week 4 Flashcards
(17 cards)
Consider two different companies. The first has a relatively inelastic supply curve; the second has a relatively elastic supply curve. What factors might lead to the difference in supply elasticities between these two businesses? Can you envision an example for each type of company?
A company that is relatively inflexible in its ability to change its supply will have relatively inelastic supply. An example of a company with relatively inelastic supply might be an airline or other companies with inputs that are difficult to obtain. A company that is flexible in its ability to change its supply will have a more elastic supply curve. An example of a company with relatively elastic supply might be a food truck or a retailer. These companies can change their inventory or orders from wholesalers relatively quickly.
how do you work out price elasticity of supply
Price elasticity of supply is calculated by dividing the percentage change in quantity supplied by the percentage change in price.
explain how you would calculate the price elasticity of supply when price increases from $5.00 to $7.50. and quantity increases from 200,000 to 210,000. is supply elastic or inelastic.
we would need to work out the percentage change for both price and quantity and then divide the percentage change in quantity by percentage change in price
The price elasticity of supply is 0.12, which is relatively inelastic, since a 40% price increase only results in a 5% increase in quantity supplied. The supply curve is likely relatively steep
a shop like subway or McDonald wishes to analyse what happens annually instead of daily. What would happen to its estimated supply curve; would it become relatively steeper or flatter?
likely better able to respond to price changes over the course of a year rather than over the course of a day. For example, it can add more capacity by building more stores, expanding operations at existing store, and hiring more workers. Therefore, at a longer time horizon, its supply curve is likely to be flatter.
Provide a real-world example of a price floor. How could the price floor result in a surplus?
Minimum wage, Scotland’s price floor on alcohol.. Price floors create surpluses if they are above the equilibrium price.
. Provide a real-world example of a price ceiling. How could the price ceiling result in a shortage?
. Rent controls, state-mandated maximum prices in some insurance markets.
Price ceilings create shortages if they are below the equilibrium price.
Provide a real-world example of a quantity regulation. Under what circumstances will a quantity regulations have an impact on market outcomes?
import quotas, taxi quotas will have an impact on markets.
this is because if the max quantity allowed is lower than the equilibrium quantity
explain how if a tax is applied it has a burden on both the consumer and supplier
When a tax is applied, the burden is shared between the consumer and the supplier. The supplier may raise prices to pass some or all of the tax onto the consumer. How much of the tax each party bears depends on the price elasticity of demand and supply; if demand is inelastic, consumers bear a larger share, while if demand is elastic, the supplier may absorb more of the tax.
how would business use demand elasticity
Knowing the PED allows you to forecast how price changes will affect revenues/profits
if demand is elastic a firm knows that a higher price yields less revenue
if demand is inelastic a higher price will yield more revenue
what is cross price elasticity of demand
A measure of how responsive the demand of one good is to price changes of another.
what is income elasticity of demand ?
A measure of how responsive the demand for a good is to changes in income.
how would you calculate cross price elasticity of demand ?
% change in quantity demanded/ % change in price of another good
how would you calculate income elasticity of demand?
% change in quantity demand / % change in income
what is price elasticity of supply
how responsive sellers are to price changes
how would you calculate the price elasticity of supply
% change in the quantity supplied/% change in the price
what are subsides
a benefit given to an individual, business, or institution, usually by the government. normally in the form of payments
explain how the benefit of subsidies can be shared
the government provides financial support to reduce the cost of a product. This typically leads to a lower price for consumers as suppliers are incentivized to lower their prices. Suppliers may benefit from the subsidy, leading them to offer more goods at a lower price, but they might also absorb some of the subsidy themselves if the demand for the product is elastic. The key difference is that with subsidies, both parties benefit, unlike with taxes where both share the burden.
