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1.1 REVISION
Achievement Criteria
Achievement
Achievement with Merit
Achievement with Excellence



Describe concepts
related to consumer
choice and demand.
Explain concepts related
to consumer choice and
demand.
Analyse and apply the concepts
related to consumer choice and
demand.
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The assessment of concepts related to choice and demand will involve a
selection from the following:

the opportunity costs of economic decisions

the conflict of limited means relative to wants

the relationship between limited means and the need to make decisions –
the ‘means’ includes family, whānau, hāpū (extended kinship group) and
iwi, as well as more familiar resources

influences that affect the demand for goods and services

a demand curve for an individual consumer

movement along a demand curve

shift of a demand curve

consumer reaction to changes caused by factors other than price

patterns of household spending and the relationships between household
income and consumption patterns.
QUESTION ONE
Becky and Ben are Year 11 students who are saving up for their school hockey trip to the
National Secondary Schools tournament. They have been selling chocolates to raise the
$300 it will cost each of them to go.
To date they have earned $150 each. Becky wants them to sell chocolates after school today
but she has a music lesson and Ben should be at rugby practice.
a) What is the opportunity cost of Ben selling more chocolates?
Not being able to attend rugby practice.
b) Why is this the opportunity cost?
Because this is the next best alternative forgone. If he wants
to sell more chocolates then he will have to give up his next
best choice which is rugby practice.
c) Using the concept of limited means, explain why Becky has to fundraise for the
hockey trip.
Because she has limited income she has to fund raise to get
enough money to go on the trip.
d) Describe another way in which Becky may have limited means.
She may have limited time to do the things she wants to.
Limited by whanau – not enough income in their family
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e) After rugby practice Ben usually needs a drink. Explain how a want is different
from a need.
A want is something you
desire.______________________________________________________
A need is something you must have to
survive._____________________________________________________
____________________________________________________________
QUESTION TWO
Becky has a part time job after school working in the local supermarket. This week has been
very busy as they have lots of items on special. Ben was pleased to buy a fridge pack of 12
cans of Coca Cola which was half the usual price.
a) Define the law of demand and explain how Ben’s demand for Coca Cola
illustrates this law.
As price increases the quantity demanded increases.
As the price of Coca Cola has come done Ben has increased the quantity he
demands.
___________________________________________________________
b) Explain why a decrease in the price of Coca Cola does NOT result in an increase
in demand.
A decrease in price will cause an increase in the quantity
demanded, it will not cause a change in demand. A change in
demand is caused by a change in Ceteris Paribus.
c) Describe the effect on demand for Coca Cola of each of the following:
i)
a decrease in income levels
Increase demand__________________________
ii)
a decrease in the price of Pepsi
Decrease in demand
iii)
a decrease in the price of Coca Cola
increase in quantity demanded.__________
iv)
a publicity campaign informing the public of the very high sugar content of soft
drinks
Decrease in demand_____________________________________
d) Explain the difference between a substitute and a complement. Use examples.
A substitute is a good that is used instead of another good.
A complement is a good that is used in conjunction with
another good.
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QUESTION THREE
Becky’s friend Sam regularly hires DVDs. When the hire charge was $10 for a new release
he hired only one movie a month, but when the $3 special was on he hired 10 movies that
month. At $7 for a DVD hire Sam would hire only one movie a week, but if the price was $5
he would hire 6 DVDs a month.
a) Use the information in the passage above to draw a fully labelled demand curve
for Sam’s
DVD use in a month on the graph.
Sam’s demand for DVD’s
P($)
10
9
8
P1
7
6
5
P2
4
3
D
2
1
1
2
3
4
5
Q1
6
7
8
9
Q2
10
QD (DVD’s per month)
b) Show on the curve above, the effect of a decrease in price from $7.00 to $5.00
c) Explain the effect of this decrease in price.
The quantity demanded has increased because Sam can now afford to buy more
so he is more able to buy more.
d) Use the information above to answer the following questions:
i)
How many DVD’s did Sam demand a month at $7.00? ______$4________
ii)
How many DVDs would Sam demand in a month at $6.00? ____$5______
iii)
How much would Sam spend a month if DVDs were $5.00? ____$30______
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QUESTION FOUR
