The Use Of Price Elasticity Of Supply Economics Essay

Price elasticity of supply measures that how the change in price of the good effected the quantity supplied with the ratio of percentage change in quantity supplied to the percentage change in price . The determinant of price elasticity of supply includes resources substitutions possibilities . There are several goods and services can be produced only by using special or rare resources. The elasticity for these are item are low or sometimes 0.Other goods and services can be produced by using normal available resources that could be found to produce many different kind of goods . These items have high elasticity of supply . Perfectly inelastic supply means that the quantity supplied remains the same although the price is change. Example of perfectly inelastic supply is a fossil of a dinosaur . Elastic supply shows that the quantity supplied is greatly increase compared to the change in price. Example of unit elastic supply is papaya tree and mango tree. The producer can choose to plant papaya tree or mango tree.If the producer choose to plant papaya tree,his opportunity cost is mango tree . Example of perfectly elastic supply is sugar . This is because this good is produced in many places so the price the quantity supplied is increase but the price do not greatly increase compared to quantity supplied .

Time Frame for the supply decision is one of the determinant if price elasticity of supply.This refers to the study the influence of the amount of time elapsed since a price change,there are three time frames of supply.Firsly,momentary supply.When the price of a good increase or decrease,the momentary supply curve shows the response of the quantity supplied immediately following the price change.Several goods,such as apple and oranges have a perfectly inelastic momentary supply.The momentary supply curve is vertical because no matter what is the price of apple,producers cannot change their output.Secondly,the long run supply curve.It shows the response if the quantity supplied to a price change after all the technologically possible ways adjusting supply have been taken advantage of.For Example, apple takes 16 years to grow till maturity.Lastly ,the short-run supply curve.This curve slopes upward.In the short-run supply,producers can take action very quickly to change the quantity supply in response to the price change.

B)

Price elasticity is usually used by business to control the price of the good in order to earn the maximum profit. It can measured the responsiveness of consumer on the quantity demanded when there is a change in price while other determinants such as weather condition, taste and fashion, size of households’ income and others remains the same. When a producer expects that the price elasticity of demand,the producer can than choose the price of a good to be sold on market to maximize their profit.For Example, a pen producer predicts that its elasticity equals to 3, and plan to raise the price from rm 1 to rm 2.Refer to diagram 6 to see the formula used to calculate the percentage loss in quantity demanded.

(Diagram 6.)

%change in quantity=300%.This means that if the producer increase the price by 100%, the quantity demanded will change by 300%.So the quantity changes more than the price.The producer will need to decrease the price to get increase the demand of pen.In conclusion, the price elasticity of demand for this pen is elastic.

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If the demand for a product is inelastic, the change in price of the product will only increase slightly in quantity demanded. The producer will increase the price to earn more profit because when the price of an inelastic good increase, the percentage of quantity change will not be as much as the percentage changes in price. For example, a cigarette business will increase the price of cigarette to gain higher profit. However, the quantity demanded will not increase much.

Q3

A)

There are several reasons why supply of a product increase.First,the price of the good,a higher price for a good cause the producers to want to produce and sell more of it.It should also cause other suppliers to release more of the good for sale.Usually a higher price should increase the total quantity supply.Secondly,Technology can also increase a supply of a product,improve in technology is a change in production way that allow the same of amount of a good to be produce in smaller quantites of inputs,a change in technology can result from a new invention of a machine to produce more supply of a product.For example,a machine can produce more goods than labour,the supplier will reduce his labour and add more machine to produce more products.Lastly, expectations.If supplier believe that price of a good will decrease,they will want to sell more of it now.Expectations,about government tax can also affect supply.For example,If the supplier predicted that the price of car will drop in the future,the supplier will supply more cars today.

B)

Price floor refers to a minimum price set by the government to help the producers to avoid producer from making loss. Where else price ceiling is a maximum price set by the government to help the consumers.This is to protect the benefits of consumer .To allow Low income people to buy a particular good. For example, when the price of beef increases,producer will increase the supply in order to earn more revenue. Therefore, the supplier will use all the recourse to produce beef instead of mutton as the selling of beef is much better than mutton. Thus, the resources is efficient.

