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21.The cross elasticity of demand
Price Elasticity of Demand The Law of Demand tells us that: “all else equal, when the price of a particular good falls, the quan- tity demanded for that good rises.” But what it fails to answer for us is: “by how much”? Will it be a relatively large increase in quantity demanded or will it be almost negligible? In other words, we would like to measure how sensitive consumers are to a change in the price of this good.
Price Elasticity of Demand Formula
Ed= (%∆ in quantity demanded of good X)/(%∆ in the price of good X)
Note: The Law of Demand insures that Ed is negative, but, for ease of interpretation, econ- omists usually ignore the fact that price elasticity of demand is negative and simply use the absolute value. The greater this ratio, the more sensitive, or responsive, consumers are to a change in the price of good X.
22.The income elasticity of demand
In the case of the income elasticity, it is a measure of how sensitive consumption of good X is to a change in a consumer’s income.
EI = (% ∆ Qd good X)/(% ∆ Income)
Example: Jason’s income rises 5 percent and we see his consumption of fast food meals rise 10 percent. EI = 10%/5% = 2
So what do we make of this? First, because EI is greater than zero, we can determine that fast food meals are a normal good for Jason. Second, at least in this example, the
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KEY IDEA
consumption of fast food meals is quite income elastic. A relatively small percentage increase in income causes a large, in fact twofold, percentage increase in fast food meals. Some refer to these goods as luxuries.
Example: Jen’s income rises 5 percent and we observe her consumption of bread rise 1 percent.
EI = 1%/5% = .2
Once again, this measure would indicate that bread is a normal good as more income prompts more bread consumption. However, the relatively small increase in consumption compared to the increase in income tells us that bread is relatively income inelastic. This makes sense, after all, how much more bread does one really wish to consume as their income rises? If Jen’s income doubled, would she double, or more than double, her con- sumption of bread? These goods are often referred to as necessities.
Example: Consumer income increases by 5 percent and we observe consumption of packaged bologna decrease by 2 percent. EI = –2%/5%= –.4
Again, there are two important observations that can be made here. First, because con- sumption of bologna decreased with an increase in income, we can conclude that bologna, in this example, is an inferior good. Second, there is a relatively inelastic response in bologna consumption to a change in income.
23. The elasticity of supply
Responsiveness of producers to changes in the price of their goods or services. As a general rule, if prices rise so does the supply.
Elasticity of supply is measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price. High elasticity indicates the supply is sensitive to changes in prices, low elasticity indicates little sensitivity to price changes, and no elasticity means no relationship with price. Also called price elasticity of supply.
Now that we have addressed the sensitivity of consumer consumption of good X, let us dis- cuss elasticity from the supplier’s perspective. When the price of good X changes, we expect quantity supplied to change. The Law of Supply predicts that as the price of good X increases, so too does quantity supplied. But what we do not know is, “by how much?” The price elasticity of supply helps to measure this response.
Price Elasticity of Supply Formula
Es = (% ∆ in quantity supplied of good X)/(% ∆ in the price of good X)
Note: The Law of Supply insures that Es is positive. The greater this ratio, the more sensi- tive, or responsive, suppliers are to a change in the price of good X.
24.The factors that influence the elasticity of supply
Time: In the short run firms will only be able to increase input of labour to increase supply of commodities may not be able to increase the supply in response to the price change but the supply change will be little because other factors of production may not be increased in the same proportion and may limit the supply. However, in the long run a firm will increase the input of all factors of production and thus the supply becomes more price elastic.
Availability of resources: If the economy already using most of its scarce resources then firms will find it difficult to employ more and so output will not be able to rise. The supply of most of goods and services will therefore be price inelastic.
Number of producers: More producers mean that the output can be increased more easily. Thus supply is more elastic.
Ease of storing stocks: If goods can be stocked with ease and have a long shelf life, the supply will be elastic, otherwise inelastic. For example perishable goods such as fresh flowers, vegetables have comparatively inelastic supply because it is difficult to store them for longer periods.
Increase in cost of production as compared to output: In cases where there is a significant increase in cost of production when output is increased, supply is inelastic. This is because suppliers will have to have to do a significant investment in order to increase the output. It will take time and some suppliers may be hesitant in doing so.
Improvement in Technology: In industries where there is a rapid improvement in technology, the PES of such goods will be more elastic as compared to industries where there is not much improvement in technology.
Stock of finished goods: In industries where there are high inventories/stocks of finished goods, the suppliers can easily supply more as the price rises. Thus, the PES for these goods will be elastic.
25. Resource allocation methods
Resource allocation is used to assign the available resources in an economic way. It is part of resource management. In project management, resource allocation is the scheduling of activities and the resources required by those activities while taking into consideration both the resource availability and the project time.
Strategic planning
In strategic planning, resource allocation is a plan for using available resources, for example human resources, especially in the near term, to achieve goals for the future. It is the process of allocating resources among the various projects or business units.
The plan has two parts: Firstly, there is the basic allocation decision and secondly there are contingency mechanisms. The basic allocation decision is the choice of which items to fund in the plan, and what level of funding it should receive, and which to leave unfunded: the resources are allocated to some items, not to others.
There are two contingency mechanisms. There is a priority ranking of items excluded from the plan, showing which items to fund if more resources should become available; and there is a priority ranking of some items included in the plan, showing which items should be sacrificed if total funding must be reduced.
Resource Leveling
The main objective is to smooth resources requirements by shifting slack jobs beyond periods of peak requirements. Some of the methods essentially replicate what a human scheduler would do if he had enough time; others make use of unusual devices or procedures designed especially for the computer. They of course depend for their success on the speed and capabilities of electronic computers. What to produce concerns allocation of resources among alternative uses. The economy must allocate the varieties of goods and services which will yield the greatest satisfaction to consumers. Once the first problem is solved, we are faced with the second problem, HOW TO PRODUCE. There are several technically possible ways a commodity can be made. A basic criterion used in deciding the best technique is that producers should avoid inefficient methods. Production is said to be inefficient when it is possible to reallocate resources and, as a result, produce more of at least one good without producing less of any other good. This information is powerful and helpful to beginners.
Algorithms
Resource allocation may be decided by using computer programs applied to a specific domain to automatically and dynamically distribute resources to applicants.
This is especially common in electronic devices dedicated to routing and communication. For example, channel allocation in wireless communication may be decided by a base transceiver station using an appropriate algorithm.
One class of resource allocation algorithms is the auction class, whereby applicants bid for the best resource(s) according to their balance of "money", as in an online auction business model (see also auction theory). A study by Emmanuel Yarteboi Annan shows that this is highly important in the resource allocation sector.
In one paper on CPU time slice allocation an auction algorithm is compared to proportional share scheduling.