Final Part One Repaired)

8/3/2019 Final Part One Repaired)

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DEMAND ANALYSIS

Many economists have considered demand and supply as the core of economics. This is

because basis of economics is built around it. As Thomas Carlyle - was quoted to have

said teach a parrot to say demand and supply and you have made an economist of

him.

NEED

Need in economics refers to an urgent requirement or something essential or necessity

which someone is lacking and which in normal sense is supposed to possess. For

instance, a sick parson needs medical attention.

WANT

This refers to a mere desire to have something. Thus the wish of a consumer to have a

commodity which in actual sense may not be backed by the ability and willingness to

purchase. For example, Mr. Fauzan may desire to have Sala dress for the celebration of

Idil fitr. However, the money to pay for this dress is not there. So we say this is a mere

desire.Mr. Fauzan can live without this dress and this therefore distinguishes a want from a

need. It means that a need is a necessity which a consumer cannot live without while in

the case of the want a customer can live without it.

DEMAND

Demand refers to the quantities of goods and services that consumers are willing and

are able to buy at various prices over a given period of time.

DEMAND SCHEDULE: It is a table showing} the relationship between quantities

demanded of a commodity at various prices at a particular time. This can be shown

below. We have the individual and market demand schedule.

PRICES OF PINEAPPLE QUANTITY DEMANDED

10 100

20 80

30 60

40 50

50 30


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MARKET DEMAND SCHEDULE: This is referred to as the total demand schedule.

Thus, the summation of alldemand schedules of all consumers of a commodity. The

table below shows the total quantities of a commodity which ail consumers of that

commodity are willing to buy at various prices, at a particular period of time. This is

shown on the table below.

Price Individual consumer

(A)

Individual

consumer(B)

Market demand

10 100 300 400

8 200 450 650

6 300 550 850

4 400 650 1050

2 500 750 1250

The summation of consumer A and B demands gives the market demand.

INDIVIDUAL DEMAND SCHEDULE: It is a table showing the various quantities

demanded by a particular or individual consumer at various prices at a particular period.

INDIVIDUAL DEMAND: This is defined as the quantity of a commodity the

individual consumer is willing and able to buy during a given period of time.

MARKET DEMAND: This is the sum total of the various quantities of a commodity

demanded by all consumers in the market at various prices and at a particular time

period.

TYPES OF GOODS

1. Normal goods: These are goods whose demand increases as the consumer's incomelevel increases.

2. Inferior goods:These are goods and services whose demand decrease as the level ofincome of consumer increases.

3. Giffen goods: These are goods whose demand decrease as the prices falls and asprices increase more is demanded.

4. Necessity or goods subjects to satiety: These are goods whose demand remains theh i f h i


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THE FUNDAMENTAL LAW OF DEMAND

The law statesthat, all things being equalthelower the price, the higher the quantity

demanded and the higher the price, the lower: the quantity demanded of a commodity

or a service.

Factorsthat affect or determine the demand of any given commodity or service in

an economy

1. Price of the commodity: The demand for a particular commodity in most casesdepends on the price of the commodity itself. If the price of the commodity falls it

means that demand is going to be high. This is attributed to the feet that asthe price

is falling many consumers can now afford to buy more of the commodity and the

existing consumers can also buy more hence demand would be increased. When

there is a fall in price consumers substitute cheaper goods for expensive ones as a

result more of the good whose price has fallen is demanded. Any time there is a fall

inprice the real income of the consumer increase as such more normal goods are

demanded and vice versa. And increase in price will also result in decrease in

demand, since that commodity becomes expensive in the eyes of the consumer.

2. Price of other commodities in addition: The price of other commodities alsodetermines the demand for a particular commodity, especially when the

commodities are substitutes or complements. Complementary goods are the goods

that are jointly demanded to achieve a particular level of satisfaction. With such

commodities a change in price of one affects the demand of the other as in the case

of car and fuel. If price of one falls demand will increase and this may cause an

increase in demand for the other and vice versa.

