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1. (a) (i) Explain, with the aid of an example, the 'Law of Demand' - Leaving Cert Economics - Question 1 - 2008
Question 1
1. (a) (i) Explain, with the aid of an example, the 'Law of Demand'. (ii) State and explain three exceptions to the 'Law of Demand'. (b) The data below represents ... show full transcript
Worked Solution & Example Answer:1. (a) (i) Explain, with the aid of an example, the 'Law of Demand' - Leaving Cert Economics - Question 1 - 2008
Step 1
Explain, with the aid of an example, the 'Law of Demand'
Answer
The 'Law of Demand' states that there is an inverse relationship between the price of a good and the quantity demanded. This means that as the price of a good decreases, the quantity demanded increases, and conversely, as the price increases, the quantity demanded decreases.
Example: Consider a bar of chocolate priced at £2. If the price rises to £2.50, consumers may choose to buy only 4 bars instead of 6, demonstrating the law.
Step 2
State and explain three exceptions to the 'Law of Demand'
Answer
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Giffen Goods: For certain necessities, a price increase can lead to an increase in demand. For example, if the price of a staple food like rice rises, people with fixed incomes may afford less of it, and they may revert to buying more expensive alternatives, effectively increasing demand for those.
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Status Symbols: Items of prestige like luxury cars may see increased demand if their prices rise because they are perceived as more exclusive and desirable, attracting wealthy buyers.
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Goods of Addiction: Certain addictive goods, like drugs or cigarettes, may see an increase in demand despite rising prices as users feel they cannot cut back due to their addiction.
Step 3
Using the above data, draw the diagram showing the market demand and supply curves for MP3 Players
Answer
To construct the diagram:
- Place 'Price' on the vertical axis and 'Quantity' on the horizontal.
- Plot the demand curve using the quantity demanded at each price.
- Plot the supply curve using the quantity supplied at each price.
- The demand curve slopes downwards from left to right, while the supply curve slopes upwards.
- Mark the intersection point to show equilibrium.
Step 4
Show on your diagram the price and quantity of MP3 Players at which this market is in equilibrium
Answer
The equilibrium occurs where the quantity demanded equals the quantity supplied. According to the data:
- Equilibrium price: €40
- Equilibrium quantity: 60 units. Mark these on the diagram as point E.
Step 5
Using this data, calculate the price elasticity of demand when price changes from €40 to €50
Answer
To calculate the price elasticity of demand (PED):
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Calculate the change in quantity (ΔQ):
- At €40, quantity demanded is 60.
- At €50, quantity demanded is 40.
- Thus, ΔQ = 40 - 60 = -20.
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Calculate the average price (P1 + P2):
- P1 = €40, P2 = €50, thus the average = €45.
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Calculate the average quantity (Q1 + Q2):
- Q1 = 60, Q2 = 40, thus the average = 50 units.
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Using the formula:
- Where ΔP = (50 - 40) = 10.
- PED = (-20 / 10 \times 45 / 50) = -1.8
- Since PED > 1, the demand is elastic.
Step 6
Explain two possible reasons for the shift in the demand curve
Answer
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Increase in Consumers' Incomes: When consumers see an increase in disposable income, they are likely to buy more MP3 Players as they can afford them more easily.
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Improvements in Services Available: As more services like streaming music become available, the demand for MP3 Players may increase as consumers seek devices to utilize these services.