Supply, Demand & Elasticity

th 6 Year Economics Higher Level Rónán Murdock Supply, Demand & Elasticity   No part of this publication may be copied, reproduced or transmitted...
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6 Year Economics Higher Level Rónán Murdock

Supply, Demand & Elasticity

 

No part of this publication may be copied, reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission from The Dublin School of Grinds. Ref: 6/Eco/h/rm/supply, demand & elasticity

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Timetable An extensive range of course options are available over a two-week period to cater for students’ timetable needs. Courses are held over the following weeks: » Monday 21st March – Friday 25th March 2016 » Monday 28th March – Friday 1st April 2016 All Easter Revision Courses take place in The Talbot Hotel, Stillorgan (formerly known as The Stillorgan Park Hotel). 6th Year Easter Revision Courses

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th

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Due to large course content, these subjects have been divided into two courses. For a full list of topics covered in these courses, please see 3 pages ahead.

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Supply, demand and elasticity has always appeared as at least one full long question in the leaving cert. (18.75%). This chart below outlines the marks allocated on each section by year. Topic Supply & Demand Elasticity

15 14 13 12 11 10 09 08 07 06 05 04 03 02 01 00 99 75 75 75 25 75 45 30 60 75 15 75 75 75 75 75 75 50 30 45 15 60 75 75 75 75 75

Checklist for mastering this topic 1. 2. 3. 4.

Definitions learnt off Bullet points covered on past questions Marking scheme for graphs covered Aware of the common trick questions (especially with elasticity)

The four areas above are essential to achieving a high grade in this section. Topic The Consumer Demand Supply Supply & Demand – Long Questions Supply & Demand – Short Questions Elasticity Elasticity Long and Short Questions

© Dublin School of Grinds

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Rónán Murdock

The Consumer The individual who makes the decision to buy goods or services for their own personal use.

SLIDER Assumptions about Consumer Behaviour

S

1. The consumer aims to gets maximum Satisfaction from that income A consumer will spend their limited income in such a way that they will achieve the most satisfaction from their money. He will obey the Equi-Marginal Principal of Consumer Behaviour.

LI

2. The consumer has a Limited Income The consumer’s income is not large enough to satisfy their needs and wants, therefore the consumer must choose between those goods he wishes to buy.

D

3. The consumer is subject to the law of Diminishing marginal utility As a consumer consumes additional units of a good their marginal utility for this good will eventually decline.

E

4. Economic goods The consumer will only spend his/her income on economic goods.

R

5. The consumer acts Rationally The consumer acts in that manner consistent with his preferences. If the person sees an identical commodity priced differently in two adjoining shops they will buy it at the lower price.

Economic Goods Is a product or service which commands a price, derives utility and is transferable. Characteristics of Economic Goods à PUT – PUT – PUT - PUT 1. It must command a Price Its supply must be scarce in relation to the demand for it. If not people will not be prepared to pay a price to obtain it. 2. It must provide you with Utility The good must give you a feeling of satisfaction. Anything which is a nuisance does not and so is not an economic good. 3. It must be Transferable For an item to be considered an economic good it must be capable of being transferred from one person to another © Dublin School of Grinds

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Rónán Murdock

Examples of Goods which are not Economic Goods 1) Fresh Air They are plentiful in supply/not scarce – commands no price 2) Weeds They do not provide you with utility – you are not prepared to pay 3) Beauty/Good Health They are not capable of being sold.

Utility Utility à Is the amount of satisfaction derived from the consumption of a good. Marginal Utility à Is the change in satisfaction resulting from consuming an extra unit of a good. The Law of Diminishing Marginal Utility This law states that as a consumer consumes additional units of a good the marginal utility/ extra satisfaction derived from each additional unit consumed will eventually decline.

TOOM Assumptions under the Law of Diminishing Marginal Utility 1. Time lapse Time Lapse between consumption of successive units. Sufficient time has not elapsed between the consumption of successive units. If a person eats an orange on Monday, one on Thursday and one on Sunday, because of the time which has elapsed between the consumption of each extra orange marginal utility may not diminish. 2. Applies after a certain point called the Origin. The origin is the minimum quantity of the commodity which can be used effectively and until this stage has been reached, marginal utility may not diminish. 3. ‘Other factors’ affecting utility do not change. The law is based on the assumption that other factors which may affect a consumer’s utility do not change including income levels, the nature of successive units of the commodity; and the consumer’s taste for the commodity. 4. Addictive Goods & Medicine It does not apply to Addictive goods. The consumer may gain increasing marginal utility by consuming each additional unit of an addictive good. © Dublin School of Grinds

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Sample Leaving Cert Question As consumers consume more units of a good their marginal utility will eventually fall.

(i) (ii)

Explain the underlined term. _____________________________________________________________ Suggest one good a person may consume which may not result in a fall in their marginal utility. Explain your answer.

(iii) Complete the following table in your answerbook. State at what point diminishing marginal utility sets in and explain your choice. Number of units consumed Total utility in units Marginal utility in units

1 10 10

2 35

3 75

4 95

5 110

6 115

2009 – Section A – Question 7 – 17 Marks (a) State the Law of Diminishing Marginal Utility. Definition @ 9 marks This law states that as a consumer consumes additional units of a good the marginal utility/ extra satisfaction derived from each additional unit consumed will eventually decline. (b) The table below illustrates the Law of Diminishing Marginal Utility. Number of units consumed 1 2 3 4 5 6 Total Utility in units 30 65 85 100 110 115 Marginal Utility in units 30 5 figures @ 1mark each= 5 marks Complete the table and state the point after which diminishing utility set in. 3 marks Diminishing utility sets in after the consumption of the 2nd unit/when the 3rd unit is consumed.

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Rónán Murdock

Consumer Equilibrium A consumer is in equilibrium when they follow the equi-marginal principal. (i.e. they are maximising their utility, they are spending their income the best way possible)

The Law of Equi-Marginal Returns “A consumer will enjoy maximum satisfaction when the ratio of MU to price is the same for all the different types of goods which he buys”. MU1 = MU2 P1 P2

YOU NEED TO LEARN THIS FORMULA OFF BY HEART, YOU DON’T GET IT ON THE DAY!!

A consumer is in equilibrium buying item A for €2 and item B for €6. the marginal utility of item A is 5 utils and the marginal utility of item B is 15 utils. Illustrate this using the Equi-marginal returns formula. Answer MU of Good A = MU of Good B = 5 utils = 15 utils Price of Good A Price of Good B €2 €6 When two items are the same price the one with greater utility is purchased. 2000 – Section B – Question 1a – 20 Marks 1. (a) Explain, with the aid of an example, the Principle or Law of Equi-Marginal Returns of Consumer Behaviour.

USE ABOVE ANSWER!! 2006 – Section A – Question 6 – 17 Marks In equilibrium a consumer buys 8 bars of chocolate at €1.00 each and 12 sandwiches at €4.00 each. The marginal utility of the eight bar of chocolate is 10 utils. Using the EquiMarginal Principle of Consumer Behaviour - calculate the marginal utility of the twelfth sandwich. Show all your workings. 3 Stages in this question.

Answer:

1

MU1 = MU2 P1 P2

Note You must always put in the formula as they usually give half the marks for writing it down

Marginal Utility of Chocolate = Marginal Utility of Sandwiches Price of Chocolate Price of Sandwiches

2

3

10 = MUS €1.00 €4.00

© Dublin School of Grinds

MU Sandwiches = 40 utils

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Rónán Murdock

2005 – Section A – Question 6 – 17 Marks A consumer in equilibrium buys 10 cups of coffee at €2 each and 10 phone cards at €6 each. The marginal utility of the cups of coffee is 5 utils. What is the marginal utility of phone cards? Show your workings.

