Practice Questions: Unit II - Demand and Law of Demand (Business Economics, B.Com Hons)

Here are questions based on the provided notes for Unit II: *Demand and Law of Demand* in Business Economics (B.Com Hons).

What does the Law of Demand state?
a) Demand increases as price increases
b) Demand decreases as price increases
c) Demand remains constant irrespective of price
d) Demand increases when supply decreases
Answer: b
Which of the following is not a determinant of demand?
a) Price of the good
b) Consumer income
c) Cost of production
d) Tastes and preferences
Answer: c
What is the shape of a normal demand curve?
a) Upward sloping
b) Downward sloping
c) Vertical
d) Horizontal
Answer: b
Which of the following can cause a shift in the demand curve?
a) Change in consumer income
b) Change in the price of the good
c) Increase in supply
d) Change in production technology
Answer: a
An inferior good is characterized by:
a) Increased demand with increased income
b) Decreased demand with increased income
c) No change in demand with income
d) Demand equal to supply
Answer: b
Which of the following is an exception to the Law of Demand?
a) Normal goods
b) Giffen goods
c) Substitute goods
d) Complementary goods
Answer: b
When the price of a complementary good rises, the demand for the primary good typically:
a) Increases
b) Decreases
c) Remains unchanged
d) Becomes perfectly elastic
Answer: b
A movement along the demand curve is caused by:
a) Change in the price of the good
b) Change in consumer preferences
c) Change in income levels
d) Change in population
Answer: a
What happens when there is a rightward shift in the demand curve?
a) Demand decreases
b) Demand increases
c) Price decreases
d) Supply increases
Answer: b
Which of the following represents the demand schedule?
a) A graphical representation of demand
b) A table showing quantity demanded at various prices
c) A table showing quantity supplied at various prices
d) The relationship between demand and supply
Answer: b

Price elasticity of demand measures:
a) Responsiveness of demand to price changes
b) Responsiveness of supply to demand changes
c) Impact of price on supply
d) Impact of income on demand
Answer: a
What is the formula for price elasticity of demand?
a) % change in price ÷ % change in demand
b) % change in demand ÷ % change in price
c) % change in demand × % change in price
d) % change in supply ÷ % change in demand
Answer: b
When demand is perfectly inelastic, the price elasticity of demand is:
a) Zero
b) One
c) Infinite
d) Negative
Answer: a
A perfectly elastic demand curve is:
a) Vertical
b) Downward sloping
c) Horizontal
d) Upward sloping
Answer: c
Cross elasticity of demand measures:
a) Change in demand for one good due to price change in another good
b) Change in supply due to demand change
c) Change in income due to price change
d) Change in production cost due to demand change
Answer: a
Income elasticity of demand for luxury goods is typically:
a) Negative
b) Zero
c) Less than one
d) Greater than one
Answer: d
Which of the following factors does not affect price elasticity of demand?
a) Availability of substitutes
b) Consumer income
c) Nature of the good
d) Production cost
Answer: d
A good with a price elasticity greater than 1 is considered:
a) Inelastic
b) Elastic
c) Unitary elastic
d) Perfectly inelastic
Answer: b
What type of elasticity is relevant for assessing the effect of advertising?
a) Price elasticity
b) Cross elasticity
c) Advertising elasticity
d) Income elasticity
Answer: c
If demand for a product rises with an increase in consumer income, the product is:
a) Inferior
b) Normal
c) Neutral
d) Giffen
Answer: b

When demand is unitary elastic, total revenue:
a) Increases with price increase
b) Decreases with price increase
c) Remains unchanged with price changes
d) Becomes zero
Answer: c
Which type of goods generally have a low price elasticity of demand?
a) Luxury goods
b) Necessities
c) Inferior goods
d) Substitutes
Answer: b
What happens when demand is perfectly elastic?
a) Price can change without affecting quantity demanded
b) Any price change leads to zero demand
c) Any price change does not affect demand
d) Quantity demanded remains constant
Answer: b
Advertising elasticity of demand focuses on the responsiveness of demand to changes in:
a) Price
b) Advertising expenditure
c) Income
d) Production cost
Answer: b
Which of the following describes inelastic demand?
a) Demand changes significantly with a price change
b) Demand changes minimally with a price change
c) Demand is constant regardless of price
d) Demand is perfectly proportional to price
Answer: b
If the cross elasticity of demand is positive, the goods are:
a) Complements
b) Substitutes
c) Unrelated
d) Inferior
Answer: b
What determines the degree of price elasticity of demand?
a) The cost of production
b) Consumer tastes and preferences
c) Nature of substitutes available
d) Both b and c
Answer: d
The elasticity of demand for a necessity good is likely to be:
a) Perfectly elastic
b) Perfectly inelastic
c) Relatively inelastic
d) Unitary elastic
Answer: c
What is the primary reason for a backward-bending demand curve in labor markets?
a) Substitution effect outweighing the income effect
b) Income effect outweighing the substitution effect
c) No effect of income and substitution
d) Labor supply being perfectly elastic
Answer: b
Which elasticity type measures responsiveness to income changes?
a) Price elasticity
b) Cross elasticity
c) Income elasticity
d) Advertising elasticity
Answer: c