In the case of substitutes it can be considered as where two or more commodities

serve the same purpose. Change in the price of one will affect* the demand of the

other. An increase in the price in of a commodity will lead to an increase in the

demand for its substitute and vice versa. A good example is Milo and Bourn vita. If

the price of Milo falls whilst that of Bournvita whose price remains the same,

consumers will look at Bourn vita whose price remains as being expensive hence

they will tend to demand more of Milo.

3. Taste and preference: Consumers taste and preference also determines how muchof a commodity or service that should be demanded. If consumers taste increase for


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4.Expectation of future changes in prices:In most case, if consumers expect price toincrease, demand will be high, since consumers will like to buy more before the

increment in price takes place. On the other hand, if they expect price to fall, they will

demand less of the commodity. Here consumers being rational will wait for the fall in

price before they can increase their demand.

5.Population size: The population of a country also determines the demand for acommodity. If the population is high demand is more likely to be high but where the

population is small demand is likely to be low. E.g. Ghana and Nigeria.

6.Income of the consumer:The income level of the consumer also affects demand.But this however depends on whether the commodity is an inferior or normal good. If

the commodity is a normal good more will be demanded if income increases and a fall

in income also leads to a fall in demand. Meanwhile if it is an inferior, as income

increases less is demanded and a fall in income brings less to demand and a fall in

income brings about an increase in demand. Good subject to satiation: the quantity

demanded remains unchanged once the consumers income increases.

7.Income distribution: if the distribution of income favours the few rich in the societydemand will be low than where the income is fairly distributed. Where income is fairly

distributed everyone has a fair share of the national cake, therefore the purchasing

power will be high, hence increase in demand.

8.Advertisement:Increase in advertisement may also bring about an increase demandfor a particular commodity. And low advertisement may bring about low demand for a

particular commodity. Since advertisement will always inform consumers of the

existence of a particular and also go on to persuade these consumers to prefer such

commodities to others.

STUDY QUESTION

Discuss the effects of the following on the demand for commodity Y.

1. An increase in the income of the consumer.2. A fall in price of its substitute.3. An increase in price of its compliments.4. An increase in supply of its substitute.


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THE DEFERENCE BETWEEN CHANGE IN QUANTITY DEMAND AND

CHANGE IN DEMAND

CHANGE IN QUANTITY DEMAND

This is the situation where more or less of a commodity is bought at different prices. It

is also known as movement along the same demand curve. The major underlying factor

is a change in the price of the commodity itselfwhileall other factors remain the same.

This can be illustrated on the diagram below. (Price induced) This is also known as a

movement along the same demand curve.

As shown in the diagram above, as the price of the commodity increase from P0 to P2 it

resulted in a movement on the same demand curve from A to B, qty demanded of the

commodity reduces from Q0 to Q2. While a fall in price from P0 to P1 resulted in a

movement on the demand curve from A to C, quantity demanded of the commodity

increases from Q0 to Q1.

The above situation can be dichotomize into increase in quantity demanded and

decrease in quantity demanded.

INCREASE IN QUANTITY DEMANDED

This is the situation where more of the commodity is bought as the prices falls. This is

shown on the diagram below.


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The fall in price from P0 to P3 has resulted in an increase in quantity demanded from Q0

to Q1 resulting in a movement on the same demand curve from A to C.

DECREASE IN QUANTITY DEMANDED

This is also the situation where less of the commodity is bought as the price increases.

This can be shown on the diagram below.

The increase in price from P0 to P2 has resulted in a decrease in quantity demanded

from Q0 to Q2,resulting in a movement on the same demand curve from A to B.

CHANGE IN DEMAND

This involves a boldly shift of the demand curve either to the left or to the right. Simply

put it is situation where more, or less of a commodity is demanded at the same price. It

implies a fundamental change in the entire demand situation of the consumer for that

particular commodity. This diagram below illustrates the situation.

With the price of the commodity remaining at same at P0it is possible for the demand

to increase from Q0 to Q2 or decrease from Q0 to Q1 Resulting in a bodily shift of the


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INCREASE IN DEMAND

This is the situation where more of the commodity is demanded at the same price.This

involves a bodily shift of the demand curve to the right.

