DEMAND AND SUPPLY

Price Elasticity of Supply

PES of GoodA = % quantity supplied of good A

% in price of good A

Tutorial Notes

DEMAND AND SUPPLY

DEMAND AND SUPPLY

Price Elasticity of Supply

The Concourse

KK Hospital

The Revenue House

Shanghai Stock Exchange

Woodlands Checkpoint

What has all these buildings got in common.Their exteriors are of aluminium cladding and glass

DEMAND AND SUPPLY

Price Elasticity of Supply

The Concourse

KK Hospital

The Revenue House

Shanghai Stock Exchange

Woodlands Checkpoint

FAÇADE OF BUILDINGS WERE DESIGNED AND BUILT BY A COMPANY CALLED PD INC. IN THE 1990S

DEMAND AND SUPPLYPrice Elasticity of Supply

The Concourse

KK Hospital

The Revenue House

Shanghai Stock Exchange

Woodlands Checkpoint

PD INC.

Aluminium Cladding Bricks

DEMAND AND SUPPLY

1994 – 1998 : Increase in taste and preference for cladding (D0 TO D1) causing upward pressure on prices for cladding and glass.

Demand For Aluminum Cladding

P

Q

P0

Q0

D1

D0

S0

Scenario Of Rise In Price For Aluminium Cladding

1997 – 1998: As price rises, quantity supplied moves in tandem along the S0 curve.

P1

E0

E1

Q1 Q2

DEMAND AND SUPPLY

Price Elasticity of Supply

The Concourse

KK Hospital

The Revenue House

Shanghai Stock Exchange

Woodlands Checkpoint

PD INC.Company founded by ex-police officer, Mr. Poh A.T. (not a super scholar just a shrew businessman). Personal nett worth approximately in excess of $60 million, 1997).Company does external portion of buildings.Specialzing in aluminium and glass exteriors. In 1997, it was 1 of 3 companies of its kind in the region. High barriers to entry. Cost of High Technology made it difficult to enter the market.

Just before the Asian financial crisis in 1998, inflation was running rampant and shortage of resources caused prices of cladding and glass to to soar.

In 1998, PD took on too many project, about 5 totaling some 200 - 400 million dollars. Its resources was overstretched and unable to obtain additional land, resource , capital and appropriate labour to do the job, PD Inc was sued for breech of contract and to which it was unable to resolve. PD filed for bankruptcy.

Unlike brick facades, aluminium and glass required special procedure to make the finished product.

Specialized labour was used to contruct aluminium and glass cladding. Unlike brick works, random labour was inappropriate a substitute for cladding works.

PD Inc was not able to retool themselves fast enough to meet the challenge of rising cost.

The prices elasticity of supply of PD Inc was inelastic and that created a host of problems for PD.

DEMAND AND SUPPLY

Determinants of PES

•Time

•Existence of spare capacity

•Availability of stocks

•Factor Mobility

•Barriers to Entry

•Substitute products/services for its resources

Cladding/Glass Vs Brick Facade

P

Q

P0

Q1Q0

S0

Price Elasticity of Supply

P1

S1

P

Brick Facade

Cla

dd

ing

an

d G

lass

Fac

ade

D1

• PES<1 inelastic

Note: when a firm’s supply curve is elastic, it means that the firm’s supplies can easily respond to price changes

2

1

3

4

Q1: What is the total revenue gained for the brick façade firm when prices shift from P0 to P1 Ans: Area 1234

Q2: What is the total revenue gained for the cladding façade firm when prices shift from P0 to P1.

D

A

C

B

Ans: ABCD

• PES>1 elastic

Price Elasticity of Supply

Recap on what affects PED:

- Availability of substitutes, Closeness of substitutes - Size of Budget Spent on Goods (eg. Smoker as oppose to non-

smokers)- Degree of necessity (rice for the poor)

- Definition – eg. BMW and QQ to mean all cars but not just luxury cars.- Time – People can adjust their consumption of the good over time (accept either more or less)

DEMAND AND SUPPLY

THE FACTORS THAT ARE RESPONSIBLE FOR PED ARE NOT ALL THE SAME FOR PES – DISPEL MISCONCEPTION IMMEDIATELY!

Assignment 6

Option 1You are one of only 2 supplier of crane to the construction industry in Singapore. The construction industry is proceeding at a feverish pace in the last year (implying that all resources are stretched and excess capacity is nonexistent).With limited supply of land and low mortgage rates, prices of properties are expected to rise further causing a strain on prices of factors of production as well. Under such a scenario, suggest what the PES for your product (cranes) would be like. Use dd/ss diagrams to substantiate your answer.

Option 2You are MD of a foreign bank in Singapore that specializes in engineering and marketing of sophisticated (and risky) mortgage back financial assets (like the Lehman Bonds of the recent financial crisis). Business has been expanding in the last 3 years and operations have been running at a feverish pace in the run up to the financial crisis of 2008. The PES for risky sophisticated asset is 5. Explain why, during the financial crisis of 2008, as prices of these assets fell, you were struggling to keep the bank from bleeding red ink (a term to mean that the bank is staring at bankruptcy). Use DD and SS diagrams to substantiate your explanation. (note: financial assets are created using very little resources but from the derived values of virtual assets that exist in the digital screens of the financial industry like bonds and currency. Human intellectual capacity is the main resource in this market)