S4 Economics Practice Paper: Demand, Supply And Market Equilibrium (12 Questions, 100 Marks, 75 Minutes)

S4 Economics Practice Paper: Demand, Supply and Market Equilibrium (12 questions, 100 marks, 75 minutes)

2026-11-09

HKDSE Economics: Demand, Supply and Market Equilibrium

12 questions, 100 marks, 75 minutes on demand and supply, market equilibrium, arc elasticity, taxes, subsidies and price controls.

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Instructions: This paper has three sections, A, B and C. Answer all questions. Total marks: 100. Time allowed: 75 minutes.

Show all working. Answers without working earn no method marks. Write down a formula before substituting numbers.

Give numerical answers to three significant figures unless stated otherwise, and state the correct units.

Spend about 30 minutes on Section A, then work through elasticities and taxes in Section B, and finish with the policy analysis in Section C.

Section A　Demand, Supply and Market Equilibrium

Section A: Show the formula and working for each calculation, with units.

#	Question	Answer and marking notes
1	Data 1: the demand function of a market is Qd = 120 – 2P, where Qd is quantity demanded (units) and P is price ($). (a) State the law of demand and explain why a demand curve normally slopes downward. (b) Distinguish between a change in quantity demanded and a change in demand, giving one example of each. (c) Calculate the quantity demanded at P = $30 and at P = $40, and find the fall in quantity demanded when price rises from $30 to $40.	(a) The law of demand states that, other things being equal, quantity demanded falls when price rises and rises when price falls; the curve slopes downward because of the substitution effect (buyers switch to cheaper alternatives) and the income effect (a higher price lowers real purchasing power) (3 marks). (b) A change in quantity demanded is a movement along the same demand curve caused by a change in the good’s own price, e.g. a price cut raises quantity demanded; a change in demand is a shift of the whole curve caused by non-price factors, e.g. a rise in income shifts demand to the right (3 marks). (c) At P = $30, Qd = 60 units; at P = $40, Qd = 40 units; quantity demanded falls by 20 units (3 marks).
2	Data 1 (continued): the supply function of the market is Qs = 3P – 30. (a) State the law of supply and explain the positive relationship between price and quantity supplied. (b) Calculate the quantity supplied at P = $20, and explain the behaviour of suppliers at P = $10. (c) Find the equilibrium price and quantity of the market.	(a) The law of supply states that, other things being equal, quantity supplied rises when price rises; the positive relationship exists because a higher price raises marginal profit and attracts firms to expand output and new firms to enter (3 marks). (b) At P = $20, Qs = 30 units; at P = $10, Qs = 0 units, i.e. the price is below the minimum supply price and suppliers will not supply the good (3 marks). (c) Setting 120 – 2P = 3P – 30 gives 5P = 150, so the equilibrium price is $30 and the equilibrium quantity is 60 units (3 marks).
3	(a) Using a demand and supply diagram, explain how market forces push the price back to equilibrium when the market price is above it. (b) When the market price is $45, use Data 1 to calculate the size of the surplus. (c) State two ways in which sellers may adjust when there is a surplus.	(a) When the market price is above equilibrium there is a surplus; sellers cut prices to clear stock, quantity demanded rises and quantity supplied falls until the two are equal (3 marks). (b) At P = $45, Qd = 30 units and Qs = 105 units, so the surplus is 75 units (3 marks). (c) Sellers may cut prices, or cut production and promotional spending to run down stock (2 marks).
4	The government considers the equilibrium price of $30 too high for low-income households and sets a price ceiling of $20. (a) Calculate quantity demanded, quantity supplied and the size of the shortage under the ceiling. (b) State two non-price methods of allocating the good under a price ceiling. (c) Explain why a price ceiling reduces supply further in the long run.	(a) At P = $20, Qd = 80 units and Qs = 30 units, so there is a shortage of 50 units (3 marks). (b) Allocation may be by queuing on a first-come-first-served basis, by ration coupons or by ballot (3 marks). (c) A ceiling keeps the price below equilibrium, so firms earn lower or negative profits; in the long run investment and output fall, some firms exit and supply shrinks further, widening the shortage (3 marks).

Section B　Elasticity, Taxes and Subsidies

Section B: Use the arc elasticity formula and keep two decimal places.