From the diagram, at t the same price of Po, quantity demanded increases from Q0 to

Q2. There are several factors that have caused this, apart from the price of the

commodity. These include:

1. An increase in the price of a substitute or a fall in the price of its jointly demandedgoods.

2. An increase in the income of the consumer will increase their demand for inferiorgoods.

3. An increase in taste for the commodity or where a commodity becomes fashionable.4. Consumer's expectation that the price of a commodity is to rise in the near future.5. An increase in population.6. An increase in advertisement.

A DECREASE IN DEMAND

This is the situation where less is demanded at the same price. Thus it involves

bodily shift of the demand curve to the left. This is also known as autonomous change

in demand.

The boldly shift has resulted in a decrease in demand from Q0 to Q2 Such a situation


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1. Decrease in the price of a substitute or an increase in the price of a jointly demandcommodity.

2. A decrease in consumers taste for the commodity or where the commodity fallsout fashion.

3. Consumers' expectation that price of the commodity is going to fall in the nearfuture.

4. A decrease in population and hence a decrease in the number of consumers forthe commodity.

5. A decrease in consumer's income decreases demands for inferior goods.6. Decrease in advertisement.

FACTORS THAT MAY CAUSE CHANGE I N DEMAND

i. Change in the price of other goods which are related ( i.e substitutes or

compliments)

ii. Change in taste and fashions

iii. Changes in income

iv. Change in population ie changes in the number of buyers.

v. Change in weather conditionsvi. Consumers expectation.

vii. Advertisement i.e information in commodities

viii. Availability of credit,

ix. Taxation on commodities.

TYPES OF DEMAND

There are basically four types of demand, these include the following;

(1) Composite demand:this occurs when a single product is wanted for a numberof different uses. Simply put when a commodity serves several different uses. A

good example is. Timber which is demanded for making chairs, tables, windows.

Bread Hour which can be used for bread, cake, pie, rough bands etc. When a

commodity has composite demand, an increase in demand for any one of its

uses will raise the commodity's price and this will reflect in the price of timber

and affect the price of other commodities made from timber.

(2) Derived demand: Some goods are needed not for the satisfaction that the)yield but for the reason that they help in the production of another commodity.

For example, the demand for cement, block is derived from the demand for

H I t th d d f F O B (f t f d ti ) i d i d


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(3) Competitive demand: This is where two or more goods serves the same purpose,and for that matter compete for the same income of the consumer. In other words

we say that the commodities give the consumer the same satisfaction. Examples

of such commodities include beef and mutton, Milo and Bourn vita, Margarine

and Butter etc. Some of these commodities are close substitutes others are not.

Whether the commodities are close substitute or not will depend much on the

consumer's taste for the commodity. Since the consumer may decide to buy one

relative to other, if the price of Bourn vita increases, while that of Milo remains

the same, consumers may shift their demand from Bourn vita to Milo as shown

in the diagrams below.

A. Bournvita B. Milo

From the diagrams, an increase in price of Bourn vita from PO to PI has resulted in

a fall in quantity demanded of Bourn vita from Q0 to Q1 with the price of Milo

remaining the same there is increase in demand from Q0to Q1.

On the other hand when the price of Bourn vita falls while that of Milo remains the

same consumers are likely to shift their demand from Milo to Bourn vita as show in

the diagram below.

Price


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The fall in price of Bournvita causes an increase in demand of Bourn vita while the

price of Milo remaining the same has resulted in a decrease in demand of Milo for

Q1to Q2.

(4) Joint or complementary demand: Where two or more commodities are jointly

demanded then they are complementary to each other or consumed together to give

certain level of satisfaction. Very common examples are chair and table, TV and

player, car and fuel and many others. For instance when the price of car falls more

is demanded and bought and since petrol is needed to move cars more petrol would

also be demanded.

So here there is an inverse relationship between the price and demanded for

complementary demand goods. This is shown on the diagrams below.

From the diagram, a fail in the price of Cars from P0 to P1 has resulted in an

i i h i d d d f i f Q Q i h h i


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more of fuel is going to be demanded. On the other hand there could be an increac ear

as shown in the diagram below.

