Answer to Question #161840 in Microeconomics for Keshav goel

Question

List and explain some of the determinants of the price elasticity of demand. Is the price 

elasticity of supply usually larger in the short run or in the long run? Why?

 B. Explain why the following might be true: A drought around the world raises the total 

revenue that farmers receive from the sale of grain, but a drought only in Bihar reduces the total 

revenue that Bihar farmers receive.

Answer 1

Answer to Task #161840

List and explain some of the determinants of the price elasticity of demand.

Answer

• Nature of a commodity.

Demand for luxurious goods is elastic since their consumption can be postponed when their price level rises. On the other hand, demand for necessities is inelastic since their consumption cannot be postponed.

• Availability of close substitute.

The more closeness substitutes are, the more elasticity of demand will be. Taking coffee and tea as our close substitute, a slight increase in price of tea will lead to a decrease of demand of tea.

• Range use of a commodity.

The wider the range of uses a commodity has, the higher the price elasticity of demand. As the price of such goods (multi-use)decreases, people extends their consumption to its other uses hence an increase in their demand.

• Habit

People consumes some goods because of habits for example smoking. In such a case, price change leaves quantity demanded unaffected. Therefore, demand for such goods is said to be inelastic.

Is the price elasticity of supply usually larger in the Short run or in the Long run? Why?

Answer

Price elasticity of supply is always larger in the Long run

This is because in the Long run all factors of production is changeable and utilized to increase supply unlike in the short run where only labor can be increased, and even then, changes

may be expensive.

B. Explain why the following might be true:

A drought around the world raises the total revenue that farmers receive from the sale of

grain but a drought only in Bihar reduces the total revenue that Bihar farmers receives.

Answer

Demand for the world grain is inelastic. Therefore, as drought in the world reduces supply of grains, the price increases significantly and quantity of grains decreases insignificantly. This makes the total revenue that is received by world farmers to increase. On the other hand, demand for Bihar grains is more elastic. Therefore, as drought in Bihar

reduces the supply of Bihar grains, prices increases insignificantly and the quantity reduces significantly. This leads to a fall in the total revenue that Bihar farmers will receive.