The Price Of Elasticity Of Supply Economics Essay

The price of elasticity of supply assesses the sensitiveness of the number supplied to an alteration in the price of a good when all other influences on selling plans remain constant. It could be calculated by using the formula:

PES = Percentage change in quantity supplied

Percentage change in price

The two determinants of price elasticity of supply are learning resource substitution choices and time frame for the source decision (Parkin 9th edition pg97):

For learning resource substitution possibilities, it means that only some goods and services can be produced only by using special or exceptional effective resources. Such items have low and sometimes even zero elasticity of source because stuff like that are hard to be substituted. For instance, cars and tyres. As the price of rubber rises, the number supplied will reduce by a little because people still need tyres because of their cars. It really is difficult to acquire another raw materials for tyre because the source factor of production is rare and therefore, the price elasticity of supply will be inelastic.

The second determinant is time respond for the source decision. For example planting maize. It requires a few months to produce maize that even if the purchase price changes, the farmer will not be in a position to do anything. Reason being so is that when the price tag on maize fluctuates, the time considered for maize production will remain constant. Thus, the price elasticity of supply will be inelastic if the production is long.






Based on the diagram, it shows that price increase is greater than the quantity offered. The two determinants of price elasticity of resource are source substitution and timeframe for source decision.

Part B

Price elasticity of demand (PED) is a unit free measure of the responsiveness of the quantity demanded of the good to an alteration in cost, when all the determinants on buying programs stay the same. The formulation used to assess PED is(Parkin, 9th model pg 86):

PED = Percentage change in variety demanded

Percentage change in price

Businesses use the price elasticity concept to select their prices strategy based on three runs of elasticity namely inelastic, elastic and unit flexible demand.

When the ratio decrease in number demanded is significantly less than percentage increase in price, it is stated to be an stretchy demand. Goods that are grouped under inelastic are believed necessities and for that reason when business raise the price to obtain additional revenue, the demand it's still there. A good example would be smokers and cigarettes. If the price tag on cigarettes is now rm10 a load up, variety demanded is 50 however when price increase to rm15 a load up, amount demanded becomes 45.

The above diagram is an example of the partnership between your change in variety demanded and change in price. The elasticity is more than zero but significantly less than one, which means it is inelastic and smokers will still continue buying cigarettes despite the price increase.

When the percentage decrease in volume demanded but greater than one surpasses the percentage upsurge in price, then it can be an elastic demand. Goods that have an elastic demand are luxury goods because the goods have many substitutes, for example Nike shoes. If the price is rm200, then variety demanded is 100 but once the price boosts to rm220, the quantity demanded will fall to 70. This is because the clients can holiday resort to other brands. The elasticity is several which means customers are delicate to the change in cost.

The diagram demonstrates even though the price increases only by a bit, but the amount demanded decreased by the whole lot because goods like that can be substituted easily.

When the percentage decrease in quantity demanded equals to the percentage upsurge in price, then it is a device elastic demand. In situations like that, businesses should neither increase nor reduce the price of goods just because a change in cost will change the number demanded. A good example would be nicotine gum. The original price is rm1, and variety demanded is 200 but once the price raises to rm2, the number demanded will lower to 100.

By using the idea of price elasticity, businesses can decide whether to increase price (inelastic demand), reduce price (elastic demand) or never to change the price (unit flexible demand) in order to maximize income.

Question 3

One of the factors of source is the costs of factors of development. A decrease in price of development will straight correlate to an increase in supply. It is because if the price of one factor of development used to make a good lowers the least price that a supplier is inclined to accept for producing each quantity of those good lowers. So a reduction in the price of one factor of production diminishes source and shifts the supply curve rightward. Another factor is the price tag on related goods produced. An alternative in production of an good is another good that may be produced using the same resources. The supply of a good increase if the price tag on an alternative in production falls. Goods are complements in production if they must be produced mutually. The supply of a good increase if the price of a supplement in production goes up. Expected future prices are another determinant of a rise in supply. If the price tag on a good is likely to decrease in the future, the supply of the good today increases and the supply curve shifts leftward.

b) A price roof or price cap is a regulation that makes it illegal to charge a price more than a particular level. If the purchase price ceiling is set above the equilibrium price, it has no effect. The marketplace works as if there were no ceiling in the first place. Inversely, if the roof were to be established below the equilibrium, its effects are far greater. If the amount of price equilibrium is above the purchase price ceiling, in order to accomplish price equilibrium one would have to go into to illegal region. Other mechanisms thus enter into place in order to eliminate the lack created by the purchase price cap. Search activity and dark-colored markets are some of these mechanisms and consumers are eager to pay a higher price to be able to get the goods due to the shortage. A price ceiling decreases the number supplied to a less effective quantity resulting in a deadweight loss. A further shrink in consumer and designer surplus further increases the potential loss from search activity. A cost floor is a legislation that makes it illegal to trade at a price lower than a particular level. If it is set below the equilibrium price, there is no effect. Result only occurs if placed above the equilibrium price. Price floor contributes to an inefficient final result. A minimum price is defined above the equilibrium and diminishes the quantity demanded. A deadweight loss thus arises due to a decrease in consumer and maker surplus.

