Name: ………………………

Date: ……………………….

Marks: ………………………

Total Marks: 90

Test
First Term Exam
Section A
Q1.

a) Define price elasticity of demand (2)

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 Ans: Price elasticity of demand is a numerical measure of the responsiveness of quantity
demanded to a change in price in a given time period.
b) Explain two advantages of horizontal mergers (4)

The merged firm can exploit internal economies of scale as it increases in size and increases output
leading to lower long run average costs of production. eg Buying economies of scale.
The firm face reduced competition in the market which will increase sales revenue.

c) Calculate, using information from the extract:

(i) the percentage of the new passenger aircraft that the USA is predicted to purchase
between 2015 and 2030 [2]
6160/28000* 100= 22%
(ii) the percentage change in demand for air travel if the price of air travel falls by 15%.
[2]
-1.2= x/15
X= 18% percentage change in demand is 18%
d) Analyse why demand for a luxury holiday may be price elastic. [5]

Price elastic demand is when a small fall in price causes a large increase in quantity
demanded for luxury holidays. Luxury holidays have price elastic demand as it takes a large
proportion of income. If luxury holidays may have many close substitutes, it is likely to
have elastic demand. A rise in price will cause consumers to switch to the cheaper
holidays causing a fall in quantity demanded of holiday holidays. As luxury holidays
are also not urgent and can be postponed, their demand is relatively price elastic.

e) Explain, using information from the extract and Fig. 1, what happened to the market for
pilots in India in 2015. [4]
The diagram shows demand increasing (1) inelastic demand (1) wages / prices rising (1)
supply extending / more pilots (1) inelastic supply (1) due to countries wanting to recruit
more pilots/increased demand for flights (1).

f) Analyse the factors affecting the elasticity of demand for air travel (5)
Price elasticity of demand is a numerical measure of the responsiveness of quantity
demanded to a change in price in a given time period. If air travel takes up a large
proportion of income of consumers, it have elastic demand. If air travel has close
substitutes like rail transport, it will have elastic demand as price rises, consumers can
switch to cheaper substitutes. For high income groups, the demand will be inelastic
whereas for low income groups demand will be elastic. If air travel is for an urgent
purpose, demand will be inelastic, whereas if the travel can be postponed, it will be
relatively elastic demand.

g) Discuss to what extent the knowledge of PED will be useful to a business (6)
Price elasticity of demand is a numerical measure of the responsiveness of quantity
demanded to a change in price in a given time period. A business can use the knowledge of
its product’s PED for its pricing strategy to maximise revenue. If the product has elastic

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 demand, a fall in price will cause extension in demand. The business would cut prices so
that the quantity increases by a larger percentage resulting in increase in total revenue. If
the product has inelastic demand, an increase in price will cause an increase in revenue.
However the PED of products may change and frequent changes in prices may annoy
consumers. Moreover, it is difficult to accurately calculate PED and there are other factors
affecting the demand like quality of the product.

Section B
Structured Questions
Q1. In the Netherlands in 2018, there were 1.3 bicycles per person and the world’s largest
underground bicycle parking area was built in the capital city. Land is scarce in city centres, where
most cycling takes place. Demand for bikes in the Netherlands is price-inelastic. Only a few people in
the Netherlands borrow money to buy bikes. The government encourages cycling by spending on
both bike parking areas and leisure cycle parks.

a) Define Price elasticity of supply (2)

b) Explain two reasons why demand for a bicycles may be price-inelastic. [4]
No close substitutes
Less proportion of income spent on purchase of bicycles
c) Analyse the factors that make the supply of a product more elastic (6)
Barriers to Entry- If there are high number of barriers to enter, the market supply
will be inelastic, but if there are less barriers to entry supply will be elastic.eg. In a
monopoly market, the supply for the product is inelastic as there are many barriers
to enter whereas in a competitive market the supply for the product is elastic as
there are less or no barriers to enter the market.
Resource Mobility- If resources can be switched easily from one product to another,
then supply for the product will be elastic whereas if resources immobile or difficult
to obtain supply will be inelastic.
Inventory- If more inventory or raw materials are available, then supply will be
elastic