EXCEPTIONAL/ABNORMAL DEMAND CURVES

Exceptional/abnormal demand is any demand situation which does not obey the

fundamental of demand.

It is not always that consumers will behave according to the general rule of den

exceptional demand curves are curves that do not behave like the normal demand

curves and this curve normally illustrates these abnormal situations.

(1)POSITIVE SLOPED DEMAND CURVEHere the consumer buys more of the commodity when the price of the commodity use

of it is demanded when the price falls.

The demand for ostentatious and Giffen goods ire very good examples. This is shown

diagram below.


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(3)The demand for an inferior good; these are goods which are demanded by the poor,for instance Gari may be considered inferior to rice among many people. Here,

when the income of the consumer increases he demands less of such commodities.

(4)Habit, where a consumer has developed a very strong habit to consume a particularcommodity his demand for it will be perfectly inelastic within a certain price range.

That is, for instance, if the price of commodity increases his demand for it remains

unchanged.

(5)Perfect market, in a perfect market where there are many buyers and sellers sellinghomogenous goods, the demand for the product of a seller is price perfectly elastic,

if a seller sells at a price slightly higher than the market price, there will be no

demand for the product or commodity at all.

(6)Ignorance about the existence of substitute. If consumers are not aware of theexistence of a substitute good somewhere there will tend to demand more of a

particular commodity even when the price is high.

THE REASONS WHY THE DEMAND CURVE IS NEGATIVELY SLOPED

(1) The first reason is the fundamental law of demand, as the price of the commodity

falls it appears cheap in the eyes of consumers and those who could not buy it at all

can now afford it. This implies that the number of consumers for a commodity

increase when the price of the commodity falls and vice versa.

(2) The second reason is Marginal Utility Theory, which is used to explain the natureof the curve. Utility is the Satisfaction derived from consuming a particular

commodity, which is measured in psychological sense using a unit call Utils.

Marginal Utility is the extra satisfaction derived from consuming n additional

unit of a commodity. It means that when the marginal utility is high, the consumer

will demand more of the commodity, and if the income of the consumer increases

and as a result of this, they can now buy more quantities of the commodity with

their given level of income and the reserve is the case.

(3) The third is the substitution effect occurring,if the price of commodity changes,normally consumers being rational, often tries to compare the prices of goods that

they have been


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(2) PERFECTLY INELASTIC DEMAND

Here the consumer demands the same amount of the commodity irrespective of the

price level. This goes with the demand for very basic essential commodities within a

certain price range as shown on this demand curve. Again habit forming commodities

also show this behavior. Example is alcohol.

(3)PERFECTLY ELASTIC

This is the 'situation where at a fixed price consumers may increase or decrease quantity

demanded of the commodity. Here as soon as there is an increase in price consumers

will entirely refuse to buy the commodity. This is shown on the diagram below.

This situation happens where government fixes prices of goods or under perfect

market situations where price is fixed and there is prefect flow of information.

REASONS FOR OCCURRENCE OF EXCEPTIONAL DEMAND

(1) Where the quality of a good is judged by its price. Here more of the commodity

is

bought at a higher price and less is bought at a lower price. Examples are

ostentatious

goods.

(2) Expectation of future change in price; here consumers ma) expect a fall in the


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buying with the price of others. La a situation where substitutes of the goods exist, when

the price of the commodity fails it may be relatively cheaper than the substitute whose

prices have remained the same. As a result consumers will shift their demand to the

commodity whose price has fallen and the reverse is the case.

ELASTICITY OF DEMAND

When price falls, quantity demanded generally increase. It is useful to know the degree

of increase. Again when price rises, quantity demanded generally decreases. To

measure the extent to which changes in prices affects the quantity demanded of the

commodity we use elasticity of demand.

Elasticity of demand therefore, is defined as the degree of responsiveness of quantity

demanded of a commodity to a change in price of the commodity in question, price of

other commodity and consumers income.

TYPES OF ELASTICITY

(1)Price elasticity of demand (own elasticity of demand)(2)Cross elasticity of demand(3)Income elasticity of demand

PRICE ELASTICITY OF DEMANDThis is the degree of responsiveness of quantity demanded to a change in price of the

commodity itself.

