CAIE IGCSE Economics 2.7. Price elasticity of supply (PES) Question Bank

Advances in technology have changed how trees (wood) are cut down, transported and used in the manufacture of furniture, such as tables. Wood is in inelastic supply. Wood can be supplied in all economic systems. However, public goods are not supplied in a market economic system.

Define inelastic supply.

Read the source material carefully before answering Question 1.

Oil makes up one third of Ecuador's exports. Ecuador has, however, decided to produce less oil and more of other goods and services. This decision has affected how products are made in Ecuador. For example luxury textile production, such as luxury scarves and jumpers, uses fewer capital goods than oil production. Tourism relies on natural resources including sunshine and beaches.

One reason Ecuador's government has encouraged less reliance on oil, is the large changes that often occur in the oil market. Between 2014 and 2016, demand for Ecuador's exports fell which caused a significant reduction in export revenue. This reduction, combined with a decrease in government spending, caused the country's output to decline.

Between 2016 and 2019, there was some improvement in Ecuador's economy. Incomes and household spending increased and more cars were purchased. Table 1.1 shows the GDP per head ($) and car ownership (per 1000 people) in selected countries in 2019.

Ecuador's government borrowed from China to spend on building more roads. The construction of these roads increased employment and was expected to influence transport costs in the long run.

Between 2016 and 2019, Ecuador's textile industry benefited from the improvement in the road network. Despite strong competition from foreign textile firms, Ecuador's textile firms increased the scale of their production. Wages paid in the textile industry did not rise significantly. A very small wage increase can affect trade union activity and emigration.

Some of Ecuador's workers emigrate to find jobs in other countries, particularly Italy, Spain and the US. These workers have a range of skills and they work in a variety of jobs abroad, some of which provide training. Many, but not all, workers send money home to their families.

Calculate the price elasticity of supply of Ecuador's oil.

Read the source material carefully before answering Question 1.

Denmark is a high-income, North European country. The Danish population have high living standards and enjoy relatively long hours of leisure time. They spend this time in a variety of ways including cycling, jogging and playing golf.

Danish workers are employed in a range of industries. Denmark used to be a leading shipbuilding country but now the industry is in decline. Ships have substitutes in other forms of transport. Also, it may be possible to postpone the purchase of ships, they take a long time to produce and they are expensive to store. In contrast to the shipbuilding industry, the Danish toy industry has grown in recent years.

Denmark's shipbuilding and toy industries are in the private sector. Denmark's economic performance is also influenced by changes in the public sector. Table 1.1 shows Danish government spending and GDP over the period 2015 to 2021.

Denmark is heavily involved in international trade. It usually has a surplus on the current account of its balance of payments. International trade affects the availability of products in the country and the country's foreign exchange rate. It also affects the country's GDP and level of employment.

How people work in Denmark, as in most countries, has changed in recent years. More people now spend at least some of their working hours working from home. This change is expected to affect productivity and help firms keep their workers. Households may be encouraged to move out of cities and to buy larger homes. There may also be changes in demand for transport, demand for food sold in city centres and firms' need for office space.

Explain two reasons why the supply of ships is price-inelastic.