IB-Style Practice Questions

Define the term 'effective demand' and explain why it differs from a mere desire for a good.

Using a demand and supply diagram, explain the likely effect of rising coffee prices and falling consumer incomes on the market for tea (a substitute for coffee).

Evaluate the view that the price mechanism is the most effective way to allocate scarce resources in a modern economy.

Calculate the price elasticity of demand for petrol and comment on whether demand is elastic or inelastic. Explain one reason for this result.

Using diagrams, explain how the concept of price elasticity of demand can be used to analyse the impact of an indirect tax on consumers and producers in two different markets: one with elastic demand and one with inelastic demand.

Evaluate the use of a minimum wage as a government policy to improve the welfare of low-income workers.

Using a diagram, explain how the production of steel creates a negative externality and how a carbon tax could correct this market failure.

Evaluate the use of tradeable permits (cap-and-trade) as a policy to reduce carbon emissions compared to a carbon tax.

Using a diagram, explain how a monopolist determines its profit-maximising price and output. Evaluate whether monopoly is always harmful to consumers and society.

Using a Lorenz curve diagram, explain how the Gini coefficient is calculated and what it measures.

Evaluate the effectiveness of progressive income taxation as a policy to reduce income inequality.