Edexcel IAL Economics: Supply and price elasticity of supply (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 1.3.3 (Supply), items 1 and 2, of the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics (YEC11) specification, Issue 2, June 2018. Unit 1, Markets in action, is an International Advanced Subsidiary (IAS) unit and its content also counts towards the full International Advanced Level. The figures and countries are made up for practice.

Read the study guide first and keep the revision notes beside you. Hub: Edexcel A Level Economics. Checklist: printable checklist. Diagnostics: free 10-minute diagnostics.

Questions

1. For each event in the market for bread in Country A, state whether it causes an extension or contraction of supply, or an increase or decrease in supply: (i) the price of bread rises; (ii) the price of flour rises; (iii) the government pays a subsidy to bakeries. [3]

2. The price of a good rises from 32 to 40 coins and quantity supplied rises from 480 to 540 units. Calculate PES and state what the value shows. [3]

3. The price of a commodity falls from 80 to 72 coins and quantity supplied falls from 500 to 470 units. Calculate PES. Explain one reason why PES might be this low in the short run. [4]

4. In a market, quantity supplied is given by Q = 15P - 45, where P is price in coins. The government is considering a specific tax of 3 coins per unit or an ad valorem tax of 20%.

(a) Complete the supply prices that producers need, with each tax, to supply 30, 60, 90 and 120 units. [4] (b) Explain how the two new supply curves differ in shape. [2]

5. Using the same supply curve Q = 15P - 45, a subsidy of 2 coins per unit is introduced.

(a) State the price producers now need to supply 30, 60, 90 and 120 units. [2] (b) Explain the direction of the shift in supply. [2]

6. Explain why the PES of fresh strawberries is likely to be lower than the PES of tinned tomatoes. [4]

7. A 25% rise in the price of a crop leads to a 0% rise in quantity supplied immediately, 5% after one season and 50% after five years.

(a) Calculate PES for each period. [3] (b) Explain the results using the idea of short run and long run. [3]

8. A drought destroys a large part of the harvest in Country B. Explain how the drought affects the supply curve, and discuss whether the price rise in the next year will be large or small. [8]

9. Assess whether a per-unit subsidy to farmers will be effective in raising output when supply is price inelastic. [12]

10. In two markets, A and B, the equilibrium price is 10 coins and equilibrium quantity is 60 units. In A, supply is Q = 8P - 20. In B, supply is Q = 2P + 40. Demand in both markets is Q = 100 - 4P and then rises to Q = 118 - 4P.

(a) Find the new equilibrium price and quantity in each market. [2] (b) Calculate the percentage change in price and quantity in each market. [2] (c) Explain what the results show about PES. [2]

11. For the supply curve Q = 15P - 45, calculate PES when P = 9 and when P = 11, and explain why the value falls. [3]

Answers

1. (i) Extension of supply, because the good’s own price changed [1]. (ii) Decrease in supply, because flour is a cost of production and the curve shifts left [1]. (iii) Increase in supply, because the subsidy lowers net cost per unit and the curve shifts right [1]. Examiner insight: Answers tend to gain credit when you pair the term with its cause. A bare “shift” for part (i) shows the movement and shift distinction has not been grasped.

2. Price change = (40 - 32)/32 x 100 = +25% [1]. Quantity change = (540 - 480)/480 x 100 = +12.5% [1]. PES = 12.5/25 = 0.5, so supply is inelastic: quantity rises by half the percentage change in price [1]. Examiner insight: Work out each percentage change first, then divide. A bare value with no meaning stated leaves the interpretation part unanswered.

3. Price change = (72 - 80)/80 x 100 = -10% [1]. Quantity change = (470 - 500)/500 x 100 = -6% [1]. PES = -6/-10 = 0.6 (inelastic) [1]. A reason: in the short run capital such as machinery is fixed, so firms cannot easily cut or raise output when price changes [1]. Examiner insight: A negative divided by a negative is positive. Linking the reason to a named determinant, here time period or capacity, makes the explanation specific rather than generic.

4. (a) Base supply prices are 5, 7, 9 and 11 coins (from P = (Q + 45)/15) [1]. Specific tax of 3 gives 8, 10, 12 and 14 [1]. Ad valorem 20% gives 6.00, 8.40, 10.80 and 13.20 [1]. Tax gaps are 1.00, 1.40, 1.80 and 2.20 [1]. (b) The specific tax curve is parallel to the original because the gap is 3 at every quantity [1]. The ad valorem curve is steeper because the gap is a percentage of price, so it widens as price rises [1]. Examiner insight: Support the shape explanation with the figures from part (a). Describing both taxes as “shifting left” without noting parallel versus pivot loses the main distinction.