Try this question yourself Formula 1

2

Workings 3

Answer à Marginal utility of phone cards ___________ SAMPLE QUESTION A woman wins a shopping voucher worth €230. She can pick any quantity of goods A and B in her local furniture shop to the value of €230. The woman calculates her utility for each of the two goods to be as follows. Quantity 1 2 3 4 5 6 (i) (ii)

GOOD A à €30 Total Marginal Utility Utility 210 210 345 465 555 615 660

GOOD B à €20 Total Marginal Utility Utility 100 100 180 240 280 300 310

Fill in the figures for marginal utility in the table provided. Prove that this woman should buy 5 units of good A and 4 units of good B in order to maximise her total utility?

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Rónán Murdock

MU1 = MU2 P1 P2 Remember you don’t get this formula on exam day. LEARN IT OFF!

Sample Question The table shows the utility schedules for three goods from which a utility maximising consumer must chose. The consumer has a budget of €120. What quantities should this consumer chose in order to maximise revenue. A, B or C. Quantity 1 2 3 4

Good X à €10 Good Y à €20 Good Z à €40 50 60 200 30 40 120 20 30 60 10 10 40

Tick the correct option below. A

2 of X, 3 of Y and 1 of Z

B

2 of X, 1 of Y and 2 of Z

C

4 of X, 4 of Y and 0 of Z

Formula

A

B

C

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Demand The Demand Curve slopes downwards from L to R indicating that the higher the price the less the quantity that will be demanded and the lower the price the greater the quantity that will be demanded. Demand curves which slope downwards from L to R are called Normal Demand Curves. Exceptions to the Law of Demand The cheapest available good. When these goods go up in price consumers buy more of it. Why? Because they have no choice. There is no cheaper alternative.

1) Giffen Goods Essentials which constitute a large proportion of the expenditure of low-income families e.g. white bread, potatoes, rice. If the price of bread is increased then people would probably continue to buy the quantity they require after the price increase. Example à White Bread Paul earns a low wage. After all his bills he has €20 per day to feed his family. His family needs 4 kilos of food every per day to live. Paul can buy either meat or bread to feed his family. Meat is charged @ €8 per kilo and bread is charged at €4 per kilo. Ideally Paul would like to buy as much meat as he can afford as it is tastier and healthier. With food prices at this rate Paul can afford to buy 1 kilo of meat (€8) and 3 kilos of bread (€4 x 3 = €12). à €8 + €12 = €20. However, if the price of bread was to rise to €5 per kilo and the price of meat was to stay the same Paul would have to buy more bread as he can no longer afford to buy any meat. (€5 x 4kg = €20). So with Giffen Goods if prices rise it has a Neutral or Positive effect on demand.

2) Snob items or Goods of Ostentation When the price of these goods falls (Rolls Royce) they lose their exclusiveness as more people can now afford them and so demand amongst the more wealthy for these goods decreases. Example à Rolex 3) Specualtitive Goods Goods, the demand for which is influenced by expectations – when the price of such goods increase, (stocks, houses) the quantity demanded may also increase because of the expectation of future price increases. Example à Houses , Shares

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What is the shape of their demand curve?

Rónán Murdock

Shifts in and Movements along a Demand Curve Movement A change in price results in a movement along a demand curve.

Shift A change in any of the other Six conditions leads to a shift in the demand curve. 1) 2) 3) 4) 5) 6)

Future Expectations Unplanned Events Change in price of Substitute good Change in consumer Taste / preferences Income Levels Change in Price of Complimentary goods.

To remember the 6 factors that cause a shift think if the word

FUSTIC .

These factors can create more or less demand.

More Demand

Less Demand

Demand Curve Shifts to Right

Demand Curve Shifts to Left

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Rónán Murdock

State à 2 Marks Explain à 2 Marks Effect à 2 Marks 5 Points at 6 Marks

Sample Question – 30 Marks State and explain five factors that would cause a shift in a demand curve for concert tickets. In each case explain how the factor affects the demand curve. FACTORS  THAT  CAUSE  A  SHIFT  IN  THE  DEMAND  CURVE?  

FUSTIC 1. Expectations About the Future If consumers expects the performance not to repeated they may increase their demand. If they expect ticket price to rise in the future they may buy the ticket now and demand will increase. Effect à Demand Curve shifts Right 2.

Unplanned Events Factors such as the weather may influence the current demand for tickets e.g. good weather may increase demand for an outdoor event. Effect à

3. Change in price of Substitute Good If the price of tickets for an alternative concert increased then demand for tickets for this concert may increase. Effect à 4.

Taste / Preference If the consumer’s preference for the artist/event becomes stronger then the demand for concert tickets will increase. Effect à

5.

Income levels If income rises then the demand for concert tickets will increase, assuming concert tickets is a normal good. Effect à

6. Change in price of Complementary good If the price of hotel accommodation near the concert venue decreased then demand for the concert tickets may increase. Effect à

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Rónán Murdock

Supply The supply of a good/service is the total quantity which is made available at any given price over a specific time period. The Supply Equation - Sx = f(Px, Pog, C, Tn) The Supply Curve slopes upwards from L to R because the higher the price the greater the quantity supplied i.e. a positive relationship between P and Q. Other Types of Supply Curves 1) Perfectly Inelastic Supply Curve There is a supply available and the quantity supplied will not fall even if there is a price reduction – not common – fish 2) Minimum Price

No supply will be made available below a certain price. 3) Limited Capacity

At a certain point there will be no further increase in quantity supplied as the firm has now reached maximum productive capacity even though prices may continue to rise.

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Rónán Murdock

Shifts in and Movements Along a Supply Curve A change in price leads to a movement along the Supply Curve. Changes in anything else leads to a shift in the Supply Curve

CUTEST The following factors causes shifts in a supply curve 1. The Cost of producing the product. 2.

Unplanned factors.

3. The state of the firm’s production TEchnology 4. Number of Sellers in the industry. 5.

Taxation / Subsidy.

These factors can create more or less Supply .

More Supply

Less Supply

Supply Curve Shifts to Right

Supply Curve Shifts to Left

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Rónán Murdock

2007 – Section B – Question 1c – 25 Marks Outline FOUR factors, other than price, which affect the supply curve of an individual firm. In each case explain how the factor affects the supply curve.

CUTEST 1. The Cost of producing the product. If there is an increase in costs of factors of production, which a firm uses in the production of their good, then it will be more costly to manufacture the good. They will not continue to supply the same quantity of the good at the old prices – there will be a reduction in the quantity supplied. 2. Unplanned factors. There may be changes in the quantity supplied, which were never intended by the producer. Examples include agriculture – due to changes in the weather; diseases etc. In industry there may be shortages of raw materials, strikes etc. 3. The state of the firm’s production technology. As new machinery is invented, as labour becomes more specialised and efficient the factors of production become more efficient. It becomes possible to increase their output even thought the payments they receive remain the same. 4. Number of Sellers in the industry. If the number of firms in the industry decreased e.g. due to rationalisation then the overall quantity supplied to the market would decrease 5. Taxation / Subsidy. If the government were to reduce the rates of taxation on the raw materials used in the manufacture of a commodity, this represents a reduction in the cost of production and hence quantity supplied would increase. If a subsidy is granted on the raw materials or on the labour employed by the firm, this has the effect of reducing costs and thereby resulting in an increase in the quantity supplied.

C U TE S T

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Rónán Murdock

Supply and Demand Combined Market Price for a commodity is determined by the intersection of Supply and Demand Curves

Effects of Shifts on Equilibrium

There are 4 possible outcomes you must figure out what happens first.

1. More Demand

Demand Curve Shifts to Right

2. Less Demand

Demand Curve Shifts to Left

3. More Supply

Supply Curve Shifts to Right

4. Less Supply

Supply Curve Shifts to Left

Whenever you are told to explain your answer think of D.E.R.E.

© Dublin School of Grinds

D

Discuss

E

Effect

R

Reason

E

Equilibrium

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Rónán Murdock

Remember nothing has happened to the consumers income / wages. That is still the same.

WHAT HAPPENS WHEN THE PRICE OF A GOOD FALLS? òòPrice Fallsòò Price Falls òò Price Falls òò Price Falls òò Price Falls òò

Two things happen 1. The substitution effect 2. The income effect The Substitution Effect i. ii.

