However, there is one difference. Therefore, ratio of their sides will be equal. Response of the Producers: Besides the change in cost of production, the elasticity of supply for a product depends on the responsiveness of producers to changes in its price. When there is good price elasticity, it means that the change in demand is greater than the change in price. In other words, the proportionate change in quantity supplied is less than the change in the price of product Z. The concept of elasticity of supply, like the elasticity of demand is a relative measure of the responsiveness of quantity supplied of a commodity to the changes in its price. She says that elasticity of demand can be measured with the help of average revenue and marginal revenue.
This method can be explained with the help of a diagram 12. For example, bread is a necessary commodity and presents a very inelastic demand. Conversely, a small rise in price leading to a big extension in supply shows more elastic supply, and a big rise in price leading to a small extension in supply indicates inelastic supply. The influence of nature is more pronounced in agricultural production. The numerical value of elasticity of supply is equal to zero. But if it is rapid, a small fall in price will cause only a very small increase in his purchases.
The percentage change in quantity is related to the percentage change in price by elasticity: hence the percentage change in revenue can be calculated by knowing the elasticity and the percentage change in price alone. Here, rise in price and total outlay or expenditure move in opposite direction. Demand is inelastic at every quantity where marginal revenue is negative. This situation is typical for goods that have their value defined by law such as fiat currency ; if a five-dollar bill were sold for anything more than five dollars, nobody would buy it, so demand is zero. This can be verified in this way. They are status symbol-enhancing goods. Hence, when the price is raised, the total revenue increases, and vice versa.
The same problem arises when calculating the percentage change in quantity supplied. Thus it is clear that with the fall in price, the total expenditure also falls and vice-versa. If the two goods are substitutes, the cross elasticity of demand is positive. Any straight line supply Curve passing through the origin, such as the one shown in Fig. It is necessary for a firm to know how quickly, and effectively, it can respond to changing market conditions, especially to price changes.
Price elasticity of staple goods in high-poverty areas, however, are different. Thus, when the price of a commodity is relatively high, the producers are likely to be supplying near the limits of their capacity and would, therefore, be unable to make much response to a still higher price. Alternatively, a ranking of users' preferences which can then be statistically analysed may be used. Therefore, this situation does not have any practical implication. Methods of Measuring Elasticity of Supply : Apart from determining the elasticity or inelasticity of supply, an organization needs to estimate the numerical value of elasticity of supply for making various business decisions. Some of the more important factors are the price of the good or service, the cost of the input and the technology of production.
This shows that the proportionate change in quantity supplied is equal to the change in the price of product Y. This is because in the case of decreasing-cost industry expansion in the industry brings down the cost of production and therefore additional output is forthcoming at a lower supply price. Therefore, changes in prices do not affect the supply of a good immediately. Now price falls from Rs. Unitary Elastic Demand: If price is Rs. Under this method, price elasticity of supply can be measured Where, Percentage method of calculating price elasticity of supply can be converted into proportionate method under following steps For an example: A firm supplies 50 units of a commodity at Rs 8 per unit. In the end the whole tax burden is carried by individual households since they are the ultimate owners of the means of production that the firm utilises see Circular flow of income.
Solution: The supply curve for product Z is shown in Figure-17: In Figure-17, when the price of product Z is Rs. When price increases to Rs. When suppliers are more responsive, they will change the quantity they supply by a greater amount in response to a small change in price. For example, it has been argued by some with some empirical evidence that farmers in developing countries respond negatively to the rise in price of their agricultural products. However, in the long run, the firms can increase output by varying all factors and also the new firms can enter the industry and thereby add to the supply of a commodity. Even if it increases its price within certain limits the vast majority of families will continue to buy the same amount of bread. Example 8: The quantity supplied and the price of product R is shown in Table-13: Prepare a supply curve for the supply schedule of product R and determine the type of elasticity of supply demonstrated by the supply curve.
The quantity effect An increase in unit price will tend to lead to fewer units sold, while a decrease in unit price will tend to lead to more units sold. On the other hand, if there is fall in the price of a product, then the quantity supplied of the product would also decrease. It is desirable for a firm to be highly responsive to changes in price and other market conditions. Entertainment Industry Economics 5th ed. To quantify such change we require the concept of elasticity of supply that measures the extent of quantities supplied in response to a change in price. It is calculated by multiplying the price by the quantity purchased.