Question

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

Answer 1

2.1.1

Narrowly defined markets tend to have elastic demand since it is easier to find a close substitute of a product in a narrow market. For eg,demand for vanilla ice cream is a narrow market because if prices of vanilla flavoured ice cream increases consumer can easily shifts to other flavour. Therefore demand of products in a narrowly defined market is elastic

While broadly defined market tends to have inelastic demand because products in broadly defined market have no close substitutes.Hence if prices of such goods increses, consumers have no choice but to buy products at increased prices.For eg, Milk. There is nearly no substitute for milk .when price of milk increases consumers have no choice to buy milk at increased prices.

2.1.2

Goods have inelastic demand in short run while they have elastic demand in long run. In short run,it is very difficult to change the habits of consumers and so demand is inelastic while it is possible to change the habits in the long run so demand is elastic in long run. For eg, if price of petrol rises,demand slightly falls in the short run while in the long run people shift to more fuel efficient or use public transport and so price changes more in long run.

2.1.3

Price elastiicty of demand depends on the very nature of the commodity.If the product is a necessity like vegetables or grains tend to have inelastic demandBecause if the prices of such goods increases people cannot stop using these goods since they are required for very survival of humans.Demand of such goods cannot fluctuate with prices.

While if th procduct is a luxury,demand is elastic since the demand of such good is very sensitive to price. For eg,car.Demand of car is elastic because car is a luxury and is not required for survival and hence when prices of car increases,consumer postpone or cancel its purchase