IB Economics Review Questions Introduction to Economics 1. Why is the concept of ‘scarcity’ important in rich countries as well as poor ones? 2. The choice between military products and the provision of health care illustrates the problem of ‘opportunity cost’. Explain the nature of the problem, using a production possibility frontier to help you. 3. Explain why countries with different economic systems face the same fundamental economic problems. 4. ‘Economics is primarily concerned with the allocation of scarce resources which have alternative uses’. Use a production possibility curve to help you explain this statement. 5. Use production possibility curve diagrams to explain the differences between actual output and potential output and between economic growth and economic development. 6. Explain what is meant by a production possibility curve and use a production possibility curve diagram to explain the concepts of scarcity, efficiency, choice and opportunity cost. 7. Explain how the three basic economic questions would be answered in a free market economy and in a centrally-‐planned economy. 8. Using a production possibility curve (PPC) diagram, explain the relationship between the economic concepts of economic goods, factors of production and opportunity cost. 9. With reference to the concept of economic growth, explain the difference between a movement along an existing production possibility curve (PPC) and an outward shift in a production possibility curve (PPC). SECTION ONE QUESTIONS (MICROECONOMICS) 1. What alternative solutions might an economist suggest to the problem of traffic congestion? What are the advantages and disadvantages of each of these solutions? 2. Under what conditions can a firm sell the same product at different prices?
3. European governments have a policy of supporting farm incomes with artificially higher prices for certain foodstuffs. What are the economic effects of this on Europe and the rest of the world? 4. Pollution is sometimes said to be an example of market failure. What is meant by this? How might governments encourage markets to work towards helping solve environ-‐mental problems? 5. In what circumstances might a government use price controls to influence a market? 6. Is the existence of monopoly in an industry likely to improve or worsen resource allocation? 7. Why are many industries, such as car manufacturing, becoming more oligopolistic? How are the price and output decisions of firms affected by this trend? 8. Economic theory makes certain assumptions about market conditions, in order to study how firms decide on prices and output. Are these assumptions realistic, and do firms always behave in the real world as Economics textbooks predict? 9. Briefly explain what economists mean by the word ‘market’. What kind of problems are markets good at solving, and what are they bad at solving? 10. Why does there appear to be a movement towards oligopoly in certain markets? How does this movement affect the way in which producers make decisions, and how does it affect the welfare of consumers? 11. Evaluate the roles of ‘markets’ and ‘planning’ in an economy today? How are these roles likely to change? 12. What are the assumptions behind the model of a perfectly competitive industry in long-‐run equilibrium? Why do economists make assumptions of this sort? Are such assump-‐tions realistic? 13. (a) Why are profits important in a market economy? (b) What problems might a country experience if it tries to use the profit motive to produce everything? 14. (a) What are economies of scale, and why have they become so important in modern economics? (b) In view of this importance, why do so many small enterprises operate successfully in the world today?
15. (a) Explain what externalities are and how they may arise. (b) Discuss whether governments should always involve themselves in markets with substantial externalities. 16. (a) What are the main features of an oligopolistic market? (b) Do oligopolies work in favor of, or against the interest of consumers? 17. (a) What do economists mean by ‘externalities’ or spillover effects? (b) How does an understanding of externalities (spillover effects) assists economists in analyzing environmental problems? 18. (a) What are ‘natural monopolies’ and why are they considered a danger if left unregulated? (b) Is nationalization of natural monopolies the best method of improving their economic efficiency? 19. (a) Distinguish between private costs and benefits and social costs and benefits. (8) (b) Explain how an increase in the number of cars n the roads of a country might lead to a misallocation of resources. (8) (c) Evaluate the ways in which a government might remedy this misallocation. (9) 20. (a) Carefully explain what is it that price, income and cross elasticities of demand are meant to measure. (b) Discuss the practical importance of the concept of price elasticity of demand for (i) business organizations (ii) the government 21. (a) Why do environmental issues cause problems to economists? (b) What solutions might an economist suggest to the problem of overfishing? 22. (a) State the law of demand and distinguish between movements along the demand curve and shifts of the demand curve. (10) (b) Explain, with the help of diagrams, the effect of an increase in the price of petrol is likely to have on (i) The market for cars. (ii) The market for coal. (15)