Question 5

Part A

Demand identifies the number of a good that audience would be ready and able to buy or attempt to buy at another type of price level. The law of demand expresses that there is an inverse romantic relationship between your price of an good and the number demanded in a defined time period. Quantity demanded of your good or service is the total amount that consumers plan to buy throughout a given time period at a specific price. (McConnell, Brue & Flynn Economics 18th release)

A reduction in demand will cause a leftward transfer in the graph and there are six main factors influencing it. The first factor is the costs of related goods. Expect if a comparison is manufactured between hamburger and hot dog. If the price tag on an alternative for hamburger increases, people buy less of the substitute plus more hamburgers. The demand for hamburger will surge and demand for hot pups will fall. Then there is also complement which really is a good that is used in conjunction with another. For example, fries and hamburgers. If the purchase price for hamburger rises, people will not buy a great deal fries and hamburgers. You will see a decrease in demand. The next factor is expected future prices. When a good, for now will decrease because people would like to buy it at a cheaper price. The third factor is income. When income increases, consumer will buy more goods however when it decreases, they will buy less of those goods. A normal good is one that demand improves as income increases. Poor good is one when demand will lower as income increases. Next factor that will decrease a demand is when expected future income and credit comes. For example, each time a sales person has learned her income will land in the foreseeable future, she'll have to invest wisely and not splurge on goods. Another factor is when the populace decreases. For instance in the 1990s in the us, a decrease in the college-age populace reduce the demand for university places. Finally would be inclination. When there is poor or no environmental consciousness, it will shift the demand curve for recycled items or even eco-friendly handbags left. The diagram shows a leftward shift on the demand curve.

Unlike the demand curve, the number demanded curve provides an upward activity on the diagram, instead of a transfer and the one factor that affects it is price with all other determinants on buying plans remain constant. According to the new laws of demand, higher price may cause a decrease in demand.

From the diagram, a decrease in quantity demanded will cause an upward movements when price rise from P0 to P1, quantity demanded comes from QD2 to QD1. An example could be the surge of price of apple from P0 to P1. It will decrease the quantity demanded to QD1. There are many distinctions between a decrease in demand and reduction in amount demanded. First, reduction in demand will show a leftward transfer in the graph but decrease in number demanded shows an upward movement. You will find six factors influencing the demand to decrease but only the one that influence the quantity demand; price.

Part B

Income elasticity of demand (YED) is the proportion of percentage change in the number demanded of the good or service to confirmed ratio change in income. YED signifies the responsiveness of demand to change of household income. To estimate YED. (McConnell, Brue & Flynn Economics 18th edition)


YED = Ratio change in quantity demanded

Percentage change in homes income

The three levels of YED are positive, negative and zero. For positive YED, it is further classified into two types that are income inelastic (01). For income inelastic, the ratio increase in variety demanded is positive but significantly less than the percentage upsurge in income. Once the demand for a good is income inelastic, the ratio of income allocated to that good decreases as income raises. Those will be considered normal goods such as clothes, food and travel. But for income stretchy demand, the percentage increase in variety demanded exceeds the percentage upsurge in income. If the demand for a good is income elastic, the percentage of income spent on that good rises as income rises. For instance, if the price tag on a doughnut is frequent and 9 doughnuts an hour are bought. So when income goes up from rm975 to tm1025 weekly, the quantity of doughnuts sold go up to 11 an hour, ceteris paribus. The change in amount demanded is 2 and the common amount is 10 doughnuts, therefore the quantity demanded boosts by 20% and the change in income is tm50 and the common is rm1000 so income raises by 5%. The income elasticity of demand for doughnut is:

20% = 4%


Therefore, it is stated that the income elasticity demand for pizza is stretchy. Next is negative YED (YED<0) demand will fall season if income goes up. Those goods are second-rate, for example second-hand goods and bus travel. The logic behind this is that whenever a persons income goes up, he will decide for normal or better goods alternatively than something of poor. Last but not least, is zero YED (YED=0), which means that the quantity demanded won't change as income changes. The good is a necessity, for example rice and toothpaste. People will still continue buying requirements no matter what their income is basically because it's important to them for living.

Question 6

Equilibrium is a predicament in which opposing pushes balance the other person out. Equilibrium in a market occurs when the purchase price balances the strategies of clients and sellers. The equilibrium price is the price at which the quantity demanded equals the number supplied.

Consumer surplus is defined as the value of any good minus the price payed for it, summed over the quantity bought. It really is measured by the area under the demand curve and above the purchase price paid, up to the quantity bought.

Producer surplus depends upon subtracting the marginal cost from the purchase price received for a good and summed over the quantity sold. It is measured by the region below the market price and above the supple curve.

b. ) The creation probability frontier (PPF) signifies the boundary between the combination of goods and services that may be produced. A couple of four assumptions that are created which will be the economy is productive, there are a permanent amount of resources, a set degree of technology and there are only two goods. In order to achieve efficiency there has to be full occupation and full production. The chance cost of an activity is the value of another best alternative that must definitely be forgone to attempt the experience. Scarcity is a situation where there isn't enough resources to produce enough a good to satisfy the needs of the consumers. Choice occurs when scarcity causes consumers to produce a choice in order to maximise satisfaction. PPF illustrates these three guidelines of economics; choice, scarcity and opportunity cost. Because of scarcity, a contemporary society has to make choices between the productions of two goods with scarce resources available. Most choice consists of opportunity costs.


Parkin. M, Economics 9th edition, Pearson International Edition

McConnell, Brue & Flynn Economics 18th edition

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