BUSINESS ECONOMICS

BUSINESS ECONOMICS

BUSINESS ECONOMICS

Introduction

The purpose of this research paper is to understand the impact of different types of elasticity like price elasticity of supply, income elasticity of supply and the cross price elasticity of supply, and the effectiveness of taxes for cutting the consumption of unhealthy food items.

Discussion

The price elasticity of supply is used to see how sensitive the supply of a good is to a price change. The upper the price elasticity, the more receptive producers and sellers are to price changes. Very high price elasticity proposes that when the in case the price goes up, sellers will supply the good less and in case of decrease in the price, sellers will supply more (Cook, 2000).

Price elasticity of supply describes the connection between change in quantity supplied and a change in price. The formula for price elasticity of supply is:

Percentage change in quantity supplied / Percentage change in price

The value of elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market and vice versa.

There is a positive value of price elasticity of, because an increase in price is expected to increase the quantity supplied to the market and vice versa.

The impact of taxes also increases the price and thus decreases the consumption and the supply of the unhealthy foods (Cook, 2000). As we can see it from the graph mentioned below that with the imposition of tax, the prices are increasing, which are resulting in the decrease in the demand and thus decrease in the supply.

Income elasticity of supply

We measure the effect of income on demand for a good as % effect on demand of a 1% increase in income.

Income elasticity is positive for normal goods

Income elasticity is negative for inferior goods.

In income elasticity, if the income increases, the demand for the luxurious or normal goods increases, whereas the demand of the inferior goods like unhealthy food items decreases, which thus results in decreasing the consumption of the unhealthy food items(Duffy, 2003). The imposition of tax on unhealthy food items also increases the price, which thus decrease the demand of the unhealthy food items and reduces the consumption of the unhealthy food items.

As the income increases, so the demand for the unhealthy food items decreases, which results in lowering the curve of the income elasticity of supply and this lower trend in graph shows the ...