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T2 Overview of Concepts on Elasticity of Demand and Supply [1725A/45A]…

- - - - [Think in terms of type of elasticity, sign, magnitude and impact on sales volume (Q)] : What does PED=0 imply? It is perfectly price inelastic demand. When PED=0, the quantity demanded is the same at all prices. A given change in price does not lead to any changes in quantity demanded.
      - [Think in terms of type of elasticity, sign, magnitude and impact on sales volume] What does PED=-0.1 imply? It implies that the smallest possible increase in price leads to an infinitely large decrease in the quantity demanded, ceteris paribus. [Tutor Comments : the demand is price inelastic. In other words, when price falls by 1%, the quantity demanded rises by 0.1%)]
      - [Think in terms of type of elasticity, sign, magnitude and impact on sales volume] What does PED=-1 imply? It is unitary elastic demand which means that when PED=-1, a given change in price causes the same proportionate change in quantity demanded of the good, ceteris paribus. For example, as supply of air travel shifts towards the left along a unitary elastic demand curve, the price of air travel increases causing the same proportionate decrease in its equilibrium quantity, ceteris paribus.
      - [Think in terms of type of elasticity, sign, magnitude and impact on sales volume] What does PED=-1.4 imply? [Tutor Comments: When PED=-1.4, this means that the PED is price elastic. In other words, when the price falls by 1%, the quantity demanded would increase by 1.4%]
  - - - Scenario 1 : There is an increase in number of sellers of fast food restaurants in Singapore due to rising total profitability. How does it affect the magnitude of the PED of food fast? Demand for fast food is price elastic as there there are variety of close substitutes. The increase in number of sellers of fast food restaurant would result in a wider variety of fast food choices to choose from. Its quantity demanded will increase more proportionately and there will be an increase in total revenue.
        
        Is it easy to find substitutes for market like shoes? Explain your reason. It is difficult as they are broadly defined goods that tend to have more price inelastic demand as it is difficult to find these goods that serve important and general purposes
    - - Scenario 2 : There is a rise in coffee culture in Singapore, popularized by Starbucks and Coffee Bean. How does it affect the magnitude of the PED of coffee drinks? Coffee initally have a low degree of necessity but it is habit forming and can become a 'necessity' to consumers. This results in consumers consuming the coffee on a regular basis habitually thus having price inelastic demand for that good. For example, coffee is habitually consumed due to addiction. An increase in their prices is likely to result in a less than proportionate fall in quantity demanded as habitual coffee drinkers will find it hard to quit their habits.
    - - Scenario 3 : Beef is a luxury good to low earners. Explain why and explain how does it affect the magnitude of the PED of beef? If the price of the beef increases, the increase in price takes up a large percentage of a family's income. This will significantly reduce the ability to purchase it and hence will result in a more than proportionate fall in quantity demanded of beef, hence the demand for beef tends to be price elastic
- - - - Sign and Magnitude :
        
        [Think in terms of type of elasticity, sign, magnitude and impact on sales volume] What does YED=-1.1 imply? The negative sign implies demand of the goods is inversely related to income level. For example, an increase in income level will lead to a decrease in demand for less known brand of goods from market. Value of YED less than 0 implies that the good is inferior. Thus with higher income, demand for inferior goods decreases as people can afford better products.
        
        [Think in terms of type of elasticity, sign, magnitude and impact on sales volume] What does YED=0.1 imply? Positive sign implies that the demand of goods is directly related to the income level. For example, an increase income level will lead to an increase in the demand for various better known goods. When YED value is between 0 and 1, demand of goods is relatively income inelastic in demand. Hence when there is a change income level, quantity demanded will change less than proportionately. [Tutor Comment : This is a basic necessity.]
        
        [Think in terms of type of elasticity, sign, magnitude and impact on sales volume] What does YED=1.1 imply? Positive sign implies that the goods is directly related to the income level. When YED value is more than 1, it implies that the demand of goods is relatively income elastic in demand. Hence when there is a change in income level, the quantity demanded will change more than proportionately. [Tutor Comment : This is a luxury good.]
    - - Factor 1 : Income Level
        
        Income Level of Consumers
        
        Scenario 1 : The majority of China's total consumption has historically centered on essential items such as food and clothing. But going forward, higher spending is expected on cars and luxury goods as average disposable income levels rise. How does it affect the magnitude of the YED of food and cars, for instance? The magnitude of the YED of food stay constant and magnitude of the car increase. For YED of food, food is consider as basic necessity in Asia, eventhough the average disposable income increase, demand curve will not shift in a large extend.For instance, the necessity of rice will not be affected by the increase in income. Rice still need to be consumed by people regardless the price. For the YED of cars, higher disposable income imply higher spending on luxury good. Since people in China have more available money to spend, their total expenditure will mostly be contributed to luxury good like cars. This lead to a greater rightward shift of demand. Fo example, the sales of BMW cars will increase since more people are nw able to afford the high price
        
