2023 H2 Economics Paper 2 Essay 2: Suggested Answers

Demand is the quantity consumers are willing and able to buy at various prices at a given time, and supply is the quantity producers are willing and able to sell at various prices over the same period. Their interaction sets the equilibrium price and quantity for vegetables.

Impact of bad weather. Bad weather is a supply shock that damages crops and reduces harvests, decreasing the supply of vegetables. This is a leftward shift of the supply curve from SS0 to SS1. Holding demand constant, at the initial price there is a shortage that exerts upward pressure on price, so the market moves to a higher equilibrium price and a lower quantity. The size of the price rise depends on the price elasticity of demand. Because vegetables are a staple with a high degree of necessity, demand is price inelastic, so prices rise sharply.

Impact of a fall in consumer incomes. Income elasticity of demand (YED) measures how demand responds to a change in income. Vegetables are a normal good and a necessity, so YED is positive but less than 1, meaning demand changes less than proportionately with income. When incomes fall, demand for vegetables falls, but only a little, as consumers still need essentials though they may buy slightly less or switch to cheaper varieties. This is a small leftward shift of demand from DD0 to DD1, giving a relatively small fall in the equilibrium price.

Overall, bad weather drives prices up strongly because demand is price inelastic, while the fall in incomes only modestly tempers that rise, leaving an overall increase in vegetable prices that is less severe than it would otherwise have been.