Edexcel IGCSE Economics: The Market System — 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 available free from your board.

Related: The Market System revision notes

This specification’s papers are not divided into lettered sections. Instead, each paper consists of four compulsory questions, each worth twenty marks, with sub-questions mixing short-answer, calculation, data-response and open-ended items. This paper follows that structure.

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Question 1 — The market mechanism

(a) Define equilibrium price and explain what happens if price is set above it. [3]

(b) Define price elasticity of supply and state one factor that affects it. [2]

(c) A new, cheaper substitute for coffee appears on the market. Using demand and supply analysis, explain the effect on the equilibrium price and quantity of coffee. [4]

(d) Explain, with reasons, whether demand for each of the following is likely to be elastic or inelastic: petrol; salt. [4]

(e) Calculate the price elasticity of supply for a good if a 10% price rise causes a 15% rise in quantity supplied, and state whether supply is elastic or inelastic. [4]

(f) State one reason why supply might be more elastic in the long run than in the short run. [3]

Question 2 — Elasticity and consumer behaviour

(a) Explain, with reasons, whether demand for each of the following is likely to be elastic or inelastic: a particular brand of crisps; foreign holidays. [4]

(b) Explain what is meant by income elasticity of demand. [2]

(c) Calculate the income elasticity of demand (YED) if a 5% rise in income causes an 8% rise in quantity demanded, and classify the good. [3]

(d) Explain what a negative YED indicates, giving an example. [3]

(e) Explain the difference between a normal good and an inferior good, using income elasticity of demand. [4]

(f) State two factors, other than income, that could cause a change in demand for a good. [4]

Question 3 — Market failure and government intervention

(a) Explain three causes of market failure, giving an example of each. [9]

(b) Evaluate whether an indirect tax is the best way to correct the negative externality caused by tobacco consumption. [8]

(c) State one alternative policy, other than an indirect tax, that a government could use to correct a negative externality. [3]

Question 4 — Costs, production and factors

(a) Explain what is meant by opportunity cost, using an example. [3]

(b) State the four factors of production and the reward corresponding to each. [4]

(c) State two internal economies of scale a large firm might achieve as it expands. [4]

(d) Explain the difference between economies of scale and diseconomies of scale. [4]

(e) Explain one reason why a firm might experience diseconomies of scale as it grows very large. [3]

(f) State one example of a fixed cost and one example of a variable cost for a manufacturing firm. [2]

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Answers

1. (a) The price at which quantity demanded equals quantity supplied, so there is no tendency for price to change [1] [1]. Above it there is excess supply (a surplus), so sellers cut prices to clear unsold stock and price falls back towards equilibrium [1].

(b) The responsiveness of quantity supplied to a change in price, calculated as %ΔQs ÷ %ΔP [1]. Affected by the time period, availability of spare capacity, or the ease of storing stock [1].

(c) A cheaper substitute shifts the demand curve for coffee to the left, as consumers switch away from coffee [1]; at the original price this creates excess supply [1]; the equilibrium price falls [1] and the equilibrium quantity falls [1].

(d) Petrol — inelastic: there are few close substitutes and most journeys are necessary, so consumers keep buying despite price rises [1] [1]. Salt — inelastic: it is a necessity taking a tiny proportion of income with no substitute, so price changes barely affect the quantity bought [1] [1].

(e) PES = %ΔQs ÷ %ΔP = 15 ÷ 10 = 1.5 [2]; since the magnitude exceeds 1, supply is elastic [2].

(f) In the long run, firms have more time to adjust their factors of production (e.g. build new capacity or acquire new machinery), so quantity supplied can respond more fully to a price change than in the short run, when at least one factor is fixed [3].

2. (a) A particular brand of crisps — elastic: there are many close substitutes, so consumers switch brands readily if the price rises [1] [1]. Foreign holidays — elastic: they are a luxury taking a large share of income, and can be postponed or replaced with a domestic holiday [1] [1].

(b) Income elasticity of demand measures the responsiveness of quantity demanded to a change in income [1], calculated as %ΔQd ÷ %Δincome [1].

