1(a).

Discuss the economic concepts of ‘price elasticity’, ‘cross price elasticity of

demand’, and ‘income elasticity of demand’

Price Elasticity

Price elasticity is defined as the degree of responsiveness of quantity demanded

of a product or service to a percentage change in the price of that product or
service. It can be expressed mathematically as:

ep = Percentage change in quantity demanded / Percentage change in Price.

This concept emphasizes that when the percentage change in the quantity of a
product demanded is greater than or more than the change in the percentage of
price of such product, price elasticity of demand will be greater than one which
means that demand for such product is elastic.

In another dimension, if the change in the percentage of the quantity of a product

demanded is less than the percentage change in the price of such a product, then
such product is said to be inelastic in such cases.

Cross Price Elasticity of Demand

Cross price elasticity of demand is a concept that seek to determine or measure

how the demand for a product increases or decreases based on a change in price
of a corresponding product. Usually, when products are complimentary in nature,
i.e. when the products have to be used together, a change in the price of such
product will most likely lead to a noticeable lower change in the demand for the
complimentary product or service. Eg. Tea and milk. Conversely, when the
products involved are substitutes, an increase in the price of a product will lead to
an increase in demand for its close substitute. This is also called positive cross
price elasticity.eg. Milo and Bournvita in the beverages subsector.

Income Elasticity of Demand

Income elasticity of demand is a concept that focus on how an increase or

decrease in income can affect the demand for a certain goods. Income elasticity
of demand measures the percentage increase in quantity of goods demanded
when there is a percentage change in price. Usually for normal goods, income
elasticity of demand is positive. This means that when income increases, a
consumer is more likely to increase the quantity of goods he purchases. In some
cases, when there is an increase income, it can lead to a percentage decrease in
the purchase of a specific good. Eg. When the income of a person increases, he
might choose to reduce or stop purchasing cheap second hand clothing and
switch to the purchase of more expensive brand new clothing. Usually, this type
of scenario happens for goods referred to as inferior goods.

1 (b). Critically analyse the use of the concept of elasticity in today’s business
organisations.

Today’s business organisations makes ample use of the concept of elasticity in

determining the price of their products. This is because the ultimate aim of every
business is to make profit. In order to make profit, businesses must take note of
the elasticity of their products when increasing prices. This is because demand
and price usually share an inverse relationship. This means that the demand for a
product will most likely reduce when the price of such a product increases.
Therefore, it is important f businesses to constantly evaluate the elasticity of their
products and raise prices up to optimal levels.

Usually, when the product of a business is inelastic, such a business can make
more profits by simply increasing the price of her product. A good example is the
business of gasoline or fuel. Businesses selling fuel can increase their profit
margins by increasing prices. But when the product of a business is elastic, the
business must be careful when making decisions on product pricing because a
slight increase in price might force consumers to dump such a product for closer
and cheaper substitutes. A good example is the beverage market where
competing products such as Milo, Bournvita and Ovaltine exists. If the business
manufacturing Ovaltine decides to arbitrarily increase her prices, it might lead to
consumers of Ovaltine switching to either milo or Bournvita.

2 (a). Define economic growth and how it may be calculated

What is economic growth

Economic growth can be defined as the measurable increase in the total
production of goods and services in a country over a period of time when
compared with another period in time. Economic growth occurs when the value
of goods and services produced in an economy increases. This means that the
businesses responsible for the production of such goods and services will earn
more profit from their production activities. The domino effect of businesses
earning more profit is that their stock value will rise. Businesses whose stock
values are rising are usually attractive to prospective investors. When more
investors put in money into such businesses, the businesses will have more capital
to hire or employ more workers that will increase their production capacity and
capability. The effect of this action is that as more jobs are created by the
businesses, it will lead to an inevitable rise in the income of workers, this means
that such people will have a higher purchasing power due to higher income levels.
Higher purchasing power will lead to an increase in the demand for goods and
services which will stimulate further economic growth. Generally, the aim of
every economy is to have positive economic growth at all times.

