Demand 6

Multiple Choice
1 C* 6 C 11 B
2 C 7 A 12 A*
3 A 8 C 13 C
4 B 9 D 14 A
5 D* 10 D 15 C
*Indicates that an enhanced answer has been provided in the section below.

Enhanced Answers
1 C If the price of printers increases, then the demand of its complement, ink cartridges, will
decrease as if less people purchase printers, less people will purchase ink cartridges.

5 D Governments tend to impose specific indirect taxes on goods or services with relatively
inelastic demand, in order to maximise revenue. Cigarette smoking is addictive and therefore
has relatively inelastic demand. Governments may also want to use an indirect tax to
discourage the consumption of certain products or services, such as activities harmful to
health which cigarette smoking is.

12 A Using the total outlay method we can calculate using the formula of (Price × Quantity) = Total
Revenue:
At $100, (100 × 100) = $10,000
At $150, (150 × 75) = $11,250
At $200, (200 × 45) = $9000
At $250, (250 × 20) = $5000
Therefore, when the price changes from $150 to $200, the total revenue decreases, therefore
demand is elastic.

Short Answers
Question 1

(a) Price and quantity demanded.

(b) 5 kg.

(c) 5 kg.

Copyright © Pearson Australia 2020 | The Market Economy Workbook – Eighth Edition 9781488626654 1

M06_TME2020_WB_03_26654_answers.indd 1 10/10/19 5:28 pm

 The Market Economy Eighth Edition Workbook Chapter 6: Demand

(d) A decrease in the demand curve (or a decrease in demand) means that fewer watermelons will
be demanded at each price level, as illustrated below in the shift from D to D1. This might be
caused by a decrease in the price of a substitute such as rockmelons, or a decrease in consumer
demand for food that required watermelons (such as watermelon juice or smoothies).

Price $
D1

D1

P2

P1

D2
D1
0 Q1 Q2 Quantity
demanded

(e) Movements along a demand curve show how consumers respond to a change in the price of
a good or service, such as the price of watermelons rising or falling.

(f) It is most likely that the demand for watermelons would increase, as an increase in the price
of rockmelons would encourage buyers of rockmelons to shift to buying watermelons.

(g) If the price of a complement to good A increases, consumers may demand less of good A as
the overall cost of using the complementary goods becomes more expensive. Therefore, the
price of complements tend to move in opposite directions – if the price of one goes up, it will
result in demand falling for the complementary good and therefore reduce its price.

Question 2

(a) Ceteris paribus is a phrase used in economics to isolate the relationship between two
economic variables. It is a Latin phrase which means ‘all other things being the same’, or in
other words ‘assuming that nothing else in the economy changes’.

(b) If an economy’s life expectancy is rising, this suggests there will be an increase in the
proportion of aged people in the population. As a result, the economy would likely experience
an increase in demand for service for aged people such as aged care centres.

(c)
Price $
125

100

75

50
D
25

0 Quantity
40 80 120 160 200
demanded

Copyright © Pearson Australia 2020 | The Market Economy Workbook – Eighth Edition 9781488626654 2

M06_TME2020_WB_03_26654_answers.indd 2 10/10/19 5:28 pm

 The Market Economy Eighth Edition Workbook Chapter 6: Demand

(d)
Price $
125

100

75 Expansion

50

25 D

0 Quantity
40 80 120 160 200
demanded

(e) A contraction in demand is simply an upward movement along the demand curve, occurring
when an increase in the price of a good or service causes a decrease in the quantity
demanded. Only an increase in the price for a good or service will lead to upward movement
along the existing demand curve. Conversely, a change in any other factor other than price
that can influence demand, such as factors affecting consumer demand, will lead to a shift of
the demand curve – hence, a decrease in demand means that consumers are willing and able
to buy less of the product than before at each price level. A decrease in demand also means
that consumers are only willing and able to buy a given quantity if the price is lower than
before. A decrease in demand is illustrated by the demand curve shifting to the left.

Question 3

(a) Price elasticity of demand is the responsiveness of quantity demanded to changes in the price
of the product.

(b) Revenue = Price of toasters ($) × quantity demanded

Revenue at $40: $40 × 200 = $8600

Revenue at $80: $80 × 120 = $9000

Since the price has risen and total revenue has risen, demand for hairdryers is relatively
inelastic between $80 and $100.

(c) Revenue at $150: $150 × 60 = $9000

Revenue at $240: $240 × 20 = $4800

Since the price has risen and total revenue has fallen, demand for hairdryers is relatively elastic
between $150 and $240.

(d) It tends to become more elastic as consumers have time to identify substitutes if the price
rises.

