IB DP Economics: Competitive market equilibrium – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

These questions cover sub-topic 2.3, competitive market equilibrium, of the IB Diploma Programme Economics guide (first assessment 2022, published February 2020) and are written for the course examined from the 2022 session onwards. Question 7 is HL only; the rest suit SL and HL. Every market is fictional and every figure is invented. Read the study guide and revision notes first, and see the course hub and checklist. Describe each diagram in words or sketch it with labelled axes and curves. Keep numbers simple, as Paper 1 does not allow calculators according to the guide.

Questions

1. Define allocative efficiency. [2]

2. (calculator-free) The table shows the market for tickets to a concert in Orlenia.

Price (vel)	Quantity demanded	Quantity supplied
20	110	20
25	100	40
30	90	60
35	80	80
40	70	100
45	60	120

(a) Identify the market-clearing price and the quantity traded at it. [2] (b) At a price of 25 vel, name the gap between demand and supply and give its size. [2] (c) Explain the adjustment that follows if the price starts at 45 vel. [3]

3. Dorvia is a fictional country. A new kiln lowers the cost of making floor tiles there. Draw a supply and demand diagram for tiles and use it to explain how the new equilibrium differs from the old. [4]

4. A poor harvest cuts the supply of marsh berries in a fictional town and the price rises. Explain how the rise in price acts as a signal and as an incentive. [4]

5. A hall in Kesh has 500 seats and more people want tickets than seats at the advertised price, so the price is raised. Explain the rationing function of price here. [3]

6. Explain, with reference to a diagram, how a rise in supply that lowers the equilibrium price changes consumer surplus and producer surplus. [4]

7. (HL only, calculator-free) In a fictional market for clay pots, the straight-line demand curve meets the price axis at 36 vel and the straight-line supply curve meets it at 8 vel. The curves cross at a price of 20 vel and a quantity of 40 pots. (a) Calculate the consumer surplus. [2] (b) Calculate the producer surplus. [2] (c) Calculate the social surplus. [1]

8. (calculator-free) In a fictional market for bicycle repairs, at 60 repairs per week the marginal benefit of the last repair is 25 vel and its marginal cost is 15 vel. The equilibrium is 80 repairs. Explain why output of 60 is not allocatively efficient. [3]

9. In the same market, output is 100 repairs per week. The marginal benefit of the last repair is 10 vel and its marginal cost is 22 vel. Explain what this shows about social surplus. [3]

10. In a fictional city, incomes rise and a new firm enters the market for bread at the same time. Using one diagram, explain what happens to the price and quantity of bread. [6]

11. Discuss the view that the competitive market equilibrium is allocatively efficient. [8]

Answers

1. Allocative efficiency is where resources are used to produce the goods and services society values most [1], which in a competitive market means output where marginal benefit equals marginal cost [1]. [2] Examiner insight: Definitions gain when they name what is being matched, so state MB = MC and not only “best use of resources”.

2. (a) Quantity demanded equals quantity supplied at a price of 35 vel [1] and a quantity of 80 [1]. (b) At 25 vel, quantity demanded is 100 and quantity supplied is 40, so there is excess demand (a shortage) [1] of 60 [1]. (c) At 45 vel supply is 120 and demand is 60, so there is excess supply of 60 [1]. Unsold stock leads sellers to cut the price [1]. Each cut draws in more buyers and discourages some sellers, until both sides are at 80 for 35 vel [1]. [7] Examiner insight: “Identify” and “name” need the answer without explanation, while “explain” in part (c) needs the reasons, so do not repeat the reading from the table there.

3. The kiln lowers costs, so the supply curve shifts right from S to S₂ [1]. At the old price there is now excess supply [1], so the price falls [1]. The new equilibrium has a lower price and a larger quantity, as buyers extend along the demand curve [1]. [4] Examiner insight: Advice: draw and label S, S₂, D and both equilibria, and refer to the diagram in the text, since the question asks for a diagram.

