Question

2.1 Defend the reason for the following, using elasticity of demand as the basis for your answer. Motivate your answer with the aid of examples.

2.1.1 Narrowly defined markets tend to be associated with a more price elastic demand than broadly defined markets. (6)

2.1.2 Goods tend to have more price elastic demand over large time horizons. (6)

2.1.3 Necessities tend to have relatively inelastic demands, whereas luxuries have relatively inelastic demand. (6)

2.2 Read the scenario below and answer the question that follows: George Richard is a farmer who is also a skilled metal worker. He makes unique garden sculptors that could earn him R400 per hour. One day he spent 10 hours planting R5 000 worth of seeds on his farm.

2.2.1 Measure George’s opportunity cost. (4) 2.2.2 Determine the cost that is measured by his accountant. (4)

2.2.3 If the seeds George planted yield R10 000 worth of crops, argue the point that George does earn an accounting profit. (4)

2.2.4 Would you advise George to continue as a farmer or switch to metal work?

Answer 1

2.1.1

Narrowly defined markets tend to have to have elastic demand because in a narrowly defined market it is easier to find close substitutes. For eg,market for ice cream is a narrow market because it is easier to substitute other dessert for icecream. While a broadly defined market tends to have inelastic demand because it is very difficult to find close substitute.For eg ,food, has a broad market since there is no substitute for food.

2.1.2

Demand of goods tends to be inelastic in short run because it is difficult to switch to substitutes in short while demand is elastic in long run. It is difficult to change the habbits in short run so demand is inelastic while it is possible to change the habbits in the long. For eg,when the prices of Petrol rises,demand falls slightly in short run but in the long run people buys more fuel efficient cars or use public transport and hence demand decreases substantially in the long run.

2.1.3

Price elasticity of demand is determined by the very nature of the commodity. If the good is a necessity like grains or vegetables tens to have inelastic demand because it is required for the survival of humans and cannot fluctuate with price.

While if the commodity is luxury for eg car,tens to have elastic demand because their purchase can be postponed or cancelled itf prices of such goods increases as it is not required for survival.