Dain Woo

1. Explain why the price elasticities of both demand and supply of primary commodities tend
to be relatively low in the short run.


Primary commodities are mostly natural resources. They include products that
does not go through the manufacturing process, such as agricultural products, which
could be apples and wheat. Price elasticity of demand is the measure of responsiveness
of a change in quantity demanded to a change in price. Price elasticity of supply is the
measure of responsiveness of a change in quantity supplied to a change in price. They
tend to have a lower price elasticity of demand and supply to those of secondary and
tertiary goods and services in short run.

Primary commodities have a relatively low PED because they are necessities. This
means that consumers have no substitutes of these primary commodities. For instance,
consumers who own their own cars have no substitutes for their fuel, which is oil. Even
if the change in price in oil is drastic in a short time period, consumers would still decide
to purchase oil, as there are no substitutes. Furthermore, consumers tend to spend a
lower proportion of their incomes on primary commodities in a shorter time period.
Most manufactured goods, such as laptops and televisions tend to be much higher in
price, meaning that consumers are unlikely to purchase them if their price rises greatly.
On the other hand, Manufactured products tend to have a more price elastic behavior
than that of primary commodities. This is because most manufactured goods have
substitutes. For example, if the price of one type of wooden tables rise greatly,
consumers would decide to purchase for another type of wooden table from a different
firm with a lower price. As there are numerous substitutes, consumers would be able to
purchase a product’s substitute even in a relatively short time period.
Primary commodities have a relatively low PES in the short run. Firstly, primary
commodities have a relatively smaller opportunity to make a change in its quantity
supplied, while quantity supplied for manufactured goods are much more flexible. For
example, it is extremely difficult to change the quantity of apples, which are primary
commodities, once they are planted to be produced. However, laptops, which are
manufactured goods, can be produced quickly due to access to capitals for its
production process. Secondly, primary commodities do not have substitutes in its
factors of production, while manufactured products do. For instance, if the laptop
screen becomes expensive, then the laptop firm can decide to find another firm to
purchase those screens. Thirdly, primary commodities are perishable, meaning that they
cannot be kept in stock for a very long time, while manufactured commodities can. For
example, blueberries rot if they are kept in stock for a year, while computers do not, and
be kept in stock for a much longer time. Lastly, the capacity factors for primary
commodities are fixed, which means that once they are decided to be produced, in
short run, they cannot be changed while that of manufactured goods can be changed.
 In conclusion, primary commodities have a relatively low PES and PED compared
to those of manufactured goods in short term, as primary commodities lack substitutes,
lower proportion of income spent in short time period, substitutes of factors of
production, bad capacity ability, and bad ability to store stocks.

1. Define cross elasticity of demand and using diagrams, explain what determines whether
cross elasticity of demand is positive for negative.


Cross elasticity of demand is a measure of the responsiveness of the quantity
demanded of a good or service to changes in the price of another good. If cross elasticity
of demand, XED, has a positive value, it can be said that the two goods are substitutes to
each other. If XED equals to zero, then it can be said that the two goods are unrelated.
Lastly, if XED has a negative value, then it can be said that the two goods are
complementary to each other. Like this, the sign of XED tells consumers, producers and
the government about the relationship between the two goods.

If the XED value is positive, it means that a percentage increase in the price of a
product brings a percentage increase of the quantity demanded of the other good. This
means that the two products are substitutes. If the positive value is high, then it can be
said that the two products are very close substitutes. In the first graph, a relatively small
percentage increase in the price of a good would bring a relatively larger percentage
increase in the quantity demanded of the other good. For example, Pepsi and Coca Cola
have high positive XED value as they are very similarly categorized as carbonated drinks,
and coke even more specifically. If the two goods have a low positive value, then it can
be said that the two goods are remote substitutes, as in the second graph, a relatively
small percentage increase in the price of a good brings a relatively short percentage
increase in the quantity demand of the other good. An example of this could be milk and
coke, where they are both drinks, but one is categorized as carbonated drink while the
other one is categorized as dairy product.

If the XED value is negative, it means that a relatively small percentage increase
in the price of a product brings a relatively small percentage decrease of the quantity
demanded of the other good. This means that the two products are complements. If the
negative value is low, then it can be said that the two products are remote
complements, meaning that in the fourth graph, a relatively small percentage increase
in the price of a good will bring a relatively small percentage decrease in the quantity
demanded of the other good. For example, if the price of peanut butter increases, then
the quantity demanded of jelly will experience a small decrease. If the negative value is
high, then the two products are close complements- in the third graph, a relatively small
percentage increase in the price of a good brings a relatively large percentage decrease
in the quantity demanded of the other good. An example of this could be hot dog buns
and hot dog sausages, where a drastic increase in the price of hot dog buns would bring
a drastic decrease in the quantity demanded of hot dog sausages.

Lastly, If the XED value equals to zero, this means that the two products are
unrelated to each other. This means that any change in the price of a good leads to
absolutely no change in the quantity demanded of the other good. An example of this
could be apples and gluesticks.

(The diagrams are below)