ECONOMICS Grade-10B

UNIT 2 : The allocation of resources: how the market works; market

failure
describe the allocation of resources in market and mixed economic systems; describe the Advantages of Market Economic System
terms primary, secondary and service (tertiary) sector in an economy
• demonstrate the principle of equilibrium price and analyse simple market situations  There is more freedom of choice for producers and consumers, this can help
with changes in demand and supply to increase quality of life with wide variety of goods and services
• describe the causes of changes in demand and supply conditions and analyse such
 Competition between firms can result in more efficient goods and services
changes to show effects in the market
• define price elasticity of demand and supply and perform simple calculations and in good quality.
• demonstrate the usefulness of price elasticity in particular situations such as revenue  Profit motive encourages firms to find better methods of production so as
changes, consumer expenditure
to minimize their average cost of production
• evaluate the merits of the market system
• describe the concept of market failure and explain the reasons for its occurrence  To increase demand, they find cheap methods of production, to reduce the
• define private and social costs1 and benefits and discuss conflicts of interest in relation prices.
to these costs and benefits in the short-term and long-term through studies of the
 producers are producing the goods and services which are demanded by the
following issues:
– conserving resources versus using resources consumers, achieving allocative efficiency.
– public expenditure versus private expenditure.
Disadvantages of Market Economic System
RESOURCE ALLOCATION:
 The existence of private property and profit motive make rich people
Distribution of the available scarce resources among the three sectors of richer, increasing inequality gap
production is known as resource allocation.  some resource may not be employed, as they only use those resources
that are profitable, this can result unemployment
 MARKET ECONOMY: in market economic system, resources are
allocated by the price mechanism. That is the market forces of demand  they fail to provide public goods which have the feature of non-
and supply. Resources are used to produce those product that has excludability and non-rivalry, since it is not profitable for them
higher demand, in order to increase the profit.  they ignore external cost and benefit, hence Welfare of the people
might be ignored.
 MIXED ECONOMY: mixed economy has both private and public sector.  freedom of choice may like drugs and cigarettes
In private sector: , resources are allocated by the price mechanism. That
 the economy might be unstable, as the resources are allocated by price
is the market forces of demand and supply. Resources are used to
produce those product that has higher demand, in order to increase the mechanism.
profit.
SECTOR OF PRODUCTION
In public sector: resources are allocated by the government according to
the welfare motive. The government decides what to produce, how to
produce and for whom to produce, the resources are used according to
the decision the government makes.

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I) PRIMARY SECTOR: it is the sector where the discovery of resources are
taken place. In this sector, natural resources are converted into primary
products through extraction or by growing them. The products of this
sector are raw materials which can be used to produce other goods and
services. Eg: fishing, farming, forestry, mining industries
II) SECONDARY SECTOR: in this sector, the output of primary sector are
converted into finished and semi-finished products. This sector creates
finished or usable product in manufacturing and construction industries.
Eg: carpentry, chemical industries, steel industry
III) TERTIARY SECTOR: this is a service sector where the provision of services
to government, producers and consumers taken place. Eg: education and
health, communication, banking
Under-developed countries usually focus on primary sector more than
tertiary sector. In under-developed countries, the percentage of labours
working in primary sector would be high than in secondary or tertiary sector
Developed countries usually focus in tertiary sector more than the primary
and secondary sector. The percentage of labour force working in tertiary
sector would be highest in developed countries.
DEMAND: it is the willingness and ability to buy a product at a given price in a
time period.
SUPPLY: it is willingness and ability to sell a product at a given price in a time
period.
 Contraction in demand: When price is increased, quantity demanded will
decrease
 Extension in demand: when the price decreased, quantity demand will
increase.
 Extension in supply: when the price is increased, quantity supply will
increase.
 Contraction in supply: when the price is increased, quantity supplied will
fall.
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FACTORS AFFECTING DEMAND:
1. Income
 For normal goods: An increase in income can increase the demand for normal
goods. Eg: clothes, slippers, sun glasses, expensive perfume
 For Inferior goods: an increase in income can reduce the demand for inferior
goods. Eg: rice, flour, cheap perfume
2. Price of related goods
a) Substitute goods: those goods which can be used instead of other goods. Eg:
butter and margarine, tea and coffee, faster pen and cello pen
 An increase in the price of a substitute good leads to an increase in the demand
for the good. (eg: an increase in the price of faster pen, will increase the demand
for the cello pen).
b) Complementary goods: those goods which can be used along with another
good. Eg: camera and Film, CD and CD player
 An increase in the price of a complementary good leads to a decrease in the
demand of the good. (eg: an increase in the price of camera, decreases the
demand for the film)
3. Weather conditions
Some goods are demanded seasonally. Eg: ice-cream, umbrella, rain coats
 Demand for umbrellas and rain coats increases during rainy seasons.
