2.1 Demand questions for IB Economics

Explain how classical microeconomics used the concept of utility to explain consumer choice and the law of demand.

Using real-world examples, discuss whether corporate social responsibility (CSR) is consistent with the assumption that firms aim to maximize profits.

Using Table 1, calculate the percentage change in the average wholesale price of gas between 2021 and 2022.

Using Table 1, calculate the price elasticity of demand (PED) for gas in Brennmark between 2021 and 2022.

Using your answer to (a)(ii), state whether the demand for gas in Brennmark is price elastic or price inelastic.

Assume that the demand curve for gas is a straight line that meets the price axis at BMK 440 per MWh and that it did not change between 2021 and 2022.

Using Table 1, calculate the consumer surplus in Brennmark's wholesale gas market in 2021 (in BMK million).

Using Table 1 and your answer to (a)(iv), calculate the change in consumer surplus in Brennmark's wholesale gas market between 2021 and 2022 (in BMK million).

Sketch a demand and supply diagram to show the effect of the disruption to gas imports on Brennmark's wholesale gas market.

Between 2021 and 2022, sales of electric heat pumps, which can replace gas boilers for heating homes, doubled, and the average price of a heat pump rose by 18 %. Several manufacturers announced plans to open new factories in Brennmark.

Using a demand and supply diagram and the information provided, explain how the price mechanism responded in the market for heat pumps.

Explain two reasons why the price elasticity of demand for gas in Brennmark is likely to be higher in the long run than the value calculated in (a)(ii).

Further information about Brennmark:

• The average household spends 4 % of its income on energy, but the poorest 20 % of households spend 11 %.

• The retail price of gas paid by households rose from BMK 90 to BMK 150 per MWh in 2022.

• Option 1: cap the retail price of gas for all households at BMK 100 per MWh, with the government paying suppliers the difference. Estimated cost: BMK 9 billion a year.

• Option 2: a lump-sum energy payment of BMK 1200 a year to each household in the poorest 30 %, paid regardless of how much gas they use. Estimated cost: BMK 1.6 billion a year.

• Option 3: cut the rate of value added tax (VAT) on household energy from 20 % to 5 %. Estimated cost: BMK 3 billion a year.

• Option 4: grants for insulation and heat pumps for low-income households. Estimated cost: BMK 2 billion a year; most of the savings on bills would appear after three to five years.

• The government aims to reduce national gas consumption by 15 %. Its budget deficit is 3.8 % of GDP, above its own limit of 3 %.

Using the information provided and your knowledge of economics, recommend a policy the government of Brennmark could introduce to protect low-income households from high gas prices without removing the incentive to reduce gas consumption.

Distinguish between a movement along a demand curve and a shift of a demand curve.

Using real-world examples, evaluate the view that indirect taxes are the most effective way to reduce the consumption of demerit goods.

Using Table 1, calculate the producer surplus of tutors in a normal week (in TSD).

Using Table 1 and your answer to (a)(i), calculate the change in tutors' producer surplus in a week before national examinations compared with a normal week (in TSD).

Using Table 1, show that social/community surplus is TSD 150 000 per week higher in a week before national examinations than in a normal week.

Using a demand and supply diagram and the information provided, explain how the price mechanism responds to the increase in demand for tutoring in the weeks before national examinations.