Slide 1

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 1

© APT Initiatives Ltd


Slide 2

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
When the price of a product increases…

Incorrect

demand will shift to the left

more will be demanded at each price

Incorrect

quantity demanded will fall

Correct

quantity demanded will rise

Incorrect

APT Initiatives Ltd

A rise in price brings about a
fall in the quantity demanded,
otherwise known as a
contraction of demand. A
contraction of demand
(illustrated by an upward
movement along the demand
curve) should be distinguished
from a decrease in demand (an
inward shift of the demand
curve).

Next question


Slide 3

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A shift in a demand curve occurs when…

Incorrect

there is a change in price

there is an increase in business costs

Incorrect

businesses become more efficient

Incorrect

there is a change in income

Correct

APT Initiatives Ltd

The first response results in
a movement along the
demand curve. The middle
two responses relate to
changes in supply. Only D
causes a shift of the whole
demand curve.

Next question


Slide 4

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
Which of the following statements is incorrect? A rightward shift
of the demand curve can be caused by…

a reduction in the price of the
product

Correct

a rise in population

Incorrect

a rise in income

Incorrect

a rise in the price of a substitute
product

Incorrect

APT Initiatives Ltd

A reduction in price will lead
to a downward movement
along the demand curve,
rather than a shift of the
demand curve.

Next question


Slide 5

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A pen manufacturer reduces the price of its latest model by 6%
and, as a result, sales volume increases by 4%. Therefore, the
price elasticity of demand, to two decimal places must be…
+1.57

Incorrect

-0.67

Correct

-1.52

Incorrect

-2.54

Incorrect

APT Initiatives Ltd

4% / -6% = -0.67.

Next question


Slide 6

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
The price elasticity of demand for a firm’s products will change
when a business …

is faced with a new competitor

Correct

manages to reduce its costs

Incorrect

benefits from a general increase in
incomes

Incorrect

experiences a rise in production
costs

Incorrect

APT Initiatives Ltd

The entry of new competitors
will increase the price
elasticity of demand for the
products of existing firms,
because buyers will have
more products to choose
from and will, therefore,
respond more readily to
price changes.

Next question


Slide 7

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
When incomes rise by 2%, demand for UK holidays rise by 4%.
The income elasticity of demand is…

+2

Correct

+20

Incorrect

+0.8

Incorrect

+0.5

Incorrect

APT Initiatives Ltd

4% / 2% = 2.
Because quantity and income
move in the same direction,
the income elasticity is
positive; hence the answer is
+2.

Next question


Slide 8

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A greengrocer has obtained some market research data which
indicates that the income elasticity of demand for potatoes is 1.56. This means that…
demand is income inelastic, and the
potatoes are a normal good

Incorrect

demand is price elastic, and potatoes
are a necessity

Incorrect

potatoes are a normal good, and
demand is income elastic

Incorrect

potatoes are an inferior good, and
demand is income elastic

Correct

APT Initiatives Ltd

Negative income elasticity
means that the product is an
inferior good. As the
coefficient of elasticity is 1.56 it means that demand is
income elastic, ie a 10% fall
in income leads to a 15.6%
rise in demand.

Next question


Slide 9

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
Petrol retailers have noticed that when cars increase in price by
5%, demand for petrol falls by 2%. The cross elasticity of demand
for petrol is…
-2.5

Incorrect

-1.0

Incorrect

-0.5

Incorrect

-0.4

Correct

APT Initiatives Ltd

-2% / +5% = -0.4.
he fact that the figure is
negative proves that the
relationship is one of
complements.

Next question


Slide 10

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement up a supply curve arises because of…

improvements in business efficiency

Incorrect

an increase in price

Correct

an increase in tax

Incorrect

a reduction in price

Incorrect

APT Initiatives Ltd

A change in price (brought
about by a rightward shift of
the demand curve) leads to
an upward movement along
the supply curve. A change
in anything else causes a
shift in the whole curve.

