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Karnataka Class 12 Commerce Economics Price Elasticity Of Supply Complete Details

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply Complete Details

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply :  The Karnataka University owes a lot to its erstwhile vice-chancellor, Dr. D.C. Pavate who headed the university from 1954 to 1967 as he was responsible for its rapid development. Dr. H.B. Walikar, the current vice-chancellor of the University, along with a few MLAs from the State of Karnataka are members of the Academic Council as well.

With facilities such as gardens, parks and a children park inside the campus, this university provides for an entire township in itself. A fully air-conditioned auditorium named Annaji Rao Sirur Rangamandira is suggestively one of the best of its kind in the state of Karnataka. A credit co-operative society also exists for the employees of the University, providing short- and long-term loans as and when they need it. The children of employees also get educated at a Kannada medium primary school that provides education till standard IV for the children.

In short, this University is a torchbearer in the field of education in the country, owing to its brilliant faculty and an impressive infrastructure, providing for a homely student life if one may put it that way.

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply Complete Details

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply :  An economy (From Greek οίκος – “household” and νęμoμαι – “manage”) is an area of the production, distribution, or trade, and consumption of goods and services by different agents in a given geographical location in various countries. Understood in its broadest sense, ‘The economy is defined as a social domain that emphasizes the practices, discourses, and material expressions associated with the production, use, and management of resources’. Economic agents can be individuals, businesses, organizations, or governments. Economic transactions occur when two parties agree to the value or price of the transacted good or service, commonly expressed in a certain currency. Monetary transactions only account for a small part of the economic domain.

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply Complete Details

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply :  Price elasticity of supply (PES or Es) is a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price. The elasticity is represented in numerical form, and is defined as the percentage change in the quantity supplied divided by the percentage change in price. When the coefficient is less than one, the supply of the good can be described as inelastic; when the coefficient is greater than one, the supply can be described as elastic. An elasticity of zero indicates that quantity supplied does not respond to a price change: it is “fixed” in supply. Such goods often have no labor component or are not produced, limiting the short run prospects of expansion. If the coefficient is exactly one, the good is said to be unitary elastic. The quantity of goods supplied can, in the short term, be different from the amount produced, as manufacturers will have stocks which they can build up or run down.

Here we provide you Karnataka Class 12 Commerce Economics Price Elasticity Of Supply Complete Details In PDF Format

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply Complete Details

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply :  Supply elasticity is defined as the percentage change in quantity supplied divided by the percentage change in price. It is calculated as per the following formula:

Formula 3.3

The calculation of elasticity of supply is comparable to the calculation of elasticity of demand, except that the quantities used refer to quantities supplied instead of quantities demanded.

Factors that influence the elasticity of supply include the ability to switch to production of other goods, the ability to go out of business, the ability to use other resource inputs and the amount of time available to respond to a price change.

Over a short time period, firms may be able to increase output only slightly in response to an increase in prices. Over a longer period of time, the level of production can be adjusted greatly as production processes can be altered, additional workers can be hired, more plants can be built, etc. Therefore, elasticity of supply is expected to be greater over longer periods of time.

We would expect the supply elasticity of wheat to be very high as farmers can easily switch land that is used for wheat over to other crops such as corn and soybeans. On the other hand, an oil refinery cannot easily switch its production capacity over to another product, so low oil-refining margins do not reduce the quantity supplied by very much. Due to high capital costs, higher refining margins do not necessarily induce much greater supply. So the supply elasticity for oil refining is fairly low.

This measures the responsiveness of quantity supplied to a change in price.

formula-pes

The price elasticity of supply (PES) is measured by % change in Q.S / % change in price.

  • If price of a cappuccino increases 10%, and the supply increases 20%. We say the PES is 2.0
  • If the price of bananas falls 12% and the quantity supplied falls 2%. We say the PES = 2/12 = 0.16

Inelastic supply

This means that an increase in price leads to a smaller % change in demand. Therefore PES <1
inelastic-supply

Supply could be inelastic for the following reasons

  • Firms operating close to full capacity.
  • Firms have low levels of stocks, therefore there are no surplus goods to sell
  • In the short term, capital is fixed in the short run e.g. firms do not have time to build a bigger factory.
  • If it is difficult to employ factors of production, e.g. if highly skilled labour is needed
  • With agricultural products supply is inelastic in the short run, because it takes at least six months to grow crops, in September the farmer cannot suddenly produce more potatoes if the price goes up.

Elastic supply

This occurs when an increase in price leads to a bigger % increase in supply, therefore PES >1

elastic-supply

  •  In this case, PES = 60% / 11% = 5.45

Supply could be elastic for the following reasons

  • If there is spare capacity in the factory.
  • If there are stocks available.
  • In the long run supply will be more elastic because capital can be varied.
  • If it is easy to employ more factors of production.

Question on price elasticity of supply equation

  • If the PES is 2.0 for CDS: and the firm supplied 4,000 when the price was £30.