5. (a) Prices needed fall to 3, 5, 7 and 9 coins [2]. (b) The subsidy lowers net cost per unit [1], so producers will supply each quantity at a lower price, which is a shift right (down) [1]. Examiner insight: A shift right and a shift down describe the same movement. State the cause (net cost falls) as well as the direction.

6. Strawberries are perishable and cannot be stored, so stock cannot be released when price rises [1]. Growing takes a season, so output cannot rise quickly, and the time period is short [1]. Tinned tomatoes can be stored for a long time so stocks can be released [1]. Therefore PES for tinned tomatoes is higher than for strawberries [1]. Examiner insight: A comparison question needs both products in the answer. Stating only that strawberries are inelastic leaves half of the comparison missing.

7. (a) Immediate: 0/25 = 0 [1]. One season: 5/25 = 0.2 [1]. Five years: 50/25 = 2 [1]. (b) Immediately all factors are fixed, so supply is perfectly inelastic [1]. In the short run at least one factor, such as land or trees, is fixed, so output rises only a little [1]. With enough time every factor can be changed, for example by planting new trees, so supply becomes elastic [1]. Examiner insight: Define the short run by a factor that cannot be changed rather than by a number of months. Using the data from part (a) in part (b) shows the link between numbers and explanation.

8. A drought destroys crops, so output falls at every price [1]. The supply curve shifts left [1]. With unchanged demand, the equilibrium price rises and quantity falls [1]. How big the price rise is hinges on PES [1]. In the short run, supply of crops is inelastic because planting takes a full season and stocks may be small or perishable [1], so a given leftward shift causes a large price rise [1]. In the long run supply recovers as farmers replant and new inputs arrive, so the price rise may be temporary [1]. Overall, the price rise next year is likely to be large unless stocks or imports exist, but the effect will fade if capital was not destroyed [1]. Examiner insight: Answers that reach a judgement about the size of the price rise and give a condition for it tend to do better than those that only list effects.

9. Subsidy lowers net cost per unit and shifts supply right [1]. This lowers the market price and creates an incentive to produce more [1]. Inelastic supply means that quantity responds less than proportionately to the price change [1]. Farmers may be unable to expand quickly because land and machinery are fixed in the short run [1]. Therefore the output increase may be small in the short run [1]. Part of the subsidy may then be kept by producers as higher profit rather than passed on in lower prices [1]. The cost to the government may be large compared with the gain in output [1]. In the long run supply is more elastic, so the output rise is larger [1]. The effect depends on spare capacity, mobility of factors and legal limits such as land rules [1]. It also depends on how large the subsidy is relative to costs [1]. A subsidy may still be worthwhile if the aim is lower prices for consumers or security of supply [1]. Judgement: the subsidy is likely to be weakly effective at raising output soon but more effective over several years, so its success depends on the time frame and on measures that raise PES, such as training and investment [1]. Examiner insight: A strong assess answer sets a clear chain of reasoning against a stated criterion and finishes with a judgement. Repeating the definition of PES gains little without applying it.

10. (a) Market A: 118 - 4P = 8P - 20 gives 138 = 12P, so P = 11.50 and Q = 8(11.5) - 20 = 72 [1]. Market B: 118 - 4P = 2P + 40 gives 78 = 6P, so P = 13 and Q = 2(13) + 40 = 66 [1]. (b) A: price +15%, quantity +20% [1]. B: price +30%, quantity +10% [1]. (c) Supply is elastic in A, because quantity rises by a larger percentage than price (20/15 = 1.33) [1]. Supply is inelastic in B (10/30 = 0.33), so the same demand increase raises price more and output less [1]. Examiner insight: Show the percentage changes from the starting point of 10 and 60. Linking the results to PES in words earns the final marks.

11. At P = 9, Q = 15(9) - 45 = 90, PES = 15 x 9/90 = 1.5 [1]. At P = 11, Q = 120, PES = 15 x 11/120 = 1.375 [1]. PES falls because the same absolute change in quantity is a smaller percentage of a larger quantity, though it stays above 1 because the line meets the price axis first [1]. Examiner insight: Explaining the fall with percentages, not slope, is what makes the reasoning correct. The slope of a straight line is the same everywhere.

Where marks are usually lost

• Writing “supply increases” when only the price of the good has changed.
• Using the new value as the base when finding percentage change.
• Getting the sign wrong on a fall in price and quantity.
• Drawing an ad valorem tax as a parallel shift.
• Confusing slope with elasticity.
• Describing the short run as a number of months instead of a period with a fixed factor.
• Giving a list of determinants without applying them to the product or market in the question.
• Ending evaluation without a judgement.

Next steps

• Read the study guide and the revision notes.
• Go to the Edexcel A Level Economics hub and the printable checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11), Specification, Issue 2, June 2018, section 1.3.3 Supply, items 1 and 2. Published by Pearson Education Limited.