The Proposal, as the demand is inelastic and elastic. With a sharp increase in the prices of some goods will go up in his offer, as the share in terms of profits increases. But in this case, some buyers will want to buy goods at an inflated price. As a result, the sales volume significantly reduced compared to the volume of proposals. However, if the increase or decrease in the volume of demand the buyer relatively quickly responds to the change in the situation of the offer the situation is somewhat different.
The Manufacturer does not have time to react to the change, as it takes some time to increase their production. Thus, the volume of supply is not so sensitive to change in the short term.
To see the above phenomena, use the index – the elasticity of supply, which shows how the percentage has changed, the volume of supply when the price changes of goods at 1 percent. It is believed that other factors affecting the offer remain unchanged.
The greater the elasticity of supply, the manufacturer is easier to increase the volume of manufactured goods and then use obtained by increasing the price advantage. In light of available resources, the increase of production of goods can occur even with a small price increase. This suggests that the elasticity of supply has a relatively high value. When capacity constrained, it will not have elasticity.
You Should take into account the reaction of the suggestions in the long and short periods. In the near future, manufacturers are limited, the firm can not the available resources are quickly brought into line with the changed market conditions. In comparison with the demand the volume of supply is not as sensitive to price changes. Therefore, in the short term, it is the volume of demand will experience the greatest impact.
The behavior of the seller is affected by the following factors:
- available capacities: the larger the amount of fixed assets in the ownership of the manufacturer, the higher at any level of prices, the volume of supply;
- the dominant technology in the world: the emergence of improved methods of production creates the opportunity to reduce the cost of the product, which ultimately leads to increased volume of supply regardless of the price;
- costs of production: at current prices for the goods change in the value of resources leads to a decrease or increase of the supply volume.
The Theoretical assumption that increasing prices will lead to a supply takes place only under condition of perfect market (price elasticity of supply). However, in reality ahead of people's demand over supply does not always cause it to increase. The manufacturer also does not always want to get rid of the deficit and undermine their dominant position in the market. Sometimes between price and supply occurs and an inverse relationship: for example, reducing the world level of cost for certain types of products is forcing exporters to increase supply to maintaining their income. Even in the presence of attractive prices is not always an opportunity to increase supply, especially in the short term. Also, the situation may arise where the seller is unable to reduce the sentence, even if not the best price.
If over a long period market equilibrium is disturbed, it can lead to serious consequences. With the continual growth of supply of goods will lower prices and its production will be carried out until the market price will be higher costs. There may come a time when some manufacturers will become unprofitable to produce certain products. In the opposite situation (increase of demand) is the maximum price increase in which part of the population will not be able to purchase the goods.
Absolutely elastic demand describes a situation where with decreasing prices of unlimited buyers increase the demand and at higher prices – begin to completely abandon the product.
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