The good becomes cheaper compared to other goods. The substitution effect will always push the consumer in one direction.

HE  /  SHE  WILL  BUY  MORE  OF  THE  GOOD.   Income Effect i. ii.

When a good drops in price it means that the consumer’s purchasing power increases as a result of his/her real income increasing. However this doesn’t necessarily mean that the consumer will buy more of the good.

Normal  Good  =  More  [email protected]   For  a  normal  good  the  fact  that  real  income  has   increased  (as  a  result  of  the  good  being  cheaper)  will   cause  the  consumer  to  buy  more.   Inferior  /  Giffen  Good  =  Less  [email protected]   If  the  good  is  inferior  or  giffen,  the  increase  in   real  income  will  cause  the  consumer  to  buy  less   of  the  good.  

On   the   next   page   we   will   see   what   happens   when   the   income   effect  and  substitution  effect  are  combined.   © Dublin School of Grinds

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Rónán Murdock

Effects  of  a  Price  Reduction  on  the  following  goods     Substitution Effect Good X Normal Good Good Y Inferior Good

Good Z Giffen Good

Income Effect

Overall Effect

Positive Positive Demand rises as Demand rises as real good is relatively + income rises = Demand Rises by 20 cheaper (+10 units) (10 Units) units Positive Negative Demand rises by 4 Demand rises as Demand falls as real units because the good is relatively + income rises = positive substitution cheaper (- 6 Units) effect is greater than (+10 units) the negative Income effect Positive Negative Demand falls by 2 Demand rises as Demand falls as real units because the good is relatively + income rises = negative Income effect cheaper (- 8 Units) is greater than the (+6 Units) positive substitution effect

2013 Section B – Question 1c- 20 Marks A fall in the price of a consumer product has both a substitution effect and an income effect. (i) Explain the underlined terms. Substitution effect When the price of a good rises customers may shift to cheaper substitutes to maximise utility.

Income effect When the price of a good falls it means that the consumer’s real income will rise.

(ii) If the price of an inferior product falls (all other things being equal) will more or less of the product be purchased? Explain your answer with reference to the substitution effect and the income effect. Price of inferior Substitution effect Income effect product falls Effect on demand Demand will rise Demand will fall Explanation

The consumer is getting more marginal utility for this good now that it is cheaper.

Because the good is an inferior good, demand will fall as the consumer will buy less as income has increased.

NB→ This point must be added to get full marks: If positive substitution effect is greater than the negative income effect then demand for the product will increase © Dublin School of Grinds

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Past Leaving Cert Questions 2014 Section B – Question 1a- 25 Marks

No of Units Consumed Total Utility in Units Marginal Utility in Units

1 2 3 4 5 20 45 60 70 75 10 25 15 10 5

(i) State and explain the law illustrated in the above table.

(ii) Outline two assumptions underlying this law. T O O M 2014 Section B – Question 1b - 30 Marks

(i) State the ‘Law of Supply’, and illustrate with a labelled diagram.

(ii) Explain how technical progress affects the supply curve.

(iii) Outline, with the aid of labelled diagrams, two other factors that would cause a shift in the supply curve.

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2014 Section B – Question 1c - 20 Marks

Macklemore announces a concert in Ireland at a venue with a maximum capacity of 80,000 people. The tickets are priced at €65 and the concert sells out in hours. (i) Draw one labelled diagram, showing a market demand curve and a market supply curve that would be consistent with the above information. Explain your answer.

(ii) Explain, using the concept of Consumer Surplus, why it might make sense for the concert promoters to have different ticket prices (e.g. VIP section, seating section and standing section) for this concert.

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2013 Section B – Question 1a- 25 Marks (i) Distinguish between the terms ‘effective demand’ and ‘derived demand’. (ii) Outline two possible exceptions to the Law of Demand. (i) Effective  demand:  Effective  demand  is  demand  supported  by  the  necessary  purchasing power. (ii) Derived  demand:  Where  a  factor  or  production  is  demanded  not  for  its  own  use  but  for its  contribution  to  the  production  process.

2013 Section B – Question 1b – 30 Marks The market for a brand of blue jeans is in equilibrium. Explain, with the aid of a separate diagram in each case, the effects which each of the following is most likely to have on the equilibrium position: Whenever  you  are   ask  to  graph  a  change   to  the  Supply  and   Demand  curve  think   of  D.E.R.E.  

D.E.R.E. – D.E.R.E. – D.E.R.E. – D.E.R.E. Discuss 1. Effect 2. Reason 3. Equilibrium (New Price and New Quantity)

DERE

( i)

Due to the economic downturn there is a reduction in the real income of consumers. Effect Reason Equilibrium A fall in the price of cotton, a key input in the production of the blue jeans. Effect Reason Equilibrium The blue jeans have recently been endorsed by a popular sports star. Effect Reason Equilibrium

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Solution to the question on previous page. (i) Due  to  the  economic  downturn  there  is  a  reduction  in  the  real  income  of  consumers.

Effect Demand curve shifts to the left. Reason Consumer income has fallen and they can’t afford the product. Equilibrium There is a new lower price and new lower quantity.

DERE

(ii) A  fall  in  the  price  of  cotton,  a  key  input  in  the  production  of  the  blue  jeans.

Effect Supply curve shifts to the right. Reason The costs of production have fallen. Equilibrium There is a new lower price and new higher quantity. (iii) The  blue  jeans  have  recently  been  endorsed  by  a  popular  sports  star.

Effect Demand curve shifts to the right. Reason Consumers’ preference for these jeans has increased. Equilibrium There is a new higher price and new higher quantity

The Paradox of Value Adam Smith identified the problem that certain goods have a high value in use and a low value in exchange e.g. water, while others have a low value in use and a high value in exchange e.g. diamonds Therefore, it is the MU of a good and not its total utility which determines the price to be paid. Random question. How could the government reduce the consumption of soft drinks? 1. ____________________________ 2. ____________________________ 3. ____________________________

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2011 Section B – Question 1a – 20 Marks (i) Define the economic terms: individual (consumer) demand; market demand. (ii) Explain, with the aid of labelled diagrams, the relationship between individual (consumer) demand and market demand. Individual Demand: The quantity of a good an individual consumer demands at different prices. Market Demand: The total quantity of a good that all consumers demand at different prices. Consumer A

Consumer B

Market

2011 Section B – Question 1b – 30 Marks (i) Distinguish between the economic meanings of a ‘movement along a demand curve’ and a ‘shift in a demand curve’ for concert tickets. Illustrate your answer using diagrams. (16m) Movement along a Demand Curve This is a movement which is caused by a change in the selling price of the good itself, with all other factors being equal. Shift in a Demand Curve If any of the factors other than the price of the good itself change this will result in a shift in the demand curve. Movement along a Demand Curve

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Shift in a Demand Curve

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2011 Section B – Question 1b – 30 Marks (ii) State and explain two factors that would cause a shift in a demand curve for concert tickets. In each case explain how the factor affects the demand curve. (14m) 2 Points @ 7 Marks FACTORS  THAT  CAUSE  A  SHIFT  IN  THE  DEMAND  CURVE?  

FUSTIC 1) Expectations About the Future a. If consumers expects the performance not to repeated they may increase their demand. If they expect ticket price to rise in the future they may buy the ticket now and demand will increase. b. Effect à 2)

Unplanned Events a. Factors such as the weather may influence the current demand for tickets e.g. good weather may increase demand for an outdoor event. b. Effect à

3) Change in price of Substitute Good a. If the price of tickets for an alternative concert increased then demand for tickets for this concert may increase. b. Effect à 4)

Taste / Preference a. If the consumer’s preference for the artist/event becomes stronger then the demand for concert tickets will increase. b. Effect à

5)

Income levels a. If income rises then the demand for concert tickets will increase, assuming concert tickets is a normal good. b. Effect à

6) Change in price of Complementary good a. If the price of hotel accommodation near the concert venue decreased then demand for the concert tickets may increase. b. Effect à

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2012 – Section B – Question 1a – 25 Marks (i) Explain the Equi-Marginal Principle of consumer behaviour.

