Factors that influence the price elasticity of supply

Price elasticity of source is a useful concept whenever we consider supply. Additionally it is use to gauge the responsiveness source to a change in price when we are supplying a good. Below is the solution that use to calculate the price elasticity of source.

Price elasticity of source (PES) =

% change in volume supplied

% change in price

There are a few factors that impact the price elasticity of supply. The first factor that impacts the determinants of price elasticity of source is the number of producers. If there are a great number of producers, the easier for the industry to raise the output and cause the price increase. For example, in line with the law of resource, the price tag on a good increase, the number supplied of the good increase. That's why whenever there are a great deal of suppliers, more goods will be produced and induced the price increase.

Besides that, another factor that influences the price elasticity of supply is the time factor. Long haul is usually more stretchy for supply equate to short run. For example, over time period the industry can make investments more equipment and build more factories. Furthermore, they can even enter a fresh market and start a bigger business. However, in the short run, industry cant expand their factory to produce more goods. Besides that, the prices of the products are not attentive to the purchase price. Therefore, supply is more stretchy in the long run.

Part B

Businesses always utilize the concept price elasticity to select their rates strategy. The strategy that utilized by the businesses to choose their price is price elasticity of demand (PED). Price elasticity of demand can be define as the way of measuring of the speed of response of number demanded anticipated to a cost change. There is a solution that uses to assess the purchase price elasticity of demand. The solution is shown in the body below.

The percentage change in price

The ratio change in volume demanded


There are extensive diplomas that show in price elasticity of demand. Price elasticity of demand will normally be considered a negative relationship between variety demanded. To look for the degree of PED, ignore the negative signal. The first degree that presents in PED is inelastic demand. That is a degree that show the ratio change in variety demanded is less than the ratio change in price. For example, 20% reduction in price cause a 10% increase in quantity demanded. The worthiness is significantly less than 1 but higher than 0 (0

The second level that shows in PED is flexible demand. That is a situation that the percentage change in volume demanded is greater than the percentage change in price. For example, a 20% reduction in price induced a 30% increase in quantity demanded. The worthiness is greater than 1 but less than infinity (1

The third level is only going to happen during special situations. The degree is unitary stretchy demand. This shows the ratio change in number demanded is equal to the percentage change in price. The worthiness is add up to 1 (PED=1). The forth level that happen in special situations is correctly inelastic demand. This shows the quantity demanded will not change as the price changes. The value is add up to 0 (PED=0). Consumers do not response to the change in cost. The fifth level that happen only in special conditions is perfectly elastic demand. That is a disorder that a little percentage change in price brings about an infinite ratio change in amount demanded. The value is add up to infinity (PED= ).

Beside that, businesses also use the full total revenue to choose their price. The solution below is use to assess the total income.

Total revenue = Price X Amount demanded

If demand is inelastic, reduction in price will cause the lower income earned. If demand is stretchy, the increase in price will cause the lower revenue acquired. However, when the demand is unitary flexible, fall or rise in price won't affect the total revenue. When the demand is correctly inelastic, surge or show up of price lead to a big change in total revenue. In case the demand is perfectly elastic, a rise in cost leads the total revenue to fall to zero, however a fall season in cost will infinite change the total revenue.

Question 3

Part A

Supply defines as the quantity of a good or service available for purchase by consumers at different prices.

There are a few reasons that may cause the increase of source. The source curve will change to rightward if the source increases. The number below shows the increase of resource.

Figure 3. 1: Change in supply- Increase of supply

Price ($/unit)

S0 S1

Quantity provided (unit)

The number above implies that the source curve shifts from S0 to S1 and cause the increase of source.

The first reason that caused the increase of supply is the price tag on the product. All of the producers are always targeting the highest income when performing a business. Regarding the regulations of supply, the bigger the price tag on the good, the greater thee quantity provided. Therefore, if the price of a good increase, the providers will produce more good to get the highest profit. This may cause the source to increase. For instance, the price of plastic has increased. Therefore, producers will produce more silicone in order to achieve a higher earnings.