MEASUREMENT OF PRICE ELASTICITY

(1) PED = Proportionate change in quantity demanded

Proportionate change in price of the commodity itself

(2) PED = Relative change in quantity demanded

Relative change in price of the commodity itself

(3) PED = Percentage change in quantity demanded

Percentage change in price of the commodity itself

PED = Q P

Q P

= Q x P

AP Q


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Note: Always deduct the new price and new quantity from original price and original

quantity respectively.

Where:

Q = Change in quantity (Q2Q1)

P = Change in price (P2-P1)

P = Initial price

Q = Initial quantity

NB: For example the table below relates the quantity demanded of a KAAKO at

various prices. Use it to determine the price elasticity of demand.

Price of KAAKO Quantity Demanded of Kaako

Period 1 100 110

Period 2 99 100

Q = 1 0 0 - 100=10

P = 99-100 = -1

P = 100

Q = 100

PED = 10 x 100

-1 100

= -10

= 10

Note: with price elasticity of demand we ignore the negative sign and take the

absolute figure.

The formula we have used above is the point elasticity.

The second formula is Arc, which is given as:

PED = Q x (P1+ P2)

P (Q1+P2)


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Let us consider this example; again to determine the price elasticity of demand by using

the second formulae.

Periods Price Quantity demanded of KAAKO

Period 1 100 100

Period 2 80 150

PED = 50 x (100 + 80)

-20 x (100+150)

= -1.8 = 1.8

From the above example, the negative sign show the demand curve slopes negatively,

which I implies that there is an inverse relationship between price and quantity

demanded. But in elasticity we don't consider the negative signs hence the co - efficient

of elasticity is 10 and 18.

NB The co-efficient (answer) from any of the above examples would give an

indication of the elasticity of demand facing the commodity.

INTERPRETATION OF PRICE ELASTICITY OF DEMAND

(1)Where the co - efficient is less than 1; i.e. ED 1 = price elastic(3)Where ED = I price unitary elastic(4)Where ED = 0 price perfectly inelastic demand(5)Where ED = price perfectly elastic demand

ILLUSTRATIONS

(a) Inelastic demand: This is where a large proportionate change in price of a

commodity leads to a small proportionate change in quantity demanded. This is shown

on the diagram below.


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From the diagram, due to a decrease in price of fee commodity from 20 to 5, quantity

demanded of the commodity increase from 2 to 3. Calculate the price elasticity of

demand.

E = Q x P = Q = 32 = 1

P Q P = 520 = -15

P1 = 20

Q1 = 2

PED = 1 x 20 = -0.6 = 0.6

-15 x 2

(b)Elastic demand: This is where a small proportionate change in price of the commoc

leads to more than a proportionate change in quantity demanded. This can be shown

the diagram below. Price

Q = 2 0 - 5 = 15

P = 2 -3 = 1

P1 = 3

Q1= 5


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(c)Unitary elastic demand;this is where a proportionate change in the price of the

commodity leads to almost the same proportionate change in quantity demanded of

the commodity.

P = 1

Q = -1

P1 = 100

Q1 = 99

PED =

PED = 1.0

PED = 1, meaning that the quantity demanded has Unitary price Elastic.

(d)Perfectly inelastic:This is the situation where a change in price has no effect

on quantity demanded. This can be shown below.


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Q = 0

P = 5

P1 = 10

Q1 = 6

PED =

= 0

(e)Perfectly elastic demand: this is the Situation where consumers are highly sensitive

to a slightest increase in price. A smallest increase in price of the commodity will

cause the consumers to entirely refuse buying the commodity. But at the ruling price

the consumers are willing to buy any quantity of the commodity. This is shown on the

diagram below.

Q = 105 = 5

P = 0

P1 = 8

Q1 = 5

PED =

= 0

DETERMINANTS OF PRICE ELASTICITY OF DEMAND

(1)Availability of substitutes: Where a commodity has a substitute the demand for itwill be elastic. The closer the relationship between the substitute goods, the more

elastic their demand would be. For instance if commodity A and B are closely related

as substitutes , a very small increase in the price of say commodity A will result in

consumers shifting to the other closely related commodity B and vice versa. A

commodity however, may have inelastic demand where it has not close substitute.


