WAEC Economics 2019 Theory — Question 6

Model answer

(a)(i) Demand is elastic if a change in the price of a commodity results in a more than proportionate change in quantity demanded. Demand is inelastic if a change in price results in a less than proportionate change in quantity demanded. (ii) Income elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in the consumer's income. Cross elasticity of demand is the degree of responsiveness of quantity demanded of one commodity to a change in the price of another (related) commodity. (b)(i) Price-elastic demand: an increase in price results in a more than proportionate fall in quantity demanded, so the producer's total revenue FALLS. As shown in the diagram, quantity demanded falls from 0Q₁ to 0Q₂ as price rises from 0P₁ to 0P₂. TR before the increase (area of rectangle 0P₁MQ₁) is greater than TR after the increase (area of rectangle 0P₂NQ₂); i.e. TR₁ > TR₂. (ii) Price-inelastic demand: an increase in price results in a less than proportionate fall in quantity demanded, so the producer's total revenue RISES. Quantity demanded falls only slightly (from 0Q₁ to 0Q₂) as price rises from 0P₁ to 0P₂. TR before the increase (area of rectangle 0P₁TQ₁) is smaller than TR after the increase (area of rectangle 0P₂SQ₂); i.e. TR₁ < TR₂. (The inelastic-demand diagram mirrors the elastic one shown, but with a steeper, more vertical demand curve.)