Price elasticity of supply

PES is the responsiveness in Supply to a change in the price of a product

%change in quantitysupplied/%change in price

This type of elasticity will always be positive as a producers main aim is to maximise profits, this therefore would mean that the higher the price, the more is supplied by a producer.

• Between 0 and 1: This suggests that supply is inelestic, this means that supply is not very responsive to a change in price of a product
• Greater than 1: Supply is elastic, therefore producers are able to respond to a change in price and supply more very quickly if price rises
• Equal to 1: here a change in price is proportional to a change in quantity supplied

  What determines the price elasticity of supply?

• Availability of stocks of the product: The speed at which goods can be released depends if the stock is available, the stock can be stored in warehouses or businesses such as Tesco can have “buffer stock” which means that they have extra stock to cope with sudden changes in demand, if this is the case, then supply is fairly PES elastic, in which an increase in price would mean that these businesses can quickly supply more.
• Availability of factors of production: Labour tends to be the most available factor of production, so that means that if the price increases then more can be produced, in this instance supply is thought to be PES elastic. However for some businesses it may be the availability of capital that determines the output produced, this maybe because extra capital will need to be found and installed, workers will need to be trained to use the equipment, and this would mean that supply would be inelastic
• Time: When supply takes more time adjust, it makes it more inelastic as it is less responsive to a change in price, however in the long term supply would be more elastic as more would be available.

 

Income elasticity of Demand YED

YED measures the responsiveness in demand when there is a change in income:

%change in quantity demanded/%change in income

 

Normal goods are goods that have a positive YED, and inferior goods are goods that have a negative YED.

When income increases then demand for Normal goods increases, the more elastic a good is, reflects how much demand would rise.

Income inelastic: Is where goods for which a change in income produces a less than proportionate change in demand

 

Income elastic: os where goods for which a change in income produces a greater than proportionate change in demand

 

An example of a normal good is where income increase by 5%, this then leads to an increase of Apple Ipads by 8%, so remembering that negative and positive signs matter here, as a (+) sign means that the good is normal and if it is (-) sign it means that it is an inferior good, the YED is 1.6, this is YED elastic, so what does that mean for apple?

Well because it is a normal good:

• It tends to expand when income grows
• Apple will increase locating and advertising in high income areas
• they will do badly in a recession

And what if it was an inferior good that was effected?:

• They expand during recession
• Inferior goods will be more popular in low income areas
• Do well during recession

 

 

 

Market value

Market value is the amount for which something can be sold in a given market

 

Setting the right price is important for effective marketing. If we look at the marketing mix (product,price,promotion and place) price is the only one that brings money into the business (revenue)

It is also a variable of the mix that can change very quickly. For example responding to competitors price change.

The price of a product can be seen as the value of the product, for the consumer, the price is the monetary expression of the value to be enjoyed and benefits recieved by purchasing a product, as compared with other variable items.

If We had to draw a equation out of this then….

(percieved) Value=(percieved) Benefits- (percieved) costs

customers motivation to purchase a product comes from a “need” and a “want”. Another perception comes from  the value of the product when it comes to satisfying the need/want that the customer may have. However these perceptions of the value of the product may value depening on the consumer as they each have different wants/needs.

percieved benefits are often largely dependant on personal taste. In order to obtain the maximum possible value from the market, a business may try and segment the market.

A products percieved value can be increased by,

• Increasing the benefits that the product will deliver
• reducing the costs

Obviously cost is important to consumers, therefore businesses need to get the product pricing right.

Factors affecting Demand (within a business)

• price (if there is not perfect competition)
• product research and development
• advertising and sales promotion
• training and organisation of the sales force
• effectiveness of distribution
• quality of after sales-service

factors affecting the demand (outside the business)

• the price of substitute goods and services
• the price of complementary goods and services
• consumers disposable income
• consumers taste and fashions.