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DEMAND AND SUPPLY
DEMAND AND SUPPLY
Price Elasticity of Supply
PES of GoodA =
%
quantity supplied of good A
%
in price of good A
Tutorial Notes
DEMAND AND SUPPLY
Price Elasticity of Supply
KK Hospital
The Concourse
The Revenue House
What has all these buildings got in common.
Their exteriors are of aluminium cladding and glass
Shanghai Stock
Exchange
Woodlands Checkpoint
DEMAND AND SUPPLY
Price Elasticity of Supply
KK Hospital
The Concourse
The Revenue House
FAÇADE OF BUILDINGS WERE DESIGNED AND BUILT
BY A COMPANY CALLED PD INC. IN THE 1990S
Shanghai Stock
Exchange
Woodlands Checkpoint
DEMAND AND SUPPLY
Price Elasticity of Supply
PD INC.
KK Hospital
The Concourse
The Revenue House
Aluminium Cladding
Shanghai Stock
Exchange
Bricks
Woodlands Checkpoint
DEMAND AND SUPPLY
Scenario Of Rise In Price For Aluminium Cladding
1994 – 1998 : Increase in taste and preference
Demand For Aluminum Cladding
for cladding (D0 TO D1) causing upward
pressure on prices for cladding and glass.
1997 – 1998: As price rises, quantity supplied
P
S0
moves in tandem along the S0 curve.
E1
P1
E0
P0
D1
D0
Q0
Q1
Q2
Q
DEMAND AND SUPPLY
Price Elasticity of Supply
PD INC.
Company founded by ex-police officer, Mr. Poh A.T. (not a super scholar just a shrew businessman).
Personal nett worth approximately in excess of $60 million, 1997).
Company does external portion of buildings.Specialzing in aluminium and glass exteriors.
In 1997, it was 1 of 3 companies of its kind in the region. High barriers to entry. Cost of High
Technology made it difficult to enter the market.
KK Hospital
Just before the Asian financial crisis in 1998, inflation was running rampant and shortage of
resources
prices of cladding and glass
to soar. House
Thecaused
Concourse
The to
Revenue
Unlike brick facades, aluminium and glass required special procedure to make the finished product.
Specialized labour was used to contruct aluminium and glass cladding. Unlike brick works, random
labour was inappropriate a substitute for cladding works.
In 1998, PD took on too many project, about 5 totaling some 200 - 400 million dollars. Its resources
was overstretched and unable to obtain additional land, resource , capital and appropriate labour to
do the job, PD Inc was sued for breech of contract and to which it was unable to resolve. PD filed for
bankruptcy.
PD Inc was not able to retool
themselves
to meet the challenge
of rising cost.
Shanghai
Stock fast enough Woodlands
Checkpoint
Exchange
The prices elasticity of supply of PD Inc was inelastic and that created a host of problems for PD.
DEMAND AND SUPPLY
Price Elasticity of Supply
Determinants of PES
Cladding/Glass Vs Brick Facade
•Time
•Existence of spare capacity
P
S1
•Availability of stocks
• PES<1 inelastic
•Factor Mobility
•Barriers to Entry
•Substitute products/services for its
resources
Q1: What is the total revenue gained for the
S0
P1
P
P0
3
A
B
2
• PES>1 elastic
D1
brick façade firm when prices shift from P0 to
P1 Ans: Area 1234
Q2: What is the total revenue
gained for the
cladding façade firm when prices shift from P0
to P1. Ans: ABCD
C
D
Q0
1
4
Q1
Q
Note: when a firm’s supply curve is elastic, it means that the
firm’s supplies can easily respond to price changes
DEMAND AND SUPPLY
Price Elasticity of Supply
Recap on what affects PED:
THE FACTORS THAT ARE
RESPONSIBLE FOR PED ARE
NOT ALL THE SAME FOR PES –
DISPEL MISCONCEPTION
IMMEDIATELY!
- Availability of substitutes, Closeness of substitutes
- Size of Budget Spent on Goods (eg. Smoker as oppose to nonsmokers)
- Degree of necessity (rice for the poor)
- Definition – eg. BMW and QQ to mean all cars but not just luxury
cars.
- Time – People can adjust their consumption of the good over time
(accept either more or less)
Assignment 6
Option 1
Option 2
You are one of only 2 supplier of
crane to the construction industry in
Singapore. The construction industry
is proceeding at a feverish pace in
the last year (implying that all
resources are stretched and excess
capacity is nonexistent).With limited
supply of land and low mortgage
rates, prices of properties are
expected to rise further causing a
strain on prices of factors of
production as well. Under such a
scenario, suggest what the PES for
your product (cranes) would be like.
Use dd/ss diagrams to substantiate
your answer.
You are MD of a foreign bank in Singapore
that specializes in engineering and
marketing of sophisticated (and risky)
mortgage back financial assets (like the
Lehman Bonds of the recent financial
crisis). Business has been expanding in
the last 3 years and operations have been
running at a feverish pace in the run up to
the financial crisis of 2008. The PES for
risky sophisticated asset is 5. Explain
why, during the financial crisis of 2008, as
prices of these assets fell, you were
struggling to keep the bank from bleeding
red ink (a term to mean that the bank is
staring at bankruptcy). Use DD and SS
diagrams to substantiate your explanation.
(note: financial assets are created using
very little resources but from the derived
values of virtual assets that exist in the
digital screens of the financial industry
like bonds and currency. Human
intellectual capacity is the main resource
in this market)