a)
Complete the sketch graph below to illustrate a decrease in demand.
Fully label your graph and use arrows to illustrate the change.
D
D2
b)
Complete the sketch graph below to illustrate a decrease in quantity
demanded.
Fully label your graph and use arrows to illustrate the change.
P2
P1
D
Q2
c)
Q1
Explain the difference between a decrease in demand and a decrease in
quantity demanded.
A decrease in the quantity demanded is caused by an increase in
price and is a movement along the demand curve
A decrease in demand is a shift to the left of the demand curve
and is caused by a change in Ceteris Paribus.
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QUESTION FIVE
Sam stays with his Dad one week and then at his Mum’s the following week. Sam’s
Dad works as a salesman and earns $45,000 a year. His Mum owns her own
business and has a salary of $70,000.
Sam likes staying at his Mum’s as they eat out often and she buys him designer label
clothes. His Dad doesn’t seem to have any spare cash for eating out or buying flash
clothes after paying the groceries, rent and other bills
The following table shows Sam’s parents approximate level of household spending
for various items.
Item
Food
Dad’s spending
25%
Mum’s spending
20%
Housing
40%
25%
Clothing
15%
18%
Savings
0%
10%
a) Present the information about Sam’s Dads spending in a fully labelled pie graph
Sam's Dad's Household Spending
20%
25%
0%
Food
Housing
Clothing
Savings
Other
15%
40%
b) Identify an item that would appear in the others category
_____________Transport, entertainment.____________
c) Sam doesn’t understand why the percentage his Mum spends on food is smaller
than his Dad because she pays heaps more for her food and they eat out often. Explain
to Sam why this is.
Sam’s mum earns a higher income than his dad and although the
total amount she spends on food might be more, as a percentage
of income it is a lesser amount.
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d) Sam’s Dad has just got a new job as a sales manager with an $80,000 salary. Use
specific examples to help you explain the changes you expect in his spending
patterns as his household income increases. Ensure you make reference to the types
and quantities of goods purchased.
Sam’s Dad would start spending a greater percentage of his
income on luxuries such as travel and entertainment.
Although he would spend more on food, as a percentage of
income it would decrease because food is a necessity and
spending doesn’t increase by as much as the increase in income.
Sam’s father would also not buy inferior goods anymore as he
can now afford more expensive items.
e)
Total
Dollars
Spent on
Luxuries
0
Level of Sam’s Dads Income
The graph above shows the pattern of Sam’s dads spending on luxuries as
income increases. Analyse how the pattern of spending on luxuries changes as
the level of household income increases.
At low levels of income Sam’s dad can’t afford to buy luxury
goods, but as his income increases he can afford to buy more
luxury items such as expensive clothing, travel etc.
As his income continues to increase Sam’s Dad will start to save
some of his income and so spending on luxuries, while still
increasing, is not increasing at as fast a rate as before.
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QUESTION SIX
Taylor has a part-time job working at the local movie theatre at night. She
sells snack food and tickets. This often means that she can’t go out with her
friends because she is working.
(a)
If Taylor takes a night off and goes with her friends to a party, what is the
opportunity cost of her decision? Income form the part time job that she gives
up.
(b)
Taylor has limited means. Describe the concept of limited means. Limited
means not enough time, income or skills to get everything you would like.
(c)
Most resources can be used to produce one good or another. Explain how this
idea is linked to scarcity and the consumers’ need to make economic
decisions. Because of unlimited wants people want as many goods and
services as we can get, but resources (land, labour) are scarce and so if we
choose to produce one type of good we will have to give up another type that
could have been produced with those resources. This means we have to make
decision about what to produce given our scarce resources.
QUESTION SEVEN
Taylor’s brother Tom works at the local garage. He is saving up to buy a
new bike, but he cannot decide which bike he wants to buy.
(a)
Identify THREE factors that may affect Tom’s demand for bikes.
(1) Income, advertising.
(2) Price of a substitute
(3) Price of a complement
(b)
Explain why price might NOT be the most important factor. Tom may be more
worried about the quality of the bike and so may be willing to pay more for a
better quality bike.
(c)
One brand of bike has a reputation for poor quality. Explain how that might
affect consumer demand. Demand would decrease as consumers would not
be as willing to buy this bike due to its poor reputation.
QUESTION EIGHT
At the moment, Tom can only afford a cheap bike. However, his birthday is
