Competitive market equilibrium Paper 1

IBDP Economics  SL  – Microeconomics- Competitive market equilibrium Paper 1- Exam Style Practice Questions

IBDP Physics
IBDP Biology
IBDP Chemistry
IBDP Maths
IBDP - All Courses

Competitive market equilibrium Paper 1

Exam Style Questions..

Subject Guide IBDP Economic IBO

IBDP Economic SL- All Topics

Exam Style Question for Microeconomics- Competitive market equilibrium Paper 1

Question

Explain how the price mechanism reallocates resources when there is an increase in demand for a good or service.

▶️Answer/Explanation

Answers may include:

  • definitions of price mechanism, resources, demand
  • diagram to show how an increase in demand leads to a reallocation of resources
  • explanation of how the signalling and incentive functions of price lead to a reallocation of resources when demand increases for a good or service
  • examples of goods and services where the price mechanism has reallocated resources because of an increase in demand.

Question

Examine the view that the best allocation of resources, from society’s point of view, occurs where the marginal private benefit equals the marginal private cost.

▶️Answer/Explanation

Answers may include:

  • definition of marginal private benefit (MPB), marginal private cost (MPC), allocation of resources
  • diagram to show marginal private benefit in equilibrium with marginal private cost and community surplus being maximized
  • explanation of why MPB = MPC (demand = supply) represents an optimal allocation of resources
  • examples of marginal private benefits and costs or externalities
  • synthesis and evaluation (examine).

Question

Explain the view that the best allocation of resources occurs when consumer surplus and producer surplus are maximized.

▶️Answer/Explanation

Answers may include:

  • definitions of allocation of resources, consumer surplus, producer surplus
  • diagram to show consumer and producer surplus being maximized
  • explanation that resources are being used in the most efficient way when demand equals supply and the consumer surplus and producer surplus are maximized
  • examples of goods and services that ensure resources are allocated efficiently. Any market example is acceptable.

Question

Explain how the price mechanism reallocates resources when there is a decrease in the supply of a good.

▶️Answer/Explanation

Answers may include:

  • definitions of price mechanism, resources, supply 
  • diagram to show how a decrease in supply leads to a reallocation of resources 
  • explanation of how a decrease in supply shifts the supply curve left, creates excess demand at the original price, incentivizes producers to increase price, provides signals and incentives to consumers to change their consumption patterns, switches demand to less expensive goods and causes a reallocation of resources
  • examples of goods where a decrease in supply has affected the allocation of resources.

Question

Discuss the view that competitive markets will always achieve allocative efficiency.

▶️Answer/Explanation

Answers may include:

  • definitions of allocative efficiency, competitive market
  • diagram to illustrate the principle of allocative efficiency, eg demand = supply, marginal benefit= marginal cost
  • explanation that allocative efficiency occurs where market equilibrium occurs, where social (community) surplus is maximized with respect to producer and consumer surplus; marginal benefit equals marginal cost
  • example(s) of competitive markets or markets where there is market failure
  • synthesis or evaluation (discuss).

Question

Explain the concepts of consumer surplus and producer surplus.

▶️Answer/Explanation

Answers may include:

  • definition of consumer surplus, producer surplus
  • diagram to show consumer surplus and producer surplus
  • explanation that consumer surplus is above equilibrium price and below the demand curve, and that producer surplus is below equilibrium price and above the supply curve
  • examples of consumer surplus and producer surplus.
Scroll to Top