2014 May (Linear Demand, PES, Price Ceiling) Paper 3 HL

2014 May (Linear Demand, PES, Price Ceiling) Paper 3 HL

(a)  (i) Calculate the equilibrium price of butter in Country X.

 

Put the Qd on one side and the Qs on the other.

 

884 – 6P = 744 + 4P

 

Subtract 744 from both sides

(884 – 774) – 6P = (744 – 744) + 4P

 

Now we have 140 – 6P = 4P

 

Add 6P to both sides

140 (-6P + 6P) = 4P + 6P

 

Equals 140 = 10P

P = $14

 

(ii)          Calculate the equilibrium quantity per month of butter in Country X.

 

Plug in the P of $14

 

Qd = 884 – 6P

Qd = 884 – (6 x 14)

Qd = 884 – 84

QD = 800

Don’t forget that it is 000kg so the answer is 800,000kg

 

Qs = 744 + 4P

Qs = 744 + (4 x 14)

Qs = 744 + 56

Qs = 800

Don’t forget that it is 000kg so the answer is 800,000kg

 

Assume that incomes in Country X increase. As a result the demand for butter increases by 10,000kg per month at each price.

 

(b)  State the new equation for demand.

 

Qd = 894 – 6P

(c)  (i) Assume the supply changes from

 

Qs = 744 + 4P to Qs = 744 + 5P

 

Outline how this change will affect the steepness of the supply curve.

 

The Supply curve will become less steep (flatter) because for any change  in price, the change in Qs will be greater, hence the supply curve will become shallower/flatter.

 

Slope of the function increases from (+4 to +5) but the axes are reversed (the independent variable is on the vertical) the supply curve will become shallower/flatter.

 

(ii) Assume now that the supply changes from

 

Qs = 744 + 4P to Qs = 544 +4P

 

The supply curve will shift to the left as the Qs has decreased.

 

(d)  (i) Define the term Price Elasticity of Supply (PES).

 

PES = is the responsiveness of supply (or Qs) to a change in price.

 

(ii) The increase in demand of 10,000kg per month (see 3 (b)) has led to a new equilibrium price of $15 and a new equilibrium quantity of 804,000 kg of butter.

 

Calculate the PES for butter between the original and the new market price.

 

Price increased from $14 to $15 = 1/14 = 7.14% increase

Qd increased from 800k to 804k = 4/800 = .5% increase

 

.5/7.14 = .07 (inelastic as between 0 and 1)

(e)  Explain two factors that determine the PES of a product.

 

Time = the longer the time period, the more price elastic supply will be as firms will have more time to adjust to any change in demand/price conditions.

 

Excess Capacity = if it does, then increasing output will be easier so supply will be more price elastic.

 

Storage = the greater the ability to store stocks (goods), the more price elastic supply will be as firms can draw from stocks to increase the quantity supplied.

 

(f)  Calculate the resulting shortage.

Using the original supply and demand functions Qd = 884 – 6P

Qs = 744 + 4P and the government set a price ceiling of $10

Using the original supply and demand functions Qd = 884 – 6P

Qs = 744 + 4P and the government set a price ceiling of $10

 

Qd = 884 – 6P = 884 – (6 x $10) = 884 – 60 = 824 (Qd at $10)

Qs = 744 + 4P = 744 + (4 x $10) = 744 + 40 = 784 (Qs at $10)

 

Shortage  = Qd – Qs = 824 – 784 = 40 (000kg)

(g)  Calculate the change in consumer expenditure (spending) on butter per month resulting from the imposition of the price ceiling.

 

Originally (before the Price Ceiling) consumers spent $11,200,000 on butter

Price x Quantity = ($14 x 800) = 11,200, 000

 

After the Price Ceiling consumers spent $7,840,000 on butter

Price x Quantity = $10 x 784 = 7,840,000

 

Change in Consumer spending = 7840 – 11200 = - 3, 360, 000 (decrease)

 

In essence the question is asking how much is actually bought after the price ceiling.

Understand that if it isn’t produced then it can’t be bought so we focus in on the amount Supplied,,,

 

With the price ceiling only 784,000 will be produced with the price ceiling but 11,200,000 would have been bought and produced without the Price Ceiling.

 

Price Ceilings cause Dead Weight Loss = a loss of consumer and producer surplus.

 

(h)  Explain 2 consequences on consumers of butter if a price ceiling (max price) is imposed.

 

Some consumers win = now will be able to purchase butter at cheaper price

Some consumers will be worse off = unable to obtain butter as shortage

Some consumers will be worse off = forced to purchase butter a higher prices in the underground/ parallel market

2019 Nov (PED, Indirect Tax) Paper 1 HL

2019 Nov 

(PED, Indirect Tax, Primary Commodities) 

Paper 1 HL

PED = measures the responsiveness of quantity demanded to a change in price, along a given demand curve.

 

Indirect Tax = is a tax placed on the producer (his produced goods and/or services) which is then (partly) passed on to the consumer in a form of a higher price.

