Name: _______________________________

IGCSE

Both the firm and the government can build houses. In a country a private firm has
built an extra 500,000 houses. But at the same time, the government has increased
income tax.
Explain what determines the demand for houses. [6]

Hint: Disposable income – prices – location – advertising – taxes on houses – other

fees – size of houses – new/old houses
Explain any two of these

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Created and Published by: Bilal Mahmood Khan

Department of Economics
Aitchison College Lahore
Name: _______________________________

Explain, using a demand and supply diagram, how these two actions would have
affected the equilibrium price and the equilibrium quantity of houses. [6]

Hint: Draw a diagram & label it (price, quantity, demand, supply) – equilibrium
position – shift of demand and supply – equilibrium changes – explain why demand
and supply changes – what happens to equilibrium price and quantity

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Created and Published by: Bilal Mahmood Khan

Department of Economics
Aitchison College Lahore
Name: _______________________________

(a) (i) Using a demand diagram, show an increase in demand for a

product. [2]
(ii) Identify two causes of such an increase in demand. [2]

Hint: (a) (i) Correctly labelled diagram (price, quantity, demand) - Shift of demand
curve to the right
(ii) Income – price of substitute and complement – advertising – population – weather
changes – change in taste/preferences – decrease in rate of interest – easy to borrow
money

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Created and Published by: Bilal Mahmood Khan

Department of Economics
Aitchison College Lahore
Name: _______________________________

Explain what is meant by price elasticity of demand. [4]

Hint: What is PED – It measures the change in demand to a change in price –

formula of PED – range of PED and its diagram (inelastic, unit elastic & elastic) –
PED is usually negative – If possible why.

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How can price elasticity of demand be very useful to a business? [4]

Created and Published by: Bilal Mahmood Khan

Department of Economics
Aitchison College Lahore
Name: _______________________________

Hint: How PED is useful - If PED is elastic, the business should decrease price – so
total revenue will be more & If PED is inelastic, the business should increase price –
so total revenue will be more

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Discuss why market failure could occur in an economy. [8]

Created and Published by: Bilal Mahmood Khan

Department of Economics
Aitchison College Lahore
Name: _______________________________

Hint: What is market failure – when prices are very high due to high cost of
production – when demand is more and supply is less leading to high prices - Merit
goods may be under-produced because the demand is less but should be more) -
Demerit goods may be over-produced because demand is more but should be less –
Public Goods; in a market system with no government intervention, will not be
produced at all – External costs are not considered when making consumption and
production decisions.

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Created and Published by: Bilal Mahmood Khan

Department of Economics
Aitchison College Lahore