Eduqas A Level Economics Demand and Supply in Product Markets Exam Questions

About Eduqas A Level Economics Demand and Supply in Product Markets

Demand and supply in product markets is the core toolkit of Eduqas A Level Economics. You learn what shifts demand and supply curves, how a freely competitive market reaches equilibrium, how consumer and producer surplus measure welfare, and how the four elasticities (price, income and cross price elasticity of demand, and price elasticity of supply) describe responsiveness. Almost every later topic uses this analysis, including market failure, taxes and subsidies, labour markets and exchange rates. Examiners in Components 1 and 2 frequently set elasticity calculations from data, ask you to interpret the sign and size of the answer, and expect accurately labelled shift diagrams showing the new equilibrium.

What you need to know

• Demand Demand is the quantity consumers are willing and able to buy at each price. It shifts with income, prices of substitutes and complements, tastes, advertising, population and expectations. A change in the good's own price causes a movement along the curve, not a shift.
• Supply Supply is the quantity producers are willing and able to sell at each price. It shifts with costs of production, technology, indirect taxes, subsidies, the number of firms and weather for agricultural goods.
• Equilibrium Equilibrium is where quantity demanded equals quantity supplied. Excess demand pushes price up and excess supply pushes it down, so the price mechanism clears the market.
• Consumer and producer surplus Consumer surplus is the difference between what consumers are willing to pay and what they actually pay (area under demand above price). Producer surplus is the difference between the price received and the minimum price producers would accept (area above supply below price).
• Price elasticity of demand PED = % change in quantity demanded / % change in price. It is usually negative; elastic if greater than 1 in absolute value. Determinants include substitutes, proportion of income, necessity or luxury, habit and time period. PED links to total revenue: cut price when demand is elastic to raise revenue.
• Income and cross elasticity YED = % change in quantity demanded / % change in income: positive for normal goods (above 1 for luxuries), negative for inferior goods. XED = % change in quantity demanded of good A / % change in price of good B: positive for substitutes, negative for complements.
• Price elasticity of supply PES = % change in quantity supplied / % change in price. Supply is more elastic with spare capacity, stocks, mobile factors of production and a longer time period.

Common mistakes in Demand and Supply in Product Markets

• Shifting the demand curve when the good's own price changes. A price change causes a movement along the curve; only non-price factors shift it.
• Putting the percentage change in price on the top of the PED formula. Quantity always goes on top: PED = %ΔQd / %ΔP.
• Saying a good with PED of -0.5 is elastic because the number is negative. Elasticity is judged by its absolute size, so -0.5 is price inelastic.
• Confusing XED signs. Substitutes have positive cross elasticity and complements negative cross elasticity.
• Forgetting to show the new equilibrium price and quantity after a shift. Mark the old and new equilibrium points clearly and label the axes Price and Quantity.

Try three Demand and Supply in Product Markets exam-style questions