Question

Consider the following two products: ‘coffee’ sold in a café and ‘hotel accommodation’ in Sydney during the Olympic Games. Which product would have a higher price elasticity of supply in absolute value? Explain your answer including identifying the determinant of elasticity. (1 mark) – Word count 60

GIVE THE ANSWER WITH THE DETERMINENTS OF SUPPLY. SUCH AS

1.Length of time involved in production.

2.Availability of inputs.

3. Existing capacity.

4. Inventories held.

5. Type of industry.

ALSO INCLUDE WHAT KIND OF PRICE ELASTICITY OF SUPPLY IS COFFEE AND HOTEL ACCOMMODATION (INELASTIC/ELASTICS/PERFECT ELASTIC/PERFECT INELASTIC/UNIT ELASTIC ETC)

Answer 1

PES = % change of supply quantity / % change in prices

PES(Coffee) will be elastic as the change in prices can lead to very easily a good amount of increase in the quantity supplied of coffee. The time involved in production is low. Input availability is abundant due to high production of coffee worldwide. Existing capacities and Inventories held will also be high due to long term presence of coffee market. The industry has been around for long time. The processes are well established and can cope up with price shocks.

PES(Hotel) will be inelastic or less then 1 as the increase in prices will not be able to conclusively increase the availability of hotel accomodation. Due to high production time demand and scarceness of inventory, the PES will be highly inelastic. Capacity can be high but production is complex and cumbersome. In the little time before the start of games, the production can increase to ramp up supplies but it wont be able to increase it to the level where the price is elastic as at the time of national events like olympics, cities see a large influx of crowd which will skyrocket the price... Any further increase in supply wont help as the price will continue to increase.