) )

The PPF graph shown the two products, literature and computers are produced with the factors of learning resource and technology set.

Scarcity is a situation when there is bound resources but there is unlimited wants at the same time. The point beyond your curve consider as unattainable. For instance, consumers need 10 books and 10 pcs at exactly the same time. Associated with there is limited resources to produce both products needed by the consumers. The resources is inadequate.

Therefore, scarcity always causes the consumers to make alternatives to increase their satisfactions. For instance, consumers should sacrifice 2 catalogs in order to get 2 more computer systems from point A to point C. It is either to stop good A to gain more once and for all B, or vice versa. Selections are made is determined by the choice of the consumers.

Moreover, the 3rd economic notion is opportunity cost. It is counted as the second best option and it will be sacrificed to gain your best option. When consumers have to sacrifice to get more of another good, the sacrificed good is consider as opportunity cost. For illustration, if the consumers request for 6 computers rather than 4, they need to sacrifice 1 booklet to get 2 more computers. The book which has been sacrifice is opportunity cost.

Finally, from economical perspective, scarcity pressured the consumers to make selections to increase their satisfaction. The sacrificed alternatives are called opportunity cost.

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