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a) State and explain four factors which affect the demand for a good or service - Leaving Cert Economics - Question 3 - 2010
Question 3
a) State and explain four factors which affect the demand for a good or service. (20 marks) b) The diagram below represents the market demand and market supply for... show full transcript
Worked Solution & Example Answer:a) State and explain four factors which affect the demand for a good or service - Leaving Cert Economics - Question 3 - 2010
Step 1
State and explain four factors which affect the demand for a good or service.
Answer
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Price of the good itself: Generally, as the price of a good falls, consumers will purchase more of that good, as they perceive they are receiving better value for their money.
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Price of complementary goods: If the price of a complementary good rises, this can lead to a decrease in demand for the good in question. For example, an increase in the price of petrol can reduce the demand for large cars.
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Prices of substitute goods: If the price of a substitute good rises, the demand for our good may increase as it becomes relatively cheaper. For instance, if the price of butter rises, the demand for margarine may increase.
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Income of the consumers: For most goods, as income rises, demand tends to increase and vice versa. Consumers typically buy fewer goods when they face unemployment.
Step 2
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Step 5
If the sugar beet producers received a subsidy, to encourage production of sugar beet as a bio fuel: • Show and explain how this would affect the market supply curve;
Answer
The subsidy would lower the cost of production, leading to an increase in supply. On the diagram, draw a new supply curve to the right of the original supply curve, indicating the increased supply.
Step 6
Show the effect this would have on the equilibrium price and equilibrium quantity. (use labels P₂ and Q₂.)
Answer
The new equilibrium price (P₂) will decrease and the equilibrium quantity (Q₂) sold will increase. Label these points clearly on the new supply curve and the intersection with the demand curve.
Step 7
Which good will experience the greatest fall in quantity demanded? Explain your answer.
Answer
The iPhone will experience the greatest fall in quantity demanded due to its higher price elasticity of demand (PED = -3.8). When the price rises by 10%, the demand will likely fall by 38%. In comparison, petrol, with a PED of -0.5, will only see a 5% fall in demand.
Step 8
Which good would you consider a ‘luxury’ good and which would you consider a ‘necessity’? Explain your answers.
Answer
Luxury good: iPhone. It is price elastic; consumers tend to buy fewer luxury goods as their prices increase.
Necessity: Petrol. It is considered price inelastic; even if prices rise, consumers still need to purchase petrol for transportation.