Slide 1

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 2

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 3

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 4

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 5

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 6

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 7

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 8

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 9

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 10

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 11

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 12

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 13

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 14

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 15

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 16

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 17

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 18

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 19

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 20

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 21

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 22

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 23

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 24

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 25

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit


Slide 26

UNIT 1
Markets & Market Failure

Click here to
Commence quiz

1.2
The Allocation of Resources
in Competitive Markets
Test 2

© APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure

Question 1
Movement down a demand curve arises because of…

an increase in income

Incorrect

a reduction in price

Correct

an increase in price

Incorrect

a decrease in income

Incorrect

APT Initiatives Ltd

Changes in income cause a
shift of the demand curve,
whereas changes in price
(prompted by a rightward shift
in the supply curve) cause a
downward movement along
the demand curve. A
movement down a demand
curve means a reduction in
price which causes an
extension of demand.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 2
A demand curve for a product would shift to the left if there
was…

an increase in income

Incorrect

an increase in its price

Incorrect

a decrease in the price of a
substitute product

Correct

a decrease in the price of a
complementary product

Incorrect

APT Initiatives Ltd

We can rule out B which
causes a movement along
the demand curve. A and D
cause a rightward shift of the
demand curve (an increase in
demand). Only D causes a
decrease in demand for the
product. This is because
people switch to the less
expensive substitute.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 3
A demand curve for a DVD is drawn on the assumption that all
factors are constant except…

the price of the DVD

Correct

the price of substitute products

Incorrect

consumer incomes

Incorrect

the price of DVD players

Incorrect

APT Initiatives Ltd

This is the ceteris paribus
(other things remain equal)
principle. We assume that all
factors remain unchanged
except the variable that we
are focusing on.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 4
A garage reduces the price of a new model from £15,000 to
£13,500. As a result, the quantity demanded rises from 20 units
a week to 23 units a week. The price elasticity of demand is…
-0.67

Incorrect

-0.9

Incorrect

-1.3

Incorrect

-1.5

Correct

APT Initiatives Ltd

Quantity demand rises by
15%.
Price is reduced by 10%.
PED = +15% / -10% = -1.5.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 5
If demand for a product has unitary price elasticity, it means
that…

changing price will leave a business’s
revenue unchanged

Correct

a percentage change in demand leads to
the same percentage change in price

Incorrect

the product is a necessity

Incorrect

the price elasticity of demand is zero

Incorrect

APT Initiatives Ltd

A is correct because one
feature of unitary demand is
that price changes are
cancelled out by quantity
changes to leave revenue
unchanged. B might be a
tempting answer but the line
of causation is the wrong way
round.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 6
A car manufacturer has been studying market research data, shown in
the table below, regarding income elasticity of demand for four of its
models. Following a 5% fall in real incomes this business can expect…
a fall in demand for the
Paris of 3.5%

Correct

an increase in demand
for the Viaggio of 5%

Incorrect

an increase in demand
for the Belmont of 4%

Incorrect

no change in demand
for the Tucson

Incorrect

Model

Paris
Viaggio
Belmont
Tucson

APT Initiatives Ltd

Income
elasticity of
demand
+0.7
+1.0
+1.25
+2.2

As income elasticity
of demand is positive
then it is certain that
a fall in income leads
to a fall in demand.
Therefore, logic
demands that only A
can be correct. This
is confirmed by the
data -3.5 / -5 =
+0.7.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 7
A normal good is one where…

demand increases when income
increases

Correct

demand rises when income falls

Incorrect

demand falls when prices rise

Incorrect

demand changes in proportion to
changes in income

Incorrect

APT Initiatives Ltd

The explanation lies in the
definition of a normal good.
Most goods are normal
goods. As our income rises,
we buy an increased quantity
of these goods.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 8
When the price of tea recently rose from £140 per kg to £160 per
kg, demand for milk fell from 1.62m litres to 1.57m litres. To
two decimal places, the cross elasticity of demand was…
-1.79

