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

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs — 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]

9. Explain the three functions of the price mechanism. [6]

10. The price of a good rises from $4 to $5 and the quantity demanded falls from 200 units to 170 units.

(a) Calculate the price elasticity of demand. [2]

(b) State what your answer shows about total revenue after the price rise. [1]

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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].

9. Signalling [1] — prices convey information about relative scarcity to buyers and sellers, indicating where consumer preferences lie [1]. Incentive [1] — a higher price encourages producers to supply more and consumers to buy less [1]. Rationing [1] — a higher price allocates scarce goods to those most willing and able to pay for them [1].

10. (a) % change in quantity = −30 ÷ 200 × 100 = −15%; % change in price = +25% [1]; PED = −15 ÷ 25 = −0.6 [1]. (b) Demand is price inelastic, so total revenue rises when the price rises (from $800 to $850) [1].

Examiner insight (June 2025): too many answers wrote everything they knew about elasticity instead of applying it to the question. Calculate, then say what the value means in the situation given. Try the real question next: Cambridge International AS & A Level Economics 9708, June 2025, Paper 22, Question 3.

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.