Edexcel International A Level Economics Price Determination Exam Questions

About Edexcel International A Level Economics Price Determination

Price determination brings demand and supply together in Unit 1 of Edexcel International A Level Economics. You learn how markets reach equilibrium, what happens when there is excess demand or excess supply, and how changes in demand and supply alter the equilibrium price and quantity. The topic also covers consumer and producer surplus and the functions of the price mechanism in allocating scarce resources. It underpins almost every other microeconomic topic, from indirect taxes to labour markets. Examiners test diagrams with simultaneous shifts, calculations of surplus areas, and explanations of how price signals resources to move between markets.

What you need to know

• Equilibrium Equilibrium price is where quantity demanded equals quantity supplied, so there is no tendency for price to change. A price above equilibrium creates excess supply, and a price below creates excess demand.
• Changes in equilibrium An increase in demand raises equilibrium price and quantity; an increase in supply lowers price and raises quantity. When both shift, the effect on one variable depends on the relative size of the shifts.
• Consumer and producer surplus Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, shown above price and below demand. Producer surplus is the difference between the price received and the minimum price producers would accept, shown below price and above supply.
• Functions of the price mechanism Rationing: rising prices ration scarce goods. Incentive: higher prices encourage producers to supply more. Signalling: price changes signal where resources are wanted.
• Interrelated markets Joint demand (complements), competitive demand (substitutes), composite demand (a good with several uses) and joint supply (by-products such as beef and leather).

Common mistakes in Price Determination

• Shifting both curves without explaining the outcome. State which variable is certain and which depends on the relative size of the shifts.
• Saying a rise in price causes supply to increase. A higher price causes an extension along the supply curve, not a shift.
• Calculating consumer surplus as a rectangle. With straight-line curves it is a triangle, so use half x base x height.
• Describing the price mechanism without its three functions. Name and explain rationing, incentive and signalling.
• Confusing composite demand with joint demand. Composite demand is one good wanted for several uses; joint demand is two goods used together.

Try three Price Determination exam-style questions