Structured Question Elasticity (some supply and demand)

Question 1

Define equilibrium price (2)

Answer 1

Price which equates demand and supply (2)

Question 2

Explain 2 reasons why borrowing may decrease (4)

Answer 2

• a rise in the rate of interest (1) will increase the cost of borrowing (1)
• a reduction in confidence about the future (1) may mean that people will be afraid they will not be able to repay loans (1)

Question 3

Draw a graph to analyse why a fall in incomes may reduce the market price of houses

Answer 3

Price on y axis, quantity on x axis

Two demand curves, inward shift
One supply curve
New equilibriums indicated by lines

Question 4

Discuss whether the building of houses should be subsidised

8

Answer 4

Pro:
• subsidising will provide an incentive to build houses (1) which will increase the supply (1)
• subsidising housing will increase economic activity (1) to produce more houses will require more labour (1) which will reduce unemployment

Cons:
• there may be no demand for extra houses (1) which will cause an oversupply of houses so it would be an inefficient use of resources (1)
• building firms may become reliant on subsidies (1) which would increase efficiency (1)

Question 5

More (factor of production) has been used for the production of (good/service A)
Why may (something that can be produced with the above factor of production| good/service B) be the opportunity cost of supplying more (above good/service)?

Answer 5

Opportunity cost is the cost of the next best alternative forgone (1)
The resources used for the production of (B good/service) may be used to produce (A) reducing the amount of (B) that can be produced

Question 6

Explain two reasons why the supply of a product may be price inelastic 4

Answer 6

(TICS)
• it may take a long time to produce the product (1) which would mean it will take more time to adjust supply in response to a change in price (1)
• it may not be possible to store the product (low shelf-life) (1) which means it cannot be taken out of storage when price falls (and vice versa) (1)

Question 7

Define demand (2)

Answer 7

The willingness (1) and ability (1) to buy a product

Question 8

Explain what an imbalance between supply and demand is likely to have on price and quantity traded (4)

Answer 8

• if there is an excess of demand, market demand exceeds market supply (1) so there would be a shortage (1)
• the equilibrium position in the market would change (1)
• prices would be driven up (1) and the quantity traded will rise (1)

Question 9

Define a mixed economy (2)

Answer 9

• an economy with a private sector (1) and a public sector (1)
• resources are allocated by both the price mechanism (1) and government decisions (1)

Question 10

Define the basic economic problem 2

Answer 10

There are scare resources but limitless human wants so decisions have to be made on how to allocate the resources

Question 11

Explain and contrast how resources are allocated to different uses in market and mixed economic systems (4)

Answer 11

Mixed economic systems: PUI
• combination of a market and planned economy, there is a public and private sector
• (Public goods)government makes some resource allocation decisions: eg providing public goods such as street lighting and merit goods (eg healthcare)
• (Undersupply) private firms will under supply these socially and economically desirable goods in a free market since they aren’t profitable
• (Intervention) government intervention in markets to regulate pricing and resource allocation

Market economy:
• decisions on the allocation of resources are made by firms in the private sector and consumers -> consumer demand + producer decision to supply -> determines prices and quantities exchanged
• private firms motivated by profit so they supply the goods that are the most profitable, the ones that consumers want and are willing + able to pay for
• more resources allocated towards goods with high demand, low demand -> failing profitability -> reallocate
-> price mechanism and profit motives determine allocation of resources

Question 12

Using a PPC analyse why choices have to be made to allocate resources (6)

Answer 12

• resources are scarce and finite so it needs to be allocated towards the most productive causes
• if you devote more resources to A you have less to produce B, this results in an opportunity cost (the next best alternative forgone)
• eg PPC curve with different points A is higher B is lower
• at A you produce more of good Y than good X, if you want more good X you have to reallocate resources from the production of good Y to good X
• from point A to point B there is an opportunity cost of z of good Y

Question 13

Explain 2 factors that may cause the supply curve of a product to shift to the right (4)

Answer 13

PINTS WC JECT

• fall in the production costs: more productivity due to technological advances, fall in the cost of materials, increased labour productivity, etc.
-> means firms can produce more at the same price

•changes in the weather for agricultural output -> good weather, good harvest, more crops -> more products supplied to market

Other: reduction in indirect taxes, increase in subsidies, fall in prices and profitability of other products, increase in business optimism and expectations of profit, increase of resources eg. capital equipment

Question 14

Analyse what a fall in food prices may have on the profit of farm owners 6

Answer 14

Ceteris paribus, a fall in prices will reduce the amount of profit per item sold. The total revenue will depend on the price elasticity of demand.

