Application of Elasticity of Supply
Definition: In economics, the price elasticity of supply is defined as a numerical measure of the responsiveness of the quantity supplied of product (A) to a change in price of product (A) alone. It is the measure of the way quantity supplied reacts to a change in price.
Calculating the Price Elasticity of Supply
Calculating the price elasticity of supply when the price changes from $9.00 to $10.00" First we need to find the data we need. We know that the original price is $9 and the new price is $10, so we have Price (OLD) =$9 and Price (NEW) =$10. From the chart we see that the quantity supplied when the price is $9 is 150 and when the price is $10 are 210. Since we're going from $9 to $10, we have Supply (OLD) =150 and QSupply(NEW) =210, where "Supply" is short for "Quantity Supplied". So we have: Price (OLD) =9 Price (NEW) =10 QSupply(OLD) =150 QSupply(NEW) =210
To
calculate the price elasticity, we need to know what the percentage change in
quantity supply is and what the percentage change in price is. [210 - 150] / 150 = (60/150) = 0.4
So we note that % Change in Quantity Supplied = 0.4 (This is in decimal terms. In percentage terms it would be 40%). Now we need to calculate the percentage change in price. Calculating the Percentage Change in Price
Similar to before, the formula used to calculate the percentage change in price is: [Price (NEW) - Price (OLD)] / Price P rice (OLD)
By filling in the values we wrote down, we get: [10 - 9] / 9 = (1/9) = 0.1111
We have both the percentage change in quantity supplied and the percentage change in price, so we can calculate the price elasticity of supply. Final Step of Calculating the Price Elasticity of Supply
We go back to our formula of: PEoS = (% Change in Quantity Supplied)/(% Change in Price)
We now fill in the two percentages in this equation using the figures we calculated.
PEoD = (0.4)/(0.1111) = 3.6
When we analyze price elasticities elasticities we're concerned with the absolute value, but here that is not an issue since we have a positive value. We conclude that the price elasticity of supply when the price increases from $9 to $10 is 3.6.
Price Elasticity of Supply
When there is a relatively inelastic supply for the good the coefficient is low; when supply is highly elastic, the coefficient is high. Supply is normally more elastic in the long run than in the short run for produced goods. As spare capacity and more capital equipment can be utilized the supply can be increased, whereas in the short run only labor can be increased. Of course goods that have no labor component and are not produced cannot be expanded. Such goods are said to be "fixed" in supply and do not respond to price changes. The
quantity of goods supplied can, in the short term, be different from the
amount produced, as manufacturers will have stocks which they can build up or run down.
The
value of elasticity of supply supp ly is positive, because an increase in price is likely
to increase the quantity supplied to the market and vice versa.
FACTORS THAT DETERMINE ELASTICITY OF SUPPLY The
elasticity of supply depends on the following factors.
The
value of price
elasticity of supply is positive, pos itive, because an increase in price is likely to increase the quantity supplied to the market and vice versa.
The
elasticity of supply depends on
the following factors: 1. SPARE CAPACI TY: How much spare capacity a firm has - if there is plenty of spare capacity, the firm should be able to increase output quite quickly without a rise in costs and therefore supply will be elastic 2. STOCKS: The
level of stocks or inventories - if stocks of raw materials, components and
finished products are high then the firm is able to respond to a change in demand quickly by supplying these stocks onto the market - supply will be elastic 3. EASE OF FAC TOR SUBS TITUTION: Consider the sudden and dramatic increase in demand for petrol canisters during the recent fuel shortage. Could manufacturers of cool-boxes or producers of other types of canister have switched their production processes quickly and easily to meet the high demand for fuel containers? If capital and labor resources are occupationally mobile then the elasticity of supply for a product is likely to be higher than if capital equipment and labor cannot easily be switched and the production process is fairly inflexible in response to changes in the pattern of demand for goods and services.
4. UTIME PERIOD: Supply is likely to be more elastic, the longer the time period a firm has to adjust its production. In the short run, the firm may not be able to change its factor inputs. In some agricultural industries the supply is fixed and determined by planting decisions made months before, and climatic conditions, which affect the production, yield. Economists sometimes refer to the momentary time period - a time period that is short enough for supply to be fixed i.e. supply cannot respond at all to a change in demand.
ILLUSTRATING PRICE ELASTICITY OF SUPPLY
Explanation with Examples
When supply is Perfectly Inelastic, a shift in the demand curve has no effect on the equilibrium quantity supplied onto the market. As the elasticity rises, the supply curve gets flatter, which shows that the quantity supplied responds more changes in the price Examples include the supply of tickets for sports or musical venues, and the short run supply of agricultural products (where the yield is fixed at harvest time) the elasticity of supply = zero when the supply curve is vertical. As a hypothetical example, consider the supply curve of the land. Suppose that no matter how much someone would be willing to pay for
an additional piece, more land cannot be created. Also, even if no one wanted all the land, it still would exist. In such a case, land would have a vertical supply curve, with w ith zero elasticity.
When supply is Perfectly elastic a firm can supply any amount at the same price. This elasticity alternative exists when the price is fixed, that is, an infinite range of quantities q uantities is associated with the same price. Perfectly Per fectly elastic demand can occur, in theory, when buyers have the choice among a large number of perfect substitutes in the consumption of a good. In an analogous way, perfectly elastic supply can occur when sellers have the choice among a large number of perfect substitutes in the production. A hypothetical example of perfectly elastic supply comes with a generic cheese sandwich, such as that sold by Manny Mustard and thousands of others. The production cost of combining labor, kitchen utensils, mayonnaise, cheese, and bread are one dollar per sandwich. This cost is the same for one sandwich or one billion sandwiches. There is no increasing opportunity cost. There are no economies of scale.
