Elasticity of demand measures the magnitude of change in the quantity demanded of a good as a result of a change in any of the factors affecting demand. When analyzing the impact of a shift in supply, it is important to consider the level of elasticity in demand. This is because an analysis of elasticity of demand gives suppliers an understanding of how much the level of demand for their good will change if they change the amount being supplied i.e. a shift in their supply curve. This can be illustrated by assuming the case of a good that suppliers know has inelastic demand e.g. cigarettes. Suppliers could easily reduce the supply of cigarettes hence causing a shift in their supply curve to the left. They can do this without fearing a reduction in the quantity of cigarettes demanded despite the increase in the price of cigarettes (Ringel, 2002).
Elasticity of supply measures the magnitude of change in the quantity supplied of a commodity as a result of a change in any of the factors affecting supply. When analyzing the impact of a shift in demand, it is important to consider the level of elasticity of supply. This is because an analysis of elasticity of supply gives consumers an understanding of how much the quantity supplied of a good will change if they change the level of their demand i.e. shift their demand curve. This can be illustrated by assuming the case of a good that can be elastically supplied e.g. table salt. Consumers, therefore, can increase their demand for table salt without fearing a shortage in the quantity supplied (TR Jain, 2003).
Increasing cost industries are industries which incur higher production costs as they increase their production levels. These industries increase their production levels in an effort to satisfy increasing levels of demand for their products. One example of an increasing cost industry is the software industry. In this industry, there has been an increased demand for software applications for phones and computers. This increased demand for software applications has attracted a lot of new firms into this industry. In an effort to acquire quality workers, these software firms may increase the amount of wages paid to a worker hence increasing their production costs. Another increasing cost industry is the building construction industry. The increased cost of firms in this industry result from the increased amount of wages paid to construction workers. Increasing cost industries have positively sloped supply curves that result from the rapid growth and expansion of their industry. This rapid growth and expansion lead to increased production costs and resource prices hence causing the supply curve to be positively sloped (Mankiw, 2011).
Firms in a perfectly competitive market achieve economic efficiency when they sell a good at a price equal to its marginal cost. Firms operating under perfectly competitive market are able to achieve economic efficiency as a result of several conditions existing within the market (Mankiw, 2010).
First, the existence of very many firms within the market. This condition ensures that none of the firms existing in the market can exercise market control over other firms in terms of setting the market price and quantity. Second, the other factor that contributes to the achievement of economic efficiency in perfectly competitive markets is that firms in this kind of market sell identical products or homogeneous goods. This condition makes customers unable to discern the difference between the goods from one firm with that of other firms. Firms, therefore, charge the same prices for their goods. No firm will have a superior good over another (Ricardo A. Bitran, 1993).
Thirdly, firms within perfectly competitive markets also enjoy the freedom to enter and exit the market freely. They are not restricted by government rules or regulations barriers of entering the market. Likewise, they are free to leave the market whenever they wish. Lastly, perfect knowledge also exists within perfect markets. Customers always have full knowledge of the prices that sellers should set such that no firm can sell its goods at a higher price than its competitors. Likewise, each seller has full knowledge of the prices that its competitors are charging. This condition ensures that no seller will charge a price lower than his competitors. All the firms within a perfectly competitive market also employ the same level of technology with its fellow competitors. No firm, therefore, will produce superior goods than the others (Electric Utility Rate Design Study. Task Force no. 2, 1977). The aforementioned conditions force firms within perfectly competitive markets to charge a price similar to the marginal costs within the market, hence the existence of economic efficiency.