Demand, Supply and Market Equilibrium: 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 — the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

Related: Demand, Supply and Market Equilibrium revision notes

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Section A

1. Define “ceteris paribus” and explain why it matters when stating the law of demand as a relationship between price and quantity demanded. [3]

2. For the market for coffee, state whether each of the following causes a movement along, or a shift of, the demand curve: (a) the price of coffee rises (b) a new study links coffee to health benefits, increasing consumer preference for it (c) the price of tea (a substitute) falls [3]

Section B

3. Using a fully labelled demand and supply diagram, explain what happens to the equilibrium price and quantity of umbrellas if a period of unusually heavy rainfall increases consumer demand for umbrellas, with supply unchanged. [8]

4. A government imposes a price ceiling on rental housing, set below the current market equilibrium price. Using demand and supply analysis, explain the likely effect on the quantity of housing available. [8]

5. Explain the three functions performed by the price mechanism in a competitive market, and briefly evaluate why this is often cited as an advantage over centrally planned allocation of resources. [6]

6. In the market for a good, both demand and supply increase simultaneously. Explain why the effect on equilibrium quantity is more certain than the effect on equilibrium price. [5]

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Answers

1. “Ceteris paribus” means “all other things being equal” or “holding all other factors constant” [1]. It matters because the law of demand isolates the relationship between price and quantity demanded specifically — without holding other determinants (income, tastes, related prices) constant, we couldn’t attribute a change in quantity demanded to price alone, since several things would be changing at once [2].

2. (a) Movement along the curve [1]. (b) Shift of the curve (rightward, an increase in demand) [1]. (c) Shift of the curve (leftward, a decrease in demand, since tea and coffee are substitutes) [1].

3. Increased demand for umbrellas shifts the demand curve rightward [2]. With supply unchanged, the new intersection of demand and supply occurs at a higher equilibrium price and higher equilibrium quantity [3]. A correctly labelled diagram should show the original equilibrium (Pe, Qe), the demand curve shifted right (D to D1), and the new equilibrium (Pe1, Qe1) at a higher price and quantity than before [3].

4. A price ceiling below equilibrium means the legal maximum price is lower than the price that would otherwise clear the market [2]. At this lower price, quantity demanded exceeds quantity supplied — the diagram shows a shortage, since landlords are only willing to supply a smaller quantity of housing at the capped price, while more tenants want to rent at that lower price [4]. This means the actual quantity of housing available is lower than the free-market equilibrium quantity, even though the government’s intention was to make housing more accessible [2].

5. Signalling — price changes tell producers and consumers that something in the market has changed, for example a price rise signalling rising demand or falling supply [2]. Incentive — a higher price incentivises producers to supply more and consumers to demand less, and vice versa for a lower price [2]. Rationing — price rations a scarce good to those most willing and able to pay for it, without any central authority allocating output directly [1]. These three functions operate automatically in a competitive market with no single participant planning them, which is the feature often cited as an advantage over centrally planned allocation, since it does not require a planner to gather and process all the information the price mechanism coordinates automatically [1].

6. A rightward shift of demand, with supply unchanged, raises equilibrium price and quantity; a rightward shift of supply, with demand unchanged, lowers equilibrium price but raises equilibrium quantity [2]. When both shift right together, both effects on quantity point the same way (upward), so equilibrium quantity definitely rises [2]; but the two curves’ effects on price work in opposite directions — demand pushes price up while supply pushes price down — so the overall direction of the price change is ambiguous without more specific information about the relative size of each shift [1].

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Where marks are usually lost

• Confusing a movement along a curve (caused by a change in the good’s own price) with a shift of the curve (caused by a change in any other determinant).
• Diagrams without correctly labelled axes, curves and equilibrium points.
• Explaining price changes in words only, when the question specifically asks for diagram-based analysis.
• Price-ceiling analysis that concludes the wrong direction (a ceiling below equilibrium creates a shortage, not a surplus).
• Naming only one or two of the price mechanism’s three functions (signalling, incentive, rationing) when a question asks for all of them.
• Claiming a definite direction for both price and quantity when demand and supply shift simultaneously — only one of the two is certain unless the relative size of each shift is also given.

For condensed recall notes on this topic, see the Demand, Supply and Market Equilibrium revision notes.