Artem Skorobogatov

Mr. Jonathan Povey

2.1, .2.2 - Supply and Demand Upgrade

19th December, 2023

Question 1 - Explain two reasons why the demand for primary goods might be price inelastic.
Question 2 - Distinguish between price elasticity of demand (PED) and income elasticity of
demand (YED)?

Question 1
A primary good is a good sold for production or consumption just as it was found in nature. Coal,
oil, and iron ore, are some examples of primary goods. Demand is considered inelastic when 0 <
PED < 1 (PED measures the responsiveness of quantity demanded to a change in price, along a
given demand curve). This means that a large change in price of a good or service results in a
small change in quantity demanded.
One reason for why the demand for primary goods might be price inelastic is lack of time to
adjust consumption. For example, in the short run, consumers may have a certain limited amount
of time to adjust their consumption patterns in response to changes in the price of primary goods.
Primary goods are mostly necessities and consumers have little to no immediate short run
substitutes available. Therefore, even if the price of primary goods increases, consumers will still
purchase them for the higher price at new quantities similar to the original quantities in the short
run. For instance, in the agricultural sector, farmers require fertilizers as an input. Even if the
price of fertilizers increases, farmers may continue to purchase them because the cost of
fertilizers represents a relatively small portion of their overall production costs. The higher price
of the fertilizer may not significantly affect the market demand for agricultural products.This
inability to quickly adjust the consumption patterns leads to demand being price inelastic for
primary goods.
 Figure 1. Inelastic demand for primary goods

The graph indicates that a change in quantity demanded due to a change in price is small. The
new equilibrium (Q1, P1) is set to the left of the original equilibrium point (Qe, Pe) at a higher
price. The decrease in quantity demanded is small compared to increase in price, therefore PED
is inelastic.

Another reason for why the demand for primary goods might be price inelastic is lack of
substitutes. When there are fewer substitutes available for the good, consumers have fewer
options to choose from if the price of the primary good increases. For instance, silicon is widely
used to build CPU’s for a majority of electronic devices. There are little to no alternative
methods of production (a.k.a. substitutes) of CPU’s, therefore, the demand for silicon is
relatively inelastic. Consumers (large electronic corporations) may be willing to pay higher
prices for silicon because it is essential for the electronic industry. The production process
heavily relies on the specific primary good (silicon), therefore, it is challenging for producers to
switch to alternative resources quickly and adjust the patterns of production. The limited
availability of substitutes reduces the responsiveness of producers to changes in the price of
primary goods, resulting in price inelastic demand.
Inelastic demand for silicon

Figure 2. Inelastic demand for silicon

The graph indicates that a change in quantity demanded due to a change in price is small. The
new equilibrium (Q1, P1) is set to the left of the original equilibrium point (Qe, Pe) at a higher
price. The decrease in quantity demanded is small compared to increase in price, therefore PED
is inelastic.

Question 2
Price elasticity of demand (PED) is defined as a measure of the change in the demand for a
product in relation to a change in its price. Income Elasticity of Demand (YED) is a measure of
the responsiveness of demand for a product or service to a change in consumer income. A normal
good is a good that experiences and increase in demand due to an increase in consumer income.
Therefore, normal goods have a positive correlation between income and demand. Some
examples of normal goods are clothing, food, household appliances, etc. An inferior good is a
good whose demand drops when the income rises. Examples of inferior goods include instant
noodles, or canned food. Luxury goods are goods for which demand increases more than
proportionally as income rises. Some examples of luxury goods include jewelry, yachts, estates,
etc.
The difference between PED and YED is the factor of change. For PED its price, for YED its the
income.
% Δ Q u a n t i t y D e m a n d ed
PED is calculated with a formula:
% Δ P r i ce
% Δ Q u a n t i t y D e m a n d ed
YED is calculated with a formula:
% Δ In c o m e
Different price elasticities of demand

D1: Large change in price, small change in quantity

demanded — inelastic.
D2: Small change in price, large change in quantity
demanded — elastic.
 Price elasticity of income

YED < 0 YED = 0 - 1 YED > 1

inferior goods normal goods luxury goods

0 1

The diagram for PED demonstrates that goods separate into 3 sections when YED is discussed.
The types of goods that a consumer buys changes with their income. For example, if a consumers
income is very low, they might buy more interior goods (cup noodles). As their income increases.
they move on the scale towards the right side. Once the YED crosses the negative value, and
enters the positive domain, their demand for interior goods drops, and the demand for normal
goods (food, clothing, household appliances) grows. When their income keeps increasing, they
may get into the luxury good domain (yachts, bespoke clothing, jewelry).