2.6 Elasticity of supply Questionbank

Explain how the rate at which costs increase with output affects the elasticity of supply.

Poland is a country in Central Europe with a population of approximately 38 million. Its membership in the European Union (EU) has contributed to strong economic ties with other European nations. In recent years, Poland has experienced both robust economic growth and rising inflationary pressures. While unemployment remains low, concerns about income inequality have drawn the government’s attention.

Poland is also one of the largest producers of apples in the EU, exporting a significant portion of its harvest to other European countries, especially Germany. However, rising production costs and shifting demand conditions have affected both domestic producers and international consumers of Polish apples. Discussions surrounding potential government interventions include tax policy changes, labor market incentives, and expanded social welfare programs. The statistics below provide insights into macroeconomic performance, apple market dynamics, taxation, and household consumption behavior in Poland.

Table 1: Selected Macroeconomic Data for Poland

Table 2: Apple Market Data (Exports to Germany)

Table 3: Corporate Taxation in Poland (2022)

Denmark is a highly developed economy in Northern Europe with a population of about 5.9 million. It boasts one of the highest standards of living in the world, supported by a broad-based welfare system and progressive taxation. The service sector, advanced manufacturing, and renewable-energy technology form key parts of its economy. Denmark’s central bank has maintained low interest rates, helping to foster economic stability. However, challenges such as ensuring long-term sustainability of the welfare system and addressing potential future energy shortfalls remain.

Exports are crucial for Denmark’s economic success, with wind turbines, pharmaceuticals, and meat products contributing significantly to export revenues. Wind turbine manufacturers in Denmark have become global leaders, but recent shifts in global demand and competition from Asian producers have tested the capacity of local firms. Meanwhile, a high rate of personal and corporate income tax has provided funds for extensive public expenditure, including education, healthcare, and infrastructure.

Table 1: Selected Macroeconomic Indicators for Denmark (2022–2023)

Table 2: Market for Wind Turbines Produced in Denmark

Table 3: Income Distribution in Denmark (2022)

Table 4: Overview of Tax Rates in Denmark

In 2023, an energy-infrastructure firm in Denmark is planning a major investment worth 1.2 billion DKK, and claims it could significantly boost the economy by generating additional consumption expenditures.

Wind Turbine Exports
Denmark exported 70 units of wind turbines at an average price of 11,000,000 DKK per unit to other European countries in 2022. Owing to rising demand for renewable energy worldwide, the price of wind turbines exported from Denmark is expected to rise from 11,000,000 DKK to 12,000,000 DKK per unit in 2023. However, global competition from producers in Asia might cause changes in the quantity demanded.

Fiji is an archipelago located in the South Pacific, known for its thriving tourism industry and longstanding sugar sector. Tourism directly and indirectly accounts for nearly 38% of Fiji’s gross domestic product (GDP), making it one of the country’s main sources of foreign exchange. The island nation receives over 800 000 international visitors in a normal (non-pandemic) year, with most tourists arriving from Australia and New Zealand. However, dependence on tourism also makes Fiji vulnerable to external shocks such as global economic downturns or natural disasters.

The sugar industry is the second-largest contributor to Fiji’s export earnings, employing workers in growing, harvesting, and processing sugarcane. Due to changing weather patterns and competition from other sugar-producing nations, sugar production in Fiji faces challenges in expanding supply. In an effort to diversify government revenue, Fiji applies a 9% value added tax (VAT) on domestic sugar sales.

In 2022, the Fijian government announced a 200 million FJD infrastructure investment program aimed at improving rural roads, upgrading port facilities, and modernizing sugar processing plants. Economists estimate Fiji’s marginal propensity to consume (MPC) at 0.75, suggesting a potentially significant boost to aggregate demand if the infrastructure spending is effectively implemented.

Table 1: Key Macroeconomic Indicators for Fiji (2019–2020)

Table 2: Sugar Market Data in Fiji

Additional Information

• Fiji’s VAT on sugar is 9%.
• The government’s total planned infrastructure investment in 2022 is 200 million FJD.
• Economists estimate Fiji’s MPC = 0.75.
• Corporate tax rate is 20%.
• Personal income tax is a progressive system up to 20%.

