Question

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Measure the price elasticity of supply and demand

Measure the cross-elasticity and income elasticity of demand

Calculate changes in consumer and producer surplus

Evaluate alternatives for fair and efficient allocation of scarce resources

Answer 1

The elasticity of Demand measures the extent to which quantity demanded of a commodity increase or decrease in response to increase or decrease in any of its quantitative determinants. The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods and change in consumer's income.

Determinants of Elasticity of Demand:

1) Nature of the commodity: Ordinarily, necessaries like salt, kerosene oil have less than unitary elastic demand. Luxuries, like air conditioner, costly furniture, etc have greater than unitary elastic demand. The reason is that change in their prices has a great effect on their demand. Comforts like milk, fans, etc have neither very elastic nor very inelastic demand. Jointly demanded goods, like, car and petrol, pen and ink, camera and film, etc have ordinarily inelastic demand.

2) Availability of substitutes: Demand for those commodities which have substitutes are relatively more elastic. The reason being that when the price of a commodity falls in relation to its substitute, the consumers will go in for it and so its demand will increase. Commodities having no substitutes like cigarettes have inelastic demand.

3) Income of the consumer: People whose income are very high or very low, their demand will be inelastic. Because rise or fall in price will have little effect on their demand. Conversely, middle income groups will have elastic demand.

4) Habit of consumer: Goods in which a person becomes accustomed or habitual will have inelastic demand like coffee, tobacco etc. It is so because a person cannot do without them.

5) Proportion of Income spent on a commodity: Goods on which a consumer spends a very small portion of the income i.e. toothpaste, newspaper, needles, etc will have an inelastic demand. On the other hand, goods on which the consumer spends a large proportion of the income i.e. scooter, cloth etc have elastic demand.

6) Time period: Demand is inelastic in short period but elastic in long period. It is so because in the long-run, a consumer can change his habits more conveniently than in the short period.

Elasticity of supply is a measurement of percentage change in quantity supplied due to change in the price of good itself.

Factors affecting Es;

(i) Nature of the inputs used

(ii) Natural constraints

(iii) Risk taking

(iv) Nature of the commodity

(v) Cost of production

Cross price elasticity of demand is the responsiveness of change in quantity demanded of good X due to change in the price of good Y.

Income elasticity of demand is the responsiveness of change in quantity demanded of good due to change in the income of the consumer.

Consumer surplus is the area below the demand curve and above price. It measures difference between willingness to pay and actual payment. On the other hand, Producer Surplus is the area below price and above supply curve. It measures difference between price received by seller and cost to seller.

Change in the price of good changes the consumer and producer surplus. Increase in the price decreases consumer surplus and increases producer surplus. While decrease in price increases consumer surplus and reduces producer surplus.