Determinants of Price Elasticity of Supply
The determinants of price elasticity of supply refer to the factors that influence how responsive the quantity supplied of a good or service is to changes in its price. These determinants include the availability of inputs, the time horizon, and the flexibility of production processes. A more elastic supply is characterized by a greater ability to increase production in response to price changes.
8 Key excerpts on "Determinants of Price Elasticity of Supply"
eBook - ePub- Rob Dransfield(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...This has been further impacted upon by aggressive discounting in rival stores. In each of the above situations how might the store use a knowledge of elasticity to adjust its pricing strategies ? Price elasticity of supply When the price of a good rises or falls this leads to an extension in supply – that is, a movement up or down the supply curve. The extent to which quantity supplied responds to a change in price is determined by how elastic supply is. Key Term Price elasticity of supply – the extent to which quantity supplied alters in response to a change in price. It is measured by the formula: In the case of supply there is a positive relationship between the two variables. As a result price elasticity of supply will typically be represented by a + sign. Elasticity of supply occurs when the percentage change in quantity supplied is greater than the percentage change in price – for example, if supply increased by 10 per cent as a result of a 5 per cent increase in price. Factors influencing price elasticity of supply The main factor influencing price elasticity of supply is time. At a particular moment in time it may be impossible to increase supply, for example reprinting a popular book, however much price increases. Supply in this instance is perfectly inelastic. In the short term it may be possible to increase supply using existing equipment and machinery. In the longer term it may be possible to increase supply further by acquiring more machinery and equipment. The longer the period of time, the more elastic supply is in response to a price change (see Figure 3.13). Figure 3.13 Price elasticity of supply and time In Figure 3.13, S 1 shows perfectly inelastic supply at a moment in time, S 2 relatively inelastic supply in the short period, and S 3 represents relatively elastic supply in the longer period. Other factors affecting the price elasticity of supply are: The ease with which a product can be stored...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...The following section explains these supply determinants. 8.4 Determinants of supply The supply of a good results from the interaction of many economic variables. The list of supply determinants generally considered to be most important includes such things as (1) input prices, (2) production technology, (3) prices of related goods, and (4) the number of sellers. Therefore, a formula for a supply curve for a good includes own price (P), input prices (P i), technology (T), prices of other, related goods (P o), the number of sellers (N), and a category “Other,” representing all other determinants of supply: (8.15) Q s = f(P | P i, T, P o, N, Other). A graph of a supply curve condenses all of the determinants into the relationship between the quantity supplied of a good (Q s) and the own price of the good (P), while all other variables are held constant (the ceteris paribus assumption). QUICK QUIZ 8.7 Why are all variables other than the price held constant? The nonprice determinants of supply are often called “supply shifters” because a change in any one of them results in a shift in the entire supply curve (a change in supply). However, if only the price of a good changes, the result is a movement along the existing supply curve, or a change in quantity supplied. 8.4.1 Input prices The prices that firms pay to purchase inputs have a direct effect on the cost of production (Chapter 3). These prices multiplied by the quantities of inputs purchased represent the costs paid by the producing firm. Since the individual firm’s supply curve is the marginal cost curve on any level of output above the shutdown point, any increase in the price of an input will increase the cost of production and hence shift the supply curve upward and to the left. QUICK QUIZ 8.8 Define the shutdown point and distinguish it from the break-even point. Figures 8.9 and 8.10 show how an increase in input prices shifts the supply curve...