Ques: 1) Agricultural commodities are known to have a price inelastic demand and to be necessities. Explain why the income of farmer falls (a) after a good harvest and (b) in relation to incomes in other sectors of the economy.
Ans: (a) After a good harvest the income of a farmer falls due to the following reasons.
Firstly after a good harvest a farmer has a good produce and if one farmer has a good crop so other farmers will also have a good crop and a lot of food. This surplus of food causes the process to fall in the market. If prices fall consumer demand goes up but since hunger is inelastic so the consumer would not buy more food than they previously did. So the farmer has to sell at a lesser price and this reduces the income of the farmer.
(b) The demand for food is inelastic. If the income of the consumer increases, its demand for food remains the same. And even if the prices of food go up a farmer can sell the same quantity of food that the land can produce. So in comparison to the incomes in other sectors of the economy, the income of the farmer falls.
Ques: 2) In India, would you expect the price elasticity of demand to be higher for Maruti SX4 automobiles or for automobiles in general? Why?
Ans: The price elasticity of demand of a product depends on the following things:
Availability of substitutes:- the higher the degree of closeness of the substitute, the greater the elasticity of demand.
Nature of commodity:- commodities can be grouped as luxuries, comforts and necessities. Demand for luxury goods is more elastic than comfort and necessity goods. Demand of necessary goods is inelastic. Comforts have more elastic demand than necessities.
Weightage in the total consumption:- it is the proportion of income which consumers spend on a particular commodity.
So, in India demand for SX4 automobiles or other automobiles in general, will be elastic. There are too many companies in the automobile industry and so many substitutes are available for a...