Economics Chapter on Demand and National Income
81 Questions
58 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

The demand curve for a product will shift to the right when there is:

  • An improvement in production which lowers costs
  • A fall in the price of a complementary good (correct)
  • A fall in the price of the good
  • A reduction in indirect tax on the good

    • Which of the following may cause an increase in National Income?

  • A rise in exports (correct)
  • An increase in saving
  • A fall in investment
  • A fall in consumer spending

    • In all economies, the fundamental economic problem is that:

  • There is always some unemployment of resources
  • The supply of resources is always less than the demand for them
  • Resources are scarce relative to human wants (correct)
  • Consumers never have as much money as they would wish

    • In a free market economy, the allocation of resources between different productive activities is determined mainly by the:

    <p>Pattern of consumer expenditure and firm's production activities</p> Signup and view all the answers

    Which one of the following is not a normal feature of the recovery phase of the trade cycle?

    <p>Increasing government borrowing</p> Signup and view all the answers

    The demand for housing can be affected by all of the following, except:

    <p>An increase in the cost of building materials</p> Signup and view all the answers

    The price of a tomato increases and people buy fewer onions. You infer that onions and tomatoes are:

    <p>Complements</p> Signup and view all the answers

    If the price of a video rental is below the equilibrium price, the quantity supplied is ________ than the quantity demanded. If the price of video rentals is above the equilibrium price, the quantity supplied is ________ than the quantity demanded.

    <p>less; greater</p> Signup and view all the answers

    Demand-pull inflation is an inflation that results from an initial ________.

    <p>increase in aggregate demand</p> Signup and view all the answers

    Select the correct implication of an imperfect market:

    <p>Product Differential</p> Signup and view all the answers

    A perfect competitive market has a distinct ________ demand curve.

    <p>downward sloping</p> Signup and view all the answers

    Cost-push inflation is an inflation that results from an initial ___.

    <p>increase in money wages or money prices of raw materials</p> Signup and view all the answers

    The recession phase of the trade cycle is usually caused by which of the following?

    <p>Falling aggregate monetary demand</p> Signup and view all the answers

    Which of the following is not an effect of low real interest?

    <p>Nominal costs of borrowing will always be low</p> Signup and view all the answers

    In the circular flow model of the economy, the level of national income will always reach equilibrium because:

    <p>Expenditure equals income</p> Signup and view all the answers

    Which of the following government policies would not tend to raise national income over time?

    <p>Financial incentives to encourage savings</p> Signup and view all the answers

    Which one of the following is not a disadvantage of inflation?

    <p>It redistributes wealth from debtors to creditors</p> Signup and view all the answers

    If the demand curves for Good A shifts to the left when the price of Good B rises, we may conclude that:

    <p>The goods are complements</p> Signup and view all the answers

    Which one of the following would lead the demand curve for a good to shift to the right?

    <p>A rise in consumer income where the good is a normal good</p> Signup and view all the answers

    If the government imposed a price for a good that was above the equilibrium price, the consequence would be:

    <p>A contraction of demand, an increase in supply and a market surplus</p> Signup and view all the answers

    If the demand for a certain product is said to be inelastic, it means:

    <p>Consumers are rather insensitive to price changes</p> Signup and view all the answers

    What are the most important factors affecting the elasticity of demand for a product?

    <p>Substitutes, luxuries or necessities, time</p> Signup and view all the answers

    Which will be more elastic: the demand for Cadbury's Fruit 'n Nut or the demand for chocolate generally? Explain your reasoning.

    <p>Cadbury's Fruit 'n Nut, it has more substitutes</p> Signup and view all the answers

    Explain why the demand for fruit juice is more elastic than that for milk.

    <p>Fruit juices have more substitutes; milk is a necessity.</p> Signup and view all the answers

    How do you explain the difference between the elasticity of demand for chicken and that for other poultry?

    <p>Chicken does not have any close substitutes.</p> Signup and view all the answers

    Calculate the price elasticity of demand facing the filling station when the price of petrol changes from 140p to 133p.

    <p>-4</p> Signup and view all the answers

    What is meant by an 'inferior good'?

