HKDSE Economics: VIQ MICRO S.

4_Chapter 9-10 Name:

Q.1
Lily said, “quantity demanded” means “quantity bought”. Do you agree? Explain. (3 marks)

No. (1)
 Quantity demanded is the quantity the consumers planned to buy at a given price. (1)
 Quantity bought is the quantity the consumers actually buy, i.e. quantity transacted.
 When market price < equilibrium price, quantity bought < quantity demanded. (1)

Q.2
Zoe said, “quantity supplied” always equals to “quantity sold”. Do you agree? Explain. (3 marks)

No. (1)
 Quantity supplied is the quantity the sellers planned to sell at a given price. (1)
 Quantity sold is the quantity the sellers actually sell, i.e. quantity transacted.
 When market price > equilibrium price, quantity sold < quantity supplied. (1)

Q.3
(a) Define law of demand. (2 marks)
(b) Lily said, “in the following diagram, when price is lowered from P1 to P2, both price and quantity
transacted decrease. In such a situation, law of demand is refuted (被推翻) / violated.” Do you agree
with Lily? Explain your answer with the aid of figure 13. (3 marks)

P P
S S

P1 P1
P2 P2
D D
Q Q
Q2 Q1 Q2 Q1 Q3 Q4

(a) Law of demand states that when price of a good increases, quantity demanded for it will (2)
decrease, vice versa, other things being constant.
(b) No. (1)
 When price decreases from P1 to P2, although quantity transacted decreases from Q1 to (2)
Q2, quantity demanded increases from Q3 to Q4. So, law of demand is not refuted (被推
翻) / violated.

1
Q.4
What is meant by “other things being constant” in law of demand and why it is important? Explain. (4)

 Other things being constant means “factors other than price of the good are held constant”. (2)
 Law of demand focuses only on “how price of good A” affects “quantity demanded for good A”. (2)
If factors other than price of good A are not held constant, then the change in quantity demanded
for good A may not just reflect the effect of a change in price of good A.

Q.5
Read the following news extract.
The strong preference for small flats has pushed the prices of the flats under 400 square feet to a new high
in the past few months. It is expected that more and more small flats will be available for sale in the
coming future.

Explain how the supply of large flats would be affected by the strong preference for small flats. (2 marks)

 The supply of large flats would drop. (1)

 As small flats and large flats are in competitive supply. (1)

Q.6 (Not yet learnt)

Statement 1: “When there is a shortage of a good, it must be a scarce good.”
Statement 2: “When the problem of a shortage is solved, the problem of scarcity is solved too.”

Explain respectively whether the above two statements are true or false. You may use a demand-supply
diagram to explain. (4 marks)

Scarcity happens when Qd > Qs at P = $0.

Shortage happens when Qd > Qs at P > $0.

Statement 1 is true.
 If there is a shortage of a good,
 That means at P > $0, quantity demanded (Qd) > quantity supplied (Qs). (1)
 Then when price decreases to $0, Qd increases and Qs decreases, that means at P = $0, Qd (1)
will be greater than Qs by an even more large extent, so it must be a scarce good.

Statement 2 is false.
 When price is raised to or above equilibrium level, Qd = Qs or Qd < Qs, then there is no (1)
shortage problem anymore. However, Qd still > Qs at P = $0 even if the actual market price is (1)
equal to or higher than equilibrium level, so a scarcity problem still exists.

2
Q.7
David: When the price of private housing property increases, people will buy fewer private housing
property.

Amy: No, I don’t think so. During 2011 to 2016, the price of private housing property has increased,
but the quantity of private housing property bought has also increased.

Explain, with the aid of separate diagrams, why both of them can be correct. (7 marks)

P P
S

P2 P2

P1 D2
P1
D1 D1
Q Q
Q2 Q1 Q1 Q2

David Indicate in the diagram

 Price increases, Quantity demanded decreases (1)

Verbal elaboration
 David refers to the law of demand. When price of private housing property increases (2)
and other things remain unchanged, then people will buy fewer private housing
property.

Amy Indicate in the diagram

 Demand increases (1)
 Price increases, Quantity transacted increases (1)

Verbal elaboration
 Amy refers to an increase in demand. During 2011 to 2016, there may be an increase in (2)
demand (caused by any non-price factors, e.g. increase in Income, increase in
Population, decrease in buyers’ stamp duties and so on) for private housing property
and hence lead to an increase in both price and quantity transacted.

