What Is Price Elasticity of Supply?

Price elasticity refers to the degree of change in market demand caused by price changes. It is the main basis for enterprises to decide whether to raise or lower their prices. Generally speaking, under the condition that the demand curve is elastic, the enterprise can adopt a price reduction strategy; on the contrary, the enterprise can adopt a price increase strategy to ensure that the corporate income continues to increase. ^[1]

Price elasticity

Price elasticity indicates the dependence of supply and demand on price changes, and reflects the corresponding supply and demand caused by price changes.

Price elasticity can be divided into

Even if only

If you do nt buy it, it s a luxury. Agricultural products and other daily necessities are inelastic commodities.

For distributors, they need to understand the price elasticity of the commodities they operate.

The purpose of elasticity theory is to account for price changes

influences

Examples of application of demand price elasticity

Analysis and estimation of prices and sales.

Example 1. In order to encourage the development of the country s petroleum industry, a country adopted measures to restrict oil imports in 1973. It is estimated that these measures will reduce the amount of available oil by 20%. How much is expected to rise in the country's oil prices since 1973?

Solution: Price elasticity of demand = Percentage change in demand / percentage in price

% change in price =% change in demand / price elasticity of demand

When the price elasticity is 0.8, the price change% = 20% / 0.8 = 25%

When the price elasticity is 1.4, the price change% = 20% / 1.4 = 14.3%

Therefore, it is predicted that the country's oil price increase in 1973 will be between 14.3-25%.

Used for decision analysis.

Price elasticity is useful for some economic decisions. For example, how do you price exports? If the purpose of exports is to increase foreign exchange income, a lower price should be set for materials with greater price elasticity, and a higher price should be set for materials with less elasticity. For another example, in order to increase the income of producers, people often adopt a price increase method for agricultural products and a price reduction method for high-end consumer goods such as televisions, washing machines, and watches, because the former is less flexible and the latter is more flexible.

(3) It is used to analyze the economic phenomenon of "the valley hurts the farmers".

Case: Some people say that bad weather is bad for farmers, because poor cereal harvest will reduce farmers' income. However, some people say that a bad climate is good for farmers because grain prices will rise after poor agricultural harvests, which will increase farmers' income. Try to use the principles of economics to evaluate these two statements.

Analysis: Evaluating whether a bad climate is beneficial to farmers depends mainly on how the farmers' agricultural income changes when the climate is bad. The direct impact of bad weather on farmers is the poor harvest of agriculture, that is, the supply of agricultural products is reduced, which is reflected by the supply curve of agricultural products moving to the upper left. If the market demand for agricultural products does not change at this time, that is, the demand curve remains the same, then a decrease in the supply of agricultural products will lead to an increase in the equilibrium price.

Generally speaking, people's demand for agricultural products is inelastic. From the relationship between the price elasticity of demand and the increase in total sales income, we can see that at this time farmers' agricultural income will increase with the rise in equilibrium prices. Therefore, under the condition that the demand situation does not change due to the bad climate and the lack of elasticity to the demand for agricultural products, the poor agricultural harvest caused by the bad climate is beneficial for farmers to increase their income. Of course, if demand conditions change at the same time, or if demand is not inelastic, farmers will not get more income because of bad weather. According to the above analysis, the answer to this question should first make assumptions about the demand elasticity and demand conditions of agricultural products, rather than making general judgments.