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(a) Differentiate between change in demand and change in quantity demanded (05 Marks)
Change in Quantity Demanded:
This refers to movement along the demand curve due to a change in price. When the price of a good or service changes, it directly affects the quantity demanded. This change is depicted as a movement along the existing demand curve. Factors like price elasticity of demand play a role here. If demand is elastic, a change in price will lead to a proportionally larger change in quantity demanded, and vice versa for inelastic demand.
Change in Demand:
This refers to a shift in the entire demand curve. It occurs due to factors other than price influencing consumers’ willingness and ability to buy a good or service. These factors can include changes in income, prices of related goods, consumer preferences, population demographics, and expectations about the future. Unlike a change in quantity demanded, which is caused by price changes alone, a change in demand is caused by shifts in non-price factors.
- B) With proper illustrations, discuss what you consider as main five (05) important factors that determine the demand of the Tomatoes in Nakawa market
Price of Tomatoes: This is a fundamental factor influencing demand. As the price of tomatoes changes, it affects how many people are willing and able to buy them. A typical demand curve slopes downwards from left to right, indicating that as prices decrease, quantity demanded increases, and vice versa.
Income Levels of Consumers: The income of consumers in Nakawa Market plays a crucial role. When incomes rise, people can afford to buy more tomatoes, leading to an increase in demand. Conversely, during economic downturns or lower income periods, demand may decrease.
Substitute Goods: The availability and prices of substitute goods, like bell peppers or cucumbers, can impact tomato demand. If these substitutes become more attractive (e.g., due to lower prices or better availability), demand for tomatoes might decrease as consumers switch to alternatives.
Complementary Goods: Goods that are often bought together with tomatoes, such as onions or cooking oil, can also influence demand. If the prices of complementary goods rise, it might reduce the demand for tomatoes as consumers might purchase fewer overall or opt for different combinations.
Consumer Preferences and Tastes: Changing consumer preferences, such as a trend towards healthier eating or a preference for certain cuisines that use tomatoes extensively, can significantly impact demand. For instance, if there’s a sudden surge in demand for Italian cuisine in Nakawa, it could increase the demand for tomatoes.
Question TWO:
Given that the price of Matooke in Nakesero central market has skyrocketed from UGX 1000 to 3000, Desire, instead decided to increase quantity of Rice from 40kgs to 50kgs.
- Determine the Cross-Elasticity of demand (05 Marks)
Cross-Elasticity of Demand=
Percentage Change in Quantity Demanded of Rice/Percentage Change in Price of Matooke
Initial Quantity of Rice (Q1) =40 kgs
New Quantity of Rice (Q2) =50 kgs
Percentage change in quantity demanded of rice=Q2−Q1/Q1+Q2/2 ×100%
Percentage change in quantity demanded of rice=50−40/ 40+50/2×100%
Percentage change in quantity demanded of rice=10/45×100%
Percentage change in quantity demanded of rice=22.22%
Percentage change in price of Matooke
Initial Price of Matooke (P1)=UGX1000
New Price of Matooke (P2)=UGX3000
Percentage Change in Price of Matooke= P2−P1/P1+P2/2×100%
Percentage Change in Price of Matooke=3000−1000/1000+3000/2×100%
Percentage Change in Price of Matooke=2000/2000×100%
Percentage Change in Price of Matooke=100%
Cross-Elasticity of Demand= 22.22/100%
Cross-Elasticity of Demand =0.2222
The cross-elasticity of demand between Matooke and Rice is 0.2222. This indicates that these two goods have a relatively low degree of cross-elasticity, suggesting that they are not close substitutes for each other in the market.
- Explain Five (05) major factors that influence price elasticity of demand in an economy (15 Marks)
Availability of Substitutes: When there are close substitutes available for a product or service, consumers have more options to choose from. In such cases, if the price of one product increases, consumers can easily switch to a similar product, leading to a more elastic demand. On the other hand, if a product has few substitutes, consumers may be less sensitive to price changes, resulting in a more inelastic demand.
Necessity vs. Luxury: The nature of a good or service also affects its price elasticity of demand. Necessities like food, housing, and healthcare often have an inelastic demand because consumers must purchase them regardless of price changes. Conversely, luxury items such as designer clothing or high-end electronics tend to have a more elastic demand since consumers can easily postpone or forego purchasing them if prices rise.
Income Levels: Income levels in an economy play a significant role in determining price elasticity. For normal goods, an increase in income can lead to a higher demand, but the degree of increase depends on the elasticity of the good. For example, luxury goods typically see a larger increase in demand with rising incomes compared to necessities. On the other hand, inferior goods (like generic brands) may see a decrease in demand as incomes rise, resulting in negative elasticity.
Time Horizon: The time available for consumers to adjust their purchasing behavior in response to price changes affects elasticity. In the short run, consumers may have limited options and may not be able to change their buying patterns quickly. This can lead to a more inelastic demand. However, over the long run, consumers have more time to find alternatives or adjust their consumption habits, making the demand more elastic.
Market Definition: The definition of the market also influences elasticity. A narrow market definition, focusing on a specific brand or product, may result in a more inelastic demand because consumers perceive fewer alternatives. Conversely, a broader market definition that includes close substitutes can lead to a more elastic demand as consumers have more options to choose from.
