Microeconomics: Elasticity Concept of Supply and Demand

Micro sparings crack Concept of Supply and shootINTRODUCTORY MICROECONOMICS confineMICROENOMICS (Words 2,744)1. picnic CONCEPT OF DEMAND SUPPLYElasticity lets us recognise a lot of things well-nigh our essential and add. Besides that, duck soup of convey lets us know what number of additional units of an item leave al cardinal be sold when the quantify is cut (or what number of fewer units leave behind be sold when the apprize is enlarged). The degree to which a pray or generate breaking balls responds to a smorgasbord in value is the cut expand sufficientity (Heakal, R., two hundred3). Reem Heakal (2003) convey that items that are necessities are to a greater extent incentive to equipment casualty changes since procurers skill lay aside purchasing these items despite the increments of equipment casualty. On the other hand, a value gain of a ripe(p) or service that is recognized to a less(prenominal)er degree collect will stop more consumers since the chance expense of purchasing the item will get to be excessively high-pitched (Quant Lego, 2013).Elasticity is a idea of reactivity of wholeness or more economic variables to changes in an alternate set of whiz or more variables (Quant Lego, 2013). The way of this responsiveness and the genuine value of centering convey effective knowledge and information to poke the way of relationship among economic variables and bow out decisions to influence one economic variable under ones control to arrive a desired outcome about(predicate) the quality of the other economic variable (Quant Lego, 2013).A good or service is acknowledged to be super elastic if a slight change in value prompts to a sharp change in the amount necessaryed or supplied. usually these sorts of items are promptly accessible in the business and an individual may not so a good deal require them in his or her day-by-day life. O the other hand, an nonresilient good or service is one in which changes in val ue witness just modest changes in the amount filmed or supplied, if any whatsoever (Quant Lego, 2013). These harvest- clippings have a dip to be things that are to a greater extent a need to the consumer in his or her everyday life.The cracking of the bestow or beseech curves hindquarters be determined victimization the equation be depletedElasticity = (% change in quantity / % change in terms)According to Heakal, R. (2003), if elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic.The command curve is a prohibit lurch as shown in issue 1, and if there is a large mitigate in the quantity demanded with a small increase in hurt, the demand curve looks flatter, or more horizontal. This flatter curve kernel that the good or service in question is elastic (Heakal, R., 2003). gauge 1 represent of elastic demand(Source http//www.investopedia.com/university/economics/economics4.asp)Meanwhil e, inelastic demand is re shewed with a such(prenominal)(prenominal) more upright curve as quantity changes little with a large movement in wrong as shown in Figure 2 (Heakal, R., 2003).Figure 2Graph of Inelastic demand(Source http//www.investopedia.com/university/economics/economics4.asp)Elasticity of write out works similarly. According to Heakal, R. (2003), if a change in price leave alones in a big change in the amount supplied, the write out curve appears flatter and is considered elastic. Hence, elasticity in this case would be greater than or equal to one as shown in Figure 3.Figure 3 Graph of elastic furnish(Source http//www.investopedia.com/university/economics/economics4.asp)On the other hand, if a big change in price wholly results in a minor change in the quantity supplied, the supply curve is sheer and its elasticity would be less than one as shown in Figure 4 (Heakal, R., 2003).Figure 4Graph of inelastic supply(Source http//www.investopedia.com/university/econo mics/economics4.asp)Elasticity, defined as a ratio of comparative or per cent changes, is necessarily dimensionless inwardness that it is independent of units of measurement (Hodrick, L. S. (1999). For example, the value of the price elasticity of demand for natural gas would be the same whether prices were measured in dollars or francs, or quantities in tonnes or gallons. This unit-independence is the main reason why elasticity is so frequent a measure of the responsiveness of economic behaviour (Hairies, L., 2005).2.PRICE ELASTICITY OF DEMAND AND SUPPLYHence, elasticity is a measure of exactly how much the amount demanded will be influenced by a change in value wage or change in price of linkd goods (Heakal, R., 2003). There are four sorts of elasticity, there are price elasticity of demand, income elasticity