An indirect tax will raise the price of a good causing the supply curve to shift left and the Qd to decrease, there is a loss of Consumer Surplus and producer Surplus and DWL

 

Understand that the more inelastic the demand, the people buying the good will still purchase much of it even when the price increases. This implies that if the government is trying to gain revenue by the imposition of the indirect tax it would do well to tax goods that have an inelastic price elasticity of demand. 

If the government is trying to stop people from consuming a product such as taxes, and the cigarettes demand is very inelastic the indirect tax must be higher than if the good has a very elastic demand to get people to forego consumption.

2019 Nov (Elasticity, PED) Paper 1 HL

2019 Nov (Elasticity, PED) Paper 1 HL

Price Inelastic Demand = Demand is price inelastic when a change in price causes a smaller percentage change in demand. It occurs where there is a price elasticity of demand (PED) of less than one

 

Primary Commodity = Primary commodities are goods arising directly from the use of natural resources, or the factor of production ‘land’ Ex. Food and live animals, beverages and tobacco, excluding manufactured goods; crude materials, inedible, excluding fuels, synthetic fibres, waste and scrap; mineral fuels, lubricants and related materials, excluding petroleum products; animal and vegetable oils, fats and waxes.

Low price elasticity of demand, together with fluctuations in supply over short periods of time, creates serious problems for primary commodity producers, because they result in large fluctuations in primary commodity prices, and these

also affect producers’ incomes.

Reason 1 = Lack of close substitutes

Reason 2  = High degree of necessity

Reason 3 = Low proportion of income spent on primary commodities/ low price

Reason 4 = Primary commodity being more addictive

2017 (EOS) Paper 3 HL

2017 (EOS) Paper 3 HL

(a)  Define the term Increasing Returns to Scale.

 

 

An increase in all inputs leads to a proportionally greater increase in output or, that an increase in all inputs by X% leads to a greater than X% increase in output.

    Increasing Returns are seen when output increases 1800 to 3000 (50% increase in inputs, while output increases by 60%)

(b)  Using the date in Table 1 to support your answer, identify how changes in inputs may result in constant returns to scale & in decreasing returns to scale.

 

Constant Returns are seen when output increases from 3000 to 4000 units (33% increase in inputs and output)

Decreasing Returns to Scale are seen if output increases from 4000 units – increase in inputs – 25%, while output increases by 20%.

Decreasing returns to Scale are seen if output increases from 5000 units to 6000 units as inputs increase by 20%, while output increases by 14.6%.

2013 May (PED) Paper 3 HL

2013 May (PED) Paper 3 HL

(c) (i) Calculate the PED for the product when the price falls from $25 to $20.

Midpoint Formula

(ii) Using the table on page 16 to illustrate your answer, explain why the PED would change along the demand curve.

 

As Price increases along a straight-line demand curve the percentage change in Qd increases while the percentage change in prices decreases. Therefore demand becomes more elastic.

2013 May (PED) Paper 3 HL

2013 May (PED) Paper 3 HL

If demand is price inelastic the resulting decrease in Qd will be proportionally smaller than the increase in price. Therefore the government’s attempt to discourage the consumption of a product will be less effective.

2014 Nov (PED, XED) Paper 3 HL

2014 Nov (PED, XED) Paper 3 HL

(e) (i) Calculate the PED for Good A when the price falls between Jan. 2014 and Feb. 2014.

 

Price is originally at $8 and falls to $6 and the Qd increases from 160 to 220

(ii) Calculate the Cross Price Elasticity of Demand (XED) between Good A and Good B when the price of Good A falls between Jan 2014 & Feb 2014.

 

When the price of Good A falls the demand for Good B also falls, this is a positive (direct) relationship and implies that the two goods are Substitutes.

(iii) Calculate the XED between Good A & Good C when the price of Good A falls.

 

When the price of Good A falls the demand for Good B also increases from 100 to 150, this is a Negative (indirect) relationship and implies that the two goods are Complements.

(f) Using your answers to part (e) explain the relationship between Good A and Good B, and between Good A and Good C.

 

An accurate explanation uses the sign of the XED and explains that if positive the two goods A & B are substitutes as the price of one and the Qd of the other move in similar directions but if negative as in the case of Good A and Good C they are complements as the price of the one and the Qd of the other move in opposite directions.

(g) Good J & Good K are both produced in Zestria. The PED for J, a primary commodity is -0.2 (inelastic). The PED of Good K, a manufacturing good is -2.3 (elastic).

 

Explain 2 reasons why the demand for products such as Good K tends to be relatively price elastic compared to the demand for products such as Good J.

 

Fewer Substitutes for Primary Products  = Demand would be relatively price inelastic. However, manufactured products tend to have elastic demand because there are likely to be more substitutes owing to the greater opportunity for product differentiation.

Greater % Income spent on Manufacturing Goods = tends to represent a considerable part of consumer income. As a result, demand would be relatively price elastic. However, spending on primary commodities is likely to take a smaller proportion of income causing demand to be relatively price inelastic.

 

Primary Commodities are often necessities and hence demand would be price inelastic. Manufacturing goods are more likely to be luxuries and therefore demand would be more price elastic.