(a) Define:
(i) elasticity of demand; [2 marks]
(ii) price elasticity of demand. [2 marks]
(b) State any four determinants price elasticity of demand. [12 marks]
(c) Draw curves illustrating
(i) fairly elastic demand; [2 marks]
(ii) perfectly inelastic demand. [2 marks]
Explanation
(a)(i) Elasticity of demand is defined as the degree of responsiveness of quantity demanded of a commodity to changes in any of its determinants such as the price of the commodity, income of the buyers and prices of its substitutes.
(ii) Price elasticity of demand is defined as the degree of responsiveness of quantity demanded of a commodity to changes in the price of the commodity.
(b) The determinants are:
(i) Nature of the commodity: That is, whether the commodity , is a necessity or luxury. Necessary goods have inelastic demand while luxury goods have elastic demand. (ii) Substitutes: Commodities having substitutes have more elastic demand while those without substitutes have inelastic demand.
(iii) Number of uses: Commodities with variety of uses have elastic demand.
(iv) Habits: Goods consumed as habits have inelastic demand.
(v) Consumer's income: Where the percentages of customer's income spent on a commodity is large, demand tends to be price elastic and vice versa.
(vi) The time factor: The longer it takes to find a substitute, the more inelastic is demand and vice versa.
(vii) Level of prices: If high, demand is elastic but if low, demand is inelastic.
(viii) The breadth of the definition of a commodity. Where a commodity is broadly defined, demand tends to be price inelastic.
(c)(i) Fairly elastic demand Fairly elastic demand
