Observation

 

 

This question was popular among the candidates and majority of them were able to define price elasticity of demand but failed to include the formulae when distinguishing between income elasticity and cross elasticity of demand. Secondly, most of them failed to explain or relate the degrees of elasticity in relation to the determinants of price elasticity of demand, hence their performance was below average. Candidates were expected to answer thus to score maximum marks in this question.

1. Price elasticity of demand measures the degree of responsiveness of quantity demanded of a commodity to a change in its price.

1. Income elasticity of demand measures the degree of responsiveness of demand to changes in the income of the consumer.

YED = % ∆ in  Qty demanded
                  % ∆ in income
while Cross elasticity of demand is the degree of responsiveness of quantity demanded of one good to a change in the price of another good i.e.
CED =   % ∆ in  Qty demanded of commodity A
                  % ∆ in price of commodity B

(c) (i) Commodities which have close substitutes tend to have elastic demand than those without close substitutes.
(ii)  If a commodity is a necessity such as food or medication, demand tends to be       inelastic.
(iii) Habit:  When a consumer develops a high taste for a good, demand tends to be inelastic.
(iv) Consumers’ income: If the fraction of consumers’ income spent on the                                 commodity is very small, demand tends to be inelastic.
(v)  Time:  Demand tends to be inelastic in the short-run but in the long run most  
commodities tend to be elastic in demand because buyers might have found
substitutes.
(vi) Number of uses:  If a commodity has a number of uses, its demand tends to be
elastic.
(vii) Durability:  demand for durable goods tend to be elastic because consumers can
defer consumption.
(viii) The width of the definition of the commodity: If a commodity is broadly defined  e.g. “food”, demand tends to be elastic but if specifically defined, it may be inelastic.

(ix)       Income groups:  Consumers who belong to the higher income group tend to have inelastic demand for commodities.  It does not matter to a rich man whether the price of a commodity has fallen or risen.