3
Q.8
The Beijing-Guangzhou-Shenzhen-Hong Kong High-Speed Railway opened for service in 2019.
(a) With the aid of figure 1, explain the effect of the opening of the high-speed rail on the total revenue of
airlines operating on the same route. Indicate in the diagram the change in total revenue. (7 marks)
(b) With the aid of figure 2, explain the effect of the opening of the high-speed rail on the total revenue of
airlines operating on the same route if they do not adjust their price in response to this. Indicate in the
diagram the change in total revenue. (7 marks)

Figure 1 Figure 2
P P
S S

P1 P (or P1 = P2)

P2
D1 D1

D2 D2
Q Q
Q2 Q1 Q2 Q1

(a) Indicate in the diagram

1. Demand decreases (1)
2. Price decreases (1)
3. Total revenue decreases (1)

Verbal elaboration
1. High-speed rail and airline service are substitute to each other. (or in competitive demand) (1)
2. After the operation of high-speed rail, demand for airline service will decrease. (1)
3. Price will decrease, quantity transacted will decrease. (1)
4. Total revenue of airline will decrease from P1Q1 to P2Q2. (1)
(b) Indicate in the diagram
1. Demand decreases (1)
2. Price remains unchanged, quantity transacted decreases (1)
3. Total revenue decreases (1)

Verbal elaboration
1. High-speed rail and airline service are substitute to each other. (or in competitive demand) (1)
2. After the operation of high-speed rail, demand for airline service will decrease. (1)
3. If some airlines do not adjust their price, quantity transacted will decrease. (1)
4. Total revenue of airline will decrease from PQ1 to PQ2. (1)

4
Q.9
The following is a conversation between two workers of an instant food shop.

Worker A said, ‘Economic recovery has led to an increase in people’s income. The total sales revenue of
our instant food shop is expected to rise soon!’
Worker B said, ‘I don’t think so. An increase in people’s income may cause a decrease in our total sales
revenue.’

Explain their points of view respectively in figure 3 and 4. (14 marks)

Figure 3 Figure 4
P P

S S

P2 P1

P1 P2
D2 D1

D1 D2
Q Q
Q1 Q2 Q2 Q1

Worker A Indicate in figure 1

 Demand increases (1)
 Price increases, quantity transacted increases (1)
 Total revenue increases (1)

Verbal elaboration
 From worker A’s points of view, instant food are superior goods / normal goods. (1)
 When people’s income increases, demand for normal goods increases. (1)
 Price increases and quantity transacted increases. (1)
 Therefore, total revenue will increase. (1)
Worker B Indicate in figure 2
 Demand decreases (1)
 Price decreases, quantity transacted decreases (1)
 Total revenue decreases (1)

Verbal elaboration
 From worker B’s points of view, instant food may be regarded as inferior goods. (1)
 When people’s income increases, demand for inferior goods decreases. (1)
 Price decreases and quantity transacted decreases. (1)
 Therefore, total revenue will decrease. (1)

5
Q.10
(a) With the aid of figure 5, if more and more people love eating chicken wings, explain how this affects
the price, quantity transacted and total revenue of sellers selling chicken legs and also indicate in the
diagram the change in total revenue (7 marks)
(b) With the aid of figure 6, if the price of Blu-ray disc players greatly decreases, explain how this affects
the price, quantity transacted and total revenue of sellers selling Blu-ray discs and also indicate in the
diagram the change in total revenue. (7 marks)

Figure 5 Figure 6
P P
S1 S
S2

P2
P1
P1
P2
D2
D1
D1
Q Q
Q1 Q2 Q1 Q2

(a) Indicate in the diagram

1. Supply increases (1)
2. Price decreases, Quantity transacted increases (1)
3. Show gain in total revenue and loss in total revenue separately (1)

Verbal elaboration
1. As chicken wings and chicken legs are in Joint Supply, (1)
2. Supply of chicken legs will increase (as more chicken are killed for chicken wings). (1)
3. Price will decrease, quantity transacted will increase. (1)
4. Change in total revenue of selling chicken legs is uncertain (from P1Q1 to P2Q2). (1)
(b) Indicate in the diagram
1. Demand increases (1)
2. Price increases, Quantity transacted increases (1)
3. Total revenue increases (1)

Verbal elaboration
1. As Blu-ray disc players and Blu-ray discs are in Joint Demand, (1)
2. Demand for Blu-ray discs will increase (as more people buy Blu-ray disc players). (1)
3. Price will increases, quantity transacted will increase. (1)
4. Total revenue increases from P1Q1 to P2Q2. (1)

