IGCSE Economics Paper-2: Specimen Questions with Answers 90 - 91 of 100

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Passage

Demand usually varies with price but the extent of variation is not uniform in all cases.

Question 90 (4 of 5 Based on Passage)

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Short Answer▾

Distinguish between price elasticity, income elasticity and cross elasticity.

Explanation

Price Elasticity and Income Elasticity
S. no.Price elasticityIncome elasticity
1.Price elasticity of demand measures the change in quantity demanded against the price of that productIncome elasticity of demand measures the change in quantity demanded against consumer՚s income level
2.General relationship between price and quantity demanded is adverse although there are some exceptionsGeneral relationship between price and quantity demanded is positive although there are some exceptions
3.Products can be categorized as elastic, inelastic and unitary elasticProducts can be categorized as inferior, Luxury, normal and necessity.

Question 91 (5 of 5 Based on Passage)

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Short Answer▾

Indicate the usefulness in classification of market situations.

Explanation

The concept of elasticity of demand has a wide range of practical application in economics and business.

  • To businessman: In decision making, the concept of elasticity of demand is of utmost importance, for taking decision for pricing policy, the businessman must know the likely effect of change in price on the product demand in the market. Like, he must consider whether a lowering of price will cause expansion in the demand for his product and if so to what extent and thus to what extent revenue would rise fetching what amount of profits.
  • To the government and finance minister: In determining the fiscal policy also, the concept of elasticity of demand is very important to the government. The finance minister must consider the elasticity of demand while selecting the commodities for taxation.
  • In International Trade: The concept is also useful in formulating export and import policies of the country. Further in determining different spheres of international trade, the relative elasticities of demand for commodities in two countries are very important.
  • To Policy makers: It is useful in solving the mystery of how farmers may remain poor despite a bumper crop. Since agricultural products, particularly food grains have inelastic demand, when there is a bumper crop it can be sold to only cutting prices substantially. Hence the total income of farmers will be lower despite bigger crop.
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