Next question


Slide 11

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A supply curve for a product would shift to the right if there
was…

an increase in tax

Incorrect

a decrease in price

Incorrect

an improvement in production
technology

Correct

an increase in business costs

Incorrect

APT Initiatives Ltd

A shift to the right means
more is supplied at each
price (an increase in supply).
This could be the result of an
improvement in technology
which will lead to lower
business costs.

Next question


Slide 12

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A rightward parallel shift in a supply curve would occur when
business costs …

rise by 3%

Incorrect

fall by 10%

Incorrect

rise by £3 a unit

Incorrect

fall by £3 a unit

Correct

APT Initiatives Ltd

A rightward shift is the result
of a fall in the cost of
production. The correct
answer hinges on the word
‘parallel’ which is why D is
right and B is wrong.

Next question


Slide 13

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
A decrease in price elasticity of supply can arise when…

business costs rise

Incorrect

business costs fall

Incorrect

government intervenes with more
market regulation

Correct

a business produces various goods
for different markets

Incorrect

APT Initiatives Ltd

Government regulation acts
as a constraint, thus
reducing the possibilities for
expansion of output and the
entry of new firms into the
market.

Next question


Slide 14

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
A rise in price from £21 to £22 leads to a 5% rise in the quantity
supplied. To two decimal places price elasticity of supply is…

+1.05

Correct

-1.52

Incorrect

-1.05

Incorrect

Even without any calculation
we can rule out the first two
responses. PES is usually
positive and it certainly is in
this case. PES =
5% / +4.7610 = +1.05

+2.52

Incorrect

APT Initiatives Ltd

Next question


Slide 15

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Movement up a demand curve to a new equilibrium position
could have been caused by…

an increase in price of a substitute
product

Incorrect

a tax imposed on a good

Correct

a shift to the right in the supply
curve

Incorrect

an increase in the price elasticity of
demand

Incorrect

APT Initiatives Ltd

What happens here is that the tax
shifts the supply curve to the left
and, as a result, there is a
movement along the demand
curve to a higher price. A would
cause a shift of the demand
curve, whereas C is a shift in the
supply, which causes a slide
down the demand curve. D is
concerned with slope of the
demand curve, rather than a shift
of the demand curve.

Next question


Slide 16

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
The conditions of demand and supply of a luxury car
brand are shown in the diagram below. The supply
curve could have shifted to the left because…
there was a decrease
in the price of petrol

Incorrect

the government has
imposed a special tax
on luxury cars

Correct

Price
S2
S1

D

the price has risen

Incorrect

the costs of
manufacture have
fallen

Incorrect

1

O

Quantity

APT Initiatives Ltd

Supply has decreased
and this can only be
explained by a rise in
producer’s costs. A
tax on cars is seen in
the same light as a
rise in costs; to
protect profits, both
changes would require
a corresponding rise
in price. Hence, B is
the correct answer. A
concerns the demand
for cars. C is
illustrated by a
movement along the
supply curve. D would
cause a rightward shift
of the supply curve.

Next question


Slide 17

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
The table below shows the demand and supply schedules for pizzas sold
by a local takeaway. Following a rise in production costs, supply falls by
80 pizzas at all prices. The new equilibrium price would be…
Incorrect

Price per Pizza

£2.50

Incorrect

£3.00
£2.75
£2.50
£2.25

£2.75

Correct

£3.00

Incorrect

£2.25

Quantity
demanded
per week
350
400
450
500

APT Initiatives Ltd

Quantity
supplied
per week
510
480
450
420

Construct a new
supply schedule
with 80 fewer
pizzas supplied
at each price.
At price £2.75,
400 pizzas are
demanded and
400 are
supplied.

Next question


Slide 18

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Supply in agriculture is typically price inelastic because…

farmers cannot alter output at short
notice

Correct

farmers rely on the weather

Incorrect

there are few substitutes for food

Incorrect

farmers can use stocks in response
to changes in price

Incorrect

APT Initiatives Ltd

Supply is inelastic because
agricultural output is subject
to the growing cycle and
seasons of the year.