        Income Level of Country
        
        Scenario 2 : China is currently at consumer spending levels seen in Malaysia in the 2000s with nearly 40% of the population in the low-income bracket (having an annual disposable of less than $2,100. But, in about 15 years, that number is expected to drop to 11% with more people moving in to the lower middle-income status. How does it affect the magnitude of the YED of cars between both countries? The YED of both country will decrease. The population in China which received less then 2,100 annually is expected to drop to 11% in the next 15 years. This means the average disposable income is expected to increase in China. Since they have more money to spend, luxury good such as cars will be consider as necessity. This is due to the growth in disposable income and therefore cars will be a necessity in China which every families will own for transportation in the future. The YED value decrease. [Tutor Comment : YED of cars in Malaysia would increase as there is a greater proportion of the low income population who has rising income.]
      - Factor 2 : Degree of necessity of the good
        
        Scenario 2 : With many of China’s wealthy elite turning away from public displays of wealth and enjoying high-priced toys within the privacy of their own homes, new status symbols like antique cars and grand pianos are joining the ranks of popular stealth buys. How does it affect the magnitude of the YED of antique cars? [Tutor Comments : The YED of antique cars would fall but the YED would still be bigger than 1 since more china wealthy elite perceived antique cars as of a higher degree of necessity.]
- - - - Sign and Magnitude : Price and quantity supplied have a positive relationship.Hence the sign of PES is always positive.The magnitude of PES reflects how reponsive producers are in adjusting their level of production of a good when its price changes.
        
        [Think in terms of type of elasticity, sign, magnitude and impact on sales volume (Q)] : What does PES=0 imply? It implies that the quantity supplied is the same at all prices.A given change in price does not lead to any changes in quantity supplied.(Perfectly Price Inelastic Supply)
        
        [Think in terms of type of elasticity, sign, magnitude and impact on sales volume] What does PES=0.1 imply?When PES is 0.1, a given change in price leads to a less than proportionate change in quantity supplied ,ceteris paribus.(Price inelastic supply) [Tutor Comments : When price rises by 1%, the quantity supplied only rises by 0.1%]
        
        [Think in terms of type of elasticity, sign, magnitude and impact on sales volume] What does PES=1 imply?When PES equals to 1, a given change in price will lead to a proportionate change in quantity supplied,ceteris paribus.(Price Inelastic Supply. [Tutor Comments : When price rises by 1%, the quantity supplied only rises by the same % amount, 1%]
        
        [Think in terms of type of elasticity, sign, magnitude and impact on sales volume] What does PES=1.4 implyWhen PES equals to 1.4, a given change in price will lead to a more than proportionate change in quantity supplied,ceteris paribus.(Price Elastic Supply) [Tutor Comments : When price rises by 1%, the quantity supplied rises by 1.4%]
    - - Factor 1 : Length of Production/ Gestation Period
        
        Scenario 1 : In collaboration with the Agricultural Department of Uttar Pradesh, DuPont Pioneer provides hybrid rice seed technology and farming techniques necessary to improve rice production for their growing population. How it does affect the magnitude of the PES of rice? This would increase the PES of rice. This is because there is an another way to produce rice at a higher level of production. With the help of hybrid rice, it would help to reduce the chance of rice shortage. Therefore, the PES Of rice would increase. [Tutor Comment : new rice technology would reduce the gestation period, hence PES would rise]
      - Factor 2 : Level of Inventory/Stock Available
        
        Scenario 2 : High Pressure Processing (HPP) can increase a product’s shelf-life without heat treatment or adding chemicals. HPP, or Pascalization is a technology widely used by firms of freshly squeezed juices.How it does affect the magnitude of the PES of freshly squeezed juices?the PES of freshly squeezed juice would increase. This is because since Hpp can increase the product's shelf-life without heat treatment or adding chemicals, this is an advancement in technology. With the help of advancement in technology, the PES of freshly squeezed juices will increase.
      - Factor 3 : Spare Capacity
        
        Scenario 3 : There is a reduction in overall market demand of bubble tea. Explain how does it affect the magnitude of the PES of bubble tea?there will be an increase in the PES of bubble tea. This is because since now there is a decrease in demand for bubble tea, the bubble tea are not selling out to the people, this will lead to the supply of bubble tea to remain the same, with the supply of bubble tea keep coming to the store and owner unable to sell the bubble tea out, the supply for bubble tea would increase. [Tutor Comments : Fall in market demand reduces production and raise unemployed resource. Hence there is spare capacity. Hence PES will rise.]
      - Factor 4 : Mobility of Resources
        
        Scenario 4 : More than 126,000 Singaporeans used their SkillsFuture Credit to upskill/reskill last year, with information and communications technology (ICT) courses. Explain how does it affect the magnitude of the PES of a good, for instance, smartphone? The PES of smartphone would increase.This due to the increase in labour mobility, which occurs when the Singaporean workers whom posses the skills required to operate the machine which in this case is the smartphone.