IB Economics Real World Examples

Supply Shift

Left: Global oil prices due to Russia Ukraine war increasing costs for manufacturers, UK sugar tax

Right: Japan's agricultural subsidies in order to increase local production and market stability

Inelastic Demand

Pfizer increased cancer drug prices, but demand remained stable as patients needed them to survive. Addictive Goods

Substitutes

Coca-Cola vs. Pepsi – consumers switch based on price and preference.

NOT: Insulin

Complementary Goods

Coffee machines & capsules – higher demand for one increases demand for the other.

Normal Goods (YED > 0)

Makeup demand in India rose as incomes increased.

Inferior Goods (YED < 0)

Fast food in France became more popular as income stagnated.

Indirect Taxes

2018 French fuel duty increase (6.5c/litre) led to protests and policy reversal. Cigarette Tax

Minimum Price (price ceilings)

Scotland’s alcohol price floor (50p/unit, 2018) reduced alcohol-specific deaths by 10%

EU's Common Agricultural Policy (CAP) sets minimum prices for crops like wheat and dairy to protect European farmers.

India’s Minimum Support Price (MSP) ensures farmers earn enough for basic crops like rice and wheat but has led to overproduction of water-intensive crops and environmental issues in Punjab.

Minimum wage law in the US of $7.5/hour

Maximum Price

Berlin rent cap (2021) aimed at housing affordability.

Facing hyperinflation with inflation rates in the thousands percentage, Venezuela placed many price ceilings on basic goods such as eggs, cuts of certain meat, etc. Was ineffective because it led to many shortages

Common Access Resources

Overfishing depletes global fish stocks, causing environmental damage.

Positive Externality of Consumption and Production + regulations

Beekeeping supports agriculture by pollinating crops worth £600m/year.

The U.S. government’s Inflation Reduction Act includes over $370 billion in subsidies and tax credits for clean technologies such as electric vehicles (EVs), solar panels, and green hydrogen

Japan, subsidy for electric vehicles, on condition that such vehicles are charged with renewable energy

Singapore, Compulsory polio vaccine for newborns

Government Failure

£2bn UK cigarette black market due to high tobacco taxes.

Monopoly Power + regulations

Google (92% market share) dominates search engines.

EU antitrust regulations and laws, European Commission (EC) imposed antitrust fines on Google 2017

Fines from colluding:German car manufacturers, The European commission has charged BMW, Daimler and Volkswagen with colluding to limit the introduction of clean emissions technology, Fine up to 10% annual revenue

Oligopoly

UK supermarkets (Top 4 control 70%) engage in price competition. Coca-Cola and Pepsi together own 70% of the soft drink market. CR2=70%, Airline industry

Collusive Oligopoly + regulations

Asda & Sainsbury’s price-fixing in dairy (2000s) raised milk, cheese, and butter prices.

OPEC - collectively limit world supply of oil to maintain high prices and earn supernormal profits
Pheobus Cartel lightbulbs - control supply and lifespan of lightbulbs

Sainsbury and ASDA tried to merge, but CMA/watchdog prevented it

Privatization

Royal Mail (2013) aimed to boost efficiency but led to price hikes.

Pay Gap

The UK gender pay gap is 7.9%,

Gini coefficient stands at 0.363 post-pandemic, indicating rising inequality. The top 1% of UK earners contribute 30% of total tax revenue.

Monetary Policy

Expansionary

The UK reduced interest rates to 0.25% and used £450bn quantitative easing to stimulate growth. (2016) Central Bank cut their (base) interest rate to 0.1% for covid

The Eurozone has a 0% interest rate, limiting further cuts.

Japan adopted a -0.1% interest rate to encourage consumption.

Contractionary

Turkey raised interest rates to 14% in 2022 to combat inflation from currency depreciation.

United States (2022–2023) the Federal Reserve raised interest rates from near 0% to over 5.25%. small and medium businesses in sectors like real estate and construction delayed or canceled investments.