A steep demand curve indicates:
a) High price elasticity
b) Low price elasticity
c) Unit elasticity
d) Perfect elasticity
Answer: b
In the case of addictive goods, demand tends to be:
a) Elastic
b) Inelastic
c) Unitary elastic
d) Perfectly elastic
Answer: b
What happens to revenue when demand is inelastic, and prices increase?
a) Revenue decreases
b) Revenue increases
c) Revenue remains unchanged
d) Revenue becomes zero
Answer: b
What indicates perfectly inelastic demand on a graph?
a) Horizontal line
b) Downward-sloping curve
c) Vertical line
d) Upward-sloping curve
Answer: c
When two goods have negative cross elasticity, they are likely:
a) Substitutes
b) Complements
c) Independent
d) Unrelated
Answer: b
Elasticity of demand for durable goods is generally:
a) Low
b) High
c) Unitary
d) Zero
Answer: b
If elasticity of demand is 0.5, demand is:
a) Perfectly elastic
b) Relatively elastic
c) Inelastic
d) Unitary elastic
Answer: c
A firm increases advertising and notices a proportionately greater increase in demand. This suggests:
a) Low advertising elasticity
b) High advertising elasticity
c) Negative advertising elasticity
d) Zero advertising elasticity
Answer: b
Which elasticity concept is critical for setting taxation policy on goods?
a) Price elasticity of demand
b) Income elasticity of demand
c) Cross elasticity of demand
d) Advertising elasticity of demand
Answer: a
If the demand for a product does not change with price, the elasticity is:
a) Zero
b) Infinite
c) Unit
d) Negative
Answer: a

Hard MCQS

Which of the following could make the demand curve upward sloping in rare cases?
a) Giffen goods
b) Substitutes
c) Inferior goods
d) Complementary goods
Answer: a
The primary reason for the downward slope of the demand curve is:
a) Law of diminishing marginal utility
b) Substitution effect only
c) Income effect only
d) Perfectly elastic demand
Answer: a
If two goods have a positive cross-price elasticity, it means they are:
a) Complements
b) Substitutes
c) Perfect complements
d) Inferior goods
Answer: b
A change in demand without a change in price is known as:
a) Movement along the demand curve
b) Contraction of demand
c) Expansion of demand
d) Shift in the demand curve
Answer: d
What distinguishes the demand curve for Veblen goods from normal goods?
a) It slopes upward due to price and status symbol
b) It slopes downward due to substitution effect
c) It shifts only due to changes in income
d) It remains constant irrespective of price
Answer: a
In the case of perfectly elastic demand, the price elasticity is:
a) Zero
b) One
c) Infinite
d) Negative
Answer: c
Which of the following factors is least likely to affect the elasticity of demand for a product?
a) Time period for adjustment
b) Price of substitutes
c) Advertising expenditure
d) Cost of production
Answer: d
A movement along the demand curve represents changes due to:
a) Consumer preferences
b) Price of the good itself
c) Income of the consumer
d) Price of related goods
Answer: b
If a good is a necessity, its price elasticity of demand will likely be:
a) Greater than 1
b) Equal to 1
c) Less than 1
d) Zero
Answer: c
A backward-bending demand curve is typically observed in the case of:
a) Labor supply
b) Luxury goods
c) Inferior goods
d) Giffen goods
Answer: a