Incorrect

-3.44

Incorrect

-0.22

Correct

-4.61

Incorrect

APT Initiatives Ltd

Demand fell by 3.09.
Price rose by 14.29%.
Cross elasticity of demand is
-3.09% / +14.29 = -0.22.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 9
Movement down a supply curve reflects…

a shift in demand arising from higher
incomes

Incorrect

a shift in demand arising from a
decrease in the demand for a
complementary product

Correct

a shift in supply arising from an
increase in supplier costs

Incorrect

an increase in equilibrium price

Incorrect

APT Initiatives Ltd

A shift of a demand curve
causes a movement along the
supply curve. As demand for a
complementary product has
declined so has the demand
for the product with which we
are concerned. The demand
for this product shifts inwards
and there is a sliding down on
the supply curve. To fully
understand this, construct a
sketch graph.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 10
A shift to the left in a supply curve would arise if…

a unit tax on the product was
reduced

Incorrect

there was an increase in consumer
incomes

Incorrect

there was an improvement in
technology

Incorrect

none of the above

Correct

APT Initiatives Ltd

A shift to the left means a
decrease in supply. A and C
would cause an increase in
supply. Notice that A is not
the imposition of a tax, but a
reduction in a tax. B would
impact upon demand rather
than supply. Hence, none of
the above is the correct
answer.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 11
A supply curve would shift to the right when…

there was a decrease in the price
elasticity of supply

Incorrect

producers increased output in response
to an increase in market price

Incorrect

output per employee falls

Incorrect

raw material costs fall

Correct

APT Initiatives Ltd

A shift of the supply curve to
the right (more is supplied at
each price) is the result of a
reduction in the cost of
production. Of the four
responses, only D relates to a
fall in the cost of production.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 12
The elasticity of supply for a product is more likely to change if…

Incorrect

output increases significantly
the business responds to an increase
in market price

Incorrect

the business has found some spare
capacity

Correct

there is a change in the price
elasticity of demand

Incorrect

APT Initiatives Ltd

Existence of spare capacity
facilitates a rise in output,
thus it makes supply more
elastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 13
If price elasticity of supply is +2.2, what percentage rise (to two
decimal places) is required to bring about a 5.6% increase in the
quantity supplied?…
12.23%

Incorrect

5.25%

Incorrect

2.55%

Correct

2.12%

Incorrect

+2.2 = +5.6% / x.
Therefore:

APT Initiatives Ltd

x = 5.6% / 2.2 = 2.55.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 14
Refer to the diagram below. The producers’ revenue is
represented by the triangles…

A+D

A+C

Incorrect
Correct

Price

S
D

B+C

A+B+C

Incorrect
Incorrect

A
C

B

Triangles A and
C combined =
price multiplied
by quantity =
sales revenue.

D
Quantity

APT Initiatives Ltd

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 15
A shift to the right in a demand curve, where supply is perfectly
inelastic will result in…

an increase in price and quantity sold

Incorrect

an increase in producer revenue,
proportional to the increase in price

Correct

an increase in producer revenue, and
quantity supplied

Incorrect

a fall in quantity sold and in producer
revenue

Incorrect

APT Initiatives Ltd

The rise in demand pushes up
price and if supply is perfectly
inelastic then quantity sold will
remain unchanged. Logically,
if price rises by 10% so will
revenue in these
circumstances.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 16
An equilibrium price for a product is certain to rise when…

business costs rise and the price of a
substitute falls

Incorrect

demand is perfectly inelastic and
technology improves production
efficiency

Incorrect

supply and demand are both perfectly
inelastic

Incorrect

incomes rise and supply is perfectly
inelastic

Correct

APT Initiatives Ltd

D is the only combination of
events which is certain to
lead to a rise in price.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 17
Markets for agricultural products can often function poorly
because…

price elasticity of supply is low

Correct

demand for these products is volatile

Incorrect

there is a shortage of agricultural land

Incorrect

the products are too expensive

Incorrect

APT Initiatives Ltd

Price elasticity is low because
the production cycle is long, eg
a planned increase in the grain
production must await the next
harvest which, in the case of
the UK, will be next year. In
the meantime farmers will be
unable to respond to changes
in demand and, as a result, the
whole of the adjustment will be
in the form of price rises.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 18
Supply of health care services is price inelastic because…

improving technology improves
decision-making and treatment
outcomes

Incorrect

it is labour-intensive, much of which
requires prolonged and intensive
training

Correct

people are living longer and demand a
quicker response to their health
concerns

Incorrect

the private sector is becoming more
significant, as it relieves pressure on
the NHS