    <p>A good for which demand decreases as income increases.</p> Signup and view all the answers

    Which of the following goods would be expected to be normal and which inferior?

    <p>Croissants</p> Signup and view all the answers

    Which statements about inferior goods are correct?

    <p>If your income goes up you will buy less of the good</p> Signup and view all the answers

    What does negative income elasticity imply?

    <p>It implies that as income increases, the demand for the good decreases.</p> Signup and view all the answers

    Why do shops have January sales?

    <p>Demand in January is more elastic.</p> Signup and view all the answers

    A tax on petrol will not have much effect on consumption.

    <p>True</p> Signup and view all the answers

    A tax on petrol will raise lots of revenue because demand is inelastic.

    <p>True</p> Signup and view all the answers

    A rise in incomes of 10% will lead to an increase in the amount of petrol bought of more than 10 percent.

    <p>True</p> Signup and view all the answers

    The price and quality of public transport will affect the elasticity of demand for petrol.

    <p>True</p> Signup and view all the answers

    State whether you would expect the cross-price elasticity of demand between margarine and butter to be positive, negative or zero, and explain why.

    <p>Positive; margarine and butter are substitutes.</p> Signup and view all the answers

    If the cross-price elasticity of demand for white grapes with respect to black grapes is +2, and the price of black grapes falls by 8%, what will happen to the demand for white grapes?

    <p>It will increase by 16%.</p> Signup and view all the answers

    What is the coefficient for the elasticity of supply based on the following data?

    <p>+2</p> Signup and view all the answers

    The supply of this commodity seems to be inelastic.

    <p>False</p> Signup and view all the answers

    The percentage increase in output is more than the percentage increase in price.

    <p>True</p> Signup and view all the answers

    We would expect supply to be elastic since it is easier for farmers to switch from growing one crop to another than it is for industry to switch from producing one manufactured product to another.

    <p>True</p> Signup and view all the answers

    If the demand for a certain product is said to be inelastic, it means:

    <p>Large changes in price have only a small effect on demand</p> Signup and view all the answers

    What are the most important factors affecting the elasticity of demand for a product?

    <p>Substitutes, luxuries or necessities, time</p> Signup and view all the answers

    Which will be more elastic: the demand for Cadbury's Fruit 'n Nut or the demand for chocolate generally? Explain your reasoning.

    <p>Cadbury’s Fruit’n Nut, it has more substitutes</p> Signup and view all the answers

    Why is the demand for fruit juice more elastic than that for milk?

    <p>Fruit juices have more substitutes</p> Signup and view all the answers

    How do you explain the difference between the elasticity of demand for chicken and that for other poultry?

    <p>Chicken does not have any close substitutes</p> Signup and view all the answers

    Use the sales data to calculate the price elasticity of demand facing the filling station. What two reasons may invalidate this estimate?

    <p>PED = -4. People get paid on Friday; they might need petrol for the weekend.</p> Signup and view all the answers

    What is meant by an 'inferior good'?

    <p>A good for which demand decreases as consumer income rises</p> Signup and view all the answers

    Choose the two correct statements regarding inferior goods.

    <p>If the good in question has a negative income elasticity of demand, it is termed inferior.</p> Signup and view all the answers

    What does it imply if some estimates of income elasticity are negative?

    <p>The goods are considered inferior goods.</p> Signup and view all the answers

    Does an increase in natural gas prices imply an upward sloping demand curve? How else could you explain the phenomenon?

    <p>No, demand could be influenced by factors other than price.</p> Signup and view all the answers

    Why do shops have January sales?

    <p>Demand in January is more elastic.</p> Signup and view all the answers

    A tax on petrol will not have much effect on consumption.

    <p>True</p> Signup and view all the answers

    A tax on petrol will raise lots of revenue because demand is inelastic.

    <p>True</p> Signup and view all the answers

    A rise in incomes of 10% will lead to an increase in the amount of petrol bought of more than 10 percent.

    <p>True</p> Signup and view all the answers

    The price and quality of public transport will affect the elasticity of demand for petrol.

    <p>True</p> Signup and view all the answers

    State the expected cross-price elasticity of demand between margarine and butter. Why?