(ii) State and explain three other economic assumptions used to analyse consumer behaviour.

2011 Section B – Question 1c (i) – 25 Marks (12 Marks) The Law of Diminishing Marginal Utility states that as more of a product is consumed, eventually each additional unit of the good provides less additional utility (marginal utility). (i) Explain two assumptions underlying the Law of Diminishing Marginal Utility. (2P X 6M) (i) Assumptions underlying the Law of Diminishing Marginal Utility. 1. Applies after a certain point called the origin. 2. Addictive Goods 3. Time lapse 4. ‘Other factors’ affecting utility do not change. 2011 Section B – Question 1c (ii) – 25 Marks (13 Marks) A consumer in equilibrium buys 6 health bars at €0.80 each and 9 cartons of juice at €1.50 each. The marginal utility of the 6th health bar is 40 utils. (ii) Using the Equi-Marginal Principle of Consumer Behaviour calculate the marginal utility of the ninth carton of juice. (Show all your workings.) MU1 = MU2 P1 P2 Marginal Utility of Health Bars = Marginal Utility of Juice Price of Health Bars Price of Juice

. .

40 = X 80 150 X = 75 Utils © Dublin School of Grinds

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2010 Section B – Question 2a – 25 Marks (Sample Paper) (i) Outline the Law of Demand. (ii) State and explain three exceptions to the Law of Demand.

i. ii. 1) 2) 3) 2008 Section B – Question 3a – 20 Marks (Sample Paper) (7m, 7m, 6m) For something to be considered an economic good, it must possess certain characteristics. State and explain THREE of these characteristics. (20 marks) P U T 2008 Section B – Question 3b – 25 Marks (Sample Paper) State and explain FIVE factors which affect a consumer’s demand schedule.

This can be caused by a movement or shift Movement à Price Shift à FUSTIC 1. 2. 3. 4. 5.

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2008 Section B – Question 3c – 30 Marks (Sample Paper) (i) Show by means of a labelled diagram, the market demand and supply for a product. Indicate equilibrium price and quantity; (ii) Using a separate diagram in each case, show the effects of the following on equilibrium price and quantity: • A successful advertising campaign in favour of the product; • A tariff on imports of the product is increased

Advertising Campaign

Tariff on Imports

Effect

Effect

Reason

Reason

Equilibrium

Equilibrium

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2010 Section B – Question 1a – 30 Marks The data below represents the market demand and the market supply schedules for the soft drink ‘Quencher’. Price € 2.00 2.25 2.50 2.75 3.00

Quantity Demanded (‘000 units) 40 30 20 10 5

Quantity Supplied (‘000 units) 5 10 20 30 40

New Quantity Supplied

(i) Using the above data, draw the diagram showing the market demand and market supply curves for the soft drink ‘Quencher’. Clearly mark the point of equilibrium and the equilibrium price and quantity. (ii) Explain what it means for the market ‘to be in equilibrium’. (iii) Assume costs of production fell, resulting in an extra 20,000 units supplied at each of the above listed prices. With reference to your diagram in 1(a) (i) above and assuming that demand remains unchanged, draw the new supply curve. Clearly indicate the new point of equilibrium and the new equilibrium price and quantity.

(ii)Answer To be in Equilibrium, is where quantity demanded meets quantity supplied and there is no tendency for prices to change.

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Answer to question on previous page. (iii)

Notes on the graph below • The points on the curves are clearly laid out, make sure you do this. • Make sure to leave the same space between each point on the X and Y axis.

2010 Section B – Question 1c – 15 Marks Many health advisors wish to reduce the consumption of soft drinks. Advise the Minister for Health and Children on possible economic actions that the Government could take to reduce the consumption of soft drinks. 1. Taxation Increase taxes on soft drinks. (V.A.T.) 2. Education and Awareness campaign The government could increase spending on advertising campaigns to raise awareness of the problems which may result from the consumption of soft drinks. 3. Legislation It could ban the sale of soft drinks in schools and colleges / ban their sale in vending machines. 4. Subsidisation By doing this the prices of substitute goods may be more attractive and this may lead to a drop in the demand for soft drinks e.g. the subsidisation of milk in schools.

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2009 Section B – Question 1a – 30 Marks (i) Show, by means of a labelled diagram, the market demand and supply curves for games consoles e.g. Xbox, PlayStation, Nintendo DS. Identify and explain the market equilibrium position.

(ii) Explain, with the aid of a separate diagram in each case, the effects which each of the following is most likely to have on the above equilibrium position: a. 50% reduction in the price of computer games used with the games console b. Quota placed on the quantity of games consoles entering Ireland c. Government introduce a 2% levy (tax) on all income earned 50% reduction in the price of computer games used with the games console Effect Reason Equilibrium Quota placed on the quantity of games consoles entering Ireland Effect Reason Equilibrium Government introduce a 2% levy (tax) on all income earned Effect Reason Equilibrium © Dublin School of Grinds

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Solution to the Question on the previous page

Discuss Effect Demand Curve Shifts to the right Reason Because the complimentary good is now cheaper. Equilibrium Higher Price Higher Quantity

Discuss

Discuss

Effect Effect Supply curve shifts to the Demand Curve shifts to the left left Reason Reason The quota has reduced the As a result of the levy supply of the product. consumers have less disposable income Equilibrium Equilibrium Higher Price Lower Price Lower Quantity Lower Quantity

2008 – Section B – Question 1 – 20 Marks 1. (a) (i) Explain, with the aid of an example, the ‘Law of Demand’. (5m) The Law of Demand states that an increase in price leads to a decrease in quantity demanded, or a decrease in price leads to an increase in quantity demanded. For Example, If price of a bar chocolate increased by 5c per bar then quantity demanded or purchased would fall. (ii) State and explain three exceptions to the ‘Law of Demand’. (15m)

1. Giffen Goods 2. Snob items 3. Speculative goods 4. Goods of Addiction

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2008 – Section B – Question 1b – 16 Marks The data below represents the market demand and supply schedules for MP3 Players. Price Quantity Demanded Quantity Supplied New Quantity Demanded € (‘000 units) (‘000 units) (‘000 units) 20 100 20 30 80 40 40 60 60 50 40 80 60 20 100 (i) Using the above data, draw the diagram showing the market demand and supply curves for MP3 Players. (14m) (ii) Show on your diagram the price and quantity of MP3 Players at which this market is in equilibrium. (2m)

2008 – Section B – Question 1 – 25 Marks (i) With reference to your diagram in 1(b) (i), assume that consumer demand for MP3 Players increases by 40 units at each price listed above, while supply remains unchanged, draw the new demand curve for this situation and show the new equilibrium price and quantity. (ii) Explain two possible reasons for the shift in the demand curve. 1. 2. 3.

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Solution to the question on previous page.

In this diagram it is important that you have a • Correctly labelled demand curve • Correctly labelled supply curve • Correctly labelling Price and Quantity axes • Correctly labelling demand and supply curves

(ii) It is important that you show the following on the graph A) Equilibrium price €40 B) Equilibrium quantity 60 units

2005 Section B – Question 1a – 25Marks State and explain FIVE factors which affect a consumer’s demand schedule. (can also be phrased as cause a shift in the demand curve for a particular good)

FUSTIC 1) Future Expectations 2) Unplanned Events 3) Change in price of Substitute good 4) Change in consumer Taste / preferences 5) Income Levels 6) Change in Price of Complimentary goods

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2007 – Section B – Question 1a – 20 Marks (i) Define the economic terms: individual (firm) supply; market supply. (ii) Explain, with the aid of labelled diagrams, the relationship between individual (firm) supply and market supply. Individual Supply: The quantity of a good an individual firm is willing to supply at different prices. Market supply: The total quantity of a good that all firms are willing to supply at different prices. Firm A Supply

Firm B Supply

Market Supply

Explanation of Relationship between Firm and Market Supply

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2007 – Section B – Question 1b – 30 Marks Explain, with the aid of a labelled diagram, the supply curve of an individual firm in each of the following circumstances. State one example in each case. (i) A firm is willing to increase supply as price rises, but there is a minimum price below which the firm will not supply at all. (ii) A firm can supply only up to a maximum production capacity. (iii) The product is fixed in supply (e.g. perishable good) and a firm is operating in the short run.