4. Fashion and taste
Some goods like clothes, shoes, slippers, or shoals, changes in fashion can bring
about a large and frequent changes in the demand.
Eg: when jeans are in fashion, the demand for jeans will increase.
 The demand will be high for those goods which are highly in fashion at the time
period.
5. Advertising
 A successful advertising will increase the demand for the advertised product, and
the competing product may have a decrease in demand.
6. Population
 An increase in population will increase the demand for the goods and services.
7. Income tax
An increase in income tax will reduce the income, and hence the demand for the
product would be reduced.
 ECONOMICS Grade-10B

8. Expected Future price  Bad weather affects the harvest of agricultural goods, hence the supply will
If the prices are expected to increase, it makes sense to buy more of that good decrease
today and less in the future. 7. Advertising
 The higher the expected future price of a good, the larger is the today’s demand Advertising can increase cost of production, which can reduce the supply
for the good. 8. Indirect Taxes
It is a compulsory payment to the government. Direct taxes are taken from the
people’s income, hence it reduces the demand.
FACTORS AFFECTING SUPPLY  Indirect taxes are added to the cost of production (part of which are added to the
1. Prices of factors of production price), indirect taxes increase the cost of production reducing the supply.
 An increase in the prices of factors of production (land, labour, capital… ) would
increase the cost of production. Increase in costs of production means more has
to be spend to produce that good, hence its production will decrease reducing 9. Subsidies
the supply. These are gifts or grants given to the producer by the government. Subsidies
2. Price of related goods reduces the cost of production, and increases the supply
a) Substitute goods: those goods which can be used instead of other goods. Eg:
butter and margarine, tea and coffee, faster pen and cello pen
 When the price of a substitute good increases, the supply of its related good
decreases as it is more profitable to sell the product with high price. (eg: when CHANGES IN DEMAND / SUPPLY AND PRICE CHANGE
price of race cars increases, producers will produce race cars and the supply of
 An increase in demand will increase the price
normal cars decreases)
 A fall in supply will increase the price
b) Complementary goods: those goods in joint supply. Eg: crude oil and natural gas
 An increase in demand and fall in supply will increase the price
 When the price of a good increases, the supply of its complementary good in
production also increases as it is automatically produced (eg: if price of crude oil
 A fall in demand will reduce the price
increases, crude oil’s supply increases and automatically the supply of natural gas
also increases)  An increase in supply will reduce the price
 A fall in demand and an increase in supply will reduce the price
3. Expected future price
 If Percentage decrease in demand is greater than percentage decrease in supply,
 If prices are expected to rise in the future, the current supply will decrease (as it
then price will wall
is more profitable to sell it when the price is high)
4. Number of suppliers (producers) price. S1
 An increase in the number of suppliers (producers) will increase the supply. S
(more producers means they will all produce different products and total supply
in the market increases)
5. Technology
 With new and better technology, producers will be able to producer at lower
cost. When the cost of production decreases, supply of that product will increase.
6. Weather (Agricultural goods) D
D1
3 0
quantity
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% change = change / old * 100

 If percentage increase in demand is greater than percentage increase in supply,
then price will increase FACTORS AFFECTING ELASTICITY OF DEMAND
price. S 1. The Availability of substitutes
S1 If a good has more substitutes, the good tends to be more elastic
If a good has no substitutes, then the good has inelastic demand
2. Habit forming goods
Those goods for which people get addicted to and seems like they can’t live
without it. Eg: tobacco
 These goods have inelastic demand.
D1
D 3. Luxury or necessity
0
quantity Necessities have inelastic demand because we have to buy them even if the
price is high
PRICE ELASTICITY OF DEMAND Luxuries have elastic demand, because the amount of which people buy
 It is the responsiveness (degree of response) of quantity demanded due to a depends on prices.
change in price
4. Percentage of income spent on the good
PED = % change in QD / % change in P
For cheap goods: percentage of income spent is less, so those goods have
 A product has elastic demand when PED > 1, that is when % change in
QD > % change in price inelastic demand
 A product has inelastic demand when PED < 1, that is when % change in For expensive goods: percentage of income spent is high, hence has elastic
QD < % change in price demand.
