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Click here to Commence quiz Click here to Commence quiz © APT Initiatives Ltd UNIT 1 Markets & Market Failure 1.2 The Allocation of Resources in Competitive.

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Presentation on theme: "Click here to Commence quiz Click here to Commence quiz © APT Initiatives Ltd UNIT 1 Markets & Market Failure 1.2 The Allocation of Resources in Competitive."— Presentation transcript:

1 Click here to Commence quiz Click here to Commence quiz © APT Initiatives Ltd UNIT 1 Markets & Market Failure 1.2 The Allocation of Resources in Competitive Markets Test 2

2 Movement down a demand curve arises because of… APT Initiatives Ltd Incorrect Next question an increase in income a reduction in price a decrease in income an increase in price Changes in income cause a shift of the demand curve, whereas changes in price (prompted by a rightward shift in the supply curve) cause a downward movement along the demand curve. A movement down a demand curve means a reduction in price which causes an extension of demand. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 1

3 A demand curve for a product would shift to the left if there was… APT Initiatives Ltd Incorrect Correct Next question an increase in income an increase in its price a decrease in the price of a complementary product a decrease in the price of a complementary product a decrease in the price of a substitute product a decrease in the price of a substitute product We can rule out B which causes a movement along the demand curve. A and D cause a rightward shift of the demand curve (an increase in demand). Only D causes a decrease in demand for the product. This is because people switch to the less expensive substitute. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 2

4 A demand curve for a DVD is drawn on the assumption that all factors are constant except… APT Initiatives Ltd Correct Incorrect Next question the price of the DVD the price of substitute products the price of DVD players consumer incomes This is the ceteris paribus (other things remain equal) principle. We assume that all factors remain unchanged except the variable that we are focusing on. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 3

5 A garage reduces the price of a new model from £15,000 to £13,500. As a result, the quantity demanded rises from 20 units a week to 23 units a week. The price elasticity of demand is… APT Initiatives Ltd Incorrect Correct Incorrect Next question Quantity demand rises by 15%. Price is reduced by 10%. PED = +15% / -10% = Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 4

6 If demand for a product has unitary price elasticity, it means that… APT Initiatives Ltd Correct Incorrect Next question changing price will leave a business’s revenue unchanged changing price will leave a business’s revenue unchanged a percentage change in demand leads to the same percentage change in price a percentage change in demand leads to the same percentage change in price the price elasticity of demand is zero the product is a necessity A is correct because one feature of unitary demand is that price changes are cancelled out by quantity changes to leave revenue unchanged. B might be a tempting answer but the line of causation is the wrong way round. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 5

7 A car manufacturer has been studying market research data, shown in the table below, regarding income elasticity of demand for four of its models. Following a 5% fall in real incomes this business can expect… APT Initiatives Ltd Correct Incorrect Next question a fall in demand for the Paris of 3.5% a fall in demand for the Paris of 3.5% an increase in demand for the Viaggio of 5% an increase in demand for the Viaggio of 5% no change in demand for the Tucson no change in demand for the Tucson an increase in demand for the Belmont of 4% an increase in demand for the Belmont of 4% As income elasticity of demand is positive then it is certain that a fall in income leads to a fall in demand. Therefore, logic demands that only A can be correct. This is confirmed by the data -3.5 / -5 = Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 6 ModelIncome elasticity of demand Paris+0.7 Viaggio+1.0 Belmont+1.25 Tucson+2.2

8 A normal good is one where… APT Initiatives Ltd Correct Incorrect Next question demand increases when income increases demand increases when income increases demand rises when income falls demand changes in proportion to changes in income demand changes in proportion to changes in income demand falls when prices rise The explanation lies in the definition of a normal good. Most goods are normal goods. As our income rises, we buy an increased quantity of these goods. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 7

9 When the price of tea recently rose from £140 per kg to £160 per kg, demand for milk fell from 1.62m litres to 1.57m litres. To two decimal places, the cross elasticity of demand was… APT Initiatives Ltd Incorrect Correct Next question Demand fell by Price rose by 14.29%. Cross elasticity of demand is -3.09% / = Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 8