Incorrect

APT Initiatives Ltd

As it takes many years to train
medical professionals, supply
cannot respond quickly to
changing demand. The other
three statements might be
accurate in themselves, but do
not explain why supply is
inelastic.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 19
If rented accommodation is seen as an inferior good compared
with owner occupation then…

demand for rented accommodation
rises as incomes fall

Correct

demand for owner occupation falls as
income rises

Incorrect

the income elasticity of demand for
rented accommodation is positive

Incorrect

cross elasticity between rented
accommodation and owner occupied
accommodation is negative

Incorrect

APT Initiatives Ltd

An inferior good is defined as
one in which demand rises as
income falls. In the case of an
inferior good income elasticity
is negative. Cross elasticity
between substitutes is positive
not negative.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 20
The entry of a new competitor to an existing market will…

result in higher prices

Incorrect

force prices down

Correct

increase the degree of monopoly
within the market

Incorrect

increase demand for the product

Incorrect

APT Initiatives Ltd

The entry of new firms
increases competitive forces
in the market and will push
prices down, illustrated by a
leftward shift in the demand
curve for the products of
established market
participants.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 21
Demand for oil for chemicals has led to an increase in the price of
petrol. This relationship is an example of products in…

joint supply

Incorrect

joint demand

Incorrect

composite demand

Correct

competitive demand

Incorrect

APT Initiatives Ltd

Composite demand refers to
demand for a good that is
wanted for more than one
purpose, so that an increase
in demand for one purpose
reduces the availability of
supply for other purposes.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 22
The relationship between the demand for computers and the
demand for computer technicians is an example of…

derived demand

Correct

joint demand

Incorrect

composite demand

Incorrect

complementary demand

Incorrect

APT Initiatives Ltd

The demand for computer
technicians is derived from
(comes from) the demand for
computers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 23
Resources are often allocated most efficiently through the price
mechanism because…

those factors of production which
produce the most get paid the least

Incorrect

the competition which arises results in
high profits

Incorrect

prices of resources rise as demand for
their product rises

Correct

the resulting output is distributed fairly
among individuals

Incorrect

APT Initiatives Ltd

Changes in consumer demand
are reflected in changes in the
relative prices of the products,
and also of the factors of
production needed to make
the products. This ensures
that resources are shifted into
the production of goods
required by consumers.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 24
Which of the following statements is not true?

The price mechanism ensures that the
quantity demanded equals the quantity
supplied

Incorrect

Rationing coupons is unnecessary in a
free market

Incorrect

A black market only exists when price
is fixed below the equilibrium level

Incorrect

The price mechanism ensures that
everyone who wants to buy the product
is able to do so

Correct

APT Initiatives Ltd

The weakness in response D
(and why it is not true) is that
there is no reference to price or
willingness to pay. We might all
like to acquire certain goods,
but without the means and
willingness to pay our demand is
not effective. For Economists,
demand is only meaningful if
desire is backed up by ability
and willingness to pay.

Next question

AQA AS Economics Unit 1 – Markets & Market Failure

Question 25
Resources are allocated in a market economy in response to…

the resources which are available to
producers

Incorrect

government’s objective of increasing
the population’s standard of living

Incorrect

the need for everyone to have the
necessities which they need

Incorrect

the products consumers wish to buy

Correct

APT Initiatives Ltd

In the free market the
consumer is sovereign. In a
competitive market the profit
motive ensures that supply
responds to demand.

Exit