IB Economics HL 2.5.4 Hl Ped Along a…emand Curve

[Maximum number: 4]

1. Capsicum prices reach NZ $\$ 24$ 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 $\$ 2$ billion per year.
${ }^{1}$ duopoly: a market dominated by two firms
${ }^{2}$ 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.

With reference to Figure 1, explain why the price elasticity of demand for capsicums would change if the price continued to increase beyond NZ $\$ 24$ per kg.

Level

Marks

0

The work does not meet a standard described by the descriptors below.

1

The written response is limited.

1-2

For the idea that as price increases from $24/kg demand will become more price elastic [1]

and, therefore, the (absolute) value of PED rises / an accurate calculation of PED that demonstrates how elasticity rises as the price rises [1]

2

The written response is accurate.

3-4

For an explanation that as price increases beyond $\$ 24$ / kg demand will become more price elastic/more responsive to an increase in price / accurate calculation [2]

because of one of the following [2]:

- As price increases consumers will be more inclined to purchase a substitute good instead of capsicums

- As price increases the proportion of income spent on capsicums/the product will increase

- As price increases the % change in quantity demanded of capsicums increases while the % change in price decreases

- PED=(1 / slope $) \times(\mathrm{P} / \mathrm{Q})$ . Since ( 1 / slope) is a constant and P and Q move in opposite directions then necessarily when P changes the Q of capsicums and PED will change.

A response that does not make some reference to the diagram (eg linear demand curve;
capsicums;
a calculation) may be awarded a maximum of [3].

IB Economics HL 2.5.4 Hl Ped Along a Straight Line Demand Curve Topic Practice

Question 1