Economics
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.
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11 Key excerpts on "Determinants of Price Elasticity of Supply"
eBook - PDFEconomics
Made Simple
- Geoffrey Whitehead(Author)
- 2014(Publication Date)
- Made Simple(Publisher)
For instance, a Finance Minister who is about to impose a tax of 10 per cent on some commodity with a view to raising revenue would like to know in advance the probable contraction in demand that his new tax will inevitably cause. The extension and contraction of demand and supply with changes in price has been termed the 'price elasticity of demand and supply'. Price elasticity of demand is the responsiveness of the quantity demanded of a particular good to a small change in its price. Price elasticity of supply is the responsiveness of the quantity supplied of a particular good to a small change in its price. Since responsiveness changes at different points along most demand curves, price elasticity always refers to particular points along the curve—which is the same as saying it refers to a particular price. Thus the elasticity of demand for a commodity at £1.00 per unit might be different from its elasticity of demand at £0.50 per unit. Elasticity of demand and elasticity of supply are relative measures, not absolute measures. Measuring change in absolute terms is not very helpful. As an example, if we lower the price of petrol by 1 per cent and as a result sell 40000 litres more per week, this absolute figure sounds impressive. If we then compare it with weekly sales of 40 million litres we see that sales actually only rose by 0.1 per cent. The percentage figure gives us a much better idea of what really happened—an insignificant increase in business as a result of the price cut. The usual formal for discovering price elasticities is Percentage change in quantity demanded Price elasticity of demand ( or su PP lie ^) (or supply) Percentage change in price Besides price elasticity of demand it is possible to have income elasticity of demand, i.e. the responsiveness of demand to changes in income; and population Elasticity of Demand and Supply 125 elasticity of demand, i.e. the responsiveness of demand to changes in population.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
This issue reaches beyond governments and taxes. Every firm faces a similar issue. When a firm considers raising the sales price, it must consider how much a price increase will reduce the quantity demanded of what it sells. Conversely, when a firm puts its products on sale, it must expect (or hope) that the lower price will lead to a significantly higher quantity demanded. 5.1 Price Elasticity of Demand and Price Elasticity of Supply LEARNING OBJECTIVES By the end of this section, you will be able to: • Calculate the price elasticity of demand • Calculate the price elasticity of supply Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage 112 5 • Elasticity Access for free at openstax.org change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. Because price and quantity demanded move in opposite directions, price elasticity of demand is always a negative number. Therefore, price elasticity of demand is usually reported as its absolute value, without a negative sign. The summary in Table 5.1 is assuming absolute values for price elasticity of demand. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes.
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
He found that not only had ticket sales declined, but his revenue had fallen as well. Where had the manager gone wrong? 1. How much do buyers alter their purchases in response to a price change? 434 Chapter 20 Elasticity: Demand and Supply Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 20-1a The Definition of Price Elasticity Elasticity is the measure of the responsiveness of quantity demanded or quantity supplied to a change in price or some other important variable . By “responsiveness” we mean “how much quantity demanded or quantity supplied changes with respect to a change in one variable, everything else held constant.” We have measures of elasticity for both demand and supply. The price elasticity of demand is a measure of the magnitude by which consumers alter the quantity of some product that they purchase in response to a change in the price of that product. The price elasticity of demand, symbolized as e d , is the percentage change in the quan-tity demanded of a product divided by the percentage change in the price of that product. e d ¼ % D Q D % D P The more price-elastic demand is, the more responsive consumers are to a price change—that is, the more they will adjust their purchases of a product when the price of that product changes. Conversely, the less price-elastic demand is, the less responsive consumers are to a price change. Demand curves typically slope down. This means that price ( P ) and quantity ( Q D ) demanded move in opposite directions. Whenever P falls, Q D rises, and when P rises Q D falls.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Chapter 5 Elasticity of Demand and Supply 99 5-2 Determinants of the Price Elasticity of Demand So far we have explored the technical properties of demand elasticity and discussed why it varies along a downward-sloping demand curve. But we have yet to consider why elasticity is different for different goods. Several factors influence the price elastic- ity of demand. 