Basic food commodities’ demand tend to be price inelastic as they are necessities, particularly for low income households and have no real substitutes. If this is the case, the fall in price will have little impact on the consumer’s demand. The percentage fall in demand is greater than the percentage change in price, meaning that the farm wonders will have less total revenue than before.

On the other hand, if the demand is elastic, there will be a proportionally larger increase in demand than a fall in price. This means the total revenue will increase even if the profit for each item is lower. If the farm is able to expand output in response, it may also be able to reduce the average cost of each item produced since its able to use its land and machinery more intensively than before

Question 15

Discuss whether food prices are likely to continue rising in the future 8

Answer 15

Demand
if increase in demand not matched by increase in supply)
• increase in population + rising incomes -> increase in demand -> d curve shifts outwards -> increase in price
• rising incomes -> demand for basic foods fall, demand for superior items increase
• changing diets -> fall in demand for unhealthy foods, increase in demand for healthier ones
• increase demand for land for housing -> less land/resources available for agriculture if less profitable

Supply
• increase in supply from better technology -> improves crop yields and costs of equipment/fertiliser/seeds -> reduce prices if demand does not rise at a faster rate
• increase in wages, fall in subsidies -> reduces supply -> forces up food prices

Question 16

Define price elasticity of supply 2

Answer 16

The responsiveness of quantity supplied by a producer to changes in the price of a product

If percentage change in price exceeds percentage change in quantity supplied, the supply is price inelastic. If vice versa the supply price elastic.

Question 17

Explain two reasons why the supply of apples may decrease 6

Answer 17

• poor weather or disease will destroy crops and decrease the quantity harvest ed which will lead to less supply in the market
- this would have a big impact on supply as it is a primary good and requires time to produce, it cannot be quickly mass manufactured

• an increase in the costs of production eg increase in wages without an increase in labour productivity, resources such as seeds, water and machines for maintenance and harvest increase
- this would reduce their profitability and may make producers allocate their resources towards the provision of products that have a greater profitability (eg. pears) so there would be less supply

Question 18

Apples are a close substitute for pears. Use diagrams to analyse the effect a rise in the price of apples will have on the market for pears.

Answer 18

Demand would increase for pears.

Increase in apple price -> consumers switch demand from apples to pears -> increase in demand for market for pears -> outward shift of demand curve
Increase in demand -> increase in price -> short term: little increase in supply (inelastic | line), long term: more supply (elastic shallower / line)

(Reason for inelasticity of supply in the short run: company has to use up any spare productive capacity they have (eg. working longer hours -> more apples picked) but once all are picked they need time to grow more trees and they need more land & machinery and skilled workers to operate them)

Question 19

Discuss whether government should only impose indirect taxes on products for which consumer demand is price inelastic

Answer 19

Depends on aim

Aim is to raise public revenues -> yes
• when demand is price inelastic, the percentage contraction in quantity demand is proportionally less than the percentage increase in price (from the taxes) -> total spending will increase

Aim to discourage consumption of these products (eg they’re demerit goods or imported) -> indirect taxes wont reduce total spending for inelastic goods, only elastic goods unless the new market price is very high for inelastic demand so people can’t afford

Problems with raising taxes
• if aim is to keep price inflation low and stable this is not a good idea since they increase the prices of the goods they’re on
•regressive in nature -> payment of indirect taxes take proportionally more out of a low income than high income & essentials are also inelastic-> affects poorer people more