How markets work: demand, supply, elasticity practice questions (A-Level Economics)

Sample questions

All 6 free A-Level Economics questions on this topic, from the free A-Level Economics Practice Paper and the free A-Level Economics Multiple Choice Questions with Answers. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 11 mark · Price elasticity of demand
   A bus company raises its single fare from 2.00 pounds to 2.50 pounds. Weekly passenger journeys fall from 40,000 to 34,000. Over this range, the price elasticity of demand for bus journeys is:
   • A.
     $-0.6$, so demand is price inelastic
   • B.
     $-1.67$, so demand is price elastic
   • C.
     $-12{,}000$, so demand is price elastic
   • D.
     $-0.6$, so demand is price elastic
   Show answerFrom the free A-Level Economics Practice Paper →
2. Question 220 marks · Housing market: supply, demand and government intervention
   The UK housing market. Read Extract A and answer all parts of the question. Extract A: The average price of a UK home rose from 240,000 pounds in 2020 to 288,000 pounds in 2024, taking the ratio of average house prices to average annual earnings from 7.2 to 8.6 over the same period. Housebuilders completed only 220,000 new homes in 2024, well short of the government's target of 300,000 per year, and blame a restrictive planning system in which fewer than half of large applications are approved within the statutory time limit. Successive governments have instead intervened on the demand side: the Help to Buy scheme offered first-time buyers an equity loan of up to 20 per cent of the price of a new-build home (40 per cent in London). Critics argue that subsidising the buyers of a good in inelastic supply chiefly bids up its price.
   (a)

   Define the term "subsidy" (Extract A).

   [2]
   (b)

   Using the data in Extract A, calculate the percentage change in the average UK house price between 2020 and 2024.

   [2]
   (c)

   With the aid of a supply and demand diagram, explain how a restrictive planning system affects the equilibrium price of housing.

   [6]
   (d)

   Using Extract A and your own knowledge, assess whether demand-side subsidies such as Help to Buy are an effective way of making housing more affordable.

   [10]
   Show answerFrom the free A-Level Economics Practice Paper →
3. Question 31 mark · Price elasticity of demand
   A cinema cuts its ticket price from 10 pounds to 8 pounds. Weekly attendance rises from 1,200 to 1,560. Over this range, the price elasticity of demand for tickets and the effect on the cinema's total revenue are:
   • A.
     $PED = -0.67$; demand is price inelastic and total revenue falls
   • B.
     $PED = -1.5$; demand is price elastic and total revenue falls
   • C.
     $PED = -1.5$; demand is price elastic and total revenue rises
   • D.
     $PED = -0.3$; demand is price inelastic and total revenue falls
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →
4. Question 41 mark · Income elasticity of demand
   When average incomes rise by 5 percent, the quantity demanded of a good falls by 2 percent, other things being equal. The income elasticity of demand for the good is:
   • A.
     $-2.5$, so the good is an inferior good
   • B.
     $-0.4$, so the good is an inferior good
   • C.
     $+0.4$, so the good is a normal good and a necessity
   • D.
     $+2.5$, so the good is a luxury
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →
5. Question 51 mark · Cross elasticity of demand
   The price of butter rises from 2.00 pounds to 2.20 pounds per pack. As a result, the quantity of margarine demanded rises from 500 to 540 packs per week. The cross elasticity of demand for margarine with respect to the price of butter is:
   • A.
     $+1.25$, so the goods are substitutes
   • B.
     $-0.8$, so the goods are complements
   • C.
     $+0.08$, so the goods are weak substitutes
   • D.
     $+0.8$, so the goods are substitutes
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →
6. Question 61 mark · Price elasticity of supply
   The price elasticity of supply of fresh strawberries in the short run is estimated to be 0.2. This means that:
   • A.
     a 10 percent rise in price leads to a 2 percent rise in quantity supplied; supply is price inelastic because output cannot be increased quickly within a growing season
   • B.
     a 10 percent rise in price leads to a 50 percent rise in quantity supplied
   • C.
     a 2 percent rise in quantity supplied causes a 10 percent rise in price
   • D.
     supply is price elastic because strawberries are perishable and must be sold quickly
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →

Key terms

The definitions and formulas A-Level Economics expects for how markets work: demand, supply, elasticity, typeset as they appear on the paper.

Price elasticity of demand (PED)

The responsiveness of quantity demanded to a price change. Elastic when the absolute value exceeds 1; determined by substitutes, necessity, proportion of income and time. Firms with inelastic demand raise revenue by raising price.

$$PED = \frac{\%\Delta Q_d}{\%\Delta P}$$

Income elasticity of demand (YED)

Positive for normal goods (above 1 for luxuries, between 0 and 1 for necessities) and negative for inferior goods. It tells a firm how a recession or boom will shift its demand.

$$YED = \frac{\%\Delta Q_d}{\%\Delta Y}$$

Cross elasticity of demand (XED)

The responsiveness of demand for one good to the price of another: positive for substitutes, negative for complements, close to zero for unrelated goods.

$$XED = \frac{\%\Delta Q_d \text{ of A}}{\%\Delta P \text{ of B}}$$

Price elasticity of supply (PES)

The responsiveness of quantity supplied to a price change, determined by spare capacity, stocks, factor mobility and time. Supply is more elastic in the long run.

$$PES = \frac{\%\Delta Q_s}{\%\Delta P}$$

Functions of the price mechanism

Rationing (a higher price excludes some buyers), signalling (prices tell producers where to shift resources) and incentive (a higher price rewards extra output). Essays on how markets respond to a shock use all three.

Consumer and producer surplus

Consumer surplus is the difference between what consumers are willing to pay and the price; producer surplus is the difference between the price and the minimum producers would accept. Both are areas on the diagram and change with every shift.

Indirect taxes and subsidies

A specific tax shifts supply up by the tax amount, an ad valorem tax pivots it; the incidence depends on relative elasticities. A subsidy shifts supply down; the gain is shared between consumers (lower price) and producers (higher revenue per unit).

Frequently asked questions

Other A-Level Economics topics

• Nature of economics and economic methodology
• Market failure and government intervention
• Measures of economic performance
• Aggregate demand and aggregate supply
• National income, growth and the multiplier
• Macroeconomic objectives and policies
• Business growth, market structures and the labour market
• Globalisation, trade and exchange rates
• Poverty, inequality and development
• The financial sector

All A-Level Economics topics · A-Level Economics exam guide · All free practice exams