LAYOUT OF PRESENTATION
•What is elasticity? •Price elasticity of supply •Types of elasticity •Factors or determinants •Examples •Case study
WHAT IS ELASTICITY ?
•Elasticity is a measure of responsiveness of one variable to another •Elasticity measures the proportional(percentage) change in one variable relative to proportional change in another variable.
•It can be defined as the “degree of responsiveness of supply to a given change in price”. Since the higher price usually results in an increased quantity supplied, the percent change in price and the percent change in quantity supplied move in the same direction ? the price elasticity of supply is usually a positive number .
PRICE ELASTICITY OF SUPPLY
The formula to find out the elasticity of supply is
Percentage change in quantity supplied divided by percentage change in price.
? The price of a product falls from 60p to 40p
causing supply to contract from 120 to 100.
? The price of a product rises from €50 to €60
causing supply to extend from 100 to 200.
?
The price of a product falls from 60p to 40p causing supply to contract from 120 to 100. PeS= 16%/ 33%= 0.48
?
The price of a product rises from €50 to €60 causing supply to extend from 100 to 200. PeS= 100% / 20 % = 5
Types of price elasticity of supply
Inelastic supply
The diagram to your left indicates a good which has an inelastic supply curve. It is possible, for example, to grow tomatoes all year round. To grow tomatoes in winter requires glass houses, heating, and supplementary lighting in the right wave lengths, to compensate for the shorter days and longer nights. However, it can be done; but at a considerable cost. The price of tomatoes would have to rise by a considerable amount (to P1 from Po) to justify the small increase in quantity supplied. (Q1 less Qo).
Elastic supply
The diagram to your left indicates a good which has an elastic supply curve. An icecream manufacturer can rapidly increase production, if hot weather is forecast. Sales are likely to increase by a large amount. The demand for icecreams would have to rise by only a small amount (to P1from Po) to justify the large increase in quantity supplied. (Q1 less Qo).
Perfectly inelastic supply
Perfectly elastic supply
ES = ES > 1 ES = 1 ES < 1 Es = 0
% change in quantity supplied % change in price price-elastic supply unit-elastic supply price-inelastic supply perfectly inelastic supply perfectly elastic supply
Es = infinity
Cross elasticity of supply
•The cross (price) elasticity of supply measures change in quantity supplied of one commodity when the price of another commodity changes .
Cross elasticity of supply can be expressed as: Esc = proportionate change in quantity supplied of one product proportionate change in price of another product •Cross elasticity is always negative indicating that a rise in the price of one good will lead to a fall in the quantity supplied of alternative good.
Example of cross elasticity of supply
Wheat paddy To understand cross elasticity of supply we are taking example of agriculture commodities wheat and paddy . Since land is a scarce factor farmers have to be careful about its use .If a farmer grows wheat on a piece of land ,but if price of paddy goes up then land will be diverted from wheat production causing fall in quantity of wheat supplied.
Determinants or factors that affect price elasticity of supply .
The value of price elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market and vice versa. 1) SPARE CAPACITY 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 FACTOR SUBSTITUTION 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 labour resources are occupationally mobile then the elasticity of supply for a product is likely to be higher than if capital equipment and labour 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) TIME 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.
Examples
An empty restaurant – When telecommunications plenty of spare capacity to networks get congested at peak meet any rise in demand! times, the elasticity of supply to meet rising demand may be low
Stocks in a warehouse – For many agricultural businesses with plentiful products there are time lags stocks can supply quickly and in the production process easily onto the market when which means that elasticity of demand changes supply is very low in the immediate or momentary time period
Case study
Salt Union and Elasticity of Supply
The Big Freeze has caused a huge rise in the demand for grit to treat road surfaces. Most of this demand comes from local authorities and inevitably the supply-side of the market has found it difficult to match production with demand.
The Salt Union is the dominant supplier of rock salt to use on Britain’s roads. Their mine at Winsford in Cheshire is the UK’s biggest rock salt mine and is capable of extracting 30,000 tonnes per week, it has nearly 140 miles of roads some 200 metres below ground. But their plant has been working at full capacity since mid December and the Salt Union has admitted that - despite working 24 hours-a-day seven days-a-week at a maximum output of 30,000 tonnes a week, it is not possible to sustain the unprecedented level of repeat orders coming in. The potash mine at Boulby in Cleveland is the other big source of rock salt in the UK, it too is working at capacity and has opted to divert planned exports to local authorities because of unexpected depletion of stocks. The third main supplier of rock salt comes from Northern Ireland - the Irish Salt Mining and Exploration Company Stocks of rock salt have dropped sharply and the main supplier is working at capacity - two factors that have made the short run supply of rock salt highly inelastic in response to strong demand. The free market price of salt ought to rise in such circumstances and there is evidence that local councils who have flexible salt supply contracts with the Salt Union are seeing a rise in the cost of salt per tonne. This BBC magazine article tries to unearth some of the detail on salt contract prices
doc_509831076.ppt
•What is elasticity? •Price elasticity of supply •Types of elasticity •Factors or determinants •Examples •Case study
WHAT IS ELASTICITY ?
