ZIMSEC A Level · Economics · Form 5
Demand and supply
- Demand falls as price rises (law of demand). Shifts are caused by income, prices of related goods (substitutes, complements), tastes, population and expectations.
- Supply rises with price. Shifts are caused by costs of production, technology, weather (important for agriculture), taxes and subsidies.
- Equilibrium is where demand equals supply; excess demand pushes price up and excess supply pushes it down.
Elasticities
- Price elasticity of demand (PED) = %ΔQd ÷ %ΔP. Elastic if |PED| > 1; inelastic if < 1.
- Determinants: availability of substitutes, proportion of income, necessity vs luxury, time period.
- Revenue: if demand is elastic, a price cut raises total revenue; if inelastic, a price rise raises revenue.
- Income elasticity of demand (YED) = %ΔQd ÷ %ΔY: positive for normal goods (luxuries > 1), negative for inferior goods.
- Cross elasticity (XED) = %ΔQd of A ÷ %ΔP of B: positive for substitutes, negative for complements.
- Price elasticity of supply (PES) = %ΔQs ÷ %ΔP, depending on time, spare capacity and stocks.
Worked example: When the price of bread rises from US$1.00 to US$1.20, quantity demanded falls from 500 to 450 loaves. Find PED and comment.
%ΔQ = −10%; %ΔP = +20%; PED = −0.5 → inelastic, so revenue rises (500 → 540)
Consumer and producer surplus
Consumer surplus is the difference between what consumers are willing to pay and what they pay; producer surplus is the difference between price received and the minimum acceptable price.
Exam tip: Distinguish a movement along a curve (caused by the good's own price) from a shift of the curve (other factors).
Check yourself
- A 10% rise in income raises demand for a good by 25%. Find YED and classify the good.
- What sign does cross elasticity have for complements?
- Why is demand for fuel price inelastic in the short run?
Show answers
- YED = 2.5 – a normal, luxury good.
- Negative.
- Few substitutes and it is a necessity for transport and production.
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