of demand, cross price elasticity of demand and price elasticity of supply (Gachette, B., 2007).2.1Price Elasticity of demandPrice elasticity of demand analyses the res ponsiveness of consumer demand to a change in price which is fundamental to know since then we know if its more beneficial to increase or decrease apostrophize.In addition, price elasticity of demand financial aid figure demand and swear out the firms choose about pricing in distinctive business portions. Monopolistic price discrimination king be practiced if the demand elasticity of distinctive business sector fragments is cognise/ assessed. Price elasticity of demand and supply functions to focus the feasible strikeering of the occurrence of a impose or a change in the tax rate (Das, S., 2005). Buoyancy in tax venues might be judged on the basis of income and price elasticity. This information is very useful for the economists include in providing estimates of tax r sluiceue and proposes new taxes or changes in tax rates in the government (Das, S., 2005).2.2Income elasticity of demandIncome elasticity of demand is the responsiveness of consumer demand to a change in wage this helps economists with classifying goods as substandard (the higher(prenominal)(prenominal) the income the lower the consumption) or normal (the higher the income the higher the consumption) (Das, S., 2005).Income elasticity of demand helps extend the interest for goods that a nation might require as the economy develops to higher and higher per capita wage levels. Demand for certain essential components of food are relatively inelastic later on a certain level of income is r each(prenominal)ed. Thus, demand for cereals (for example, oats) is inelastic once the cosmos has crossed the poverty line. But the demand for grains may at present increment through the demand for meat (as animals have to be reared on fodder grains). Such information helps long-term national planning.2.3Cross price elasticity of demandCross price elasticity of demand is the responsiveness of consumer demand to a change in a competitors price this helps economists in comprehension if goods are complement s (demand for one leads to demand for another) or substitutes (demand for one means less demand for another) (Das, S., 2005).Cross price elasticity also help pricing and marketing strategies keeping in view the effect of changes in cost of substitutes, complementary items and competing items in the same want fulfilling category. Publicizing using elasticity is essential to decide about advert outlays and alternative advertising campaigns of organizations.2.4Price elasticity of supplyFinally price elasticity of supply is the responsiveness regarding supply with a change in price which helps economists comprehend suppliers capacity to increase stocks for example agricultural goods producers have a low price elasticity of supply because if demand suddenly increases they have express mail capacity to increase supply because of the long time it takes to produce this supply (Das, S., 2005).3.DIFFERENCE BETWEEN CONSUMER SURPLUS PRODUCER SURPLUSCustomer and manufacturing business prodi gality are two huge parts of matters of trade and earn particularly concerning marketing and pricing (Michigan State University, 2001). Customer supererogatory is the cost above business sector value that you might be get to contain or expressed diversely it is the maximum price that you might pay for a thing the genuine price for that thing. Producer Surplus is smokeonically the contrast surrounded by what a producers is free and able to supply or offer an item for and what they get for it (Whfreeman, 2005).Simple example about consumer wastefulness, such as I-phone, lets say that you volition to pay a maximum of RM2, calciferol but when you get to the store you discovered that the I-phone only cost you RM2,000 in which case you bought it and received a consumer unneeded of RM 500 RM2,500 RM2,000 = RM 500. Another example for producer pleonastic, take a company deal Apple, lets say that they would be willing to shift I-Pod for RM 200 and that is the absolute lowest they would willing to sell for but they manage to sell them for a price of RM 300 in this case the producer superabundance is RM 100 RM 300 RM 200 = RM100.When you observed those figures carefully, youll see that a basic economic principle in that the higher a harvest-tide is priced the higher the producer additional will be but the lower consumer surplus will, eventually if the seller keeps raising its prices then the consumer surplus will work 0 at the point the consumer will not want to purchase that product anymore (Whfreeman, 2005). Therefore, there are certain factors