LRN International AS Level: Economics (7141)
Candidate Name:
(30 Minutes)
For Examination [Topic: week 3 – Demand and supply]
It is necessary to respond on the answer sheets provided alongside this
question paper. Additionally, you must have a soft pencil (preferably of
type B or HB), a clean eraser, and a dark blue or black pen.
INSTRUCTIONS:
You must write your name on the answer sheets in the designated
spaces.
Attempt all the questions in both sections using a dark blue or black
pen.
It is important to follow the instructions provided on the answer
sheets.
Do not use correction fluid.
Avoid writing on any barcodes.
INFORMATION:
The total number of marks for this paper is 30.
The number of marks assigned for each question is indicated within
brackets [ ].
Section A: Case Study-Based Question
Case Study:
Country X has been experiencing fluctuations in the prices of essential
goods such as wheat and dairy products. Recent changes in household
income levels and shifts in consumer preferences have affected the
demand for these goods. Additionally, due to unfavorable weather
conditions, agricultural supply chains have faced disruptions, leading to a
shift in market equilibrium. The government is considering intervention to
stabilize prices and protect both consumers and producers.
1. Define market equilibrium and explain how it is determined in the
context of Country X’s agricultural market. [3 marks]
2. Explain two factors that could affect the price elasticity of supply
(PES) for wheat in Country X. [4 marks]
3. Illustrate and explain how an increase in household incomes could
impact the demand curve for dairy products in Country X. [4 marks]
4. Discuss how consumer and producer surplus might change if the
government imposes a price ceiling on dairy products in Country X.
[4 marks]
Section B: Structured Questions
5. Differentiate between price elasticity of demand (PED), income
elasticity of demand (YED), and cross elasticity of demand (XED),
providing relevant examples. [5 marks]
6. Using an indifference curve and budget line, explain how a
consumer maximizes utility when choosing between two goods. [5
marks]
7. Evaluate the impact of diminishing marginal utility on consumer
demand and price setting by firms. [5 marks]
Section A: Case Study-Based Questions
(Q1a) Define market equilibrium and explain how it is determined
in the context of Country X’s agricultural market. [3 marks]
1 mark: Market equilibrium is the point where quantity demanded
equals quantity supplied, with no excess demand or supply.
2 marks: In Country X’s agricultural market, equilibrium is
determined by the interaction of demand and supply. If demand
increases (e.g., due to population growth or higher incomes) or
supply decreases (e.g., due to bad weather), the equilibrium price
and quantity change.
(Q2a) Explain two factors that could affect the price elasticity of
supply (PES) for wheat in Country X. [4 marks]
2 marks: Explanation of two factors:
1. Time period – In the short run, wheat supply is inelastic
because farmers cannot quickly increase production. In the
long run, PES is more elastic as they can expand farmland.
2. Stock availability – If wheat is stored in large quantities,
suppliers can respond quickly to price changes, making PES
more elastic.
2 marks: Application to the wheat market in Country X.
(Q3a) Illustrate and explain how an increase in household
incomes could impact the demand curve for dairy products in
Country X. [4 marks]
2 marks: Demand curve shifts rightward if dairy products are
normal goods (higher income → higher demand). If dairy is an
inferior good, demand might decrease.
2 marks: Application to Country X’s market, explaining how income
elasticity of demand (YED) determines the effect.
(Q4a) Discuss how consumer and producer surplus might change
if the government imposes a price ceiling on dairy products in
Country X. [4 marks]
2 marks: Explanation of consumer and producer surplus: Consumer
surplus is the benefit consumers receive when they pay less than
what they are willing to pay.
o Producer surplus is the difference between what producers
receive and their minimum acceptable price.
2 marks: Impact of a price ceiling:
o If the government sets a price ceiling below equilibrium,
consumer surplus may increase as prices fall, but
shortages may arise.
o Producer surplus decreases as firms receive lower prices
and may cut supply, leading to inefficiencies such as black
markets.
Section B: Structured Questions
(Q1b) Differentiate between price elasticity of demand (PED),
income elasticity of demand (YED), and cross elasticity of
demand (XED), providing relevant examples. [5 marks]
2 marks: Definitions:
o PED: Measures responsiveness of quantity demanded to price
changes.
o YED: Measures responsiveness of demand to income changes.
o XED: Measures responsiveness of demand for one good when
the price of another good changes.
3 marks: Examples and applications:
o PED example: If the price of petrol rises by 10% and demand
falls by 5%, PED = -0.5 (inelastic).
o YED example: Luxury goods have YED > 1 (e.g., designer
bags).
o XED example: Complements (e.g., coffee and sugar) have
negative XED, while substitutes (e.g., Coke and Pepsi) have
positive XED.
(Q2b) Using an indifference curve and budget line, explain how
a consumer maximizes utility when choosing between two
goods. [5 marks]
2 marks: Explanation of indifference curves and budget constraints:
o Indifference curve: Represents combinations of two goods
that provide equal satisfaction to the consumer.
o Budget line: Represents all affordable combinations of two
goods given income and prices.
3 marks: Utility maximization occurs where the highest indifference
curve is tangent to the budget line.
o If income increases, the budget line shifts outward.
o If the price of one good falls, the consumer may buy more of it
(substitution effect) and increase total consumption (income
effect).
(Q3b) Evaluate the impact of diminishing marginal utility on
consumer demand and price setting by firms. [5 marks]
2 marks: Explanation of diminishing marginal utility:
o As a consumer consumes more of a good, the additional
satisfaction (marginal utility) gained from each extra unit
decreases.
o Example: The first slice of pizza provides more satisfaction
than the fifth slice.
3 marks: Application to consumer behavior and pricing strategies:
o Demand curve slopes downward because consumers are
willing to pay less for additional units.
o Firms use pricing strategies such as bulk discounts (e.g.,
“buy one, get one 50% off”) to encourage purchases despite
diminishing utility.