5-2a Availability of Substitutes As we saw in Chapter 4, your particular wants can be satisfied in a variety of ways. A rise in the price of pizza makes other food relatively cheaper. If close substitutes are available, an increase in the price of pizza prompts some consumers to buy substitutes. But if nothing else satisfies quite like pizza, the quantity of pizza de- manded does not decline as much. The greater the availability of substitutes and the more similar these substitutes are to the good in question, the greater that good’s price elasticity of demand. The number and similarity of substitutes depend on how the good is defined. The more narrow the definition, the more substitutes and, thus, the more elastic the demand. For exam- ple, the demand for Post Raisin Bran is more elastic than the demand for raisin bran in general because there are more sub- stitutes for Post Raisin Bran, including Kellogg’s Raisin Bran and Total Raisin Bran, than for raisin bran generally. The demand for raisin bran, however, is more elastic than the demand for breakfast cereals more generally because the consumer has many substitutes for raisin bran, such as cereals made from corn, rice, wheat, or oats, and processed with or without honey, nuts, fruit, or chocolate. To give you some idea of the range of elasticities, the price elasticity of demand for Post Raisin Bran has been estimated to be 22.5 versus 20.9 for all breakfast cereals.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. 108 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes. If . . . Then . . . And It Is Called . . . % change in quantity > % change in price % change in quantity % change in price > 1 Elastic % change in quantity = % change in price % change in quantity % change in price = 1 Unitary % change in quantity < % change in price % change in quantity % change in price < 1 Inelastic Table 5.1 Elastic, Inelastic, and Unitary: Three Cases of Elasticity Before we delve into the details of elasticity, enjoy this article (http://openstaxcollege.org/l/Super_Bowl) on elasticity and ticket prices at the Super Bowl. To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. 108 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col12190/1.4 We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes. If . . . Then . . . And It Is Called . . . % change in quantity > % change in price % change in quantity % change in price > 1 Elastic % change in quantity = % change in price % change in quantity % change in price = 1 Unitary % change in quantity < % change in price % change in quantity % change in price < 1 Inelastic Table 5.1 Elastic, Inelastic, and Unitary: Three Cases of Elasticity Before we delve into the details of elasticity, enjoy this article (http://openstaxcollege.org/l/Super_Bowl) on elasticity and ticket prices at the Super Bowl. To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
On the supply side of markets, producers of goods and services typically find it easier to expand production in the long term of several years rather than in the short run of a few months. After all, in the short run it can be costly or difficult to build a new factory, hire many new workers, or open new stores. But over a few years, all of these are possible. Indeed, in most markets for goods and services, prices bounce up and down more than quantities in the short run, but quantities often move more than prices in the long run. The underlying reason for this pattern is that supply and demand are often inelastic in the short run, so that shifts in either demand or supply can cause a relatively greater change in prices. But since supply and demand are more elastic in the long run, the long-run movements in prices are more muted, while quantity adjusts more easily in the long run. 118 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col11858/1.4 5.4 | Elasticity in Areas Other Than Price By the end of this section, you will be able to: • Calculate the income elasticity of demand and the cross-price elasticity of demand • Calculate the elasticity in labor and financial capital markets through an understanding of the elasticity of labor supply and the elasticity of savings • Apply concepts of price elasticity to real-world situations The basic idea of elasticity—how a percentage change in one variable causes a percentage change in another variable—does not just apply to the responsiveness of supply and demand to changes in the price of a product. Recall that quantity demanded (Qd) depends on income, tastes and preferences, the prices of related goods, and so on, as well as price. Similarly, quantity supplied (Qs) depends on the cost of production, and so on, as well as price. Elasticity can be measured for any determinant of supply and demand, not just the price.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
At the opposite extreme, if supply is entirely unresponsive to price, the supply curve is vertical and the elasticity of supply is equal to zero. For example, no matter how high the price gets, it is impossible to produce more original Picasso paintings (although several imposters have attempted to copy the dead artist’s style and pass off the result as Picasso originals). The responsiveness of the quantity of Picasso paintings supplied to increases (or decreases) in the price of Picasso paintings is thus zero. cross-price elasticity of demand a measure of how responsive consumption of one good is to a change in the price of a related good price elasticity of supply a measure of the responsiveness of the quantity supplied of a commodity to a change in the commodity’s own price 38 Chapter Two • Supply and Demand • Finally, as in the case of elasticity of demand, when the ratio of the percentage change in quantity supplied to the percentage change in price is greater than unity, we say that supply is elastic. When supply is elastic, an increase in price produces a more than proportionate increase in quantity supplied. When the elasticity of supply is less than unity, supply is inelastic and a higher price produces a less than proportionate increase in quantity supplied. When the ratio equals unity, supply is unit elastic and a higher price produces a propor- tionate increase in quantity supplied. • Most economic issues involve the workings of individual markets. • In the supply–demand model, we analyze the behavior of buyers by using the demand curve. • The demand curve shows how much people will pur- chase at different prices when other factors that affect purchases are held constant. The demand curve slopes downward, reflecting the law of demand. • Analysis of the seller side of the market relies on the supply curve, which shows the amount that firms will offer for sale at different prices, other factors being constant.
