Monday, April 18, 2016
Tuesday, March 18, 2014
Understanding Price Elasticity of Supply
Price elasticity of supply (PES) is the degree of responsiveness of quantity supplied for a good to a change in its own price. In formula, it can be written as: PES = % of change in quantity supplied / % of change in price
The main aim of PES is nothing more than to measure the ability of firms/ producers/ companies to respond to any increase in demand/ price. In some situations, producers can be very responsive and hence high value of PES. This is known as price elastic in supply. On the other hand, the same producers are not responsive and so the value of PES must be low. In more extreme situations, PES can be zero which means perfectly inelastic in supply
What are the determinants of PES?
a. Time period under consideration. If firms are given a very short time frame, perhaps they are unable to respond at all to any increase in demand/ price. The logic is simple. Depending on what industries we are discussing about but all of them are almost unable to produce or give anything in the immediate period. Consider a hobby shop selling some rare collectible figures. All the stocks are shipped from Taiwan, China and Hong Kong to Malaysia. Even if a hardcore collector is willing to pay 3/4/5 times the market price, if the retailers are out of stock they would probably be unable to give anything in the immediate period. This is because the next batch of stocks will probably arrive in the next few months. The same goes for farmers. If they given only one day to grow fresh lemons, bananas and chillies, they are probably unable to provide anything at all since all of them take time to grow. The same goes for new houses. You don't expect a construction firm to complete a condominium/ apartment in one or two days. Of course the ability to supply is zero. But if they are given more time, then they will be able to adjust factors of production for instance buying more raw materials, hire more skilled workers, adjust the size of land and others, then they will become more responsive to market demand and the PES will gradually increase over the time
b. Whether finished stocks can be kept or not. Vegetables and most crops have short shelf lives. They cannot be stored for long. So, let's just say that the market price suddenly increases, there is a possibility that farmers are unable to respond by increasing the market supply. The reason is, there is nothing in the storage! So, how can they be responsive to price increase? If that is the case PES is usually inelastic. On the other hand, coffee beans and oil can be kept. If the market price is good, coffee farmers and oil producing countries can easily flood the market with such output, hence supply becoming more elastic
c. Whether the firm has spare capacity or not. Spare capacity in this case refers to factors of production that are not put to full use such as workers and equipments. If there is unused capacity, then an increase in market price means firms would be able to become more responsive by making all the employees work and machines running. Supply will become price elastic. On the other hand, if the factory is already running to its maximum capacity, no matter how high the price can go, it is not possible to make the workers work any longer or the machines operating further. Think about this. Being a student, if you already have so much homework thrown to you by your lecturer, I am sure that if there is any additional homework given to you, you probably will tell the lecturer that there is no way that you can cope with the volume already. In this case, your supply is price inelastic. This is the case for any industries. As long as production hits bottleneck, there is no way quantity of output can be further increased
d. Factors of production are mobile or not. If workers are occupationally mobile, then supply may become price elastic. In other words, workers must be able to multi-task. If the market price increases, then firms may need more help so that the quantity supplied can be increased. Being able to get some of the workers from other departments to help out is crucial and if not supply will become price inelastic. For instance, the college where I am currently lecturing is said to be price elastic in supply. In case if there is a sudden increase in the number of students who take CIE Economics, lecturers currently teaching Edexcel Economics can be diverted to where they are needed. Likewise, occupational immobility is the main reason why supply of any firms can become price inelastic
e. Number of firms. The greater is the number of firms, the more elastic will be the supply. If the market price for one particular good increases, it will create an incentive for more factories or farmers to start producing it. As such, supply can be greatly increased in the near future
f. Whether the production process is complicated or not. Goods that can be easily produced, fast and do not need to go through many stages of production process will be more responsive to an increase in price. Most manufacturing goods fall under this category. On the other hand, if the production process is lengthy then supply is usually price inelastic such as agricultural produce
Monday, March 17, 2014
The List of the Most Important Definitions for Chapter 2 (CIE AS): The Price System
Here you go,
2. Cross elasticity of demand: An economic concept that
measures the responsiveness of demand for a good to a change in the price of
another good
4. Complementary goods: Goods which have to be consumed
together
6. Change in quantity demanded: It is when the demand for
a product changes as a result of a change in its own price
7. Change in supply: It is when there is a change or
shift in the market supply curve
8. Change in quantity supplied: It is when the supply for
a product changes as a result of a change in its own price
9. Consumer surplus: The difference between what
consumers are willing and able to pay and what they are actually paying at the
market price
10. Demand curve: A curve that shows how much of a good or
service will be demanded by consumers at a given price in a given period of
