24. The Factors that Influence the Elasticity of Supply

Time: In the short run firms will only be able to increase input of labour to increase supply of commodities may not be able to increase the supply in response to the price change but the supply change will be little because other factors of production may not be increased in the same proportion and may limit the supply. However, in the long run a firm will increase the input of all factors of production and thus the supply becomes more price elastic.

Availability of resources: If the economy already using most of its scarce resources then firms will find it difficult to employ more and so output will not be able to rise. The supply of most of goods and services will therefore be price inelastic.

Number of producers: More producers mean that the output can be increased more easily. Thus supply is more elastic.

Ease of storing stocks: If goods can be stocked with ease and have a long shelf life, the supply will be elastic, otherwise inelastic. For example perishable goods such as fresh flowers, vegetables have comparatively inelastic supply because it is difficult to store them for longer periods.

Increase in cost of production as compared to output: In cases where there is a significant increase in cost of production when output is increased, supply is inelastic. This is because suppliers will have to have to do a significant investment in order to increase the output. It will take time and some suppliers may be hesitant in doing so.

Improvement in Technology: In industries where there is a rapid improvement in technology, the PES of such goods will be more elastic as compared to industries where there is not much improvement in technology.

Stock of finished goods: In industries where there are high inventories/stocks of finished goods, the suppliers can easily supply more as the price rises. Thus, the PES for these goods will be elastic.

25. Resource Allocation Methods

Resource allocation is used to assign the available resources in an economic way. It is part of resource management. In project management, resource allocation is the scheduling of activities and the resources required by those activities while taking into consideration both the resource availability and the project time.

Strategic planning

In strategic planning, resource allocation is a plan for using available resources, for example human resources, especially in the near term, to achieve goals for the future. It is the process of allocating resources among the various projects or business units.

The plan has two parts: Firstly, there is the basic allocation decision and secondly there are contingency mechanisms. The basic allocation decision is the choice of which items to fund in the plan, and what level of funding it should receive, and which to leave unfunded: the resources are allocated to some items, not to others.

There are two contingency mechanisms. There is a priority ranking of items excluded from the plan, showing which items to fund if more resources should become available; and there is a priority ranking of some items included in the plan, showing which items should be sacrificed if total funding must be reduced.

Resource Leveling

The main objective is to smooth resources requirements by shifting slack jobs beyond periods of peak requirements. Some of the methods essentially replicate what a human scheduler would do if he had enough time; others make use of unusual devices or procedures designed especially for the computer. They of course depend for their success on the speed and capabilities of electronic computers. What to produce concerns allocation of resources among alternative uses. The economy must allocate the varieties of goods and services which will yield the greatest satisfaction to consumers. Once the first problem is solved, we are faced with the second problem, HOW TO PRODUCE. There are several technically possible ways a commodity can be made. A basic criterion used in deciding the best technique is that producers should avoid inefficient methods. Production is said to be inefficient when it is possible to reallocate resources and, as a result, produce more of at least one good without producing less of any other good. This information is powerful and helpful to beginners.

Algorithms

Resource allocation may be decided by using computer programs applied to a specific domain to automatically and dynamically distribute resources to applicants.

This is especially common in electronic devices dedicated to routing and communication. For example, channel allocation in wireless communication may be decided by a base transceiver station using an appropriate algorithm.

One class of resource allocation algorithms is the auction class, whereby applicants bid for the best resource(s) according to their balance of "money", as in an online auction business model (see also auction theory). A study by Emmanuel Yarteboi Annan shows that this is highly important in the resource allocation sector.

In one paper on CPU time slice allocation an auction algorithm is compared to proportional share scheduling

26. Demand and Marginal Benefit

The value of one more unit of a good or service is its marginal benefit. Marginal benefit is the maximum price that people are willing to pay for another unit of a good or service. And the willingness to pay for a good or service determines the demand for it. So the demand curve for a good or service is also its marginal benefit curve.

27. Supply and Marginal Cost

The cost of producing one more unit of a good or service is its marginal cost. Marginal cost is the minimum price that producers must receive to induce them to produce another unit of the good or service. And the minimum acceptable price determines the quantity supplied. So the supply curve for a good or service is also its marginal cost curve.

28. Is the Competitive Market Efficient?

The marginal benefit to the entire society is the marginal social benefit curve, MSB. If all the benefits from a good go to its consumers, the market demand curve is the same as the MSB curve.

The marginal cost to the entire society is the marginal social cost curve, MSC. If all the costs of producing a good are paid by the producers, the market supply curve is the same as the MSC curve.

When the marginal social benefit of the last unit produced equals its marginal social cost, society attains efficiency. However, because the demand curve is the same as the MSB curve and the supply curve is the same as the MSC curve, the quantity that sets the MSB equal to the MSC also sets the quantity demanded equal to the quantity supplied and so is the equilibrium quantity.

29. Obstacles to Efficiency

The key obstacles to achieving an efficient allocation of resources in a market are:

1. Price and Quantity Regulations: If a price ceiling or price floor makes the equilibrium price illegal, it can lead to inefficiency.