The price elasticity of demand for a good is affected by:
a) Availability of close substitutes
b) Proportion of income spent on the good
c) Time horizon
d) All of the above
Answer: d
If the cross-price elasticity between two goods is zero, the goods are:
a) Perfect complements
b) Perfect substitutes
c) Unrelated
d) Inferior goods
Answer: c
Income elasticity of demand for a necessity is generally:
a) Positive but less than 1
b) Negative
c) Zero
d) Greater than 1
Answer: a
Which elasticity concept is most relevant for setting excise taxes on luxury goods?
a) Income elasticity
b) Price elasticity
c) Cross elasticity
d) Advertising elasticity
Answer: b
The demand for a product with high advertising elasticity is likely to:
a) Remain constant regardless of advertisements
b) Increase significantly with more advertisements
c) Be perfectly inelastic
d) Decrease with advertising
Answer: b
The degree of price elasticity of demand is higher when:
a) There are no substitutes available
b) The good is a luxury
c) The good is a necessity
d) Consumers have less time to adjust
Answer: b
Which type of goods typically exhibit a negative income elasticity of demand?
a) Normal goods
b) Inferior goods
c) Luxury goods
d) Giffen goods
Answer: b
A good with a price elasticity of 0.8 is classified as:
a) Perfectly elastic
b) Inelastic
c) Unitary elastic
d) Elastic
Answer: b
What happens to revenue when price increases for a product with unitary elastic demand?
a) Revenue increases
b) Revenue decreases
c) Revenue remains constant
d) Revenue becomes zero
Answer: c
If the price elasticity of demand is -2, this implies that demand is:
a) Inelastic
b) Perfectly elastic
c) Unitary elastic
d) Elastic
Answer: d

Elasticity of demand for durable goods is usually:
a) Inelastic in the short run and elastic in the long run
b) Elastic in the short run and inelastic in the long run
c) Always perfectly elastic
d) Always perfectly inelastic
Answer: a
What indicates the importance of price elasticity for producers?
a) It helps in determining how much revenue will change with price changes
b) It helps predict income changes
c) It shows the relationship between supply and production costs
d) It is irrelevant to producers
Answer: a
Cross elasticity of demand is negative for:
a) Substitute goods
b) Complementary goods
c) Unrelated goods
d) Inferior goods
Answer: b
If demand is perfectly inelastic, what will happen to total revenue when the price increases?
a) It decreases
b) It increases
c) It remains the same
d) It becomes zero
Answer: b
Which of the following is an example of a normal good?
a) Generic rice
b) Branded clothing
c) Public transport in rural areas
d) Second-hand cars
Answer: b
A perfectly elastic demand curve is associated with:
a) Price takers in a competitive market
b) Monopolies
c) Necessities
d) Giffen goods
Answer: a
What is the main factor that causes a leftward shift in the demand curve?
a) Increase in consumer income
b) Decrease in consumer preferences
c) Increase in substitute goods' prices
d) Increase in population
Answer: b
The elasticity of demand for addictive goods is generally:
a) Perfectly elastic
b) Highly inelastic
c) Unit elastic
d) Zero
Answer: b
In the case of a Giffen good, the demand curve will:
a) Slope upward
b) Slope downward
c) Be vertical
d) Be horizontal
Answer: a
What kind of demand arises when the price of one good affects the demand for another unrelated good?
a) Cross demand
b) Derived demand
c) Joint demand
d) Composite demand
Answer: a

If price elasticity of demand is less than 1, an increase in price will:
a) Increase total revenue
b) Decrease total revenue
c) Keep total revenue unchanged
d) Increase marginal cost
Answer: a
A product with an elasticity of -0.2 is considered to be:
a) Inelastic
b) Elastic
c) Unitary elastic
d) Perfectly inelastic
Answer: a
When a price ceiling is imposed, which type of elasticity determines the magnitude of the shortage?
a) Price elasticity of demand
b) Price elasticity of supply
c) Income elasticity of demand
d) Cross elasticity of demand
Answer: b
What happens to marginal utility as consumption increases?
a) It decreases
b) It increases
c) It remains constant
d) It becomes negative immediately
Answer: a
Which of the following statements is true for necessities?
a) They always have unit elasticity
b) They have low price elasticity
c) Their demand decreases with increasing income
d) They have negative cross elasticity
Answer: b
Elasticity of demand for luxury items during a recession is likely to:
a) Increase
b) Decrease
c) Remain constant
d) Become negative
Answer: b
The concept of "consumer surplus" is directly related to:
a) Price elasticity of demand
b) Income elasticity of demand
c) The downward slope of the demand curve
d) The area below the supply curve
Answer: c
Which of the following would most likely have perfectly inelastic demand?
a) Life-saving drugs
b) Branded shoes
c) Seasonal clothing
d) Fast food items
Answer: a
The slope of an indifference curve is directly affected by:
a) Marginal rate of substitution
b) Income level
c) Substitution effect only
d) Elasticity of demand
Answer: a
Price elasticity of demand is higher for:
a) Goods with close substitutes
b) Goods with no substitutes
c) Necessities
d) Addictive goods
Answer: a