23. “Monopoly price is higher and output smaller than is socially ideal. The public is a victim.” (J.K. Galbraith, 1974) (a) Explain to economic reasoning behind the statement that “monopoly price is higher and output smaller than is socially ideal.” (12) (b) Do you agree that the public is always the victim of monopoly? Justify your answer. (13) 24. (a) Why are environmental problems considered to be an example of market failure? (10) (b) To what extent can government intervention correct this failure? 25. (a) Under what conditions is price discrimination possible and profitable? (12) (b) Who gains and who loses from price discrimination? Illustrate your answer with examples. (13) 26. (a) Using suitable diagrams, explain why there is likely to be an absence of long run economic profits in perfect competition. (12) (b) To what extent might consumers benefit from increased competition between firms? (13) 27. (a) How does a monopoly maintain supernormal (or abnormal) profit in the long run? (12) (b) Is monopoly always undesirable? (13) 28. Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly. 29. (a) Why is pollution an example of market failure? (10) (b) To what extent can the market system protect the environment? (15) 30. (a) What does an economist mean by efficiency in the operation of a firm? (10) (b) Discuss whether the achievement of efficiency is possible and desirable. (15) 31. (a) What role do prices play in the allocation of resources in free market economics? (b) Evaluate the options available to governments to overcome the failure of markets arising from the production and consumption of demerit goods. Illustrate your answer with the examples where possible.
32. (a) Outline the ways in which monopoly power might arise. (b) Evaluate the extent to which governments should seek to control the growth of monopoly power. 33. ‘National policies and international agreements must be implemented in order to reduce global environmental problems’. (a) Using the concepts of market failure, explain the statement above from an economist’s point of view. (b) With references to both national policies and international agreements, present and evaluate three solutions that could be recommended by economists. 34. Discuss the economic arguments for and against imposing substantially higher levels of taxation on the sale of alcohol. 35. (a) In what ways do firms operating in different market structures compete? (b) Discuss the view that the more competition there is within each industry, the better. 36. (a) Explain the concepts of maximum and minimum price controls. (b) Evaluate the idea that government intervention in the form of price ceilings and price floors is well intentioned, but often leads to undesirable side effects. 37. (a) Explain how a monopolist may be able to earn supernormal (abnormal) profits in the long run (10 marks) (b) ‘Production by a monopolist will always be against the interests of consumers’. Discuss. (15 marks) 38. (a) Explain how profit is determined in perfect competition (10 marks) (b) ‘Whatever the type of market structure, profit maximization will always be the only goal of firms’. Discuss. (15 marks) 39. (a) Explain the differences between monopolistic competition and oligopoly as market structures (10 marks) (b) Discuss the differences between a collusive and a non-‐collusive oligopoly (10 marks)
40. (a) Carefully distinguish between merit goods, demerit goods and public goods (10 marks) (b) Evaluate the view that governments should always intervene in markets for such goods as cigarettes and alcohol (15 marks) 41. (a) Explain the necessary conditions for price discrimination to take place (10 marks) (b) Discuss the advantages and disadvantages of price discrimination for consumers and producers (15 marks) 42. (a) Explain how barriers to entry may affect market structure (10 marks) (b) Evaluate the view that monopoly is an undesirable type of market structure (15 marks) 43. (a) Explain the difference between short run equilibrium and long run equilibrium in monopolistic competition (10 marks) (b) ‘Perfect competition is a more desirable market form than monopolistic competition’. Discuss. (15 marks) 43. (a) Explain how a firm operating in an oligopolistic market might attempt to increase its market share (10 marks) (b) Evaluate the view that producers, and not consumers, are the main beneficiaries of oligopolistic market structures 44. (a) Explain the determinants of price elasticity of demand. (10 marks) (b) ‘A deterioration in a country’s terms of trade will always be disadvantageous for the current account balance.’ Evaluate this statement using the concept of price elasticity of demand. (15 marks) 45. (a) Explain the concepts of allocative and productive (technical) efficiency. (10 marks) (b) ’Monopolies are inefficient and therefore always act against the public interest’. Discuss this statement. (15 marks)
