Horizontal = elastic Price Elasticity of SupplyDefinition: the responsiveness of the quantity supplied to a change in the price: the proportionate change in quantity supplied divided by the proportionate change in price. Vertical = inelasticMeaning of price elasticity of supply: -Measurement: %ΔQS / %ΔP -Elastic and inelastic supplyDeterminants of price elasticity of supply-Amount that costs rise as output increases ~The less the additional cost of producing additional output, the more firms will be motivated to produce for a given price rise and the more elastic will supply be.~Supply is this likely to be elastic if firms have plenty of spare capacity, get raw materials fast, switch from producing alternative products and avoid having to introduce overtime.-Time period ~Immediate Firms are unlikely to increase supply by much immediately.~Short run P a g e 29 | 41
Some inputs can be increased on a short term whilst others will remain fixed.Supply can increase somewhat more than elastic.~Long runThere will be enough time for all inputs to be increased.Supply is therefore likely to be highly elastic.Demand PredictionMarket demand – individual firm – perfect competition:-Many firms. Consumers have perfect knowledge. Each firm is a price taker. -Price level = market price: the firm can sell all it wants at this price but can’t influence market (too small to do that). Example: even if a firm doubles its output, there are too many firms and so individually its increased output won’t affect prices.Market reality: -Consumers do not have perfect knowledge. Most firms are not price takers and can choose prices to some extent. -Most firms have a downward sloping demand curve (if the P, the quantity they sell i.e demandfalls – other factors constant).-If firms can control elasticity of demand – it gives them more power of prices.Increase revenue = reduces elasticity-If the product is ‘perceiver’ to be essential, its price elasticity is lower.-If the product is differtiated from other brands using product development +advertising, its crosselasticity is lower.-Income elasticity – normal goods. P a g e 30 | 41
Marginal Utility:-Extra satisfaction gained from consuming one extra unit of a good within a given time period.-Total utility: total satisfaction a consumer gets from consuming all units of a good consumed within a given period.Is there something that gives you more satisfaction if you have more of it? If you have something, the second unit might not give you as much satisfaction. Irrational Consumer Behavior:-Choices and flagging -Too much choice -Sunk cost -Maximizing consumer surplus vs cost of information -Emotions, jealousy, unreasonable choices -Group think Perfect Competition:-Economies of scale….do they exist in perfect competition? Why? Why not? -Diminishing Marginal utilityPeople have an individual demand. An additional unit is less satisfying, so they are only willing to buy it if the price is lower. When the price drops, the demand gets higher again.