# Revision Questions on Demand, Supply & Elasticities

## Question 1

"As price falls the quantity supplied falls. As supply increases price falls." Use supply and demand analysis to explain why these two statements do not contradict each other. [10 marks]

In the question the first part of the statement refers to a movement along the supply curve resulting from a shift of the demand curve to the left and a fall in price. The second part of the statement refers to a shift of the supply curve to the right, a movement along the demand curve and fall in price.

You are expected to show

• The difference between a shift and a movement along a supply curve.
• Draw diagrams (a) movement along the supply curve (b) shift of supply curve. Label it properly, or else you will lose marks.

## Question 2

Why is the concept of income elasticity of demand likely to be important for a producer of an agricultural product? Use supply and demand analysis in your answer. [10 marks]

You are expected to

Define the concept of income elasticity of demand.

Explain that.... for most agricultural products, demand expands less than proportionately as real incomes grow, so demand tends to be income inelastic and the value of the YED tends to be low. Thus YED determines the extent to which the agricultural producers' demand curve will shift to the right in response to an increase in income.

Illustrate with the help of a properly labelled diagram that income is a determinant of demand and therefore can shift the demand.

Draw diagrams:

• demand curves shifting to the right
• income elasticity diagram

## Question 3

Using demand and supply analysis, explain how resources are allocated through changes in price in a market economy.

You are expected to

Explain the concept of scarcity

Explain that resources are allocated in a free market through the interaction of demand and supply because there is no government intervention. Emphasise that this is a dynamic process and that the market forces i.e. demand and supply are constantly changing to arrive at an equlibrium or market price.

Draw the following diagrams

• supply and demand diagram to illustrate the signalling effect of a change in demand
• supply and demand diagram to illustrate the rationing effect of a change in supply via a change in price

Label the diagrams properly.

## Question 4

Define cross elasticity of demand and using diagrams, explain what determines whether cross elasticity of demand is positive or negative.

You are expected to

Define cross elasticity of demand as the % change in quantity demanded of good X in response to a % change in the price of good Y.

Explain that XED with respect to the price of a complement is negative for substitute is positive

Give some examples of negative and positive cross elasticity

Explain closeness of substitute or complement determines the degree to which the quantity of a product demanded changes when the price of substitutes or complements change.

Draw properly labelled diagrams showing

• a shift in the demand curve right or left
• positive sloping positive cross elasticity of demand (substitutes)
• negative sloping negative cross elasticity of demand (complements)

## Question 5

"Normally, it would be expected that more would be demanded at lower prices as opposed to higher prices, all other things being equal, but this may not always be the case." Explain this statement.[10 marks]

You are expected to

Explain that as per the law of demand ,all other things being equal, a rise in price causes a fall in the quantity demanded similarly a fall in price causes a rise in the quantity demanded.

Explain that a normal demand curve is downward sloping demand

Draw properly labelled demand curve diagram.

Now talk about exceptions to the law of demand i.e. demand curves can sometimes slope upwards Giffen goods or Veblen goods or speculative goods

Draw Giffen Goods diagram and Veblen goods diagram. Label them

## Question 6

With the aid of a diagram, explain why the price elasticity of supply is likely to change over time.

You are expected to start with a definition of price elasticity of supply.

State the formula for calculating the PES

Explain why the PES can change over time (factors affecting PES)

How quickly the costs of using resources rise as output increases; if the cost of resource use increases quickly as production increases, producers are less likely to increase supply, resulting in an inelastic supply

Time period: the longer the time period considered, the more elastic supply will be (for example, difficulty in expanding capital e.g. constructing another factory)

Spare Capacity: the greater the excess capacity, the more elastic supply will be

Availability of substitutes in production: the more the substitutes, the easier it is to switch production, and the more elastic supply will be.

Give examples, such as primary products (agriculture, minerals) which have a lower PES than manufactured products.

Draw a diagram showing supply curves with different values of PES. Label it properly.