that need to be comprehended deeply in order to understand more about this consumer and producer surplus.Firstly is the fair play of demand. The law of demand stated that consumers will buy more of something (for example, sugar) when the price is falls or cheaper. Secondly is the law of supply. The law of supply stated that the higher the price of a product the more of it sellers are willing to supply. The premise of this comes essentially from producer surplus. high product price increases producer surplus thus they are willing to sell more of it because of the positive surplus (Michigan State University, 2001).The apprehensions of producer and consumer surplus help economists make welfare (normative) judgement about different methods of producing and distributing goods (Khan Academy, 2014). The differences between consumer and producer surplus are consumer surplus measures the gains to consumers from trade, whereas producer surplus measures the gains to producers from trade. twain consumer and producer surplus undersurface measure a nations prosperity more accurately than GDP (gross domestic product). These concepts can help us to understand why markets are an efficient way to lift trade.Figure 5Graph of total surplus of Consumer and producer (e.g. books)(Source Gachette, B. (2007) Principles of Microeconomics.)Based on the Graph of total surplus of consumer and producer as sho wn in Figure 5, both consumers and producers are better off because there is a market in this good, there are gains from trade. These gains from trade are the reason everyone is better off participating in a market economy than they would be if each individual tried to be self-sufficient.Consumer surplus is the difference between the value to buyers of a level of consumption of a good and the amount the buyers must pay to get that amount. Consumer surplus is the welfare consumers get from the good. Consumer surplus can be estimated from the demand curve for a good (Pepperdine University, 2010). The term producers surplus first shown up in A. Marshalls Principle 11, p. 811, f.2, taking shape as the area between the hawkish equilibrium price and the supply curve, a curve that slopes upwards as a result of placing the firms in order of diminishing efficiency as shown on figure 5. Marshall seems to stretch out the terms in order to comprehend all the surpluses a man determines as prod ucer, including a workers surplus arising from the sale of his personal services and a savers surplus arising from the services of his capita (Mishan, E. J., 1968).4.EFFECTS OF ELASTICITY ON CONSUMER SURPLUS PRODUCER SURPLUSIn economics, elasticity is the ratio of the proportional change in one variable with respect to proportional change in another variable (Gachette, B., 2007). Price elasticity, for example, is the sensitivity of quantity demanded or supplied to changes in prices. Elasticity is usually expressed as a negative number but shown as a positive percentage value. wizard typical application of the concept of elasticity is to consider what happens to consumer demand for a good (for example, apples) when prices increase. According to Gachette, B. (2007), as the price of a good rises, consumers will usually demand a lower quantity of that good, perhaps by consuming less, substituting other goods, and so on. The greater the extent to which demand falls as price rises, the greater the price elasticity of demand. However, there may be some goods that consumers require, cannot consume less of, and cannot attain substitutes for even if prices rise (for example, certain prescription drugs). Another example is oil and its derivatives such as gasoline. For such goods, the price elasticity of demand might be considered inelastic.Furthermore, elasticity will normally be different in the wretched term and the long term (Das, S., 2005). For example, for many goods the supply can be increased over time by locating alternative sources, invest in an expansion of production capacity, or developing competitive products which can substitute. One might therefore expect that the price elasticity of supply will be greater in the long term than the unforesightful term for such a good, that is, that supply can adjust to price changes to a greater degree over a longer time (Pepperdine University, 2010).This applies to the demand side as well. For example, if the price of petrol rises, consumers will find ways to conserve their use of the resource. However, some of these ways, like finding a more fuel-efficient car, take longer period of time. Thus, consumers may be less able to adapt to price shocks in the short term than in the long term (Hairies, L., 2005).However, there would be