Test: Theory Of Demand- 1

30 Questions MCQ Test Business Economics for CA Foundation | Test: Theory Of Demand- 1

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Expansion & contraction of Demand curve occurs due to 


An expansion or contraction of demand occurs as a result of the income effect or substitution effect. When the price of a commodity falls, an individual can get the same level of satisfaction for less expenditure, provided it's a normal good. In this case, the consumer can purchase more of the goods on a given budget.


Demand for a commodity refers to:


Demand for a commodity refers to a quantity of the commodity demanded at a certain price during any particular period of time.


Demand of a commodity depends upon:


1. Price of related goods:
a. Substitute Goods: 
When the price of substitute goods increases the demand of the given commodity increases and vice versa.
Example: Tea and coffee, when price of tea increases demand for coffee increases and vice versa.

b.Complementary Goods: 
When the price of complementary goods increases, the demand of the given commodity decreases and vice versa.
Example: Car and petrol, if the price of car increases demand for petrol decreases.

2. Income of the consumer: 
As the income of the consumer increases, his purchasing power increases and therefore the demand of the given commodity increases. Similarly, when the income of the consumer decreases, his purchasing power contradicts and hence the demand of the given commodity decreases.


Suppose the price of movies seen at a theatre rises from Rs. 120 per person to Rs. 200 per person. The theater manager observes that the rise in price is because attendance at a given movie is to fall from 300 persons to 200 persons. What is the price elasticity of demand for movies? 


Arc elasticity may be expressed as: [(Q1 - Q)/(Q1 + Q)] x [(P1 + P)/(P1 - P)]


[(300 - 200)/(300 + 200)] x [(200 + 120)/(200 - 120)]

= (100/500) x (320/80)

So, Arc elasticity = 4/5 = 0.8

(differences were large hence arc elasticity is used.)


The price of hot-dogs increases by 22% and the quantity demanded falls by 25% this indicates that demand for hot dogs is: 


According to relatively elastic demand, an increase in price will lead to greater than proportionate change in quantity demanded. In this case price increases by 22% and quantity demanded falls by 25% which is greater than 22% (increase in price) so the ans is elastic.


What is the value of elasticity of demand if the demand for the good is perfectly elastic?


Infinity because price does not change but demand change due to change in other factors.


The demand of which type of goods do not decrease with increase in its price


An increase or decrease in the price of such a good does not affect its quantity demanded. These goods have a perfectly inelastic relationship, in that any change in price does not change the quantity demanded.


 If the price of any complementary goods rises:


Complementary goods are those goods which consume together.
For example - Car and petrol

When price of car increase then demand of petrol and car decreases because petrol is necessary to drive a car and when price of car increases then people do not buy car and due to this reason petrol is also not in demand so, demand curve shifts to left and remember complimentary goods are joint goods.


What is an Engels curve?


The Engel curve, named after the German statistician Ernst Engel (1821-96), is a relation between the demand for a good and the income of its buyers, the former depending on the latter.
The Engel curve of an individual consumer can be obtained from his ICC. 


What is income elasticity of demand, when income changes by 20% and demand changes by 40%


Ed= (% change in demand) / (% change in price)

E= (40% / 20%)

E= 2 %


In case of Inferior goods like bajra, a fall in its price tends to: 


A Giffen good is typically an inferior product that does not have easily available substitutes. They are quite rare, to the extent that there is some debate about their actual existence. So fall in the price of such good like Bajra will also reduce its demand as income effect dominates the substitution effect.


Compute income elasticity if demand increases by 5% and income by 1%.


Income elasticity = (% change in quantity demand ÷ % change in income)

Hence, income elasticity = 5 ÷ 1

= 5


In case of an inferior good, the income elasticity of demand is: 


In the case of an inferior good, the income elasticity of demand is Negative. A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes.


In the case of a straight-line demand curve meeting the two axes, the price-elasticity of demand at the mid-point of the line would be


In the case of a straight-line demand curve meeting the two axes, the price-elasticity of demand at the mid-point of the line would be 1.