5. Time spent looking for the good
More time spent in looking for the good, more elastic the demand becomes.
6. Ability to postpone the purchase:
If purchase can be delayed, demand tends to be elastic.FACTORS AFFECTING
ELASTICITY OF SUPPLY
PRICE ELASTICITY OF SUPPLY
1. Availability of resources
 It is the responsiveness (degree of response) of quantity supplied due to a
change in price  If an industry is working below capacity, has un-used resources, then the
PED = % change in QS / % change in P supply will be elastic, because production can be increased with the help of
 A product has elastic demand when PES > 1, that is when % change in those resources.
QS > % change in price  Supply will be inelastic if the industry is fully employed as it has no un-used
 A product has inelastic demand when PES < 1, that is when % change in resources to increase production
QS < % change in price
2. Availability of skilled labour
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 supply would be inelastic if the skilled labours are not available, since
these labours can easily increase production through technical methods
3. Excess stock
 If an industry holds large stock, then supply is elastic, because then
demand can be met by this stock.
 If the stock has been used up, then supply would be inelastic, as it may be
difficult to increase the output.
4. Type of the product
 Agricultural goods are inelastic in supply in the short term, because its
supply cannot be increased quickly.
 Some plantations like natural rubber, coffee, cocoa have inelastic supply
even in long-run, because it takes years for new to reach maturity.
 Manufactured products have elastic supply, as less time is required to
produce them, if unemployed resources are available.
5. Time period
 In the Short-run, supply is inelastic, because it would be difficult to increase
labour and capital to increase production.
 In the long-run, supply would be elastic, as factors of production can be
increased in the long run.
USEFULNESS OF PED
USEFULLNESS TO PRODUCER
It will give guidance to the firm if it is thinking about changing the price to
achieve their maximum profit.
 if PED is elastic, a price reduction will increase revenue, as demand will rise
by more than price.
 if PED is inelastic, a price rise will increase revenue as demand will fall by
less than price.
 If the producer is a monopoly, then the product would have inelastic
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demand and charge a very high price since the product doesn’t have close
substitutes, but it depends on the type of the product as well.
Limitations:
 may be difficult for the manufacturer to calculate accurately, whether the
product would have elastic or inelastic demand.
 Demand elasticity may be constantly changing
HELPFUL TO THE GOVERNMENT
PED helps the government in formulating taxation policies.
 In order to increase revenue, Government can impose a high tax on those
goods which have inelastic demand, since the demand will fall by less than
price.
 In order to increase revenue, Government can charge a lower tax on elastic
demand goods as demand will rise by more than price.
USEFULLNESS IN INTERNATIONAL TRADE
International trade means buying (importing) and selling (exporting) of goods
between countries.
 If exporting inelastic demand goods, it should set a high price to earn more
foreign currency. If exporting elastic demand goods, it should set a low
price to earn more foreign currency.
Also the country can gain from international trade if it exports inelastic
demand goods, and imports elastic demand goods. Then the country will
earn more than they spend.
MARKET FAILURE
 Market failure When the market system fails to achieve efficient
allocation of resources
REASONS FOR MARKET FAILURE
1. Market system do not consider external cost and ignore cost on third party
 ECONOMICS
in producing a good or service. Eg: private producers or consumers do not
consider the cancer caused from passive smoking.
2. Private producers under provide the merit goods because people
underestimate the benefit of the good and under consume it. e.g. education
and health is under provided by private sector.
3. Market system over provide the demerit goods due to their profit motive
and people underestimate the costs of good and so over consume them. Eg:
private sector over provide cigarettes
4. Market system do not produce public goods because they cant charge a
price as the goods are non-rival and non-excludable. It is a market failure.
e.g. police, national defence, street light etc.
5. A private monopoly can abuse market power and charge higher prices and
reduce production. Market fails to achieve welfare
6. There is inequality of income and wealth in market system because there is
unfair distribution of resources and private property.
7. In market system, geographical / occupational immobility can cause
unemployment and lead to inefficiency of market.
8. Agriculture is often subject to market failure due to volatile prices and
externalities.
9. In market system, there is lack of information to make an informed choice
to the society, which can lead to failure of markets
GOVERNMENT ACTIONS TO CORRECT MARKET FAILURE
1. Government can put a pollution tax, green tax or tax on petrol and
pollution permits to reduce external cost created by the firms.