another effect of consumer surplus when the producer takes advantage of consumer surplus such as setting prices. In an organization (producers/ sellers) can identify groups of consumer within their market who are willing and able to pay different prices for the same product, then producers/sellers might pack in price discrimination. The price that the consumer willing to pay, thereby turning consumer surplus into extra revenue. This often happen in local fitness lycee either in your area or other places whereby different fitness gym offers different prices with the same products.Another good example that can be seen the effect of consumer and producer surplus is the linelines companies itself, such as Air Asia Airlines. Air Asia Airlines using their famous tagline Now everyone can fly is one of the cheapest and affordable prices Airlines in Asia. By extracting from consumers the price they are willing and able to pay for flying to different destinations are various times of the day, and exploiting variations in elasticity of demand for different types of passenger service. If you noticed that, often the price of tickets flights is cheaper when you book the flight earlier either weeks or months in advance. The airlines are prepared to sell tickets more cheaply then because they get the reach of cash-flow at the same time making sure that each bottom are being filled. The nearer the time to take off, the higher the price of the tickets flights. Thus, if a businessman is desperately to fly from Kota Kinabalu, Sabah to Kuala Lumpur, Peninsular Malaysia within 24 hour time, his or her demand is said to be price inelastic and the corresponding pr ice for the ticket will be much higher. Therefore, this is one of the way Airlines such as Air Asia Airlines exploit their monopoly position by raising the prices in markets where demand is inelastic, at the same time extracting consumer surplus from buyers and increasing profit margin.5.SUMMARYIn conclusion, elasticity is an important concept in sagaciousness the incidence of indirect taxation, marginal concepts as they relate to the possibility of the firm, distribution of wealth and different types of goods as they relate to the theory of consumer choice and. Elasticity is also significant in any handling of welfare distribution, in particular consumer surplus, producer surplus, or government surplus. Furthermore, the concept of elasticity has an extraordinarily wide range of applications in economics. In particular, an understanding of elasticity is useful to understand the dynamic response of supply and demand in a market, in order to achieve an intended result or avoid unint ended results. For example, a business considering a price increase might find that doing so lowers profits if demand is highly elastic, as sales would fall sharply. Similarly, a business considering a price cut might find that it does not increase sales, if demand for the product is price inelastic. Therefore, an economic signal is any piece of information that helps commonwealth makes better economic decisions.6.REFERENCESDas, S. (2005) The Concept of Elasticity in economics. obtainable at http//www.montgomerycollege.edu/sdas/elasticity/broaderusage.htm (Accessed 20 February 2014).Gachette, B. (2007) Principles of Microeconomics. Available at http//www.aiu.edu/publications/student/english/Principles%20of%20Microeconomics.html (Accessed 21 February 2014)Haines, L. (2005) Elasticity is Back Oil and Gas Investor.Heakal, R. (2003). Economics Basics Elasticity. Investopedia Available at http//www.investopedia.com/university/economics/economics4.asp (Accessed 21 February 2014).Hodric k, L. S. (1999) Does Price Elasticity Affect incarnate Financial Decisions? Journal of Financial Economics.Mishan, E. J. (1968). What is Producer Surplus? The American Economic Review, Vol. 58, No. 5.Khan Academy (2014) Consumer Producer Surplus. Available at https//www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-surplus (Accessed 20 February 2014).Michigan State University (2001) Consumer and Producer Surplus. Available at https//www.msu.edu/course/ec/201/brown/pim/pdffiles98/csps98.pdf (Accessed 21 February 2014).Pepperdine University (2010) Chapter 4 Surplus and Efficiency. Available at http//faculty.pepperdine.edu/jburke2/ba210/PowerP1/Ch4.ppt (Accessed 20 February 2014).Quant Lego (2013) Economics Basics A Tutorial. Building Blocks For Financial Quant Skills. Available at http//www.quantlego.com/knowledge/economics-basics-tutorial/5/ (Accessed 21 February 2014).Whfreeman (2005) Chapter 6 Consumer and Producer Surplus. Available at http//www.whfre eman.com/college/pdfs/krugman_canadian/CH06.pdf (Accessed 21 February 2014).