P~~~E~~~S~~~

Price Elasticity of Supply (PES) is the measurement of responsiveness of the quantity SUPPLIED of a good to a change in it's price. In PED, YED, and XED, the gradient were rather important when it comes to the graph. HOW~E~VER~, in PES, the gradient is not as important, but rather WHERE the SS curve cuts.

If the SS curve cuts the y-axis, then it's elastic.

Like all elastic sayings, small percentage change in P will lead to a big percentage change in Qs

Unfortunately, we are talking about the Qs, so it does not mean, demand increase or decrease or so and so. Instead, (it was brain wrecking for me to understand it but I got it now... I think) it shows that the producers are able to increase the output of supply in a short amount of time. Such as, from one moment, Ztabilo could produce 10 mil pens per day last week, but this week, they are producing 20 mil pens per day. However, not all products has the ability to be elastic, especially those that takes a lo~~~ng time to produce. These type of products are also known as, INELASTIC (are unable to increase output of supply in a short amount of time)!

Q1 to Q2 increase by 5% whereas P1 to P2 increase by 10 percent (not accurate graph, I know ==) Not that important though, as whats important is where the SS curve cuts, and in this case, it cuts the~~~, X-axis.

A rather good example of inelastic goods would be airplanes/aeroplanes (British or American spelling, who cares right?). We can't simply expect MAS to suddenly mass produce airplanes as we need to consider, not only the process of assembling the parts of an airplane, but also due to the limited natural resources and space/area to store these airplanes in a short time.

Then there's the perfectly inelastic (PES=0; vertical SS curve), perfectly elastic (PES=Infinity; horizontal SS curve) and unitary SS (PES=1; SS curve cuts the origin)

Ignore the shapes...they are failed...inputs? Anyways, the explanation is similar to PED, but it's supply instead.

Determinants of PES

Determinants of PES would include time, length of production, and existence of surplus capacity.

Time: Time be branched out into another 3 category, momentary period, short run(SR), and long run(LR).

Length of production process: As stated earlier, a product that takes a long production process is considered inelastic. However, airplanes, houses and spaceships are exceptions as most manufactured goods are actually elastic, as manufactured goods are non perishable, excess supply can be stored and released once the demand for it increases. An example of elastic supply would be toothbrushes.

Agricultural goods in the other hand are categorized under inelastic goods. This is because vegetables and seasonal fruits takes a long time to grow ripe and are able to be sold in markets. However, there are also exceptions for agricultural goods, such as frozen food and crop rotation.

Existence of surplus capacity: Surplus capacity indicates that there are underutilized machines or spare raw materials. For example, a car factory has 100 robot but only 80 of them are actually switched on and USED in the production process. Firms that has surplus capacity are considered as elastic, as they will be able to cope with the sudden increase in Qd.

Applications of PES:

PES is important to firms in a couple of ways. When a firm knows they are carrying too much stock, it would be costly (storing your stocks are not free. Imagine the size of your warehouse if you need to store 10 million mattresses). However, if they are to carry Insufficient stock, then the firm has a risk of not being able to fulfill the demands when they increase. If a firm is aware that their SS is inelastic, then it is suggested they should carry more stock as they wont be able to increase the Qs in a short time and visa-versa.

In conclusion, PES is just as important to a firm as PED, YED and XED would be. Without PES, firms might have problems coping with sudden changes in demand as they can't identify whether their supply is inelastic or elastic.

Theory Of Demand~~~~PROJECT Part 2

In this episode, we'll be covering the YED, XED and their determinants.

YED is used to measure the responsiveness of Qd to a change in income(Y).

YED isn't as special as the PED 'cause,

1. They have a +ve and -ve value(normal)
2. No special cases(Yay for me! Don't need to wreck my head)
3. Just cause. Got a problem?

ANYWAYS~~~~

 The formula can be shown as YED=(%change in Qd) / (%change in Y)

It was stated in 1. that they have a +ve and -ve value, each having a meaning behind it. It being +ve shows that it is a normal G&S where else if YED were to be -ve, it shows that the G&S is inferior, meaning a G&S that is low rated.

