OxfordAQA IGCSE Economics: Markets and Market Failure — 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: Markets revision notes

The real paper has two sections: Section A opens with ten multiple-choice questions before further calculation, short-answer and extended-response questions, worth 48 marks in total; Section B is worth 32 marks. This paper follows that two-section structure.

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Section A — Multiple choice

1. A change in a good’s own price causes: [1] A. a shift of the demand curve B. a movement along the demand curve C. a shift of the supply curve D. no change to the market

2. A market with only one seller and high barriers to entry is best described as: [1] A. a competitive market B. an oligopoly C. a monopoly D. a perfectly elastic market

3. A market dominated by a small number of large firms is best described as: [1] A. a monopoly B. an oligopoly C. a competitive market D. a planned market

4. A negative externality means that: [1] A. third parties gain a benefit not reflected in the price B. third parties bear a cost not reflected in the price C. the good is under-produced D. the market always corrects itself

5. If demand is price inelastic, a rise in price will: [1] A. reduce total revenue B. increase total revenue C. leave total revenue unchanged D. make the good a luxury

6. Market failure caused by resources being misallocated occurs when: [1] A. the market produces exactly what consumers want B. resources are used to produce the wrong combination of goods relative to society’s wants C. the government sets a price D. a firm earns high profits

7. Capital, as the term is used in economics, means: [1] A. money held by a business B. man-made aids to production such as machinery and tools C. profit retained by a firm D. the price of a good

8. A maximum price set below the market equilibrium price will cause: [1] A. a surplus B. a shortage C. no change to quantity D. supply to increase

9. Cross elasticity of demand measures: [1] A. the responsiveness of demand for one good to a change in the price of another good B. the responsiveness of demand to a change in income C. the responsiveness of supply to a change in price D. the responsiveness of demand to a change in its own price

10. Equilibrium price is the price at which: [1] A. supply exceeds demand B. demand exceeds supply C. quantity demanded equals quantity supplied D. the government sets the market price

Section A — continued

11. Define effective demand and explain why willingness alone is not enough. [3]

12. Define opportunity cost, and explain why “capital” in economics does not mean money. [3]

13. Distinguish between a negative and a positive externality, giving one example of each. [4]

(This original Section A totals 20 marks; the live paper’s Section A is worth 48.)

Section B

14. Explain what happens to the equilibrium price and quantity of coffee in each case, giving your reasoning:

(a) a frost destroys part of the Brazilian harvest [3] (b) a medical study reports health benefits of drinking coffee [3] (c) both events occur at once [3]

15. Explain the relationship between price elasticity of demand and a firm’s total revenue, using calculated examples of an elastic and an inelastic good. [6]

16. Explain two advantages and one disadvantage of competition for consumers. [6]

17. Explain how a monopoly may harm consumers, and give two ways a government could regulate one. [6]

18. The government sets a maximum price for bread below the market equilibrium price.

(a) Explain, with reference to a diagram, the effect on the quantity demanded and supplied. [3] (b) State two likely consequences of this policy. [2]

(This original Section B totals 32 marks, matching the live paper.)

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Answers

Section A (multiple choice): 1. B 2. C 3. B 4. B 5. B 6. B 7. B 8. B 9. A 10. C

11. Effective demand is the desire for a good backed by the willingness and the ability to pay for it [1] [1]. Someone who wants a car but has no money contributes nothing to market demand, because producers only respond to demand that can actually be paid for [1].

12. Opportunity cost is the value of the next best alternative forgone when a choice is made, not the total of everything given up [1] [1]. In economics, capital means machinery, tools and equipment used in production — not money, which is merely used to buy capital [1].

13. A negative externality imposes costs on third parties who are not part of the transaction, e.g. air pollution from a factory harming nearby residents [1] [1]. A positive externality creates benefits for third parties, e.g. a vaccinated individual reducing the spread of disease to others [1] [1].

14. (a) Supply shifts left [1]; there is a shortage at the old price, so the price rises and the equilibrium quantity falls [1] [1]. (b) Demand shifts right [1]; there is a shortage at the old price, so the price rises and the equilibrium quantity rises [1] [1]. (c) Both effects push the price up, so the price rises sharply [1]. The effect on quantity is indeterminate [1], because supply reduces it while demand raises it — the outcome depends on which shift is larger [1].

15. If demand is elastic, a price cut causes a proportionally larger rise in quantity, so total revenue rises [1]. Example: price falls from $10 to $8 (−20%) and quantity rises from 100 to 150 (+50%); revenue rises from $1000 to $1200 [1] [1]. If demand is inelastic, a price rise causes a proportionally smaller fall in quantity, so total revenue rises [1]. Example: price rises from $2 to $2.40 (+20%) and quantity falls from 500 to 475 (−5%); revenue rises from $1000 to $1140 [1] [1]. The rule is that revenue rises when price moves towards the inelastic direction — cut price where demand is elastic, raise it where demand is inelastic.

16. Advantages, 2 marks each (any two): lower prices, since firms must match rivals or lose customers [1] [1]. Better quality and more choice, as firms differentiate their products to attract buyers [1] [1]. Innovation — firms invest in new products and processes to gain an advantage, so consumers benefit from improved goods over time [1] [1]. Greater efficiency, since firms must cut costs to survive, which keeps prices down [1] [1]. Disadvantage, 2 marks (any one): duplication and wasted resources — competing firms each build their own networks or advertise heavily, and advertising costs are passed to consumers without improving the product [1] [1]. Loss of economies of scale — several small firms may each have higher unit costs than one large one, so prices could actually be higher [1] [1]. Excessive choice and confusing pricing, which make it difficult for consumers to compare offers [1] [1].

17. Harm to consumers, up to 2 marks: a monopoly can restrict output and charge a higher price than would prevail under competition, so consumers pay more and consume less [1]; with no competitive pressure it may also allow quality to fall, be slow to innovate and become inefficient, since it will retain customers regardless [1]. Regulation, any two ways, 2 marks each (1 for the way, 1 for how it protects consumers): the government can set a maximum price or a price cap linked to inflation [1], so the monopoly cannot use its position to raise prices [1]; it can use competition law to break the firm up or prevent mergers that create monopoly [1], restoring competitive pressure on price and quality [1]; or it can open the market to competition by removing barriers to entry [1], so new firms can undercut the monopoly [1].

18. (a) A maximum price set below equilibrium causes quantity demanded to rise and quantity supplied to fall, since the price is now more attractive to buyers but less attractive to producers [1] [1]; on a demand-and-supply diagram this creates a gap between the two curves at the new lower price, representing excess demand [1]. (b) Any two, 1 mark each: shortages and queues, since quantity demanded exceeds quantity supplied [1]; the emergence of a black market, where the good is resold above the legal price [1]; producers may reduce quality to cut costs at the lower legal price [1].

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Where marks are usually lost

• Saying quantity definitely rises when demand and supply both shift.
• Confusing effective demand with wants.
• Saying elastic demand always means cutting prices raises profit — revenue is not profit.
• Listing disadvantages of monopoly without any regulatory remedy.
• Confusing a monopoly (one dominant seller) with an oligopoly (a few large firms).