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Microeconomics Demand, supply, elasticity and market failure using original scenarios and data.
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Economics SL Microeconomics
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1 The government of a small country imposes a specific tax of $2 per unit on sales of sugary drinks, a good with relatively price-inelastic demand. (a) Explain, describing the demand curve in words, why inelastic demand means most of the tax burden is likely to fall on consumers rather than producers. (b) State the likely effect of this tax on government tax revenue. (c) Explain one reason a government might choose to tax a good with inelastic demand specifically to raise revenue. ✓ Reviewed Paper 1 style Medium 4 marks No calculator + 2 Marking analysis: A learner attempts the following task: “The government of a small country imposes a specific tax of $2 per unit on sales of sugary drinks, a good with relatively price-inelastic demand. (a) Explain, describing the demand curve in words, why inelastic demand means most of the tax burden is likely to fall on consumers rather than producers. (b) State the likely effect of this tax on government tax revenue. (c) Explain one reason a government might choose to tax a good with inelastic demand specifically to raise revenue.” Their response addresses only this point: “States that with inelastic demand, quantity demanded changes proportionally less than price.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks No calculator + 5 When the price of a particular smartphone model rose from $600 to $660, the quantity demanded fell from 5,000 to 4,200 units per month. (a) Calculate the price elasticity of demand using the percentage change method. (b) State whether demand is elastic, inelastic or unit elastic. (c) Calculate the resulting percentage change in total revenue. (d) State whether the manufacturer's total revenue increased or decreased as a result of the price rise. ✓ Reviewed Paper 2 style Medium 5 marks Calculator + 6 Marking analysis: A learner attempts the following task: “When the price of a particular smartphone model rose from $600 to $660, the quantity demanded fell from 5,000 to 4,200 units per month. (a) Calculate the price elasticity of demand using the percentage change method. (b) State whether demand is elastic, inelastic or unit elastic. (c) Calculate the resulting percentage change in total revenue. (d) State whether the manufacturer's total revenue increased or decreased as a result of the price rise.” Their response addresses only this point: “Calculates the percentage change in quantity as −16% (from 5,000 to 4,200).” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 5 marks Calculator + 7 A government sets a minimum price for wheat at $5 per kg to support farmers' incomes, above the free-market equilibrium price. At this price, farmers are willing to supply 800 tonnes per month, but consumers are only willing to buy 500 tonnes per month. (a) Calculate the resulting surplus of wheat. (b) State one method the government could use to dispose of this surplus. (c) Explain one negative consequence of this price floor for consumers. ✓ Reviewed Paper 2 style Medium 4 marks Calculator + 8 Marking analysis: A learner attempts the following task: “A government sets a minimum price for wheat at $5 per kg to support farmers' incomes, above the free-market equilibrium price. At this price, farmers are willing to supply 800 tonnes per month, but consumers are only willing to buy 500 tonnes per month. (a) Calculate the resulting surplus of wheat. (b) State one method the government could use to dispose of this surplus. (c) Explain one negative consequence of this price floor for consumers.” Their response addresses only this point: “Calculates the surplus as 800 − 500 = 300 tonnes per month.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks Calculator + 9 A city government imposes a maximum rent of $800 per month on apartments, below the free-market equilibrium rent of $1,100 per month. At $800, landlords are willing to supply 3,000 apartments, while 4,200 households want to rent at that price. (a) Calculate the resulting shortage of apartments. (b) Explain one likely consequence of this shortage in terms of non-price allocation, referring to how landlords might choose among applicants. (c) Explain one reason landlords might reduce spending on maintaining the quality of existing apartments as a result of this policy. ✓ Reviewed Paper 2 style Medium 4 marks Calculator + 10 Marking analysis: A learner attempts the following task: “A city government imposes a maximum rent of $800 per month on apartments, below the free-market equilibrium rent of $1,100 per month. At $800, landlords are willing to supply 3,000 apartments, while 4,200 households want to rent at that price. (a) Calculate the resulting shortage of apartments. (b) Explain one likely consequence of this shortage in terms of non-price allocation, referring to how landlords might choose among applicants. (c) Explain one reason landlords might reduce spending on maintaining the quality of existing apartments as a result of this policy.” Their response addresses only this point: “Calculates the shortage as 4,200 − 3,000 = 1,200 apartments.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks Calculator + 11 In a market, the demand function is P = 100 − 2Q and the supply function is P = 20 + 2Q, where P is price in dollars and Q is quantity in thousands of units. (a) Calculate the equilibrium price and quantity. (b) Calculate the value of consumer surplus at the equilibrium. (c) Calculate the value of producer surplus at the equilibrium. ✓ Reviewed Paper 2 style Medium 5 marks Calculator + 12 Marking analysis: A learner attempts the following task: “In a market, the demand function is P = 100 − 2Q and the supply function is P = 20 + 2Q, where P is price in dollars and Q is quantity in thousands of units. (a) Calculate the equilibrium price and quantity. (b) Calculate the value of consumer surplus at the equilibrium. (c) Calculate the value of producer surplus at the equilibrium.” Their response addresses only this point: “Sets 100 − 2Q = 20 + 2Q and solves to obtain Q = 20 (thousand units).” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 5 marks Calculator + 13 When the price of coffee rose by 10%, the quantity demanded of tea increased by 4%. (a) Calculate the cross price elasticity of demand (XED) between coffee and tea. (b) State whether coffee and tea are substitutes or complements, based on your answer. (c) Explain what the sign of your answer indicates about the relationship between the two goods. ✓ Reviewed Paper 2 style Medium 4 marks Calculator + 14 Marking analysis: A learner attempts the following task: “When the price of coffee rose by 10%, the quantity demanded of tea increased by 4%. (a) Calculate the cross price elasticity of demand (XED) between coffee and tea. (b) State whether coffee and tea are substitutes or complements, based on your answer. (c) Explain what the sign of your answer indicates about the relationship between the two goods.” Their response addresses only this point: “Calculates XED = %ΔQd(tea) / %ΔP(coffee) = 4/10 = +0.4.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks Calculator + 15 As average household income rose by 8%, the quantity demanded of a particular brand of instant noodles fell by 3%. (a) Calculate the income elasticity of demand (YED) for instant noodles. (b) State, with reference to the sign of your answer, what type of good instant noodles represent. (c) Explain what this classification implies about how demand for instant noodles is likely to change during an economic downturn. ✓ Reviewed Paper 2 style Medium 4 marks Calculator + 16 Marking analysis: A learner attempts the following task: “As average household income rose by 8%, the quantity demanded of a particular brand of instant noodles fell by 3%. (a) Calculate the income elasticity of demand (YED) for instant noodles. (b) State, with reference to the sign of your answer, what type of good instant noodles represent. (c) Explain what this classification implies about how demand for instant noodles is likely to change during an economic downturn.” Their response addresses only this point: “Calculates YED = %ΔQd / %Δincome = −3/8 = −0.375.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks Calculator + 17 When the price of a particular vegetable rose from $2.00 to $2.50 per kg, the quantity farmers were willing to supply increased from 10,000 kg to 11,000 kg within the same week. (a) Calculate the price elasticity of supply (PES). (b) State whether supply is elastic or inelastic. (c) Explain one reason why supply of an agricultural good like this vegetable is often relatively inelastic in the short run. ✓ Reviewed Paper 2 style Medium 4 marks Calculator + 18 Marking analysis: A learner attempts the following task: “When the price of a particular vegetable rose from $2.00 to $2.50 per kg, the quantity farmers were willing to supply increased from 10,000 kg to 11,000 kg within the same week. (a) Calculate the price elasticity of supply (PES). (b) State whether supply is elastic or inelastic. (c) Explain one reason why supply of an agricultural good like this vegetable is often relatively inelastic in the short run.” Their response addresses only this point: “Calculates %ΔQs = 1,000/10,000 = 10%.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks Calculator + 19 Education generates benefits not only for the individual who receives it, such as higher future earnings, but also for society as a whole, such as a more productive workforce and lower crime rates. (a) Identify the type of market failure this represents. (b) State whether the free-market quantity of education consumed is likely to be higher or lower than the socially optimal quantity. (c) Suggest one government policy that could correct this market failure, and briefly explain how it works. ✓ Reviewed Paper 1 style Medium 4 marks No calculator + 20 Marking analysis: A learner attempts the following task: “Education generates benefits not only for the individual who receives it, such as higher future earnings, but also for society as a whole, such as a more productive workforce and lower crime rates. (a) Identify the type of market failure this represents. (b) State whether the free-market quantity of education consumed is likely to be higher or lower than the socially optimal quantity. (c) Suggest one government policy that could correct this market failure, and briefly explain how it works.” Their response addresses only this point: “Identifies a positive externality of consumption.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks No calculator + 21 A national flood-defence system protects an entire coastal region: once built, no resident can be excluded from its protection, and one resident benefiting from it does not reduce the protection available to others. (a) Identify the two defining characteristics of a public good illustrated by this example. (b) Explain why a private firm is unlikely to provide this flood-defence system profitably if left to the free market. (c) Suggest how the government could ensure the flood-defence system is provided. ✓ Reviewed Paper 1 style Medium 4 marks No calculator + 22 Marking analysis: A learner attempts the following task: “A national flood-defence system protects an entire coastal region: once built, no resident can be excluded from its protection, and one resident benefiting from it does not reduce the protection available to others. (a) Identify the two defining characteristics of a public good illustrated by this example. (b) Explain why a private firm is unlikely to provide this flood-defence system profitably if left to the free market. (c) Suggest how the government could ensure the flood-defence system is provided.” Their response addresses only this point: “Identifies non-excludability (no resident can be excluded) and non-rivalry (one resident's benefit does not reduce others' benefit).” