Demand, Supply and How Markets Work: practice questions

Question 1

A sports shop sells hiking boots. The price of a pair of hiking boots falls from $90 to $70, while consumer incomes, tastes and every other influence on demand for hiking boots stay exactly the same. As a result, customers buy more pairs of hiking boots at the new, lower price.

What is the correct economic term for this change in the quantity of hiking boots demanded?

Accepted Answer

A

Question 2

Wireless earbuds are sold by many competing brands in a country's electronics market. (a) Define the term demand. [2] (b) State two determinants of demand, other than the price of wireless earbuds themselves, that could cause the market demand curve for wireless earbuds to shift…

Accepted Answer

((a)) Demand is the willingness and ability of consumers to buy a good or service at a given price, over a given period of time  ((b)) Any two of: the tastes and preferences of consumers; the price of related goods (substitutes or complements); the income of consumers; the number of buyers in the market; consumer expectations of future prices  ((c)) Since wireless earbuds are a normal good, the rise in incomes means consumers are now willing and able to buy more earbuds at every price, so the market demand curve for wireless earbuds shifts to the right (demand increases). The fall in the price of a substitute, headphones, m…

Question 3

A small pottery studio sells handmade ceramic mugs. (a) State the law of supply. [2] (b) The price of a ceramic mug rises. In response, pottery studios produce and offer more mugs for sale, while the cost of clay, the price of glaze, and every other influence on supply remain un…

Accepted Answer

((a)) The law of supply states that, other things being equal (ceteris paribus), the higher the price of a good, the greater the quantity of that good producers are willing and able to supply, and vice versa  ((b)) This is a movement along the supply curve (an extension in supply): the change is caused only by a rise in the mug's own price, with every other influence on supply unchanged, so studios move to a new point on the same, unchanged supply curve  ((c)) The supply curve for ceramic mugs shifts to the left (supply decreases): a rise in the cost of a raw material increases the cost of production at every level of output, making mug-making less profitable at every price, so studios are willing and able to supply fewer mugs at ever…

Question 4

A government introduces a subsidy paid to bicycle helmet manufacturers for every helmet they produce. At the same time, and completely separately, a national road-safety campaign successfully persuades many more cyclists that wearing a helmet is important, at every possible price of a helmet.

Which combination of changes would these two events cause in the market for bicycle helmets?

Accepted Answer

A

Question 5

A school sets up an online noticeboard where students can buy and sell second-hand textbooks directly with each other, instead of every family having to buy only brand-new textbooks from a single shop. (a) Define the term market, as used in economics. [2] (b) State the role of b…

Accepted Answer

((a)) A market is any arrangement that brings together the buyers and sellers of a good, a service, or a factor of production, allowing them to exchange with each other; it does not have to be a physical location  ((b)) Buyers are willing and able to purchase the good, creating demand; sellers are willing and able to offer the good for sale, creating supply  ((c)) The noticeboard is a market because it brings together students who want to buy a second-hand textbook (the buyers, creating demand) and students who want to sell a textbook they no longer need (the sellers, creating supply); no physical shop is required for a market to exist, o…

Question 6

A bakery sells artisan sourdough loaves. The price of a loaf rises from $4 to $6, while consumer incomes, tastes and every other influence on demand for sourdough loaves stay exactly the same. As a result, customers buy fewer loaves at the new, higher price.

What is the correct economic term for this change in the quantity of sourdough loaves demanded?

Accepted Answer

B

Question 7

Green Valley Farm grows and sells strawberries to shops across a farming region. (a) State two determinants of supply, other than the price of strawberries themselves, that could shift the market supply curve for strawberries. [2] (b) The farm invests in a new automated irrigati…

Accepted Answer

((a)) Any two of: the costs of production (such as fertiliser, labour or land rent); the technology used to grow and harvest strawberries; natural factors such as weather or climate; government taxes or subsidies; the number of strawberry farms supplying the market; the price of other…  ((b)) The new technology lowers the cost of producing each punnet of strawberries, so growing and picking strawberries becomes more profitable at every price than before. This is a non-price determinant of supply, so the market supply curve for strawberries shifts to the right (supply…  ((c)) Heavy rainfall damaging plants across the region is a natural factor, a non-price determinant of supply, so it shifts the whole supply curve even though the price of strawberries itself has not changed. With fewer healthy plants able to produce a crop, farms are willing and able…

Question 8

A toy shop sells collectible action figures. Many customers who buy an action figure also buy the matching comic book that goes with it, so the two goods are complements. The price of the comic books rises sharply, while the price of the action figures themselves stays exactly t…

Accepted Answer

B

Question 9

A limited-edition sneaker is released each year in a fixed quantity and later resold between collectors on an online resale marketplace. (a) Explain what economists mean by "expectations of future price changes" as a determinant of demand. [2] (b) Sneaker collectors begin to exp…

Accepted Answer

((a)) Expectations of future price changes describe how buyers' beliefs about what a price will be in the future affect how much they are willing to buy today, even though the current price has not changed. If buyers expect the price to rise later, they tend to buy more now; if they e…  ((b)) Because collectors now expect the price to rise once the batch sells out, many try to buy the sneaker now, before the anticipated rise, even though today's marketplace price has not changed. This expectation is a non-price determinant of demand, so the market demand curve for th…  ((c)) Suspending the accounts of buyers from one country reduces the number of buyers able to purchase the sneaker. Since the sneaker's own price has not changed, this is a non-price determinant of demand (a fall in the number of buyers), so the market demand curve for the sneaker shi…

Question 10

A flower stall sells fresh bouquets. The price of a bouquet falls from $25 to $15, while the cost of the flowers, the wages paid to stall workers, and every other influence on supply stay exactly the same. As a result, the stall grows and offers fewer bouquets for sale at the new, lower price.

What is the correct economic term for this change in the quantity of bouquets supplied?

Accepted Answer

C

Demand, Supply and How Markets Work: Economics 0455 (Cambridge O Level / IGCSE)

Syllabus coverage

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8

Question 9

Question 10