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...The major determinants of the price elasticity of demand are the availability of substitutes, the proportion of buyer income spent on a product, and the time period under consideration. If a firm’s price and total revenue move in opposite directions, demand is elastic. If the firm’s price and total revenue move in the same direction, demand is inelastic. If the firm’s total revenue does not respond to a change in price, demand is unit elastic. Occasionally, the government will impose price controls on individual markets in which prices are considered unfairly high to buyers or unfairly low to sellers. When the government imposes a price ceiling on a product, it establishes the maximum legal price that a seller may charge for that product. Conversely, the government may establish a price floor to prevent prices from falling below a legally mandated level. Although price controls on individual markets attempt to make prices more “fair” for buyers and sellers, they interfere with the market’s allocation of resources. Price ceilings that are set below the equilibrium price level result in market shortages of a product. Price floors that are set above the equilibrium level entail market surpluses. Key Terms and Concepts price elasticity of demand (58) total revenue (62) elastic demand (62) inelastic demand (62) unit elastic demand (62) price ceiling (68) price floor (68) rent controls (69) Study Questions and Problems Suppose that researchers estimate that for every 1-percent change in the price of computers, the quantity demanded will change by 2.5 percent. Describe the price elasticity of demand for computers. What if researchers estimate that the quantity demanded for computers will change by 0.5 percent in response to a 1-percent change in price? Economists estimate the short-run price elasticity of demand for airline travel to be 0.1, 0.3 for housing, 1.5 for glass, and 1.9 for automobiles...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
...The next section expands and explains that information. 8.2 The elasticity of supply The profit-maximizing behavior of business firms leads to a positive (upward-sloping) relationship between the price and quantity supplied of a good. The rate of change in one variable in response to a change in the other variable is of critical importance. It comes down to the question, “How much will quantity supplied increase (decrease) for a given increase (decrease) in the price?” The term Elasticity describes this relationship, and understanding the relationship is important to understanding how a market economy functions. 8.2.1 Elasticity defined Elasticity is a measure of the responsiveness of one variable to a small change in another variable. Elasticity = the percentage change in one economic variable in response to a percentage change in another economic variable. The elasticity of supply measures how quantity supplied changes when the price of a good increases by one percent: Elasticity of Supply = the percentage change in the quantity supplied in response to a percentage increase in price. Mathematically, the elasticity of supply (E s) is given by: (8.5) E s = (% change in Q s)/(% change in P) = %ΔQ s /%ΔP. 8.2.2 Elasticity classifications The formula E s = %ΔQ s /%ΔP shows that the price elasticity of supply is the responsiveness (measured by the percentage change) in quantity supplied, given a one percent change in the good’s own price. The price elasticity of supply measures the movements along a supply curve. A hypothetical example of the supply curve for bread in New York City appears in Figure 8.4...
eBook - ePubIntermediate Microeconomics
Neoclassical and Factually-oriented Models
- Lester O. Bumas(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...Income, which varies with the price level and other factors, may very well be the most important determinant of quantities purchased. This will be seen in Chapter 4 on consumer behavior. Shift variables play an important role in changing demand and changing supply, and they warrant more consideration than is normally awarded to them. It is important, in general, to consider supply and demand to be independent of each other. When demand is being analyzed, care must be taken not to enter the realm of supply and vice versa. There are, however, important cases in which supply is a function of demand or demand a function of supply, and we should be aware of them and the need to determine whether or not such dependencies exist in a market that may concern us. An important example is the role of job vacancies, the difference between demand and supply, in drawing supplies of workers to occupations, industries, regions, and employers. This anticipates Chapter 12 ’s discussion on aspects of the supply of labor. Questions on Chapter 2 1. Explain the sense of the breakdown into supply and demand? 2. a. Define the price elasticity of demand. b. Explain why a firm that found its price to be in the inelastic range would like to raise its price. (Use a numerical example to help explain your answer.) 3. a. Show an elastic and an inelastic positive-sloped supply function. Explain why one is elastic and the other inelastic. b. As Q increases, the price elasticity of supply approaches unity. Show why this is so. 4. Supply functions tend to be horizontal for a period of a year, on the average. Explain why this is so. Give a few examples. 5. If price is constant for a substantial period of time, what signal is used by producers to make their rate of production decision. 6. Assume that people are wealthy enough to buy most habitual products irrespective of price...
