Draw a graph of the market for a product, such as cocoa beans, assuming that the demand is inela

Draw a graph of the market for a product, such as cocoa...

Key Concepts

Inelastic Demand

Inelastic demand refers to a situation where the quantity demanded of a product does not change significantly in response to changes in price. In a graph, this is often represented by a steep demand curve, indicating that consumers' purchase behavior remains relatively constant even when prices fluctuate. This concept is central when analyzing markets for commodities that lack close substitutes, as even small shifts in supply can lead to large price variations.

Elastic Demand

Elastic demand occurs when the quantity demanded changes considerably in response to price changes. This is depicted by a flatter demand curve on a graph, where a shift in supply results in less dramatic price fluctuations but more substantial changes in the quantity sold. Understanding elasticity is crucial for markets where consumers have flexible spending behavior or readily available substitutes.

Supply Fluctuations

Supply fluctuations involve shifts in the supply curve due to factors such as unpredictable production levels, external shocks, or seasonal variations. These shifts are essential in market analysis because they can lead to changes in the equilibrium price and quantity, particularly in markets with inelastic demand, where even minor supply changes can cause significant price volatility.

Market Equilibrium

Market equilibrium is the point where the supply and demand curves intersect, setting the equilibrium price and quantity. Changes in either supply or demand disturb this balance, leading to adjustments in price until a new equilibrium is found. Understanding this concept helps explain how fluctuations in supply and variations in demand elasticity interact to determine prices in different market scenarios.

Price Volatility

Price volatility refers to the degree of variation in the price of a good over time. In markets with inelastic demand, such as certain commodity markets, even small shifts in supply can lead to substantial price swings, whereas in markets with more elastic demand, prices tend to be more stable. This concept is important for understanding the economic risks faced by producers and consumers, especially in industries reliant on commodities.

Commodity Processing and Value Addition

Processing a raw commodity into a finished product often involves adding value, which can alter the demand elasticity. Processed goods may have more substitutes or meet diverse consumer needs, resulting in a more elastic demand curve compared to raw commodities. This shift can reduce the extent of price fluctuations and provide more stability for producers, influencing trade dynamics and economic outcomes in developing countries.

Transcript

00:01 I'm going to study the price elasticity of demand and income elasticity of demand under different scenarios.

00:07 Now if we read the first question, it shows that using the midpoint method, calculate the price elasticity of demand when price of the t -shirt rises from $1 .5 to $16 and the average tourist income is $20 ,000.

00:20 Also calculated when the average tourist income is 30 ,000.

00:24 Now the formula which is used this price elasticity of demand is q2 minus q1 divided by the average of q2 plus q1 divided by 2 that is now and this again divided by p2 minus p1 and average of price 1 and price 2 that is equal to p2 plus p1 divide by 2.

00:43 Now if we look at the table which is given in the question we will find that at the price corresponding to dollar 5 and dollar 6 the quantities are like for dollar 5.

00:54 The quantity is 2400 and dollar six the quantity is sixteen hundred so what we will first of all we'll find the percentage change in quantity that is sixteen hundred minus two hundred sixteen hundred plus 24 hundred divided by two into hundred and by solving it we get forty percent now one thing make sure that no negative sign is taken while calculating price elasticity of demand so this is because minus sign is ignored and while calculating price elastity of demand we will consider only absolute values so so if we look over here we can find that the percentage change in quantity is equal to 40 percent now similarly we will find the percentage change in price 6 minus 5 then average of both that is 6 plus 5 divided by 2 into 100 and we get percentage change in price as 18 .2 percent so elasticity of demand will be percentage change in quantity divided by percent a change in price so it is equal to 2 .2 now this we have calculated when income is 20 ,000 tourist income is 20 ,000 now we have to calculate when the tourist income is 30 ,000 now next we have to do when tourist income is 30 ,000 now income is 30 ,000 so again we will find the percentages in quantity we can get these figures by looking at the table 3 ,000 minus 4200 3 ,000 plus 4200 into 100 and here we have took the average that is 3 ,000 plus 4200 divided by 2 and here we have to the simple subtraction in the numerator that is 3 ,000 minus 4200 and we have multiplied it by 100 to get the percentage so what we get 1200 over 3600 into 100 that is 33 .3 this is the percentage change in quantity the percentage change in price is the same as we have calculated above that is 18 .2 % so we will we don't need to calculate it again so what is the velocity of demand it is 33 .3 divided by 18 .2 is equal to 1 .8.

02:52 We come to income elasticity of demand now in part b so part b is what it shows part b so using midpoint method calculate the income elasticity of demand when the price of the t -shirt is dollar for an average tourist income increases from 20 ,000 dollars to 30 ,000 dollars also calculated when the price is dollar seven so here we are calculating income elasticity of demand in previous question we have calculated the price elasticity of demand now if we look at the income elasticity of demand so we can see income is 30 ,000 now first we again we have to calculate the percentage change in quantity so percentage change in quantity we can see it from the table it will be 3000 minus 4200 divided by 3 ,000 plus 42 hundred divide by 2 into 100 so and we solve it further what we get 33 .3 % now we have to find the percentage now we are doing part b so now we have to calculate the income elasticity of demand which is q2 minus q1 q2 plus q2 q1 sorry for that because we were we are discussing part b and not part a so in income elasticity of demand the formula is q2 minus q1 divided by q2 plus q1 divided by two and here what we do instead of price we will take the income i2 minus i1 divide by i2 plus i1 divide by two so here previously we were taking price now we have taken income why because we are calculating income elasticity of demand now percentage change in quantity so we can see it from the table.

04:27 So these will be the corresponding quantities at the corresponding income.

04:31 Now 5 ,000 minus 3 ,000 divide by 5 ,000 plus 3 ,000 divided by 2 into 100.

04:36 And when we solve it further, we get 50%.

04:39 Now percentage change in income, we will take the difference of two incomes, that is 30 ,000 and 20 ,000 in numerator.

04:45 And in the denominator, we will add both of them and divide it by 2.

04:49 And then we whole multiply by 100 to get the percentage.

04:52 What we get percentage change in income is 40%.

04:56 Now as per formula income elasticity of demand is percentage change in quantity demand it over percentage change in income that is 50 divided by 40 in that is which we get 1 .25...

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