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(2) Necessity: This is yet another strong factor and therefore even where a commodityhas no substitute, its demand could be elastic if it is nut a necessity. A commodity

which is very essential may have inelastic demand because even where the price of

the commodity increases consumers would still look for money to buy them, except

may be, where the consumer is very poor, that he will go without such an essential

commodity. In this case the entire demand will fall by a smaller proportion. On die

other hand if the commodity is a luxury the demand for it will be elastic. Any small

increase in the price may cause many consumers to refrain from buying such a

commodity but a small fall in price will induce several consumers to buy such a

commodity.

(3) Habit/taste: If a consumer has developed a very Strong taste or habit for a particularcommodity it makes them to have inelastic demand for such commodity. It simply

means that if a consumer develops a strong habit for a commodity it is difficult to

change his demand irrespective of what happens to price. Example is cigarettes and

necessities. (Unless the consumer is poor and may decide to do without thecommodity.

(4) The time period: It is an accepted fact that, it takes consumers time to adjust theirtaste or spending habits or patterns when price changes. This makes demand to be

inelastic in the short run because the consumer finds it very difficult to adjust their

purchase or taste for any new commodity when price of the commodity changes so in

the short run, consumers do not reduce their purchase by a greater margin since they

are not prepared to take other substitutes when the price changes. On the other hand,

demand is elastic in the long run.

(5) The number of uses of thecommodity:If commodity has so many uses; it tends tohave elastic demand. The reason is that, any increase in the price of the commodity

will lead to a small fall in each of the numerous uses resulting in a greater fall in

quantity demanded of commodity since die change in demand may come from only

source.

(6) Occasion: It is known that certain specific items or commodities are demandedduring certain occasions, demand for such commodities tends to be inelastic. For

instance the demand for Christmas cards, seasons, this is because they are needed

during the reason, so if even the price increases people would still buy them.

(7) The consumer's income: The income of the consumer will determine hisresponsiveness to price changes. The larger the income of a consumer, the more

inelastic his demand for commodities. A consumer with a high income will complain

less about any price increase. A small increase in price of a commodity will mean

little to him. He will still buy the commodity, since he can afford. On the other hand,

the demand for a commodity with low income tends to be elastic. He will react

sharply to price changes. A little increase in price will discourage him from

purchasing it and his


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demand for it will decrease appreciably but if the price falls he is likely to increase the

quantity demanded.

(8) Durability of the commodity: Goods that last for a longer time and such

commodities, for example television sets, video decks, are goods that the consumers

required only one at any given period of time with all things being equal. In this wise if

there happen to be change in price, it is prospective consumers that come and not Old

Ones, so few people would buy such commodities if the price changes, so demand tend

to be inelastic.

THE IMPORTANCE OF PRICE ELASTICITY OF DEMAND

(1)Importance to the businessmanThe concept of price elasticity helps the businessman to price their commodities.

The concept enables the businessman or producers to know how to raise their

revenue, since it is the aim of every producer to increase his total revenue and

hence maximize profit. We know that is given as PROFIT is given as TR

= P X Q T Y

A seller who wants to increase the revenue will have to consider the price elasticity

of demand for his commodity. If the commodity has elastic demand, then a small

reduction in price will induce a greater increase in quantity demanded. That will

bring about an increase in Total revenue. Example if the price of a commodity is

150 and the quantity demanded is 300 units, hence TR - 45,000 i.e. (P x Qty) - 150

x 300 if pace fells to 140 and quantity demanded increased 500. The total revenue

after the fall in price will now be 140x500 = 70,000.

On the other hand, if the commodity has inelastic demand, then an increase in price

will not result in a big change in quantity demanded and the seller will increase histotal revenue by doing so. It therefore means that the seller is likely to loss than

gain when he reduces price, in other words, the seller will gain if he charges higher

prices for his commodity, since increase in price will result in a small change in

quantity demanded. For example if the price of the commodity is 40 and the

quantity demanded is 200 units the TR x 40 x 200 = 8,000. But if price should

increase to 060 and the quantity demand fails to amounts, then the new Total

Revenue = 60 x 160 = 9,600. This has shown on increase in the total for 8000 to

9600.