(c) YED = 8 ÷ 5 [1] = +1.6 [1]; positive and greater than 1, so it is a normal luxury good [1].

(d) A negative YED means that as income rises, demand for the good falls [1] [1]; the good is inferior, e.g. bus travel or supermarket own-brand basics, which consumers abandon for better alternatives as they become richer [1].

(e) A normal good has a positive YED — demand rises as income rises [1] [1]. An inferior good has a negative YED — demand falls as income rises, as consumers switch to preferred alternatives they can now afford [1] [1].

(f) Any two: a change in the price of a substitute or complement good [1] [1]; a change in consumer tastes or fashion [1] [1]; a change in population [1] [1]; advertising [1] [1].

3. (a) Any three, 3 marks each: Negative externalities — costs imposed on third parties not reflected in the price, so the good is overproduced and overconsumed; e.g. pollution from a factory harming local residents’ health [1] [1] [1]. Public goods — non-excludable and non-rival, so the free rider problem means the market provides none; e.g. national defence or flood barriers [1] [1] [1]. Information failure — consumers do not know the true costs or benefits of a good, so they consume the wrong amount; e.g. smoking, where the long-term health cost is underestimated, or education, whose benefits are underestimated [1] [1] [1]. (Also accept monopoly power, factor immobility, inequality.)

(b) For an indirect tax [3]: it raises the price, causing a contraction in demand and reducing consumption [1]; it internalises the external cost, making the polluter or consumer pay for the harm imposed on others [1]; it raises government revenue which can be spent on healthcare or on anti-smoking campaigns [1]. Against [3]: demand for tobacco is highly inelastic and addictive, so a large tax causes only a small fall in consumption — the main effect is a transfer of income to the government [1]; the tax is regressive, taking a larger share of income from the poor (who are also more likely to smoke), and a high tax also risks encouraging smuggling and a black market, which reduces revenue and puts consumption beyond regulation [1]; the correct level of tax is very difficult to calculate, since the external cost cannot be measured precisely [1]. Judgement [2]: a tax is useful but insufficient on its own [1]; because demand is inelastic it works best combined with information campaigns, advertising bans and age restrictions, which shift demand leftwards rather than relying on price alone [1].

(c) Any one: regulation (e.g. banning sale to under-18s or restricting advertising) [3]; provision of information (e.g. public health campaigns) [3]; direct provision of substitute goods or support services [3].

4. (a) Opportunity cost is the next best alternative given up when a choice is made [1] [1]; e.g. spending an hour revising economics means giving up the chance to revise a different subject in that hour [1].

(b) Land — rent [1]; labour — wages [1]; capital — interest [1]; enterprise — profit [1].

(c) Any two, 2 marks each, all internal economies of scale: purchasing economies — buying raw materials in bulk at a lower cost per unit [1] [1]; technical economies — large-scale machinery and production techniques lower the cost per unit [1] [1]; financial economies — larger firms can borrow more cheaply [1] [1]; marketing economies — advertising cost is spread over a much larger output [1] [1]; managerial economies — larger firms can afford specialist managers [1] [1]; risk-bearing economies — a larger firm can spread risk across a wider range of products or markets [1] [1].

(d) Economies of scale are falling long-run average costs as output rises [1] [1]. Diseconomies of scale are rising long-run average costs as output rises, once a firm has grown beyond its most efficient size [1] [1].

(e) As a firm grows very large, communication and coordination between managers and workers can break down, since decisions must pass through more layers and information can be lost or delayed, raising costs per unit [3].

(f) Any valid example, e.g. fixed cost — rent on a factory (does not change with output) [1]; variable cost — raw materials (changes directly with output) [1].

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Where marks are usually lost

• Saying elasticity depends on whether the good is “cheap”.
• Confusing income elasticity with price elasticity.
• Giving an example of market failure without explaining the mechanism.
• Not addressing inelastic demand when evaluating a tax on tobacco.
• Explaining a market change without stating all four steps: which curve shifts, which direction, the new equilibrium, and the effect on both price and quantity.
• Confusing capital (machinery and equipment) with money in the factors of production.
• Confusing economies of scale (falling costs from growth) with diseconomies of scale (rising costs from excessive growth).