IBDP Economics HL – Microeconomics – Elasticity of demand -Paper 1 Exam Style Practice Questions
Elasticity of demand Paper 1?
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Exam Style Question for IBDP Economics HL- Elasticity of demand -Paper 1
Question
Explain why price elasticity of demand varies along the length of a straight-line demand curve.
▶️Answer/Explanation
Answers may include:
- definitions of demand curve, price elasticity of demand
- diagram to show differing price elasticities of demand along a straight-line demand curve
- explanation why the price elasticity of demand varies along the length of the demand curve, using the diagram, the elasticity formula and an economic rationale (eg when the price is higher the proportion of income spent on the good is higher)
- examples (hypothetical numerical example to support the explanation or a hypothetical example of a single good or service sold at different prices and having different price elasticities of demand).
Question
Examine the significance of price elasticity of demand for the decision-making of firms and governments.
▶️Answer/Explanation
Answers may include:
- definition of price elasticity of demand (PED)
- diagrams to show the relationship between PED, price changes and the total revenue of firms; the relationships between PED, the size of an indirect tax, tax incidence, quantity produced/consumed and government tax revenue
- explanations of the relationship between: PED, price changes and total revenue of firms; how PED affects government tax revenue, production/consumption and tax incidence
- examples of PED proving significant for firms and governments in practice
- synthesis and evaluation (examine).
Question
Explain two reasons why the demand for primary commodities might be price inelastic.
▶️Answer/Explanation
Answers may include:
- definitions of price inelastic demand, primary commodity, demand
- diagram to show price inelastic demand
- explanation of why the demand for primary commodities might be price inelastic that refers to two reasons for low price elasticity of demand, such as the lack of close substitutes, high degree of necessity and low proportion of income spent on the primary commodity
- examples of primary commodities with price inelastic demand.
Question
Explain how knowledge of price elasticity of demand could be used by a firm that is considering changing the price of its product.
▶️Answer/Explanation
Answers may include:
- definition of price elasticity of demand
- diagram to show the revenue consequences of elasticity when the price is changed
- explanation of how total revenue changes following a change in price depending on whether the demand for the product is price elastic, price inelastic or unit elastic
- examples of “real-world” products with different elasticities to support the explanation (students do not need to provide actual total revenue figures, but should provide a consideration of why demand for the product might be more or less likely to be elastic or inelastic).
Question
Discuss the significance of price elasticity of demand (PED) for a government imposing an indirect tax on a good.
▶️Answer/Explanation
Answers may include:
- definitions of indirect tax, price elasticity of demand (PED)
- diagram(s) to show the effect of taxation on the market for a good and how the price elasticity of demand (PED) will impact the outcome
- explanation that the government uses indirect taxes to raise revenue as well as to limit the production/consumption of demerit goods
- examples of specific products upon which a government has imposed indirect taxes in practice
- synthesis or evaluation (discuss).
Question
Explain why products may have different income elasticities of demand
▶️Answer/Explanation
Answers may include:
- Terminology: income elasticity of demand (YED)
- Explanation: that a positive YED is where an increase in income leads to an increase in demand/a decrease in income leads to a decrease in demand and that this is associated with normal goods; that a negative YED is where an increase in income leads to a decrease in demand/a decrease in income leads to an increase in demand and that is associated with inferior goods; that some goods may have a high income elasticity of demand (ie income elastic) and some may have a low income elasticity of demand (ie income inelastic).
- Diagram: demand and supply diagram showing relevant shifts of demand, Engel curve.