Studies have shown that the price elasticity of demand for necessities, such as food, are higher in developing countries and lower in developed countries. What is the reason for this difference in elasticity?
What will be an ideal response?
One of the determinants of elasticity is the proportion of income spent on a good or service. The higher the proportion of income spent on a good, the larger the price elasticity of demand for that good. People in developing countries have low incomes and therefore spend a large part of it on food. For example, in Tanzania, 62 percent of income is spent on food. On the other hand, in United States, only 12 percent of income is spent on food. The price elasticity of demand for food, therefore, will be larger in developing countries as compared to developed countries.
You might also like to view...
When the supply of labor increases, according to the specificfactors model, which of the following is NOT likely to happen?
a. The number of workers employed will increase. b. The wages for workers will decline. c. The marginal product of labor shifts to the right. d. The overall wage in the economy increases in the short run.
If the economy experiences an inflationary gap, a contractionary monetary policy will
A) increase real GDP and increase the price level. B) increase real GDP and decrease the price level. C) decrease real GDP and increase the price level. D) decrease real GDP and decrease the price level.