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.

 

Price elasticity of Demand (PED)

 

The elasticity is the extent to which buyers and sellers respond to a change in market conditions…

Price elasticity of demand

PED measures the responsiveness in demand to a change in price, it is measured with the following equation:

% change in quantity demanded/%change in price

 

For example if Sony playstation raised the price of their Sony ps3 console by 5% and as a result of this demand for the games console fell by 10% it means that the price elasticity is:

10% (change in quantity demanded)/5% (change in price) = -2

This suggests that demand for the games console is responsive to a change in price, as it is above 2 it suggests that this product is price elastic:

Price elastic is when the percentage change in quantity demanded is sensitive to a percentage change in price

 

Price Inelastic therefore is when the percentage change in quantity demanded is NOT sensitive to a percentage change in price.

 

PED is greater than 1 = Price Elastic

PED is less than 1 = Price inelastic

PED 1 = where a change in price causes a proportional change in demand

So now we have looked at PED we need to ask the obvious questions, what factors affect demand for products?

• The availability and closeness of substitutes: This is an alternative to a particular product. The more close substitutes available for a product means that it is probably price elastic. So if we go back to the playstation example: It had an elasticity of 2 which shows that it is PED elastic, this implies that there are probably substitutes that are fairly similar to the product such as the XBOX 360
• The relative response to a product with respect to income: If the product takes up a small part of income, such as a packet of gum for example, then an increase in price would not really lead to such a large decrease in demand, in these instances, demand is thought to be price inelastic. However if a the product takes up a larger proportion of income, for example a holiday then demand would be more sensitive, making it more PED elastic. Some products are habit forming, such as Cigarettes. Therefore a change in price would not effect the demand for it by that much, no matter how much a proportion it may take up on the incomes, even for lower income families.
• Time: In the short term, changing buying habits may be hard, so during this period demand maybe price inelastic, however over time demand becomes more elastic as more substitutes become available. Consumption of a product can even be delayed, making it more price elastic, this is even more so as these products do not tend to be necessities such as home improvements.

 

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.