How is economic growth calculated

Economic growth is usually calculated by measuring the gross domestic product

of an economy over a certain period of time. Gross domestic product (GDP) is a
term used to describe the total monetary value of all the goods and services that
are produced in a country for a period of time usually a one year period.

GDP can be calculated either as nominal or as real gross domestic product.

Nominal gross domestic product is calculated as the current value of the total
goods and services produced in an economy without adjusting for inflation. Real
gross domestic product is calculated when the value of goods and services have
been adjusted to account for inflation. Usually, countries with increasing gdp are
those whose balance of trade is positive. This means that the total value of goods
and services sold to other countries is more than the total value of goods and
services imported into the economy. Another word for this is trade surplus. On
the other hand, when the total value of goods and services sold to other countries
is less than the total value of goods and services that are imported into the
country, it will lead to a diminishing gross domestic product. This is also called a
trade deficit.

2 (b). Discuss the following statement: ‘Although mineral resources (like oil, coal
and iron ore) are finite in supply, economic growth will continue for ever’.

Since time immemorial, the exploitation of mineral resources by the extractive

and productive sectors of the economy has acted as the pedestal on which
economic growth foundations are laid. These mineral resources have continued
to be the bedrock responsible for the growth of major economies around the
world. Countries such as Russia and Saudi Arabia depend on their vast gas and
crude oil reserves to grow their economy. In the same vein, majority of the
countries in Africa and Latin America also depend on their vast natural and
mineral resources as the main fulcrum of their economies. One of the main
challenges facing the exploitation of mineral resources is that such resources are
finite. This means that as the mineral resources are continuously exploited, their
quantity keeps on reducing. This phenomenon will suggest that economic growth
will reduce or stop as the amount of mineral resources available are depleted but
this theory has been proven not to be so.

Economic growth will keep on increasing even though mineral resources are finite
in nature due to the following of reasons.

1. The rate of economic growth is measured using the gross domestic product
concept. It is important to note that the gross domestic product is the tota; sum
of the value of goods and services that are produced within an economy. What
this means is that services form a major component of economic growth. As
mineral resources get depleted, more economies are going to focus more on the
service sector of their economy to act as the main driver of economic growth.
Sectors of the service industry such as education, healthcare and transportation
can act as major drivers of economic growth without depending on the finite
mineral resources. Economies which have high education rates and access to
quality healthcare tend to have a growing economy regardless of the state of
their mineral resources.
2. As economies keep growing, such economies learn and create tools that will
lead to a more efficient and sustainable use of their resources. These new levels
of efficiency will spur further economic growth without leaning on the finite
mineral resources. When economies focus on developing a more efficient public
transportation services using new technologies, it will reduce the consumption of
finite mineral resources such as natural gas and crude oil. Another way of
improving economic growth is by developing an efficient energy usage at homes
and businesses. This efficient energy consumption will lead to less dependence on
finite resources such as natural gas. Also the production and use of more fuel
efficient vehicles and machineries can also keep an economy growing without
limitations.

3. Another way that economies can keep on growing regardless of the finite
nature of mineral resources is not just focusing on the quantity of goods and
services produced but also focusing on raising and improving the quality of such
goods and services that are produced within the economy. Higher quality goods
and services is the act of using lesser resources to produce high value goods
efficiently. These efficient productive activities will contribute to a higher gross
domestic product which is used to measure economic growth.

4. Another way to keep on growing an economy despite the finite nature of

mineral resources is by focusing on sustainable development. This is a new
frontier in economic development whereby the focus is on reducing wastage of
resources in both the production and services industries of the economy. This
reduction of wastage will lead to less usage of the mineral resources and also
ensure greater conservation of the earth’s finite mineral resources. This is the
way to go for any economy who really wants to keep on experiencing economic
growth regardless of the finite nature of mineral resources. This also means that
economic growth does not have to depend on the continuous consumption of
mineral resources. The continuous consumption of mineral resources is
unsustainable and often leads to environmental degradation.

In conclusion, when economies are subjected to harnessing their human and

capital index, focus on improving the quality of their products and developing an
efficient service industry, then economic growth will keep on occurring forever
regardless of finite mineral resources such as coal, iron and natural gas.