IB Economics Paper 1 Case Studies

Elasticity of Demand (primary commodities)

Locust Infestation in West Africa:
Cereal Crops have little substitutions, meaning it is relatively inelastic.
Locust infestation destroys crops in the region and Supply shift to the left, leading to increase in price.

Elasticity of Supply (artificial scarcity)

Diamonds in South Africa:
DeBeers has a monopoly power in the diamond industry, limiting diamond supply to the market and creating a relationship between diamonds and weddings.
High demand + Low supply = high prices

Inelastic supply

Lithium in Australia
High demand for Lithium for EV batteries but unable to meet demand due to limited Lithium reserves. Inelastic supply as there are few major producers + complex infrastructure needed.

Elastic Supply

L.O.L Dolls in China/USA
LOL dolls are popular with kids around the world. USA toy producers ramps up production and manufacturing in 6 different Chinese factories. Plastic is used in production, which is easy to find, hence becoming elastic in supply.

Price Volatility

Copper in Chile (inelastic)
change in demand/supply = heavy fluctuation in price
Copper is Chile’s primary commodity

Indirect Taxes

Australia impose indirect tax on cigarettes
costs $40 AUD for pack of 20 cigarettes
Now only 12% of the adults smoke cigarettes in AUS

Subsidies (positive)

Electric Vehicles (EV) in America
$7500 subsidy per EV sold
200k sold after subsidies
Tesla gains 1.5billion dollar benefits from Subsidies

Subsidies (negative)

2500 large US cotton farms in West Africa share 3billion dollars in subsidies
20-30million smaller cotton farms suffer
Subsidies —> lower world prices
14% increase in price after abolition

Maximum price

Housing in NYC —> rent control introduced during WW2, makes housing affordable.
Distorts market forces of supply and demand
Deters investment in housing = shortages

Minimum prices

Alcohol prices in Scotland
0.5 euros per unit of alcohol
reduces 13% of alcohol-related deaths

Minimum wages

Australia impose minimum wage of $14 an hour (highest in the world)
increase in inflation and decrease in employment but no actual evidence.

Positive externality of Consumption

English language schools in Korea
Positive externalities include:
- More job/university applications
- boost economic growth/competition

Negative externality of Consumption

Fast Food restaurants in UK
Increase in fast food chains in UK leads to obesity
UK citizens enjoy free universal healthcare, which led to increase in obesity related illnesses

Positive externality of Production

Solar Panels in China
Technology advanced —> cost per Kilowatts fell
More renewable energy —> less pollution

Negative externality of Production

Coal-power production in India
One of the largest producers/consumers of coal
Coal -—> increased pollution and poorer air quality

Perfect competition

Soybean farmers in the US have no market power
They are price takers
Soybeans are grown in US, Brazil, Argentina

Monopolistic competition

Fast food restaurants in US
Have fairly similar products, low degree of market power.
They have differentiated products thru branding/menu

Oligopolies

Cell Phone Network in US
Market dominated by AT&T, Verizon, T-mobile.
Controls 99% of the market
The 3 only compete on basis of marketing and not price.

Monopoly

Google in (US) dominates the search market
88% market shares in “search”
High degree of market power
A tech monopoly not natural
Accused of anti-competition practices.

GDP vs GDP per capita

US GDP (25.4 trillion) > CHINA GDP ($18.3 trillion)
US GDP per Capita (76k) > CHiNA GDP per Capita (12k)

GDP vs GNI

Disneyland Shanghai = USA’s GNI + CHINESE GDP
Tiktok in USA = USA’s GDP + CHINESE GNI

Aggregate Demand

104% Household debt to GDP ratio in S.Korea
Household Debt includes personal loans + credit card bills
Household Debt therefore increases consumption = increase in AD

Aggregate Supply

Shifts in LRAS in Dubai
LRAS = changes in FoP
Land: artificial land
Labor: Millions of migrant workers
Capital: Construction of Dubai Metro
Enterprise: Dubai internet city established

Cyclical unemployment

Covid-19 in USA
Lockdown reduces employment + C + I = decrease in AD
American Rescue Plan increases Government spending = Increases in AD

Structural Unemployment

USA outsourcing manufacturing to cut cost
US factories close = loss of secondary sector jobs
US tries to retrain workers for tertiary jobs

Frictional Unemployment

Labor laws in US make it easier to hire and fire
Job centers introduced to help people find jobs

Seasonal Unemployment

Temporary Visa programs in USA
Agriculture/construction works are seasonal
Guest worker program attracts temporary workers
Hired in summer, laid off in winter.