Short Questions

Explain the difference between movement along the demand curve and shift in the demand curve.
What is the significance of the Law of Demand in economic analysis?
How does the income effect differ from the substitution effect in the context of the Law of Demand?
What are Giffen goods, and why do they violate the Law of Demand?
Explain the concept of "perfectly inelastic demand" with an example.
What are the implications of price elasticity of demand being greater than 1 for revenue?
How do complementary goods exhibit negative cross elasticity of demand?
Describe how price elasticity of demand changes over different time horizons.
Explain the impact of a price ceiling on the demand and supply equilibrium.
What does a price elasticity of demand coefficient of 0.5 imply about the responsiveness of demand?
How does the availability of substitutes influence the elasticity of demand for a product?
Why is the demand for luxury goods more elastic compared to basic goods?
What factors can lead to the demand curve becoming more elastic over time?
How do expectations of future prices affect current demand elasticity?
What are Veblen goods, and how do they deviate from typical demand curve behavior?
Explain why demand for addictive products tends to be highly inelastic.
How do external factors like social trends impact the elasticity of demand for certain goods?
What role does the concept of "marginal utility" play in the Law of Demand?
Why might income elasticity of demand be negative for inferior goods?
Discuss how income elasticity of demand helps in understanding the consumption pattern of necessities versus luxuries.
How do shifts in consumer preferences affect the demand curve, and what is the effect on price elasticity?
In what ways does the elasticity of demand for a product differ in the short-run versus the long-run?
What happens to total revenue when demand is unitary elastic?
Explain how advertising elasticity of demand influences marketing strategies.
How does a price increase for a necessity good affect its demand elasticity and total expenditure?
What are the key factors that determine whether demand for a good is elastic or inelastic?
How do government interventions like subsidies or taxes affect the elasticity of demand?
What role does consumer income play in determining the elasticity of demand for different goods?
How do consumer expectations about future prices influence the current elasticity of demand for certain goods?
Explain the relationship between elasticity of demand and the concept of consumer surplus.
Why might the demand for a product be perfectly elastic in a perfectly competitive market?
What are the major differences between price elasticity and income elasticity of demand?
How can the concept of "marginal rate of substitution" help explain consumer choices in terms of elasticity?
What is the impact of a change in the price of a substitute good on the price elasticity of demand for a product?
Explain how the demand for essential goods differs from the demand for luxury goods in terms of price elasticity.
Why do businesses consider the elasticity of demand when setting prices for their products?
How do the availability and affordability of close substitutes affect the elasticity of demand for a product?
Explain the impact of price elasticity on a monopolist's pricing strategy.
What does it mean for demand to be "inelastic," and what are some real-world examples?
How does the length of time for consumer adjustment affect the price elasticity of demand for a product?

Long Questions

Define the concept of demand and explain how it differs from the concept of desire and effective demand in the context of economic theory.
Discuss the determinants of demand in detail. How does each factor influence the quantity demanded for a good or service? Provide real-life examples.
What are the different kinds of demand (individual, market, joint, composite, etc.)? How do these types of demand influence pricing and market strategy?
Explain the importance of the demand curve in understanding consumer behavior. How do businesses use demand schedules and demand curves for decision-making?
Critically analyze the Law of Demand. How does it reflect the inverse relationship between price and quantity demanded? What economic theories support this law?
Discuss the exceptions to the Law of Demand in detail. In what cases do the usual price-quantity demand relations not hold? Provide examples for Giffen goods, Veblen goods, and speculative bubbles.
What are the reasons for the application of the Law of Demand in real-world markets? How do these reasons shape business strategies and market analysis?
Explain the difference between a movement along the demand curve and a shift in the demand curve. What factors cause each, and how do they affect the market equilibrium?
Discuss the concept of consumer preference in relation to demand. How do changes in tastes and preferences shift the demand curve for certain goods or services?
How does income inequality affect the demand for different goods and services? Discuss how this is reflected in the demand curve for inferior, normal, and luxury goods.

