CIE AS SAMPLE ESSAYS
Price elasticity of supply (PES)
9708/21/O/N/24
Assess whether the supply of agricultural products is likely to be more price elastic or less price elastic than the supply of manufactured products.[12]
Price Elasticity of Supply (PES) measures the responsiveness of the quantity supplied to a change in price. The formula for PES is calculated as the percentage change in quantity supplied divided by the percentage change in price. A higher PES indicates that producers can respond quickly to price changes, whereas a lower PES shows that supply is less responsive.
Several factors influence PES, and analyzing these factors helps us understand whether the supply of agricultural products is more or less price elastic than that of manufactured products.
The first factor is the availability of spare capacity in production of these goods. Manufacturing firms typically have the ability to increase production quickly by scaling up machinery or hiring additional workers. This allows them to respond more swiftly to price increases. In contrast, agricultural production is constrained by land and natural conditions. Farmland is often fully utilized, and farmers must wait for crops to be harvested before planting a larger batch, making agricultural supply less elastic. This time lag in agriculture limits the ability to increase supply rapidly in response to price changes.
Another factor that determines the PES is the ability to store goods for a long time. Manufactured products are easier to store for long periods without spoiling, giving producers the flexibility to release stock when prices rise. This storage ability allows for a more elastic supply of manufactured goods. However, agricultural products, especially perishable ones like fruits and vegetables, cannot be stored for long without losing quality. As a result, agricultural producers may not be able to respond to price increases by releasing stock, leading to a less elastic supply.
Finally, factor mobility also plays an important role in determining the PES of a good. Manufacturing industries generally have more mobile factors of production, such as labor, capital, and raw materials. These can be easily shifted between products or production processes, allowing manufacturers to quickly adjust supply. In agriculture, land is a fixed resource, and labor may require specialized skills. Additionally, weather and climate conditions are less adaptable, limiting the ability of agricultural producers to respond to price changes. These limitations make the supply of agricultural products less elastic compared to manufactured goods.
While the factors mentioned above generally suggest that agricultural supply is less elastic than manufactured goods, this is not always the case. In developed countries, better infrastructure, technology, and access to refrigeration facilities make it easier to store agricultural products and extend their shelf life. This allows agricultural producers in developed markets to respond more elastically to price changes, sometimes in a manner similar to manufacturers.
In developing countries, however, the lack of infrastructure and technology limits the ability of farmers to store goods or increase supply in response to price fluctuations. In such economies, agricultural supply tends to be much more inelastic.
Technological advancements are increasingly changing the landscape for agricultural supply. For example, the development of hydroponics and the use of greenhouses enable producers to grow crops in controlled environments, even in regions with harsh weather conditions. Additionally, ongoing research and development in seed resistance have created crops that can grow in less favorable conditions. These innovations improve the long-run price elasticity of agricultural supply, allowing farmers to respond more effectively to price changes over time.
In the short-run, however, agricultural supply remains relatively inelastic due to the time it takes for crops to grow and the natural limitations of land and climate. While technological innovations are improving long-run elasticity, they do not immediately resolve the short-term constraints on agricultural supply.
Therefore, while agricultural supply has the potential to become more elastic over time, especially with technological advances, it remains less elastic than manufactured goods in most cases, particularly in the short-run.
9708/21/M/J/24
Assess the extent to which price elasticity of supply or cross elasticity of demand is most useful to businesses. [12]
PES measures how responsive the quantity supplied of a good is to changes in its price. This metric is crucial for businesses as it provides insight into how quickly they can adjust production in response to market demand fluctuations. For instance, a high PES indicates that a firm can rapidly increase output when prices rise, helping capitalize on potential profits. Conversely, low PES suggests that supply cannot be quickly adjusted, which may lead to lost sales during high-demand periods.
However, PES is not always precise; there are other external factors like supply chain disruptions or production capacity limits can hinder a firm’s ability to respond swiftly. Additionally, varying levels of stock can influence how quickly a business can adapt its supply.
Cross elasticity of demand (XED) measures the responsiveness of demand for one good when the price of another changes. This is particularly useful for understanding competitive dynamics. A positive XED indicates that two products are substitutes, while a negative XED suggests they are complements. For example, if coffee prices rise, a café may see increased demand for tea (a substitute), guiding its pricing and marketing strategies.
XED also helps businesses gauge how sensitive their products are to competitors’ pricing strategies. However, the relationship captured by XED can change rapidly due to market trends or consumer preferences. As such, businesses must regularly reassess these relationships to remain competitive.
The relevance of price elasticity of supply (PES) and cross elasticity of demand (XED) depend on external market conditions and the nature of the goods involved. For example, in volatile markets, where prices fluctuate rapidly due to external factors (like raw material costs or geopolitical events), PES becomes increasingly important. Firms need to quickly adjust their supply to respond to these changes, making understanding PES critical for maintaining market stability. On the other hand, in industries where technological advancements lead to rapid product innovation, XED may be more crucial.
In conclusion, when comparing PES and XED, both metrics provide unique insights but serve different purposes. The extent to which each measure is useful depends on the specific needs and context of the business. For firms primarily concerned with supply management, PES may be more critical. However, for businesses in highly competitive markets with numerous substitutes, XED may hold greater significance. Ultimately, a comprehensive approach that considers both metrics can lead to more informed decision-making, as they complement each other in understanding market dynamics.
9708/23/O/N/23
The price elasticity of supply (PES) for a new smartphone is estimated to be 0.8 in the short run and 1.8 in the long run.
Explain what these estimates mean for producers and consumers of smartphones and consider why the estimates differ. [8]
Price elasticity of supply (PES) measures the responsiveness of the quantity supplied of a good to a change in its price.
It is calculated using the formula: % change in quantity supplied / % change in price. A PES value less than 1 indicates inelastic supply, meaning that the quantity supplied changes less proportionately than the price. Conversely, a PES value greater than 1 indicates elastic supply, where the quantity supplied changes more than proportionately to price changes.
A PES of 0.8 for smartphones in the short run suggests that supply is inelastic, however, a PES of 1.8 in the long run indicates that supply becomes elastic.
The difference in PES values between the short run (0.8) and long run (1.8) can be attributed to time period. In the short run, producers may have limited flexibility to change production levels due to fixed factors of production, such as existing technology and labor constraints. Over the long run, they can invest in new technology, hire more workers, or expand facilities, allowing them to respond more effectively to price changes.
Additionally, in the short run, manufacturers might be using existing production methods that cannot be easily altered. Over the long run, firms can innovate, optimize processes, and even shift to different production technologies, enhancing their ability to respond to price changes.
The varying PES values have significant implications for both consumers and producers. For consumers, the inelastic supply in the short run (0.8) means that an increase in demand will lead to higher prices and limited availability, negatively affecting consumers to smartphones. As for producers, the inelasticity can limit to capitalise on short-term price hikes.