Spare production capacity: If there is plenty of spare capacity then a business can

increase output without a rise in costs and supply will be elastic in response to a
change in demand. The supply of goods and services is most elastic during a
recession, when there is plenty of spare labour and capital resources.

d) Discuss whether or not producers would want the demand and the supply of their product
to be more price elastic (8)
Producers would want the supply of their product to be more elastic. This is because they are
likely to be in a better financial position if they can respond quickly and fully to changes in
demand and price. If price rises due to higher demand, producers would want to take
advantage
of the favourable market conditions. By supplying more, their profits may rise. If demand and
prices fall, producers would want to reduce their supply. They would not want to sell their

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 products if the price is lower than the cost of producing the product. Removing products from
sale now may enable them to be put back on the market if price should rise in the future.
While producers would want supply of their products to become more elastic, they are
unlikely to
want the demand for their products to become more elastic. This is because it is likely to
mean
that the producers’ products now have closer substitutes. This increased competition would
restrict the producers’ ability to raise price and would put pressure on them to keep price low.

Q2. It is forecast that by 2022 India will overtake China as the world’s most highly populated
country. China’s birth rate is lower than India’s and China has a higher proportion of its population
aged over 65. By 2050, it is estimated that 500 million Chinese people and 330 million Indian people
will be over 65. Changes in population size and age structure affect the quantity and quality of a
country’s resources.

a) Identify two causes of an increase in population (2)

High birtrate greater than deathrate
High Net immigration
b) Explain two features of the population structure of a developing country. (4)

A developing economy has a broad base due to a high birth rate caused by a high infant

mortality rate. It has a high death rate due to lack of health care facilities. This is indicated

by a narrower peak. Net emigration is high as a large proportion of the working age

population leaves the country to find better jobs. This results in a decrease in working

population which is represented by a narrow bar chart in the middle.

c) Analyse the reasons why a country’s birth rate may fall. [6]
Expensive to raise children
Well paid jobs are available to women
If government provides pensions and welfare benefits, people rely less on the need to have
a large family.

d) Discuss whether or not a government should be worried about an increase in the proportion
of its population that is aged over 65. (8)
When there is an increase in the proportion of people above 65years, it will result in an
ageing population. The government may be worried as it may result in an increase in
dependency ratio. Higher demand for healthcare will result in the government spending
more on healthcare and thus government may face a high opportunity cost. The government
will have to spend more on pensions while receiving less tax revenue.
However, the economy have an experienced labour force if the government increases the
retirement age. Working longer will also increase incomes and keep them physically and
mentally fit. An ageing population will increase the tax burden on workers if they are
occupationally immobile.

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Q3. a) Define Average costs (2)

Average costs are total costs divided by total output. It is also known as unit cost.

b) Distinguish between internal economies of scale and external economies of scale (4)

Internal economies of scale are advantages that occur in the form of lower long run average
costs of production as the firm increases in size. Eg buying economies of scale. However,
External economies of scale occur when firms benefit from lower long run average costs
resulting from the entire industry growing in size. Eg access to skilled workers.

c) Analyse why some firms remain small (6)

owners preference

lack of financial capital

niche market- personal services

e) Discuss whether average costs of production always decreases when a firm increases the
total output (8)
As a firm increases its scale of production, the long run average cost of production
reduces due to internal economies of scale. This can occur due to buying raw
materials in bulk resulting in getting a discount on the purchase called buying
economies of scale leading to decrease in LRAC. Large firms can also employ
specialist managers who operate the firm efficiently due to their skills, also resulting
in LRAC falling which is known as managerial economies of scale. When a firms
expands its output it can also gain marketing economies of scale which arises as the
distribution costs and advertising costs are spread over a larger output leading to a
fall in LRAC. A large firm can raise finance at a lower interest rate which is known as
financial economies of scale. However, if a firm expands beyond its minimum
efficient scale of production, the LRAc increases instead of decreasing which is
known as internal diseconomies of scale. This may occur due to coordination
problems that may occur due to the firm expanding too large resulting in increased
administration costs and slower decision making making the firm inefficient.
Diseconomies of scale may occur due to communication problems between the
workforce also resulting in loss of output and increased costs.
Diagram

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To conclude a firm could expand its scale of production till it remains efficient and
the costs of production are falling. A business needs to balance the short run costs
and long run benefits while making a decision of expansion.

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