ECO10004: Economic Principles

Week 1: Practice Question Model Answers

Question 1a

Question 1b

As demand curve is a linear line the slope does not change as the price changes. Therefore to
calculate the slope we can take any two points calculate the rise over the run. Let’s use the
points A(p1,q1) = (5,4) and B(p2,q2) = (3,6)

change _ in _ price
Slope of a line =
change _ in _ quantity

 p2  p1   3  5  2   1
= = =
 q2  q1  6  4 2

Question 1c

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It is negative. This is to be expected as increasing the price means that a customer will by less
of the good (law of demand). We cover the law of demand next week.
Question 2

We need to draw two separate lines to compare sunny days and overcast days when keeping
the price constant. For example if the price today is 0.60 and the quantity sold is 50 units, but
tomorrow the day is overcast then, if we keep the price at 0.60 the quantity sold will decrease
to 30 units. We can only establish this type of relationship if we have collected a lot of data
over time. In practice we do have data on quantity sold and price on many goods and services
(maybe you could search data from the Australian Bureau of Statistics) we can also get data
on weather so we could undertake this type of analysis for some goods.

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