6
Q.11
(a) With the aid of figure 7, if more and more people love drinking coffee, explain how this affects the
price, quantity transacted and total revenue of sellers selling coffee beans. (7 marks)
(b) With the aid of figure 8, explain how an increase in the price of coffee beans affects the equilibrium
price, quantity transacted and total revenue of sellers selling coffee. (7 marks)
Figure 7 Figure 8
P P
S S2
S1
P2
P2
P1
P1
D2
D1
D1
Q Q
Q1 Q2 Q2 Q1

(a) Indicate in the diagram

1. Demand increases (1)
2. Price increases, Quantity transacted increases (1)
3. Total revenue increases (1)

Verbal elaboration
1. Demand for coffee creates derived demand for coffee beans. (1)
2. When demand for coffee increases, then demand for coffee beans will increase. (1)
3. Price will increase, quantity transacted will increase. (1)
4. Total revenue increases from P1Q1 to P2Q2. (1)
(b) Indicate in the diagram
1. Supply decreases (1)
2. Price increases, Quantity transacted decreases (1)
3. Show gain in total revenue and loss in total revenue separately (1)

Verbal elaboration
1. An increase in the price of coffee beans raises the production cost of coffee. (1)
2. Supply of coffee will decreases. (1)
3. Price will increase, quantity transacted will decrease. (1)
4. Change in total revenue of selling coffee is uncertain (changes from P1Q1 to P2Q2). (1)

Points to note:
 Demand for coffee affects demand for coffee bean  derived demand
 Coffee bean affects Coffee  production cost  supply

7
Q.12
(a) Suppose the rental of shopping premises in Hong Kong rises sharply and the economy in the mainland
experience a recession. With the aid of figure 9, explain under what conditions the price of luxury
watches in Hong Kong will increase. (6 marks)
(b) If people become open-minded to cosmetic surgery while more regulations are imposed on the
cosmetic surgery industry. With the aid of figure 10, explain under what conditions the quantity
transacted of cosmetic surgery service will rise. (6 marks)

Figure 9 Figure 10
P P

S2 S2
S1 S1
P2
P2
P1
P1
D2
D1
D2 D1
Q Q
Q2 Q1 Q1 Q2

(a) Indicate in the diagram

1. Supply decreases (1)
2. Demand decreases (1)
3. Decrease in supply > decrease in demand, Price increases (1)

Verbal elaboration
1. As the rental of shopping premises rises sharply, production cost of luxury watches (0.5 / 0.5)
retailing service increases, supply of luxury watches decreases.
2. As the mainland experience a recession, mainland visitors’ income decreases, (0.5 / 0.5)
fewer visitors will buy luxury watches, demand for luxury watches decreases.
3. If decrease in supply > decrease in demand, price of luxury watches will increase (1)
(b) Indicate in the diagram
1. Demand increases (1)
2. Supply decreases (1)
3. Increase in demand > decrease in supply, quantity transacted increases (1)

Verbal elaboration
1. As people become open-minded to cosmetic surgery, demand for cosmetic surgery (0.5 / 0.5)
service increases.
2. As more regulations are imposed, production cost of providing cosmetic surgery (0.5 / 0.5)
service increases, supply of cosmetic surgery service decreases.
3. If increase in demand > decrease in supply, quantity transacted will increase. (1)

8
Q.13
(a) Suppose there is a technological advance in producing air-purifiers (空氣清新機). At the same time,
the average air pollution index has been increasing over the last decade. With the aid of Figure 11,
explain under what condition the price of air-purifiers would decrease. (6 marks)
(b) The government announces to build more public housing in coming 5 years. At the same time, the
Labour Department relaxed the requirement on labour importation scheme for construction workers.
With the aid of Figure 12, explain under what condition the equilibrium wage of construction workers
will increase. (6 marks)

Figure 11 Figure 12
Price ($) Wage ($)
S1
S1
S2 S2

P1 W2
W1
P2
D2
D2
D1 D1
Quantity
Q1 Q2 Q1 Q2 No. of workers

(a) Indicate in the diagram

 Demand increases (1)
 Supply increases (1)
 Price decreases (1)

Verbal elaboration
 Demand increases as more people will buy when the average air pollution index increases. (1)
 Supply increases as technologial advance lowers the production cost. (1)
 If increase in demand < increase in supply, then price will decrease. (1)
(b) Verbal elaboration:
 Demand for construction workers increases as more public housing will be built. (1)
 Supply of construction workers increases as more labour can be imported. (1)
 If increase in demand > increase in supply, then equilibrium wage of construction workers (1)
will increase.

Point to note:
 % increase in demand > % increase in supply  INCORRECT!