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The answers print on a separate page at the end. Higher levels include the lower-level questions.

ExamPass · AS Level worksheet

Demand, supply and price determination

NameClassDate

Key terms

Define each term.

1
Demand
2
Supply
3
Equilibrium price

Multiple choice

Circle the correct answer.

4

The government raises income tax, reducing household disposable income. What happens in the market for restaurant meals, a normal good?

  1. Movement along the demand curve to a lower quantity
  2. Demand shifts left, lowering price and quantity
  3. Supply shifts left, raising price
  4. Demand shifts right, raising price and quantity

Worked problems

Show your working.

5

Finding equilibrium and disequilibrium from a schedule. The weekly market for a snack is shown below. Price $1.00: quantity demanded 900, quantity supplied 300. Price $1.50: quantity demanded 700, quantity supplied 500. Price $2.00: quantity demanded 600, quantity supplied 600. Price $2.50: quantity demanded 500, quantity supplied 700. Find the equilibrium, then describe the market at $1.50 and at $2.50.

Chains of reasoning

The steps are in the wrong order. Write the letters in the order that makes a linked chain.

6

How a market absorbs a supply shock

  • A The higher price simultaneously signals scarcity to producers elsewhere.
  • B A new equilibrium is reached at a higher price and lower quantity, and in the longer run the entry of new supply moderates the price rise.
  • C A poor harvest reduces the quantity producers can supply at every price, shifting supply left.
  • D Unsatisfied buyers bid against one another, so price rises.
  • E The higher price rations the reduced supply, since buyers who value the good least withdraw first, and this is a movement along the demand curve.
  • F At the original price, quantity demanded now exceeds quantity supplied, creating a shortage.
  • G It also incentivises them, since production is now more profitable, so resources are drawn into the market.

Diagrams

7

Show the effect on the market for wheat of a government subsidy paid to farmers.

8

Draw a market in equilibrium and shade consumer surplus and producer surplus. Then shift demand right and show how each area changes.

Answers

1

Demand: The quantity of a good consumers are willing and able to buy at a given price over a given period.

2

Supply: The quantity of a good producers are willing and able to sell at a given price over a given period.

3

Equilibrium price: The price at which quantity demanded equals quantity supplied, so there is no tendency to change.

4

B. Income is not the price of the good, so the whole demand curve shifts. Lower income reduces demand for a normal good, moving the curve left. Equilibrium price and quantity both fall.

5

Step 1. Equilibrium. Quantity demanded equals quantity supplied at $2.00, where both are 600. That is the equilibrium price and quantity.

Step 2. At $1.50. 700 are demanded but only 500 supplied, a shortage of 200. Buyers compete for the limited supply, so the price is pushed up towards $2.00.

Step 3. At $2.50. 500 are demanded but 700 supplied, a surplus of 200. Sellers cannot sell all their stock, so they cut the price towards $2.00.

Step 4. What changes along the way. As the price rises from $1.50 to $2.00, quantity demanded contracts from 700 to 600 and quantity supplied extends from 500 to 600. These are movements along the curves, not shifts.

Always say which is larger, demand or supply, and name the result as a shortage or a surplus. Reading the table is one mark; naming and explaining the disequilibrium is the other.

6

C, F, D, E, A, G, B

  1. A poor harvest reduces the quantity producers can supply at every price, shifting supply left.
  2. At the original price, quantity demanded now exceeds quantity supplied, creating a shortage.
  3. Unsatisfied buyers bid against one another, so price rises.
  4. The higher price rations the reduced supply, since buyers who value the good least withdraw first, and this is a movement along the demand curve.
  5. The higher price simultaneously signals scarcity to producers elsewhere.
  6. It also incentivises them, since production is now more profitable, so resources are drawn into the market.
  7. A new equilibrium is reached at a higher price and lower quantity, and in the longer run the entry of new supply moderates the price rise.

Notice the chain names all three functions of price as it runs. Weaving the theory through the mechanism, rather than listing it separately, is what earns the analysis marks.

7

Supply shifts right. Mark both the original and new equilibrium, label the axes, and show the direction of change in price and quantity.

8

Both areas grow, but by how much depends on the elasticity of supply. Say which assumption you are making about the slope of the supply curve.