ATAR Notes: Forum
VCE Stuff => VCE Business Studies => VCE Subjects + Help => VCE Economics => Topic started by: costargh on February 28, 2008, 07:31:09 pm
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I have a firm grip on the elasticity of demand but am having trouble visualising the elasticity of supply.
Say, what would the price elasticity be of a Wii?
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For a Wii, it would be pretty typical. If the price goes up, the quantity demanded will go down. Elasticity affects the slope of the demand curve.
A highly elastic good responds to price changes. A perfectly elastic good will only be bought at some maximum price, and any price higher than that will result in no quantity demanded (the demand curve will be a horizontal line).
A highly inelastic good will not respond to price changes very much. A perfectly inelastic good will be bought at the same quantity regardless of the price (the demand curve will be a vertical line).
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Sorry, that was about elasticity of demand. Elasticity of supply is the same thing: the supply curve will respond to price changes if it is elastic.
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Elasticity of supply is the responsiveness of the quantity supplied to a change in price. There are a few factors that would affect the elasticity of supply of a Wii. Firstly, there are shortages of the Wii as it is. As such, an increase in price may result in a proportionally less rise in the quantity supplied, as not many are available anyway. This would result in an inelastic supply curve for the Wii.
The demand curve would be elastic as it is a relatively expensive item, so the price is important as it represents a higher proportion of your income. You could expect to see a proportionally greater rise in the quantity demanded to a fall in price (eg. a 10% fall in price may result in a 20% rise in the quantity demanded). There are other factors, but expensive items usually have an elastic demand curve.
It may be useful to think about elasticity of supply from the perspective of the business owner. If the price increases, the business will make more profit from that item. As a business will always attempt to maximise profit, they will dedicate more resources to this product. Here you need to make a judgement as to how responsive this change in resources will be. There are factors such as storability, mobility and the availability of spare capacity. I hope that helps...
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Thanks James
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If you like examples,
Supply is very inelastic for things like wine, because it takes so long to produce, producers can't react very well to changes in market price. Whereas, something like haircuts would be quite elastic, because it's easier to increase or decrease the amount of haircuts someone gives in response to price.
From memory this hardly ever comes up in the economics exam. I think I saw a question on it once in a multiple choice, and it was a fairly straightforward question.
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KK thanks Eriny. It's just because I have a SAC on demand and supply (including elasticity) tomorrow and I want to have everything covered. We have been told by our teacher that the questions are focused around the Wi (or at least some of the questions are).
Just if you are interested, I got my first SAC back. Number 1 Ranking 37.5/40. =)
But the first three SACs are such that the best two will make up the score for Outcome One.
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Just if you are interested, I got my first SAC back. Number 1 Ranking 37.5/40. =)
Congrats!