Edexcel IAL Economics: Price determination, surplus, the price mechanism, indirect taxes and subsidies (YEC11) – Practice Questions

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 – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover section 1.3.4 Price determination, items 1 to 4, of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018. It is Unit 1 content, labelled IAS and also part of the full IAL. Every market, country and figure is invented. Prices are in currency units (cu).

Pages: the study guide, the revision notes, the Edexcel Economics hub and the printable checklist.

Questions

1. The table shows weekly demand and supply for a good in an illustrative market.

Price (cu)	4	6	8	10	12
Quantity demanded	80	70	60	50	40
Quantity supplied	20	40	60	80	100

State the equilibrium price and quantity, and calculate the excess supply at 12 cu. [3]

2. In a market for bus journeys in Town T, demand is Qd = 300 - 10P and supply is Qs = 20P - 60. Calculate the equilibrium price and quantity. Then calculate the new equilibrium if demand falls by 60 journeys at every price. [4]

3. Explain the difference between consumer surplus and producer surplus. [3]

4. Using the market in question 2, calculate consumer surplus and producer surplus before and after the fall in demand, and state the change in each. The demand curve meets the price axis at 30 cu before the fall and 24 cu after it. Supply is zero at 3 cu. [5]

5. A poor harvest cuts the world supply of Crop M and its price rises sharply. Explain how the rationing, incentive and signalling functions of the price mechanism respond. [4]

6. Explain one way in which the price mechanism works differently in a local market, such as a village produce market, than in a global commodity market. [4]

7. The government of Country B introduces a specific tax of 3 cu per journey in the market in question 2 (original demand). (a) Calculate the new equilibrium price and quantity. [3] (b) Calculate the government’s tax revenue. [1] (c) Calculate the total burden of the tax on consumers and on producers. [2]

8. Explain why consumers bear most of an indirect tax when demand for a good is price inelastic. [4]

9. The government of Country B instead gives bus operators a subsidy of 3 cu per journey (original demand and supply). (a) Calculate the new equilibrium price and quantity. [2] (b) Calculate the cost to the government. [1] (c) Calculate the total gain to consumers and to producers. [2]

10. Country C’s government subsidises rail fares to reduce the price of a rail journey. Evaluate whether the subsidy is likely to be a good use of public money. [8]

11. A government places a specific tax on Good Y, which has inelastic demand and is bought by many low-income households. Evaluate the impact of the tax on consumers, producers and the government. [10]

12. In the market in question 2, the price is fixed at 6 cu. Calculate the excess demand and explain how market forces would remove it if the price were free to move. [3]

Answers

1. Equilibrium is where Qd = Qs, which is at a price of 8 cu [1] and a quantity of 60 [1]. At 12 cu, Qs - Qd = 100 - 40 = 60 units of excess supply [1]. [3] Examiner insight: Read the equilibrium from the row where both quantities match, and give the excess with its direction, not a bare 60.

2. Set demand equal to supply: 300 - 10P = 20P - 60, so 360 = 30P and P = 12 cu [1], with Q = 180 [1]. New demand is Qd = 240 - 10P. Then 240 - 10P = 20P - 60 gives 300 = 30P, so P = 10 cu [1] and Q = 140 [1]. [4] Examiner insight: Show the equating step and test your answer in both equations, so a slip shows itself before a marker sees it.

3. Consumer surplus is the gap between the most buyers would pay and the price they really pay [1]. Producer surplus is the difference between the price producers receive and the lowest price at which they would supply [1]. Consumer surplus lies under the demand curve and above the price, whereas producer surplus lies above the supply curve and below the price, and it is not the same as profit [1]. [3] Examiner insight: A definition of each term plus a sentence on the difference is stronger than two definitions side by side.

4. Original: CS = 1/2 x (30 - 12) x 180 = 1,620 cu [1]; PS = 1/2 x (12 - 3) x 180 = 810 cu [1]. After the fall in demand (P = 10, Q = 140): CS = 1/2 x (24 - 10) x 140 = 980 cu [1]; PS = 1/2 x (10 - 3) x 140 = 490 cu [1]. Changes: CS falls by 640 cu and PS falls by 320 cu [1]. [5] Examiner insight: Write the triangle formula with the numbers substituted, and then state each change with its direction, so the reader sees both the size and whether it rose or fell.

5. Rationing: the higher price excludes buyers who are unwilling or unable to pay it, so the limited supply goes to those who value it most [1]. Incentive: the higher price makes growing Crop M more profitable, so farmers in other regions plant more [1]. Signalling: the rising price tells buyers and producers that the crop is scarcer, and so shows where resources are needed [1]. Result: demand contracts while supply extends over time, which moves the market towards a new equilibrium [1]. [4] Examiner insight: Tie each function to Crop M and the price rise; a generic definition of rationing, incentive or signalling shows less than applied reasoning.

6. Local: buyers and sellers meet face to face, information is shared at once, and prices can change within a day [1]. Rationing is visible directly, as stalls sell out [1]. Global: buyers and sellers are far apart, so price signals take longer to reach farmers and producers in other countries [1]. Responses also depend on planting or production cycles, so adjustment may take months or seasons [1]. [4] Examiner insight: A comparison needs both sides, so for each point state what is different, not just what happens in one market.