10 Movement down a supply curve reflects… APT Initiatives Ltd Incorrect Next question a shift in demand arising from higher incomes a shift in demand arising from higher incomes a shift in demand arising from a decrease in the demand for a complementary product a shift in demand arising from a decrease in the demand for a complementary product an increase in equilibrium price a shift in supply arising from an increase in supplier costs a shift in supply arising from an increase in supplier costs A shift of a demand curve causes a movement along the supply curve. As demand for a complementary product has declined so has the demand for the product with which we are concerned. The demand for this product shifts inwards and there is a sliding down on the supply curve. To fully understand this, construct a sketch graph. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 9

11 A shift to the left in a supply curve would arise if… APT Initiatives Ltd Incorrect Correct Incorrect Next question a unit tax on the product was reduced a unit tax on the product was reduced there was an increase in consumer incomes there was an increase in consumer incomes none of the above there was an improvement in technology there was an improvement in technology A shift to the left means a decrease in supply. A and C would cause an increase in supply. Notice that A is not the imposition of a tax, but a reduction in a tax. B would impact upon demand rather than supply. Hence, none of the above is the correct answer. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 10

12 A supply curve would shift to the right when… APT Initiatives Ltd Incorrect Correct Incorrect Next question there was a decrease in the price elasticity of supply there was a decrease in the price elasticity of supply producers increased output in response to an increase in market price producers increased output in response to an increase in market price raw material costs fall output per employee falls A shift of the supply curve to the right (more is supplied at each price) is the result of a reduction in the cost of production. Of the four responses, only D relates to a fall in the cost of production. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 11

13 The elasticity of supply for a product is more likely to change if… APT Initiatives Ltd Incorrect Correct Next question output increases significantly the business responds to an increase in market price the business responds to an increase in market price there is a change in the price elasticity of demand there is a change in the price elasticity of demand the business has found some spare capacity the business has found some spare capacity Existence of spare capacity facilitates a rise in output, thus it makes supply more elastic. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 12

14 If price elasticity of supply is +2.2, what percentage rise (to two decimal places) is required to bring about a 5.6% increase in the quantity supplied?… APT Initiatives Ltd Incorrect Correct Next question 12.23% 5.25% 2.12% 2.55% +2.2 = +5.6% / x. Therefore: x = 5.6% / 2.2 = Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 13

15 Refer to the diagram below. The producers’ revenue is represented by the triangles… APT Initiatives Ltd Incorrect Next question A + D A + C A + B + C B + C Triangles A and C combined = price multiplied by quantity = sales revenue. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 14 S D Price D A C B Quantity

16 A shift to the right in a demand curve, where supply is perfectly inelastic will result in… APT Initiatives Ltd Incorrect Next question an increase in price and quantity sold an increase in producer revenue, proportional to the increase in price an increase in producer revenue, proportional to the increase in price a fall in quantity sold and in producer revenue a fall in quantity sold and in producer revenue an increase in producer revenue, and quantity supplied an increase in producer revenue, and quantity supplied The rise in demand pushes up price and if supply is perfectly inelastic then quantity sold will remain unchanged. Logically, if price rises by 10% so will revenue in these circumstances. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 15

17 An equilibrium price for a product is certain to rise when… APT Initiatives Ltd Incorrect Correct Incorrect Next question business costs rise and the price of a substitute falls business costs rise and the price of a substitute falls demand is perfectly inelastic and technology improves production efficiency demand is perfectly inelastic and technology improves production efficiency incomes rise and supply is perfectly inelastic incomes rise and supply is perfectly inelastic supply and demand are both perfectly inelastic supply and demand are both perfectly inelastic D is the only combination of events which is certain to lead to a rise in price. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 16

18 Markets for agricultural products can often function poorly because… APT Initiatives Ltd Correct Incorrect Next question price elasticity of supply is low demand for these products is volatile the products are too expensive there is a shortage of agricultural land Price elasticity is low because the production cycle is long, eg a planned increase in the grain production must await the next harvest which, in the case of the UK, will be next year. In the meantime farmers will be unable to respond to changes in demand and, as a result, the whole of the adjustment will be in the form of price rises. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 17

