Supply
50 marks: 12 multiple choice questions, a data response and an essay. Answers are at the end.
AQA: Question 14 would be a 25-mark question on your papers.
Edexcel: Question 14 would be a 25-mark question on your papers.
OCR: Question 14 would be a 25-mark question on your papers.
Multiple choice online
The test
1Supply curves normally slope upwards from left to right because:
- A average costs of production fall steadily as output rises
- B a higher price makes extra output profitable, so firms expand
- C firms always produce as much as they can at any price
- D consumers are willing and able to buy more as the price of the good rises over time
2Which of the following would shift the supply curve of wheat to the right?
- A the removal of a subsidy to wheat farmers
- B a rise in the price of fertiliser
- C a rise in the market price of wheat
- D a new variety of seed that raises yields per hectare
3Beef and leather are produced together from cattle. A rise in the demand for beef is likely to:
- A reduce the supply of leather and raise its price, as cattle are diverted
- B shift the demand for leather to the right
- C increase the supply of leather and lower its price
- D leave the leather market unchanged
4Farmers can grow either wheat or barley on the same land. A rise in the price of barley is likely to:
- A shift the supply of wheat to the left, as land moves into barley
- B shift the demand for wheat to the right
- C leave the supply of wheat unchanged
- D shift the supply of wheat to the right
5The price of a good rises from £50 to £60 and the quantity supplied rises from 500 to 560 units. The price elasticity of supply is:
- A 6
- B 0.12
- C 1.67
- D 0.6
6Supply is likely to be more price elastic when:
- A the good is perishable and cannot be stored
- B firms hold large stocks of the finished good
- C the time period is very short
- D firms are already working at full capacity
7On the night of a concert, the supply of seats in the arena is:
- A perfectly price inelastic, because capacity is fixed
- B perfectly price elastic, because any number can be sold
- C unit elastic
- D price elastic, because the promoter can raise prices
8The supply of agricultural products is price inelastic in the short run mainly because:
- A demand for food is price inelastic
- B farm products are easy to store
- C output cannot be increased until the next growing season
- D farmers are not interested in profit
9A subsidy paid to the producers of a good:
- A shifts the supply curve to the right, by the subsidy per unit at every quantity
- B shifts the supply curve to the left, because the government takes a share of revenue
- C moves the market along the existing supply curve
- D shifts the demand curve to the right
10The price elasticity of supply of a good is 0.5. If its price rises by 10%, the quantity supplied will rise by:
- A 0.5%
- B 50%
- C 20%
- D 5%
11Producer surplus is:
- A the revenue a producer earns above its fixed costs
- B the difference between the price consumers pay and the price they would have paid
- C the difference between the price a producer receives and the lowest price it would accept
- D the profit a producer makes after paying all of its fixed and variable costs of production
12A rise in the wages paid to fruit pickers will:
- A shift the supply of strawberries to the right, as more workers are attracted into picking
- B shift the supply of strawberries to the left, raising the price
- C shift the demand for strawberries to the right, as pickers have more income to spend
- D leave the strawberry market unchanged
13Most British strawberries are grown under polytunnels in Kent, Herefordshire and Scotland between May and October. Growers employ thousands of seasonal pickers, many from overseas. In winter the shops are supplied from Spain, Morocco and Egypt, and the few British growers using heated glasshouses produce small volumes at high cost. Table 1 shows how much British growers would supply at different prices in June and in December. Figures are illustrative.
| Price per kg | £3 | £4 | £5 | £6 |
|---|---|---|---|---|
| June | 20 | 30 | 40 | 50 |
| December | 2.0 | 2.5 | 3.0 | 3.5 |
(a)Using Table 1, calculate the price elasticity of supply in June when the price rises from £4 to £5. [2]
(b)Using Table 1, explain why the price elasticity of supply is lower in December than in June. [4]
(c)With the aid of a diagram, explain how a wet June that cuts the harvest affects the price and quantity of British strawberries, and why the price rises by more when demand is price inelastic. [6]
(d)Explain two factors, other than the weather, that could shift the supply of British strawberries to the right. [6]
14Evaluate the view that the price inelastic supply of housing is the main cause of high house prices in the UK. [20]
Answers
Show the answers
AO1 knowledge, AO2 application, AO3 analysis, AO4 evaluation.