    <p>Positive; they are substitutes.</p> Signup and view all the answers

    State the expected cross-price elasticity of demand between petrol and motor vehicles. Why?

    <p>Negative; they are complements.</p> Signup and view all the answers

    What will happen to the demand for white grapes if the price of black grapes falls by 8%?

    <p>It will increase by 16%.</p> Signup and view all the answers

    Calculate the coefficient for the elasticity of supply based on the given output and price data.

    <p>PES = +2</p> Signup and view all the answers

    The supply of this commodity seems to be inelastic.

    <p>False</p> Signup and view all the answers

    The percentage increase in output is more than the percentage increase in price; therefore, supply is said to be elastic.

    <p>True</p> Signup and view all the answers

    We would expect supply to be elastic since it is easier for farmers to switch from growing one crop to another than for industry to switch from producing one manufactured product to another.

    <p>True</p> Signup and view all the answers

    What is the market demand for strawberries when the price is $35?

    <p>13</p> Signup and view all the answers

    What is the equilibrium price and quantity for strawberries?

    <p>$45 and 10</p> Signup and view all the answers

    What will be the effect on house prices if banks adopt a less generous attitude to borrowers?

    <p>Demand shifts left</p> Signup and view all the answers

    How will improvements in the A40 impact house prices in Ealing?

    <p>Demand shifts right</p> Signup and view all the answers

    What is the impact on house prices if the local authority relaxes planning restrictions?

    <p>Supply shifts right</p> Signup and view all the answers

    What is the effect on house prices if house prices in Wembley rise?

    <p>Demand shifts right</p> Signup and view all the answers

    What effect do rising costs of building new houses have on supply?

    <p>Supply shifts left</p> Signup and view all the answers

    If the Monetary Policy Committee raises interest rates, what happens to house prices?

    <p>Demand shifts left</p> Signup and view all the answers

    How does rioting and looting in Ealing affect house prices?

    <p>Demand shifts left</p> Signup and view all the answers

    What consequences do economic growth in Asia have on wheat prices?

    <p>Demand shifts right</p> Signup and view all the answers

    What effect does severe drought in wheat-producing areas have on supply?

    <p>Supply shifts left</p> Signup and view all the answers

    What happens to supply if supermarkets offer bread as a loss leader?

    <p>Supply shifts left</p> Signup and view all the answers

    How does global warming affect the supply of goods?

    <p>Supply shifts left</p> Signup and view all the answers

    What happens to the price of vegetables when they are in season?

    <p>Prices fall</p> Signup and view all the answers

    What happens to the supply of oil when new oil fields start production?

    <p>Shift right</p> Signup and view all the answers

    What happens to supply if the demand for central heating rises?

    <p>Movement up along the supply curve</p> Signup and view all the answers

    How does a rise in the price of gas affect oil supply?

    <p>Movement down along the supply curve</p> Signup and view all the answers

    What is the equilibrium price and quantity for t-shirts?

    <p>£5 and 12 million</p> Signup and view all the answers

    Study Notes

    Demand Curve Shifts

    • A demand curve shift to the right indicates an increase in demand.
    • A fall in the price of a complementary good will increase demand.
    • A reduction in indirect tax on a good will increase demand.
    • An improvement in production which lowers costs will increase demand.

    National Income

    • National income can be increased by a rise in exports.

    Scarcity & Resources

    • All economies face the fundamental economic problem of resource scarcity relative to human wants.

    Free Market

    • In a free market economy, the allocation of resources is mainly determined by the pattern of consumer expenditure and firm's production activities.

    Trade Cycle Recovery Phase

    • Increasing government borrowing is not a normal feature of the recovery phase of the trade cycle.

    Demand for Housing

    • Changes in the price of housing in surrounding neighborhoods can affect demand for housing.
    • An increase in interest rates by the central bank can affect the demand for housing.
    • Changes in crime rates within a housing community can affect demand for housing.
    • An increase in the cost of building materials can affect demand for housing.

    Complementary Goods

    • The price of tomatoes increases, causing people to buy less onions. This indicates that onions and tomatoes are complements.

