Question

Briefly explain the behavior of consumers and businesses as illustrated in the  “price elasticity of demand” and “price elasticity of supply”.  

Answer 1

Consumers are the users of any products.Behaviour of consumers means how the consumers responds to the several factors that determines their consumption.In other words,consumer behaviour is the consumption pattern of any consumer.This is determined by a number of factors such as law of diminishing marginal utility,Marginal rate of substitution,price elasticity of demand etc.We would be focusing here on price elasticity of demand.Demand refers to the different quantities of a commodity which is demanded by a consumer at various given prices in a given period of time."Price elasticity of demand" plays a crucial role in determination of demand.It is the measure of degree of responsiveness of demand for a commodity to the change in its price.In other words,it is a method to quantify the effect of change in price on the demand for a good.We also know that the budget of a consumer is limited.And so,any change in the price will change the total expenditure of the consumer having an impact on income and consumption pattern.As per the law of demand,we know that as the price of a commodity rises,there is a fall in the quantity consumed of that commodity and vice-versa.The elasticity of demand helps us to quantify the same. The consumer behaviour,is here determined by the elasticity which is further determined by a number of factors such as nature of good,availability of substitute,use of commodity,price level etc.The demand for luxury goods are more elastic and for essentials,the demand is more inelastic.Demand of Goods having substitutes are more elastic and complementary goods are relatively inelastic.Multiple use good's demand are elastic than the single use goods.If the general price level is lower,demand will be inelastic and vice-versa.All the above mentioned factors collectively determine the consumer behaviour.

In the same way,as mentioned above,the behaviour of 'businesses' are also determined.Here the businesses can be understood as suppliers.We know that producers produce goods with a profit motive or they produce those goods that increases their income.This is only possible when they get higher prices for the commodity they produce.Supply of a commodity refers to a schedule showing various quantities of a commodity that the producers are willing to sell at different prices at a given point of time.We know that, in the short run the producing resources are limited.Using those,the producers want to maximize their profit and income.There is a positive relationship between the price of a commodity and its supply.Producers supply/produce more,goods having higher prices and vice versa.The behaviour of "businesses" is also much determined by the elasticity of supply.This is the measure of degree of extension and contraction of supply in response to a given change in own price of the commodity.Various elasticities determines the supply pattern or producer behaviour but elasticities are further determined by a number of factors such as nature of inputs,risk taking,cost of production,time period etc.Production of goods involving commonly available inputs are elastic and if inputs used are not commonly available,supply would be inelastic.Production involving high risk more elastic and vice-versa.Supply would be less elastic if in case of increase in production causes increase in the cost of production.Longer the time period,greater will be the elasticity of supply.These factors including much more determines the supply behaviour.