| Answer | Why | |
|---|---|---|
| 1 | B | At a higher price it pays to cover the rising marginal cost of extra units, and firms that could not profit at the old price now can. |
| 2 | D | Better technology lowers the cost of each tonne, so more is offered at every price; a change in the price of wheat itself moves the market along the curve. |
| 3 | C | Joint supply: more cattle reared for beef means more hides, so leather supply shifts right. |
| 4 | A | Competing supply: land moves into the more profitable crop, so less wheat is offered at every price. |
| 5 | D | Quantity rises by 12% (60 ÷ 500) and price by 20% (10 ÷ 50): 12 ÷ 20 = 0.6, inelastic. |
| 6 | B | Stocks can be released quickly when the price rises; the other three stop firms from responding. |
| 7 | A | However high the price, no more seats can be supplied that night: a vertical supply curve, PES = 0. |
| 8 | C | A higher price today cannot bring forward a harvest; planting decisions respond only over a season or more. |
| 9 | A | The subsidy lowers the cost of each unit to the producer, so more is offered at every market price. |
| 10 | D | Percentage change in quantity supplied = PES × percentage change in price = 0.5 × 10% = 5%. |
| 11 | C | It is the area above the supply curve and below the market price: the gain to producers from selling at the market price rather than their minimum. |
| 12 | B | Labour is a cost of production; higher costs mean less is supplied at every price. |
13 (a) Using Table 1, calculate the price elasticity of supply in June when the price rises from £4 to £5. [2: AO2 2]
- AO2 (1) Quantity rises by 10 ÷ 30 = 33.3%; price rises by 1 ÷ 4 = 25%
- AO2 (1) PES = 33.3 ÷ 25 = 1.33: elastic
13 (b) Using Table 1, explain why the price elasticity of supply is lower in December than in June. [4: AO2 2, AO3 2]
- AO2 (1) In December a rise from £4 to £5 raises supply from 2.5 to 3.0 thousand tonnes, 20% for a 25% price rise: PES = 0.8, inelastic, against 1.33 in June
- AO3 (1) In June growers have spare capacity and a crop that can be picked faster or left longer, so a higher price brings a large response; in December only heated glasshouses can produce, and their capacity is fixed in the short run
- AO3 (1) Winter production also needs expensive heating and lighting, so costs rise steeply with output: each extra tonne needs a much higher price
- AO2 (1) Application: the time needed to plant and grow means a higher December price cannot bring forward the next crop; the response is limited to the small existing winter capacity
13 (c) With the aid of a diagram, explain how a wet June that cuts the harvest affects the price and quantity of British strawberries, and why the price rises by more when demand is price inelastic. [6: AO1 2, AO2 1, AO3 3]
- AO1 (2) Diagram: supply shifts left from S1 to S2 along a downward-sloping demand curve; price rises from P1 to P2 and quantity falls from Q1 to Q2; a second, steeper demand curve through the original equilibrium shows a larger price rise and a smaller fall in quantity
- AO3 (1) Bad weather cuts the yield from the same area and the same cost, so less is offered at every price: a leftward shift in supply
- AO3 (1) At the old price there is now a shortage, so the price is bid up until quantity demanded falls to meet the smaller supply
- AO3 (1) If demand is inelastic, buyers cut back little as price rises, so the price has to rise further to clear the market and quantity falls less; with elastic demand the adjustment comes mainly through quantity
- AO2 (1) Application: supermarkets and consumers treat British strawberries in June as having few close substitutes (imports are lower quality after transport), so demand is fairly inelastic and the price spike is sharp; growers' revenue may even rise
Levels: 1 to 2 for a description with a partly correct diagram; 3 to 4 for a correct diagram with the shift and the price adjustment explained; 5 to 6 for the elasticity comparison shown and applied.