    Equilibrium Price

    • If the price of a product is below the equilibrium price, the quantity supplied is less than the quantity demanded.
    • If the price of a product is above the equilibrium price, the quantity supplied is greater than the quantity demanded.

    Demand-Pull Inflation

    • Demand-pull inflation arises due to an initial increase in aggregate demand.

    Imperfect Market

    • Imperfect markets can have product differentiation.
    • Imperfect markets tend to result in lower bargaining power than perfect markets.

    Perfect Competition

    • A perfectly competitive market has a horizontal demand curve.

    Cost-Push Inflation

    • Cost-push inflation results from an initial increase in money wages or money prices of raw materials.### The Recession phase of the Trade Cycle
    • Recession is usually caused by a decline in aggregate demand.
    • Recession is often caused by high consumer spending.
    • High inflation does not characterise a recession.
    • Increased import levels can prolong a recession.

    Low Real Interest Rates

    • Low real interest rates do not mean low nominal borrowing costs.
    • Low real interest rates can lead to increases in credit based sales.
    • Low interest rates can increase business activity.
    • Low real interest rates can act as an incentive for investment.

    Circular Flow Model

    • The equilibrium of the economy is determined by a balance between injections and withdrawals.
    • Injections are not always equal to withdrawals.
    • The government does not always intervene to ensure equilibrium
    • The economy is in equilibrium when aggregate expenditure equals aggregate income

    Government Policies

    • Financial incentives to promote savings are not a good way to increase national income.
    • Increased investment in economic infrastructure can increase national income
    • Tax cuts that promote consumption can increase national income.
    • Policies that promote labour training can aid national income.

    Disadvantages of Inflation

    • Inflation redistributes wealth from debtors to creditors
    • Inflation reduces international competitiveness.
    • Inflation distorts market price signals.
    • Inflation decreases real income for fixed income earners.

    Goods and Demand

    • If a demand curve shifts left when the price of a related good rises, the goods are complements.
    • If a demand curve shifts right when the price of a related good rises, then the goods are substitutes.

    Shifting Demand Curves

    • A demand curve shifts right when consumer income rises and the Good is a normal good.
    • A decrease in the supply of a complimentary good will shift the demand curve right.
    • An increase in supply of a substitute good will shift the demand curve left.
    • A fall in price of a good will move along the demand curve, not shift it.

    Price Controls

    • A price set above equilibrium will create a surplus in market supply.

    Demand Curve Shifts

    • Shifting demand curves to the right can be caused by factors such as a rise in incomes, a fall in the price of complements, and an increase in the cost of substitutes.

    Price Elasticity of Demand

    • A small increase in price leads to a small rise in demand, meaning consumers are generally insensitive to price changes.
    • The elasticity of demand for a product is affected by the availability of substitutes, whether it's considered a necessity or luxury, and the time period considered.
    • Cadbury's Fruit 'n Nut will be more elastic than the demand for chocolate generally because it has more substitutes.
    • Fruit juices have more substitutes, while milk is a necessity, leading to a higher elasticity for fruit juice.
    • Chicken does not have any close substitutes, explaining its lower elasticity compared to other poultry.

    Income Elasticity of Demand

    • An inferior good is a good whose demand decreases as income rises.
    • Goods such as standard white loaves, remould tyres, Tesco's baked beans, and McDonalds' hamburgers are likely to be inferior goods.
    • A negative income elasticity of demand indicates an inferior good.

    Price and Income Elasticity – One or the Other or Both

    • Rising sales of natural gas despite a price increase could indicate an increase in demand due to factors like increased usage or population growth, rather than an upward sloping demand curve.
    • January sales are due to increased demand elasticity during the month.
    • A tax on petrol will not have much effect on consumption due to the inelastic nature of demand, meaning consumers will continue to buy petrol.
    • A 10% rise in incomes will lead to an increase in petrol consumption exceeding 10% due to the income elasticity.

    Cross-price Elasticity of Demand

    • Goods that are substitutes have a positive cross-price elasticity of demand, meaning a price increase in one leads to increased demand for the other.
    • Complements have a negative cross-price elasticity of demand, indicating that a price increase in one good leads to decreased demand for the other.

