Question: (a) Explain the difference between the law of supply and the price elasticity of supply. (4 marks) (b) Use the price elasticity of supply concept
(a) Explain the difference between the law of supply and the price elasticity of supply. (4 marks)
(b) Use the price elasticity of supply concept and your own reasoning to judge
whether the supply for each of the following products is either elastic or
inelastic:
(i) Gold (2 marks)
Gold production is a costly and time-consuming process of exploration,
mining, and refining. Moreover, the physical availability of gold is highly limited. For both
reasons, increases in gold prices do not elicit substantial increases in quantity supplied.
Thus, price decreases do not produce large drops in the quantity of gold supplied. In short, the
supply of gold is highly inelastic with respect to price.
(ii) Testing kits for Covid 19 (2 marks)
(iii) Handphone (2 marks)
(c) Mary is a smart entrepreneur in her primary school. She sells ball points to her fellow school mates. At a price of $2.00 each, she sells 100. At a price of $1.50 each, she sells 300.
(i) Is Mary's demand elastic or inelastic over this price range? (5 marks)
(ii) If demand had the same elasticity for a price decline from $1.50 to
$1.00 as it does for the decline from $2.00 to $1.50, would cutting the price from $1.50 to $1.00 increase or decrease Mary's total revenue?
(4 marks)
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