4. Due to high company taxes prevailing un the auto mobile industries, the average prices of motor vehicle specifically sedan has increased from a N$170 000 to a N$190 000 and the quantity demand for sedan motor vehicle decreases from 1000 units to 800 units. Use arc elasticity method to calculate the price elasticity of demand for sedan motor vehicle. (5 Marks) 5. Describe in detail the factors that affect supply and demand elasticity (15 Marks) LESSON 6 B: PRICE ELASTICITY OF SUPPLY Price Elasticity of Supply - the ratio of the percentage change in quantity supplied of a product to the percentage change in its price. The responsiveness of production to a change in price of a product or resource) E- Percentge change in quantity supplied of product X Percentage change in price of product X As with demand, averages, or midpoints of the before and after quantities supplied are used as reference points for the percentage changes What determines price elasticity of supply? Time If the price of a product increases, the amount of increase in quantity supplied will depend on the ability of a firm to shift resources to production of that product. The more time they have, the more able they will be to shift more resources. We can consider a firms response immediately, after a short duration, and in the long run. Immediately, there's not much a firm can do. If I bring a barrel of green beans to the market, can't sell any more than I brought, no matter how high the price. It takes time to produce them. (Inelastic) In the short term, I can grow green beans more intensively, planting more of my land and using fertilizer. (Fairly elastic) In the long term, I can buy more land and maybe other farmers will start growing green beans. (Very clastic). Market Period: a period in which producers of a product are unable to change the quantity produced in response to a change in price. Time and supply Elasticity Graphs: what does supply look like in the immediate market period, short term and long run? inelaste supply Elastic supply inelastic supply Perfecycle Determinants of Price Elasticity of Supply 1. Spare production capacity: If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elastic in response to a change in demand. The supply of goods and services is most clastic during a recession, when there is plenty of spare labour and capital resources. 2. Stocks of finished products and components: If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand-supply will be elastic. Conversely when stocks are low, dwindling supplies force prices higher because of scarcity 3. The case and cost of factor substitution/mobility: If both capital and labour are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily be switched. E.g. a printing press which can switch easily between printing magazines and greetings cards. Or falling prices of cocoa encourage farmers to switch into rubber production 4. Time period and production speed: Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels. In some agricultural markets the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions, which affect the production yield. In contrast the supply of milk is price elastic because of a short time span from cows producing milk and products reaching the market place. 4. Due to high company taxes prevailing un the auto mobile industries, the average prices of motor vehicle specifically sedan has increased from a N$170 000 to a N$190 000 and the quantity demand for sedan motor vehicle decreases from 1000 units to 800 units. Use arc elasticity method to calculate the price elasticity of demand for sedan motor vehicle. (5 Marks) 5. Describe in detail the factors that affect supply and demand elasticity (15 Marks) LESSON 6 B: PRICE ELASTICITY OF SUPPLY Price Elasticity of Supply - the ratio of the percentage change in quantity supplied of a product to the percentage change in its price. The responsiveness of production to a change in price of a product or resource) E- Percentge change in quantity supplied of product X Percentage change in price of product X As with demand, averages, or midpoints of the before and after quantities supplied are used as reference points for the percentage changes What determines price elasticity of supply? Time If the price of a product increases, the amount of increase in quantity supplied will depend on the ability of a firm to shift resources to production of that product. The more time they have, the more able they will be to shift more resources. We can consider a firms response immediately, after a short duration, and in the long run. Immediately, there's not much a firm can do. If I bring a barrel of green beans to the market, can't sell any more than I brought, no matter how high the price. It takes time to produce them. (Inelastic) In the short term, I can grow green beans more intensively, planting more of my land and using fertilizer. (Fairly elastic) In the long term, I can buy more land and maybe other farmers will start growing green beans. (Very clastic). Market Period: a period in which producers of a product are unable to change the quantity produced in response to a change in price. Time and supply Elasticity Graphs: what does supply look like in the immediate market period, short term and long run? inelaste supply Elastic supply inelastic supply Perfecycle Determinants of Price Elasticity of Supply 1. Spare production capacity: If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elastic in response to a change in demand. The supply of goods and services is most clastic during a recession, when there is plenty of spare labour and capital resources. 2. Stocks of finished products and components: If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand-supply will be elastic. Conversely when stocks are low, dwindling supplies force prices higher because of scarcity 3. The case and cost of factor substitution/mobility: If both capital and labour are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily be switched. E.g. a printing press which can switch easily between printing magazines and greetings cards. Or falling prices of cocoa encourage farmers to switch into rubber production 4. Time period and production speed: Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels. In some agricultural markets the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions, which affect the production yield. In contrast the supply of milk is price elastic because of a short time span from cows producing milk and products reaching the market place