eBook - ePub- Ralph Turvey(Author)
- 2022(Publication Date)
- Routledge(Publisher)
...Unfortunately, despite the simplicity of such markets, measurement of supply relationships is trickier than the measurement of demand relationships - at least as regards those of nondurable goods. The time factor is the reason for this contrast. Margarine purchasers can alter their behaviour pretty fast in response to price changes. Wheat farmers, on the other hand, decide how much they sow rather than how much they harvest, and do so in relation to the prices that they expect to rule for the harvested crop. Thus wheat supply is a matter of their decisions and of their expectations, whereas the statistics available usually relate to actual harvests and to realized prices. Furthermore, a sustained expectation of higher prices may lead farmers to acquire more equipment over a period of years, so that the full response of supply to price is spread out over time. In technical jargon, the elasticity of supply may be greater in the long run than in the short run. Supply, then, both of goods and even more of labour, is less promising than demand for empirical illustration or for application. Since this is an empirically oriented book, we had better leave it there for the present. 6.11. Prices, information and incentive It is a fundamental proposition of demand and supply that an increasing scarcity of something leads to the substitution for it of other things. Where the ‘something’ can be bought and sold, we have said that a major manifestation of growing scarcity is a rise in price relative to the prices of other things. Such a rise in relative price provides an incentive: - to purchasers, to substitute other things; - to sellers, to increase supply. As was mentioned earlier, a large part of economic theory has been built on the assumption that prices are the only mechanism which adjust demand and supply to each other. This, it has now been made clear, is a gross simplification in many markets...
eBook - ePubEconomics
A Foundation Course for the Built Environment
- J.E. Manser(Author)
- 2003(Publication Date)
- Routledge(Publisher)
...An initial reduction in supply (S curve shifts left) would also create a shortage and cause the price to rise. Sales would fall, not because buyers wants have changed—the position of the demand curve is unaltered—but because they cannot afford to use bricks so freely at the higher price (move upwards along the demand curve). The effect of a decrease in demand is shown in Fig. 3.6. A change in conditions of demand, such as a fall in incomes, might cause this to happen. The result will be excess supply until suppliers adjust their prices and quantities to restore equilibrium. The effect of an increase in the quantity of bricks supplied can be analysed in a similar manner—you may like to try working out this diagram for yourself. PRICE ELASTICITY We know that price affects the quantity traded. If increased demand pushes up prices sellers strive to supply more goods. If a cut in supplies forces the price up, consumers will buy less. The effect on sales may be quite small or it may be substantial. Elasticity measures the degree of response to price changes. The more price sensitive we are, as consumers or suppliers, the greater the elasticity of demand or supply. Elasticity is calculated according to the formula: Figure 3.5 Equilibrium price and quantity. If the result is greater than 1, e.g. a 5% price change produces a 7% change in the quantity traded, the response to the price change is elastic. If the result is less than 1, e.g. a 5% price change produces only 4% change in quantity, the response is inelastic. Price elasticity has an important bearing on firms’ revenues. These depend on both the quantity of sales and the price. If higher prices reduce sales, will revenue rise or fall? (Total revenue = Sales × Price.) The answer depends on elasticity. If buyers are not price sensitive (demand is inelastic) sales will fall very little, so revenue rises because each sale brings in more money...
eBook - ePub- Tom Craig, David Campbell(Authors)
- 2012(Publication Date)
- Routledge(Publisher)
...We may say, therefore, that the total demand for product A is 10,000 units a month if the price is 45 pennies per unit. Thus all three components must be in place before the demand can be said to be effective. The Determinants of Demand In seeking to answer the question why the demand for a product is as it is, we must explore the reasons behind consumer choices. We can intuitively appreciate that demand for goods and services varies, both according to the type of product and over time. There are five broad variables which determine the demand for any given product: the financial ability to pay; changing tastes and fashions (i.e. changing preferences); the prices of other, related products; the consumer’s perceptions of what will happen in the future; the type of product it is. We will examine each in turn. Ability To Pay The ability to pay for goods and services will obviously have a huge influence on demand. If consumers have a lot of spending power (or disposable income), demand for most products will rise. Conversely, if consumers are ‘hard up’, demand will tend to fall. The power of consumer spending will depend, among other things upon macroeconomic features such as: the level of wage or income increases, tax rates, interest rates, employment and unemployment levels in the country. Consumer Preferences The second determinant of demand is the changing face of consumer preferences. If financial issues determine the consumer’s ability to buy, preferences concern the consumer’s willingness to buy. It is obvious that people change over time in what they want to buy. It may be that one type of product is in demand 1 year, but not the next...
