Economics – Demand and supply curves | e-Consult
Demand and supply curves (1 questions)
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Answer:
Introduction: This question tests understanding of the law of demand and the factors influencing price elasticity of demand. It requires a clear explanation of the relationship between price and quantity demanded, and the reasons for inelastic demand.
Body:
- Law of Demand: The law of demand states that, all other things being equal (ceteris paribus), an increase in the price of a product will lead to a decrease in the quantity demanded. This is because consumers are less willing to purchase a good when it is more expensive. The inverse relationship is represented graphically by a downward-sloping demand curve.
- Price Elasticity of Demand: The responsiveness of quantity demanded to a change in price is measured by price elasticity of demand.
- Inelastic Demand: Demand is considered relatively inelastic when the quantity demanded changes by a smaller proportion than the change in price. This means that consumers are not very responsive to price changes.
- Factors leading to Inelastic Demand:
- Necessity: If a product is a necessity (e.g., medicine, essential food items), consumers will continue to purchase it even if the price increases.
- Few Substitutes: If there are few close substitutes available, consumers have limited options and are less likely to switch to a cheaper alternative when the price rises.
- Small Proportion of Income: If the product represents a small proportion of a consumer's income, a price increase will not significantly affect their purchasing decisions.
- Addictive Goods: Demand for addictive goods (e.g., cigarettes, alcohol) tends to be inelastic.
- Time Lags: Consumers may not immediately adjust their consumption patterns in response to a price change.
- Example: Provide an example of a product with relatively inelastic demand (e.g., petrol, cigarettes) and explain why demand is inelastic in that case.
Conclusion: The law of demand dictates an inverse relationship between price and quantity demanded. The factors that make the demand curve relatively inelastic are those that limit consumer responsiveness to price changes, such as necessity, few substitutes, and a small proportion of income.