2. Government can make some economic activities illegal and put a high
fine for disobeying the laws. Eg: ban smoking in public areas and places
3. Government can give subsidy to private producer to provide merit
goods at a cheap prices. Or government themselves can provide merit
goods at a cheap rates or freely.
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Grade-10B
4. Government can also give subsidy in order to encourage firms to use
the limited resources to activities that create external benefit.
5. Government can put a high tax on demerit goods, so that their price will
be increased and its consumption can be reduced. Eg: tax of cigarettes
6. Government has to provide public goods for the development of the
country and private sector.
7. Government has to control private monopoly through regulations to
increase competition and through price controls.
8. Government can use progressive tax system by imposing high income
tax on high income earners, and transferring tax revenue to low income
earners as state benefits.
PRIVATE COST
 It is the cost to the producers and consumers of an economic activity.
Eg: sickness due to smoking, money spent to buy cigarettes, tax on
cigarettes (producer cost)
 Private cost = social cost = external cost
PRIVATE BENEFIT
 It is the benefit to the producers and consumers of an economic
activity. Eg: profit from selling cigarette (producer benefit), satisfaction
from smoking (consumer benefit)
 Private benefit = social benefit – external benefit
EXTERNAL COST
 It is the cost to the third party due to economic activity (production or
consumption of goods and services). Eg: sickness due to passive
smoking, pollution , global warming, erosions
 External cost = social cost – private cost
EXTERNAL BENEFIT
 It is the benefit to the third party due to an economic activity
(production or consumption of goods and services) eg: benefit to other
 ECONOMICS
(non-students) from to teaching.
 External benefit = social benefit – private benefit
SOCIAL COST
 It is the cost to the society due to an economic activity (production or
consumption of goods and services).
 Social cost = private cost + external cost
SOCIAL BENEFIT
 It is the benefit to the society due to economic activity (production or
consumption of goods and services).
 Social benefit = private benefit + external benefit
CONSIDER SOCIAL COST AND BENEFIT BEFORE ECONOMIC ACTIVITY
 The production/consumption has to take place after considering the
social cost and social benefits of that activity
- The best output is the output that will cause maximum benefit to the
society. It will occur when the social benefit is equal to the social cost of
that unit.
- If social cost > social benefit, it means too many resources are used to the
production of that output. In this case, society will benefit by reducing the
output.
- If the social benefit > social cost of producing more output, then the
resources have to be used to produce more.
EXPLOITATION (using) AND CONSERVATION (Saving) OF NATURAL RESOURCES
EXPLOITATION:
CONSERVATION:
 Using the scarce resources can increase employment, can increase income
of the people. It can help to reduce inequality and poverty.
 It can increase the output and income of the country, leading to an
economic growth and improving standard of living of the country.
 Increased income and output due to exploitation can generate more tax
revenue to the government, which can be used for further development
and also budget deficit can be reduced.
 local firms are benefited as they can also export these resources overseas
so their revenue increase.
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Grade-10B
 Also the exports of goods from using resources can reduces a deficit or
result in a favourable position (surplus) in the nations balance of payment.
HOWEVER:
 More use of non-renewable resources will make them exhausted eg:
deforestation leads to fall in rainfall, over fishing leads to decrease in
fish stock, over farming lead to decrease in fertility of soil which
decreases the fertility. This has to be regulated, so alternative
methods must be developed.
 Using resources to increase profit of firms can create external cost to
the third parties like industrial pollition, and the loss of natural beauty
which diminishes the real development
 Increased income and standard of living due to exploitation can
increase aggregate demand and cause demand-pull inflation.
 The inflation and pollution is leading to an increasing opportunity
cost, which can have a worse effect on future standard of living and
development
 Also, the money spent on producing goods and services using rich
natural resource can be utilized for some other productive purpose.
 Over exploitation (over use) of resources can severely affect the
quality of resources, reducing the productive capacity of the country.
 It is important to conserve the resources for future generation and for
future development of the country, since the resources are scarce.
 Efficient use of resources by avoiding / minimizing waste gases can
benefit the country in long term, as it can maintain high employment
level for a long time. This can lead to increase income of people and
country increasing standard of living for a long time period.
 If we cut down timber in the rain forests, we destroy forest habits that
provide for the people, plants and animals today and in the future.
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 Conservation of resources can reduce external cost to the society, like
pollution, global warming.
 Conservation of resources might help to maintain stable price level.
