Elasticity of supply is a measure of how much the supply for a product changes when there is a change in the price

How much costs rise as output is increased: If total costs rise significantly as a producer attempts to increase supply, then it is likely that the producer will not raise the supply and so the elasticity of supply for the product will be inelastic. However, if costs do not rise significantly, then the producer will raise the quantity supplied and take advantage of costs.

Time period: amount of time over which PES is measured will affect its value; the longer, the more elastic. In the immediate time period, firms are not really able to increase their supply.

The ability to store stock: While firms have higher levels of stock, they will be ready in case of an increase in prices and continue with their produtions. But if they do not have much stock, they will be affected with a rise in prices.

PED is defined as a measure of how much consumption for a product changes if the price changes.
PED= % change in qty demanded / % change in the price

Range of Values:
Inelastic Demand 0<PED<1, a change in price does not affect the quantity demanded as much.

Elastic Demand : PED>1, a change in price leads to a bigger in proportion change in quantity demanded

Unit Elastic Demand: PED=1, a change in price is inversely proportional change in quantity. Both quantities fall at the same rate.

Effect on Revenue
Inelastic Demand when price increases --> Revenue Increases

Inelastic Demand when prices decrease --> Revenue decreases

Elastic Demand when price increases --> Revenue decreases

Elastic Demand when price decreases --> Revenue Increases

Unit Elastic Demand when price increases --> No change

Unit Elastic Demand when price decreases --> No change

PES= % change in quantity supplied of the product/ % change in price of product

Non-price determinants of supply:
The Cost of Factors of Production, if there is an increase in the price of a factor of production, a company can produce less of a product, and a shift to the left of the supply curve occurs

The price of related goods, competitive and joint supply: If a company produces more than one related product, increasing the supply for one (using their factors of production for one specific good) decreases the supply for another. If one company produces skateboards and roller skates, and suddenly skateboards have more demand, they will produce less roller skates (Competitive Supply). However, when one company produces two related products (joint supply), if the demand of one increases, the other one increases too.

Government Intervention - indirect taxes and subsidies, while indirect taxes increase the production cost of firms and shift the supply curve upwards, subsidies reduce the cost of production and lead to a shift downwards of the supply curve.

Expectations about future prices: producers may expect a product's demand to increase and store or increase the supply. If suppliers learn from market researchers that demand will drop, they will decrease the supply in response.

Changes in technology: as technology improves, the supply becomes more efficient and the supply curve shifts rightwards.

Natural Disasters: Markets that are vulnerable to natural disasters or weather conditions can have an increase or decrease of supply depending on the time period. The Agricultural market experiences a growth in supply when weather is favorable, and a decreases during droughts.

Movements along and shifts of the supply curve: A change in the price of the good itself causes movement along an existing supply curve. A change in a price determinant leads to a shift in the supply curve.

Demerit goods:
Overproduced and over consumed goods and services that have a negative impact on third parties and should be consumed/produced less

Welfare loss/gain:
Welfare gain, refers to the potential positive impact of merit goods or services that can be obtained if consumers/producers consumed/supplied them more.

Welfare loss refers to the impact of negative externalities and a potential reduction on the supply or consumption of demerit goods through government intervention

Negative Externalities
The Marginal Private Cost is higher than the Marginal Social Cost when a demerit good is overproduced. The government should aim at reducing the production of this good or service. If a demerit good or service is over consumed, the Marginal Private Benefit is higher than the Marginal Social Benefit.

Common pool resources
Refers to resources that are very difficult or expensive to exclude people from using them (commonly natural resources), which makes them non-excludable. They are rivalrous, because using the good reduces the value of the resource to others (for example, using the wood from the forest without replanting trees). They are linked with negative externalities, as they are inevitably degraded. The Tragedy of the Commons occurs when individual producers act rationally in self-interest and end up harming or degrading a common pool resource.

Merit goods:
Under-produced and under-consumed goods and services that have a positive side effect on third parties (positive externalities)

Government intervention in response to externalities
Eliminating the welfare loss related to negative externalities of consumption:
Indirect Taxes, which increase the cost of a demerit good and reduces the quantity demanded.
Legislation, age restrictions or bans on advertising and consumption of demerit goods.
Education: funding campaigns or making more information available to consumers about demerit goods.
Achieve potential Welfare gain related to positive externalities of production
Subsidies, received by firms that offer training.
Direct provision, where the government provides vocational training themselves
Achieve Welfare gain related to positive externalities of consumption
Subsidies or provision by the government.
Improving information about the benefits of the good.
Legislation insisting on the consumption of the good (such as vaccinations).

Positive externalities of production and consumption
Whenever a merit good is being under produced, there is a market failure and an opportunity to produce the more. In that case, there is a shift of the Supply curve upwards. The MPC is smaller than the MSC. The Private Cost is higher than the socially optimal price. The quantity supplied should be higher in order to have more consumption. Similarly, when a product is under-consumed there is a shift leftwards of the demand curve. The Marginal Social Benefit is higher than the Marginal Private Benefit. The government should aim at making the good or service more attractive for consumers.