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(2)DevaluationThis is deliberate reduction of the value of a country's currency in terms of other

currencies. The main aim of such a policy is to solve balance of payments

problem and increase production. Devaluation in most cases lead to a reduction in

imports and increase in export s but the effectiveness of this policy depends on

the price elasticity of demand for imports and exports because for devaluation to

be effective demand for exports must be elastic and demand for imports must be

inelastic.

(3)It determines incidence of taxationPrice elasticity of demand also helps to determine how the burden of an indirect

tax is shared between the consumer and producer. If demand is fairly elastic, the

producer bears the greater part of the tax but if demand is fairly inelastic, the

consumer will bear a greater part of the indirect tax.

But in case, where demand is unitary elastic both

the producer and consumer bear the tax, on one hand if demand is perfectly

inelastic consumers would bear the whole tax burden.

(4)It Determines the terms of TradeThe terms of trade are the rate at which a country exchanges her goods and

services for other goods from other countries. This is mostly determined by the

magnitude of elasticity of demand for export and imports.

In most case, if demand for imports is inelastic and

that of export is elastic there will be unfavorable terms of trade. But where

demand exports is inelastic and that of imports is elastic there will be favourable

terms of trade.

(5)Indirect Taxation Policy of the Government

Price elasticity of demand also helps to ensure effective implementation of the

government tax policy means to raise revenue or control consumption. To obtain

or raise revenue the government must impose tax on commodities with inelastic

demand. This is because if tax rate is raised and as a result price increases

quantity demanded will fall by less than proportionate increase in price of the

quantity. On the other hand, if indirect tax is meant to control consumption there

is the need to impose tax on goods having elastic demand. This is because with

the imposition of the indirect tax, price increases and as a result quantity

demanded will fall by more than proportionate increase in price.


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INCOME ELASTICITY OF DEMAND

It is the degree of responsiveness of quantity demanded to change in die consumer's

income.

MEASUREMENT OF INCOME ELASTICITY

It is measured by the following: -

YED =Proportionate change in quantity demanded

Proportionate change in income

YED =Percentage change in Quantity Demanded

Percentage change in income

Where; Q = change in quantity demanded

Y = change in income of the consumer

Y = is the initial income Q = is the initial quantity

Q = is the initial quantity

YED =

X

ILLUSTRATION

When a consumer income was GHl00 quantity demanded was 20 units. As his

income increase to 150, quantity demanded also increased to 25 umts. Calculate the

income elasticity of demand.

Quantity Y (income GH)

20 100

25 150

Q = 25-20 = 5

Y = 150- 100 = 50

Given the formula;

YED =

X

=

X

ARC = YED

X

=

X

INTERPRETATION OF CO-EFFICIENT OF INCOME ELASTICITY OF

DEMAND

A good is said to be inferior, superior or necessity depending upon its numericalvalue in income elasticity of demand.


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If the income elasticity is positive, then the commodity is a normal or superior

commodity. If the elasticity is negative then it means the good is inferior, also if the

elasticity is less than one or equal to zero, the commodity is a necessity oh the other

hand if income elasticity is greater than one or elastic the commodity is considered

luxurious.IMPORTANCE OF INCOME ELASTICITY

1. BusinessmanIf income elasticity is positive and large in the case of normal goods, in that case

the trader will offer more goods for sale when income rises.

2. Income elasticity may be negative as in the case of inferior goods.In that case it is advisable for the traders to reduce the quantity of inferior goods

they offer for sales when income rises.

3. GovernmentThe knowledge of income elasticity of demand helps the government to

determine which item/ products need to be emphasized during a development

process.

4. If the government effort results in the increase in income levels then thegovernment must encourage the production of goods with higher income

elasticity.