Define elasticity of demand and discuss its significance in understanding consumer behavior. How do businesses use elasticity to optimize pricing and revenue?
Explain the factors that affect the price elasticity of demand (PED). How do the availability of substitutes, necessity vs. luxury, and time period influence elasticity?
What is the importance of elasticity of demand for government policymakers when determining taxation and subsidy policies? Provide examples where elasticity plays a key role.
Explain the concept of price elasticity of demand in detail. How is it calculated, and what does its value indicate regarding the responsiveness of demand to price changes?
Discuss the various degrees of price elasticity of demand (perfectly elastic, elastic, unitary elastic, inelastic, and perfectly inelastic). Provide examples for each type.
Discuss the methods of measuring price elasticity of demand, including the percentage method, total expenditure method, and geometric method. Evaluate the advantages and limitations of each.
Explain the concept of income elasticity of demand. How does the income elasticity of demand help businesses in predicting how changes in consumer income affect the demand for their products?
What is cross-price elasticity of demand, and how does it help businesses understand the relationship between complementary and substitute goods? Provide examples.
How does advertising elasticity of demand differ from price elasticity? Discuss its significance in marketing strategies for firms and the impact of advertising on consumer demand.
Explain how the concept of elasticity can be applied to understand demand fluctuations in the short run versus the long run. How does elasticity change over different time frames?

Discuss how knowledge of price elasticity of demand allows a monopolist to determine its optimal pricing strategy. What impact does this have on consumer surplus and producer surplus?
Analyze how a firm can use income elasticity of demand to segment its market. How does income elasticity help identify the target demographic for different product lines?
How do changes in the price of complementary goods affect the demand for a firm's product? Provide an in-depth analysis using cross-price elasticity concepts.
How does the concept of elasticity help businesses determine the best pricing strategies for launching a new product in the market? Discuss the use of market research in elasticity-based pricing.
Explain how firms in oligopoly markets use price elasticity to engage in price competition or price leadership. How does elasticity influence strategic pricing decisions?
Discuss the role of price elasticity in determining the economic efficiency of a market. How does high price elasticity result in greater efficiency and consumer welfare?
Examine the role of elasticity in determining the impact of taxation on goods. How do businesses and consumers adjust to changes in taxes based on the elasticity of demand for a good or service?
How do luxury goods exhibit different price elasticity compared to necessity goods? Discuss the implications for businesses in terms of pricing and market segmentation.
Analyze the implications of inelastic demand for a business's pricing power. How can firms take advantage of inelastic demand to maximize revenue?
How does elasticity of demand affect a firm’s revenue when prices are increased? Explain using the total revenue test and provide examples where firms benefit from raising prices.

Critically analyze the impact of government price controls (price ceilings and price floors) on market equilibrium and demand. How do these controls alter consumer and producer behavior?
Discuss the concept of demand for a good being perfectly elastic or perfectly inelastic. How do these extreme cases affect the pricing and market strategies of firms in such markets?
Explain how the elasticity of demand can be influenced by the time frame of the price change. What is the difference between short-run and long-run elasticity of demand?
Discuss the effects of multiple pricing strategies (such as price discrimination) on elasticity of demand. How do firms use elasticity to design targeted pricing strategies?
What role does advertising elasticity of demand play in influencing consumer decisions? Analyze how changes in advertising spending can lead to shifts in the demand curve.
Explain how the Law of Demand applies in international trade, particularly with regards to goods with high price elasticity. How does this concept impact global supply chains and trade policies?
Discuss the relationship between elasticity of demand and consumer utility. How can firms use elasticity data to increase consumer utility and their own profitability?
Critically assess the application of the Law of Demand in the context of speculative bubbles. How do irrational behaviors and expectations alter the demand curve in such scenarios?
Discuss the role of technological innovation in shifting the demand curve for traditional products. How does technological advancement impact the price elasticity of these goods?
Examine the impact of shifting consumer preferences and tastes on the demand curve. How do these shifts interact with changes in income and prices, and how do they affect elasticity?

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Practice Questions: Unit II - Demand and Law of Demand (Business Economics, B.Com Hons)