IB Economics HL 2.11 Market Failure Market Power

Covered syllabus points

2.11.1 (HL)—Market structures 2.11.2 (HL)—Rational producer behaviour 2.11.3 (HL)—Degrees of market power 2.11.4 (HL)—Monopoly 2.11.5 (HL)—Oligopoly 2.11.6 (HL)—Monopolistic competition 2.11.7 (HL)—Advantages and risks of market power 2.11.8 (HL)—Government responses to market power

[Maximum number: 25]

(a)

Distinguish between perfect competition and monopolistic competition.

[ 10 ]

(b)

Using real-world examples, discuss the impact of large firms having significant market power.

[ 15 ]

Answers may include:
- Terminology: market power
- Explanation: of the impact of significant market power in terms of the monopoly and oligopoly models
- Diagram: showing monopoly/collusive oligopoly (significant market power)
- Synthesis (discuss): the advantages and disadvantages of significant market power in terms of economies of scale, including natural monopolies, abnormal profits to finance investment in R&D and innovation;
the possible welfare loss, the risks in relation to price, output and consumer choice, the possibility that such firms may pursue goals other than profit maximization
- Examples: real-world examples of large firms that have significant market power.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.

Assessment Criteria

Marks ..... Level descriptor
0:
- The work does not reach a standard described by the descriptors below.
1-3:
- The response indicates little understanding of the specific demands of the question.
- Economic theory is stated but it is not relevant.
- Economic terms are stated but they are not relevant.
- The response contains no evidence of synthesis or evaluation.
- A real-world example(s) is identified but it is irrelevant.
4-6:
- The response indicates some understanding of the specific demands of the question.
- Relevant economic theory is described.
- Some relevant economic terms are included.
- The response contains evidence of superficial synthesis or evaluation.
- A relevant real-world example(s) is identified.
7-9:
- The response indicates understanding of the specific demands of the question, but these demands are only partially addressed.
- Relevant economic theory is partly explained.
- Some relevant economic terms are used appropriately.
- Where appropriate, relevant diagram(s) are included.
- The response contains evidence of appropriate synthesis or evaluation but lacks balance.
- A relevant real-world example(s) is identified and partly developed in the context of the question.
10-12:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is explained.
- Relevant economic terms are used mostly appropriately.
- Where appropriate, relevant diagram(s) are included and explained.
- The response contains evidence of appropriate synthesis or evaluation that is mostly balanced.
- A relevant real-world example(s) is identified and developed in the context of the question.
13-15:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is fully explained.
- Relevant economic terms are used appropriately throughout the response.
- Where appropriate, relevant diagram(s) are included and fully explained.
- The response contains evidence of effective and balanced synthesis or evaluation.
- A relevant real-world example(s) is identified and fully developed to support the argument.

[Maximum number: 13]

The following diagram illustrates the demand and cost conditions of a firm.

(a)

Identify whether this firm is in perfect competition. You must give a reason for your choice.

[ 2 ]

(b)

Identify the profit maximizing level of output for this firm. You must give a reason for your choice.

[ 2 ]

(c)

Calculate the total revenues and the total costs and the profits or losses for this firm at the profit maximizing level of output.

[ 3 ]

$\mathrm{TR}=\$ 20.00 \times 17000=\$ 340000$ $\mathrm{TC}=\$ 11.00 \times 17000=\$ 187000$

Profit $=\mathrm{TR}-\mathrm{TC}=\$ 340000-\$ 187000=\$ 153000$ of profits

Marking guidance:

OFR applies for the third mark.
Workings are not required for any of the responses.
If the dollar sign is not present in each of the three steps then a maximum of 2 marks may be awarded.

(d)

Identify the level of output this firm would choose if instead of profit it aimed at maximizing revenues. You must give a reason for your choice.

[ 2 ]

(e)

Explain why a profit maximizing firm with monopoly power will never choose to operate on the inelastic portion of its average revenue curve.

[ 4 ]

[Maximum number: 25]

(a)

Explain how welfare loss may result from monopoly power.

[ 10 ]

(b)

Discuss the effectiveness of government policies (legislation and regulation) to reduce monopoly power.

[ 15 ]

N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.

Answers may include:
- definitions of monopoly power and legislation (anti-monopoly, anti-collusion, merger prevention etc.) and regulation (lower prices and larger quantities for consumers, fair prices for natural monopolies)
- theory of how a monopolist's control of price or output might be reduced by legislation or regulation in the interests of the consumer
- diagram to show a comparison of monopoly and perfect competition;
diagram to illustrate price regulation showing monopoly charging a price which is equal to average cost
- examples of legislation, regulation, and also other solutions such as nationalization, privatization and trade liberalization
- synthesis and evaluation (discuss).

Discussions may include: effectiveness of policies against the sources of monopoly power, eg reduction of legal barriers to entry, control of anti-competitive behaviour. Where natural monopoly occurs, restrictive policies might not be in the consumer's interest. Government policies might be rendered less effective by globalization. Government policies might move a market from monopoly towards a market structure which gives rise to allocative efficiency.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Assessment Criteria

Part (b) 15 marks
0 The work does not reach a standard described by the descriptors below. ..... 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. ..... 1-5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. ..... 6-9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. ..... 10-12
4 There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. ..... 13-15

All question bank results loaded

IB Economics HL 2.11 Market Failure Market Power Topic Practice

Covered syllabus points

Question 1

Question (a)

Question (b)

Question 2

Question (a)

Question (b)

Question (c)

Question (d)

Question (e)

Question 3

Question (a)

Question (b)