13 (d) Explain two factors, other than the weather, that could shift the supply of British strawberries to the right. [6: AO1 2, AO2 2, AO3 2]
- AO1+AO2+AO3 (3) Technology: new varieties, table-top growing and polytunnels extend the season and raise yields per hectare, lowering the cost of each kilogram so more is supplied at every price (British growers' season has already lengthened from eight weeks to six months this way)
- AO1+AO2+AO3 (3) Labour: more seasonal worker visas or higher productivity from picking robots cut the cost and uncertainty of harvesting, which has limited how much growers plant
- AO1+AO2+AO3 (3) Or: a government subsidy or grant for glasshouses; lower energy prices for heated production; a rise in the price of a crop in competing supply falling (land moves back into strawberries)
Maximum 6: two factors, each explained as a cost or capacity change and applied to strawberries.
14 Evaluate the view that the price inelastic supply of housing is the main cause of high house prices in the UK. [20: AO1 6, AO3 6, AO4 8]
Knowledge and analysis (AO1 to AO3)
- Define price elasticity of supply and explain why the supply of housing is inelastic: building takes years, land is fixed and planning permission is restricted, construction capacity and skilled labour are limited, and the existing stock dwarfs annual new building (around 200,000 to 250,000 new homes a year against about 25 million dwellings).
- Show on a diagram: a steep supply curve with demand shifting right (rising incomes, population growth, smaller households, low interest rates, buy-to-let and foreign investment); the price rises a long way while quantity rises little. With elastic supply the same demand shift would mostly raise quantity.
- Evidence for the view: house prices have risen far faster than incomes since the 1990s; regions with the tightest planning (London and the South East) have the highest prices; countries that build more relative to population (parts of Germany, Japan) have had flatter prices.
- Demand-side causes: three decades of falling mortgage rates raised what buyers could borrow; Help to Buy and other subsidies added to demand; housing as an investment asset; population growth; these shift demand right and would raise prices even with somewhat elastic supply.
- Other causes: the tax system (no capital gains tax on main homes, council tax based on 1991 values) favours holding housing; land banking by developers; the planning system raises the price of land with permission, a cost that feeds through to new homes.
- Policy implications: if inelastic supply is the cause, planning reform and building more is the answer; if demand is the cause, building more would have little effect and demand-side measures (interest rates, tax, limits on second homes) matter more.
Evaluation (AO4)
- Both are needed: a demand shift only raises prices sharply because supply is inelastic, so the question is which to call 'main'; the supply side determines how much of a demand shift becomes price rather than quantity.
- It depends on the time horizon: in the short run supply is almost fixed so prices move with demand and interest rates (the 2022 to 2023 fall in prices as rates rose was a demand effect); in the long run supply can respond if planning allows.
- It depends on the region: inelastic supply explains the London premium better than it explains price rises in areas with land to spare.
- Measurement: house prices rose when mortgage rates fell everywhere, including countries with more elastic supply, which points to credit as a major cause.
- Building more lowers prices only slowly because new supply is small relative to the stock; so even if inelastic supply is the main cause, it is not a quick fix.
Judgement
A supported judgement might conclude that inelastic supply is the main reason demand pressures translate into high prices rather than more homes, so the view is largely right about the mechanism, but that the size of the demand shift, above all cheap credit, explains most of the timing and scale of the rise; policy needs both more building and attention to demand.
Marking
Bands, out of 20 (AO1 knowledge 6, AO3 analysis 6, AO4 evaluation 8, as WJEC marks a 20-mark question). Top band (16 to 20): a range of points developed in full chains of reasoning, supported by an accurate diagram and real examples, with evaluation that weighs the arguments and reaches a judgement that depends on stated conditions. Middle band (9 to 15): some developed chains, a relevant diagram, evaluation present but one-sided or asserted. Bottom band (1 to 8): points listed or described, little use of theory or examples, judgement missing or unsupported.