Practical application of price elasticity of supply. Practical Application of Price Elasticity and Income Elasticity of Demand 2022-10-10
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Price elasticity of supply is a measure of the responsiveness of the quantity of a good or service that a producer is willing and able to supply to changes in the price of that good or service. It is an important concept in economics that has practical applications in various industries and markets.
One practical application of price elasticity of supply is in the agricultural industry. Farmers and agricultural producers may have a relatively inelastic supply of certain crops, meaning that their supply is not very responsive to changes in price. For example, if the price of wheat increases, a farmer may not be able to immediately increase their supply of wheat because it takes time to plant and harvest crops. This can lead to higher profits for the farmer, but can also result in shortages and higher prices for consumers. On the other hand, if the price of wheat decreases, a farmer may have a surplus of wheat that they are unable to sell at a profit, leading to lower profits or even losses.
Another practical application of price elasticity of supply is in the pharmaceutical industry. The supply of prescription drugs may be relatively elastic, meaning that it is responsive to changes in price. This is because pharmaceutical companies can often adjust their production levels in response to changes in demand. For example, if the price of a particular drug increases, pharmaceutical companies may increase production in order to meet the increased demand and maximize profits. On the other hand, if the price of a drug decreases, production may decrease as well in order to minimize losses.
Price elasticity of supply is also important in the energy industry, particularly in the production of oil and natural gas. The supply of these resources may be relatively inelastic in the short term, as it takes time and significant investment to explore, extract, and transport these resources. However, in the long term, the supply of these resources may be more elastic, as new technologies and investment in exploration and extraction can lead to increased production.
In summary, the practical application of price elasticity of supply is evident in various industries, including agriculture, pharmaceuticals, and energy. It is an important concept that helps producers and businesses make informed decisions about production and pricing, and it has significant implications for consumers as well. Understanding and analyzing the elasticity of supply can help businesses maximize profits and minimize losses, and can also help policymakers make informed decisions about economic policies and regulations.
The importance of elasticity of supply
Products that exhibit the characteristics of elasticity of demand are usually cars, appliances and other luxury items. Finally on the issue of price elasticity, there is also the concept of cross-price elasticity of demand for say good X and Y E XY , which measures the percentage change in the quantity of good X as a result of a change in the price of good Y. If demand is elastic, revenue is gained by reducing price, but if demand is inelastic, revenue is gained by raising price. If, however, the government simply wishes to discourage the consumption of a commodity which happens to have a highly inelastic demand—e. Price falls when price elasticity of demand is less than infinite. Importance in Determining the Incidence of Taxation: The concept of the elasticity of demand, along with that of supply, is used to determine the shifting and incidence of a tax. The demand for smoke alarms is more elastic than the demand for Persian rugs.
What are the practical applications of price elasticity of supply?
It is calculated as the ratio of the percentage change in demand to the percentage change in income. The demand for natural gas is more elastic over a short period of time than over a long period of time. So, before imposing a tax or raising the existing rate of a tax, the government will have to consider the elasticity of demand of the commodity concerned. Applying either of the point measurement of elasticity above, a unique solution could be arrived at, which is denoted as the elasticity coefficient. Thus the demand will not decrease. The concept of elasticity which lies within the neoclassical economic theory can be used to determine the magnitude of a change in certain variable in relation to other critical determining variable. ADVERTISEMENTS: The following points highlight the nine main practical applications of the concept of price elasticity of demand.
Practical Application of Price Elasticity and Income Elasticity of Demand
Digressing a little from the price elasticity of demand and supply, it is also important to find out the effect a change in the income of a consumer can have on the demand for certain products- which is usually referred to as income elasticity of demand. If he pushes commodity tax excise duty rates up too much the consequent increase in price may make the total tax yield even lower than before. Suppose the supply of farm product, say rice, increases and the supply curve shifts to the right from S to and the new equilibrium is established at E 1 But the demand remains unchanged which brings down the price to OP 1 With the fall in price, the supply increases to OQ 1 because the producers want to maintain their former levels of income. In fact, there is instability and uncertainty in agriculture. All of the above are correct. People within many professions and occupations may refer to this sort of training as professional development. A change in price of, say, a dollar, is going to be much less important in percentage terms than it would have been at the bottom of the demand curve.
Finally, the shortcomings of the elasticity concept will be treated just before concluding the study. They are produced by many farmers and each farmer is producing a very small portion of the total supply of a particular farm product, say wheat. It is often used in the context of the Arc elasticity measures the responsiveness of demand to price changes over a range of values. Agricultural price support by the government is illustrated in Fig. Table of Coefficients 5. Thomas South- Western, ISBN:13:978-0-3246451964- International Student Edition.
Price Elasticity of Demand (Practical Applications)
High income elasticity of demand: In this case increase in income is accompanied by relatively larger increase in quantity demanded. What happens to the price if supply increases? It must be equally noted that for cases of price elasticity of demand, the solutions must be preceded by a minus. He will not, therefore, curtail the supply. One should also know if the rise or fall of income is temporary or permanent. This is because it is a measure of the interdependence between firms. This would mean that for every 1 percent change in price, quantity demanded would change by 0 percent.
Practical Applications of Price Elasticity of Demand
On-the-Job Training OJT is a form of training taking place in a normal working situation. When we are at the upper end of a demand curve, where price is high and the quantity demanded is low, a small change in the quantity demanded, even in, say, one unit, is pretty big in percentage terms. Both intersect at E and determine OP price and PE is the market price line. A zero income elasticity or inelastic demand occurs when an increase in income is not associated with a change in the demand of a good. The consumer spends only a small portion of his income on them. Let D be the demand curve and S be the supply curve of the commodity before the tax is levied. This means that whatever the state of your income, they are class of goods that you just cannot do without them.
Economic Policy: The knowledge of elasticity is also valuable in the formation of economic policies, too. Rather, he will produce more, in the hope of compensating himself when the price of his product falls. The price elasticity of supply is calculated as the percentage change in quantity divided by the percentage change in price. The incidence of a tax involves the process of transfer from the person on whom the tax is imposed initially to the ultimate taxpayer who bears the money burden of the tax. Is the elasticity the slope? Because gasoline is a necessity, consumers do not decrease their quantity demanded in either the short run or the long run. Therefore, the response variable demand which is being analyzed in relation to other exogenous variable will then coin the title of elasticity being measured. Sequel to this, an empirical analysis on the subject matter will be examined using some lecturers within the Obafemi Awolowo University, Ile-Ife, Osun State, Nigeria, as a case study.
In this situation, the government may find it necessary to introduce rationing so that the limited goods may be allocated among all the buyers who want them. What does your answer tell you? This is specially so if prod uce is perishable. Therefore, Cars can only become a luxurious commodity to these lecturers if their net pay changes significantly or a total change in the present employment by the lecturer to a highly paid or better employment by the lecturers. Price elasticities of demand are always negative since price and quantity demanded always move in opposite directions on the demand curve. This point may now be illustrated. If the government regards the equilibrium price as too high, it may fix a ceiling price at OP 1. ADVERTISEMENTS: At this price floor, the producers are willing to sell OQ 1 quantity, while the demand falls to OQ 2, resulting in a surplus of Q 2Q 1 which the government buys as buffer stock.