time
11. Demand schedule: A table that shows the quantities of
a product bought at different prices in a given period of time
12. Derived demand: This is where the demand for factors
of production is as a result of the demand for that final good or service
13. Direct tax: A tax that is directly paid to the government
by working individuals and firms
14. Disequilibrium: A situation where there is an
imbalance between demand and supply in a market
15. Equilibrium: A situation where the quantity demanded for
a good in the marketplace is exactly equal to the quantity supplied
16. Income elasticity of demand: An economic concept that
measures the responsiveness of demand for a good to a change in income
17. Income inelastic in demand: Is when a change in income
leads to a smaller than proportionate change in the demand for a particular good
18. Income elastic in demand: Is when a change in income
leads to a larger than proportionate change in the demand for a particular good
19. Inferior goods: Goods or services where its demand
will fall whenever there is an increase in income
20. Incidence of tax: Refers to the burden of taxation
21. Indirect tax: A tax that is imposed upon expenditure
22. Joint demand: A situation where two goods have to be
consumed together
23. Joint supply: A situation where the production of one
good leas to the production of another related good
24. Normal goods: Goods or services where their demand
will increase whenever there is an increase in income
25. Necessity: Goods or services where its consumption is
essential for survival
26. Price elasticity of demand: An economic concept that
measures the responsiveness of quantity demanded for a good to a change in its
own price
27. Price inelastic in demand: Is when a change in price
leads to a smaller than proportionate change in the quantity demanded for a
good
28. Price elastic in demand: Is when a change in price
leads to a larger than proportionate change in the quantity demanded for a good
29. Perfectly elastic in demand: Is when all goods are
bought at a given price
30. Perfectly inelastic in demand: Is when a change in
price does not have any effect onto the quantity demanded for a good
31. Price elasticity of supply: Measures the responsiveness
of quantity supplied for a good to a change in its own price
32. Price inelastic in supply: Is when a change in price
leads to a smaller than proportionate change in the quantity supplied of a good
33. Price elastic in supply: Is when a change in price
leads to larger than proportionate change in the quantity supplied of a good
34. Perfectly elastic in supply: Is when all goods are
sold at a given price
35. Perfectly inelastic in supply: Is when a change in
price does not have any effect onto the quantity supplied of a good
36. Price mechanism: The interaction of demand and supply
to allocate scarce resources and resolve the problem of infinite wants
38. Supply curve: A curve that shows how much of a good
and service that will be supplied by producers at a given price in a given
period of time
39. Supply schedule: A table that shows the quantities of
a product that is sold at different prices in a given period of time
40. Substitute goods: Goods that can be used in the place
of another
41. Specific tax: An indirect tax with a fixed amount for
every unit of output
42. Subsidies: A grant given by the government to reduce
the production costs of a good or service
43. Total revenue: Total income that firms receive from
sales
44. Unitary price elasticity of demand: Is when a change
in price leads to a proportionate change in the quantity demanded for a good
45. Unitary price elasticity of supply: Is when a change
in price leads to a proportionate change in the quantity supplied of a good
1. Ad-valorem tax: An indirect tax that is levied based
on certain percentage rate of the selling price
3. Competitive demand: A situation where one good can be
used in place of another
5. Change in demand: It is when there is a change or
shift in the market demand curve
37. Producer surplus: The difference between the market
price and the lowest price that producers are willing and able to sell at
Tuesday, January 28, 2014
More Videos on Specialisation
If you think that division of labour/ specialisation is only limited to professions/ working people, these two videos above might change the way you look at things. Basically, it also covers interests/ hobbies and when people are passionately doing the same thing over and over again, they become skilled at it and they will always discover fun and interesting ways to do it
Monday, January 20, 2014
Reviews of MCQ For Chapter 1 (AS): Basic Economic Ideas
Answer A:
The roles of an entrepreneur are managing the other three factors of production and accepting the risks involved in a business
Option B, C and D are all related to management
Answer B:
Division of labour or specialisation means a worker/ group of people will perform the same small tasks repetitively. If a market is small e.g. small population or less buying interest, then fewer output will be produced and that means lesser repetitions. A worker may still gain the skill but it would have been better if he or she produces more
Option A and C are irrelevant. Option D is incorrect. Division of labour increases productivity not lowers it
Answer C:
Straight forward question. Civil engineers refer to human capital/ labour. Rail, road and electricity infrastructure are known as capital goods because they are man-made resources that aid us in the production process
Option A, B and D are all irrelevant
Answer B:
This is a straight forward question. Resources are scarce/ limited/ finite but human wants are unlimited/ infinite. Therefore, all economic agents are forced to make a choice on how to possibly best use the scarce resources. If they choose one, they may not be able to have the other. This means the need to carefully allocate resources in between uses
Option A is wrong. That is more of a macroeconomic aim by a government
Option C is incorrect. This would probably be a typical goal for an enterprise
Option C has the same nature with A. This is the common goal for all governments.