    Elasticity of Supply

    • The elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.
    • The supply of a commodity is considered elastic if the percentage increase in output is greater than the percentage increase in price.
    • The supply of agricultural products is likely to be more elastic when farmers can easily switch from producing one crop to the other.

    Price Elasticity of Demand

    • A small change in price will lead to a small change in quantity demanded when demand is inelastic.
    • Factors that affect the elasticity of demand are substitutes, luxuries vs necessities, and time.
    • Cadbury's Fruit 'n Nut will have more elastic demand due to more substitutes.
    • The demand for fruit juice is more elastic compared to milk because fruit juice has more substitutes and milk is a necessity.
    • The demand for chicken is less elastic compared to other poultry because chicken has no close substitutes.
    • The price elasticity of demand for petrol can be calculated from the change in price and quantity. However, the estimate may not be accurate as it may be influenced by other factors like people getting paid on Fridays and needing petrol for the weekend.

    Income Elasticity of Demand

    • An inferior good is a good for which demand decreases when income increases.
    • Inferior goods have a negative income elasticity of demand.
    • Goods with a negative income elasticity of demand are considered inferior goods.

    Price and Income Elasticity

    • An increase in sales of natural gas despite an increase in price can be explained by factors other than an upward sloping demand curve, such as increased demand due to other factors like a cold winter.
    • January sales are held because the demand for goods is higher in January.

    Cross-Price Elasticity of Demand

    • The cross-price elasticity of demand indicates the relationship between the demand for one good and the price change of another good.
    • Substitutes have a positive cross-price elasticity of demand, while complements have a negative cross-price elasticity of demand.

    Elasticity of Supply

    • The elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.
    • The elasticity of supply can be calculated from the change in price and quantity of a good.
    • Supply is considered elastic when the percentage change in output is bigger than the percentage change in price.
    • Supply is expected to be more elastic for agricultural commodities than for manufactured products.

    Market Demand and Supply

    • Market demand is the total quantity demanded by all consumers at each price.
    • The equilibrium price and quantity occur where the market demand and supply curves intersect.
    • A bumper crop will shift the supply curve to the right, resulting in a lower equilibrium price and a higher equilibrium quantity.

    Factors Affecting House Prices

    • A less generous attitude from banks towards borrowers will shift the demand for houses to the left, leading to lower house prices.
    • Improved infrastructure, like better roads, will increase demand for houses in that area, shifting the demand curve to the right and increasing house prices.
    • Relaxing planning restrictions will increase the supply of housing, shifting the supply curve to the right, leading to lower house prices.
    • Rising house prices in a nearby area will increase demand for houses in the current area, shifting the demand curve to the right, leading to higher house prices.
    • An increase in building costs will decrease the supply of houses, shifting the supply curve left and raising house prices.
    • Higher interest rates make borrowing more expensive, reducing demand for houses and shifting the demand curve left resulting in a lower equilibrium price and a lower equilibrium quantity.
    • Negative events like riots will reduce demand for houses in the area, shifting the demand curve left, and lowering house prices.

    Wheat Market

    • A renewed economic growth in Asia with rising income levels will increase demand for wheat, shifting the demand curve to the right, leading to higher prices and a larger quantity traded.
    • An increase in popularity of diets that avoid wheat will decrease demand for wheat, shifting the demand curve to the left, lowering prices and decreasing the quantity traded.
    • A severe drought in a key wheat-producing area will decrease the supply of wheat, shifting the supply curve to the left, leading to higher prices and a lower quantity traded.
    • Supermarkets offering bread at a loss will increase demand for bread, leading to an increased demand for wheat, shifting the demand curve to the right, resulting in higher wheat prices.
    • Global warming causing worse climatic conditions will decrease the supply of wheat, shifting the supply curve to the left, resulting in higher prices and a lower quantity traded.
    • Larger subsidies for farmers will increase the supply of wheat, shifting the supply curve to the right, resulting in lower prices and a larger quantity traded.
    • A rise in global prices for other cereals will increase the demand for wheat, shifting the curve to the right, resulting in higher prices and more wheat traded.
    • WTO preventing subsidies to farmers will decrease the supply of wheat, shifting the supply curve to the left, leading to higher wheat prices and a lower quantity traded.
    • Development of drought-resistant wheat strains will increase supply, shifting the supply curve to the right, resulting in lower wheat prices and a larger quantity traded.

