Price Elasticity of Supply Revision PDF

# Price Elasticity of Supply ## Application - Determines impact of price changes on consumer behaviour and the market. - Used to determine pricing strategy of a product or a service to help businesses adjust prices and stay competitive. - Global revenue after a price change: $TR = P \times Q$ ## P...

# Price Elasticity of Supply ## Application - Determines impact of price changes on consumer behaviour and the market. - Used to determine pricing strategy of a product or a service to help businesses adjust prices and stay competitive. - Global revenue after a price change: $TR = P \times Q$ ## Price Elasticity of Supply (PES) - Measures how responsive supplied quantity is to price change. - $PES = \frac{\% \ change \ in \ supplied \ quantity (AQ)}{\% \ change \ in \ price (AP)}$ ## Supply can be - **Inelastic** ($0 < PES < 1$)- Change in price leads to less than proportionate supplied quantity. - **Elastic** ($PES > 1$)- Change in price leads to greater than proportionate change in quantity supplied. - **Unit elastic** ($PES = 1$) ## Materials and Capital - Supply is very inelastic - As time passes, supply becomes more and more elastic. ## Ability to store stock - Storing high levels of stock = elastic supply. ## Companies want price elasticity to be very high - So they can capture as much profit as possible, even if price changes. ## To do this they can: - Improve used technology. - Improve capacity to hold stock. - Ensure that products can last long stored. ## Government Interventions - May happen in individual microeconomic markets to support households, companies, influence consumption, production, and protect consumers from monopoly power or to protect well-being: - Subsidies - Benefit given to companies per unit of output. ## Setting a maximum price - Done to protect consumers when the product is a necessity or a merit good. - Excess demand is created due to lower prices. - This may cause shortages and a black market to emerge (where price is usually between price ceiling and price equilibrium) ## By price floors - Setting a minimum price, above the equilibrium price. - Prevents producers from reducing the price below it. ## Reasons: - Attempt to raise income for producers. - Of goods and services which are important according to the government. - Usually when the price fluctuates too much or there is a lot of foreign competition. - To protect workers by setting a minimum wage. ## Taxes - Most taxes are collected as a percentage of a monetary exchange. - In Slovakia, the collecting institution is the Financial Administration of SR, municipalities. ## Direct Tax - Paid directly by a person/company as the entity which imposed it. - Advantage is that they can be easily tailored to fit personal circumstances or a specific situation ## SR: - **Income tax**. - Personal income tax - Corporate tax - Progressive tax system - more tax for higher-earning individuals and companies (15% up to ~47500€ per year; then 25%). - **Property tax**. - Levies on the value of property that people own. Collected locally by municipalities. - Excise Duties - Regulate consumption of selected products. - Usually applied hazardous chemicals, alcohol, cigarettes, gambling, etc. - Aimed at influencing people's bad behaviors. - Collected taxes usually go towards healthcare or programs which tackle these bad behaviors. - SR: - On alcoholic beverages. - On tobacco products. - On mineral oil. - On electricity, coal, and natural gas. - They are levied on everyone, no matter their income. - Easily collected because people must pay them as purchase. ## Laffer Curve - Relationship between tax rate and tax revenue. - Based on a theory by Arthur Laffer in 1974. ## Change in price leads to a proportionate change in supply. - **Perfectly inelastic** - Supply is fixed. - **Intermediate case** - Unit elasticity. - **Perfectly elastic** - Indefinitely large quantity response to price changes. ## Determinants of Elasticity - **Costs rise as output rises**. - Supply is likely to be more elastic when: - Companies have a lot of spare capacity. - They can readily get extra supply of raw material. - They can switch to producing alternatives. - Factors of production can easily be moved to another productive use. - **Time period**. - For a short time, after a price increase, companies may not immediately increase labor. ## It can be: - **Direct** (Cash payments) - **Indirect** (Tax breaks) ## Reasons: - To lower price of essential goods (milk, cereals...). - To encourage consumption of a product encouraged by a lower price. - To guarantee the supply of products necessary for the economy. - Certain industries also hold a lot of employment which if were lost, would cause economic problems. - Enable competition with overseas trade, protecting home industry. - Specific subsidies are the most common (specific amount of money given for each unit of a product). - Percentage subsidies: Percentage from total sum. ## Price control - By price ceiling. - Excess supply creates surplus. - Producers may try to sell their products at a lower price than price floor. - Government usually buys up surplus products and stores them, destroys them, or sells them abroad. ## Taxes - Mandatory contributions levied on individuals and companies by the government. - Tax revenues finance government activities, services for the public, etc. - Tax system in Slovakia is affected by: - Tax legislation in the EU. - Coordination of tax policies within OECD. - Taxpayer: A person whose income, property, or activities are subject to tax. - Tax burden: Amount of tax paid by a person or company as a proportion of their income. - Tax object: Subject of taxation. - Tax base: Quantitative expression of tax subject. ## Indirect Taxes - Collected by one entity in the supply chain (manufacturer, retailer) and paid to the government. - It's passed onto the consumer as part of the purchase price. ## Value-added tax (VAT) - Added at each stage of manufacture, production, and distribution of goods. - The most common indirect tax globally. - Collected at each stage; it may qualify for input tax credits in early stages.