5. A guide to the government with respect to which commodity to tax more.

CROSS ELASTICITY OF DEMAND

It is the degree of responsiveness of quantity demanded of a commodity (X) to a

change in price of another commodity (Y) this is measured by: -

CED = Proportionate change in quantity demand o f commodity (X)

Proportionate change in priceo f commodity (Y)

CED=

X

Where; = change in quantity demanded commodity (X)

= change in price of commodity (Y)

ILLUSTRATION (1)

A decrease in price of Milo from 01500 to 01200 a tin cause quantity demanded of

Bourvita to decrease from 50to 40 tin a day. Find the cross price elasticity of demandbetween the two commodities.


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CPED=

X

= 1

Midpoint or ARC = CPED=

X

From the above it means that the two commodities are unitary, cross price elastic.

The co -efficient (answer) obtained from any of the above mathematical methods

would give an indication of the type of relationship existing between the two

commodities (X) and (Y). It would at the same time indicate the degree of

relationship existing between the two commodities.

ILLUSTRATION

The price of a commodity Y increase from GH30 to GH341 per unit and all the

quantity of another commodity X bought increased from 120 to 150 units.

a. What type of demand relationship does commodity X and Y have?

b. Is demand for commodity x elastic or inelastic?

INTERPRETATION OF CROSS PRICE ELASTICITY OF DEMAND

i. Where the co - efficient is positive, k indicates that the commodities underconsideration are related as substitutes.

ii. Where the co - efficient is negative it indicates that the goods existcomplements.

iii.The co - efficient is equal to zero it means that there exists no relationship atall, between the goods under consideration.

iv.Where the co- efficient is a small figure, it is an indication that very littlerelationship exist between the good under consideration.

v. Where the co -efficient is a large it is an indication that there exists a closerelationship between the goods.

vi.Again where the co - efficient is unitary, it means that the goods are perfectsubstitutes, they are perfectly the same and very substitutable.

In the same vein, we can classify cross elasticity into

a. Cross elastic

b. Cross inelastic

c. Cross unitary elastic

d. Cross perfectly elastice. Cross perfectly inelastic


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SUPPLY ANALYSIS

Supply is the quantities of goods and services that sellers are willing and able to offer

for sales at various prices over a given period of time in a given market.

DIFFERENCE BETWEEN SUPPLY AND TOTAL OUTPUT

Total output is the total amount of goods which producers are able to bring out as

output after successfully combining factors of production in an economic activity

while supply is that part of total output that producers are willing to offer for sale

whether there is market forthe goods or not.

RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED OF A COMMODITY

There is an appositive relationship between price and quantity supplied. This implies

that all other things being equal, the higher the price of the commodity, the higher the

quantity supplied. There are three different ways through which this relationship can

be presented. A tabular form which is called the supply schedule; a graphical form

that is also called the supply curve; a mathematical form and this is also known, as the

supply equation.

SUPPLY SCHEDULE

This is a tabular presentation which shows the relationship between quantities

supplied of a commodity at various prices over a given period of time.

Price of yam GH GH 10 GH 20

Quantity supplied 10 tubes 15 tubes 46 rubes

SUPPLY CURVE

This s a graphical presentation which shows the relationship between quantities

supplied of a commodity at various prices over a given a period of time. The supply

curve has a positive slope, indicating that more of a commodity is supplied at higher

prices, while less is supplied at lower prices. This can be illustrated blow on thediagram.


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From the diagram it can be clearly seen that when price was 10, quantity supplied

was 25 units. As price falls to 5, quantity supplied falls to 10 units. However, when

price increased to 20 quantity supplied increase to 46 units. This shows that, there is

a positive relationship between price and quantity supplied of a commodity.

SUPPLY EQUATION

This also a mathematical presentation of the relationship between price and quantity

supplied of a commodity. This is normally put in an equation form, where quantity

supplied is the dependant variable and the various prices of the commodity is the

independent variable. E g

Qs = 40 + 4 Px

Where Qs = quantity supplied of the commodity

Px = is the price of the commodity

ILLUSTRATION

Given supply function as Qs = 40 + 4Px, find the quantity supplied of the commodity.When price is:

i. Px = 04ii. Px = 08

iii.Px-020SOLUTION

GIVEN Qx = 40 + 4Px

ii) If price = 4

Qx = 40 + 4(4)

40 + 16

Qx = 56 units


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