2.3 Competitive market equilibrium questions for IB Economics

Using a production possibilities curve (PPC), explain the concepts of scarcity, choice and opportunity cost.

Using real-world examples, evaluate the view that the price mechanism is the best way to allocate scarce resources.

Define the term capital indicated in bold in the text (Text A, paragraph 3).

Using information from Text A, paragraph 2, calculate the percentage increase in Halvenmark's maximum possible output of rice.

Sketch a production possibilities curve (PPC) diagram to show the effect of the irrigation programme on Halvenmark's production possibilities (Text A, paragraph 2).

Using a demand and supply diagram, explain the likely effect of the new irrigation technology on the market price of rice in Halvenmark (Text A, paragraphs 2 and 3).

Using Table 1, identify the equilibrium price of maize flour in 2024.

Using Table 1, calculate the percentage change in the equilibrium price of maize flour between 2023 and 2024.

Using the information provided, calculate the consumer surplus in the market for maize flour in 2023 (in TVS million per month).

Using the information provided, calculate the change in consumer surplus in the market for maize flour between 2023 and 2024 (in TVS million per month).

In mid-2024 the government of Tavora set a maximum price of TVS 60 per kg for maize flour in urban markets.

Using Table 1, calculate the shortage of maize flour at the maximum price.

Reports soon emerged of long queues at official markets and of maize flour being resold informally at around TVS 90 per kg.

Using a demand and supply diagram and the information provided, explain why the maximum price has led to a parallel (informal) market for maize flour.

Distinguish between the signalling function and the rationing function of price.

Explain two reasons why the maximum price may reduce the future supply of maize flour in Tavora.

The government is considering the following options:

• Keep the maximum price at TVS 60 per kg. Queues and the informal market continue.

• Release maize from the Strategic Grain Reserve. The reserve holds 120 million kg of maize, enough to supply an extra 20 million kg of flour a month for six months. The reserve would then need to be rebuilt.

• Cash transfers by mobile phone to the poorest 25 % of households, costing TVS 400 million a month. The mobile money system reaches about 70 % of poor households; coverage is weakest in remote rural areas.

• Remove the 15 % tariff on maize imports. Neighbouring countries had good harvests in 2024, but roads to the border are poor.

• Subsidize drought-resistant seed and small-scale irrigation. Benefits would take three to five years to appear.

The government's budget deficit is 6.2 % of GDP, and an agreement with international lenders requires it to reduce the deficit.

Using the information provided and your knowledge of economics, recommend a policy the government of Tavora could introduce to make maize flour more affordable for low-income households.

Explain how scarcity leads to opportunity cost in the decisions made by consumers, producers and governments.

Using real-world examples, evaluate the effects on stakeholders of a government subsidy granted to producers in a particular industry.

Define the term free good indicated in bold in the text (Text A, paragraph 1).

List two factors of production used by the desalination plant (Text A, paragraph 3).

Explain two reasons why fresh water on Coralis can no longer be considered a free good (Text A, paragraphs 2 and 3).

Using a demand and supply diagram, explain why the price of water on Coralis has risen (Text A, paragraphs 2 and 3).

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.