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2007 – Section B – Question 1c – 25 Marks Outline FOUR factors, other than price, which affect the supply curve of an individual firm. In each case explain how the factor affects the supply curve.

CUTEST 1. The Cost of producing the product. If there is an increase in costs of factors of production, which a firm uses in the production of their good, then it will be more costly to manufacture the good. They will not continue to supply the same quantity of the good at the old prices – there will be a reduction in the quantity supplied. 2. Unplanned factors. There may be changes in the quantity supplied, which were never intended by the producer. Examples include agriculture – due to changes in the weather; diseases etc. In industry there may be shortages of raw materials, strikes etc. 3. The state of the firm’s production technology. As new machinery is invented, as labour becomes more specialised and efficient the factors of production become more efficient. It becomes possible to increase their output even thought the payments they receive remain the same. 4. Number of Sellers in the industry. If the number of firms in the industry decreased e.g. due to rationalisation then the overall quantity supplied to the market would decrease 5. Taxation / Subsidy. If the government were to reduce the rates of taxation on the raw materials used in the manufacture of a commodity, this represents a reduction in the cost of production and hence quantity supplied would increase. If a subsidy is granted on the raw materials or on the labour employed by the firm, this has the effect of reducing costs and thereby resulting in an increase in the quantity supplied. 2006 – Section B – Question 1 – 15 Marks For analytical purposes economists make certain assumptions about consumer behaviour. State and explain FOUR principal assumptions.

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2005 Section B – Question 1 – 30 Marks (i) Show, by means of a labeled diagram, the market demand and supply for a product. Indicate the equilibrium price and quantity in this market. (6m)

(ii) Explain, with the aid of a separate diagram in each case, the effects which each of the following may have on the above equilibrium position: • A successful advertising campaign in favour of the product is introduced; • A tariff on imports of the product is removed.

Advertising Campaign

Tariff on Imports

Effect

Effect

Reason

Reason

Equilibrium

Equilibrium

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Answer to the question on the previous page.

2003 – Section B – Question 3A – 30 Marks (i) State and explain FOUR factors which affect a consumer’s demand schedule, other than the price of a good itself.

(ii) Explain the economic rationale for assuming that a person’s demand curve for a normal good slopes downward. The reason a person’s demand curve for a normal good slopes downward as the price of a good falls the consumer buys more of this cheaper good, because the marginal utility per cent spent on this good increases and the consumer aims to maximise his/her total utility. © Dublin School of Grinds

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2005 Section B – Question 1 – 20 Marks Assume that the average spending on energy by a low-income family is €40 weekly. The price of energy rises by 20% so that the same consumption by a low-income family would now cost €48 weekly. The government is considering introducing one of the following policy measures to assist low-income families: a. Giving low- income families an increased allowance of €8 weekly (income supplement); b. Subsidising the producers of energy so that energy can continue to be sold at the initial price (price subsidy). Which policy measure would you advise the government to take? Explain the economic reasons for your answer. (A) 1. Cost Efficient As the income supplement specifically targets low-income families it is cost efficient and cheaper for the government than the price subsidy. 2. Purchasing Power Maintained / No change to standard of living Low-income families will now receive an additional €8 weekly income. The family now have a choice in deciding how to allocate this. It can maintain existing energy consumption or economise on the use of energy and use the €8 in some alternative way. 3. Efficient use of scarce resources by consumers As the price of energy rises, consumers seeing this may economise on energy use thus saving scarce resources. OR (B) 1. Protecting employment By using a price subsidy the demand for energy will remain unchanged and so employment is protected. 2. Prevent an increase in inflation / maintain competitiveness The government may use the price subsidy so that energy prices remain unchanged hence maintaining price stability and ensuring that our competitiveness is not affected, subject to EU rules.

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2003 – Section B – Question 3 – 20 Marks For something to be considered an economic good, it must possess certain characteristics. State and explain THREE of these characteristics.

If you’re in doubt on this question go back to the chart on page 9. Remember it is a normal good.

2003 – Section B – Question 3c – 25 Marks A consumer spends all income on two goods, Good A and Good B. Both goods are normal goods but they are not complementary goods. The price of Good A is reduced and the price of Good B remains unchanged. The consumer continues to spend all income on the two goods. Distinguish between the substitution effect and the income effect of the price reduction in Good A. Substitution  Effect   Income  Effect Demand  for  Good  A   Demand  for  Good  A   Increases

Increases

Good  A  is  now  relatively  cheaper.   Hence  the  consumer  is  getting   increased  marginal  utility  for  this   good.  

Consumer  has  additional  income,   due  to  the  reduction  in  price  of  Good  A   As  good  A  is  a  normal  good  the  demand   for  this  good  will  increase.

Cutest 2001 – Section B – Question 3 – 25 Marks State FOUR factors that affect the supply of a good, other than the price of the good itself, and explain how each factor affects supply. 1)

Cost of

2)

Unplanned Factors

3)

Technology

Producing the good

4) Number of Sellers in the Industry 5)

Taxation

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2001 – Section B – Question 3 – 25 Marks State and explain the principal economic assumptions made about consumer behaviour. 1. 2. 3. 4. 2001 – Section B – Question 3 – 25 Marks The law of diminishing marginal utility states that as additional units of a good are consumed the marginal utility of this good will eventually decline. ii(i) State and explain the assumptions underlying the law of diminishing marginal utility. Assumptions under the Law of Diminishing Marginal Utility

1. 2. 3. 4. i(ii) Give TWO examples of commodities which do not comply with this law. Justify each choice with a brief explanation.

2000 – Section B – Question 1a – 20 Marks 1. (a) Explain, with the aid of an example, the Principle or Law of Equi-Marginal Returns of Consumer Behaviour. The Law of Equi-Marginal Returns “A consumer will enjoy maximum satisfaction when the ratio of MU to price is the same for all the different types of goods which he buys”. MU1 = MU2 P1 P2 A consumer is in equilibrium buying item A @ 2 and item B @ €6. the marginal utility of item A is 5 utils and the marginal utility of item B is 15 utils. MU of Good A Price of Good A

=

MU of Good B Price of Good B

à

5 utils €2

=

15 utils €6

When two items are the same price the one with greater utility is purchased. © Dublin School of Grinds

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If you’re in doubt on this question go back to the chart. Remember it is a normal good.

2000 – Section B – Question 1b – 30 Marks A consumer spends all income on two goods, Good X and Good Y. Both goods are normal goods but they are not complementary goods. The price of good X is reduced and the price of good Y remains unchanged. The consumer continues to spend all income on the two goods. Explain, using the Substitution effect and Income effect how this price reduction affects the demand for both goods. Demand for Good X Substitution  Effect   Increases Good  X  is  now  relatively  cheaper.   Hence  the  consumer  is  getting   increased  marginal  utility  for  this   good.  

Income  Effect Increases Consumer  has  additional  income,   due  to  the  reduction  in  price  of  Good  X   As  good  X  is  a  normal  good  the  demand   for  this  good  will  increase.

Demand for Good Y Substitution  Effect   Decreases Good  Y  is  now  relatively  Expensive.   Hence  the  consumer  is  now  getting   decreased  marginal  utility  for  this   good  in  comparision  to  good  X.  

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Income  Effect Increases Consumer  has  additional  income,   due  to  the  reduction  in  price  of  Good  X   As  good  Y  is  a  normal  good  the  demand   for  this  good  will  increase.

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2000 – Section B – Question 1c – 20 Marks (i) Explain briefly, what is meant by the Law of Demand. The Law of Demand states that an increase in price leads to a decrease in quantity demanded, or a decrease in price leads to an increase in quantity demanded. For Example, If price of a bar chocolate increased by 5c per bar then quantity demanded or purchased would fall. (ii) There are exceptions to the Law of Demand. Explain clearly THREE of these exceptions.

