Crosselasticity of demand the change in the quantity demanded of good a when the price of a different good, b, changes price. Introduction to markets and market failure edexcel economics a. Explaining price elasticity of supply economics tutor2u. We will look at how quantity demanded and supplied respond to their key determinants in quantitative elasticity as well as qualitative terms. Along with the method mentioned above, there are two more ways to calculate the price elasticity of supply, both of which make use of the supply curve. Evidence from china authors songtao wang, su han chan, and bohua xu abstract this paper provides a. The citylevel analysis reveals that geographic, economic as well as regulatory factors are significant determinants of the variation in the observed price elasticity of housing supply.
Elasticity of supply measures the degree of responsiveness of quantity supplied to a change in own price of the commodity. This lowers the average and marginal costs, since, with the same. The main determinants factors which determine the degree of price elasticity of supply are as under. May 15, 2020 price elasticity of supply is defined as the responsiveness of quantity supplied when the price of the good changes. The law of supply states that there is a direct relationship between the quantity supplied and price of a commodity. When factors other than price changes, supply curve will shift. Apart from the price, there are several other factors that influence the elasticity of demand.
Determinants of price elasticity of demand although we know how to measure the elasticity. Number of sellers as a determinant of market supply although not a determinant of individual firm supply, the number of sellers in a market is clearly an important factor in calculating market supply. So here are the numbers for the price elasticity of supply for tobacco and housing. Elasticity of demand and supply webarchiv of the eth zurich. Pdf the estimation and determinants of the price elasticity of. The law of supply indicates the direction of changeif price goes up, supply will increase. The main determinantsfactors which determine the degree of price elasticity of supply are as under. Income elasticity of demand definition types of income elasticity necessities and luxuries 5. Determinants of price elasticity and the total revenue rule. The income of the consumer also affects the elasticity of demand.
If the price of a commodity rises and the producers have enough time to make adjustment in the level of output, the elasticity of supply will be more. The two determinants of price elasticity of supply are production time period and the availability of factors of production. We can either calculate the elasticity at a specific point on the supply curve, known as point elasticity or between two prices, known as arc elasticity. If substitutes are available, customers are likely to be very responsive to changes in price. The supply and demand curves which are used in most economics textbooks show the dependence of supply and demand on price, but do not provide adequate information on how equilibrium is reached, or the time scale involved. As with demand elasticity, the most important determinant of elasticity of supply is the availability of substitutes.
More specifically, it is the percentage change in quantity demanded in response to a one percent change in price when all other determinants of demand are held constant. So, if the related infrastructure is easily scalable, then the supply of such a product will be highly elastic or else it will be inelastic. Interestingly, the concept of elasticity of supply handles all of this with ease. In doing so, the law of supply ignores the ground realities that are related with supply. Determinants of price elasticity of supply uk essays. Determinants of price elasticity of demand video khan academy. In economics, elasticity is a summary measure of how the supply or demand of a particular good is. Pes 1, then producers can increase output without a rise in cost or a time delay. If the price elasticity of supply is less than 1, supply is inelastic. Microeconomics supply and demand price elasticity of demand determinants of price elasticity and the total revenue rule ap micro. What is the formula for calculating price elasticity of supply.
Determinants of price elasticity of supply a numeric value that measures the elasticity of a good when the price changes. Discuss factors that determine demand and supply elasticity. In the context of supply, substitute goods are those to which factors of production can most easily be transferred. In short term, due to deficient availability of time to organize and adjusts the supply to demand, so supply is more tends to inelastic. Pes definition p 7 price elasticity of demand the elasticity of demand tells us how sensitive the quantity demanded is to the goods price at a given point on a demand curve. Determinants of price elasticity of demand goods economics. Microeconomics supply and demand price elasticity of demand determinants of price elasticity and the total revenue rule ap. Perfectly elastic demand occurs when a change in price results in an infinite change in quantity demanded.
The short run is the period of time in which a firm is able to increase supply with its existing capacity. Supply determinants other than price can cause shifts in the supply curve. Unlike the other determinants of supply, however, the analysis of the effects of expectations must be undertaken on a case by case basis. Determinants of price elasticity of supply management study guide.
Determinants of demand, elasticity, supply and demand study guide by mathildendoye includes 28 questions covering vocabulary, terms and more. Here we will discuss the determinants of supply other than price. It is the ratio of the percentage change in quantity supplied to the percentage change in price. The following nine points highlight the nine factors affecting price elasticity of supply.
Elasticity of demand 29 elasticity of demand it answers the question by how much. Let us make an indepth study of the elasticity of supply. Determinants of price elasticity of demand video khan. Price elasticity of supply is defined as the responsiveness of quantity supplied when the price of the good changes. The most important determinant of a products elasticity is the availability of close substitutes. If the price of a commodity rises and the producers have enough time to make adjustment in the level of output, the elasticity of supply will be more elastic. Explain determinants of price elasticity of supply economics. Elasticity of demand is defined as the responsiveness of the quantity demanded of a good to change on one of the variables on which demand depends.