Q. If the price increased from £30 to £36, what will be the new Q?

  • QS increases by 6, therefore as a % 6/30 = 0.2 = 20%
  • 2.0 = % change in QS /20
  • 40 = % change in QS
  • Therefore new Q = 4000 *140/100 = 5,600

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply Complete Details

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply :  The elasticity measures encountered so far in this chapter all relate to the demand side of the market. It is also useful to know how responsive quantity supplied is to a change in price.

Suppose the demand for apartments rises. There will be a shortage of apartments at the old level of apartment rents and pressure on rents to rise. All other things unchanged, the more responsive the quantity of apartments supplied is to changes in monthly rents, the lower the increase in rent required to eliminate the shortage and to bring the market back to equilibrium. Conversely, if quantity supplied is less responsive to price changes, price will have to rise more to eliminate a shortage caused by an increase in demand.

This is illustrated in Figure 5.5 “Increase in Apartment Rents Depends on How Responsive Supply Is”. Suppose the rent for a typical apartment had been R0 and the quantity Q0 when the demand curve was D1 and the supply curve was either S1 (a supply curve in which quantity supplied is less responsive to price changes) or S2 (a supply curve in which quantity supplied is more responsive to price changes). Note that with either supply curve, equilibrium price and quantity are initially the same. Now suppose that demand increases to D2, perhaps due to population growth. With supply curve S1, the price (rent in this case) will rise to R1 and the quantity of apartments will rise to Q1. If, however, the supply curve had been S2, the rent would only have to rise to R2 to bring the market back to equilibrium. In addition, the new equilibrium number of apartments would be higher at Q2. Supply curve S2 shows greater responsiveness of quantity supplied to price change than does supply curve S1.

Figure 5.5 Increase in Apartment Rents Depends on How Responsive Supply Is

The more responsive the supply of apartments is to changes in price (rent in this case), the less rents rise when the demand for apartments increases.

We measure the price elasticity of supply (eS) as the ratio of the percentage change in quantity supplied of a good or service to the percentage change in its price, all other things unchanged:

Equation 5.5

e S  =  % change in quantity supplied % change in price

Because price and quantity supplied usually move in the same direction, the price elasticity of supply is usually positive. The larger the price elasticity of supply, the more responsive the firms that supply the good or service are to a price change.

Supply is price elastic if the price elasticity of supply is greater than 1, unit price elastic if it is equal to 1, and price inelastic if it is less than 1. A vertical supply curve, as shown in Panel (a) of Figure 5.6 “Supply Curves and Their Price Elasticities”, is perfectly inelastic; its price elasticity of supply is zero. The supply of Beatles’ songs is perfectly inelastic because the band no longer exists. A horizontal supply curve, as shown in Panel (b) of Figure 5.6 “Supply Curves and Their Price Elasticities”, is perfectly elastic; its price elasticity of supply is infinite. It means that suppliers are willing to supply any amount at a certain price.

Figure 5.6 Supply Curves and Their Price Elasticities

The supply curve in Panel (a) is perfectly inelastic. In Panel (b), the supply curve is perfectly elastic.

Time: An Important Determinant of the Elasticity of Supply

Time plays a very important role in the determination of the price elasticity of supply. Look again at the effect of rent increases on the supply of apartments. Suppose apartment rents in a city rise. If we are looking at a supply curve of apartments over a period of a few months, the rent increase is likely to induce apartment owners to rent out a relatively small number of additional apartments. With the higher rents, apartment owners may be more vigorous in reducing their vacancy rates, and, indeed, with more people looking for apartments to rent, this should be fairly easy to accomplish. Attics and basements are easy to renovate and rent out as additional units. In a short period of time, however, the supply response is likely to be fairly modest, implying that the price elasticity of supply is fairly low. A supply curve corresponding to a short period of time would look like S1 in Figure 5.5 “Increase in Apartment Rents Depends on How Responsive Supply Is”. It is during such periods that there may be calls for rent controls.

If the period of time under consideration is a few years rather than a few months, the supply curve is likely to be much more price elastic. Over time, buildings can be converted from other uses and new apartment complexes can be built. A supply curve corresponding to a longer period of time would look like S2 in Figure 5.5 “Increase in Apartment Rents Depends on How Responsive Supply Is”.

Elasticity of Labor Supply: A Special Application

The concept of price elasticity of supply can be applied to labor to show how the quantity of labor supplied responds to changes in wages or salaries. What makes this case interesting is that it has sometimes been found that the measured elasticity is negative, that is, that an increase in the wage rate is associated with a reduction in the quantity of labor supplied.

In most cases, labor supply curves have their normal upward slope: higher wages induce people to work more. For them, having the additional income from working more is preferable to having more leisure time. However, wage increases may lead some people in very highly paid jobs to cut back on the number of hours they work because their incomes are already high and they would rather have more time for leisure activities. In this case, the labor supply curve would have a negative slope. The reasons for this phenomenon are explained more fully in a later chapter. The Case in Point in this section gives another example where an increase in the wage may reduce the number of hours of work.

Karnataka Class 12 Commerce Economics Price Elasticity Of Supply Complete Details

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