If the YED>1, besides being elastic, the change in income would lead to a big change in demand. Say if income decrease by 10%(from $100 to $90), then you most probably would not want to buy that unnecessary junk food that costs around $10 in total. =D

If the YED<1, other than being inelastic, the change in income would have little impact in demand. This is normally the case for everyday G&S such as food supplies.

Elaborating on the -ve value of YED, if a consumers income were to increase by 10%, then he/she would be able to afford the normal ranking goods and ditch the inferior goods. Thus a decrease in Qd for the inferior G&S but an increase in the Qd of normal goods.

DETERMINANTS OF YED~~~

 Similar to the PED's determinants, it would be the degree of necessity and the proportion of income spent on the good. BECAUSE OF THIS, please refer to TOD~~~PROJECT Part 1 as how YED is affected is similar to the case of PED. =D

If the value of YED is >1, it is most probably a normal luxury good such as holiday trips.

If the value of YED is =0.5 it is most probably a necessity good such as food

If the value of YED is =-05, it is most probably an inferior basic good such as canned food(but some I would still buy even if my income increasesXD)

If the value of YED is <-1 it is most probably an inferior luxury good such as those 'fake' LV bags.

YED are most effectively used in 'boom period' where the economy of the country increase drastically. This would mean a sharp increase in income for many people. With this, the YED can show which goods are actually inferior goods, and which goods are elastic(visa versa) cetirus peribus.

Unfortunately, it is suggested that even during this boom period, firms producing inferior G&S should NOT increase their G&S price or expand as the Qd would decrease. Instead they should cut down supply and even try to start selling normal goods.

CROSS ELASTICITY OF DEMAND (XED)

The XED is used to measure the responsiveness of Qd of G&S to a change in Price of a related G&S.

The XED formula can be written as (%change in Qd of G&Sy) / (%change in P of G&Sx)

Like the YED, the XED can have a +ve and -ve value.

If the value of XED is +ve, it shows that they are substitute good(normally goods that are in high competition)

If the value of XED is -ve, it means that they are complement goods(stated in TOD~~~PROJECT Part 1. Please refer back. THANKS!!!)

If the XED > 1, then the goods are close substitute. Whereas if it were XED=0.5, then they are still substitute goods, just with low or no close substitutes.

If the XED < -1 then the goods are complement goods.

[Fun fact: If the complement good increases their price, it 'should' not make much of an impact on the Qd of the main good. For example, even if Mac Centre were to increase their photostatting price, it won't stop people from going to Taylor's College. HOWEVER, if Taylors were to increase THEIR Price, causing the Qd of both Taylor's College AND Mac Centre to decrease.]

DETERMINANTS OF XED~~~

Closeness of relationship between the 2 goods and whether they have close or good substitute or complement G&S.

LIMITATIONS OF ELASTICITY OF DEMAND CONCEPT~~~

Data inaccuracy:- In the real world, cetirus paribus is nearly impossible to follow as there are many factors that are changing CONSTANTLY!!! Because of this, it is nearly impossible to see how much of the change is caused solely of one reason. For example, it is difficult to calculate the PED, as you will need to single out how much of it's increase is attributed by change in price ALONE.

Theory Of Demand~~~~PROJECT PART 1

NOTE: These post will be considered as Theory of Demand~~~~Part 4 as it covers the PED, YED and XED.


In general, during the presentation of the project, we were discussing about the factors affecting supply, demand, Price Elasticity of Demand(PED), Income Elasticity of Demand(YED), and Cross Elasticity of Demand(XED).

FACTORS AFFECTING DEMAND~~~
The factors include, change in people's income, population, fashion and tastes, substitute and complementary goods and advertising.
When peoples income increases, they would want to buy more and more; thus increasing demand. A fall in income however would also lead to a fall in demand. @.@

A picture from http://www.fivecentnickel.com/2011/03/03/adjusting-to-an-increase-in-income/
by Laura Martinez

An increase in population will also increase the demand for G&S and visa versa.(You don't say.....)
Because of us humans being very choosy and only choose things to our liking's. For example;

 "MAMA, I don't want that phone!"says Junior Robert. "Why's that son?" says Mama. And Robert replies "'cause it's soo out of fashion! Who uses flip-open phones these days?" 