Giffen paradox is an exception of 


In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics. According to the Law of Demand, when the price of a commodity falls the demand for it rises. Giffen's Paradox is an exception to this law.


A fall in price of normal goods leads to:


When the price of normal good falls, consumer's real income increases and this induces him to buy more of that commodity. this is known as the income effect.


If the number of customers in the market increases suddenly, the supply will:


In a very short period, supply is fixed as suppliers cannot increase the supply of a commodity. Since, in a very short period price is determined by demand only (supply being constant), thus the price that prevails in the very short period is called market price. Hence if the number of customers in the market increases suddenly, the supply will not be affected.


Other things remaining constant, if the price of the inferior goods decreases then what will be the effect?


Quantity demand decrease because inferior goods are low quality goods and law of demand does not apply on inferior goods.


Cross elasticity of complementary goods is:


Complementary goods have a negative cross - price elasticity: As the price of one good increases, the demand for the second good decreases.

Substitute goods have a positive cross -price elasticity: As the price of one good increases, the demand for the other good increases.


If a 20% fall in price of a commodity brings about a 40% increase in its demand, then the demand for the commodity will be termed as:


If percentage change in price a of commodity is more than percentage change in quantity demanded then it is known as "ELASTIC DEMAND"

If the change in demand is 40% when price changes by 20% then EP = 40% / 20% = 2, in Panel (B), i.e. Δq /Δp> 1. 


Which of the following elasticity of demand measures a movement along the demand curve rather than a shift in the curve?


Movement along a demand curve occurs when the demand of a commodity changes due to change in its own price whereas shift in demand occurs when demand changes due to other factors keeping its own price constant. Price elasticity of demand measures relationship between price and demand of the product and hence it measures movement along demand curve.


In case of straight line demand curve meeting two axis, the price elasticity of demand at the point where the curve meets Y-axis would be _______


The slope of a straight-line demand curve, one with a constant slope, has constantly changing elasticity. No two points on a straight-line demand curve have the same elasticity. The price elasticity of demand is different at each point on a demand curve with constant slope.


The commodity whose demand is associated with the name of Sir Robert Giffen?


Those goods which are considered inferior by the consumers and which occupy a substantial place in consumers budget are called 'Giffen' goods.
These goods have got their name after Sir Robert Giffen.


If income of a person increases by 10% and his demand for goods increases by 30%, income elasticity will be _______


More than one because change in demand is more than change in income


Cross elasticity of perfect substitutes is:


In the case of perfect substitutes, the cross elasticity of demand will be equal to positive infinity.

Substitutes: Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises.

Two goods may also be independent of each other.


Normal goods have __________.


A normal good, also called a necessary good, is the opposite of an inferior good. A luxury good means a greater increase in income results in a larger percentage increase in demand. A normal good has an income elasticity of demand that is positive, but less than one.


Certain goods for which Quantity demanded decreases when income Increases are called_______. 


Its answer is inferior good. Because there is negative relation between income and demand of inferior good. we know that when our income increase we would not like to purchase low quality products. so we can say that when income increase then demand of inferior good decrease.


If the price is decreased form Rs.10 to Rs.8 of a commodity but the quantity demanded remains the same price elasticity is _________.


When the price elasticity of demand for a good is perfectly inelastic (Ed =0), changes in the price do not affect the quantity demanded for the good;  and hence option B is the correct answer.


The price of a commodity were increased form Rs. 4 to Rs. 6. As a result demand decreased form 15 units to 10 units. What is the price elasticity? (Point elasticity)


Ep = - (ΔQ/ΔP)*(P/Q)
= -[(15-10)/(4-6)]*[4/10]
= - (-5/2)*(2/5)
= 1


Movement along the same demand curve shows:


A movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price.

Contraction of demand refers to the increase in own price of the commodity.

Expansion in demand refers to a rise in the quantity demanded due to a fall in the price of commodity, other factors remaining constant.

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