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

---

Section A

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

2. State the four conditions of a perfectly competitive market. [4]

Section B

3. 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]

4. 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]

5. Explain three advantages and two disadvantages of competition for consumers. [10]

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

Section C — Market failure

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

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

9. Explain why a free market fails to provide street lighting, referring to the two defining properties of a public good. [4]

10. 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]

---

Answers

1. 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].

2. Many buyers and many sellers, so none can influence price [1]; a homogeneous (identical) product [1]; freedom of entry and exit from the industry [1]; perfect information available to all participants [1].

3. (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].

4. 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.

5. Advantages, 2 marks each: 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]. Disadvantages, 2 marks each: 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; competition may also produce excessive choice and confusing pricing that makes comparison difficult [1] [1].

6. A monopoly can restrict output and charge a higher price than would prevail under competition, so consumers pay more and consume less [1] [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: the government can set a maximum price or a price cap linked to inflation, so the monopoly cannot exploit its position [1]; it can use competition law to break the firm up or prevent mergers that create monopoly [1]; or it can open the market to competition by removing barriers to entry, or take the firm into public ownership [1].

7. 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].

8. 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].

9. A public good must be non-excludable — once provided, no one can be stopped from using it, so a private firm cannot charge for it [1] [1] — and non-rival — one person’s use does not reduce its availability to anyone else [1]. Because people can enjoy street lighting without paying for it (the free-rider problem), no private firm would find it profitable to supply, so the free market provides none at all [1] [1].

10. (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: 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].

---

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.