 Conservation of resources would allow future generation to continue
the benefit of the resources, which leads to a more balanced economy
HOWEVER
 If resources are conserved, the current economy might have
problems of unemployment and reduction in income, leading to
poverty and inequality
 Since the resources are not used, the output of the country might
not be increasing hindering the economic growth of the country
 Government tax revenue might not be increased much, leading to
budget deficit problems.
Public Expenditure:
1. Knowing the state is paying, the government business or a private firm hired by
the government may not keep it cost down.
2. A state owned enterprise may lack the expertise to complete the project on
time.
3. Delays in making the decision by the government to go ahead with the project.
4. Expenditure of government on certain projects might be a waste, as the
project that they spent on may not be what the consumers really want to have.
However,
-The government consider all the factors involved before making a decision of
starting a project.
-The govt. should produce the public and merit goods that the private sector is not
able to produce at the right quantity with the cheap price.
-Private sector may not spend the money in a way that is fair to all and lead to an
increase in inequality.
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Private Expenditure:
1. The profit motive can increase the quality of production
2. Competition among producers means that it will produce good quality
products (airport, health or education) at lower cost and in less time.
3. They will be able to increase economies of scale and produce goods at lower
average cost, this can help them to reduce the prices
4. Private firms know what the consumers demand and they produce that. But
the government can only guess what the consumers want and that spending
might be a waste.
However:
- Private sector may be a monopoly and so may not be forced to keep the costs
down and may charge a high price
- Also, private firm consider only private cost and benefit, and not consider the
costs and benefits to the society
Discuss whether a decision to cut down trees for wood is an appropriate use
of a scarce resource. [8]
it is an appropriate use of a scarce resource:
 cutting down trees for wood will create employment (1) which will
increase incomes in the economy (1).
 cutting down trees for wood can be used to build houses, bridges and
furniture (1), improving the country’s infrastructure (1), satisfying
people’s wants/demand (1).
 the wood can be sold (1), creating profit (1), leading to an increase in GDP
(1).
 replacement trees can be planted (1) enabling trees to be harvested in the
future (1).
 wood could be exported (1), improve current account/balance of
payments (1).
it is an inappropriate use of a scarce resource:
 it could destroy the livelihoods of people who live and work in the forests
(1), leading to a rise in unemployment (1).
 examples of environmental damage e.g. such as loss of wildlife habitats
and cause global warming (1 + 1) causing negative externalities (1).
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 there is a need to take into account the interests of future generations (1),
and so there is an issue of sustainability (candidates do not need to use
that particular term) (1).
 decision may be informed by a C.B.A. (1) recommendation would depend
on the relationship of social benefits and social costs (1).
(c) Discuss whether a resource, such as a rainforest, should be conserved
rather than used. [8]
for conservation of a resource:
 conservation involves taking a long-term rather than a short-term view (1)
enabling future generations to benefit from the rainforest (1)
 if a rainforest is cut down, forest habitats that provide for people, plants
and animals today and in the future are destroyed (1) may reduce tourism
(1)
 cutting down forests could cause external costs (1) e.g. noise pollution (1)
 demand for wood may be higher in the future (1) resulting in a better
return (1)
for use of a resource:
 this will increase incomes/GDP now (1) the standard of living in material
terms will improve in the area (1)
 jobs will be created (1) lowering unemployment (1)
 exports can increase (1) improving the current account position (1)
 revenue earned may be reinvested by firms in the local area (1) creating
employment (1)
 tax revenue will increase (1) this could be used to e.g. subsidise new
industries (1)
 demand for timber may decrease in the future (1) so more revenue may
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Grade-10B
be gained now (1)
 there is an opportunity cost involved in keeping the rainforests (1) e.g. the
land could be used for farming (1)
Discuss how knowledge of the price of elasticity of demand for magazines may
be used by a firm which produces and sells magazines [8]
The price- elasticity of demand (P.E.D) is the percentage change or
responsiveness in quality demanded to percentage change in price.
The knowledge of price elasticity of demand is very vital for a firm which
produces and sell magazines as the revenue earned from the business is related
to price elasticity of demand.
According to P.E.D:
 if the product (Magazine) is having a high price elasticity of demand, more
elastic demand, the firm must decrease its selling price in order to obtain
more revenue.
o This is because there is a significant change in demand even due to a
small change in price. So as firms like to know how much of goods
sold varies when price changes and revenue increases or decreases.
 If the magazines have a low price elasticity of demand / in elastic demand.
