IGCSE Microeconomics Mastery-Paper 1

Lucy is planning to sell lemonade at a local fair. What does the law of demand suggest about her pricing strategy?

• The law of demand suggests that higher prices lead to higher demand.

• The law of demand states that price and quantity demanded are directly related.

• The law of demand indicates that quantity supplied increases as price decreases.

• The law of demand indicates that price and quantity demanded are inversely related.

Answer explanation

The law of demand indicates that as prices rise, the quantity demanded decreases, and vice versa. This means price and quantity demanded are inversely related, making the correct choice the last option.

Lucy and Emma are discussing how a shift in supply affects the equilibrium price of apples in their local market.

• A shift in supply has no effect on equilibrium price.

• An increase in supply always raises the equilibrium price.

• A decrease in supply leads to a constant equilibrium price.

• A shift in supply affects equilibrium price by decreasing it with an increase in supply and increasing it with a decrease in supply.

Answer explanation

A shift in supply affects equilibrium price by decreasing it when supply increases, as more goods are available, leading to lower prices. Conversely, a decrease in supply results in higher prices due to scarcity.

In a bustling town, Meng and Tom are discussing the concept of perfect competition in the local market. They wonder what defines this market structure and its characteristics.

• A market with barriers to entry and exit for new firms.

• Perfect competition is a market structure with many buyers and sellers, homogeneous products, free entry and exit, perfect information, and price takers.

• A market with a single seller and many buyers.

• A market where products are differentiated and prices are set by sellers.

Answer explanation

Perfect competition features many buyers and sellers, identical products, no barriers to entry or exit, complete information, and firms as price takers, making the correct choice the second option.

During a class discussion, Emma asked her classmates about the main types of market structures. What are the main types of market structures?

• Perfect competition, monopolistic competition, oligopoly, monopoly

• Duopoly, oligopoly, perfect competition

• Monopolistic competition, perfect competition, cartel

• Monopoly, duopoly, perfect competition

Answer explanation

The main types of market structures are perfect competition, monopolistic competition, oligopoly, and monopoly. These categories describe how markets operate based on the number of firms and the nature of competition.

Bill is trying to understand the concept of price elasticity of demand while shopping for groceries. He wonders how the price of apples affects the quantity he buys. Can you explain this concept to him?

• Price elasticity of demand measures the total revenue generated by a good.

• Price elasticity of demand is the same for all goods regardless of their nature.

• Price elasticity of demand only applies to luxury items and not necessities.

• Price elasticity of demand is a measure of how much the quantity demanded of a good changes in response to a change in its price.

Answer explanation

Price elasticity of demand quantifies how the quantity demanded of a good changes when its price changes. This concept is crucial for understanding consumer behavior and market dynamics.

Tina is studying the factors that affect the elasticity of demand for various products. What factors should she consider?

• Price of the product

• Advertising expenditure

• Factors affecting the elasticity of demand include availability of substitutes, income proportion, necessity vs. luxury, time period, and consumer preferences.

• Brand loyalty

Answer explanation

The correct choice highlights key factors affecting demand elasticity, such as availability of substitutes and consumer preferences, which directly influence how sensitive consumers are to price changes.

Ashton is planning a small business and wants to understand how fixed and variable costs differ in his operations.

• Fixed costs do not change with production levels, while variable costs do.

• Fixed costs vary with production levels, while variable costs remain constant.

• Fixed costs can be adjusted easily based on production needs.

• Variable costs are always higher than fixed costs regardless of production.

Answer explanation

Fixed costs remain constant regardless of production levels, such as rent or salaries, while variable costs fluctuate with production volume, like materials or labor. This distinction is crucial for understanding business expenses.

Nabil and Tiffany are discussing the concept of externalities in their economics class. They wonder, what are externalities and how do they lead to market failure?

• Externalities are costs or benefits affecting third parties not involved in a transaction, leading to market failure due to inefficient resource allocation.

• Market failure occurs only due to government intervention.

• Externalities are always related to public goods.

• Externalities are only positive effects on the economy.

Answer explanation

Externalities are costs or benefits that impact third parties not involved in a transaction. This can lead to market failure as resources are not allocated efficiently, making the correct choice the one that accurately describes this relationship.

In a small town, Yuchen and Ashton are discussing the role of government in correcting market failures. They wonder how the government can help ensure that everyone has access to essential services and that businesses operate fairly.

• The government should eliminate all regulations to promote free markets.

• The government focuses solely on taxation without addressing market issues.

• The government corrects market failures by regulating markets, providing public goods, addressing externalities, and ensuring competition.

• The government only intervenes in markets when profits are low.

Answer explanation

The correct choice highlights the government's role in correcting market failures through regulation, public goods provision, addressing externalities, and ensuring competition, which are essential for a well-functioning economy.

Tiffany is trying to decide which brand of smartphone to buy. How does a monopoly affect her consumer choice?

• A monopoly has no effect on consumer choice or prices.

• A monopoly encourages competition among different products.

• A monopoly reduces consumer choice by limiting options and increasing prices.

• A monopoly increases consumer choice by providing more options.

Answer explanation

A monopoly reduces consumer choice by limiting options and increasing prices. With only one provider, consumers have fewer alternatives and often face higher costs, as competition is stifled.