H1 Economics Notes and
Exemplar Answers
Price Mechanism and its applications
Explain the increase in price of a good (4 marks)
• Usually explain 1 demand factor + 1 supply factor.
• Illustrate shortage in diagram
• Increase in DD, Fall in SS à shortage at original price (Qd-Qs) à
upward pressure on prices à as price increases, consumers and
producers adjust quantity demanded and supplied until new equilibrium
price of P1 and equilibrium quantity of Q1
When there was poor harvesting season, supply of corn fell from S0 to S1.
The demand of corn also increased due to change in taste and preferences,
so demand increased from D0 to D1.
,At the prevailing price level, there was a shortage (Q0-Qs) which resulted in a
upward pressure on prices. Quantity demanded decreased and quantity
supplied increased. Overall, there was an increase in equilibrium price from
P0 to P1, and a more than proportionate fall in equilibrium quantity from Q0 to
Q1.
Explain fall in total revenue of a good using elasticity concepts (4
marks)
Price elasticity of demand refers to the responsiveness of change in
quantity demanded to changes in price, ceteris paribus.
The demand for tuna is likely to be price elastic, as there could be large
number of substitutes available to tuna, like types of fish. When there was
poor fishing season, supply of tunagoods fell from S0 to S1. At the prevailing
price level, there was a shortage (Q0-Qs) which resulted in a upward pressure
on prices. Quantity demanded decreased and quantity supplied increased.
Overall, there was an increase in equilibrium price from P0 to P1, and a more
than proportionate fall in equilibrium quantity from Q0 to Q1.
Overall, there was a fall in total revenue from (P0aQ0O) to (P1bQ10).
Thus, a price elastic demand could serve to explain fall in total revenue for
tuna.
, Example answer for case study question on whether price elasticity of
demand is relevant in explaining the fall in total revenue of a good
Note: Start off by defining PED. DO NOT FORGET the word CETERIS
PARIBUS when you define PED. Then, I made a thesis and antithesis,
arguing whether PED is relevant (thesis) or irrelevant (anti-thesis). You should
have at least two diagrams.
Consider when PED might not be relevant: What if the fall in global demand is
greater than the fall in supply? Would PES be a more important criterion in
that case?
Finally, in the conclusion, I decide on whether PED is a useful concept or not,
and what factors influence this. I also consider if PES is useful, then what is
the PES of the good likely to be, elastic or inelastic? If PED is useful, is the
demand elastic or inelastic?
Price elasticity of demand refers to the responsiveness of change in
quantity demanded to changes in price, ceteris paribus.
The demand for agriculture goods is likely to be price elastic, as there
could be large number of substitutes available to certain agriculture goods.
When there was poor harvest, supply of agriculture goods fell from S0 to S1.
At the prevailing price level, there was a shortage (Q0-Qs) which resulted in a
upward pressure on prices. Quantity demanded decreased and quantity
supplied increased. Overall, there was an increase in equilibrium price from
P0 to P1, and a more than proportionate fall in equilibrium quantity from Q0 to
Q1.
Exemplar Answers
Price Mechanism and its applications
Explain the increase in price of a good (4 marks)
• Usually explain 1 demand factor + 1 supply factor.
• Illustrate shortage in diagram
• Increase in DD, Fall in SS à shortage at original price (Qd-Qs) à
upward pressure on prices à as price increases, consumers and
producers adjust quantity demanded and supplied until new equilibrium
price of P1 and equilibrium quantity of Q1
When there was poor harvesting season, supply of corn fell from S0 to S1.
The demand of corn also increased due to change in taste and preferences,
so demand increased from D0 to D1.
,At the prevailing price level, there was a shortage (Q0-Qs) which resulted in a
upward pressure on prices. Quantity demanded decreased and quantity
supplied increased. Overall, there was an increase in equilibrium price from
P0 to P1, and a more than proportionate fall in equilibrium quantity from Q0 to
Q1.
Explain fall in total revenue of a good using elasticity concepts (4
marks)
Price elasticity of demand refers to the responsiveness of change in
quantity demanded to changes in price, ceteris paribus.
The demand for tuna is likely to be price elastic, as there could be large
number of substitutes available to tuna, like types of fish. When there was
poor fishing season, supply of tunagoods fell from S0 to S1. At the prevailing
price level, there was a shortage (Q0-Qs) which resulted in a upward pressure
on prices. Quantity demanded decreased and quantity supplied increased.
Overall, there was an increase in equilibrium price from P0 to P1, and a more
than proportionate fall in equilibrium quantity from Q0 to Q1.
Overall, there was a fall in total revenue from (P0aQ0O) to (P1bQ10).
Thus, a price elastic demand could serve to explain fall in total revenue for
tuna.
, Example answer for case study question on whether price elasticity of
demand is relevant in explaining the fall in total revenue of a good
Note: Start off by defining PED. DO NOT FORGET the word CETERIS
PARIBUS when you define PED. Then, I made a thesis and antithesis,
arguing whether PED is relevant (thesis) or irrelevant (anti-thesis). You should
have at least two diagrams.
Consider when PED might not be relevant: What if the fall in global demand is
greater than the fall in supply? Would PES be a more important criterion in
that case?
Finally, in the conclusion, I decide on whether PED is a useful concept or not,
and what factors influence this. I also consider if PES is useful, then what is
the PES of the good likely to be, elastic or inelastic? If PED is useful, is the
demand elastic or inelastic?
Price elasticity of demand refers to the responsiveness of change in
quantity demanded to changes in price, ceteris paribus.
The demand for agriculture goods is likely to be price elastic, as there
could be large number of substitutes available to certain agriculture goods.
When there was poor harvest, supply of agriculture goods fell from S0 to S1.
At the prevailing price level, there was a shortage (Q0-Qs) which resulted in a
upward pressure on prices. Quantity demanded decreased and quantity
supplied increased. Overall, there was an increase in equilibrium price from
P0 to P1, and a more than proportionate fall in equilibrium quantity from Q0 to
Q1.
