Practise using demand and supply evidence to determine prices, surpluses, shortages and the effects of taxes or subsidies.
Sources for use with Section C. The global market for palm oil. Figure 1 records 2018 percentage price changes: palm −25.94%, rapeseed −12.71%, soybean −17.75% and sunflower −12.81%. Figure 2 shows 2017 global palm-oil production in million tonnes: Indonesia 36, Malaysia 21, Thailand 2.2, Colombia 1.3 and other countries 6.3. Extract A: The equilibrium price of palm oil decreased in 2018. Competing vegetable-oil prices also fell. Palm oil is used in biodiesel, a substitute for crude oil, and lower crude-oil prices reduced biodiesel demand. Production exceeded consumption, creating a three-million-tonne stockpile. Palm trees can take up to 30 months to produce fruit; fruit can be harvested twice a year. Extract B: Palm-oil production more than tripled between 1998 and 2018 and is used in processed foods, cosmetics, detergents, chocolate and biodiesel. It uses one-tenth of the land, one-seventh of the fertiliser and one-sixth of the energy needed for soybean oil. In Indonesia and Malaysia, more than 4.7 million workers are directly employed and 11 million indirectly. Rapid, poorly managed expansion has caused deforestation, greenhouse-gas emissions, habitat and biodiversity loss. Orangutan numbers fell by 100,000 between 2001 and 2017; 69% of elephant habitats in western Indonesia have been lost and only 100 rhinos remain in the wild.
Figures 1 and 2 from the original Source Booklet
Extracts A and B from the original Source Booklet
Define the term equilibrium.
Analyse two reasons why the price of palm oil decreased in 2018. Illustrate with a supply-and-demand diagram.
Sources for use with Section C
The market for rice in Japan
Figure 1 The price of rice January 2024–April 2025 (Yen per 5 kg bag)
Figure 2 Land used for rice (million hectares), 2000–2023
Extract A The price of rice
Rice is a staple food in Japan and it is considered to be a necessity by consumers. After years of declining consumption of rice, demand has been rising since 2023. Demand for rice increased by 110 000 tons to 7.02 million tons for the first time in 10 years between June 2023 and June 2024. Part of the explanation was that demand for rice among foreign visitors to Japan rose from 19 000 tons in June 2022 to 51 000 tons in June 2024. Also, the Nankai Trough earthquake alert in August 2024 caused stockpiling by restaurants and consumers, leading to excess demand.
In addition, the price of rice rose because of high temperatures in 2023 that reduced the quality and quantity of rice produced. Rice production cannot be changed overnight. It takes months of planning and is significantly influenced by seasonal conditions, land use and water management. However, the Government does hold stocks of rice to prevent large price fluctuations.
Extract B The future of rice production in Japan
The future of rice production in Japan is uncertain. Firstly, there was a 25% decline in the number of rice farmers between 2015 and 2020. Secondly, the average age of the remaining rice farmers is increasing. Only 11.3% of rice farms are operated by farmers who are under the age of 50.
A further issue affecting the future of rice production is climate change. For example, in some years heatwaves have delayed growth, reduced yields, and even destroyed entire harvests.
Extract C The environmental impact of rice production
To produce one kilogram of rice requires an average of 2 500 litres of water. Rice production uses over a third of the world’s irrigated water. Rice production also contributes to climate change, with methane, a greenhouse gas, emitted by flooded paddy fields. This factor is responsible for 10% of total global methane emissions. Further, the impact of climate change is expected to reduce the output and nutritional value of rice as average temperatures rise.
To meet future demand, global rice production will need to grow by 25% over the next 25 years. However, changes in production methods are helping to limit climate change and conserve water. For example, direct seeding reduces water use by up to 20% and greenhouse gas emissions by up to 50%.
With reference to Extract A, explain what is meant by 'excess demand'.
With reference to Figure 1 and Extract A, analyse one demand factor and one supply factor that explain why the price of rice increased between January 2024 and April 2025.
Illustrate your answer with a supply and demand diagram.
With reference to Figure 2 and Extract B, examine two factors that might cause a shortage of rice in Japan in the future.
Sources for use with Section C.
The markets for rubber, tyres (tires) and rubber gloves
Figure 1 World price of rubber, US$ per kg, May 2019–May 2020
Extract A Rubber price falls as car and tyre production fall
Between January and May 2020 the world price of rubber fell from $1.67 to $1.35 per kg. This was caused by a significant decrease in demand for tyres that are made from rubber. Tyre production uses 75% of the world’s natural rubber.
Over the same period, tyre sales fell by 35% in Europe, 42% in North America and by 33% in South America. There was a large decrease in car production in all of these regions as a result of the temporary closure of car factories. Car usage also fell, resulting in fewer tyres needing to be replaced. Cars and tyres are complementary goods.
