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During the lectures it was noted that India is one of the world's largest producers and consumers of onions
During the lectures it was noted that India is one of the world's largest producers and consumers of onions. India exports onions to the world market. There is also a significant demand for onions within India.
(a) Research shows that the price elasticity of demand for onions in India is <1. What does this mean and why might this be the case? [1 mark]
(b) The price of onions within the domestic market can be hugely volatile. Why might this be the case and what does this suggest about the supply curve in the short run? [1 mark]
(c) When prices are volatile the government often intervenes and imposes a binding price to assist the poor. Do they impose a price floor or ceiling and what is the affect on market outcomes in the short-run and the long run? Explain with the use of diagrams [2 marks]
(d) What is the income elasticity of demand and what does it mean if the income elasticity of demand is negative? What goods might fall into this category? [1 mark]
Expert Solution
When the magnitude of the own- price elasticity coefficient has a value of less than one, demand is said to be inelastic. If price elasticity of demand for onions in India is <1 it means with the change in the price the demand will not change . This is true for onion because it is very essential commodity used in households in India.
b)
The price of onions within the domestic market can be hugely volatile This is mainly driven by the environmental reasons such as flood or drought , the supply keeps fluctuating and because the demand is inelastic the supply curve can be changing too much driven by the higher demand and uneven supply.
C) Yes the govnement impose the pirce control . In time of shortage of the supply , the governtmn impose price ceiling and in times of excess production and exess supply they impose price floor.
d) manded of a good is also a function of consumer income. Income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income, holding all other things constant. Income elasticity of demand can be negative, positive, or zero. Positive income elasticity means that as income rises, quantity demanded also rises. Negative income elasticity of demand means that when people experience a rise in income, they buy less of these goods, and when their income falls, they buy more of the same good. Goods with positive income elasticity are called “normal” goods. Goods with negative income elasticity are called “inferior” goods. Typical examples of inferior goods are rice, potatoes, or less expensive cuts of meat.
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