(e) According to the law of demand, as the price of a good falls, the quantity demanded for that
good will rise. This is because as prices fall, consumers will demand more of the good. In
contrast, as the price of a good rises, consumers will demand less of the good (as they shift
their demand to other goods). This creates a downward sloping demand curve, with demand
expanding as the price falls.

Copyright © Pearson Australia 2020 | The Market Economy Workbook – Eighth Edition 9781488626654 3

M06_TME2020_WB_03_26654_answers.indd 3 10/10/19 5:28 pm

 The Market Economy Eighth Edition Workbook Chapter 6: Demand

(f) A correct answer may include any two of the following:

• If consumers consider toasters to have close substitutes, demand is more likely to be
relatively elastic, since consumers can easily find substitutes in response to a change in
price.
• If expenditure on household electrical appliances such as toasted comprises a significant
proportion of consumers’ income, there will be a higher price elasticity of demand.
• As time after a price change increases, the demand is likely to become more price
elastic, since there will be more time for consumers to substitute to other goods and
services.
• To the extent that consumers regard toasters as essential or a necessity good for daily life,
they are more likely to have relatively inelastic demand.

Skills Revision Activity 1

1 A report suggests excessive use of smartphones can cause harm to mental health

2 A ban on imports of Huawei smartphones from China is lifted, leading to a fall in the price of smartphones

3 The economy enters a recession and average household incomes decrease

4 The government announces a ‘smartphone tax’ starting next year

5 An increase in the price of smartphone apps

6 A celebrity starts sharing photos from her new iPhone 12 on Instagram, saying it is the best camera she
has ever seen

1, 3 & 5 are a decrease in demand: e.g. 4 & 6 are an increase in demand: e.g.

Price $ Price $
D1 D2

D2 D1

P2 P2

P1 P1

D1 D2
D2 D1
0 Q1 Q2 Quantity 0 Q2 Quantity
demanded Q1
demanded

2 is an expansion in demand: e.g. (Note that for (4), the announcement of a future
tax will result in an increase in demand in the
short term before its introduction as consumers
Price $
bring forward their planned purchases.)

A
20

10 B

0 25 Quantity
10 demanded

Copyright © Pearson Australia 2020 | The Market Economy Workbook – Eighth Edition 9781488626654 4

M06_TME2020_WB_03_26654_answers.indd 4 10/10/19 5:28 pm

 The Market Economy Eighth Edition Workbook Chapter 6: Demand

Skills Revision Activity 2

Price ($) Qty Demanded Total Revenue Elasticity

(units)
$30 to $60 = inelastic, since price has risen and
30 200 6000 total revenue has risen from $6000 to $9600

60 160 9600 $60 to $120 = inelastic, since price has risen and
total revenue has risen from $9600 to $13,2009
120 110 13,200 $120 to $170 = elastic, since price has risen and
total revenue has fallen from $13,200 to $11,900
170 70 11,900
$170 to $250 = elastic, since price has risen and
250 40 10,000 total revenue has fallen from $11,900 to $10,000

$250 to $500 = elastic, since price has risen and

500 15 7500 total revenue has fallen from $10,000 to $7500

Price ($) Qty Demanded Total Revenue

Elasticity
(units)
$1999 to $2999 = inelastic, since price has risen and
1999 25 49,975 total revenue has risen from $49,975 to $59,980

2999 20 59,980 $2999 to $4500 = inelastic, since price has risen and
total revenue has risen from $59,980 to $67,500

4500 15 67,500 $4500 to $6750 = unit elastic, since price has risen
and total revenue has remained the same at $67,500
6750 10 67,500 $6750 to $7500 = elastic, elastic, since price has
risen and total revenue has fallen from $67,500 to
7500 8 60,000 $60,000

$7500 to $9900 = elastic, since price has risen and

9900 5 49,500 total revenue has fallen from $60,000 to $49,500

Price ($) Qty Demanded Total Revenue

(units) Elasticity

8 45 360 $8 to $13 = inelastic, since price has risen and total

revenue has risen from $360 to $455
13 35 455 $13 to $19 = inelastic, since price has risen and total
revenue has risen from $455 to $532
19 28 532
$19 to $28 = unit elastic, since price has risen and
total revenue has stayed the same at $532
28 19 532
$28 to $40 = elastic, since price has risen and total
revenue has fallen from $532 to $480
40 12 480
$40 to $50 = elastic, since price has risen and total
revenue has risen from $480 to $250
50 5 250

Copyright © Pearson Australia 2020 | The Market Economy Workbook – Eighth Edition 9781488626654 5

M06_TME2020_WB_03_26654_answers.indd 5 10/10/19 5:28 pm