Extract B Rubber production and pollution from tyres
Rubber trees grow best in a climate where there is heavy rainfall and temperatures between 20°C and 35°C. Farmers in Thailand, Indonesia, China and West Africa provide 85% of the world’s natural rubber supply. Rubber trees take 6 years to produce their first crop. Consequently, the supply of rubber is price inelastic.
Between 2000 and 2019 the demand for rubber tyres increased resulting in deforestation. 3 million hectares of forests in the Mekong region of South East Asia were lost to make space for rubber plantations.
A research study into car emissions found that tyres emitted 1 000 times more PM2.5 particles than emissions from exhaust fumes. This study was based on testing one fully loaded car and one type of road surface.
Long-term exposure to PM2.5 results in respiratory diseases and reduced lung function in children and adults, increased risk of lung cancer, and cardiovascular disease affecting the heart and causing strokes.
Further problems are caused when tyres are sent to landfill. Tyres contain chemicals and heavy metals that are released into the environment over time. These cause cancer and genetic mutations.
Tyre recycling has helped to reduce the number of tyres in landfill from one billion in 1991 to 60 million in 2018. In the USA 43% of the recycled tyres are used to produce energy. These recycled tyres produce 25% more energy than coal. The ash from the tyres is less polluting than burning coal.
Extract C Profits of manufacturers of rubber gloves
Rapidly rising demand for rubber gloves across the world enabled the Malaysian rubber glove manufacturer, Top Glove, to achieve a 366% increase in profits in the second quarter of 2020. This was caused by a substantial increase in sales of rubber gloves to the healthcare sector.
With reference to Figure 1 and Extract A, analyse why 'between January and May 2020 the world price of rubber fell from $1.67 to $1.35 per kg'.
Illustrate your answer with a supply and demand diagram.
Examine the effect on producer surplus of the change in market conditions for rubber gloves as described in Extract C. Include a diagram in your answer.
Sources for use with Section C. The global market for palm oil. Figure 1 records 2018 percentage price changes: palm −25.94%, rapeseed −12.71%, soybean −17.75% and sunflower −12.81%. Figure 2 shows 2017 global palm-oil production in million tonnes: Indonesia 36, Malaysia 21, Thailand 2.2, Colombia 1.3 and other countries 6.3. Extract A: The equilibrium price of palm oil decreased in 2018. Competing vegetable-oil prices also fell. Palm oil is used in biodiesel, a substitute for crude oil, and lower crude-oil prices reduced biodiesel demand. Production exceeded consumption, creating a three-million-tonne stockpile. Palm trees can take up to 30 months to produce fruit; fruit can be harvested twice a year. Extract B: Palm-oil production more than tripled between 1998 and 2018 and is used in processed foods, cosmetics, detergents, chocolate and biodiesel. It uses one-tenth of the land, one-seventh of the fertiliser and one-sixth of the energy needed for soybean oil. In Indonesia and Malaysia, more than 4.7 million workers are directly employed and 11 million indirectly. Rapid, poorly managed expansion has caused deforestation, greenhouse-gas emissions, habitat and biodiversity loss. Orangutan numbers fell by 100,000 between 2001 and 2017; 69% of elephant habitats in western Indonesia have been lost and only 100 rhinos remain in the wild.
Figures 1 and 2 from the original Source Booklet
Extracts A and B from the original Source Booklet
Define the term equilibrium.
Sources for use with Section C.
The markets for rubber, tyres (tires) and rubber gloves
Figure 1 World price of rubber, US$ per kg, May 2019–May 2020
Extract A Rubber price falls as car and tyre production fall
Between January and May 2020 the world price of rubber fell from $1.67 to $1.35 per kg. This was caused by a significant decrease in demand for tyres that are made from rubber. Tyre production uses 75% of the world’s natural rubber.
Over the same period, tyre sales fell by 35% in Europe, 42% in North America and by 33% in South America. There was a large decrease in car production in all of these regions as a result of the temporary closure of car factories. Car usage also fell, resulting in fewer tyres needing to be replaced. Cars and tyres are complementary goods.
Extract B Rubber production and pollution from tyres
Rubber trees grow best in a climate where there is heavy rainfall and temperatures between 20°C and 35°C. Farmers in Thailand, Indonesia, China and West Africa provide 85% of the world’s natural rubber supply. Rubber trees take 6 years to produce their first crop. Consequently, the supply of rubber is price inelastic.
Between 2000 and 2019 the demand for rubber tyres increased resulting in deforestation. 3 million hectares of forests in the Mekong region of South East Asia were lost to make space for rubber plantations.
A research study into car emissions found that tyres emitted 1 000 times more PM2.5 particles than emissions from exhaust fumes. This study was based on testing one fully loaded car and one type of road surface.
