Practical application of price elasticity of supply. 5.1 Price Elasticity of Demand and Price Elasticity of Supply 2022-10-24
Practical application of price elasticity of supply Rating:
Price elasticity of supply is a measure of the responsiveness of the quantity of a good or service that a producer is willing and able to supply to changes in the price of that good or service. It is an important concept in economics that has practical applications in various industries and markets.
One practical application of price elasticity of supply is in the agricultural industry. Farmers and agricultural producers may have a relatively inelastic supply of certain crops, meaning that their supply is not very responsive to changes in price. For example, if the price of wheat increases, a farmer may not be able to immediately increase their supply of wheat because it takes time to plant and harvest crops. This can lead to higher profits for the farmer, but can also result in shortages and higher prices for consumers. On the other hand, if the price of wheat decreases, a farmer may have a surplus of wheat that they are unable to sell at a profit, leading to lower profits or even losses.
Another practical application of price elasticity of supply is in the pharmaceutical industry. The supply of prescription drugs may be relatively elastic, meaning that it is responsive to changes in price. This is because pharmaceutical companies can often adjust their production levels in response to changes in demand. For example, if the price of a particular drug increases, pharmaceutical companies may increase production in order to meet the increased demand and maximize profits. On the other hand, if the price of a drug decreases, production may decrease as well in order to minimize losses.
Price elasticity of supply is also important in the energy industry, particularly in the production of oil and natural gas. The supply of these resources may be relatively inelastic in the short term, as it takes time and significant investment to explore, extract, and transport these resources. However, in the long term, the supply of these resources may be more elastic, as new technologies and investment in exploration and extraction can lead to increased production.
In summary, the practical application of price elasticity of supply is evident in various industries, including agriculture, pharmaceuticals, and energy. It is an important concept that helps producers and businesses make informed decisions about production and pricing, and it has significant implications for consumers as well. Understanding and analyzing the elasticity of supply can help businesses maximize profits and minimize losses, and can also help policymakers make informed decisions about economic policies and regulations.
The importance of elasticity of supply
While in the case of supply, a 1% increase in price will lead to more than 1% increase in quantity supplied. Therefore, the elasticity reproduces the many economic, social and psychological forces that shape consumer tastes. A the micro level, its specific application to the income elasticity of demand for cars amongst OAU, Ile-Ife lecturers revealed that given the income group the lecturers find themselves, cars remain a good of necessity on the average. If the monopolist believes that the demand for a product is inelastic, then the demand for that product should not decrease significantly with a price increase. It occurs within the normal working environment an employee will experience on the job.
What are the practical applications of price elasticity of supply?
Essential items usually possess inelasticity of demand. This especially is applicable in explaining demand and supply behavior, variables that shape macroeconomic behavior as well as forecasting. But, its adequacy in explaining the behavior economic phenomenon remains suspicious. This can also be denoted as 1. Present Designation…………………………………… Previous Designation…………………………………. On-the-job training, sometimes called direct instruction, is one of the earliest forms of training observational learning is probably the earliest. The magnitude of change in price and demand is divided by its midpoint to arrive at a measure of change over a curve rather than at a point.
The Practical Application of Price Elasticity and Income...
They are produced by many farmers and each farmer is producing a very small portion of the total supply of a particular farm product, say wheat. . If, on the other hand, the demand is elastic he will lower the prices, stimulate demand and thus maximize his monopoly net revenue iii. Price elasticity of demand for X is a. The longer the time period, the more elastic demand is. A finance minister is to consider the elasticity of demand of the different commodities for the purpose of taxation.
Price Elasticity of Demand (Practical Applications)
A firm will know much more about its internal operations and product costs than it will about its external environment. Similarly, farm labour lacks in free mobility. A drought or heavy rains may damage the crop and bring misery to the farmer. The government can create public utilities where demand is inelastic and monopoly element is present. ADVERTISEMENTS: The concept of price elasticity of demand has a significant contribution in the field of industry, trade, and commerce.
Practical Application of Price Elasticity and Income Elasticity of Demand
The increase in the price of labour to OW 2 reduces the demand for labour to ON 2 But the supply of labour increases to ON 1 with the fixation of the higher minimum wage. For example, a 10% increase in the price will result in only a 4. What will be the profit- maximising price will be dictated by elasticity of demand; and it will enable the monopolist to know exactly at what price sales proceeds or total revenue will be the highest. This means that, along the demand curve between point B and A, if the price changes by 1%, the quantity demanded will change by 0. Umo Joe Umo 2007 "Economics An African Perspective" Published by Millennium Text Publishers Limited; ISBN 978-083-131-8. Price determinatio n: Price determination is forced to be profitable if elasticity o f demand in another. Sellers are also interested in the black market to sell the products at higher prices and earn more profits.
5.1 Price Elasticity of Demand and Price Elasticity of Supply
We shall explain below the various uses, applications and importance of the elasticity of demand. About half of the long-run reduction in quantity demanded arises because people drive less and about half arises because they switch to more fuel-efficient cars. This, still goes to re-affirm that the commodity car on the average amongst OAU lecturers, given their income earned, remains a normal and a necessary commodity. Effects of Changes in Price Upon Demand: The concept is very useful to study the reactions of the demand for a commodity to the changes in its price. Thus, as a result of the subsidy, the price falls to OP 1 and the quantity rises to OQ 1.
The demand for bourbon whiskey is more elastic than the demand for alcoholic beverages in general. Elasticity can be described as elastic or very responsive , unit elastic, or inelastic not very responsive. Introduction The concept of elasticity is an imperative functional tool for economist, policy makers and businessmen and businesswomen, therefore, its role in decision making and forecasting issues cannot be overlooked. Minimum Wage Legislation: Fixation of minimum wages by the government can also be shown by demand-supply analysis. Thus, the market in which the farm products are sold and bought is perfectly competitive. The subsidy paid by the government is equal to the sum of the benefits of consumers and producers the shaded area P 1P 2BC.
Practical Applications of Price Elasticity of Demand
Figure 6 illustrates the effects of fixing the minimum wage above the competitive level. The applications are: 1. In case of a commodity with elastic demand, a reduction in price alone can raise the sales volume and, consequently, profit. When a tax is imposed on a commodity of inelastic demand, the seller can generally transfer the burden of the tax upon the consumers by raising the price, and so the incidence of tax falls upon the buyers. They intersect at point E and determine OP market price and OQ market quantity.