Elasticity of demand Paper 1

IBDP Economics  SL  – Microeconomics- Elasticity of demand Paper 1- Exam Style Practice Questions

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Elasticity of demand Paper 1

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Exam Style Question for Microeconomics-Elasticity of demand Paper 1

Question

Explain how the price elasticity of demand for a good might be affected by the number and closeness of substitutes.

▶️Answer/Explanation

Answers may include:

  • definitions of price elasticity of demand and substitutes
  • diagram of goods with different price elasticities of demand.
  • explanation that the more close substitutes a good has the more price elastic its demand tends to be
  • examples of how the number of substitutes a good has affects its price elasticity of demand.

Question

Examine the significance of price elasticity of demand for the decision making of firms and government.

▶️Answer/Explanation

Answers may include:

  • definition of price elasticity of demand (PED)
  • diagram to show how total revenue/tax revenue changes when price/tax changes
  • explanation that a change in price will lead to a fall/rise in total revenue/tax revenue depending on the value of PED
  • examples of goods where a change in price does lead to a rise/fall in total revenue/tax revenue
  • synthesis or evaluation (examine the significance).

Question

Explain two reasons why the demand for manufactured goods might be price elastic.

▶️Answer/Explanation

Answers may include:

  • definitions of PED, price elastic, demand
  • diagram to show a relatively elastic demand curve, elastic section on a demand curve
  • explanation of two determinants of the elastic demand of manufactured goods, including: the number and closeness of substitutes, the degree of luxury/necessity, time and the proportion of income spent on the good
  • examples of manufactured goods with a relatively price elastic demand.

Question

Explain why the price elasticity of demand for primary commodities is often relatively low while the price elasticity of demand for manufactured goods is often relatively high.

▶️Answer/Explanation

Answers may include:

  • definitions of PED, primary commodities, manufactured goods 
  • diagram(s) to show low (inelastic) demand for primary commodities and high (elastic) demand for manufactured goods
  • explanation of low PED for primary commodities and high PED for manufactured goods in terms of the number and closeness of substitutes, degree of necessity and proportion of income spent on the good
  • examples of primary commodities with a relatively low PED and manufactured goods with a relatively high PED.

Question

Explain how a decrease in income might affect the demand for normal goods and the demand for inferior goods.

▶️Answer/Explanation

Answers may include:

  • definitions of demand, normal good, inferior good
  • diagram(s) to show a how a decrease in income affects the demand for a normal good and an inferior good
  • explanation of how a decrease in income reduces the demand for normal goods and increases the demand for inferior goods
  • examples of normal goods and inferior goods.

Question

Examine the significance of price elasticity of demand for the decision making of firms and government.

▶️Answer/Explanation

Answers may include:

  • definition of price elasticity of demand (PED)
  • diagram to show how total revenue/tax revenue changes when price/tax changes
  • explanation that a change in price will lead to a fall/rise in total revenue/tax revenue depending on the value of PED
  • examples of goods where a change in price does lead to a rise/fall in total revenue/tax revenue
  • synthesis or evaluation (examine the significance).

Question

Explain how the price elasticity of demand for a good might be affected by the number and closeness of substitutes.

▶️Answer/Explanation

Answers may include:

  • definitions of price elasticity of demand and substitutes
  • diagram of goods with different price elasticities of demand.
  • explanation that the more close substitutes a good has the more price elastic its demand tends to be
  • examples of how the number of substitutes a good has affects its price elasticity of demand.
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