A Level Economics: The Price System and the Microeconomy — Practice Questions (Cambridge 9708)

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — Cambridge International holds copyright in its own papers. Use these alongside the official past papers available free from your board.

Related: The price system and the microeconomy study guide and revision notes

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Section A

1. State whether each of the following causes a movement along the demand curve or a shift of the demand curve: (a) a fall in the good’s own price; (b) a rise in consumer income. [2]

2. A good’s price rises by 10% and quantity demanded falls by 20%. Calculate the price elasticity of demand, and state whether demand is elastic or inelastic. [3]

3. Define consumer surplus. [2]

Section B

4. The price of coffee rises by 8%, and the quantity demanded of tea (a substitute) rises by 6%.

(a) Calculate the cross elasticity of demand between coffee and tea. [2] (b) State what the sign of your answer indicates about the relationship between coffee and tea, and explain why. [2]

5. A firm selling a product with price-inelastic demand raises its price.

(a) Explain what happens to the firm’s total revenue as a result. [3] (b) Explain why the same price rise would have a different effect on total revenue if demand were price elastic instead. [3]

6. An increase in consumer incomes causes demand for a good to fall.

(a) State the type of good this describes, and calculate the sign of its income elasticity of demand. [2] (b) Explain, using a diagram description, the effect of this demand shift on market equilibrium price and quantity, assuming supply is unchanged. [3]

7. Explain why the price elasticity of demand varies along the length of a straight-line demand curve, rather than being a single fixed value. [3]

8. Explain the difference between joint demand and derived demand, giving one example of each. [4]

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Answers

1. (a) Movement along the demand curve [1]. (b) Shift of the demand curve [1] (income is a determinant of demand other than the good’s own price).

2. PED = %ΔQD / %ΔP = −20% / 10% = −2 (or 2 in magnitude) [2]. Since the magnitude is greater than 1, demand is elastic [1].

3. Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay [2].

4. (a) XED = %ΔQD of tea / %ΔP of coffee = 6% / 8% = +0.75 [2]. (b) The positive sign indicates coffee and tea are substitutes [1], because a rise in the price of coffee has led to an increase in demand for tea, as consumers switch towards the relatively cheaper alternative [1].

5. (a) Because demand is price inelastic, the percentage fall in quantity demanded is smaller than the percentage rise in price [1–2], so total revenue (price × quantity) increases as a result of the price rise [1]. (b) If demand were price elastic instead, the percentage fall in quantity demanded would be larger than the percentage rise in price [1–2], so total revenue would decrease as a result of the same price rise [1] — the direction of the total revenue effect depends entirely on whether demand is elastic or inelastic at that price.

6. (a) This describes an inferior good [1]; its income elasticity of demand is negative [1]. (b) The fall in demand shifts the demand curve to the left [1]. At the original equilibrium price, quantity demanded now falls short of quantity supplied, creating excess supply [1], which puts downward pressure on price until a new, lower equilibrium price and lower equilibrium quantity are reached [1].

7. Towards the upper end of a straight-line demand curve (high price, low quantity), a given absolute price change represents a smaller percentage change in price but is associated with a larger percentage change in quantity, making demand relatively elastic in that region [1–2]. Towards the lower end of the curve (low price, high quantity), the same absolute price change represents a larger percentage change in price relative to a smaller percentage change in quantity, making demand relatively inelastic in that region [1]. Because elasticity depends on percentage, not absolute, changes, a straight-line demand curve does not have a single constant elasticity value along its length.

8. Joint demand describes goods that are bought and consumed together, so that demand for one increases demand for the other — for example, printers and printer ink [2]. Derived demand describes demand for a good that exists specifically because of demand for another good, rather than the two being consumed together — for example, demand for steel is derived from demand for cars, since steel itself is not what the final consumer wants to buy [2].

A note on exam technique for this topic

Question 5 illustrates the link between PED and total revenue that the study guide flags as one of the most heavily tested applications in this topic: the direction of the total revenue effect following a price change depends entirely on whether demand is elastic or inelastic at that specific price, not on the direction of the price change alone. Practising this pairing — a given price change, and the correct total revenue conclusion for each possible elasticity value — is more exam-effective than memorising the elasticity formulae in isolation from their real-world implication for a firm’s pricing decisions.