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Question 19M.3.HL.TZ0.g

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Date May 2019 Marks available [Maximum mark: 4] Reference code 19M.3.HL.TZ0.g
Level HL Paper 3 Time zone TZ0
Command term Explain Question number g Adapted from N/A
g.
[Maximum mark: 4]
19M.3.HL.TZ0.g

Note that widgets are an imaginary product.

In Country X, the supply and demand for widgets are given by the functions

Qs = − 45 + 4.5P
Qd = 180 − 3P

where P is the price per widget in dollars ($), Qs is the quantity of widgets supplied (thousands per year) and Qd is the quantity of widgets demanded (thousands per year).

The supply (S) and demand (D) functions are represented in Figure 1.

An increase in costs of production has resulted in a new supply function:

Qs1 = − 60 + 3P

The time taken to produce goods is an important determinant of the price elasticity of supply.

Apart from time, explain two factors which influence the price elasticity of supply.

[4]

Markscheme

Factors may include:

  • whether the firm has excess (or unused, or spare) capacity available: if it does, then increasing output will be easier so supply will be more price elastic
  • possibility of storage: the greater the ability to store stocks, the more price elastic supply will be as firms can draw from stocks to increase the quantity supplied
  • mobility of factors of production: the easier it is for a producer to switch resources from one use to another, the easier it will be to increase the quantity supplied in response to an increase in the price of the product, so supply will be more elastic (the ease with which technology can be implemented/applied could be an example
    of this)
  • the rate at which costs rise as output increases – the faster/higher the rate, the lower the PES (NB “costs of production” should not be rewarded)
  • the nature of the product eg for agricultural products, the time lag between planting and harvest is relatively long, so supply would be relatively price inelastic in the short term.

Any other reasonable response should be rewarded.

Examiners report

The majority of candidates were able to refer to “ability to store”, “mobility of factors of production” or “the rate at which costs of production increase” as factors other than time which influence PES. Lower achieving responses stated rather than explained, while some made basic errors such as explaining that factor mobility is the ability to physically move machinery. Others confused PES with PED and referred to factors such as the degree of necessity.

Syllabus sections