Download Price Elasticity of Supply

Economics iGCSE
The Allocation of Resources
Price Elasticity of Demand
Price Elasticity of Supply
Market Failure
Externalities
Price Elasticity of Demand (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 7, Section 4: p122-127
• Price Elasticity of Demand – what is changing?
• What happens to consumer demand when prices rise?
• Quantity moves the opposite way to price moves (has an inverse relationship)
• PeoD is negative sign (there are exceptions):
• Veblen goods - conspicuous consumption (status goods ) demand rises as price rises
•
What’s the formula for PEoD?
% Change in Qty D
% Change in Price
Determinants of PeoD:
• Availability of substitutes:
• Proximity and number .. What does that mean?
• Time period to look for substitutes:
• Are you constrained?
• E.g. peak hour toll-road charges are higher (motorist has no choice)
• Proportion of income devoted to this product:
• Coffee Vs annual vacation
iGCSE Economics/Yr10/SH/24-10
Price Elasticity of Supply (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 7, Section 5: p128-134
• Who decides what is supplied in the economy?
• The producers
• What are they motivated by?
• Profits (and sales)
• Who decides what is demanded in the economy?
• The consumers
• What are they motivated by?
• Fulfilling their wants
• What happens to both groups when prices rise?
What is the difference between price elasticity of supply and price elasticity of demand?
•PeoS is likely to be a positive number:
• When prices rise supply INCREASES (when prices fall, supply DECREASES)
• What’s the formula for PEoS?
% Change in Qty S
% Change in Price
iGCSE Economics/Yr10/SH/24-10
Price Elasticity of Supply (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 7, Section 5: p128-134
•What are the possible range of values for PeoS?
•Exercise: Fill in the box …
PeoS value
Describe
Term
Zero
Qty S# does not change
when P# change
Perfectly inelastic
<1
% changes in Qty S less
than % change in price
inelastic
1
% changes in Qty S the
same amount as %
change in price
Unitary
>1
% changes in Qty S more
than % change in price
elastic
infinity
Qty S# changes infinitely
when P# changes
Perfectly elastic
iGCSE Economics/Yr10/SH/24-10
Price Elasticity of Supply (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 7, Section 5: p128-134
• If prices increase the producer increases supply - IF POSSIBLE - what does this mean?
• What are the assumptions behind any Supply curve?
• What availability of the factors of production (fop):
• Hire new staff .. Are they properly trained?
• Get hold of the right ingredients/raw materials/inputs .. At what price?
• What time period:
• How quickly can I make or get access to new supply/products (i.e. how quickly can
supply be ‘made’ and reach the market)?
• Paperclips Vs aeroplanes?
• Paperclips Vs strawberries?
• What is the ease of supplying more:
• Is it worth the hassle of producing one more? Do I need a whole new factory, or do I
have
• What stocks – what stock is available?
• Is the stock ‘useful’ (gone off, last season style, wrong colour etc)
• Exercise: PEoS Handout
iGCSE Economics/Yr10/SH/24-10
Market Failure & Role of Government Intervention (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 7, Section 6: p131-134; Ch 21, Section 1-4: p 392-400
• What is the price of a packet of cigarettes? What does that price include?
• Raw materials
• Production costs (electricity, processing, labour)
• Marketing & sales
• What else??
• What is the role of ‘price’ in the economy?
• To convey information (a ‘signal’) to ALL traders in the market
• To provide an ‘incentive’ to producers to supply a product
• What is ‘wrong’ with the market price of cigarettes?
• Information problems exist.
• Externalities:
• When there are 3rd party cost or benefits:
• 1st party = producer; 2nd party = consumer
• 3rd party is external to the relationship as defined by the market
• Give examples …
iGCSE Economics/Yr10/SH/24-10
Market Failure & Role of Government Intervention (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 7, Section 6: p131-134
The effect of a SUBSIDY (extra cash to cover supplier’s costs)
If left to the market, Pm and Qm results.
So
Price/
unit
Ss
subsidy
This shifts the So to Ss – more supply at
every price – so consumers can afford to
demand more at the lower prices.
Po
Subsidy
= P1-Po
Pm
Qm
Qs
But government wants more than Qm –
so pays Po-Pm as a subsidy.
Quantity
Qty supplied
increases
iGCSE Economics/Yr10/SH/24-10
Governments use subsidies to incentivise
investment in
‘green’ products & services.
[BUT they can distort competition –
enable inefficient producers to stay in
business]
Market Failure & Role of Government Intervention (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 7, Section 6: p131-134
The effect of a TAX on supplier’s costs & market price
St
Cost/
price
per unit
Taxes are an additional cost of
production (increase from Po to
Pt). Therefore quantity supplied
will reduce from Qo to Qt
So
tax
Pt
Po
D
Qt
Qo
Quantity
The effect of a SALES TAX on market price
St
Price/
cost
unit
Tax
as a
% of
price
So
Pt
Po
QoSt QoSo
QoSt
QtSo
Quantity
The position of the St curve
shows a sales tax (i.e. % of value)
effect on supply So – the effect of
a %age is higher on larger
absolute amounts, thus the St
curve PIVOTS out from original
So.