coming up, and he asks his family to contribute towards a better bike instead
of buying him presents.
Explain how Tom’s means have increased because of his family. Because of
his family Tom now has more income and so his means have increased due
to having another way to get income.
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QUESTION NINE
When a local DVD store started offering specials, so did the movie theatre
that Taylor works at. Movie prices stayed the same, but snack prices
changed.
(a)
Use the information in the demand schedule to draw a demand curve for
Popcorn. Fully label your graph.
Demand for Bags of Popcorn
Price ($)
Quantity (per night)
1.80
200
2.00
185
2.20
170
2.60
140
Demand for Bags of Popcorn
P12.60
P($)
2.40
2.20
2.00
P21.80
D
0
30
60
90
120 150 180 210
Q1
Q2
Q (bags per night)
(b)
(i)
How many bags were sold at $2.00? 185 bags
(ii)
At what price were 170 bags sold? $2.20
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(c)
(iii)
How many bags would be sold at $2.40? 160 bags
(i)
On the same graph, illustrate a price decrease from $2.60 to $1.80.
(ii) Explain the effect on quantity demanded. The quantity demanded has
increased because people can now afford to buy more.
(iii) If the price decreased from $2.60 to $1.80, explain the effect on revenue.
Revenue has decreased from $364 to $360, so it has decreased as the increase in
quantity demanded is less than the decrease in price.
QUESTION TEN
When customers buy popcorn, they usually buy a soft drink as well.
(a) What is the economic term used for items normally purchased together?
Complements.
(b) What is the economic term used for items that might be bought in place of
each other?
Substitutes
(c)
Explain how a decrease in the price of popcorn would affect the demand for
soft drink. A decrease in the price of popcorn would lead to an increase in the
quantity demanded of popcorn and because soft drink is a complement and is used
with the popcorn it will increase demand for soft drink.
QUESTION ELEVEN
(a)
Complete Graph 1 below to illustrate the effect of a decrease in demand. Fully
label your graph and use arrows to illustrate the change.
D2
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(b)
Complete Graph 2 below to illustrate the effect of a decrease in the price of
DVDs at the local video store on the demand for movie tickets. Fully label
your graph and use arrows to illustrate the change.
D2
(c)
Use economic ideas to explain Graph 2, above. DVD’s and movies are
substitutes and so a decrease in price of DVD’s will lead to an increase in the
quantity demanded of DVD’s and so a decrease in demand for movie tickets.
(d)
The Law of Demand states that consumers demand more when price
decreases and all other factors are held constant. Use an example to
explain how this may not always be true. If the good is an inferior good
then a decrease in price may not lead to an increase in the quantity
demanded as consumers would prefer not to buy this good any way and
the decrease in price will have little effect. E.g. a decrease in price of
cheap meat may have little effect on the quantity demanded.
QUESTION TWELVE
Taylor’s family is typical of many households. Most of their disposable
household income is spent on necessities like food, rent, power, insurance,
and health. There is little left over for luxuries like new clothes, entertainment,
or holidays.
(a)
Define the term household. A group of people living under one roof.
(b)
Define the term necessities. Things you must have to survive.
(c)
Explain why their disposable household income is less than the total amount
the family earns. Disposable income is income after tax and so this is their
income after tax payments to the government have been made.
Taylor’s mother decides to return to full-time work now that both children are
over 14 years old and at school. This will significantly lift their family income.
(d) Explain how Taylor’s mother returning to work will affect their household
consumption patterns, with reference to necessities and luxuries. With an
increase in income Taylor’s mother will spend more on luxuries because she can
now afford to. As a percentage of income the amount spend on necessities such
as food will decrease, because although the amount of money spent on food may
increase a little, as a percentage of income it will be less.
Spending on items such as inferior goods will decrease, because they can afford
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to buy better quality goods and so will buy less inferior goods.
QUESTION THIRTEEN
Mereana lives at home with her parents, her older brother Nathan, and her
grandmother. Her father owns and operates his own business, selling sports gear.
Her mother works in the shoppart-time and manages their home.
(a)
Mereana’s father works most Saturdays, but he comes to watch her play
soccer when he can. What is the opportunity cost to Mereana’s father of
watching her play soccer?
The income lost from not working.
(b)
Why is this the opportunity cost?
alternative forgone.
(c)
Using the concept of limited means, explain why Mereana’s mother only
works part-time when she could work full-time in the family business.