7. (a) The tax shifts supply: Qs = 20(P - 3) - 60 = 20P - 120 [1]. Then 300 - 10P = 20P - 120, so 420 = 30P and P = 14 cu [1], with Q = 160 [1]. (b) Revenue = 3 x 160 = 480 cu [1]. (c) Consumers pay 14 - 12 = 2 cu more per journey, so the burden is 2 x 160 = 320 cu [1]. Producers keep 14 - 3 = 11 cu, which is 1 cu less than 12, so their burden is 1 x 160 = 160 cu [1]. [6] Examiner insight: Tax revenue uses the new quantity, not the old one, and the two burdens must add up to the revenue (320 + 160 = 480), which is a useful check.

8. If demand is price inelastic, quantity demanded falls by a smaller percentage than price rises [1]. Buyers have few substitutes and keep buying [1]. Sellers can therefore pass on most of the tax in a higher price without losing many sales [1]. So the consumer share of the burden is large, while producers, facing little loss of sales, absorb the smaller share [1]. [4] Examiner insight: Explain the mechanism (why buyers keep buying), rather than just stating that the burden shifts, since the reasoning carries the credit.

9. (a) Supply becomes Qs = 20(P + 3) - 60 = 20P [1]. Then 300 - 10P = 20P, so P = 10 cu and Q = 200 [1]. (b) Cost = 3 x 200 = 600 cu [1]. (c) Consumers pay 12 - 10 = 2 cu less per journey, so the gain is 2 x 200 = 400 cu [1]. Producers receive 10 + 3 = 13 cu, which is 1 cu more than 12, so the gain is 1 x 200 = 200 cu [1]. [5] Examiner insight: A subsidy is paid on the new quantity, and the gains (400 + 200) should equal the cost of 600, which is a good check on your arithmetic.

10. Case for: the subsidy lowers the price and raises the number of journeys, which helps consumers [1]. If rail travel reduces road congestion or pollution, there may be wider benefits [1]. Lower-income travellers gain, so equity improves [1]. Case against: the cost falls on taxpayers and has an opportunity cost, since the money could be spent on health or education [1]. Part of the subsidy goes to rail operators, depending on elasticities [1]. If operators become reliant on it, efficiency may weaken [1]. The effect depends on how responsive demand and supply are, and on the size of the wider benefits compared with the cost [1]. Judgement: it is a reasonable use of money if wider benefits are large and fares are a barrier for the poor, but a poor one if supply is inelastic or demand very elastic, because the subsidy then mainly transfers money to operators [1]. [8] Examiner insight: Evaluation needs a supported judgement that says which factor matters most, and bullet-point lists of pros and cons earn less than a reasoned conclusion.

11. Consumers: the price rises, but demand is inelastic, so quantity falls by a smaller percentage than price rises [1]. Their consumer surplus falls, and low-income households lose a larger share of their income, so the tax is regressive [1]. Producers: the price they receive net of tax falls and sales fall, although the fall is small because demand is inelastic, so the producer share of the burden is smaller [1]. Their producer surplus falls [1]. Government: revenue rises, because tax per unit times the new quantity is large when the quantity falls only a little [1]. The revenue can fund other spending [1]. Evaluation: the extent of the effects depends on elasticities, on the size of the tax and on how long the market has to adjust, as demand may be more elastic in the long run [1]. If the aim is to cut consumption of a harmful product, an inelastic demand makes the tax a weak tool, although it raises money [1]. Judgement: the impact is heavy on poor consumers and the government’s gain is substantial, so it depends on whether revenue is used to protect low-income households [1]. Overall, government and consumers are the most affected groups, and producers the least [1]. [10] Examiner insight: Cover all three named groups and then weigh them, and name elasticity as the reason the effects differ, because a conclusion that only repeats the earlier points adds little.

12. At 6 cu, Qd = 300 - 60 = 240 and Qs = 20 x 6 - 60 = 60, so there is excess demand of 180 [1]. Shortages let sellers raise prices, and buyers bid against each other [1]. As price rises, quantity demanded contracts and quantity supplied extends, until they match at 12 cu and 180 units [1]. [3] Examiner insight: Name the direction of each movement along the curves, as the explanation is incomplete if only one curve is mentioned.

Where marks are usually lost

• Using the old quantity to find tax revenue or subsidy cost.
• Forgetting to halve the base times height when finding surplus.
• Treating a fall in price as a shift of the demand curve.
• Describing the three functions in general terms without using the context.
• Writing that the “tax is paid by consumers” without separating legal and economic incidence.
• Stating inelastic demand as the reason without explaining the mechanism.
• Concluding “it depends” without saying what it depends on.

Next steps

• Review the revision notes and the study guide.
• Return to the Edexcel Economics hub and tick off the checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class: trial.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11), Specification, Issue 2, June 2018, section 1.3.4 Price determination. Published by Pearson Education Limited.