Paper1

Question 1

What is demand?

Answer 1

Demand is the quantity of a good or service that consumers are willing and able to buy at a given price.

Demand is influenced by various factors, including consumer preferences and income levels.

Question 2

What does the demand curve show?

Answer 2

The demand curve shows the relationship between price and quantity demanded.

It typically slopes downwards, indicating that higher prices lead to lower quantities demanded.

Question 3

What happens to demand when the price decreases?

Answer 3

When the price decreases, the quantity demanded generally increases, leading to an extension in demand.

This is illustrated by a movement along the demand curve.

Question 4

What is meant by contraction in demand?

Answer 4

Contraction in demand refers to a decrease in the quantity demanded as the price increases.

This is also represented by a movement along the demand curve.

Question 5

What does it mean for a demand curve to shift to the left?

Answer 5

A demand curve shifts to the left when there is a decrease in the amount demanded at every price.

This can occur due to factors such as changes in consumer preferences or income.

Question 6

What does it mean for a demand curve to shift to the right?

Answer 6

A demand curve shifts to the right when there is an increase in the amount demanded at every price.

This may be caused by factors like increased consumer income or changes in tastes.

Question 7

What is the law of diminishing marginal utility?

Answer 7

The law of diminishing marginal utility states that as a consumer consumes more units of a good, the additional satisfaction (utility) gained from each additional unit decreases.

This concept helps explain why demand decreases as prices increase.

Question 8

True or False: Demand curves are always straight lines.

Answer 8

False. Demand curves can be curved but are more often drawn as straight lines.

They are usually labeled with a ‘D’ to represent demand.

Question 9

What is the typical slope of a demand curve?

Answer 9

Demand curves typically slope downwards.

This indicates that as prices decrease, more consumers are willing to purchase goods or services.

Question 10

Fill in the blank: The relationship between price and quantity demanded can be explained using the _______.

Answer 10

law of diminishing marginal utility.

Question 11

What is the effect of lower prices on demand?

Answer 11

Lower prices generally result in higher demand.

Consumers aim to pay the lowest price possible for goods and services.

Question 13

What causes a shift in the demand curve?

Answer 13

Factors such as changes in tastes and fashion, real income, and market interrelations can cause shifts.

A right shift indicates increased demand, while a left shift indicates decreased demand.

Question 14

What are normal goods?

Answer 14

Normal goods are those for which demand increases as real income increases.

Example: DVDs.

Question 15

What are inferior goods?

Answer 15

Inferior goods are those for which demand decreases as real income increases.

Example: Cheap clothing.

Question 16

How does a more equal distribution of income affect demand for luxury goods?

Answer 16

It may cause the demand curve for luxury goods to shift to the left.

This happens because fewer rich people can afford luxury items.

Question 17

What are substitute goods?

Answer 17

Substitute goods are alternatives to each other, such as beef and lamb.

An increase in the price of one decreases its demand and increases the demand for its substitute.

Question 18

What are complementary goods?

Answer 18

Complementary goods are those often used together, such as strawberries and cream.

An increase in the price of one decreases the demand for both.

Question 19

What is derived demand?

Answer 19

Derived demand is the demand for a good or factor of production used in making another good or service.

Example: Increased demand for fencing leads to increased demand for wood.

Question 20

What is composite demand?

Answer 20

Composite demand refers to goods that have more than one use, like oil.

Changes in demand for one use can affect the supply for another.

Question 21

What causes a movement along a demand curve?

Answer 21

A change in the price of the good or service causes movement along the curve.

This does not shift the curve itself.

Question 22

Name four examples of complementary goods.

Answer 22

• Cheese and crackers
• Strawberries and cream
• Printers and ink cartridges
• Cars and fuel

Question 23

True or False: An increase in the price of strawberries will increase demand for cream.

Answer 23

False

The demand for cream will decrease if the price of strawberries increases.

Question 24

What impact did the decline in the UK housing market from 2008-2012 have on tile manufacturers?

Answer 24

It likely led to reduced workload for building firms and tile retailers delaying expansion plans.

This reflects the interconnected nature of market demand.

Question 25

What is elasticity of demand?

Answer 25

A measure of how much the demand for a good changes with a change in one of the key influences: price, real income, or the price of another good.

Question 26

What does Price Elasticity of Demand (PED) measure?

Answer 26

How the quantity demanded of a good responds to a change in its price.

Question 27

How is PED calculated?

Answer 27

PED = percentage change in quantity demanded / percentage change in price.

Question 28

What happens to demand when the price of a good increases?

Answer 28

Demand typically falls as price increases for most goods.

Question 29

What is the value of PED for elastic demand?