1. Giffen Goods 2. Snob items 3. Speculative goods

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Supply and Demand – Short Questions 2015 – Section A – Question 7 – 17 Marks

2009 – Section A – Question 7 – 17 Marks (a) State the Law of Diminishing Marginal Utility. Definition @ 9 marks This law states that as a consumer consumes additional units of a good the marginal utility/ extra satisfaction derived from each additional unit consumed will eventually decline. (b) The table below illustrates the Law of Diminishing Marginal Utility. Number of units consumed Total Utility in units Marginal Utility in units

1 30 30

2 65 35

3 85 20

4 100 15

5 110 10

6 115 5

5 figures @ 1mark each= 5 marks Complete the table and state the point after which diminishing utility set in. 3 marks Diminishing utility sets in after the consumption of the 2nd unit/when the 3rd unit is consumed.

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2008 – Section A – Question 6 – 17 Marks China will host the Beijing Olympic Games in August 2008 and 7 million tickets are available for the event. On the diagram below draw the supply curve for tickets and explain the reason for its shape.

(5 Marks) Explanation: • The supply of tickets available for the Olympics is fixed at 7 million. • Regardless of price this seating capacity will remain unchanged. (12 Marks)

2006 – Section A – Question 6 – 17 Marks In equilibrium a consumer buys 8 bars of chocolate at €1.00 each and 12 sandwiches at €4.00 each. The marginal utility of the eight bar of chocolate is 10 utils. Using the EquiMarginal Principle of Consumer Behaviour - calculate the marginal utility of the twelfth sandwich. Show all your workings. Answer:

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Solution: MU1 = MU2 P1 P2 Marginal Utility of Chocolate = Marginal Utility of Sandwiches Price of Chocolate Price of Sandwiches 10 = MUS €1.00 €4.00

MU Sandwiches = 40 utils

2005 – Section A – Question 6 – 17 Marks A consumer in equilibrium buys 10 cups of coffee at €2 each and 10 phone cards at €6 each. The marginal utility of the cups of coffee is 5 utils. What is the marginal utility of phone cards? Show your workings. Solution: MU1 = MU2 P1 P2 Marginal Utility of coffee = Marginal Utility of Phone Cards Price of Coffee Price of Phone Cards 5 = MU P.C. MU Phone Cards = 15 utils . €2 €6 2004 – Section A – Question 6 – 17 Marks Define the Law of Diminishing Marginal Utility and state TWO assumptions underlying the law. The law of diminishing marginal utility states that as a consumer consumes additional units of a good their marginal utility for this good will eventually decline. Assumptions under the Law of Diminishing Marginal Utility 1. Applies after a certain point called the origin. 2. Addictive Goods 3. Time lapse 4. ‘Other factors’ affecting utility do not change. (Definition: 9 marks graded Assumptions: 8 marks: 2 x 4 marks each.)

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2003 – Section A – Question 6 – 17 Marks Using  the  diagram,  explain  how  higher  consumers’  incomes  (other  factors  unchanged)   may  affect  the  demand  curve  for  mobile  phones  in  Ireland.  

Explanation   As   consumers’   incomes   grow,   the   increased   purchasing   power   will   give   ‘new’   consumers  the  ability  to  purchase  mobile  phones,  and/or  existing  customers  the  ability   to  update  their  models.   2003 – Section A – Question 7 – 17 Marks State  FOUR  economic  assumptions  used  for  analysing  consumer  behaviour.   1. The  consumer  has  a  limited  income. 2. The  consumer  aims  to  gets  maximum  satisfaction  /  utility  from  that  income. 3. The  consumer  acts  rationally. 4. The  consumer  is  subject  to  the  Law  of  Diminishing  Marginal  Utility.

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Now test yourself with the 2015 paper – Question 1

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Effect

Effect

Effect

Reason

Reason

Reason

Equilibrium

Equilibrium

Equilibrium

Price Ceiling on Rent

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Marking Scheme for 2015 Question

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Elasticity “If price rises, demand falls. If price falls, demand rises” But by how much is the question?

The Types of Elasticity 1. Elastic Demand The percentage change in price will be less than the percentage change in quantity demanded. For Example, Price decreases by 25% demand increases by 40%.

Change in Price < Change in Demand Goods with Elastic Demand These are goods which have a co-efficient greater than 1. If producers of elastic goods wish to maximise revenue they must decrease their selling price. Why? The percentage increase in demand exceeds the percentage decrease in price. The following co-effecients all represent Elastic Demand: +2.0, -2.0, +1.1, -1.1 (They are all greater than 1 in absolute terms) Examples of Elastic goods

Example of an elastic good If the price is reduced by 25% quantity demanded will increase by 40% Below is a graph representing an elastic good

As we can see the price has decreased by 25% and the demand has increased by 40% © Dublin School of Grinds

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2. Inelastic Demand The percentage change in price will be greater than the percentage change in quantity demanded. For Example, Price decreases by 40% demand increases by 15%.

Change in Price > Change in Demand Goods with Inelastic Demand These are goods which have a co-efficient less than 1. If producers of inelastic goods wish to maximise revenue they must increase their selling price. Why? The percentage increase in price exceeds the percentage decrease in demand. The following values represent Inelastic Demand +0.9, -0.9, -0.2 Examples of Inelastic goods

Example of an elastic good If the price is reduced by 40% quantity demanded will increase by 15% Below is a graph representing an inelastic good

Hint→ Remember the three ‘I’s of an inelastic curve… (i) Inelastic. (ii) Shaped like a slanted I. (iii) Insensitive to a change in price. © Dublin School of Grinds

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3. Unit Elastic Any percentage change in price results in an equal percentage change in quantity demanded. These are goods which have a co-efficient equal to 1.

Change in Price = Change in Demand If a good is Unit Elastic, the quantity demanded will change in direct proportion to price change. For Example, Price decreases by 15% demand increases by 15%. The following values represent Unitary Elastic Demand +1 and -1 Below is a graph representing an unitary elastic demand Note that the demand curve is drawn an 45 degrees.

For Example A 30% price change will lead to a 30% change in quantity demanded. 4. Perfect Inelastic Demand If the percentage change in the price of a good causes no change in the quantity demanded of that good.

5. Perfect Elastic Demand Consumers will demand all of a firms goods at a given price but any increase will cause demand to fall to zero (0) This happens in markets with perfect competition.

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The three types of Elasticity A) Price Elasticity of Demand B) Income Elasticity of Demand C) Cross-Elasticity of Demand

Make sure to learn the definitions off by heart!!

Price Elasticity of Demand Measures  the  percentage  change  in  the  quantity  demanded  for   a  good  caused  by  the  percentage  change  in  the  price  of  that  good.   Formula =

∆Q = Change in quantity demanded Q1 = Original Quantity demanded Q2 = New Quantity demanded after price change ∆P = Change in Price There is a bit of a trick P1 = Original Price P2 = New Price after Price change question here, so read

the question very carefully!!!

Practice  Question   A   consumer   spends   €120   per   month   on   a   product   when   its   unit   price   is   80c,   and   continues  to  spend  €120  per  month  on  this  product  when  its  unit  price  increases  to  €1.   Calculate   the   consumer’s   price   elasticity  of  demand.     Fill  in  the  following  values  below   ∆Q ∆P Q1 P1 Q2   P2

The Most Common Mistake that students make on the above question!!   If the quantity demanded or selling price drops (which usually happens) students often forget   to show this. If the selling price drops by 20 cent you must write (-20) when you are showing the change in price.

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Solution  

The minus coefficient (-1.0) in this answer tells us that the good is a normal good. When the price goes up demand goes down!!

Take note that the quantity demanded dropped by 30 units and it is written as -30.

2014 Section B – Question 3b – 20 Marks A consumer/motorist buys 20 litres of petrol when the price is €1.60 per litre. When the price increases to €1.70, as a result of an increase in carbon tax, the consumer buys 19 litres. Calculate the consumer's Price Elasticity of Demand (PED). (Show all your workings.)

