Download Chapter 4 textbook questions

3)
Explain the factors, which influence price elasticity of supply. Illustrate
your answer with reference to market for a commodity or raw material.
The factors that influence price elasticity of supply are: the amount of
time following a change in price, the mobility of factors of production, the ability
to store stocks, and the amount of unused capacity. We can use rice to explain
those determinants of elasticity of supply.
In Korea the demand for rice increased suddenly in 2001, and since
farmers wish to make a profit, the farmers wanted to increase their production
of rice. However, since the farmers were told about this increase in demand
recently, the farmers had little time to react and went into the market period, in
which farmers could only take the rice out from their inventories. In this phase
the supply was highly inelastic. As few months passed, the farmers now had the
chance to increase labor and use the land and capital at maximum intensity, but
still did not have enough time to increase capital and land (short run). Thus the
supply at this point was relatively elastic. In 2002 the farmers now had a year to
met the demand and had enough time to increase all factors of production, which
increased the supply of rice significant. The supply of rice now became highly
elastic. As the example shows, the amount of time following a change in price
separates the suppliers at three different phases, and as time passes the
commodity becomes more price elastic.
Continuing with rice, in 2001 demand for rice increased, but since rice has
poor mobility of the factors of production, because rice requires land and time to
grow, the supply of rice of relatively inelastic. Even though the demand increased,
it was impossible for the farmers to grow more rice at their current field, and
also grow rice so rapidly, as to met the demand of the market. Also, since rice
spoils easily and quickly, the farmers could not store much rice in their inventory
and therefore, could not increase their supply as the price and the demand of
rice increased. Therefore, the supply of rice was price inelastic even though the
price increased. Finally, since Korea is small and has limited land given to the
farmers for agriculture, most farmers were using all the land and factors of
production in 2001. Therefore, the farmers did not have any available factors of
production to increase their supply when the price increased in 2001.
b) Discuss the importance of price elasticity of supply and price elasticity of
demand for producers of primary commodities in less developed countries.
In LEDC countries the market is small, the market equilibrium price of
commodities are low, and often times the climate is timid and hot (Africa).
Therefore, large supply of commodity will not be sold, any supply of commodity
will be sold at low price, and the shelf life of commodity is short. Therefore, the
producers have to get the perfect amount of commodities at a perfect price in
order to make a profit. This can be achieved through analyzing the PED. By
analyzing the PED the producer can get how price sensitive the consumers are
can with the data the producer can create a total revenue vs. quantity graph to
find the perfect amount of price and quantity that would be sold and maximize
the revenue. Then, analysis of the PES strengthens the prediction by showing
how decrease in price or increase in price will affect the supply of the commodity
and the revenue. With the analysis of both the PED and PES the supplier can get
that perfect price and the perfect quantity that will be all be sold, at a rate that
the commodity wont spoil.