21. The price elasticity of supply
The price elasticity of supply is defined as a numerical measure of the responsiveness of the quantity supplied of product to a change in price of product alone.
When there is a relatively inelastic supply for the good the coefficient is low; when supply is highly elastic, the coefficient is high.
Supply
is normally more elastic in the long run than in the short run for
produced goods.
As spare capacity and more capital equipment can be utilised the
supply can be increased, whereas in the short run only labor can be
increased. Of course goods that have no labor component and a
re
not produced cannot be expanded. Such goods are said to be "fixed"
in supply and do not respond to price changes. 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.
The determinants of the price elasticity of supply are:
the existence of the naturally occurring raw materials needed for production;
the length of the production process;
the production spare capacity (the more spare capacity there is in an industry the easier it should be to increase output if the price goes up);
the time period and the factor immobility (the ease of resources to move into the industry);
the storage capacity of the merchants (if they have more goods in stock they will be able to respond to a change in price more quickly).
22. Market adaptation to Demand and Supply changes in long-run and in short-run
• Short
run- s - a period during which a partial adaptation of producers and
consumers to price changes and demand and supply become more
elastic. Production
capacity remains unchanged, but producers can increase output by more
intensive use. Consumers
can find substitutes for certain products or restrict
consumption. Demand
and supply become more elastic (curve DS, SS).
•
long run
- l - a period sufficient for complete adaptation and buyers and
sellers to price changes. During
this period, producers can expand production capacity. Consumers
can change the tastes and preferences. Demand
and supply are highly elastic (curve DL, SL).
Adaptations
to changes in the market supply
illustrated in Fig. 3.4.The
initial equilibrium is established at the point
,
equilibrium price
,.
When supply decreasing for short-term point of equilibrium
gradually moves along the demand curve to
до
. Since
the curve
is very short fast, inelastic demand, price increases sharply with
до
,before,
and the volume of demand decreased slightly from before
до
.. The
sharp increase in prices encourages consumers to replace the
expensive goods cheaper. In
course of time buyers are changing their tastes are more
substitutes. Long-term
demand curve
is пологішою
and demand - more flexible. The
equilibrium shifts to point
along
the curve supply
. The
price is reduced from to
до
,,
and the volume of demand is significantly reduced to.
.
Adaptations
to changes in market demand illustrated in Fig. 3.5.The
initial equilibrium is established at the point
of
intersection of demand
and
supply curves
,,
a significant slope which demonstrates its inelastic in the short
term. Suppose
that household income increased, the demand curve shifts to the right
into position
..Equilibrium
point moves along a short curve to the supply,
до
the price quickly rises to
,,
and the volume of offerings increases slightly - to
,,
because producers can increase production only due to its
intensification.
Gradually,
manufacturers are increasing capacity and supply curve in the long
run
is пологішою. Equilibrium
point
,moves
along to the new demand curve
equilibrium price falls to
,
and equilibrium output increases to
. Thus,
as in the previous case, in the short run primarily tracked response
rates, which indicates a significant increase in producers that
increase production profitable.
Overall
analysis of market adjustment to changes in supply and demand shows
that in the short run, these changes most responsive price in the
long run - production volumes, and the elasticity of demand and
supply at a price in the long run is much higher than in the short
23. Three parts and three assumptions of consumer behavior theory.
Consumer behavior is best understood in 3 steps.
To examine consumer preferences (to describe how people might prefer one good to another)
To account the fact that consumers face budget constraints (they have limited incomes that restrict the quantities of goods they can buy)
To determine consumer choices (to put consumer preferences and budget constraints together).
In other words, given their preferences and limited incomes, what combinations of goods will consumer buy to maximize their satisfaction?
The theory of begins with three basic assumptions regarding people’s preferences for one market basket (just a collection of one or more commodities) versus another:
Preferences are complete (it means that consumer can compare and rank all market baskets, ignoring costs in this case).
Preferences are transitive (it means that if consumer prefer market basket A to market basket B, and prefer B to C, then the consumer also prefers A to C. This assumption ensures that the consumer preferences are rational).
All goods are “good” (i.e. desirable), so that leaving cost aside, consumers always more of any good to less. (It simplifies graphical analysis, despite of the fact that some goods are not desirable for consumer).
There are two approaches that may be used to explain an individual’s choice: cardinal and ordinal. A cardinal concept believes that individual preferences can be easily quantified or measured in terms of basic unit with the help of “utils”. By contrast, ordinal theory ranks market baskets in the order of most preferred to least preferred. Whereas this two approaches are different in the question of utility ranking they are compatible.