Next question


Slide 19

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
The price elasticity of supply of houses is estimated to be less
than 1. This means that…

supply is price elastic

Incorrect

builders cannot easily build more
houses in a booming economy

Correct

producer revenue will remain
unchanged

Incorrect

builders benefit from increased
revenue when prices rise

Incorrect

APT Initiatives Ltd

By definition inelasticity of
supply means that it is
difficult to respond to
changes in the market.

Next question


Slide 20

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
Which one of the following products or services is not
complementary to owner occupied houses?

Mortgages

Incorrect

Home improvements

Incorrect

Rented accommodation

Correct

Furniture

Incorrect

APT Initiatives Ltd

Rented accommodation is a
substitute for owner
occupation.

Next question


Slide 21

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The introduction of high definition television can be expected to
result in the following with the exception of…

increased demand for new TV sets

Incorrect

increased supply of second hand TV
sets

Incorrect

increased price of second hand TV
sets

Correct

increased demand for satellite
television services

Incorrect

APT Initiatives Ltd

HD will increase the demand for
new sets and, at the same time,
increase the supply of second hand
sets as people upgrade. The new
HD television increases the
attractiveness of digital satellite
services which should be seen as a
complementary service. The one
thing it will not lead to is a rise in
the price of used sets. If anything,
it will put downward pressure on
the price of used sets.

Next question


Slide 22

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Coffee and tea are substitute
products. A rise in the price of coffee
will lead to…
an increase in demand for tea

Correct

an increase in the quantity
demanded of tea

Incorrect

a contraction in the demand for tea

Incorrect

no change in the demand for tea

Incorrect

APT Initiatives Ltd

As the two products are substitutes
for each other it is to be expected
that a rise in the price of coffee will
mean people switch to tea. The
only issue in dispute is whether it is
an increase in demand, or an
increase in the quantity demanded.
By custom, we use the term “an
increase in quantity demanded”
(alternatively an extension of
demand) to mean a change brought
about by a reduction in the price of
the product. The phrase “increase
in demand” is reserved for an
increase brought about by
something other than a change in
the price of the product.

Next question


Slide 23

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The motor industry uses steel to make cars. This relationship is
an example of products in …

joint supply

Incorrect

derived demand

Correct

substitute demand

Incorrect

competitive demand

Incorrect

APT Initiatives Ltd

As the car industry is a major
user of steel we can conclude
that the demand for steel is,
in part, derived from the
demand for cars.

Next question


Slide 24

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Which of the following is not a feature of price?

It rations available resources

Incorrect

It signals market conditions

Incorrect

It incentivises buyers and sellers

Incorrect

It allocates resources fairly

Correct

APT Initiatives Ltd

The price mechanism
allocates resources, but not
necessarily fairly. However,
it does definitely ration,
signal and incentivise.
Therefore, D is the correct
answer to the question.

Next question


Slide 25

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
When resources are allocated through the price mechanism…

prices must fall

Incorrect

prices are typically determined by
central government

Incorrect

production costs will determine
prices

Incorrect

business costs are more likely to be
competitive

Correct

APT Initiatives Ltd

Competition will force firms
to keep down costs and,
therefore, D is correct.

Next question


Slide 26

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Which of the following statements is true about a market
economy?

Economic decision makers act in ways
which will maximise social welfare

Incorrect

The government has a crucial role to play
in ensuring that economic outcomes are
fair

Incorrect

Prices help buyers make rational
judgements about the value of what they
buy

Correct

Producers determine what is produced,
and for whom it is produced

Incorrect

APT Initiatives Ltd

Economic theory is based on
the assumption that consumers
and others make rational
decisions. A is certainly not
true since economic agents act
in their own self interest. B is
not true since governments play
a minimal role in a market
economy. D is not true since
producers respond to consumer
demand.

Exit