IBDP Economics 2.3 Competitive market equilibrium SL Paper 1 - New Syllabus
Question
Explain how the price mechanism reallocates resources when there is an increase in demand for a good or service.
▶️Answer/Explanation
Answers may include:
- definitions of price mechanism, resources, demand
- diagram to show how an increase in demand leads to a reallocation of resources
- explanation of how the signalling and incentive functions of price lead to a reallocation of resources when demand increases for a good or service
- examples of goods and services where the price mechanism has reallocated resources because of an increase in demand.
Question
Examine the view that the best allocation of resources, from society’s point of view, occurs where the marginal private benefit equals the marginal private cost.
▶️Answer/Explanation
Answers may include:
- definition of marginal private benefit (MPB), marginal private cost (MPC), allocation of resources
- diagram to show marginal private benefit in equilibrium with marginal private cost and community surplus being maximized
- explanation of why MPB = MPC (demand = supply) represents an optimal allocation of resources
- examples of marginal private benefits and costs or externalities
- synthesis and evaluation (examine).