To point out, this is a very qualitative statement. Of all the factors determining price elasticity of demand the. Explain determinants of price elasticity of supply. If a product has many close substitutes, for example, fast food, then people tend to react strongly to a price increase of one firms fast food. Theincome elasticity of demand, and the crossprice elasticityof demand. The cases for price elasticity or determinants of supply are the factors that affect the supply of a product or service and that cause a shift in the supply curve. And clearly we see that the price of elasticity tobacco is a little more, its larger. Also, a steeper demand curve tends to be more inelastic, and a flatter demand curve tends to be more elastic. Relatively inelastic supply quantity stretches less than price p2 quantity 0 q1 q2 relatively elastic supply quantity stretches more than price price quantity s 0 unit elastic supply any straight line s curve that goes through the origin as slide along curve, the ratio between p and q is unchanged s s price quantity 0 s p1 q1 p2 q2 8. The price elasticity of demand ped is a measure that captures the responsiveness of a goods quantity demanded to a change in its price. Which ever production process can increase the supply, more rapidly, its going to have a larger number, its going to have a more elastic supply. Here is a list of determinants which generally affect the price elasticity of supply in the market. Determinants of labour supply reserve bank of fiji. If substitutes are not available, demand is likely to be unresponsive to price changes.
A firm or industry operating at full capacity is unable to raise output quickly so. Relatively inelastic supply quantity stretches less than price p2 quantity. For highincome groups, the demand is said to be less elastic as the rise or fall in the price will not have much effect on the demand for a product. The demand for a product is more elastic if there are close substitutes for it, if a consumer has time to search for substitutes, or if the product requires a large.
The price elasticity of supply is always positive because the law of supply says that quantity supplied increases with an increase. Price elasticity of supply boundless economics lumen learning. Define and explain the factors that influence the cross elasticity of demand and the income elasticity of demand. Determinants of price elasticity and the total revenue. After presenting the quantitative results, illustrative examples are depicted to show that the most influential determinants according to the results of the study, do indeed apply in the real word. Determinants of price elasticity of supply flashcards quizlet. The market period means that a certain time period is needed to let producers adapt to the market situation. The most important factor affecting price elasticity of supply in the nature of the industry under consideration. Factors affecting elasticity of supply prelim topic 3. Those that cause a decrease in the supply shifts the supply curve leftward, meaning that suppliers will supply. Thus, the price elasticity of demand of this firms product is high. The following are the main factors which determine the price elasticity of demand for a commodity. Price elasticity of supply percentage change in quantity supplied percentage change in quantity price if the price elasticity of supply is greater than 1, supply is elastic. Lecture topics elasticity of demand elasticity of supply elasticity and income elasticity 5.
The estimation and determinants of the price elasticity of. Time is the most significant factor which affects the elasticity of supply. Cross price elasticity definition substitutes and complements 4. Using a panel dataset consisting of 35 cities in china. Determinants of price elasticity of supply central. Identifying the determinants of elasticity the main determinants of a products elasticity are the availability of close substitutes, the amount of time a consumer has to search for substitutes, and the percentage of a consumers budget that is required to purchase the good. Oct 14, 2015 for more free video tutorials covering microeconomics.
This is perhaps the most important determinant of elasticity of supply. Number of substitutes the goods which tend to have more substitutes have elastic demand. Pdf this paper provides a first look at estimates of the price elasticity of the housing supply in china at both the national and city levels. This will indicate the extent to which production can be increased in response to an increase in the price of the product. The most important determinants of elasticity are discussed below. Price elasticity of supply definition determinants. One of the determinants of price elasticity of supply is the market period of a specific good or product. However, these factors are held constant according to the law of supply to alleviate the effect of the law of supply especially with relation with quantity supplied and the supply price.
The greater the availability of substitutes, and the more similar the substitutes. The estimation and determinants of the price elasticity of housing supply. If the price elasticity of supply equals 1, supply is unit elastic. Classical economics has been unable to simplify the explanation of the dynamics involved. Law of supply 28 elasticity of supply elasticity of supply is defined as the responsiveness of the quantity supplied of a good to change in its price. Determinants of price elasticity of supply flashcards.
At least factor input is likely to be fixed in quantity in the short run, which makes it difficult for a firm to raise production. Elasticity measures the percent change in one economic variable when there is a 1% change in a different economic variable. The price of a product is a major factor affecting the willingness and ability to supply. The three determinants of price elasticity of demand are.
A high level of spare capacity in a firm means that it can raise production quickly, so supply tends to be elastic. Determinants of the growth elasticity of poverty reduction. Determinants of supply are factors that may cause changes in or affect the supply of a product in the market place. The market period means that a certain time period is needed to let producers adapt to. Quizlet flashcards, activities and games help you improve your grades. We have not yet discussed the reasons why some products have elastic demand and others not so. Identifying the determinants of elasticity the main. The theoretical model stated in the law of supply simply assumes that supply will be able to adjust up and down as and when the price changes. However, markets for different commodities differ in many ways. There are several factors that affect how elastic or inelastic the price elasticity of demand is, such as the availability of substitutes, the timeframe, the share of income, whether a good is a luxury vs. For highincome groups, the demand is said to be less elastic as the rise or fall in the price will not have much. Since most private companies goal is profit maximization. Higher production cost will lower profit, thus hinder supply. The study of a different regulatory and economic environment contributes to the growing literature on supply elasticity and helps explain the seemingly wide.
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