Edexcel IGCSE Economics: The Market System — 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: The Market System revision notes

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Section A

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

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

Section B

3. Explain, with reasons, whether demand for each is likely to be elastic or inelastic: petrol, a particular brand of crisps, salt, foreign holidays. [8]

4. Explain income elasticity of demand.

(a) Calculate YED if a 5% rise in income causes an 8% rise in quantity demanded, and classify the good. [3] (b) Explain what a negative YED indicates, giving an example. [3]

5. Explain three causes of market failure, giving an example of each. [9]

6. Evaluate whether an indirect tax is the best way to reduce consumption of a demerit good such as tobacco. [8]

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Section C

7. Explain what is meant by opportunity cost, using an example. [3]

8. State the four factors of production and the reward corresponding to each. [4]

9. 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]

10. State two economies of scale a large firm might achieve as it expands. [4]

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Answers

1. 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].

2. 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].

3. Petrol — inelastic: there are few close substitutes and most journeys are necessary, so consumers keep buying despite price rises [1] [1]. A particular brand of crisps — elastic: there are many close substitutes, so consumers switch brands readily if the 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]. 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].

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

5. 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.)

6. For an indirect tax: 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: 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, worsening inequality [1]; a high tax encourages 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: 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].

7. 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].

8. Land — rent [1]; labour — wages [1]; capital — interest [1]; enterprise — profit [1].

9. 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].

10. Any two, 2 marks each: 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].

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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.