Cambridge International as and a level Economics Ebook

ii
A substantial increase in the price of branded 
cola. 
[12]
3
Air Passenger Duty (APD) is a flat rate indirect tax on 
passengers who fly from UK airports. It is collected 
by the airlines who add the tax onto ticket prices. In 
2009, the tax was £5 for economy class passengers 
travelling on flights within the European Union.
The table below summarises the likely eff ects of 
increases in APD on a typical flight.
New tax rate
£10
£15
£25
£35
% change in ticket 
prices
7%
14%
28%
42%
% change in 
quantity demanded
−
5%
−
15%
−
40%
−
66%
a
Calculate the price elasticity of demand for each 
of the new tax rates. 
[4]
b
Explain the meaning of each of the figures you 
have calculated. 
[4]
c
Suppose the UK government wishes to reduce the 
demand for air travel for environmental reasons. 
Comment on how it might use the price elasticity 
of demand estimates to achieve this objective. 
[12]
In this chapter it has been shown that:
■ 
A market exists whenever people come together 
for the trade or exchange of goods and services.
■ 
The buying side of the market is referred to by 
economists as the demand side. It is possible 
to derive a demand curve for any market – this 
shows how the quantity demanded varies 
with the price of a product.
■ 
The selling side of the market is referred to by 
economists as the supply side. It is possible 
to derive a supply curve for any market – this 
shows how the quantity supplied varies with 
the price of the product.
■ 
Price, income and cross elasticity of demand 
can be used to explain the extent of a change 
in the quantity demanded as the price of the 
good, consumer incomes and the prices of 
related goods change.
■ 
The price elasticity of supply measures 
the extent to which the quantity supplied 
changes with a change in price.
■ 
Equilibrium occurs in the market when there 
is no tendency to change; the price and the 
quantity traded match the intentions and 
plans of consumers and producers.
■ 
The demand curve shift s to the left or right when, 
ceteris paribus
, the assumption is changed. Three 
important causes of this are a change in income, 
a change in the price of related products and a 
change in fashion, tastes and attitudes.
■ 
The supply curve shift s when there are 
changes in the costs of supply, characteristics 
of the industry and government policy.
■ 
A change to the equilibrium position will 
produce a new equilibrium price and 
quantity as a consequence of a change in 
demand or a change in supply or both.
■ 
The price mechanism acts as a signal, a 
means of rationing and for the transmission 
of preferences.
■ 
Consumer surplus arises because some 
consumers are willing to pay more than the 
market price for a product; producer surplus 
arises when consumers are willing to pay a higher 
price than the minimum sought by producers.