Answer to Question #198036 in Macroeconomics for Zalikha

Question

d) Suppose the demand for houses is fairly elastic.

i) Define what is meant by a fairly elastic demand.

(4 marks)

(2 marks)

ii) What do you think will happen to the total revenue of developers when price of houses rise? Explain using a diagram.

Answer 1

(i)Elastic demand occurs when change in quantity demanded is greator than the percentage change in price. Therefore fairly elastic demand refers to moderate percentage change in quantity demanded due to change in price.

(ii)Since the demand is elastic, increase in price of the houses will lead to a reduction of percentage quantity of house supply thus reducing the total revenue of developers.

For example an increase in price of above 5 will lead to a reduced quantity of below 10 thus decreasing the total revenue.