Price Elasticity of Supply

Elasticity! Post 4

In microeconomics a topic I struggle with is Elasticity. So this is a series of posts to consolidate my understanding.

There are 4 types to know about for AS.

Price Elasticity of Supply (PES)
The fourth type is price elasticity of supply, which measures the percentage change in quantity supplied after a change in price.

It is measured by the following formula

Price Elasticity of Supply (PES) = %Change in Quantity Supplied/ %Change in Price

Inelastic supply means a change in price will cause a smaller percentage change in supply therefore the PES<1.
Perfectly inelastic means a change in price has no effect on supply.
Supply could be inelastic due to a company operating close to full capacity, as it may be difficult to increase supply. Low levels of stock meaningSuply may be inelastic in the short  there are no surplus goods to sell. In the short term capital is fixed meaning firs cannot build a bigger factory and increase supply. It may be difficult to imply factors of production and find relatively skilled labour to increase output. Supply may be inelastic in the short run as it may take a long time to grow crops.

Elastic supply occurs when an increase in price leads to a bigger percentage increase in supply. therefore the PES>1
Perfectly elastic supply means that at a given price, supply is unlimited.
Supply could be elastic because, there may be space capacity in a factor, there may be abundant stock available or it many be easy to employ more factors of production.

In the short run supply is more likely to be inelastic because a firm cannot increase the size of their factory.
In the long run supply can be more elastic as the firm will be able to invest in more capacity and increase supply.

Cross Elasticity of Demand

Elasticity! Post 3

In microeconomics a topic I struggle with is Elasticity. So this is a series of posts to consolidate my understanding.

There are 4 types to know about for AS.

Cross Elasticity of Demand (XED)
The third type is cross elasticity of demand, which measures how the demand for one good is affected by the price change of another.

It is measured by the following formula

Cross Elasticity of Demand (XED) = %Change in Quantity Demanded of good A/ %Change in price of good B

There are 3 types of goods in this scenario:

• Substitute
• Complementary
• Unrelated

Substitute Goods are goods that could be used as alternatives to each other. If the price of good A rises and the price of goods B remains consistent, then less will be demanded of good A and more of price B and vice versa. This means the XED will be positive.

Weak substitutes such as tea and coffee will have a low XED whereas close substitutes such as different brands of the same product e.g. Tesco Butter and ASDA Butter will have a higher XED.

Complementary goods are goods which are used together therefore XED is negative so that if the price of good A rises then the demand for good B will fall.

e.g. Shoes and Shoelaces
e.g.iPhones and charging cables

Unrelated goods are those where is the price of one good changes this will not affect the demand for the other. The goods are not related and a change in one will not affect the other.

e.g. Fireworks and highlighters 

Income Elasticity of Demand

Elasticity! Post 2

In microeconomics a topic I struggle with is Elasticity. So this is a series of posts to consolidate my understanding.

There are 4 types to know about for AS.

Income Elasticity of Demand (YED)
The second type is income elasticity of demand, which measures the responsiveness of demand to a change in income.
It is measured by the following formula

Income Elasticity of Demand (YED) = %Change in Quantity Demanded/ %Change in Income

This is very similar to price elasticity of demand, in what is measured and the way it is calculated

There are 3 types of good:

• Inferior
• Normal
• Luxury

Inferior goods occur when an increase in income leads to a fall in demand, therefore these have a negative YED. e.g. Charity Shop Clothes and Tesco Value Butter. As your income rises you can afford to buy better quality alternatives instead.

Normal goods occur when an increase in income leads to an increase in demand for the good, so the YED is larger than 0. Most goods fall under this category as an increase in income means more is demanded.

Luxury goods are those which an increase in income leads to a much larger increase in demand for this good. So the YED is greater than 1 this means demand is income elastic, for example items such as holidays, jewellery and technology.

This is important as in events such as a recession demand for luxury goods will fall and demand for inferior goods will increase, this can give firms information about the level of stock they need to produce and help them predict future demand.

Price Elasticity Of Demand

Elasticity!

In microeconomics a topic I struggle with is Elasticity. So this is a series of posts to consolidate my understanding.

There are 4 types to know about for AS.

Price Elasticity of Demand (PED)
The first type is price elasticity of demand, which measures the responsiveness of demand to a change in price.
It is measured by the following formula

Price Elasticity of Demand (PED) = %Change in Quantity Demanded/ %Change in Price

Demand is price elastic if a change in price causes a bigger percentage change in demand.