Long-term exposure to PM2.5 results in respiratory diseases and reduced lung function in children and adults, increased risk of lung cancer, and cardiovascular disease affecting the heart and causing strokes.
Further problems are caused when tyres are sent to landfill. Tyres contain chemicals and heavy metals that are released into the environment over time. These cause cancer and genetic mutations.
Tyre recycling has helped to reduce the number of tyres in landfill from one billion in 1991 to 60 million in 2018. In the USA 43% of the recycled tyres are used to produce energy. These recycled tyres produce 25% more energy than coal. The ash from the tyres is less polluting than burning coal.
Extract C Profits of manufacturers of rubber gloves
Rapidly rising demand for rubber gloves across the world enabled the Malaysian rubber glove manufacturer, Top Glove, to achieve a 366% increase in profits in the second quarter of 2020. This was caused by a substantial increase in sales of rubber gloves to the healthcare sector.
Examine the effect on producer surplus of the change in market conditions for rubber gloves as described in Extract C. Include a diagram in your answer.
Which one of the following is a function of the price mechanism?
An increase in the price of hand sanitisers, caused by an increase in demand, will ration them to those who are most able to pay
A decrease in the price of carrots, caused by excess supply, provides farmers with the incentive to increase supply
A decrease in the price of tinned meat is a signal to producers that demand for it is increasing
An increase in the price of petrol is a signal to the government to impose a maximum price
Sources for Section C: The markets for oil and electric cars.
Figure 1 shows global oil prices from 2016 to 2020, with a sharp fall in early 2020.
Extract A: movement restrictions closed offices and factories, reducing transport and energy use and therefore oil demand. Russia increased production while Saudi Arabia responded by increasing its production. In India, petrol and diesel prices fell only 7% because almost half their price is indirect tax.
Extract B: Canada aims to remove petrol and diesel cars by 2040, but only 2% of cars were electric in 2019. A $5,000 manufacturer subsidy applies to electric cars below $45,000; only nine models qualify. Canada has 5,800 charging points for 37 million people and plans to spend $130 million on more. Electric cars have zero driving emissions, but battery production uses twice as much energy as conventional batteries. Electricity can cause emissions if generated from fossil fuels. Canada generates 60% of electricity using hydroelectricity, a renewable resource.
Original PDF figure/source page
Examine two effects of high indirect taxation on diesel and petrol in India.
The diagram shows the market for a sugar-sweetened drink in Peru. In 2018 Peru's Government imposed an ad valorem tax on sugar-sweetened drinks.
Which one of the following shows the value of the consumer incidence of the tax?
Sol 94500
Sol 126000
Sol 220500
Sol 228000
Sources for use with Section C
The market for rice
Figure 1 Index of the world price for rice, July 2022 to July 2023 (July 2016 = 100)
Extract A Rice price rising
The global price of rice increased by over 19.6% between July 2022 and July 2023. Rice consumption in Africa and Asia is growing rapidly, as populations increase and incomes rise. In 2022 the population grew by 2.45% in Africa and by 0.83% in Asia. This compared to a 0.06% increase in Europe. In 2022 average real income growth was approximately 4% in Asia and 3.85% in Africa. In advanced economies the average increase in real incomes was only 2%.
Figure 2 Estimated price elasticities of demand in Japan for selected food groups
Extract B The impact of rice production
Rice production contributes 12% of global methane emissions and 1.5% of all greenhouse gas emissions. Vietnam’s paddy fields, where the rice is grown, produce more carbon emissions than the country’s transportation network. Producing one kilogram of rice requires 2 500 litres of water. Rice production uses over 33% of the world’s irrigation water.
Rice growers often use an insecticide to protect the crop from insects. In the USA these insecticides contributed to a 44% decline in the bee population in 2020. On average, 90% of rice is consumed in the country in which it is grown. This limits the environmental damage caused by transporting rice abroad.
Extract C Indian Government intervention in the market for rice
The rice sector contributes $51.58 billion to the Indian economy. India exports rice to 150 countries. The Government supports rice growers by providing subsidies. These subsidies are used by farmers to invest in capital goods and to purchase fertiliser and water used in 5 production. This can lead to over-farming that results in lower quality rice crops. In 2021 the Indian Government spent $6.9 billion on subsidising rice production. In 2022 the Government decided to reduce expenditure on these subsidies. However, this caused mass protests from farmers that led to the Government increasing these subsidies to their previous levels. 10
With reference to Extract C, discuss the benefits of subsidies paid to rice growers.
Illustrate your answer with an appropriate diagram.
The diagram shows the market for wheat in India after a production subsidy. Which is the producer incidence of the subsidy?
Rs 217 500 000
Rs 435 000 000
Rs 1 812 500 000
Rs 2 247 500 000
Original examination diagram