Sample Economics Paper on Microeconomics

Microeconomics

Price Elasticity of Supply

Price elasticity of supply is the responsiveness of the quantity of goods supplied in a market to the percentage change in the unit price of the same good. In other words, it is the percentage change in the quantity of goods supplied per percentage change in the unit price of the product in question. In the calculations of the price elasticity of supply, the formula is such that the denominator is the percentage change in the unit price of the good in question while the denominator is the percentage change in the quantity supplied.  Using the midpoint formula, we would find the percentage change in the quantity supplied by getting the difference between the initial value and the final value then dividing by the initial value of the quantity supplied. On the account of the unit price change,  the difference between the initial and the new price is divided by the initial price then multiplied by 100 to get the percentage change.

Interpretation of elasticity of supply

If the price elasticity of supply of a commodity is more than 1, then the supply is said to be elastic. This means that the consumers will react highly when the price of a good changes. A 1% unit change in the price of a good will yield more than a one percent change in the quantity supplied. If the price elasticity of supply is equal to 1 then it is said to be unit elastic. The change in price will affect the supply of the commodity in equal measure. If the price elasticity of supply is less than 1 then the supply is inelastic. This means that the price change will affects the supply in a les proportionate way.

Numerical example

Example 1

The price elasticity of supply = percentage change in the quantity supplied/ percentage change in the unit price

Percentage change in qty supplied      =          {(10-14)/10} * 100     =-40%

Percentage change in the unit price    =          {(4-6)/4} * 100           =-50%

Price elasticity of supply                     =          -40/-50                         =0.8

Therefore the supply is inelastic 

Example 2

Price elasticity of supply         = [{(14-18)/14}*100 / {(6-8)/6}*100}]

                                                = 0.857

The supply is inelastic

Example 3

Price elasticity of supply         = [{(18-22)/18} * 100}/ {(8-10)/8} *100}]

                                                = 0.89

The price is inelastic

We conclude as follows: the easier (the less time-consuming) it is for the firm to move resources from basketball to football production, the more elastic is the supply of footballs. The reason for this is because the quantity changes will be higher than the corresponding price changes making the denominator of the equation to be lower than the numerator have the high elasticity.

Cross Elasticity of Demand and Income Elasticity of Demand

Cross elasticity of demand is the responsiveness of quantity demanded of a good to the changes in the price of another good in the industry. In the calculations of the cross elasticity,  the denominator is the percentage change in the price of the other commodity while the numerator is the percentage change in the quantity demanded by another good. In the calculations of the midpoint, the change in price is calculated by getting the difference between the initial and the new price of the good then dividing by the initial price.  On the account of the quantity change, we get the difference between the initial and the new quantity sold divided by the initial multiplied by 100.

Interpretation

If the elasticity is negative then the goods are complementary and if positive then the goods are substitutes.

Example

The elasticity = 0.5 the goods are substitutes since the changes move in the same direction (positive sign)

The elasticity = -1 the goods are complementary since the changes move in the opposite direction (negative sign)

Income elasticity

This is the responsiveness of a quantity demand with respect to the percentage change in the income of the individual consumers of the good. The denominator is the percentage change in the income while the numerator is the percentage change in the quantity demanded.  If the elasticity is negative, the good is normal while it is an inferior good if its elasticity is positive.

Example

Elasticity         = 1.5, it is a normal good since the change moves in the same direction (positive sign)

Elasticity         = -1.5 it is an inferior good since the change moves in opposite direction (negative sign)