2. Taxes and Subsidies: Taxes and subsidies place a wedge between the prices consumers pay and the prices producers receive.

3. Externalities: An externality is a cost of a benefit that affects someone other than the seller or the buyer.

4. Public Goods and Common Resources: Public goods lead to a free-rider problem, in which people do not pay for their share of the good. Common resources are generally over-used because no one owns the resource.

5. Monopoly: A monopoly is a firm that has sole control of a market. To maximize its profit, a monopoly produces less than the efficient quantity and so creates inefficiency.

6. High transactions costs: The opportunity costs of making a trade are transactions costs. When these costs are high, a market might underproduce because too few transactions take place.

30. Is the Competitive Market Fair?

There are two general ways of defining fairness: “It’s not fair if the results aren’t fair” and “It’s not fair if the rules aren’t fair.”

It’s Not Fair If the Result Isn’t Fair. Utilitarianism adopts this view. Utilitarianism is a principle that states that we should strive to achieve “the greatest happiness for the greatest number.” This principle argues that fair-ness requires equality of incomes, which requires that incomes be redistributed.

It’s Not Fair If the Rules Aren’t Fair

This perspective relies on the symmetry principle—the requirement that people in similar situations should be treated similarly. In economics, this means equality of economic opportunity rather than equality of economic outcomes.

31. Maximizing Utility

• A consumer’s choices influence the total level of his or her utility some combination of goods generate more utility than others. The key assumption of marginal utility theory is that the household consumes the combination that maximizes its utility.

• Total utility is the total benefit that a person gets from the consumption of goods and services. As more of a good or service is consumed, total utility increases.

• Table 8.1 provides an example of utility from consuming movies and paperback books in a given week.

• Marginal utility is the change in total utility that results from a one-unit increase in the quantity of a good consumed. The table shows the marginal utility from movies.

Positive Marginal Utility

• When a good generates value, it has a positive marginal utility. Total utility increases as the quantity consumed increases.

Diminishing Marginal Utility

• Diminishing marginal utility is the principle that as more of a good or service is consumed, its marginal utility decreases. In the table the marginal utility diminishes as more movies are consumed.

• The theory of consumer behavior uses the law of diminishing marginal utility to explain how consumers allocate their incomes. The utility maximization model is built based on the following assumptions:

• 1. Consumers are assumed to be rational, trying to get the most value for their money.

• 2. Consumers’ incomes are limited because their individual resources are limited. They face a budget constraint.

• 3. Consumers have clear preferences for various goods and services, thus they know their MU for each successive units of the product.

• 4. Every item has a price tag. Consumers must choose among alternative goods with their limited money incomes.

• The Utility Maximization rule states: consumers decide to allocate their money incomes so that the last dollar spent on each product purchased yields the same amount of extra marginal utility.

• The algebraic statement is that consumers will allocate income in such a way that:

• MU of product A / price of A = MU of product B / Price of B = MU of product C / price of C = etc.

• It is marginal utility per dollar spent that is equalized. As long as one good provides more utility per dollar than another, the consumer will buy more of that good; as more of that product is bought, its MU diminishes until the amount of MU per dollar just equals that of the other products.

32. Predictions of Marginal Utility

A Fall in the Price of a Movie

A Change in the Quantity Demanded

• If the price of a good falls and other things remain the same, the marginal utility per dollar from that good rises. As a result, the consumer increases his or her purchases of that good in order to maximize utility. (As more of the good is purchased, its marginal utility decreases; as less of other goods are purchased, their marginal utilities increase. Eventually the consumer reaches a new equilibrium at which the marginal utility per dollar for all the goods is equal.)

A Change in Demand

• When the price of a good falls, it will have an impact on the demand for related goods (substitutes and complements in consumption). In our example, when movie prices fall, the demand for paperback books decreases, implying that movies and books are substitute goods.

A Rise in Income

• If a consumer’s income increases, the consumer will reach a new consumer equilibrium in which all the income is spent and the marginal utility per dollar from all goods is equal. Marginal utility theory predicts that as the consumer’s income increases, the demand for normal goods increases and the demand for inferior goods decreases.

Paradox of Value

• The paradox of value is that water, which is essential to life, costs little, but diamonds, which are useless in comparison to water, are expensive. The resolution to this paradox comes from distinguishing total utility from marginal utility. The total utility from water is much more than from diamonds. But we have so much water that its marginal utility is small. And we have so few diamonds that their marginal utility is high. When a household maximizes its utility, it makes the marginal utility per dollar equal for all goods. Because diamonds have a high marginal utility, they have a high price. Because water has a low marginal utility, it has a low price.

Temperature: An Analogy

• Like temperature, utility cannot be observed. A thermometer can be used to measure temperature, and whether temperature is measured in Celsius or Fahrenheit is essentially arbitrary. Similarly, units of measurement for utility are arbitrary, but they can still help us to predict consumption choices.