Q5

A)

Decrease in demand refers to the shift of the demand curve to the left.This will cause the demand to drop.One of the factor which cause the demand curve to shift left is the price of the good itself.For example,in figure 1, car and petrol is a complimentary goods.If the price of petrol increase,the demand for car will also decrease because the price for petrol has increase.

FIGURE 1-Shift In Demand Curve

A Decrease in quantity demanded refers to a movement upwards along the demand curve.The factor which cause a decrease in quantity demand is the price of the good itself.For example figure 2,A movement fron point A to point B.The graph shows the increase in price from rm 1 to rm 2 and a decrease in demand .

Figure 2-A shift in quantity demanded

B)

Income elasticity of demand is defined as the ratio of the percentage change in the quantity demanded to the percentage change in aggregate consumer income.The income elasticity if demand is represented as follows:

Income elasticity of demany = Percentage change in quantity

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Percentage change in income

The first degree is 0(YED>0).This is when the income elasticity is positive.This can be categorized into several types.Firstly,income inelastic.If the quantity demanded increase by a smaller percentage than the rise in income, one say that the good is a normal good.Example,Shoes,drinks and pen.Second,income elastic.If the quantity demanded rises by a higher percentage than the rise in income,one say that the good is a luxury good.Examples,sport car,branded shoes and laptop.

The other degree is (YED<0) which is when the YED is negative.Demand drops as income increases.The good is called as inferior.Examples,used cars,low quality tissue and public transport.

Lasly,when YED is equal to 0 (YED=0) the quantity demanded does not change as income changes.The good is a necessity.For Example, food,water,sugar.

Q6

A)

People do not always have to pay what people are willing to pay.When people buy something for less than it is worth to them, they receive a consumer surplus.A consumer surplus is the value of a good minus the price paid for it,total over the quantity bought.For example,figure 1.1 shows a consumer surplus.

Figure 1.1-shows the consumer surplus

Figure 1.1 shows the maximum willingness of consumers to pay for each unit of good.The yellow colour part in figure 1.1 shows the consumer surplus.Above p0,there is still demand from consumers.but the market price is $p0.The consumer only need to pay $p0.

For example,$p0 = Rm 10.One is willing to pay rm30 to buy the good.But one only needs to pay the market price which is rm 10.So one gains a consumer surplus of rm20

Producer surplus can appear as profit,but usually it takes a different form.For example figure 1.2. shows the producer surplus.

Figure 1.2 —producer surplus

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The red colour in figure 1.2 shows the willingness of producers to receive for each unit if good.Under the equilibrium price,P1,There is still supply from producers.But the market price is rm 0.Producers can receive a price of rm0.For Example, p1 = rm 5.Producer A is willing to receive rm4 to prouce good.But the producer actually receive the market price which is rm 10 to produce good.So the producer gain a producer surplus of rm 1 .

B)

The production possibilities frontier is a graph that shows the maximum combinations of two outputs that the economy can produce.. There are several economic concepts that are using the production possibilities frontier.

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Scarcity

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Scarcity is a situation when resources in the world is limited to produce the amount of good .the graph shows the maximum output a company can produce.For example,the consumer wants 160 tyres and 20 normal car tyre,but the producer cant produce 160 tyres and 20 normal car tyre because there is not enough resources to produce what the consumer want.

Choice

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The company have to make a choice to maximize profit.The company have to choose to decrease the amount of lorry tyre or normal car tyre.For example,when a company move point A to point B,the company have to reduce the amount of lorry tyre by 50 to increase the amount of normal car tyre by 5.

Opportunity Cost

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The company has to make 1 choice.When the company make a choice,the company have just sacrifice the other choices which is known as opportunity cost.For example,the company choosed to produce 150 lorry tyre and sacrifice 5 normal car tyre.Therefore,the opportunity cost is 5 normal car tyre.