CIE AS SAMPLE ESSAYS
Price elasticity of supply (PES)
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.