Serbia is a country located in Southeastern Europe with a population of approximately 6.9 million. Its official currency is the Serbian dinar (RSD). According to official estimates, Serbia’s nominal GDP in 2022 reached US$65.2 billion, growing from US$63.5 billion in 2021. The unemployment rate stands at 9.8%, although it can be higher in rural areas. Inflation in 2022 averaged about 11.5%, driven partly by increasing energy prices.

Serbia is well-known for its agricultural output—especially raspberries, where it ranks among the top producers in the world. Domestically, the government charges a 20% value added tax (VAT) on many goods and services. The personal income tax system has a base rate of 10%, rising gradually for higher income brackets, while corporate income is taxed at 15%. The Gini coefficient stands at 0.35, suggesting moderate income inequality.

Trade is a constant focus of Serbian economic policy. Serbia has strong trade links with the European Union (EU), which accounts for roughly 63% of its exports. Policymakers have debated using expansionary fiscal policy to support economic growth, focusing on infrastructure development and public investment.

Table 1: Selected Macroeconomic Indicators for Serbia (2022)

Table 2: Labour Market Data for Serbia (2022)

Table 3: Domestic Market for Raspberries in Serbia

Figure 1 (not shown) illustrates the domestic demand (Dd) and supply (Sd) for raspberries in Serbia, where the equilibrium price in 2022 was 300 RSD per kg. By early 2023, the price reached 350 RSD per kg as global demand picked up.

Italy is the Eurozone’s third largest economy. Although it experienced a sharp contraction in 2020 due to the global pandemic, economic recovery followed in 2021 and 2022, partly driven by an upturn in manufacturing and consumer spending. Italy’s unemployment rate, however, remains higher than the European Union average. Income inequality, measured by the Gini coefficient, is moderate but still a concern for policymakers aiming to promote inclusive growth.

Italian coffee culture remains a vital part of domestic consumption. Table 2 provides data for the market for coffee beans. Despite fluctuations in demand and price, Italy’s coffee imports and exports of processed coffee products continue to be important for the country’s trade balance.

In 2021, Italy’s exports of manufactured goods such as machinery and vehicles led to a small trade surplus, as shown in Table 3. The government also relies on progressive income taxes to finance public spending. Some economists argue that a well-designed policy could improve both growth prospects and income distribution.

Table 1: Selected Macroeconomic Data for Italy

Table 2: Market for Coffee Beans in Italy (Hypothetical Data)

Table 3: Italy’s Key Trade Data (2021)

Austria is a landlocked country in Central Europe with a population of approximately 9 million. It has a high-income economy, diversified across manufacturing, services, and a thriving tourism sector. During 2022, tourism alone contributed about 15% of Austria’s gross domestic product (GDP), fueled by both winter sports and year-round cultural tourism.

Austria’s real GDP growth rate moderately improved between 2019 and 2022, assisted by strong consumer demand, increasing trade with neighboring economies (most notably Germany), and an expansionary fiscal stance. Government spending on infrastructure has grown, although policy makers closely watch any inflationary pressures that could arise from such fiscal expansion.

Despite relatively low inequality levels compared to many other developed nations, Austria’s Gini coefficient has inched upward from 0.26 a decade ago to around 0.28 in 2022. Debates on whether to reform personal income tax rates or strengthen social welfare programs have gained attention.

In terms of taxation, Austria uses a progressive personal income tax system with a top marginal rate of 55%. Corporate income taxes for resident firms currently stand at 25%, although there have been proposals to reduce this rate to 22%. To stimulate the economy further, the government allocated €5 billion in 2022 toward infrastructure projects, anticipating that the Keynesian multiplier would raise overall economic activity significantly.

Table 1 below shows simplified data on the Austrian ski package market, while Tables 2–4 provide additional macroeconomic and distribution information that will be referred to in the questions.

Table 1: The Market for Austrian Ski Packages (2021–2022)

Table 2: Nominal GDP and Price Index in Austria (2019–2022)

Table 3: Selected Economic Indicators (2022)

Table 4: Income Distribution Data in Austria (2022)