•Elasticity is a measure of responsiveness of one variable to another •Elasticity measures the proportional(percentage) change in one variable relative to proportional change in another variable.
•It can be defined as the “degree of responsiveness of supply to a given change in price”. Since the higher price usually results in an increased quantity supplied, the percent change in price and the percent change in quantity supplied move in the same direction ? the price elasticity of supply is usually a positive number .
PRICE ELASTICITY OF SUPPLY
The formula to find out the elasticity of supply is
Percentage change in quantity supplied divided by percentage change in price.
? The price of a product falls from 60p to 40p
causing supply to contract from 120 to 100.
? The price of a product rises from €50 to €60
causing supply to extend from 100 to 200.
?
The price of a product falls from 60p to 40p causing supply to contract from 120 to 100. PeS= 16%/ 33%= 0.48
?
The price of a product rises from €50 to €60 causing supply to extend from 100 to 200. PeS= 100% / 20 % = 5
Types of price elasticity of supply
Inelastic supply
The diagram to your left indicates a good which has an inelastic supply curve. It is possible, for example, to grow tomatoes all year round. To grow tomatoes in winter requires glass houses, heating, and supplementary lighting in the right wave lengths, to compensate for the shorter days and longer nights. However, it can be done; but at a considerable cost. The price of tomatoes would have to rise by a considerable amount (to P1 from Po) to justify the small increase in quantity supplied. (Q1 less Qo).
Elastic supply
The diagram to your left indicates a good which has an elastic supply curve. An icecream manufacturer can rapidly increase production, if hot weather is forecast. Sales are likely to increase by a large amount. The demand for icecreams would have to rise by only a small amount (to P1from Po) to justify the large increase in quantity supplied. (Q1 less Qo).
Perfectly inelastic supply
Perfectly elastic supply
ES = ES > 1 ES = 1 ES < 1 Es = 0
% change in quantity supplied % change in price price-elastic supply unit-elastic supply price-inelastic supply perfectly inelastic supply perfectly elastic supply
Es = infinity
Cross elasticity of supply
•The cross (price) elasticity of supply measures change in quantity supplied of one commodity when the price of another commodity changes .
Cross elasticity of supply can be expressed as: Esc = proportionate change in quantity supplied of one product proportionate change in price of another product •Cross elasticity is always negative indicating that a rise in the price of one good will lead to a fall in the quantity supplied of alternative good.
Example of cross elasticity of supply
Wheat paddy To understand cross elasticity of supply we are taking example of agriculture commodities wheat and paddy . Since land is a scarce factor farmers have to be careful about its use .If a farmer grows wheat on a piece of land ,but if price of paddy goes up then land will be diverted from wheat production causing fall in quantity of wheat supplied.
Determinants or factors that affect price elasticity of supply .
The value of price elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market and vice versa. 1) SPARE CAPACITY 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 FACTOR SUBSTITUTION 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 labour resources are occupationally mobile then the elasticity of supply for a product is likely to be higher than if capital equipment and labour 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) TIME 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.
Examples
An empty restaurant – When telecommunications plenty of spare capacity to networks get congested at peak meet any rise in demand! times, the elasticity of supply to meet rising demand may be low
Stocks in a warehouse – For many agricultural businesses with plentiful products there are time lags stocks can supply quickly and in the production process easily onto the market when which means that elasticity of demand changes supply is very low in the immediate or momentary time period
Case study
Salt Union and Elasticity of Supply
The Big Freeze has caused a huge rise in the demand for grit to treat road surfaces. Most of this demand comes from local authorities and inevitably the supply-side of the market has found it difficult to match production with demand.
The Salt Union is the dominant supplier of rock salt to use on Britain’s roads. Their mine at Winsford in Cheshire is the UK’s biggest rock salt mine and is capable of extracting 30,000 tonnes per week, it has nearly 140 miles of roads some 200 metres below ground. But their plant has been working at full capacity since mid December and the Salt Union has admitted that - despite working 24 hours-a-day seven days-a-week at a maximum output of 30,000 tonnes a week, it is not possible to sustain the unprecedented level of repeat orders coming in. The potash mine at Boulby in Cleveland is the other big source of rock salt in the UK, it too is working at capacity and has opted to divert planned exports to local authorities because of unexpected depletion of stocks. The third main supplier of rock salt comes from Northern Ireland - the Irish Salt Mining and Exploration Company Stocks of rock salt have dropped sharply and the main supplier is working at capacity - two factors that have made the short run supply of rock salt highly inelastic in response to strong demand. The free market price of salt ought to rise in such circumstances and there is evidence that local councils who have flexible salt supply contracts with the Salt Union are seeing a rise in the cost of salt per tonne. This BBC magazine article tries to unearth some of the detail on salt contract prices
doc_509831076.ppt