GCSE Economics: How Markets Work — Practice Questions

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

Related: How Markets Work revision notes

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Section A

1. State the law of demand and the law of supply. [2]

2. Distinguish between a movement along a demand curve and a shift of the demand curve. [3]

Section B

3. Explain three factors that would shift the demand curve for coffee to the right. [6]

4. Explain three factors that would shift the supply curve for wheat to the left. [6]

5. The market for umbrellas is in equilibrium. A period of unusually wet weather begins.

(a) Explain the effect on demand, price and quantity, using a diagram in words. [4] (b) Explain how the market mechanism restores equilibrium. [3]

6. Explain price elasticity of demand.

(a) Calculate the PED if a 10% price rise causes a 25% fall in quantity demanded, and state whether demand is elastic or inelastic. [3] (b) Explain why a firm facing inelastic demand would raise its price. [3] (c) State two factors that make demand more elastic. [2]

Section C

7. Explain why governments often tax goods such as tobacco and fuel heavily, in terms of price elasticity of demand. [3]

8. Explain what is meant by market failure, and give two examples. [4]

9. Bad weather destroys a third of the coffee harvest. Coffee has few close substitutes.

(a) Explain the effect on the supply curve and the equilibrium price and quantity. [3]

(b) Explain why total revenue to remaining growers may actually rise despite the fall in quantity sold. [3]

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Answers

1. Demand — as price rises, quantity demanded falls, other things being equal [1]. Supply — as price rises, quantity supplied rises [1].

2. A movement along the curve is caused only by a change in the price of the good itself — an extension or contraction [1] [1]. A shift of the whole curve is caused by a change in any other determinant of demand, such as income or tastes, and means a different quantity is demanded at every price [1].

3. Any three, 2 marks each: a rise in real incomes — coffee is a normal good, so more is bought at every price [1] [1]; a rise in the price of a substitute such as tea — consumers switch to coffee [1] [1]; a fall in the price of a complement such as milk or sugar — consuming coffee becomes cheaper overall [1] [1]; a change in tastes or successful advertising making coffee more popular [1] [1]; a rise in population [1] [1].

4. Any three, 2 marks each: poor weather or a crop disease destroying part of the harvest, so less can be supplied at every price [1] [1]; a rise in costs of production, such as fertiliser or fuel, making wheat less profitable to grow [1] [1]; the removal of a government subsidy, raising the effective cost to farmers [1] [1]; farmers switching land to a more profitable crop [1] [1]; new taxes or regulation raising the cost of production [1] [1].

5. (a) Wet weather increases the demand for umbrellas at every price, shifting the demand curve to the right [1] [1]. At the original price there is now excess demand (a shortage) [1], so the equilibrium price rises and the equilibrium quantity rises [1]. (b) The shortage causes buyers to bid the price up [1]; the higher price encourages producers to extend supply while simultaneously causing some consumers to contract their demand [1], until quantity demanded equals quantity supplied at the new, higher equilibrium price [1].

6. (a) PED = %ΔQd ÷ %ΔP = −25 ÷ 10 [1] = −2.5 [1]; since the magnitude exceeds 1, demand is elastic [1]. (b) With inelastic demand, the percentage fall in quantity is smaller than the percentage rise in price [1], so total revenue increases [1]; consumers have few alternatives, so they continue to buy despite the higher price [1]. (c) Any two: many close substitutes are available; the good takes up a large proportion of income; it is a luxury rather than a necessity; there is a long time period for consumers to adjust [1] [1].

7. Tobacco and fuel are goods with few substitutes and are addictive or necessities, so demand for them is inelastic [1]. Because demand is inelastic, a large price rise (from the tax) causes only a small fall in quantity demanded [1], so tax revenue holds up even as the price rises, making these goods reliable sources of government revenue [1].

8. Market failure is where the free market misallocates resources [1], failing to achieve the most efficient outcome for society. Any two examples: negative externalities such as pollution [1]; positive externalities such as vaccination [1]; public goods that no firm will supply [1]; merit or demerit goods consumed at the wrong level due to imperfect information [1].

9. (a) The supply curve shifts left, since less is available at every price [1]. Demand is unchanged, so at the old price there is now excess demand (a shortage) [1], and the price is bid up while the equilibrium quantity falls [1].

(b) Coffee has few close substitutes, so demand is relatively inelastic [1]. This means the price rise is proportionally large while the fall in quantity is comparatively small [1], so total revenue (price × quantity) to remaining growers may actually rise despite selling less [1].

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Where marks are usually lost

• Saying a price change shifts the demand curve.
• Explaining a shift without stating “at every price”.
• Dropping the negative sign but then misinterpreting the value.
• Saying a firm with elastic demand should raise price.