What J. Robert does not want...
From www.gadgetreview.com

...and what he saw next door...begging his Mama to get it...
From www.telegraph.co.uk

=.=

...and that leads to the fashion and taste point. If firms are able to identify and be up-to-date with fashions, they 'should' have an increase in demand. If not, well, they've just lost Junior Robert in the potential consumer's list.

As for the substitute and complementary goods, well, I THINK I've stated their meaning in the previous TOD chapters so refer back XD but anyways.... How do they affect the demands? Simple, if one G&S were to have a change in price, say decrease, then the demand for the substitute G&S would increase. For the Complementary G&S, if supply for the 'main' product(cars) were to increase, then the demand for the substitute product(petrol) would increase.

Advertising, the most basics of basics, is a method used often by almost every firms to attract consumers to buy their G&S, thus an increase in demand.


FACTORS AFFECTING SUPPLY~~~
As stated in the beginning TOD Part 2~~~~ no matter how many demands a firm receives, the extra demands will going down the gutter if firms are UNABLE to fulfill them.
This would refer to the ability and capacity to produce the G&S. This can come from an improvement in technology, expertise, and change in cost of production(COP).

Technology has helped mankind in thousands of ways and it is because of these machines that firms continues to thrive with new machinery; leading to an increase in efficiency. This is more to the capital intensive method, where firms relies on machines more than labour.

The old fahioned was of washing...
From www.primaculture.com

...to this.
From www.savegaselectricity.com

Expertise would basically mean the strong points of a firms labour. An accountant that's lazy to.... count(?) ...doesn't quite fit into the picture, otherwise the firm will have no idea on their capital. So the expertise and how a firm uses them to their maximum potential is key to having a good firm that can fulfill all their demands.

As for the COP... increase in the cost of any factor of production may result in the decrease in supply as reduced profits might see producers less willing to produce that certain G&S.

PRICE ELASTICITY OF DEMAND(PED)~~~

This would refer to the responsiveness of the quantity demanded(Qd) of a G&S to a change in it's price(P).
It's formula can be written as;

PED= (%change in Qd)/(%change in P)

There's something special about PED, and that is their value is constantly a -ve value. That's cause the graph is downward sloping(Most of the time).

In some cases, they are horizontal and not touching the Quantity(X-axis) which shows it's a Perfectly Elastic Demand; meaning that for a given price, the Qd is infinite. However, if there is a slight change in price then Qd might decrease to 0.

From en.wikipedia.org.
Since there's lil time, too lazy to 'draw' it. SRY!!!

There are also situations where the DD curve is in vertical position, not touching the Price(Y-axis). This means that even for a big change in price, there'll be little or no change in Qd. This is better known as Perfectly Inelastic Demand. A good example would be oil. Did you know, that around 10 years ago, oil was sold at around RM1.00 per litre? Now it's like RM1.90 per litre. Have your parents stopped buying petrol? Instead, I bet, they've bought more cars...@.@

www2.yk.psu.edu

Case 1: When there is a change in percentage for Price, there is a bigger change in percentage for demand. This shows that the G&S is elastic, as a slight change in Price will make a big impact on demand. This would happen when PED>1

Over here, we can see that a small decrease in P from P1 to P2 (Say 10 %), the Qd has increased greatly from Q1 to Q2(Say 20%).
From www.agmrc.org

Case 2: Inelastic demand (PED<1) shows that even if there was a big change in Price, there'll only be a small change in Qd.

In this picture, we can see that a big decrease in P from P1 to P2(say 20%), the Qd has increased only slightly from Q1 to Q2 (Say 10%).
From www.agmrc.org  

Case 3: This is when the PED=1. It is also known as Unitary DD. This is when the percentage change in P would equal to the percentage change in Qd

Over here, it is quite clear that the change in P is approximately the same as the change in Qd.
From en.wikibooks.org

PED has their own determinants, such as the availability of substitute G&S, degree of necessity/essentially, proportions of income spent on the goods, time and habit's formed.

To 'cut' a grandma's story short: availability of sub. G&S- if there are many, then the goods would most likely be elastic,(stated when talking about factors affecting demand) and visa versa.

