Q.
(a) If income increases from RM2,000 per month to RM5,000 per month and the quantity of demand for single storey terrace increases from 90 to 100 units,
(i) Calculate the income elasticity of demand.
(ii) Explain the elasticity of demand in relation to the above market scenario. (5 marks)
(b) If the price of condominium increases from RM200,000 to RM250,000, the quantity of demand for apartment increases by 15%,
(i) Calculate the cross elasticity of demand between apartment and condominium.
(ii) Explain in the above elasticity of demand in relation between condominium and apartment. (5 marks)
(c) If the market price of apartment decreases from RM200,000 to RM150,000 and the quantity of demand for apartment increases from 40 to 50 units,
(i) Calculate the price elasticity of demand of the apartment.
(ii) Explain the above price elasticity of demand for the apartment. (5 marks)
(d) Briefly explain any FIVE (5) of the following determinants of demand.
(i) Taste and Fashion
(ii) Consumer's income
(iii) Expectation about the future price
(iv) Population and Numbers of Buyers
(v) Level of Taxation
(vi) Profit Margin
(vii) Money Supply (10 marks)
(25 marks, 2016 Q3)
A.
a) Income elasticity of demand - single storey terrace
RM2,000 per month to RM5,000 per month and the quantity of demand for single storey terrace increases from 90 to 100 units
Change in income is RM3,000 per month, change in units is 10 units.
i) Change in income commensurate to 1 unit is RM300 : 1 unit.
ii) Elasticity of demand for single storey terrace to income is positive, with income increment, the demand for it will increase. This market scenario is explained by more available disposable income to purchase of the single storey terrace house. Income has a direct elastic relationship with ability to purchase the house. The demand is less if people are unable to afford with lower income, and naturally so as disposable income is less.
b) Condominium increases from RM200,000 to RM250,000, the quantity of demand for apartment increases by 15%
(i) Cross elasticity of demand between apartment and condominium.
Change in condo price is RM50,000, demand for apartment is increased by 15%
Cross elasticity of demand between them is:
Price Condo RM3,333 to 1% increase demand for apartment.
(ii) Elasticity of demand in relation between condominium and apartment
The price increase of condominium will fuel increase in demand for apartment. This is because more people would choose to buy apartment when they cannot afford condominium. Apartment is a substitute of condominium, though at a different category.
c) Apartment decreases from RM200,000 to RM150,000 and the quantity of demand for apartment increases from 40 to 50 units
(i) Price elasticity of demand of the apartment
Price is negative elasticity to demand. Reduction in price will increase its demand.
Change of price is (50,000), demand increase is 10 units.
Price elasticity of demand for apartment is (RM5,000) per unit.
(ii) Price elasticity of demand for the apartment
As price is determining factor to purchase an apartment. Which means more people can afford the apartment when it is at lower price.
(d) Determinants of demand
(i) Taste and Fashion
Demand for taste and fashion is affected by socio-economic status, income earning.
The higher the socio-economic status or income earning, the higher the demand for taste and fashion. This can be seen in the apparel market, women wear especially in bigger cities. As socio-economic status and income level of women as working professionals, the demand for taste and fashion also increase in this market.
(ii) Consumer's income
Consumer's income is determinant factor for household spending, which is demand for home appliances.
Higher consumer's income group would spend on better and bigger home appliances. For example, washing machine, cookers, stove, oven, vacuum and toiletries.
(iii) Expectation about the future price
Future price will determine the demand for certain consumer item. Non-perishable good, especially.
When future price is perceived to be more, people tends to stock up. This means higher demand if future price is perceived to increase. For example, if shampoo is going to cost more, people will buy more shampoo to save money.
(iv) Population and Numbers of Buyers
Demography has direct impact on consumer demand for goods and services.
Higher population growth and increased numbers of buyers will generate more demand for consumer goods and services.
(v) Level of Taxation
Taxation will increase cost to doing business and adversely affect spending.
As taxation is a mean by government to collect taxes from the public. Any form of taxation will result in reducing income of the people, be it income tax, valued added tax, custom duty, etc. More taxes means less disposable income in the market. Hence, more tax would dampen demand for consumer spending.
(vi) Profit Margin
Profit margin means the profitability or return of a business. Higher profit margin means greater return.
Profit will spur more activities of business as the business can sustain its going concern. Higher profit also means more affordable promotion and thus, more demand for the product.
(vii) Money Supply
Money supply means available of money in the market. The Central Bank may pump in money or reduce interest rates so that more people borrow money to do business.
More money supply usually means more disposable income to purchase general items of needs. Therefore, money supply has a direct effect on demand for goods and services. During economic depression (Keynesian theory), it is advocated to print more money to spear head spending by the government to generate economic activities. This way, more demand can be created, and the economy can recover.
Ref:
Own account.