Questions Explain whether primary commodities are likely

Questions • Explain whether primary commodities are likely to have a low or high PED. • Explain whether manufactured goods are likely to have a low or high PED. • Explain whether primary products have a low or high YED? What does this mean for the producers of primary products? What implications does this have for countries who specialise in exporting primary products?

Explain the significance of the following figures for a business • PED= -0. 3 • YED= -2 • XPED of product A with respect to a change in the price of product B is 0. 6

Supply

Lesson Objectives • To be able to define ‘supply • To be able to illustrate and explain a movement along a supply curve and a shift of the supply curve including the causes • To understand be able to calculate Price Elasticity of Supply (PES) • To understand what influences PES

Supply • The quantity of goods that sellers are willing and able to sell at any given price over a period of time • As the price of a product rises the quantity supplied of the product will usually increase, ceteris paribus • Assumes firms are motivated by profit (so does not apply to much of what is produced by the gov. )

Price S 1 P 2 P 1 0 Q 1 Q 2 Quantity

• If the price of a product changes then there will be a movement along the supply curve (extension or contraction of supply) • Any other factors affecting supply will cause a shift in the supply curve

Shifts of the supply curve • RATNESTS • Raw materials (cost of)

• Alternate goods (producers can produce different goods with same resources) – Some goods are in ‘competitive supply’ – A rise in the P of one product will cause the supply of that product to extend and the supply of other products to decrease – Example- a firm can produce skateboards and roller skates with the same resources, if the price of skateboards increased, the firm is likely to switch production from roller skates to skateboards thus extending the supply of skateboards and decreasing supply of roller skates

– Other goods are in ‘joint supply’ – Eg. Petrol and paraffin, a rise in the price of petrol will cause the supply of petrol to extend and the supply of paraffin to increase – Show on 2 diagrams

• Taxes- indirect taxes (Eg. VAT) • New firms entering the market/ firms leaving the market • Expectations • Seasons incl. weather conditions • Technology • Subsidies

Show. … • What would happen to the supply of coal if a large coal mining firm had an increase in the cost of their machinery • What would happen to the supply of mopeds if there were a large increase in tax on mopeds • What would happen to the supply of white bread if a firm were to discover that there had been a large increase in the demand for brown bread which they could also produce

Producer Surplus The difference between the market price a firm receives and the price at which it would be prepared to supply The area P 0 P 1 E therefore, are ‘surplus earnings’ for the firm/industry (sum of the producer surplus earned at every level)

Price Producer Surplus S P 1 E P 0 0 Q 1 Quantity

Producer Surplus • Show the effect an increase in price will have on producer surplus

Activity for h/w • Page 33 Exam question 4 • Note: Paper 1 in the IB exams: 2 x 25 mark questions in 1 hr 30 mins 1 q= 45 minutes Part a (10 marks)= 15 -20 mins (1 -1 ½ sides of A 4) Part b (15 marks)= min 25 mins (2 -2 ½ sides of A 4)

Elasticity of Supply • PES measures the responsiveness of quantity supplied to changes in price

Calculating PES = % ∆ QS %∆P Example The price of a product rises from £ 10 to £ 15 and supply rises from 200 to 500 The PES will be …

Value Perfectly Inelastic PES= 0 Description of Response There is no response in supply to a change in price Inelastic 0 ∞ The percentage change in quantity supplied equals the percentage change in price

Elasticity Of Supply S ( E= 0) Price The elasticity of supply of a straight line supply curve varies depending upon which axis it intersects or whether it intersects at the origin S (E=∞) Quantity

Price Inelastic Supply S S Price Quantity Any straight line supply curve passing through the x axis has a PES of less than 1 Elastic Supply Quantity Any straight line supply curve passing through the y axis has a PES greater than 1

rice of offee eans S 2 S 1 P 1 Q 2 Q 1 Quantity of coffee beans Any straight line supply curve passing through the x axis has a PES of less than 1 Any straight line supply curve passing through the y axis has a PES greater than 1

S 1 (E=1) passes through origin Price S 2 (E=1) passes through origin Any straight line supply curve passing through the origin has a PES of 1 Quantity

Non-Linear Supply Curve Elasticity of supply varies at different output levels. S Price At low output (where the supplier has plenty of spare capacity) supply is price elastic. Changes in demand can be met easily by changes in supply As output rises, it moves closer to the production capacity of the producer, hence elasticity of price decreases, when capacity is reached PES=0 Quantity

Questions Calculate PES and comment on elasticity • Price increases from £ 4 to £ 6 and quantity supplied increases from 7 m to 9 m • Price increases from £ 8 to £ 10 and quantity supplied increases from 2 m to 5 m • Price increases from £ 8 to £ 10 and quantity supplied increases from 12 m to 15 m

Determinants of Elasticity of Supply • Producer substitutes – Goods which a producer can easily produce as alternatives eg. One model of car for another model in the same range – If there are many substitutes then production can be altered quickly hence it’s elasticity will be relatively high – If there are no substitutes, and price falls, the producer has no alternative but to continue production or withdraw from the market, hence elasticity is low

• Time – The shorter the time period, the more difficult firms find it to switch from making one product to another, elasticity will, therefore be low in the short term – In the long run supply will be more elastic (firms can buy more equipment, hire and train more staff) – Eg. Agriculture

• Spare capacity – The more spare capacity there is, the easier it is to increase output if price rises, hence supply is more elastic • Number of producers – The more producers there are, the easier it should be for the industry to raise output, hence supply will be more elastic

• Nature of product – Can product be stored? – Supply of fresh food is more inelastic because it is perishable, – seats on an aeroplane?

Significance of PES • Firms have a profit incentive to make their supply as elastic as possible- i. e. they can respond quickly to changes in price – Flexible resources – Stock levels

• Gov. seek to increase elasticity of supply of products – Quicker reallocation of resources, more competitive – Raise mobility and flexibility of resourceshow do they try to achieve this?

Importance of Elasticity • Relationship between changes in price and total revenue • Importance in determining what goods to tax or subsidise and what effect this will have on s & d • Importance in analysing time lags in production • Influences the behaviour of a firm • Impact on demand for exports and imports when the e/r changes • Potential to exploit monopoly power in a market: The extent to which a firm or firms with monopoly power can raise prices in markets to extract consumer surplus and turn it into extra profit (producer surplus) • Impact of government intervention such as introducing a minimum price (price floor) or maximum price (price ceiling) into a market

Next Topic… • Markets- equilibrium price and quantity