Degree of necessity- If it's important to the consumer, no matter how much the price changes, the consumer will continue to buy the G&S(a cause for inelastic DD) and visa versa.

Proportions of income spent on that G&S-If P of the G&S is a small % in the consumers income, then he/she will continue buying it and if P of the G&S is a big % in the consumers income, then he/she will might stop buying it if the price increases even a little. Why buy Subway that costs around 1/5 of your pocket money when you can buy a burger that costs around 1/8 of your pocket money?

Habit- It's hard to suddenly change from being a frequent buyer of Pringels to buy Mr Potato, right?!?!?!

Time- There are two terms within time, short-term and long-term. In short-term, it basically means that even if the price were to change a lot, people might still continue to buy it as no close substitutes has been found. However, in the long-term Qd would change greatly as consumers has found a substitute to the G&S.

[TO BE CONTINUED....]

Theory of Demand~~~~ Part 2

Demand is pointless without the supply of the G&S. Imagine, you went to a grocery store wanting to buy some chicken, fish, rice and noodles; only to discover that their shelves are empty... Not a pleasant sight. Thus, we will be talking about supply.

Supply can be defined as the quantities of goods that sellers are willing and able to sell at various prices over a period of time.

There are few factors that determines the supply of G&S; one being the price.

PRICE: The higher the price, the higher quantity supplied; Cetirus paribus. Frankly speaking, who would not want to produce more of the G&S if you could sell it at a high price? The higher the price would lead to a higher profit for the producers. Hence, they would want to sell more.

Original price and Qs was P1 and Qs1 (at pt A)
If it were to increase from P1 to P2, Qs1 would also increase to Qs2 (at pt B)
Since there is a change in price of the G&S, the point moves along the SS curve.







However, if the determiners were NOT the price, then the SS curve would, instead, SHIFT. One of the determinate s would be the cost of production.

COST OF PRODUCTION: This could either come from the change in raw materials or even due to the improvements of technology; making production more efficient.

If the COP were to increase; due to an increase in wages, the SS curve would shift to the LEFT; from S1 to S2.  At the original price, the firm could make Q1 of G&S(at pt A). However, after the shift, even at the same price they could only supply Q2, which is less.

The SS curve can also shift to the right. This would be due to an increase in efficiency.

Before, saw that the Qs had decrease from Q1 to Q2. This time, it has instead increase from Q1 to Q2 at the same price, as the SS curve has shift to the RIGHT(S1 to S2).

Other contributing factors to the SS curve would be the size and nature of the industry(if the firm supplies good G&S, it would make it easier for them to enter a new market), the attractiveness and availability of other products(this would mean goods that complement each other, a.k.a, Complement goods) A good example of this would be between cars and petrol. Once you buy a car, it's complement would be the petrol. Thus, if the Qs of cars increases, the SS of petrol would shift to the right.

Similar to the DD curve, there are also exceptions for the SS curves. WR-Wage Rate. WH-Working Hours

This only applies to INDIVIDUAL WORKERS SS CURVE. For low level income people,(below $10) income is more important than leisure, thus an increase in Price for everyday G&S would lead to an increase in WH.
However, for the high level income people(a.k.a; flthy ars people) with WR above $10, leisure would become more important than income, therefore, for an increase in come would lead to a decrease in working hour......I know quite confusing.

Imagine it this way. When you're earning a handful of cash per month, you work for only 7 hours. So when you need to earn more, you work 9 hours.
IF you are a high level income individual, you can just stay at home and leave the rest of the work load to your subordinates.(LIKE A BOSS). Thus, you only have a few working hours, and yet you're earning like mad...

In my opinion, firms needs to pay a lot of attention to the trend of the SS curve, whether t is shifting to the left or to the right. If to the right, the firm has a big advantage as they now can sell at a higher price for the same amount of Qs, leading to an increase in TR(total revenue). If it shifts to left...well...don't panic and just try to minimize the shift, otherwise the firm will be in big trouble...

In conclusion, there are also many factors that affects the SS curve, like the DD curve, but the most important part of the SS curve would be the shift, and not the movement along the SS curve.