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks No calculator + 23 Compare a market with many small firms selling an identical product and free entry and exit (perfect competition) to a market with a single firm facing no competition (monopoly), both producing the same underlying good. (a) State which market structure is generally considered allocatively efficient, and explain why, in terms of the relationship between price and marginal cost. (b) Explain why a profit-maximising monopoly is likely to charge a higher price and produce a lower output than a perfectly competitive market for the same good. (c) Identify the term used to describe the loss of total welfare that results from this reduction in output under monopoly. ✓ Reviewed Paper 1 style Medium 5 marks No calculator + 24 Marking analysis: A learner attempts the following task: “Compare a market with many small firms selling an identical product and free entry and exit (perfect competition) to a market with a single firm facing no competition (monopoly), both producing the same underlying good. (a) State which market structure is generally considered allocatively efficient, and explain why, in terms of the relationship between price and marginal cost. (b) Explain why a profit-maximising monopoly is likely to charge a higher price and produce a lower output than a perfectly competitive market for the same good. (c) Identify the term used to describe the loss of total welfare that results from this reduction in output under monopoly.” Their response addresses only this point: “States that perfect competition is allocatively efficient, because in equilibrium price equals marginal cost (P = MC).” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 5 marks No calculator + 25 A government introduces a subsidy of $3 per unit on locally grown rice to support farmers and keep food affordable. Before the subsidy, the market equilibrium price was $10 per kg and equilibrium quantity was 50,000 kg per week. After the subsidy, the new equilibrium quantity rises to 60,000 kg per week, and the new price paid by consumers falls to $8.50 per kg. (a) Calculate the price received by producers per kg after the subsidy, including the subsidy. (b) Calculate the total cost of the subsidy to the government per week. (c) State one advantage and one disadvantage of using a subsidy to support this market. ✓ Reviewed Paper 2 style Medium 5 marks Calculator + 26 Marking analysis: A learner attempts the following task: “A government introduces a subsidy of $3 per unit on locally grown rice to support farmers and keep food affordable. Before the subsidy, the market equilibrium price was $10 per kg and equilibrium quantity was 50,000 kg per week. After the subsidy, the new equilibrium quantity rises to 60,000 kg per week, and the new price paid by consumers falls to $8.50 per kg. (a) Calculate the price received by producers per kg after the subsidy, including the subsidy. (b) Calculate the total cost of the subsidy to the government per week. (c) State one advantage and one disadvantage of using a subsidy to support this market.” Their response addresses only this point: “States that the price received by producers equals the price paid by consumers plus the subsidy per unit.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 5 marks Calculator + 27 In the market for used cars, sellers typically know much more about a car's true condition and history than potential buyers do. (a) Identify the type of market failure illustrated here. (b) Explain how this information gap could lead buyers to only be willing to pay an average price that reflects the average quality of cars on the market. (c) Explain why this could cause sellers of genuinely high-quality used cars to withdraw from the market, using the term 'adverse selection'. ✓ Reviewed Paper 1 style Medium 4 marks No calculator + 28 Marking analysis: A learner attempts the following task: “In the market for used cars, sellers typically know much more about a car's true condition and history than potential buyers do. (a) Identify the type of market failure illustrated here. (b) Explain how this information gap could lead buyers to only be willing to pay an average price that reflects the average quality of cars on the market. (c) Explain why this could cause sellers of genuinely high-quality used cars to withdraw from the market, using the term 'adverse selection'.” Their response addresses only this point: “Identifies asymmetric information as the market failure.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks No calculator + 29 A government wants to reduce total carbon emissions from a group of factories using a market-based approach rather than a fixed emissions tax. (a) Outline how a cap-and-trade (tradable permit) scheme would work to reduce total emissions across the group of factories. (b) Explain one reason this approach could achieve emission reductions at a lower overall cost than requiring every factory to cut emissions by the same fixed amount. ✓ Reviewed Paper 1 style Medium 4 marks No calculator + 30 Marking analysis: A learner attempts the following task: “A government wants to reduce total carbon emissions from a group of factories using a market-based approach rather than a fixed emissions tax. (a) Outline how a cap-and-trade (tradable permit) scheme would work to reduce total emissions across the group of factories. (b) Explain one reason this approach could achieve emission reductions at a lower overall cost than requiring every factory to cut emissions by the same fixed amount.” Their response addresses only this point: “Outlines that the government sets a total cap on emissions and issues (or auctions) a matching number of tradable permits to factories.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks. ✓ Reviewed Marking analysis Medium 4 marks No calculator + Self-assessed 0 / 0
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