Answer 29

> 1.

Question 30

What is the value of PED for inelastic demand?

Answer 30

0 < PED < 1.

Question 31

What does a perfectly elastic demand curve indicate?

Answer 31

PED of + infinity; any increase in price leads to zero demand.

Question 32

What does a perfectly inelastic demand curve indicate?

Answer 32

PED of 0; any change in price has no effect on quantity demanded.

Question 33

What is unit elasticity of demand?

Answer 33

PED = 1; the percentage change in price is equal to the percentage change in quantity demanded.

Question 34

What is a common mistake regarding PED?

Answer 34

Writing PED as a percentage instead of a ratio.

Question 35

What is the formula for percentage change in quantity demanded?

Answer 35

Change in demand / original demand × 100.

Question 36

What is the formula for percentage change in price?

Answer 36

Change in price / original price × 100.

Question 37

What does a higher value of PED indicate?

Answer 37

More elastic demand; a larger percentage change in quantity demanded with a percentage change in price.

Question 38

What does a lower value of PED indicate?

Answer 38

More inelastic demand; a smaller percentage change in quantity demanded with a percentage change in price.

Question 39

Fill in the blank: Perfectly elastic demand has a PED of _______.

Answer 39

+ infinity.

Question 40

Fill in the blank: Perfectly inelastic demand has a PED of _______.

Answer 40

0.

Question 41

True or False: An elastic demand means that the quantity demanded changes less than the price change.

Answer 41

False.

Question 42

What is the significance of a PED value of -1?

Answer 42

Indicates unit elasticity; percentage changes in price and quantity demanded are equal.

Question 43

What happens to demand when the price decreases?

Answer 43

Demand typically increases.

Question 44

In the example given, what was the percentage change in quantity demanded when the price of the toy car increased from 50p to 70p?

Answer 44

-33.33%.

Question 45

What is the typical sign of PED and why?

Answer 45

Usually negative because demand falls as price increases.

Question 46

What does it mean if PED is less than 1?

Answer 46

The demand is inelastic.

Question 48

What is the formula for calculating Price Elasticity of Demand (PED)?

Answer 48

PED = percentage change in quantity demanded / percentage change in price ## Footnote PED measures how much the quantity demanded of a good responds to a change in its price.

Question 49

What does a perfectly inelastic demand curve indicate?

Answer 49

YED = 0 ## Footnote In this case, quantity demanded does not change regardless of price changes.

Question 50

What does a negative Cross Elasticity of Demand (XED) imply?

Answer 50

The goods are complements ## Footnote When the price of one good rises, the demand for the other good falls.

Question 51

What does a positive Cross Elasticity of Demand (XED) indicate?

Answer 51

The goods are substitutes ## Footnote An increase in the price of one good leads to an increase in the demand for the other good.

Question 52

What is the Income Elasticity of Demand (YED) for a normal good?

Answer 52

YED > 0 ## Footnote This indicates that an increase in income leads to an increase in the quantity demanded.

Question 53

What does an Income Elasticity of Demand (YED) of less than 1 signify?

Answer 53

The good is a necessity ## Footnote Demand increases with income but at a slower rate.

Question 54

What is indicated by an Income Elasticity of Demand (YED) greater than 1?

Answer 54

The good is a luxury ## Footnote Demand increases significantly as income rises.

Question 55

Fill in the blank: For complementary goods, the Cross Elasticity of Demand (XED) will be _______.

Answer 55

negative

Question 56

Fill in the blank: For substitute goods, the Cross Elasticity of Demand (XED) will be _______.

Answer 56

positive

Question 57

What happens to demand for a good if the price increases and the good is inelastic?

Answer 57

Demand decreases only slightly ## Footnote Inelastic goods have a demand that is not sensitive to price changes.

Question 58

What is the formula for calculating Income Elasticity of Demand (YED)?

Answer 58

YED = percentage change in quantity demanded / percentage change in income ## Footnote YED measures how much the quantity demanded of a good responds to changes in consumer income.

Question 59

What does an Income Elasticity of Demand (YED) of 0.9 indicate?

Answer 59

The good is income inelastic ## Footnote Demand increases with income but at a less than proportional rate.

Question 60

True or False: If the income elasticity of demand is negative, it indicates that the good is inferior.

Answer 60

True

Question 61

What is the effect on demand if real income increases by 5000 and YED is 0.1?

Answer 61

Demand increases by only 0.5 units ## Footnote This shows a low responsiveness of demand to income changes.

Question 62

How does demand for luxury goods typically respond to changes in income?

Answer 62

Demand increases significantly ## Footnote Luxury goods have a YED greater than 1.