A-AS Level (CIE) Business Studies Paper-2: Specimen Questions with Answers 3 - 4 of 52

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Case Study- 3

Tobacco products are kind of goods with inelastic demand since there is almost no substitute goods for them. Therefore, it is hard to reduce the amount of people smoking once they have been addicted. Moreover, cigarettes also have a high-income elasticity of demand as people with high income will be willing to buy a lot more of packs of cigarettes, thus, they become more addicted.

One way to reduce youth smoking and people smoking in general is to raise the price through higher cigarettes taxes. The reduction amount of youth smoking depends on the price elasticity of demand. This elasticity is elastic for teenagers than for adults. It is because teenager income is relatively low, the portion spent on cigarettes usually bigger than that of adult smokers. In addition, peer pressure affects a young person՚s decision to smoke more than an adult՚s decision to continue smoking. The impact of a higher price also reduces smoking by peers and thus, drives down the number of young smokers. Moreover, young smokers not yet addicted to nicotine are more sensitive to price rises than adults, who are likely to be heavy smokers. The experience from other countries encourages the efficiency of higher cigarette taxes in reducing people smoking. For example, Thailand government has regularly raised the cigarettes taxes nine times within 15 years (1992 - 2007) and recently, the amount of tax collected is 2 - 3 times more than Vietnam and the number of smokers is two-thirds less than Vietnam.

Question 3 (3 of 5 Based on Passage)

Describe in Detail Essay▾

On a straight-line demand curve, select any point ‘A’ and give a geometrical proof of measurement of elasticity at this point.



Marshall suggested method of calculating elasticity of demand called point elasticity of demand for measuring price elasticity at a point on the demand curve. Point method can be explained by considering a linear (straight line) demand curve. Let the straight-line be extended to meet the two axes. Let us take point P, it divides the curve into two segments.

The Point Elasticity

The point elasticity is thus measured by the ratio of the lower segment of the curve below the given point to the upper segment of the curve above the point.

For brevity, we may put it as;

MN is a straight-line demand curve point P is the point. Thus, PN is the lower segment and PM is the upper segment.

As, point P divides the straight line into two equal parts of the demand curve so the lower segment is equal to the upper segment hence, the elasticity is equal to 1.

Question 4 (4 of 5 Based on Passage)

Write in Short Short Answer▾

What is point elasticity of demand how it is measured?



Point elasticity is measured at a point demand curve is referred as point elasticity of demand. For non-linear demand curve we need to apply calculus to calculate point elasticity. As the change in price become smaller and approach zero, the ratio ∆ Q/ ∆ P becomes equivalent to the first order derivative of the demand curve function with respect to price .

Point elasticity can be expressed as: Lower segment/Upper segment

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