Elastic Demand Products are those that are luxury (not necessary) as they represent a large percentage of disposable income. e.g. Large Holidays. Items which also have competition also have elastic demand as consumers can switch easily. e.g. Different brands of the same product (bread) Equally products that are frequently bought are price elastic as consumers are more likely to compare prices and switch if they find an alternative. E.g Butter

Inelastic demand products are those that have few substitutes e.g. petrol, necessities meaning you have to buy them, things that are addictive, as you will pay higher prices, items that take up a small percentage of your income, meaning you worry less if prices rise, and items in the short run, as it takes time for consumers to find alternatives and switch to them.

The Economics of HS2

It is argued that high speed rail delvers many economics benefits: HS2 is a controversial project which if build would join London, Birmingham, Manchester and Leeds and would cost roughly £42 billion. The real economics argument in favour of HS2 is that it could transform the economies of the midlands and the North, it was also designed to combat infrastructure for example the UK being 27th in the World Economics's Forum's League table for quality of infrastructure. The main argument against applies on the principle of "if we build it they will come" but would this really happen? Some people argue Canary Wharf is an example of this in the UK. This issue is still mutely under discussion an interesting report is found here.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/365065/S_A_1_Economic_case_0.pdf

Black Friday

Black Friday is the day after Thanksgiving, November 27, 2015. It's traditionally the busiest shopping day of the year and kicks off the busy holiday season. The holiday shopping season is critical for the economy because around 30% of annual retail sales occur between Black Friday and Christmas. For some retailers for example jewelers, it's even higher, nearly 40%. Black Friday is set to become the biggest day of shopping in Britain, with as much as £2bn spent in shops and online in the space of 24 hours. Yet five years ago the shopping event known for its violence in people fighting for purchases didn’t even exist in the UK. Black Friday is a US shopping tradition exported across the Atlantic by companies such as Amazon and Asda.  Until 2010, the closest UK shoppers got to Black Friday was TV news coverage of the queues at shops across the US.

Black Friday is named as some claim it relates to the fact it is the day when retailers turn a profit for the year and move into the black, while others claim it relates to the markdowns on shop prices. Until 2010, the closest UK shoppers got to Black Friday was TV news coverage of the queues at shops across the US. Visa Europe predicts that shoppers will spend £6,000 per second on the day.  Most retailers are now stretching it into the following week, at least until Cyber Monday. That’s the day after the Black Friday weekend when shoppers are supposed to go crazy online.

What does the VW Emisions Scandal mean for the economy?

Volkswagen Car Group are Germany’s biggest private employer and Europe’s biggest carmaker, with about 300,000 workers across the country and 600,000 worldwide. The recent emissions scandal will cost the company up to $86 billion as originally the US EPA claimed that roughly 500,000 VW diesels (including models from as recent as 2014) cheated on their emissions tests, more recently VW says 11 millions cars worldwide are affected, including 2.1 million Audis, and vehicle brands Skoda and Seat. There is no question that the crisis engulfing the car manufacturer will cause damage to the company's reputation and standing in the industry; the only question is how much economic damage will there be and where and when. Clearly, this was not the work of just one person, and the company must deal with a big lack of trust by customers and the governments of the world. Although this scandal is solar limited to  the Volkswagen Car Group only, the software has been supposedly sold to other companies too “only for testing.” The main economic problem is that demand has and will dramatically fallen as consumers have lost confidence and many of the cars have been removed from sale which is costly for the company as they cannot sell the goos likewise they cannot produce more and they will have to be paying a large amount of money to repair and alter the currently sold cars. This is also bad for the customers as the scandal is likely to have dramatically reduced the resale cost of the car leaving the consumer with less in their pocket. Equally the 265,000 German employees of Volkswagen are anxious many towns such as Wolfsburg a town near Hannover, was founded together with the Volkswagen factory and is the company’s headquarter it is totally dependent on the enterprise and equally hundreds of other firms, VW’s suppliers, are likely to be in trouble many of them for totally unrelated parts to the scandal.In 2008, the University of Mannheim published a study showing that the German car industry accounted for 7.7% of gross value added in that country, the highest percentage for any country in the world. Most other European countries were in the range of 2 to 4%. With so much of the country’s economy tied up in automaking, the possible crippling of its biggest carmaker could be deeply injurious to the GDP of the country. 

http://www.seattletimes.com/business/international-trade/vw-scandal-has-impact-throughout-germany/

http://fortune.com/2015/10/14/volkswagen-scandal-europe/
http://www.theguardian.com/business/2015/oct/04/vw-scandal-is-heavy-blow-for-german-economy-says-eus-martin-shulz
http://www.bbc.co.uk/news/business-34324772
www.bbc.com/news/business-34650233
www.bbc.com/news/business-34438031