Inflation

Pakistan Inflation rate of 35-40%
caused by Demand-pull —> increase in demand after Covid-19
Cost-push —> increase in oil imports in US
Higher living cost/maintenance —> increased poverty

Economic Growth

Economic growth of 10% in 1990s and 2000s
Reduction in people in poverty
Higher pollution + income inequality

Economic growth 2

Vietnam introduces Doi Moi, which allows formation of private enterprises
Increases foreign trade
7%-8% growth in 1990s and 2000s
Relative poverty drops from 60% to 10%

Inequality

Racial inequality in South Africa
White minority still richer than Black majority
Ruling party promotes black business ownership
Critics argue only black people benefit

Multi-Dimensional Poverty

Rural poverty in India
230m live in M-D poverty
Health: poor nutrition, high child mortality
Education: bad education level in rural areas
Living Standards: lack of clean water + sanitation

Extreme Poverty

Afghanistan
GDP per capita of only $368
Caused by political isolation and corruption.
Lack of trade and outside investment

Progressive Tax

Federal income taxes in USA
Lowest tax band = 10%
Highest tax band = 37%
One of the least progressive tax system in OECD

Tax and Transfer programs

La Bolsa Familia in Brazil
Aims to combat hunger and solution to poverty cycle
¼ population involved in program
Rules: attending school, health checks, vaccines
Decrease in absolute poverty from 10% to 4%

Universal Basic Income

UBI in Gyeonggi (South Korea)
200,000 ppl part of UBI program
Citizens receive $220 per 3 months
Credits loaded on “Gyeonggi pay” cards
Money can be spent in local small markets only

Expansionary monetary policy

Quantitative easing in UK
Bank of England creates $425bn of new money
Increase in money supply —> lower interest rates —> more borrowing —> increase in AD

Government discretionary spending

Total spending = 1.5 billion dollars in 2021
Defense + veteran benefits
Housing = 7%
Education = 7%

Expansionary Fiscal policy

Stimulus program in USA
American recovery act in 2009
Tax cuts/giving credits/welfare
Total govt spending = $787 billion
Reinvestment in infrastructure and green energy

Contractionary fiscal policy

Fiscal austerity in UK
aim to reduce national debt
decrease in education, defence, housing, etc
Increase in poverty as the broke bitches were hit hard asf.

Supply-side policy (interventionist)

Interventionist policies in Rwanda
Agriculture training programs
Regional research centers
High speed internet network
Visit Rwanda tourism campaign

Supply-side policy (market-based)

Deregulation of airline industry
Agency to monitor unfair competition
Privatization of national banks
Trade barriers

Supply Side policies (3rd)

Trump’s tax cuts in the USA
Tax cut and jobs act in 2018
Income tax cut (39% to 37%)
Corporate tax (35% to 21%)
costed 1 to 2 trillion dollars

Absolute Advantage

Brazil has absolute advantage in coffee production
China has Absolute advantage in Electronics production
Saudi Arabia has absolute advantage in oil and gas extraction

Comparative advantage

Mexico automotive manufacturing and Germany’s machinery and engineering

Trade protection (Subsidies)

Common Agriculture policy (EU)
55 billion euros per year (30% of EU budget)
support farmers and secure food supplies

Trade protection (Quotas)

Sugar quotas in USA
US impose quota on foreign produced sugar
US sugar producers enjoy increased output and prices
US consumers must pay 2-3x more than world price
US firms face increased cost of production

Trade protection (Tariffs)

Steel Tariffs between US and China

US accuse China of subsiding steel production
Accused china for “dumping” artificially cheap steel
US impose tariffs on chinese steel to increase price of steel
US firm experiences increased cost of production

Trade Agreement

USMCA (US, CANADA, MEXICO)
Replaces North American free trade agreement
decrease tariffs, customs procedures, and rules of origin
IP protection increase (copyrights, patents, trademarks)

Trading bloc

European Nations (EU)
Free trade area that removes tariffs and quotas
Common external tariffs
Common market: free movement of goods/service
Unified monetary policies.

Monetary Union

The Euro (EU)
Initially used by 12 EU member states, now 19
Replaced deutschmark, franc, lira, etc.
Monetary policy created by European central bank.
Common interest rate across all of eurozone.

Fixed exchange rates

Hong Kong Dollar
HK dollar pegged to USD since 1983
1USD = 7.80 HKD
Rate is maintained by buying/selling of HKD
Fixed rate provides stability for HKD

Currency Devaluation

Argentino Peso
New president of Arg devalues peso by 50%
Aimed to reduce imports + increase exports —> increase AD
1USD = 400ARS —> 1USD = 700ARS

Floating exchange rate

British Pound (US/UK)
GBP floats against the USD in the open market
1GBP = 2.00 USD
Floating exchange rate fluctuates
1GBP = 1.21 USD
Depreciation of the GBP
Appreciation of the USD

Current account deficit

The US has a deficit in its current account
This is balanced by a surplus in its financial account
This is why foreigners own so many US stocks

Current Account Surplus

Qatar has a surplus in its current account. Qatar is a tiny oil and gas rich state in the Gulf
The surplus is CA is balanced by a deficit in the capital account.
This is why Qatar has so many assets over seas.

Trade Deficit

US trade deficit with China of $382billion in 2022
Increase of 29.4billion/8.3% since 2021
US exports farm products, aircraft, etc to China
China exports electronics, textiles, etc to the US
Trade deficit = the cost of the country’s imports exceed the the value of its exports.

Barriers to Development

Sub-saharan Africa (DR congo)
conflict + instability + corruption = infrastructure deficit = undiversified economy (dependence on mining)

Strategies for Development

Sub-Saharan Africa (Rwanda)
Current GDP per capita just $854
Rwanda has received billions in development aid
AIMS for GDP per capita to $12,500 in 2050
Attracted $400 FDI in 2022