Practise IB Economics HL 2.3.6 by calculating consumer and producer surplus and explaining changes caused by taxes, subsidies, quotas, demand and cost shifts, using marked exam evidence.
1. Capsicum prices reach NZ per kilogram
The price of capsicums, a common vegetable in New Zealand, reached an all-time high of NZ$24 per kilogram (kg) in 2021. Vegetable prices in New Zealand rose 15% in 2021, driven by higher prices for cucumbers, lettuce, capsicums and broccoli.
A consumer prices analyst said "prices for many vegetables typically rise in winter. However, we are seeing larger rises than usual for this time of the year and for a greater number of vegetables." It has been suggested that price increases are larger than usual because of the market power of the supermarkets in New Zealand.
Figure 1 illustrates a decrease in supply in the market for capsicums in New Zealand.
Figure 1
High profits: New Zealand considers breaking up supermarket duopoly¹
New Zealand's supermarket industry is dominated by two huge firms, Foodstuffs and Woolworths. Together, their stores control about 85 % of the total market, giving them significant market power.
A report by the New Zealand Commerce Commission has found that these supermarkets are making huge profits and charging some of the highest prices in the OECD².
A government official said the government would "do whatever it takes to make sure New Zealanders get a fair deal at the checkout".
The major retailers appear to avoid competing strongly with each other, particularly on price. Meanwhile, competitors wanting to enter the market or expand face significant barriers to entry, including a lack of suitable sites for large scale stores.
The government has strict regulations limiting the sites that can be used for building supermarkets. The big supermarkets have been buying the limited sites in order to prevent competitors from entering the market.
It has been reported that the entry of a German retailer into the Australian supermarket industry, which was also dominated by two firms, has increased competition, cut prices by around 13 % and saved customers more than NZ billion per year.
duopoly: a market dominated by two firms
OECD: The Organisation for Economic Co-operation and Development
Figure 2 illustrates a market in which two firms act as a monopolist in the market for cheese by colluding on the price they charge.
Calculate the loss in consumer surplus resulting from the increase in the price of capsicums from NZ$18 per kg to NZ$24 per kg.