#	Question	Answer and marking notes
5	Data 2: the price of a product rises from $40 to $50 and quantity demanded falls from 40 units to 30 units. (a) Use the arc elasticity formula to calculate the price elasticity of demand and decide whether demand is elastic or inelastic. (b) Calculate total revenue before and after the price change, and explain whether the change is consistent with your elasticity finding. (c) If the firm wants to raise total revenue, should it raise the price further? Explain with your calculations.	(a) Arc elasticity = [(30 – 40) / 35] / [(50 – 40) / 45] = (-0.2857) / (0.2222) = -1.29; the absolute value exceeds 1, so demand is elastic (4 marks). (b) Total revenue before = 40 x 40 = $1600; after = 50 x 30 = $1500, a fall of $100; with elastic demand a price rise lowers total revenue, which is consistent with the elasticity finding (2 marks). (c) The firm should not raise the price further; with elastic demand the percentage fall in quantity exceeds the percentage rise in price, so total revenue would fall again, while a price cut would raise it (2 marks).
6	(a) State three factors that affect the price elasticity of demand. (b) Explain why the demand for cigarettes is usually inelastic. (c) What does this elasticity imply for the pricing strategy of tobacco companies?	(a) The number and closeness of substitutes, the proportion of income spent on the good, and the time period (also the distinction between necessities and luxuries) (3 marks). (b) Cigarettes are addictive, have few substitutes and take a small share of income, and smoking habits take time to change, so demand is inelastic (3 marks). (c) Because demand is inelastic, a price rise reduces quantity only slightly and total revenue rises, giving tobacco companies a strong incentive to raise prices (2 marks).
7	Data 3: the price of a good rises from $30 to $33 and quantity supplied rises from 60 units to 69 units. (a) Use the arc elasticity formula to calculate the price elasticity of supply. (b) Explain why the long-run elasticity of supply is usually greater than the short-run elasticity. (c) Explain how the mobility of factors of production affects the elasticity of supply.	(a) Arc elasticity of supply = [(69 – 60) / 64.5] / [(33 – 30) / 31.5] = (0.1395) / (0.0952) = 1.47 (4 marks). (b) In the long run firms can build factories, buy machinery and train workers, and factors of production can move in freely, so quantity supplied responds more to price (2 marks). (c) The easier it is for factors to move into the industry, the more elastic supply is; where factors are highly specific and costly to move, supply is less elastic (2 marks).
8	The government imposes a per-unit tax of $5 on suppliers, so that the supply function changes from Qs = 3P – 30 to Qs = 3(P – 5) – 30. (a) Write down the new supply function after the tax. (b) Together with the demand function in Data 1, find the new equilibrium price and quantity. (c) Calculate the tax burden per unit borne by consumers and by producers.	(a) Qs = 3(P – 5) – 30 = 3P – 45 (3 marks). (b) Setting 120 – 2P = 3P – 45 gives 5P = 165, so the equilibrium price is $33.00 and the equilibrium quantity is 54.00 units (3 marks). (c) Consumers bear $33.00 – $30 = $3.00 per unit; producers receive $33.00 – $5 = $28.00, which is $2.00 less than the original $30, so producers bear $2.00 per unit (3 marks).

Section C　Policy Applications and Current Issues

Section C: Combine demand and supply analysis with the given context and answer in full sentences.

#	Question	Answer and marking notes
9	(a) Distinguish between a per-unit tax and an ad valorem tax, giving one example of each. (b) Using the result of Question 8, calculate the government’s total tax revenue. (c) Explain why the tax burden falls mainly on consumers when demand is inelastic.	(a) A per-unit tax is a fixed amount per unit sold, e.g. $5 per pack of cigarettes; an ad valorem tax is a percentage of the price, e.g. 10% of the selling price (3 marks). (b) Tax revenue = 5 x 54 = $270 (2 marks). (c) The less elastic demand is, the harder it is for consumers to switch to substitutes, so they absorb most of the price increase and bear most of the tax; the less elastic supply is, the more producers bear (3 marks).
10	Vegetable prices in the local market rise sharply within a few days after a typhoon. (a) Use demand and supply analysis to explain the rise in prices. (b) Some people blame the price rise on greedy traders; comment on this view from the perspective of market forces. (c) What would you expect if the government immediately sets a price ceiling on vegetables?	(a) The typhoon reduces the supply of vegetables, shifting the supply curve to the left; demand barely changes in the short run, so the equilibrium price rises and quantity falls (3 marks). (b) The price rise is a result of the demand and supply imbalance and reflects the rationing role of the price mechanism; without a price rise there would simply be queues and panic buying, so blaming traders alone is not a complete explanation (3 marks). (c) A price ceiling would keep prices below equilibrium, producing shortages, queues, black-market premiums and lower quality, and little produce would reach the market (2 marks).
11	The government raises the minimum wage from $40 to $45 per hour, which is above the equilibrium wage of $38 in the low-skilled labour market. (a) Use a demand and supply diagram to analyse the effect of the minimum wage on employment in this market. (b) Identify which workers are likely to gain and which are likely to lose. (c) Suggest one supporting measure that could reduce the negative effects.	(a) A minimum wage of $45 is above the equilibrium wage of $38 and acts as a price floor; wages are pushed above equilibrium, employers cut staff, labour supply rises while demand falls, creating a surplus of labour, i.e. unemployment or shorter hours (4 marks). (b) Low-skilled workers who keep their jobs are likely to gain from higher wages; those with lower marginal productivity, young people and inexperienced workers are likely to lose, as they find it harder to get work (2 marks). (c) Providing on-the-job training or a wage subsidy would raise low-skilled workers’ productivity and reduce unemployment (2 marks).
12	To encourage local production, the government gives a subsidy of $5 per unit, so that the supply function changes from Qs = 3P – 30 to Qs = 3(P + 5) – 30. (a) Together with the demand function in Data 1, find the equilibrium price and quantity after the subsidy. (b) Calculate how much consumers save per unit and how much more producers receive per unit. (c) Comment on the effects of the subsidy on market efficiency and government spending.	(a) Qs = 3(P + 5) – 30 = 3P – 15; setting 120 – 2P = 3P – 15 gives 5P = 135, so the equilibrium price is $27.00 and the equilibrium quantity is 66.00 units (3 marks). (b) Consumers save $30 – $27.00 = $3.00 per unit; producers receive $27.00 + $5 = $32.00, which is $2.00 more than the original $30 (3 marks). (c) The subsidy pushes output above the equilibrium level, causing over-production and a loss of allocative efficiency; the government also bears 5 x 66 = $330 of spending, which is a fiscal burden (2 marks).

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