She has limited time and is not able to do everything she would like to and so
she chooses not to work full time and do other things.
(d)
Describe another way in which Mereana’s family may have limited means.
Limited skills – not able to do some things. Limited family – may only have
small family resources.
(e)
After soccer, Mereana usually needs a drink. Explain how a want is different
from a need.
A want is something you desire. A need is something you have
to have to survive.
Because this is the next best
QUESTION FOURTEEN
Mereana also works in the shop after school. She notices that customers usually buy
more when prices are lower. This is the Law of Demand.
(a) What is demand?
How much of a commodity a consumer is both willing
and able to buy at a certain price.
(b) Explain why a decrease in price does NOT result in an increase in demand.
A decrease in price results in an increase in the quantity demanded – not a
change in demand. A change in demand is a shift of the demand curve and is caused
by a change in Ceteris Paribus conditions.
QUESTION FIFTEEN
(a)
Describe the effect on demand for sports shoes of each of the following:
(i)
an increase in income levels increase demand
(ii)
an increase in the price of sports socks
decrease demand
(iii)
a decrease in the price of school shoes
decrease demand
(iv)
a community health and fitness programme. Increase demand
(b)
Explain the difference between a substitute and a complement. Use
examples.
A substitute is a good used instead of another good such as
using margarine instead of butter. A complement is a good that is used with
another good such as cars and petrol.
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QUESTION SIXTEEN
Mereana kept a record of the number of sports drinks they sold to see if the Law of
Demand worked.
Demand for 500 ml bottles of Sports Drinks
(a)
Price ($)
Quantity (per week)
1.00
70
1.20
50
1.40
35
1.60
25
1.80
20
Use the information in the demand schedule above to draw a demand curve
for sports drinks. Fully label your graph.
Title: Demand For 500ml bottles of Sports Drinks.
P($)
1.80
1.60
1.40
1.20
1.00
0
D
10
20
30
40
50
60
70
QD (bottles Per Week)
(b) Use the information in the Demand Schedule to answer the following questions.
(i)
How many bottles were sold at $1.40? 35 per week
(ii)
At what price were 50 bottles sold? $1.20
(iii)
How many bottles would have been sold at $1.10? 60 per week
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(c)
Explain if it is possible to predict how many bottles would be sold in a week at
$2.00 by using the information in the demand schedule above.
No. The information given does not go to or beyond $2 and so it is impossible
to predict what will happen at this price.
QUESTION SEVENTEEN
(a)
Complete the sketch graph below to illustrate an increase in demand. Fully
label your graph and use arrows to illustrate the change.
P
D2
Q1
(b)
Q2
Complete the sketch graph below to illustrate an increase in quantity
demanded. Fully label your graph and use arrows to illustrate the change.
P1
P2
Q1
(c)
Q2
Explain the difference between an increase in demand and an increase in
quantity demanded. An increase in quantity demand is caused by a
decrease in price and is a movement along the demand curve. An increase in
demand is a shift of the demand curve to the right and is caused by a change
in Ceteris Paribus.
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QUESTION EIGHTEEN
Before starting their business, Mereana’s family earned a much lower income. Now,
her parents are planning to expand their very successful business in the hope of
earning an even higher family income. Their spending patterns are typical of most
households.
The following table reflects their approximate level of spending for each item.
Item
Food
(a)
Mereana’s family spending
Before
Now
25%
15%
Future
12.5%
Housing
40%
30%
20%
Clothing
15%
18%
20%
Savings
0%
10%
Which item does Mereana’s family spend the most on now?
Housing
25%
(b)
Explain why the total for now does not equal 100%.
There are other items such as transport and entertainment that have not been
included. And so because some items have been left out the total does not
equal 100%.
(c)
Explain why the percentage Mereana’s family spends on housing keeps
decreasing even though they pay the same amount on their mortgage.
As Mereana’s family income increases they still pay the same amount on their
mortgage and so as a percentage of income it is decreasing.
(d)
Explain the changes they expect for each item as their household income
increases.
Spending on necessities such as food and housing will not
increase much and so as a percentage of income it will decrease. Also
spending on inferior goods such as cheaper piece’s of meat will fall as income
increases.
Spending on luxury items such as entertainment and travel will increase a lot
and as a percentage of income this will increase.
As their income continues to increase Mereana’s family may be able to save
more and so the percentage of income saved will also increase.
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