19 Supply of health care services is price inelastic because… APT Initiatives Ltd Incorrect Next question improving technology improves decision-making and treatment outcomes improving technology improves decision-making and treatment outcomes it is labour-intensive, much of which requires prolonged and intensive training it is labour-intensive, much of which requires prolonged and intensive training the private sector is becoming more significant, as it relieves pressure on the NHS the private sector is becoming more significant, as it relieves pressure on the NHS people are living longer and demand a quicker response to their health concerns people are living longer and demand a quicker response to their health concerns As it takes many years to train medical professionals, supply cannot respond quickly to changing demand. The other three statements might be accurate in themselves, but do not explain why supply is inelastic. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 18

20 If rented accommodation is seen as an inferior good compared with owner occupation then… APT Initiatives Ltd Correct Incorrect Next question demand for rented accommodation rises as incomes fall demand for rented accommodation rises as incomes fall demand for owner occupation falls as income rises demand for owner occupation falls as income rises cross elasticity between rented accommodation and owner occupied accommodation is negative cross elasticity between rented accommodation and owner occupied accommodation is negative the income elasticity of demand for rented accommodation is positive the income elasticity of demand for rented accommodation is positive An inferior good is defined as one in which demand rises as income falls. In the case of an inferior good income elasticity is negative. Cross elasticity between substitutes is positive not negative. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 19

21 The entry of a new competitor to an existing market will… APT Initiatives Ltd Incorrect Next question result in higher prices force prices down increase demand for the product increase the degree of monopoly within the market increase the degree of monopoly within the market The entry of new firms increases competitive forces in the market and will push prices down, illustrated by a leftward shift in the demand curve for the products of established market participants. Correct AQA AS Economics Unit 1 – Markets & Market Failure Question 20

22 Demand for oil for chemicals has led to an increase in the price of petrol. This relationship is an example of products in… APT Initiatives Ltd Incorrect Correct Next question joint supply joint demand competitive demand composite demand Composite demand refers to demand for a good that is wanted for more than one purpose, so that an increase in demand for one purpose reduces the availability of supply for other purposes. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 21

23 The relationship between the demand for computers and the demand for computer technicians is an example of… APT Initiatives Ltd Correct Incorrect Next question derived demand joint demand complementary demand composite demand The demand for computer technicians is derived from (comes from) the demand for computers. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 22

24 Resources are often allocated most efficiently through the price mechanism because… APT Initiatives Ltd Incorrect Correct Next question those factors of production which produce the most get paid the least those factors of production which produce the most get paid the least the competition which arises results in high profits the competition which arises results in high profits the resulting output is distributed fairly among individuals the resulting output is distributed fairly among individuals prices of resources rise as demand for their product rises prices of resources rise as demand for their product rises Changes in consumer demand are reflected in changes in the relative prices of the products, and also of the factors of production needed to make the products. This ensures that resources are shifted into the production of goods required by consumers. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 23

25 Which of the following statements is not true? APT Initiatives Ltd Incorrect Correct Incorrect Next question The price mechanism ensures that the quantity demanded equals the quantity supplied The price mechanism ensures that the quantity demanded equals the quantity supplied Rationing coupons is unnecessary in a free market Rationing coupons is unnecessary in a free market The price mechanism ensures that everyone who wants to buy the product is able to do so The price mechanism ensures that everyone who wants to buy the product is able to do so A black market only exists when price is fixed below the equilibrium level A black market only exists when price is fixed below the equilibrium level The weakness in response D (and why it is not true) is that there is no reference to price or willingness to pay. We might all like to acquire certain goods, but without the means and willingness to pay our demand is not effective. For Economists, demand is only meaningful if desire is backed up by ability and willingness to pay. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 24

26 Resources are allocated in a market economy in response to… APT Initiatives Ltd Incorrect Correct Incorrect Exit the resources which are available to producers the resources which are available to producers government’s objective of increasing the population’s standard of living government’s objective of increasing the population’s standard of living the products consumers wish to buy the need for everyone to have the necessities which they need the need for everyone to have the necessities which they need In the free market the consumer is sovereign. In a competitive market the profit motive ensures that supply responds to demand. Incorrect AQA AS Economics Unit 1 – Markets & Market Failure Question 25


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