Q.
a) Decide whether the following goods have elastic or inelastic demand. Give reasons.
i) Petroleum
ii) Clothes
iii) Jewellery
iv) Low-cost house
v) Toothpaste
(5 marks)
b) State the special characteristics of land as one of the factors of production. (5 marks)
c) Illustrate Ricardo's theory of rent and the assumptions. (10 marks)
(20 marks, 2012 Q2)
A.
First, get the definition right:
- Elastic demand, which is when the quantity demanded changes more than the price does.
- Unit elastic demand, which is when the quantity demanded changes exactly in unison with price changes.
- If production is elastic, we assume that if the price of a product goes up, or if a shortage of the product develops, then competitors are able to add new capacity to increase the availability of that product.
- If production is inelastic, then higher prices and/or shortages do NOT bring forth new capacity because suppliers are unwilling, or unable, to increase production.
i) Petroleum is inelastic of demand. Petroleum production is a very capital intensive venture. The mineral crude is also in scarcity. Fuel or energy consumption is very much a basic requirement of any industry, or in daily transportation needs of a working person. Hence, whether price up or down, people still require Petroleum for energy and daily activities of firing up vehicles. That is why despite price increase in petroleum, demand still does not reduce.
ii) Clothes is elastic of demand. New clothes are not a daily necessity. Hence, when there is limited clothes, people would buy less. When there is more supply, people would demand more.
iii) Jewellery is inelastic of demand. Not everyone is keeping jewellery as a livelihood. When there is more jewellery, people would probably keep for investment or decorative purposes. When there is less, people would not rush for it, unless keeping jewellery becomes a medium of exchange. Furthermore, jewellery is a natural resource (mineral) and it is limited in supply.
iv) Low-cost house is elastic of demand. People require shelter. When the availability of low-cost houses are limited, more would demand for the shelter. when there is more being built, it would solve the shortage issue, and the demand for it will fall.
v) Toothpaste is elastic of demand. More toothpaste would be produced when more people brush teeth. When there is less people brushing teeth, the demand for toothpaste falls. If one day people choose to use tooth picks, there will be no demand for toothpaste.
b) Land as a factor of production.
Scarcity of land is a factor in limiting production. When there is demand to utilize land, for example for plantation, recreational park, housing, or building infrastructure, limited land can restrict the production of crops, affordable shelter, better infrastructure and overall betterment of standard of living. Housing is a major economic sector which rely on availability of land. Without land, there can be no housing. Thus, land being a factor in production of housing is critically true especially in the recent time of urbanization and exodus of people to city and suburbs.
c) Ricardo's Theory of rent and its assumptions.
Ref:
Resilience at http://www.resilience.org/stories/2007-03-22/elasticity-oil-production-and-consumption
Definition of elastic of demand from http://useconomy.about.com/od/glossary/g/inelastic_demand.htm