    Price of Fresh Vegetables

    • Prices of fresh vegetables fall when they are in season due to increased supply from harvests and reduced demand due to the availability of less expensive vegetables.
    • Individual farmers cannot prevent the price fall as the market price is determined by the overall supply and demand for fresh vegetables.

    Supply of Oil for Central Heating

    • New oil fields coming online will increase supply, shifting the supply curve to the right.
    • Increased demand for central heating will move the supply curve upward along the curve.
    • Lower gas prices will decrease demand for oil, moving the supply curve downward along the curve.
    • Anticipated upsurge in central heating oil demand will decrease supply, shifting the supply curve to the left as companies conserve inventory.
    • Increased demand for petrol will increase supply of oil as they are in joint supply, shifting the supply curve to the right.
    • New refining technology that lowers costs will increase supply, shifting the supply curve right.
    • Higher prices for all oil products will move the supply curve upwards along the curve.

    T-shirt Market

    • Equilibrium in a free market occurs when quantity demanded equals quantity supplied.

    Bread Market

    • A rise in wheat prices will increase the cost of producing bread, shifting the supply curve of bread to the left.
    • A rise in the price of butter and margarine will increase demand for bread as substitute goods, shifting the demand curve for bread to the right.
    • A rise in the price of rice, pasta, and potatoes will increase demand for bread as substitute goods, shifting the demand curve for bread to the right.

    Foreign Holiday Prices

    • Factors affecting demand for foreign holidays can include:

      • Changes in disposable income (e.g., economic recession)
      • Changes in the exchange rate (e.g., depreciation of the local currency against the holiday destination currency)
      • The popularity of certain destinations
      • Changes in travel costs (e.g., airfares, fuel costs)
      • Security and safety concerns at a destination

    • Factors affecting supply of foreign holidays can include:

      • Increased competition in the tourism market
      • Costs of operating travel businesses (e.g., fuel costs, hotel prices)
      • Availability of resources (e.g., hotel rooms, flights)
      • Government policies (e.g., visa requirements, environmental regulations)

    Butter Market

    • An increase in the price of margarine, a close substitute for butter, will increase demand for butter, shifting the demand curve right, leading to higher equilibrium prices and a larger equilibrium quantity.
    • A decrease in the price of milk, a key input for butter production, will increase the supply of butter shifting the supply curve right, leading to a lower equilibrium price and a larger equilibrium quantity.
    • A decrease in the number of dairy farms will decrease the supply of butter, shifting the supply curve to the left, leading to higher equilibrium prices and a smaller equilibrium quantity.
    • A successful advertising campaign promoting butter's health benefits will increase demand for butter, shifting the demand curve right, leading to higher equilibrium prices and a larger equilibrium quantity.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    BE Mock Test Answers PDF
    Elasticity - Seminar Guide PDF
    Seminar 3 with Answers PDF

    Description

    Test your knowledge on the critical concepts of demand shifts, national income, resource scarcity, and free market dynamics in this quiz. Explore how these economic principles impact consumer behavior and overall market efficiency. Understand the factors influencing housing demand and the trade cycle's recovery phase.

    More Like This

    Understanding Demand Curve Shifts
    5 questions

    Understanding Demand Curve Shifts

    BestKnownSpring avatar
    BestKnownSpring
    Demand Curve and Law of Diminishing Marginal Utility Quiz
    10 questions

    Demand Curve and Law of Diminishing Marginal Utility Quiz

    AdulatoryEpilogue avatar
    AdulatoryEpilogue
    Demand Curve Properties & Exceptions
    10 questions

    Demand Curve Properties & Exceptions

    BrotherlyRuthenium avatar
    BrotherlyRuthenium
    Microeconomics Demand Curve Quiz
    48 questions

    Microeconomics Demand Curve Quiz

    TerrificGarnet2622 avatar
    TerrificGarnet2622
    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser