Demand, Supply and Elasticity: Economics 9708 (Cambridge International AS & A Level)
Syllabus 2.1, 2.2, 2.3, 2.4, 2.5 · Strand 2 The Price System and the Microeconomy
- Questions
- 10
- Total marks
- 80
- Tier mix
- 10 Core
0 of 10 questions completed
Syllabus coverage
- 2.1 4 questions completed
- 2.2 3 questions completed
- 2.3 2 questions completed
- 2.4 4 questions completed
- 2.5 2 questions completed
The demand curve shows how much of a good buyers plan to buy at each price, and the supply curve shows how much sellers plan to sell; where they cross is the market equilibrium price and quantity. A change in price causes a movement along a curve, while a change in any other determinant (income, tastes, the price of related goods, costs of production) causes the whole curve to shift.
Elasticity measures how responsive one variable is to another. Price elasticity of demand is , income elasticity is , cross elasticity is , and price elasticity of supply is . The size and sign of each coefficient classify a good (elastic, inelastic, normal, inferior, substitute, complement) and predict how total revenue and consumer or producer welfare (measured as consumer surplus and producer surplus, the areas below the demand curve and above the supply curve either side of equilibrium) respond to a shift.
The exam-style problems below are original, with full worked solutions.
Question 1
A bicycle rental company situated near a large university campus offers daily bike rentals to students.
Which of the following would cause a movement along the demand curve for daily bike rentals, rather than a shift of the demand curve for daily bike rentals?
Question 2
A small dairy farm sells unhomogenised whole milk directly to a local grocery co-operative. The table below shows the quantity of milk that the co-operative's customers demand each week, and the quantity that the farm is willing and able to supply each week, at different prices.
| Price ($ per litre) | Quantity demanded (litres per week) | Quantity supplied (litres per week) | New quantity supplied (litres per week) |
|---|---|---|---|
| 1.00 | 800 | 200 | 500 |
| 1.50 | 650 | 350 | 650 |
| 2.00 | 500 | 500 | 800 |
| 2.50 | 350 | 650 | 950 |
| 3.00 | 200 | 800 | 1100 |
The "new quantity supplied" column shows quantity supplied after a sharp fall in the cost of cattle feed, which allows the farm to profitably supply more milk at every price than before.
(a) At a price of $1.00 per litre, calculate the size of the excess demand in the market for milk (using the original "quantity supplied" column), and explain, using the concepts of rationing and signalling, how the price mechanism would be expected to move the market toward equilibrium. [3]
(b) State the original equilibrium price and quantity of milk (using the original "quantity supplied" column). [2]
(c) State whether the fall in the cost of cattle feed causes a movement along the supply curve for milk or a shift of the supply curve, giving a reason for your answer, and state the direction of this change. [2]
(d) Using the "new quantity supplied" column, state the new equilibrium price and quantity of milk, and describe the overall change in equilibrium price and quantity caused by the fall in the cost of cattle feed. [3]
Question 3
A boutique coffee roastery raises the price of its single-origin specialty coffee beans from $20 to $25 per 250g bag. As a result, the quantity of bags it sells each week falls from 400 to 340.
(a) Calculate the percentage change in price and the percentage change in quantity demanded. [2]
(b) Calculate the price elasticity of demand (PED) for these coffee beans, showing your working, and state whether demand is price elastic, price inelastic or unitary. [3]
(c) Calculate the roastery's total revenue from these coffee beans before and after the price rise, and use your answer to (b) to explain whether this change in total revenue is what you would expect. [3]
(d) State one determinant of price elasticity of demand that could help explain why demand for this specialty coffee is price inelastic. [2]
Question 4
A small pottery studio makes hand-painted ceramic mugs. Each mug is thrown and painted individually by the studio's small team of trained artisans, so the studio cannot increase the number of mugs it supplies very quickly in response to a change in price. At the same time, buyers can choose from many close substitutes for these mugs (factory-made mugs, glass mugs, and hand-painted mugs from other craft studios) so they can switch away fairly easily if this studio's mugs become noticeably more expensive.
The local authority then imposes a specific (per-unit) tax of $1.50 on every mug the studio sells, paid by the studio.
(a) Explain why this tax causes a shift of the supply curve for the studio's mugs, rather than a movement along it, and state the direction of the shift. [3]
(b) Explain the effect of this shift on the equilibrium price and quantity of the studio's mugs, and on consumer surplus and producer surplus in this market. [3]
(c) Discuss the extent to which the burden of this $1.50 tax is likely to fall on buyers of the mugs rather than on the pottery studio, using the relative price elasticities of demand and supply described above. [4]
Question 5
A furniture retailer sells handcrafted oak dining tables and matching handcrafted oak dining chairs, sold separately.
During an economic upswing, average household income in the retailer's region rises from $40,000 to $46,000 per year. Over the same period, the quantity of oak dining tables the retailer sells rises from 500 to 620 per year.
Separately, when the retailer cut the price of its oak dining tables from $800 to $680, the quantity of oak dining chairs it sold rose from 1,800 to 2,070 per year.
(a) Calculate the percentage change in average household income and the percentage change in quantity demanded of oak dining tables, then calculate the income elasticity of demand (YED) for oak dining tables. State whether oak dining tables are a normal or an inferior good, and whether demand for them is income elastic or income inelastic. [4]
(b) Calculate the percentage change in the price of oak dining tables and the percentage change in quantity demanded of oak dining chairs, then calculate the cross elasticity of demand (XED) between oak dining tables and oak dining chairs. State whether oak dining tables and oak dining chairs are substitutes or complements. [4]
(c) Using your answers to (a) and (b), explain one implication for the retailer's business decisions of (i) the income elasticity of demand for oak dining tables, and (ii) the cross elasticity of demand between oak dining tables and oak dining chairs. [3]
Question 6
A stationery company makes three products at the same factory site: recycled-paper notebooks, produced on machinery that is currently running at only 60% of its capacity; fresh-cut flowers for its gift-wrapping service, bought each morning from a local grower who can only pick a fixed quantity per day; and hand-bound leather journals, each of which requires three weeks of work by a single skilled bookbinder.
Which of these products is most likely to have the most price elastic supply in the short run?
Question 7
An artisan workshop hand-pours scented candles using a specialty soy-wax blend imported from a single overseas supplier under an annual import quota, and each candle is finished by one of the workshop's small team of trained candle makers. The workshop raises the price of its scented candles from $8 to $10 each. As a result, the quantity of candles it supplies each week rises from 300 to 330.
(a) Calculate the percentage change in price and the percentage change in quantity supplied. [2]
(b) Calculate the price elasticity of supply (PES) for the candles, showing your working, and state whether supply is price elastic, price inelastic or unitary. [3]
(c) State and explain one determinant of price elasticity of supply that could explain why supply of the candles is price inelastic in this context. [2]
Question 8
A stationery retailer's monthly market for a particular style of hardback notebook can be modelled with the following demand and supply functions, where is the price in dollars and is the quantity of notebooks per month:
(a) Using these functions, calculate the equilibrium price and quantity of notebooks, showing your working. [3]
(b) The government then introduces a new environmental compliance cost on notebook production. With demand unchanged, the market's supply function becomes . Explain why this change represents a shift of the supply curve rather than a movement along it, and state the direction of the shift. [3]
(c) Using the new supply function , calculate the new equilibrium price and quantity, and describe the overall change in equilibrium price and quantity compared with your answer to (a). [4]
Question 9
A farmers' market stallholder sells jars of organic honey each week. The market demand and supply for organic honey jars can be modelled by the following equations, where is the price in dollars per jar and is the quantity of jars per week:
(a) Using these equations, calculate the equilibrium price and quantity of honey jars, showing your working. [3]
(b) Calculate the consumer surplus and the producer surplus at this equilibrium, showing your working. [3]
(c) A health-food trend then increases demand for organic honey, and with supply unchanged the demand equation becomes . Calculate the new equilibrium price and quantity, and the new consumer surplus and producer surplus. [4]
Question 10
A national cinema chain is considering raising the price of its standard adult evening ticket.
(a) Explain how knowledge of the price elasticity of demand for standard adult evening tickets would help the cinema chain predict the effect of a price rise on its total revenue from ticket sales. [3]
(b) Discuss the extent to which price elasticity of demand alone gives the cinema chain a complete and reliable guide to how a rise in ticket prices will affect its total revenue from ticket sales, referring to price elasticity of demand, cross elasticity of demand and income elasticity of demand in your answer. [7]