Question

a) “Prices have risen because market women are hoarding”. “Prices have risen because consumers are holding large stocks for fear of future shortages” Reconcile the two statements by means of diagrams.

                                                                                                                                               

b)         Solve the following and interpret your results appropriately

1. When price of Motorola is GH¢10 demanded of Nokia is 50 units. The price of Motorola increases to GH¢12 and demand for Nokia increases to 70 units     

ii.         When the price of car is GH¢10,000 demand for fuel was 50,000 litres per month. Price of car increases to GH¢ 60,000 and demand for fuel fall to 5,000 litres.                                                                                                                           

iii.        A 10% fall in the demand of koobi has been attributed to a 5% increase in the price of momoni.                                                                                                                                                                                                                                               

c)     How relevant is elasticity to the Ghanaian economy?                                       

Answer 1

a.)

The first diagram refers to the hoarding of goods. When goods are hoarded the market experiences a crunch in the supply of the goods which causes the supply to shift to the left as not all the products are reaching the market to satisfy the demand. This causes the market supply curve to shift to the left. This leftward shift causes the quantity to fall and prices to rise.

The second diagram refers to the holding of large stocks for fear of future shortages. As the consumers fear future shortages they increase their present demand for goods as they aim to stock up on the goods. This causes the demand curve to shift to the right, causing the price to rise and quantity demanded to increase.

b.)

i.) The first combination of goods corresponds to the rise in the price of one good leading to a rise in the demand of the other. As the price of Motorola rises, the demand for Nokia goes up. This makes the two goods substitute goods. This relationship is substantiated by their cross-price elasticity of positive 2.

ii.) The second combination of goods corresponds to a complementary good as a rise in the price of one good leads to a drop in the demand for the other good. This is substantiated by their cross-price elasticity of negative 1.15 ~ - 1.15.

iii.) The third combination of goods also share a complementary relationship as the rise in the price of momoni caused the demand for momoni to fall.

c.) the concept of elasticity forms the crux of economic theory. The elasticity is highly relevant to the Ghanaian economy because it aids in understanding the responsiveness of demand for various goods and services to a change in their price. Along with cross-price elasticity and general price elasticity of demand and supply, the concept of elasticity extends to income elasticity which measures the responsiveness of quantity demand to a change in income. This helps the economists and policymakers to classify goods in terms of their demand sensitivity to price and income into categories such as necessities, normal goods, and inferior goods.