eBook - PDF- Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
................................................................................................................................................................................................................. ............................................................................................................................................................................................... ................................................................................................................................................................................................................. and subsidies, (5) expectations, and (6) prices of other goods. We will discuss these non-price determinants in more detail momentarily, but first we must distinguish between a change in quantity supplied and a change in supply . A change in quantity supplied is a movement between points along a stationary supply curve, ceteris paribus. In Exhibit 8(a), at the price of $10, the quantity supplied is 30 million Blu-rays per year (point A ). At the higher price of $15, sellers offer a larger “ quantity supplied ” of 40 million Blu-rays per year (point B ). Economists describe the effect of the rise in price as an increase in the quantity supplied of 10 million Blu-rays per year. CONCLUSION: Under the law of supply, any increase in price along the vertical axis will cause an increase in the quantity supplied, measured along the horizontal axis. A change in supply is an increase (rightward shift) or a decrease (leftward shift) in the quantity supplied at each possible price. If ceteris paribus no longer applies and if one of the six nonprice factors changes, the impact is to alter the supply curve ’ s location. CONCLUSION: Changes in nonprice determinants can produce only a shift in the supply curve and not a movement along the supply curve.
eBook - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
53 Demand, Supply, and Price Determination CHAPTER OBJECTIVES Explain how demand and supply work using schedules and graphs. Demonstrate how demand and supply interact in markets to determine prices and to show equilibrium price and quantity, shortages, and surpluses in a market. Explain how changes in nonprice factors cause changes in demand and changes in supply. Illustrate how changes in demand and changes in supply affect equilibrium prices and quantities in markets. Illustrate how government‐imposed price ceilings and price floors influence market conditions. Introduce the concept and calculation of price elasticity, which measures buyers’ and sellers’ sensitivities to price changes. Explain how to measure price elasticity. CHAPTER 3 As we noted in Chapter 2, one way societies can make the basic economic decisions is through individual buyers’ and sellers’ actions in markets. Many societies, such as the United States and some countries in Western Europe and Asia, base their economic systems on such market decision making. There are two basic economic tools to study buyers and sellers and their behaviors in the marketplace: demand and supply. Together these tools help us understand the forces at work in a market economy. In this chapter, we explore demand and supply in detail and put the two together to see how they interact to determine the prices of goods and services. 54 Chapter 3 Demand, Supply, and Price Determination DEMAND AND SUPPLY Demand: The Buyer’s Side Demand, in economic terms, refers to buyers’ plans concerning the purchase of a good or service. For example, you might demand an airplane ticket to London, tennis les- sons, or a chemistry lab book. A business might demand workers, raw materials, machinery, or any other factor of production. Many considerations go into determin- ing the demand for a good or service.
eBook - PDFEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
In the case of own-price elasticity of demand, that measure is Equation 1-23: 10 E d P x ¼ %ΔQ d x %ΔP x ð1-23Þ 10 The reader will also encounter the Greek letter epsilon (ε) being used in the notation for elasticities. Chapter 1 Demand and Supply Analysis: Introduction 41 Notice that this measure is independent of the units in which quantity and price are measured. If, for example, when price rises by 10 percent, quantity demanded falls by 8 percent, then elasticity of demand is simply 0.8. It does not matter whether we are mea- suring quantity in gallons per week or liters per day, and it does not matter whether we measure price in dollars per gallon or euros per liter; 10 percent is 10 percent, and 8 percent is 8 percent. So the ratio of the first to the second is still 0.8. We can expand Equation 1-23 algebraically by noting that the percentage change in any variable x is simply the change in x (denoted “Δx”) divided by the level of x. So, we can rewrite Equation 1-23, using a couple of simple steps, as Equation 1-24: E d P x ¼ %ΔQ d x %ΔP x ¼ ΔQ d x Q d x ΔP x P x ¼ ΔQ d x ΔP x P x Q d x ð1-24Þ To get a better idea of price elasticity, it might be helpful to use our hypothetical market demand function: Q d x ¼ 11,200 400P x . For linear demand functions, the first term in the last line of Equation 1-24 is simply the slope coefficient on P x in the demand function, or 400. (Technically, this term is the first derivative of Q d x with respect to P x , dQ d x =dP x , which is the slope coefficient for a linear demand function.) So, the elasticity of demand in this case is 400 multiplied by the ratio of price to quantity. Clearly in this case, we need to choose a price at which to calculate the elasticity coefficient. Let’s choose the original equilibrium price of $3. Now, we need to find the quantity associated with that particular price by inserting 3 into the demand function and finding Q ¼ 10,000.
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