Secondly, technology change may also cause the increase of the supply. The longer enough time, better technology will be developed. The better technology will make the producers to make a good by using a easier way and faster time at cheaper cost. Through the use of an improved and cheaper way of producing, providers will raise the productivity to gain a higher earnings. For instance, the development in technology leads to a better production in silicone at cheaper cost. Manufacturers of silicone will produce more silicone so that they can get a higher profit.

Thirdly, the low cost of the raw material could also lead to a rise of the supply. When the price of a raw materials drops, the providers get to make a good at a cheaper cost. Therefore, makers will increase the supply to be able to get a higher profit. For instance, the price tag on rubber has cut down. The producers of tyre reach produce the tyre at cheaper price. So, the suppliers will increase the way to obtain tyre so they'll get a higher income in producing tyres.

Part B

Market a place where consumers and makers influence the purchase price in the market. Therefore, the purchase price won't achieve due to the price roof and price floor. Price floor is the bare minimum price set above the equilibrium price. Some suppliers or producers will gain bare minimum profit due to the price floor. However, price roof is the maximum price set below the equilibrium price. Bringing down the price of the nice so that consumers are affordable to buy the goods. Numbers below shows the price floor and price roof.

PriceFigure 3. 2




Max price


Figure 3



Min price




The function of prices is to able for both resource and demand reach set a price which both attributes are willing to shell out the dough. When price floor happen, company will sell the nice with the price more than the equilibrium price. This will help the producer to get more take advantage of the lower equilibrium price place my demand and offer curve. surplus will occurs means that amount offered more than amount demanded.

Price of Good A


Min price


Quantity of Good A

When the price ceiling happen, it will help the consumers to pay lesser from the equilibrium price. The purchase price is lower than the equilibrium price. This will cause the scarcity occurs when the quantity demanded is more than number offered. Consumers is affordable to buy the goods when the purchase price is lower than the equilibrium price.

Price of Good A


Max price

Question 5

Part A

Demand defines as the consumers would be inclined and in a position to buy a proficient at different price level.

Figure 5. 1

A change popular is a transfer in the demand curve. There are many factors that will have an impact on the shift in the demand curve, aside from the factor of the price of the good itself. The other factors, such as, the price tag on the other good. For instance substitute goods and matches goods. Other than that, homeowners' income, expectation, tastes and fashion are also the factors of the switch in the demand curve. The demand curve will alter left when there is a reduction in the demand. For instance, the price of the substitute of espresso, tea, has slipped from $1. 50 to $1. 20. This cause the demand of caffeine decease because espresso is more expensive compare to tea. Individuals are more willing to drink tea and cause the demand of caffeine dropped. Physique 5. 1 below shows the reduction in demand.

Price of coffee



Quantity demanded

Quantity demanded define as the quantity of goods which would be demanded at a specific price.

However, an alteration in quantity demanded is a activity along the demand curve. There is merely one factor that impacts the movement across the demand curve which is the price of the good itself. The decrease in the demand curve in number demanded will cause the movements of downward in the demand curve. When the price tag on a good increase, volume demanded will lower and vice versa. For instance, when the price of a Pepsi increase from $2 to $3, amount demanded of Pepsi lower from 100 to 60. Physique 5. 2 below shows a decrease in volume demanded of Pepsi.

Price of Pepsi

3. 90



Quantity demanded of Pepsi






Part B

Figure 5. 3 Income elasticity of demand defines as the dimension of the responsiveness of the demand for a good to be always a change in the income of people demanding the good. It is calculated as the ratio of the ratio change popular to the percentage change in income. The body 5. 3 below implies that the formula of the income elasticity of demand.


The percentage change in income

The percentage change in quantity demanded

There are three different kinds of level about the income elasticity of demand. The first level is positive income elasticity of demand. Positive income elasticity of demand can be split into 3 parts. The first part is device income elasticity of demand. The value of unit income elasticity is 1. When there can be an increase of income, demand will can also increase proportionate. The second part is inelastic income elasticity of demand. The worthiness of inelastic income elasticity of demand is less than 1 (01). A little change in income provides about a more than proportionate change in demand. The good types of stretchy income elasticity of demand are brand name shoes, branded luggage. These are luxury goods.

