CIE A Level Economics
CIE A Level Economics 2 The Price System and the Microeconomy Exam Questions
Free CIE A Level Economics revision for 2 The Price System and the Microeconomy: what you need to know, common mistakes and exam-style questions with answers. Covers demand and supply, price, income and cross elasticity, price elasticity of supply, equilibrium and consumer and producer surplus.
Practise 2 The Price System and the Microeconomy with past papers
Once you have learnt this topic, find the 2 The Price System and the Microeconomy questions in real CIE A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About CIE A Level Economics 2 The Price System and the Microeconomy
Topic 2 is the core AS Level microeconomics in the Cambridge 9708 syllabus. You learn what determines demand and supply, how to tell movements along a curve from shifts, how to calculate and interpret price, income and cross elasticities of demand and price elasticity of supply, and how equilibrium price is set and changed. Joint, competitive, derived and composite demand, and joint supply, link markets together. Consumer and producer surplus measure the gains from trade and reappear when you analyse taxes, subsidies and price controls in topic 3. Examiners regularly set elasticity calculations, ask for accurate shifts on diagrams and want surplus areas labelled correctly.
What you need to know
- 2.1 Demand and supply curves Demand is willingness and ability to buy at each price; supply is willingness and ability to sell. A price change causes a movement along a curve; changes in income, tastes, prices of related goods, costs or technology shift the curve.
- 2.2 Elasticities of demand PED = % change in quantity demanded / % change in price. YED = % change in quantity demanded / % change in income (positive for normal goods, negative for inferior goods). XED = % change in quantity demanded of good A / % change in price of good B (positive for substitutes, negative for complements).
- PED and revenue When demand is price elastic, a price cut raises total revenue; when inelastic, a price rise raises total revenue. Determinants include availability of substitutes, share of income, necessity and time period.
- 2.3 Price elasticity of supply PES = % change in quantity supplied / % change in price. It depends on spare capacity, stocks, factor mobility and time. Supply is usually more elastic in the long run.
- 2.4 Interaction of demand and supply Equilibrium is where quantity demanded equals quantity supplied; excess demand pushes price up and excess supply pushes it down. Know joint demand, competitive demand, derived demand, composite demand and joint supply, and the rationing, signalling and incentive functions of price.
- 2.5 Consumer and producer surplus Consumer surplus is the area below the demand curve and above the price; producer surplus is the area above the supply curve and below the price. Both change when the equilibrium changes.
Common mistakes in 2 The Price System and the Microeconomy
- Saying a change in price shifts the demand curve. A price change causes a movement along the curve; only non-price factors shift it.
- Ignoring the sign of YED and XED. The sign is essential: it shows whether a good is normal or inferior, and whether goods are substitutes or complements. PED is usually treated as a magnitude.
- Treating a PED of -0.5 as elastic because it is a large number of goods sold. Any value between 0 and 1 in magnitude is inelastic.
- Shifting both curves when only one determinant has changed. Identify which side of the market the change affects first, then shift only that curve.
- Labelling consumer surplus as the area below the price. It is the area between the demand curve and the price line, up to the quantity bought.
Try three 2 The Price System and the Microeconomy exam-style questions
1. The price of a product rises from $20 to $25 and quantity demanded falls from 400 to 340 units. Calculate the PED and state whether total revenue rises or falls. (3 marks)
Show the mark scheme answer
% change in price = 5/20 x 100 = 25%; % change in quantity = -60/400 x 100 = -15%; PED = -15 / 25 = -0.6 (inelastic); total revenue rises from $8000 to $8500.
2. Explain, with an example, what is meant by derived demand. (2 marks)
Show the mark scheme answer
Demand for a good or factor that comes from demand for another product it helps to make; e.g. demand for steel is derived from demand for cars.
3. Using a diagram, explain how a fall in the cost of raw materials affects consumer surplus in a market. (4 marks)
Show the mark scheme answer
Lower costs shift the supply curve to the right; equilibrium price falls and quantity rises; consumer surplus is the area under demand and above price; this area increases because price is lower and more is bought.
2 The Price System and the Microeconomy FAQs
What does Cambridge International AS and A Level Economics topic 2 The Price System and the Microeconomy cover?
It covers demand and supply, price, income and cross elasticity of demand, price elasticity of supply, market equilibrium and related markets, and consumer and producer surplus.
Which paper is topic 2 examined in?
It is AS Level content, assessed in Paper 1 (multiple choice) and Paper 2 (data response and essays), and it is assumed knowledge for Papers 3 and 4.
What formulas do I need for topic 2?
PED, YED, XED and PES, each a percentage change in quantity divided by a percentage change in price or income. You should also know total revenue = price x quantity and how PED predicts what happens to revenue.
