CA Foundation · Paper 4 · Business Economics

Chapter 2 · Unit 1 · Law of Demand and Elasticity of Demand

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Question 01

In Economics, demand means:

desire alone to buy a commodity need for a commodity willingness and ability to buy at various prices during a given period stock of goods in a market

Demand in Economics is not mere desire. It must be backed by ability to pay and willingness to spend at various prices during a period.

Question 02

Effective demand requires:

desire only means to purchase only willingness to pay only desire, purchasing power and willingness to use that purchasing power

ICAI explicitly states that effective demand depends on desire, means to purchase and willingness to use those means.

Question 03

Quantity demanded is always expressed:

without reference to price at a given price without reference to time only as annual stock

Quantity demanded has meaning only at a particular price.

Question 04

Demand is a flow concept because it is expressed:

per unit of time only in physical units as a one-time purchase without any price

Demand refers to a continuous flow of purchases over time, such as per day, per week or per month.

Question 05

Which of the following is an important determinant of demand?

price of the commodity price of related goods disposable income All of the above

ICAI lists own price, price of related goods, disposable income, tastes and preferences among key determinants.

Question 06

According to the law of demand, other things remaining constant, demand for a commodity:

rises when its price rises falls when its price rises remains unchanged when its price changes first rises and then falls with price rise

The law of demand states an inverse relation between price and quantity demanded, ceteris paribus.

Question 07

The law of demand operates because of:

income effect and substitution effect government budget only law of diminishing returns only increase in population only

ICAI links the inverse price-demand relation to the income effect and substitution effect.

Question 08

A demand schedule shows:

supply at different prices income at different prices different quantities demanded at different prices cost of production at different outputs

A demand schedule presents the relationship between various prices and corresponding quantities demanded.

Question 09

A normal demand curve generally slopes:

upward from left to right vertically upward horizontally downward from left to right

Because of the law of demand, the demand curve is downward sloping under normal conditions.

Question 10

When the price of tea falls and quantity demanded of tea rises, it is called:

increase in demand extension or expansion of demand decrease in demand contraction of demand

A change in quantity demanded due to own price change is movement along the curve, called extension or contraction.

Question 11

When the price of a commodity rises and quantity demanded falls, it is called:

contraction of demand decrease in demand increase in demand shift in demand

This is contraction of demand because the cause is the commodity’s own price increase.

Question 12

A rightward shift of the demand curve indicates:

extension of demand only contraction of demand increase in demand decrease in demand

A shift to the right means more quantity is demanded at the same price because of non-price factors.

Question 13

A leftward shift of the demand curve indicates:

extension of demand contraction of demand increase in demand decrease in demand

A decrease in demand means less quantity demanded at every price, shown by a leftward shift.

Question 14

Tea and coffee are generally:

complements substitutes inferior goods Giffen goods

Tea and coffee satisfy similar wants and can be used in place of each other, so they are substitutes.

Question 15

If the price of coffee rises, demand for tea is likely to:

increase decrease remain unchanged always become perfectly elastic

When the price of one substitute rises, demand for the other substitute tends to increase.

Question 16

Petrol and car are examples of:

substitutes independent goods complementary goods luxury goods

Cars and petrol are used together, so they are complementary goods.

Question 17

If the price of petrol rises, demand for petrol-driven cars is likely to:

increase remain unchanged first rise then fall decrease

An increase in price of a complementary good reduces demand for the related good.

Question 18

Most goods for which demand rises when consumer income rises are called:

inferior goods normal goods Giffen goods joint goods

Normal goods are demanded in increasing quantities as income rises.

Question 19

Inferior goods are those for which demand:

falls when income rises beyond a certain level always rises proportionately with income never changes with income is perfectly inelastic

ICAI notes that demand for some goods rises only up to a point and then falls as income rises further; these are inferior goods.

Question 20

Luxury goods generally show:

negative income elasticity zero income elasticity high positive income elasticity perfectly inelastic demand

Demand for luxury and prestige goods rises strongly with increase in income.

Question 21

Price elasticity of demand measures responsiveness of quantity demanded to change in:

consumer income price of related goods advertisement expenditure own price of the commodity

Price elasticity focuses on the percentage response of quantity demanded to a change in the commodity’s own price.

Question 22

If percentage change in quantity demanded is greater than percentage change in price, demand is:

inelastic elastic perfectly inelastic unitary only if price falls

Demand is elastic when quantity responds more than proportionately to price change.

Question 23

When percentage change in quantity demanded equals percentage change in price, demand is:

perfectly elastic inelastic unitary elastic perfectly inelastic

Unitary elasticity means proportionate response of quantity demanded to price change.

Question 24

Demand for salt is usually regarded as:

relatively inelastic perfectly elastic highly elastic unitary elastic always

Necessaries with limited substitutes and small share in budget tend to have inelastic demand.

Question 25

Cross elasticity of demand between two substitute goods is generally:

negative zero less than zero always positive

For substitutes, a rise in price of one increases demand for the other, so cross elasticity is positive.

Question 26

Cross elasticity of demand between two complementary goods is generally:

positive negative infinite always one

For complements, a rise in price of one reduces demand for the other, so cross elasticity is negative.

Question 27

Income elasticity of demand for inferior goods is generally:

positive greater than one always negative zero

Demand for inferior goods falls when income rises, so income elasticity is negative.

Question 28

Which of the following tends to make demand more elastic?

availability of close substitutes commodity is a necessity commodity takes a very small share of income habit-forming consumption

When close substitutes are available, consumers can switch easily, making demand more elastic.

Question 29

Which of the following is most likely to cause an increase in demand for a commodity?

rise in its own price fall in consumer income in case of normal good rise in price of its complement rise in price of its substitute

A rise in price of a substitute shifts demand for the commodity to the right.

Question 30

Which statement correctly distinguishes movement along a demand curve from shift of a demand curve?

Both are caused only by own price changes Movement is caused by own price change; shift is caused by non-price factors Movement means increase in demand and shift means contraction There is no difference between the two

This is a core CA Foundation distinction: own price changes cause movement; other determinants cause shifts.

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