As such, the supply of generic cheese sandwiches is perfectly elastic. If buyers pay a buck each, one dollar, they get as many generic cheese sandwiches as they want. If buyers should lower the price they offer for generic cheese sandwiches by an infinitesimally small amount, then sellers do not supply any generic cheese sandwiches. If buyers should raise the price they offer for generic cheese sandwiches by an infinitesimally small amount, then sellers supply an infinitely large amount.
Relatively Inelastic means that relatively large changes in price pr ice cause
relatively small changes in quantity. In other words, quantity is not very responsive to price. More specifically, the percentage change in quantity is less than the percentage change in price. Relatively inelastic demand occurs when buyers can choose from among a small number of imperfect substitutes-inconsumption. One hypothetical example of relatively inelastic supply is Mona Mallard Duct Tape.
While it might seem as though duct tape (that shiny gray tape that is used for every conceivable purpose EXCEPT sealing ventilation ducts) is easily produced by switching resources from the production of cellophane tape, electrical tape, or adhesive tape, Mona Mallard M allard Duct Tape has a special "something" that generates a relatively elastic supply. That special something is quagliminium, a rare adhesive substance found only in the natural vegetation growing in the isolated country of Northwest Queoldiolia. Therefore, to increase the quantity supplied of duct tape, Mona Mallard must acquire greater amounts of quagliminium, which is always an expensive proposition. As such, the supply of Mona Mallard Duct Tape is relatively inelastic.
Relatively elastic means that relatively small changes in price cause re latively large changes in quantity. In other words, quantity is very responsive to price. More specifically, the percentage change in quantity is greater than the percentage change in price. Relatively elastic demand occurs when buyers can choose from among a large number of very close substitutes-inconsumption. One example of relatively elastic supply is Wacky Willy Stuffed Amigos (those cute and cuddly stuffed armadillos and tarantulas).
The
production and thus quantity supplied of these can be easily expanded by acquiring additional resources at about the same cost of the resources already employed. The semi-skilled labor used (sewers, stuffers, packers, shippers) is easy to train. The materials used (cloth, stuffing, thread) are readily available. It is just not a big deal to increase production. As such, the supply of Wacky Willy Stuffed Amigos is relatively elastic. The price received by The Wacky Willy Company only needs to change a little to induce significant changes in the quantity supplied.
Unit elastic means that any change in price causes an equal proportion change
in quantity. Quantity changes are matched by price changes. More specifically, the percentage change in quantity is equal to the percentage change in price. Unit elastic demand occurs when buyers can choose from among a modest number of substitutes in the consumption of a good.
y
In economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable. It is a tool for measuring the responsiveness of a function to changes in parameters in a relative way. Commonly analyzed are elasticity of substitution, price and wealth.
y
An "elastic" good is one whose price elasticity of demand has a magnitude greater than one. Similarly, "unit elastic" and "inelastic" describe goods with price elasticity having a magnitude of one and less than one respectively.
y
The
degree to which a demand or supply curve reacts to a change in price is the
curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. y
A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all.
These
goods tend to be
things that are more of a necessity to the consumer in his or her daily life.
Applications As the price of a good rises, consumers will usually demand a lower quantity of that good; they may consume less of that good, substitute it with another product, etc. The greater the extent to which demand falls as price pr ice rises, the greater the price elasticity of demand. Conversely, as the price of a good falls, consumers will usually demand a greater quantity of that good: consuming more, dropping substitutes, etc. However, there may be some goods of which consumers cannot consume less or for which adequate substitutes cannot be found. Prescription drugs, fuel, and food are some examples of these. For such goods, demand does not greatly decrease as the price rises, and elasticity of demand can be considered low. Further, elasticity will normally be different in the short term and the long term. For example, for many goods the supply can be increased over time by locating alternative sources, investing in an expansion of production capacity, or developing competitive products which can substitute. One might therefore expect that the price elasticity of supply will be greater in the long term than the short term for such a good, that is, that supply can adjust to price changes to a greater degree over a longer time. This
applies to the demand side as well. For example, if the price of petrol
rises, consumers will find ways to conserve their use of the resource. However, some of these ways, like finding a more fuel-efficient car, take time. So consumers as well may be less able to adapt to price shocks in the short term than in the long term.
The
concept of elasticity has an extraordinarily wide range of applications in
economics. In particular, an understanding of elasticity is useful to understand the dynamic response of supply and demand in a market, to achieve an intended result or avoid unintended results. Supply and demand does not always guarantee buyers or sellers; this depends on their competitive positions within the market. For example, a business considering a price increase might find that doing so lowers profits if demand is highly elastic, as sales would fall sharply. Similarly, a business considering a price cut might find that it does not increase sales, if demand for the product is price inelastic. Elasticity is also used to analyze social s ocial policies. For example, the tobacco settlement in the United States led to significant s ignificant price and tax increases on cigarettes. PED's could be used to determine the incidence of taxes and the demand response to the increase prices.
Bhagwan Mahavir College of Management
Name: Jayesh Khatwani
(21)
Kajal Lad
(22)
Nency Lakdawala (23) Kishan Lukhi
(24)
Hemali Hemali Mangrola
(25)
Subj: Economics For Managers. Topic:
Application of Elasticity of Supply. Suppl y.
Submitted To: Mr. Sanjay Ghosh. Submitted On: 5th Dec. 2009
