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OCR F581 Markets in Action - 11 May 2015

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Can anyone please suggest how to evaluate and explain the business relevance of the price elasticity of supply (PED) estimates?

So the question is normally to first calculate a few figures.

They most likely give you elastic figures and inelastic figures.

If PED > 1 (price elastic) . PED ( 0-1 = Inelastic).

Businesses can use this information to maximise revenue.
Total revenue = Price x quantity

If the good is price elastic this means that the percentage change in quantity demand is greater than the percentage change in price. It is sensitive to a change in price.
The way a business would increase revenue with a price elastic good is by reducing the price. By reducing the price by a small amount the quantity demanded will increase by proportionately more.

However, if the good is price inelastic increasing the prices would be the best way. With an inelastic good the price changes more than the quantity demanded. Therefore if you increase the price the quantity demanded is unlikely to change. So to maximise revenue you would increase prices with inelastic good. This is because the percentage change in price > percentage in quantity demanded.

It sometimes says "comment on the business relevance". I always tend to say, PED is an estimate this means it is unreliable. It is also based on historical data so unrepresentative. Varies along the demand curve...

I think that is all you have to know.

(edited 8 years ago)

Reply 721

Hammy_23

Brilliant explanation could u give one for price elasticity of supply please

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Reply 722

Sahil_

Hi, Can someone explain to me why a competitive market will lead to allocative efficiency? Thank you.

Reply 723

nomita

Original post by loooolo12345

yep

Thanks Does anyone has F581 Mark scheme for June 2014.

Thanks

Reply 724

Jim Riley

A busy 48 hours ahead for student everyone preparing for F581 on Monday.

A quick reminder of some extra help available if needed:

There is a complete set of new study notes available by topic here

Geoff is busy on Twitter today providing exam technique and topic support. Catch his tweets today - he is away tomorrow.

Our series of AS Economics revision videos is available to view here

Finally, you'll find lots more Economics exam technique advice here

Jim

Reply 725

palaseum9

Can somebody please upload pages 71-72 from the OCR textbook on tradeable permits (I am resitting this module, haven't got the book).

Reply 726

Hammy_23

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Reply 727

Tommehh

Can anyone please suggest how to evaluate and explain the business relevance of the price elasticity of supply (PES) estimates?

Reply 728

Makashima

Original post by palaseum9

Can somebody please upload pages 71-72 from the OCR textbook on tradeable permits (I am resitting this module, haven't got the book).

Hammy uploaded the pages

Reply 729

lam12

So it trade off related to opportunity cost? I'm a bit confused as when to use the word trade off haha

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Reply 730

Super199

Original post by Hammy_23

Brilliant explanation could u give one for price elasticity of supply please

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I'll give it a go :smile:

.

Definition of PES = The responsiveness of the quantity supply to a change in the price of a good.
PES is always positive. This is because as the price increases the quantity increases, the reason for that is because at higher prices it makes it more profitable for businesses.

In exams they will normally ask you to calculate a few figures.
PES > 1 (Elastic) PES (0-1) = Inelastic

Let's say the figures you worked out were (+)1.4 and (+) 0.2 .
The initial marks you get are for saying the value of 1.4 shows the good has an elastic supply as it is greater than one.
Whereas 0.2 shows we have an inelastic supply. It basically tells businesses I think how quick they can react to changes in supply. The more elastic the supply is the better it is. This is because firms want to maximise profit so if they are unable to react then they will lose out.

There are a few factors that affect it:

Availability of the factors of productions - If there is a lot of the factors of production available the business can expand quickly. This makes it more elastic. It does depend on the amount of spare capacity though I think

Availability of stocks - I think this is similar to the other one. It is just says if you have spare stock available and the price rises you can react quickly and maximise your profit. This makes it price elastic.

Time period - In the short-term supply is more inelastic. In the long-term supply is more elastic.

The comment bit of the question I normally put:

1). PES is an estimate so may be unreliable
2). Varies along the supply curve
3). Businesses do not usually consider PES
4) Depends on other factors (ceteris paribus).

Not the biggest fan of PES so might have a few errors. :smile:

Reply 731

username1155040

Original post by nomita

Thanks Does anyone has F581 Mark scheme for June 2014.

Thanks

I don't have that one.... if anyone does have it that would be great (F582 ms on pg 35)

Reply 732

2014_GCSE

@Super199 your PED & PES business significance notes have saved me. A personal big thank you!

Reply 733

Super199

What are the depend upon with pollution permits?

Reply 734

jamesnicholson9

Cross elasticity of demand will come up, hands down.

Reply 735

anndz3007

i have a strong feeling that positive externalities or merit good will come up this year, or maybe both, but i'm also quite worried about government provision and public good since they have never came up before.