(a) Define: (i) elasticity of demand; [2 marks] (ii) price elasticity of demand. [2 marks] (b) State any four determinants price elasticity of demand. [12 m...

(a)

(i) Elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in any of the factors that influence demand, such as price, income and the prices of related goods.

(ii) Price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in its own price.

(b) Determinants of price elasticity of demand

1. Availability of substitutes: Demand is more elastic where close substitutes are available, but inelastic where there are no close substitutes.
2. Nature of the commodity: Necessities generally have inelastic demand, whereas luxuries tend to have elastic demand.
3. Proportion of income spent: Demand tends to be elastic where a large proportion of income is spent on the commodity, and inelastic where only a small proportion is spent.
4. Number of uses: A commodity with many alternative uses tends to have elastic demand, while one with few uses tends to have inelastic demand.
5. Habit or addiction: Goods which consumers are accustomed or addicted to using tend to have inelastic demand.
6. Time period: Demand becomes more elastic over a longer period because consumers have more time to find substitutes or adjust their consumption.
7. Level of price: Demand for very cheap goods tends to be inelastic, while demand for relatively expensive goods tends to be more elastic.
8. Breadth of definition: Broadly defined commodities tend to have inelastic demand, while narrowly defined brands or varieties tend to have elastic demand.

(c)

(i) Fairly elastic demand curve: The demand curve slopes downward from left to right and is relatively flat.

(ii) Perfectly inelastic demand curve: Quantity demanded remains constant at all prices. The demand curve is vertical and parallel to the price axis.