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ELASTICITY CONCEPTS OF DEMAND AND SUPPLY

Nov 2003
(a) Explain the concepts of PED, YED, indicating why elasticities are different for different
products. [12]
(b) Discuss how the supplier of a product that is currently fashionable might use both of these
concepts in making price and output decisions. [13]

Nov 2004
The terrorist attacks on New York on 11 Sep 2001 caused a worldwide recession and an
increased fear of flying, both of which severely affected the demand for travel by air. This led to
the closure of some of the major airlines in the world.

a) With the aid of a diagram, explain how the re cession and the closure of some of the major
airlines in the world affected the market for air travel. [10]
b) Assess the relevance of PED, YED, XED and PES in explaining the effects of these events
on the airline industry. [15]


Nov 2005
Discuss how the Spore government might use the concepts of PED and YED to determine the
impact of a fall in exchange rates and a rise in worldwide incomes on the current account of the
Spore BOP. [25]

Nov 2007
In 2005 the rate of GST in Spore rose from 3% to 5%. Incomes rose by approximately 4.5% in
2005.

(a) Explain the likely effect of this change in GST on expenditure by consumers on different
types of goods. [10]

(b) Discuss whether the combined effect on the rise in incomes and the rise in GST is likely to
cause the quantities of different types of goods sold to rise or fall. [15]



Nov 2008
Developments in modern technology, such as faster broadband internet connections, portable
DVD players, iPods and MP3 players, have had major impacts on the demand and supply of
recorded music and associated products.

Assess how the markets involved might be affected by these developments. [25]

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EXAMINERS REPORT


NOV 2003
Part (a) is well answered although many listed all possible PED values, often abstractly. The
best scripts explained the PED values with reference to avail of substitutes, time period, etc with
apt illustrations of different types of good.
Many ignored part (b) context, and gave theoretical responses. Most limited their response to
the theoretical effects of price changes on TR. The best scripts gave good analysis and clear
evaluations, eg the good has inelastic demand in SR, but becomes more price-elastic in LR as
more competitors enter the market and as it becomes less fashionable. Similarly, PED would be
large and +ve initially but might become smaller in size over time as fashions changed.



NOV 2004
Answers to this question were in the main disappointing. Although there were several high
quality answers to part (a), the number of good answers to part (b) were few and far between. In
general part (a) was handled extremely well with clear and crisp analysis. Candidates in the mid
range of marks tended to give the demand shift only, or failed to give diagrams to show both
supply and demand curve shifts, or were content to draw the diagrams without explaining them.

In contrast, part (b) proved a very difficult hurdle to clear. Most candidates were able to define
the concepts of elasticity of demand. However, price elasticity of supply was less well
understood, and very few used diagrams to show the relevance of the concepts on an airlines
price, output and revenue. What was more worrying is that these concepts were clearly not
understood. Many incorrectly thought that price elasticity of demand referred to a shift in the
demand curve and similarly that price elasticity of supply referred to a shift in the supply curve
rather than to movements along the respective curves.

That said, there was some good application from the best answers with candidates correctly
recognising that business travel will have an inelastic demand whilst holiday travel will have a
more elastic demand. Others arguments referred to the limited use of cross-elasticity, especially
for long-haul travel.

















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NOV 2005
The answers to this question were, in the main, technically sound with most candidates giving
correct formulae and a clear understanding of each demand elasticity. Unfortunately weaker
candidates wasted considerable amounts of time by spending more than half of their answers
giving a purely theoretic explanation of a vast number of different values that each elasticity
might take without any application to the question (i.e. without setting their answer within the
context of the balance of payments).

There were though some really outstanding answers to this question. These candidates gave
brief but clear explanations of both of the concepts. They further recognised that a fall in
Singapores rate of exchange against the rest of the world would reduce export prices and
increase import prices, used the Marshall-Lerner condition to discuss the likely impacts in the
short run, and gave long run differences by way of evaluation.

This was also typically set within the context of Singapores pattern of trade. A similar approach
was used to discuss the use of income elasticity; evaluation was based upon a discussion of
whether Singapores exports were mainly inferior, normal or luxury goods.

Mid-range responses tended to concentrate on either price elasticity or, very occasionally,
income elasticity alone, or more often than not the answers were not set within the Singapore
context. There were a range of misconceptions or errors repeated in sufficient numbers to
mention them here.

Several candidates argued that a fall in exchange rates would lead to rise in export prices and a
fall in import prices. A very small proportion of these candidates explained that this was from the
perspective of a foreigner rather than someone living in Singapore and clearly in this case it is
an acceptable response.

Many candidates incorrectly stated that if the income elasticity is inelastic then a rise in income
would lead to a fall in revenue.

Some candidates did not appear to read the question or appreciate that they were required to
refer only to the current account of the balance of payments and thus also referred to the capital
account.



NOV 2007
This generally appeared to be a question of last resort for many candidates. As a result few
performed well and the marks for the question as a whole tended, on average, to be lower than
that awarded to other questions. Overall there were weaknesses in the diagrams presented. In
many cases no diagrams were offered at all and many were unable to shift the supply and
demand curves in an appropriate manner.

(a) Whilst most candidates were able to recognise the importance of price elasticity on the
quantity demanded very few were able to develop this to consider the correct effect on
expenditure. Those that did were rewarded with good Level 3 marks. A small number realised
that a change in GST would not only shift the supply curve left but also alter the slope of the
curve.


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Several candidates who did explain the effect on expenditure got it wrong. A common error
therefore was to state correctly that, for an inelastic demand curve, an increase in price would
cause quantity demanded to fall by a smaller percentage. These candidates then incorrectly
stated that expenditure would also fall by a small amount. Very few candidates correctly stated
that expenditure would rise in this case.

Further misconceptions and errors arose from the attempt by many candidates to examine the
impact on consumers who have different income levels. This approach often led to confused
and poorly focused responses. It appeared from these answers that only the rich have demand
curves that are price-elastic and only the poor buy inferior goods. This led to confused and often
incorrect responses on the impact of this tax change on expenditure on different categories of
goods.

As a result only a small minority achieved Level 3 marks, which is disappointing as the question
is a good test of the application of some basic theory to the real world.


NOV 2008
There were many flimsy and superficial responses to this question; they also frequently lacked a
developed and thoughtful evaluative comment. It was often the case that the two markets
referred to in the stem were treated as one. In other cases recorded music was seen simply as
music that was recorded onto CDs.

This said, there were some very good responses to this question, with candidates clearly
identifying that the change in technology had had significant effects on a number of markets.
These answers used the concepts of substitutes and complements together with correct use of
cross-elasticities of demand to explain the potential impacts on the demand curves. Technology
changes were also used to explain shifts in the supply curve.

As might be expected, candidates in the mid-range did not make sufficient use of analysis such
as diagrams. Most attempts at using economic theory were based on explaining how demand
and supply functioned at too basic a level for an A Level response. Diagrams (when they were
used at all) were often poorly explained, and it was not clear to which market they referred, i.e.
whether it was the market for recorded music or for the hardware on which it was played.
Candidates should be encouraged to label the horizontal axis not simply with a single word
quantity but to refer to the product e.g. quantity of MP3 players, or quantity of CDs.

Many of the weaker candidates gave answers containing little if any economics and described
the various attributes on the technologies and products.