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Factors Leading to Increased Elasticity of Demand

Indonesia’s output is influenced by its factors of production. A production possibility curve diagram can be used to show this relationship between resources and output. Indonesia does have extensive fishing waters but does not actually catch many fish. Most of its fishing firms are small and they compete against much larger foreign firms. These larger foreign firms have been attracted into Indonesia’s waters because of increasing demand for fish. The price elasticity of demand for different types of fish has changed in the last few years.

Analyse why demand for a product may become more elastic over time. [6]

Category:

Elasticity

[CIE O level May 2017]

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Answer


Step 1 : Explain 'price elasticity of demand' in the introduction.

Price elasticity of demand (PED) is a numerical measure of the responsiveness of the quantity demanded for a product following a change in the price of that product.

It can be calculated as follows :

PED =

% change in quantity demanded for a product

% change in price of that product

The demand for a product may become more elastic over time for several reasons.


Step 2 : Give the reasons why demand for a product may become more elastic over time.


➤ 2.1 People need time to change their habits.

Over time, people can change their demand in response to more permanent price changes by seeking out alternative products. Similarly, owners of private motor vehicles are not likely to get rid of their vehicles simply because of higher fuel prices. However, if there is a continual rise in prices over time, vehicle owners may seek alternatives such as electric cars. Hence, demand tends to be more price elastic in the long run.

➤ 2.2 More substitutes may be available for the product in the long term.

More substitutes may be available for a product in the long term due to a larger number of firms getting time to set up. There may also be more competition and more innovation in the long term. For example, good battery technology may not be readily available to manufacture electric cars. In the short run, the only choice available to consumers will be diesel cars. However, over time better battery technology will enable manufactures to produce more efficient electric cars. In the long term, consumers will be able to choose between electric cars and diesel cars.

It can be seen that more choice of substitutes is available for consumers over time. If there is a readily available substitute for a good, the substitute makes the demand for the good elastic.

➤ 2.3 The product may become less habit-forming over time.

The product may become less habit-forming. Addictive products such as cigarettes and alcohol usually have price inelastic demand. However, over time, people may get over their addictions. Less habit forming goods have a more elastic demand.


Step 3 : Conclude

Demand for a product may become more elastic over time for several reasons. First, people need time to change their habits.( In the case of fish products, people will not readily stop eating fish following a rise in price. However, over time, they may swich to other alternatives such as meat.) Second, more substitutes may be available for the product in the long term. (A wider variety of seafood may be available to consumers over time, as fishermen get better fishing equipment and are able to catch more fish.) Third, the product may become less habit-forming over time.

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