The second degree is negative income elasticity of demand. The value of negative income elasticity of demand is less than 0 or negative (YED<0). Once the income increases, the total amount demanded falls if the income elasticity of demand is negative. For example, when the income rises, the total amount demanded for the inferior goods cut down. The example of the inferior goods are secondhand vehicles, secondhand totes.

The third level is zero income elasticity of demand. The worthiness of the third degree is 0 (YED=0). This means that whenever the income increase, the total amount demanded will still remain the same. This is actually the zero income elasticity of demand. All of the goods in cases like this are called necessity. For example, sodium, sugar and rice are necessary goods. The consumers need the required goods in their lifestyle. That is why the changes in their income will not have an effect on their demand for necessary goods.

Question 6

Part A

Market is a location where a great deal of situation may happen. Consumers and producers are willing to buy and produce the goods at different price level. Market also has the situation like consumer's surplus and producer's surplus.

Consumer's surplus is the difference between the price that consumers prepared to pay over the price that consumers actually pay. The consumers actually get an advantage from paying significantly less than the total amount they are prepared to pay on a good. For example, a consumer be prepared to pay $20 to buy a booklet. When the buyer go to a bookshop, he bought the book with only $15. Consumers get a benefit for $5. This explained the consumer's surplus. The demand curve of the consumer's surplus is downward sloping.

However, producer's surplus is the difference between your prices that makers actually obtain over the purchase price they are willing to receive. The makers actually get an advantage from receiving market price higher than the purchase price they are willing to sell. For instance, a producer desires to sell a reserve with $10 however the market price of the booklet is $15. The manufacturer actually get a benefit of $5 for selling a publication. This described the producer's surplus.

The physique 6. 1 shows the consumer's surplus and producer's surplus.

Figure 6. 1

Price of book









Quantity of book






Benefit $5

Benefit $5

Part B

Production options frontier is shows the three economics notion. The three economics strategy are scarcity, choice and opportunity cost. Production possibilities frontier can be also called as production options curve.

Production options frontier is a graph shows both outputs that the overall economy can possibly produce given the available factors and production technology. Production options frontier can be dependant on four key points. The ideas are two products produced, effective production, fixed resources and permanent technology.

Scarcity can be define as insufficiency of amount or source. It can be define as lack too. Scarcity in market is where consumers and suppliers feel that have limited resources to make a choice for unlimited needs. Every choice that the consumers and suppliers make will have the ability cost. To be able to improve their satisfaction, companies and consumers have to help make the choice to release their opportunity cost. The chance cost the the second best good to release.

Production prospects frontier is bowed outward of the origin. This means that opportunity cost change as the united states move from one option to another. In production alternatives frontier has different point of view. The details that lies outside the Production possibilities frontier are called unattainable point, inside that Creation options frontier are called achievable things and on the curve called useful points.

Good AFigure 6. 2





Good B

Figure 6. 2 shows that the transfer in PPF. The move from HH to KK shows the increase of creation in the economy. If the industry is producing more goods and services, the industry will have more growth in economy. The factors that influence the PPF switch to the rightwards is the development in new technology and bigger labour make.

The move from KK to HH shows a decrease of the production throughout the market. There are a few factors that have an impact on the PPF shift towards the departed. The factors are natural disasters and depletion of natural resources.


Essentials of Economics, 2nd edition, Robert L. Sexton, Thomson, South-Weston, 2006.

Comprehensive Economics Guide, Hashim Ali, Oxford School Press, 1990.

Essentials of Economics, 2nd edition, R. Glenn Hubbard, Anthony Patrick o' Brien, Pearson, 2009.

Success in economics 3rd release, Derek Lobley, Barking College of Technology, 1987, London. Team of Business Management Studies.

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