MSB = MSC
The Marginal Social Cost and Marginal Social Benefit are indicators used in equilibrium. The MSB is the benefit of consuming, and it should match the MSC (Public Cost) in order to have allocative efficiency. Whenever the Private Benefit or Cost is not equal to the social cost, there is a market failure

Eliminating the welfare loss related to negative externalities of consumption:
Indirect Taxes, are effective in generating government revenue, but demerit goods tend to be inelastic, so changes in price do not impact on demand as much as to decrease consumption to socially optimal levels. Extremely high taxes make consumers more willing to travel abroad to obtain the demerit good, so not even the revenue is obtained.

Legislation, is often met with opposition from consumers who feel that their consuming rights are being limited. Many times, legislation is blocked by producing companies.

Education: the main limitation is the cost, which has to be financed by tax campaigns. Some consumers accept the dangers of consuming a demerit good, so the effectiveness of education is dubious.

Achieve potential Welfare gain related to positive externalities of production
Subsidies, received by firms that offer training. This solution is very costly for the government, having to cut expenditure on other areas
Direct provision is very costly and trainers may lack the required expertise found in the firms. Nevertheless, increasing the efficiency of labor can shift out an entire economy's PPC.

Achieve Welfare gain related to positive externalities of consumption
Subsidies or provision by the government, which is costly and depends on the political ideology of the elected party.

Improving information about the benefits of the good.This solution is extremely long term and involves costly public advertisement campaigns.

Legislation insisting on the consumption of the good (such as vaccinations): Can be seen as a violation of the citizens' civil liberties and interventionist.

Negative externalities of production and common pool resources
International Agreements: when a variety of countries sign agreements to prevent the threats to common pool resources, such as the environment, the number of human beings involved in the reduction of the production of negative externalities.

Tradable Permits: setting a limit for the amount of common pool resources that can be used by suppliers )such as the amount of fish that fishers are allowed to catch). International agreements include tradable permits, and their effectiveness depends on the inclusiveness of the agreement, the willingness of producers to assume the additional production cost and the strength of the punishments.

Carbon taxes, imposed on fossil fuel suppliers, who have to pay the cost of their production. This tax does not completely reduce the welfare loss, but it does decrease the production of negative externalities

Regulation/legislation, creating laws to charge or ban demerit goods, as well as limit their production; this solution can lead to over and under-regulation due to the excess of changes in the markets. Excess regulation makes domestic firms less competitive abroad,

Subsidies, promoting the use of positive alternatives for demerit goods. Nevertheless, there are sector (like the energy sector) that are rapidly growing, and cheaper alternatives are more efficient to cover for increasing needs.

Collective self-governance, where communities share their common pool resources and work together alongside top-down regulation to manage their resources; a great strength is that communities who use the resource develop the rules, and the users who follow them are related with their establishment, making them more likely to follow rules.

Threats to sustainability are global threats, and many common pool resources include globally-shared resources such as the atmosphere or the ocean. There is an interdependence amongst countries, so if any country abandons an agreement to favor economic growth, others may follow. With sufficient means to monitor and enforce the commitments signed in international agreements, threats to common pool resources could be reduced or eliminated.

Consumer and producer surplus
Consumer surplus is the extra satisfaction gained by consumers from paying a price that is lower than that which they are prepared to pay. In the diagram, it represents the consumers who are willing to pay above the equilibrium price, and therefore benefit from it.

Producer Surplus
This refers to the revenue gained for the producers who were willing and prepared to sell a product at a lower price than the equilibrium.

Functions of price mechanism
To Signal Information to Consumers and Producers; they signal the people in the market on how to act depending on the price levels.

To ration scarce resources; prices help ration scarce resources when the demand is too high, pushing the prices up to avoid excess demand.

Give incentives to consumers and producers.
Lower prices favor consumers, receiving more utility the less the cost; high prices disincentives the consumers, but serve as a signal for producers that demand is increasing and consumers wish to buy their goods.

Excess supply (surplus)
When the price of a good is raised by producers, the quantity demanded falls, leading to an excess supply (more goods produced than what consumers are willing and able to consume at that price)

Social/ Community Surplus
The addition of the consumer and producer surplus; represents the benefit to society (both producers and consumers). Occurs at the equilibrium position between the demand and supply curve, where both Supply and Demand have a balanced surplus, and therefore the best scenario for both.

Excess demand (shortage)
Once producers lower their prices to meet the demand, they are able to produce less goods, generating an excess demand (more demand for a good than there are goods in the market).

Allocative Efficiency at the Competitive Market Equilibrium
allocative efficiency occurs when the market is in equilibrium with no external influences or impact (negative/positive externalities). The resources are allocated in the most efficient way for society.

Shifting the demand and supply curve to reach new market equilibrium
Whenever there is a shift of the demand or the supply curve, the market will adjust to the new equilibrium price. If a non-price determinant shifts the demand rightwards, prices will have to rise to fix the excess demand, to a new equilibrium.

Demand and supply curves forming a market equilibrium
The state of rest, with no outside disturbance; the demand and the supply of a good tend to equilibrium with no outside disturbance. The more the price of a good increases, the less demand and revenue for the suppliers. The less the price of a good, the more demand.

MSB, MSC
The Marginal Social Cost occurs when we assume that the costs of the industry are equal to the costs to society S=MSC.
The Demand Curve represents the utility of consumers, so when we assume the benefits of society to be represented by the demand curve, we obtain MSB=D.