Is this demand for petrol price elastic or price inelastic? Outline the implication of your answer for government revenue.

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This question hasn’t come up yet in the leaving cert but it is on the syllabus so make so to cover it, if you learn off the four titles it’s easy enough to explain.

Here are the Factors which affect Price Elasticity of Supply 1. Firms Production Capacity If the firm is operating with plenty of capacity it should be able to increase production without any major difficulty. Therefore Supply is likely to be more elastic. 2. Time period Supply tends to be more inelastic in the short as producers will often struggle to bring about an immediate increase in supply. For Example, If the price of fish was to increase this would not bring about an immediate increase in supply. 3. Storage Costs If storage costs are low producers may increase supply without any major impact on costs. Therefore supply is more likely to be elastic. 4. Nature of the product Perishable products are more likely to be inelastic in supply. For example a rise in the price of strawberries will not result in an increase in supply on the day.

Sample Question The price of strawberries rises from €8 to €10 per kilo. One firm increases its production from 60,000 to 100,000 kilos. Calculate the firms price elasticity of supply.

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CELLS Here are the Factors which affect Price elasticity of Demand

C

1. Complementary goods If the two goods are complimentary the demand for the cheaper of the two goods is likely to be inelastic.

E

2. Is the product Expensive In general the greater the proportion of income which is spent on a good, the more elastic the demand for it is likely to be, in response to a change in its own price. A rise of 50% in the price of a box of matches is unlikely to have a significant effect on its demand.

L

3. Brand Loyalty A consumer may become strongly attached to a particular product through habit or loyalty to that brand. An increase in price for that good will not cause him/her to consume less of the product or to switch to cheaper substitutes. The demand for such goods will therefore be price inelastic.

L

4. Is it a Luxury or necessity? It is not vital that one should possess luxuries and therefore the PED for them will be relatively elastic. Necessities are vital for life – people must buy them even when their price is increased, so their PED will be relatively inelastic.

S

5. Availability of close Substitutes When a good has a close substitute and its price is increased the demand for the good will be elastic because people will switch to the cheaper substitute. Where a good has no substitutes and its price is increased there is no substitute to switch to and so it will be inelastic.

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Income Elasticity of Demand Measures the percentage change in demand for one good caused by a percentage change in the consumers income. Formula

Where YED= income elasticity of demand ∆Q= change in quantity demanded Q1= original quantity demanded Q2= new quantity demanded ∆Y= change in income Y1= original level of income Y2= new level of income

The Golden Rule Normal Good = Positive YED Inferior Good = Negative YED

• Income elasticity of demand for most goods (normal goods) is positive, the quantity demanded rises as Income rises. • An inferior good is a good with a negative income elasticity of demand • The demand for consumer durables and luxuries has a high Income elasticity of Demand - the demand for them rises greatly as Income rises.

Inferior good à A very low quality product. An example of an inferior good would be always save cat food. If you look closely at the cats pissed off face it’s like he’s begging you not to buy him that crap.

So the only people who will buy this is people who are on a very desperate. Now if incomes rise demand for this product will fall as consumers will buy better quality food for their cats. The grid below illustrates this. ∆Q ∆Y

Demand falls by 5% Incomes rise by 10%

-5 - 0.5 10

Note that the co-efficient is negative. That tells us that the product is inferior.

Note: The key thing you need to pay attention to here is the negative co-efficient. © Dublin School of Grinds

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2002 – Section B – Question 3d – 10 Marks Income elasticity of demand for a good is +1.8 and sales in Year 1 are 20,000 units. If consumers’ incomes are expected to rise by 5% in Year 2, calculate the expected level of sales. Show your workings. Remember Calculate the percentage rise in demand first. (Co-efficient x percentage change in income)

Question 1 Which type of goods can be observed assuming the following income elasticities of demand? Type of good? Luxury, necessity etc Good X: + 0.5 Good Y: +2.6 Good Z: - 0.4 Question 2 The income elasticities of demand of two goods, A and B, are as follows: Good A: + 3.0 Good B: - 0.2 Now income rises by 5 %. By how much quantities demanded of A and B will change? Good A: + 3.0

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Good B: - 0.2

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Cross Elasticity of Demand (CED) Measures   the   percentage   change   in   the   demand   for   one   good   cause  by  the  percentage  change  in  the  price  of  other  goods.   For Example How a change in the price of Ryanair affects the demand for Aer Lingus. Formula:

The Golden Rule Substitutes = Positive CED Complimentary = Negative CED

∆QA = change in quantity demanded of good A Q1A = original quantity of demanded of good A Q2A = quantity demanded of good A after the price of Good B has changed ∆PB = change in the price of B P1B= original price of B P2B= new price of B When two goods are substitutes a rise in the price of one will lead to an increase in the demand for the other so CED will be positive. When goods are complimentary an increase in the price of one will lead to a fall in demand for the other so CED will be negative. Sample Question – 20 Marks A consumer buys 8 units of Good A when the price of Good B is €4. When the price of Good B rises to €6 (the price of Good A remaining unchanged) the consumer buys 15 units of Good A. Using an appropriate formula, calculate this consumer’s cross elasticity of demand for Good A. Show your workings. Is Good A a substitute for, or a complement to, Good B? Explain your reasoning.

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Past Leaving Cert Questions 2015 – Short questions- Question 7 – 17 Marks

2014 – Short questions- Question 4 – 16 Marks

Explain the meaning of the term ‘complementary goods’(i.e. joint demand). State one example. Explanation: _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ Example: _____________________________________________________________________

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2013 – Short questions- Question 3

Sample Question If, last year, average income at constant prices rose from €10,000 to €10,700 and the income elasticity of demand for iPhones is +4, by what percentage would the amount spent on iPhones increased by?

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When you see a question like this think of the 4 W’s. 1. What type of good is it? 2. What should the manufacturer do? 3. Why? 4. What will happen to revenue?

2012 – Section B – Question 1b – 30 Marks A manufacturer of three different products calculates the price elasticity of demand (PED) for each product as follows: Product A: -2.8 Product B: -1.0 Product C: -0.5 The manufacturer wishes to maximise its revenues. Explain in respect of each of these products, what change, if any, the manufacturer should make in the prices currently being charged to enable it to achieve its aim. Illustrate your answers with the aid of a demand curve for each product

Product A

Product B

Product C

What type of good is it? What should the seller do?

WHY?

What will happen to revenue?

Graph

Note à If they ever give you a figure that has a positive PED (ie. +0.6 or +4.3) and they ask what should the seller do in order to raise revenue? Say they should raise their selling price because if they do this they will have higher sales at a higher selling price. These are goods which don’t obey the law of demand. © Dublin School of Grinds

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2012 – Section B – Question 1c – 20 Marks You are given the following information about certain products: Cross Elasticity of Demand between Product X & Product A = -0.8 Cross Elasticity of Demand between Product X & Product B = +3.2 Cross Elasticity of Demand between Product X & Product C = -1.6 Cross Elasticity of Demand between Product X & Product D = +0.5

(i)

Which of the products above are substitutes for Product X? Explain your answer

(ii) Which product is the closer complement to Product X? Explain your answer.

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2011 – Section A – Question 8 – 17 Marks A consumer buys 20 units of Good A when the price of Good B is €8. When the price of Good B rises to €10 (the price of Good A remaining unchanged) the consumer buys 12 units of Good A. Using an appropriate formula, calculate this consumer’s cross elasticity of demand for Good A. (Show your workings.) Is Good A a substitute for, or a complement to, Good B? Explain you answer. Cover the answer on the left and attempt this question.

Give them 5 points, so that way you’re covering yourself.

2010 – Section B – Question 1b – 30 Marks (i) Outline four factors which affect price elasticity of demand (PED). (ii) The PED for the soft drink ‘Quencher’ has been calculated at -3.8. Using your knowledge of PED, explain the economic meaning of this figure.

