Exam-style question
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Household budget on 3.1.3.2 Price, income and cross elasticities of demand: which option best explains the economic mechanism in Individuals, firms, markets and market failure?.
- A.Use a three-step chain: cause changes incentives, incentives change demand or supply behaviour, and the new equilibrium affects welfare or resource allocation.
- B.Elasticity only matters to firms and has no welfare effect.
- C.Elastic demand means demand has increased.
- D.Give a definition of elasticity only, without application, chain of analysis, evaluation or judgement.
Model answer
What a good answer should say
- Correct answer: Use a three-step chain: cause changes incentives, incentives change demand or supply behaviour, and the new equilibrium affects welfare or resource allocation..
- It is correct because it links 3.1.3.2 price, income and cross elasticities of demand to consumer incentives and keeps the reasoning within the evidence supplied by the question.
Explanation
Why this works
The reasoning should move from cause to transmission mechanism to consequence. Use a diagram, calculation or data point if it is relevant, then test the answer with Economics evaluation: size of effect, time period, elasticity or responsiveness, assumptions, and distribution of gains and losses.
This keeps the response specific to Price determination in a competitive market rather than repeating a generic question template.
Common mistake
No common mistake is linked to this question yet.