Price Elasticity and Income Elasticity of Demand

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  1. It is often observed that the price elasticity of demand for primary commodities is relatively low while that of manufactured goods is relatively high. Using diagrams, explain why. [10 marks]

The PED of primary commodities (materials in a raw or unprocessed state) are generally low or that they are inelastic. This means that the % change in demand is lower than the % change in price or that demand won’t change by a large degree if price changes. This can be seen in figure 1.1. On the other hand, the PED    of manufactured goods is relatively high or that they are elastic. This means that the % change in demand is higher that the % change in price. A change in price would result in a big change in demand which can be seen in figure 1.2.

Figure 1.1                                                Figure 1.2

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 The reason why could be found if looked at the non-price determinants of elasticity. Those are: the substitution effect, the income effect, the degree of necessity, the addictive nature of the product, the number of uses of the product and the time period covered.

I will use wheat as an example of a primary commodity. Generally, wheat only has a few close substitutes. The less substitutes for a product, the more inelastic it becomes as there is less choice for the purchaser. An increase in price wouldn’t change demand by that much. Also, wheat tends to ...

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