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2010 – Section A – Question 3 – 16 Marks A consumer spends €200 monthly on Product A when its price is €2 and continues to spend €200 monthly when its price increases to €2.50. Calculate the consumer’s price elasticity of demand. Show all your workings and explain your answer. ∆Q = Q1 = Q2 =

∆P = P1 = P2 =

2009 – Section A – Question 2 – 16 Marks

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2009 – Section B – Question 1b – 30 Marks (i) Define income elasticity of demand and price elasticity of demand. (ii) Which figure stated below is most likely to represent each of the following: • Income elasticity of demand for low price cuts of meat; • Income elasticity of demand for Apple iPhones; • Price elasticity of demand for Petrol. Give reasons for your choice in each case. - 1.6 - 0.1 + 4.3 Low Price Cuts of Meat

Apple Iphones

Petrol

2009 – Section B – Question 1c – 15 Marks Assume Income elasticity of demand for games consoles is + 2.5 and total sales in 2008 were 100,000 units. Calculate the expected total sales for the year if consumers’ incomes are expected to fall by 8% in 2009. Show your workings.

Sample Question Assume Income elasticity of demand for games consoles is + 2.5 and total sales in 2008 were 50,000 units. Calculate the expected total sales for the year if consumers’ incomes are expected to increase by 6% in 2009. Show your workings.

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2008 – Section B – Question 1 – 14 Marks The data below represents the market demand and supply schedules for MP3 Players. Price Quantity Demanded Quantity Supplied € (‘000 units) (‘000 units) 20 30 40 50 60

100 80 60 40 20

20 40 60 80 100

Using this data, calculate the price elasticity of demand when price changes from €40 to €50. (Show all your workings). For this price change, is demand for MP3 Players elastic or inelastic? Explain your answer.

2007 – Section A – Question – 16 Marks Consumers buy 50 units of a product when the price is €1.50. When the price is reduced to €1 consumers buy 90 units. Using an appropriate formula, calculate the consumers’ price elasticity of demand. Show your workings and explain your answer.

ΔQ    x    P1  +  P2   ΔP          Q1  +  Q2  

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When you see a question like this think of the 4 W’s. 1. What type of good is it? 2. What should the manufacturer do? 3. Why? 4. What will happen to revenue?

2006 – Section B – Question 1b – 30 Marks A manufacturer of three different products calculates the price elasticity of demand for each product as follows: Product X: -1.5 Product Y: -1.0 Product Z: -0.3 The company wishes to maximise its revenues. Explain in respect of each of these products, what change, if any, the company should make in the prices currently being charged to enable it to achieve its aim. Product X: -1.5

Product Y: -1.0

Product Z: -0.3

What type of good? Elastic or Inelastic? Normal / Inferior? What should the manufacturer do?

Why?

What will happen to revenue?

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2004 – Section B – Question 1a – 20 Marks Define  the  following  types  or  degrees  of  price  elasticity  of  demand:   (i) Perfectly  elastic  demand;  (ii)  Perfectly  inelastic  demand; (iii) Elastic  demand;  (iv)  Unitary  elastic  demand. (i)

(ii)

(iii)

(iv)

2004 – Section B – Question 2b – 25 Marks State and explain FIVE factors that affect price elasticity of demand. (1)

(2)

(3)

(4)

(5)

(6)

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2004 – Section B – Question 1c – 30 Marks A  consumer  spends  €120  per  month  on  a  product  when  its  unit  price  is  80c,  and  continues   to  spend  €120  per  month  on  this  product  when  its  unit  price  increases  to  €1.   (i) Using  the  formula  below,  calculate  the  consumer’s  price  elasticity  of  demand.  Show  all your  workings. Fill in the values for question ΔQ    x    P1  +  P2   (i) into the grid below. Make ΔP          Q1  +  Q2   sure to always do this! (ii) Is  demand  for  this  product  elastic,  inelastic  or  unitary  elastic? (iii) Should  the  seller  make  any  changes  in  the  selling  price  of  this  commodity  to increase  overall  revenue?  Explain  your  answer. (i) ∆Q = ∆P = Q1 =

P1 =

Q2 =

P2 =

(ii)

(iii)

2003 – Section B – Question 1a – 20 Marks Define  (i)  price  elasticity  of  demand  and  (ii)  cross  elasticity  of  demand.  In  each  case,  state   the  formula  by  which  it  is  measured.  

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2003 – Section B – Question 1b – 25 Marks When  the  price  of  Good  X  is  €27,  the  quantity  demanded  of  Good  Y  is  1,200  units.  When   the  price  of  Good  X  falls  to  €23  (the  price  of  Good  Y  unchanged)  the  quantity  demanded  of   Good  Y  falls  to  800  units.   (i) Using  the  cross  elasticity  of  demand  formula,  calculate  the  cross  elasticity  of  demand for  Good  Y.  Show  all  your  workings. (ii) Is  Good  Y  a  substitute  for  or  complement  to  Good  X?  Explain  your  choice.

When you see a question like this think of the 4 W’s. 1. What type of good is it? 2. What should the manufacturer do? 3. Why? 4. What will happen to revenue?

2003 – Section B – Question 1c – 30 Marks A  firm  has  the  following  price  elasticities  of  demand  for  two  goods,  Good  X  and  Good  Y:   Good  X  …..  -­‐2.0   Good  Y  …..  -­‐0.5   What  changes,  if  any,  should  the  firm  make  in  the  selling  price  of  each  of  the  goods  to   increase  overall  revenue.  Explain  your  answer.  

-­‐2.0  

-­‐0.5  

TYPE  OF   GOOD   ACTION   WHY   RESULT   © Dublin School of Grinds

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2002 – Section B – Question 3a – 15 Marks Define (i) Income Elasticity of Demand. (ii) Cross Elasticity of Demand. (i) Income Elasticity of Demand

(ii)

Cross Elasticity of Demand

2002 – Section B – Question 3b – 20 Marks (i) “Income elasticity of demand is usually positive but sometimes negative”. Explain, giving examples, the meaning of this statement. (ii) A consumer spends 40% of income on a certain good. After the consumer’s income doubles (everything else remaining unchanged), only 30% of income is spent on the good. State whether this good is a normal or inferior good and explain your answer.

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30 Marks – 12 Minutes 2014 Section B – Question 3a - 30 Marks

(i) Define the categories of Price Elasticity of Demand (PED): elastic, inelastic and unit elastic.

Elastic

Inelastic

Unit elastic

(ii) State three factors that affect PED and explain how each factor affects it.

1 2 3 4

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2014 Section B – Question 3b - 20 Marks

A consumer/motorist buys 20 litres of petrol when the price is €1.60 per litre. When the price increases to €1.70, as a result of an increase in carbon tax, the consumer buys 19 litres. Calculate the consumer's Price Elasticity of Demand (PED). (Show all your workings.) Is this demand for petrol price elastic or price inelastic? Outline the implication of your answer for government revenue.

2014 Section B – Question 3c - 25 Marks

A firm is considering a change to its product's price. It conducts market research which reveals that the Price Elasticity of Demand (PED) for the product is -2.5. Use this information to answer the following question: (i) If the firm wishes to maximise total sales revenue, should it lower or raise the price of the product? Explain your answer.

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The market research also reveals Income Elasticity of Demand (YED) for the product is +4.5. Use this information to answer the following question: (ii) In the case of an economy which is expected to remain in recession for the next five years, what, if any, will be the likely impact on the demand for the product? Explain your answer.

2002 – Section B – Question 3c – 30 Marks Which of the figures stated below is likely to represent: (i) Income elasticity of demand for potatoes; (ii) Income elasticity of demand for designer clothes; (iii) Price elasticity of demand for airline seats. -2.8, -0.1, + 2.5 Explain each of your choices. 1. -2.8

2. 3. 1.

-0.1

2. 3. 1.

+2.5

2. 3.

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Tricky questions from sample papers

25 Marks Domestic users in most European countries pay for the provision of clean water and wastewater service provision. (i) Outline three economic reasons for the introduction of water charges for households.

(ii) State and explain two possible economic effect which these water charges may have for each of the following: households who pay these water charges

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the Irish Government.

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