4. Signal: the higher price tells buyers and producers that berries have become scarcer [1], so buyers learn they should economise [1]. Incentive: it raises the reward for each unit supplied, so growers have a reason to produce more or find new sources [1], and some buyers have a reason to switch to substitutes [1]. [4] Examiner insight: Keep signalling (information) apart from incentive (a change in behaviour), and tie both to berries.

5. There are fewer seats than people willing to buy at the old price [1]. A higher price removes those who are unwilling or unable to pay it [1], until the number of buyers matches the 500 seats [1]. [3] Examiner insight: Rationing answers gain when they say who is left out and why, not only that “price shares the seats”.

6. On the diagram S shifts right and the equilibrium price falls [1]. Consumer surplus (the area under D and above the price) grows [1], as the price is lower and quantity is larger [1]. Producer surplus (above S and below the price) falls at each unit but the larger quantity adds area, so the net effect depends on the shift [1]. [4] Examiner insight: Advice: do not state that producer surplus must fall; a lower price and a larger quantity pull in opposite directions.

7. (a) Consumer surplus = ½ × 40 × (36 − 20) [1] = 320 [1]. (b) Producer surplus = ½ × 40 × (20 − 8) [1] = 240 [1]. (c) Social surplus = 320 + 240 = 560 [1]. [5] Examiner insight: Show the formula and the substitution so that an arithmetic slip still shows correct method, and state the units.

8. At 60, marginal benefit (25) is greater than marginal cost (15) [1]. The next repair adds more value to buyers than it costs to supply [1], so social surplus can still rise by producing more, up to 80, where MB = MC [1]. [3] Examiner insight: The comparison of MB with MC must be explicit, with both figures used.

9. At 100, marginal cost (22) exceeds marginal benefit (10) [1]. The last repair costs more than it is worth to buyers [1], so there is a loss of social surplus, which would rise if output fell towards 80 [1]. [3] Examiner insight: Say whether output is above or below the efficient level, as well as that it is inefficient.

10. Higher incomes shift D right [1]. The new firm shifts S right [1]. Both shifts raise the equilibrium quantity [1]. The effect on price is uncertain [1]: it rises if the shift in demand is larger, falls if the shift in supply is larger, and is unchanged if they are equal [1]. A diagram labelled D, D₂, S, S₂ and both equilibria shows one case clearly [1]. [6] Examiner insight: Advice: state which effect is certain and which is not, and say which case your diagram shows.

11. Indicative points, each worth one mark; the real paper uses markbands, so this is a revision guide only. For: at equilibrium social surplus is maximum [1]; MB = MC there [1]; the price mechanism signals scarcity and creates incentives to move resources to where they are valued most [1]; a shortage or surplus pushes the price towards that point [1]. Against: the curves may omit some benefits or costs, so the equilibrium may not be efficient for society [1]; efficiency says nothing about how surplus is shared [1]; real markets may have few sellers or poor information, so the competitive conditions fail [1]. Judgement: efficient in the narrow sense and when the assumptions hold, but not always the best outcome [1]. [8] Examiner insight: “Discuss” asks for both sides and a supported conclusion, so finish with a clear judgement rather than a summary.

Where marks are usually lost

• Leaving the new curves and equilibria unlabelled on a diagram.
• Writing “demand rises” where only the quantity demanded changes.
• Putting the shortage or surplus on the wrong side of equilibrium.
• Defining signalling and incentive without tying them to the market in the question.
• Not comparing MB with MC using both figures.
• Showing an HL surplus answer with no working or units.
• Giving a definite price change where two shifts leave it uncertain.
• Treating efficiency as fairness in an evaluation.

Next steps

• Read the revision notes and the study guide.
• Check progress against the Economics checklist and the course hub.
• Try all the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Source document: Economics guide for the Diploma Programme, first assessment 2022, from the International Baccalaureate Organization. All figures are invented for illustration.