The impact on reducing Qs
(because tax cost is higher) will be
greater at higher prices.
iGCSE Economics/Yr10/SH/24-10
Market Failure & Role of Government Intervention (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 21, Section 1-4: p 392-400
• Sometimes a private producer or consumer fails to recognise their responsibility:
• The free market fails to generate an ‘incentive’ for less pollution (who’s cost is it?)
• The free market fails to ‘keep tabs’ on which consumers enjoy beautiful public parks
• The ‘market price’ needs to take these externalities into account.
• Private costs Vs private benefits:
• The firm’s own costs and revenues are PRIVATE costs and benefits:
• Raw materials, wages (labour), electricity, transportation, research & development
• What about pollution into the river, noise pollution – who suffers and who pays?
• The issue - If the private firm had to take into account ALL the costs would it still make
profit?
Social
costs &
benefits
• External costs Vs external benefits:
• The costs that result from private firm activity that are borne by society not the firm
• And the benefits that result from private activity that give benefit to more people that
just the private firm & its customers (e.g. fireworks display)
iGCSE Economics/Yr10/SH/24-10
Market Failure & Role of Government Intervention (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 21, Section 1-4: p 392-400
Exercise: What are the total social costs [private costs + external costs] and social
benefits [private benefits + external benefits] of everyday actions/decisions?
(Mini group work)
•Smoking inside buildings
•Litter (rubbish/garbage) in the river
•Loud music from a concert
•Building a fast motorway
•Building a factory on the coast
•Giving pre-school children vaccinations
•Building a school
•Setting up a National Park (for an area of outstanding beauty)
Who is affected?
Consumers
Bystanders/neighbours
Producers
Wider society
Government
iGCSE Economics/Yr10/SH/24-10
Market Failure & Role of Government Intervention (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 21, Section 1-4: p 392-400
• Making ‘economic’ decisions – what do you have to consider?:
• Profits – is there any unexpected risk to profits
• Economic growth – short term or long term
• Resource allocation – are resources scarce, could they be better used
• Distribution of income – how many people/which people will benefit
• Opportunity cost – what is the next best allocation of resources … consider all social
costs/benefits
• Conflicts of interest – parties may disagree on the best (most ‘economic’) use of
resources .. Who is right?
• What can the government do when the market fails?
• Taxation
• Subsidies
• Nationalisation - public provision of goods & services. When does this make sense?
• Laws & regulations (see Kyoto protocol)
• Government policy to overcome conflicts of interest
• Exercise: Pg 398, Ex 2 ‘Belt Up’
iGCSE Economics/Yr10/SH/24-10
Market Failure & Role of Government Intervention (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 21, Section 1-4: p 392-400
The Kyoto Protocol (1997):
•The first attempt to provide a global framework to limit carbon based emissions by
setting deadlines for developed countries to reduce emissions to 1990 levels.
•By 2009 187 states had signed and ratified the protocol
•BUT the US refused to ratify … because it made no demands on China and other
developing nations
•Copenhagen (2009) was another attempt to reach international agreement, but
was disappointing. The eventual document signed agreed that:
•Climate change is one of the greatest challenge today
•Must aim to keep to a maximum of 2% temperature increase
•BUT nothing was legally binding
What is the problem?
•Developing countries think it’s unfair to have to reduce their emissions because it
may prevent them from reaching a more mature state, when the developed
countries operated under no such constraints in the past. The developing nations
argue that once they are equally developed, they wil reduce their emissions …
what’s the problem with this?
iGCSE Economics/Yr10/SH/24-10
Appendix: How markets work
Price Elasticity of Demand (Year 10 Economics)
References: ECONOMICS (Moynihan & Titley) Ch 7, Section 4: p122-127
• Price Elasticity of Demand – what is changing?
• What happens to consumer demand when prices rise?
• Price increase = less Qty D
• What direction does quantity move when price moves?
• Opposite way (inverse relationship)
• PeoD is negative sign (exceptions):
• Veblen goods are a group of commodities for which people's preference for buying them
increases as a direct function of their price because a higher price confers greater status
Conspicuous consumption .. Status goods
• Giffen goods - e.g. staple foods without a substitute. Substitute goods are not available, so if
prices rise, consumers are forced to consumer more (they cannot substitute and cannot
afford additional food stuffs as well, so end up consuming more of the more expensive staple
on its own e.g. rice or bread). A theoretical construct, very little real-life evidence.
• What’s the formula for PEoD?
% Change in Qty S
% Change in Price
• Is PeoS likely to be a positive or negative number?
• If price increases …. What usually happens to Supply?
• A positive sign – If price increases, IF POSSIBLE, Supply increases (Why? More profits for the
supplier who sells more)
iGCSE Economics/Yr10/SH/24-10