Answer A:
Before technological progress, to produce OX consumer goods, the opportunity cost is YF capital goods. After technological progress, the PPC will shift outward from EF to GH. To produce the same number of OX consumer goods, MH capital goods will be forgone
B is wrong. It will be the opportunity cost of producing OG units of consumer goods
D is incorrect. That is the original opportunity cost before technological progress
Answer C:
An inward movement of the PPC is always due to a fall in the quantity or/ and quality of resources. When there are fewer resources, the maximum ability of the economy to produce will be hindered e.g. tsunami in Indonesia (2004) or typhoon Haiyan (2013). Equally a fall in the quality of resources such as human capital will lead to a fall in potential capacity of a nation and so lesser output will be produced
Option A is obviously wrong. With technological progress, the PPC will shift outward instead of inward
Option B is also wrong. When resources are unemployed such as unemployment of workers during the recession, it will be represented by a point moving away from the PPC rather than a whole shift
Option D is incorrect. When resources are reallocated, it could be the case where more good Y is produced at the expense of good X. This shows opportunity cost and the movement will be along the PPC
Answer B:
The term comparative advantage may have confused some of the candidates here. Basically, it means that this country is able to produce good Y at a lower opportunity cost than other countries. Since that is the case, this country should therefore specialise in the production of good Y and perhaps lesser of good X and then sell it to the world. This will be taught in Chapter 4 (AS): International Trade. Getting back to the question, LM is the PPC of this country and if all resources are fully and efficiently used, the best it can operate is along the LM line. There are three ways to achieve point R. First, increase in the QUANTITY of resources. Second, increase in the QUALITY of resources and finally engage in INTERNATIONAL TRADE. By importing additional both good Y and X, this country will be able to consume beyond its own PPC
Option A is wrong. It has been stated that this country has comparative advantage in good Y
Option C is wrong. By reducing unemployment, this economy is said to have better managed/ used all its available resources and so a point within the PPC will move closer to the boundary of LM rather than beyond it
Option D is also wrong. While this country has comparative advantage in good Y and should therefore specialise in it, it does not help to attain the position of R
Answer D:
Private production such as personal cars, private education, private healthcare, cosmetic products and others to cater for those who are willing and able to pay exists in both free market and mixed economy
Option A is wrong. Capital goods refer to man-made tools like sophisticated machineries, lorries, tractors and ships which are meant to assist us in the production process. They are present in both mixed and planned economy
Option B is wrong. Consumer surplus refers to the difference between what consumers are willing and able to pay and what they actually need to pay. In all three economic systems, such feature definitely exists. There will always be some people who are willing to pay more (positive consumer surplus) while some refuse to (negative consumer surplus) depending on the level of benefits/ satisfactions derived from the consumption of a good or service
Option C is wrong. All governments do engage in borrowing
Answer A:
A planned economy/ command economy/ communist economy refers to an economic system where all scarce resources (land, labour and capital) are owned and allocated by the government. There are no such thing as private enterprise and consumer interest. In fact these two are strictly prohibited and if such elements are found, the person/ entity may have to undertake severe punishments. The government itself believes that the welfare of the people is better managed in such way since there is no aim to maximise profits. Also, all decisions are made with the public interest in mind and that means after considering all the pros and cons of projects
B is wrong. Governments in market economy, planned economy and mixed economy are unlikely to run a balanced budget. They will either incur a deficit (government spending > tax revenue) or surplus (government spending < tax revenue)
C is wrong. This refers to a free market economy where consumer sovereignty exists
D is wrong. Regardless of which economic systems that we refer to, a machinery cannot easily replace a manual worker and likewise is true. This is the case of occupational immobility
Answer D:
‘Best way’ is a value judgement. It reflects an opinion
which is highly debatable. A person may claim that indirect taxes are the best
solutions but another person may argue that ban of smoking in open places, ban
of smoking advertisement or introduction of nicotine replacement products as substitutes
are better solutions. In fact, both persons are correct
A, B and C are positive statement because all of them
can be testified true or false. For A, it is a true statement that money is
more liquid than say, property or stocks. B is again positive because it is
true that some firms subsidised by government while some not. C is also
positive because it is true that doctors generally earn more than cashiers and
this cannot be debated.
Answer C:
A normative statement contains value/ subjective
judgement. They cannot be testified true or false and instead, stand in
between. This is because opinions can be debated unlike facts. As in this case,
the phrase ’more harmful’ reflects a subjective judgement. Another person may
argue likewise e.g. inflation is more harmful than joblessness
A, B and D are positive because inflation and
unemployment are measurable. To testify the relationship between the two, we
can usually refer to the annual statistics published by ONS (Office for
National Statistics). If the claim is true as reflected by the data then it has
to be a true fact (positive). If the claim is false as reflected by the data,
then it has to be a false fact (positive). Most importantly, facts cannot be
debated
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