The firm must increase its selling price in order to get benefit from high
sales and revenue.
o This is because in inelastic demand, the percentage change in
quantity demanded is less than percentage change in price as
customer will remain to purchase magazines at an even higher cost.
 For instance, if a magazine has a very strong popularity among consumers
and have many loyal customers so even the price increases, they will
continue to buy the magazine.
However,
 usually magazines have a price elastic demand as there are lot of
substitutes available as there are many magazine firms and a wide range of
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magazines are available in the market .
 so according to price elasticity of demand, the magazine firm has to fix the
best price in order to get benefit from high turnover and profit.
 Hence firms obtain more revenue by decreasing prices when demand for
magazine is price- elastic and increasing prices when demand for magazine
is price-inelastic.
Discuss whether it is better for the public sector to build houses rather than
the private sector. [8]
Using public sector (government) or private sector (private firms, individuals to
build houses has both positive and negative prospects.
 Initially, public sector is preferred for this project as industries such as
providing suitable infrastructure for locals through houses is essential and a
strategic necessity for the nation’s wellbeing and security. So public
interest should be preferred before profit ownership.
 Control of major industry such as housing gives government a powerful
instrument to influence the performance of the economy and to regulate
economic fluctuations and help to manage the economy.
 Also allowing private firms to build houses may not benefit any of the firms
if the market is small. In this case, nationalized firm can operate to achieve
economies. So to reduce inequality of societies public sector is perfect to
build the houses.
However,
 by doing this it does not encourage efficiency as they have no fear of
bankruptcy as government is there to cover any loss they may incur.
 Also it is difficult to measure efficiency of a nationalized firm as huge profit
earned, it can be argued that it has monopoly power.
 If a huge loss incurred welfare motive can be used as an excuse so that it is
not a clear indication of its performance.
 Also, the pressure and influence of government officials who may misuse
their power which affect performance of public owned enterprises lead to
increased corruption and bureaucratic influences.
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 Also, allowing private sector to build the houses may also be beneficial as it
increase variety when presence of many competitive firms produce
different types of houses.
 Besides, presence of many private firms increase competition and improves
the quality of the houses as well as reduce the prices. It also encourages
innovations, having a good effect on economy.
 In contrast, the competitiveness between firms may drive less efficient
firms out of the market and create a private monopoly which may abuse its
power by charging higher prices.
 Additionally it fails to consider increased social costs such as pollution etc.
as private firms work to maximize their profits.
 Also, the competition between firms both price and non-price lead to
wastage of resources which can be utilized for some other productive
purposes.
Discuss whether new airports should be built and operated by governments or
the private sector. [8]
Up to 5 marks for why governments should:
 more likely to take into account social costs and benefits/welfare (1) will
not base decisions just on private costs and benefits (1) will consider
external costs and benefits (1) e.g. lowering pollution (1)
 a government may set price relatively low (1) in order to allow more
people to use it (1) to lower costs for domestic firms (1) to increase
international competitiveness (1)
 a government may have the finance available (1) tax revenue (1)
Up to 5 marks for why the private sector should:
 may be more efficient (1) keep costs low (1) quality high (1) due to the
desire to make a profit (1)
 may have experience of building and operating an airport (1) increase
efficiency (1)
 a government spending money on an airport involves an opportunity cost
 ECONOMICS Grade-10B

(1) if the private sector builds and operates an airport, the government can
spend money on other areas (1)

(c) Analyse why demand for a product may become more price elastic. [6]
• there may be closer substitutes (1) making people more willing to switch
between products (1) • the price may rise (1) as products more expensive,
people become more sensitive to price changes (1) • the product may become
less of a necessity/more of a luxury (1) this would mean a change in price would
have more impact on demand (1) • the product may be taking up a larger
proportion of people’s income (1) this would mean that a change in the price
would be more noticeable (1) • the product has become less addictive (1) this
would mean that people will become more willing to alter their demand (1) • it
may become easier to postpone buying the product (1) this would mean that a
rise in the price of the product would cause a greater percentage fall in demand
(1) • a longer time period (1) gives people more time to find substitutes (1)

(b) Explain two reasons why the supply of a product may be price inelastic. [4]
• long production period (1) this will make it difficult to adjust supply quickly (1)
• inability to store the product (1) this means goods cannot be taken out of
storage to meet higher demand (1) • time period under consideration (1) supply
is more inelastic in the short run (1) • if there is a shortage of the raw material
(1) it will be difficult to supply more in response to a rise in demand/price (1)

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