Business Confidence

Brexit uncertainty since 2016 has reduced investment and raised inflation in the UK.

Corporation Tax (S-side policy)

The UK cut corporation tax from 28% to 19% during COVID-19 to aid business recovery. France maintains a corporation tax rate of 31% for large firms and 28% for small firms.

Fiscal Policy

Germany's €130bn COVID-19 stimulus supports households, renewable energy, and childcare.

United States (2021–2022) after the COVID-19 pandemic, the U.S. government introduced large stimulus packages, and the Federal Reserve kept interest rates low.

UK financial crisis 2008: Gov expenditure on public sector infrastructure projects increased by 3 billion pounds, Provided emergency support to retail banks, providing 37 billion worth of capital injections

Cut: Eurozone Debt Crisis (2010–2013): Countries like Greece, Spain, and Italy cut government spending (austerity) during the crisis → aggregate demand fell sharply due to reduced G, falling C, and high unemployment.

Exchange Rate

The US Dollar (USD) is considered a strong currency. The Turkish Lira is weak at 17.1 per USD, contributing to inflation.

Short-Run Aggregate Supply (SRAS)

An oil price surge to $139/barrel due to Russia-Ukraine war increased UK production costs. Germany cut VAT from 19% to 16% to lower production costs and boost SRAS.

Recession - Demand-Side and Supply side

The 2008 Global Financial Crisis was marked by bank failures in the US, UK, and Greece. aka the Great recession

In the UK, rising oil and food prices worsened economic downturns in 2008 and 2010.

Informal Sector

The informal sector constitutes about 25% of GDP in Italy and Greece, reducing tax revenue.

Demand-Pull Inflation

US experienced a 7% inflation in 2021 POST covid driven by strong economic growth and government stimulus.

Cost-Push Inflation

The UK saw 3.1% inflation in 2017 as a weak pound raised import costs.

War in Ukraine and post-COVID supply disruptions led to sharp increases in oil and gas prices, as well as grain and fertilizer costs. This triggered cost-push inflation globally, especially in energy and food markets.

Cyclical Unemployment

Turkey faces over 10% cyclical unemployment linked to economic crises and currency depreciation.

Structural Unemployment

Strict labor laws and trade unions in France and Spain limit hiring flexibility, increasing structural unemployment.

In the automobile industry in the U.S. and Germany, increased use of robots in assembly lines has led to job losses for low-skilled labor, especially in areas with few retraining opportunities.

The Great Depression (1930s), millions of workers in the U.S. and other advanced economies were unemployed for several years, many of the jobs in agriculture, textiles, and traditional manufacturing never came back, as the economy shifted toward automated production and new industries.

U.K. Manufacturing Sector Automation (2010s–2020s), traditional manual jobs (e.g., car assembly, textile work) declined, replaced by robots and AI-driven processes.

Costs of Unemployment

In the UK, during COVID-19 (2020), unemployment rose and the government launched expensive support schemes (e.g., furlough). Public borrowing reached record highs, with the budget deficit rising to over 14% of GDP — the highest since World War II.

During the 2008–2009 global financial crisis, many developed countries, such as Spain, experienced unemployment rates above 20%. Their GDP growth stalled, and it took years for output to return to pre-crisis levels.

Supply-Side Policies (market and interventionist)

Deregulation: UK deregulation of telecoms and postal services

Privatisation: UK British Airways

Antimonopoly, trade liberalisation

Investment in education: Singapore lifelong funding for training and upskilling in tech and manufacturing industries

Healthcare: The UK invested £640bn in the NHS to improve health and productivity.

Investment in infrastructure: The HS2 Rail Project in the UK, costing £96bn, seeks to boost labor mobility and productivity.

International Tariffs

UK tariff of 20% on vehicles aims to protect the domestic industry. China imposed tariffs on Australian wine to influence trade relations

Current Account Deficit

The UK's current account deficit stands at 4% of GDP, with a trade in goods deficit reducing growth by 1.2%.

Current Account Surplus

China's current account surplus is 10% of GDP, benefiting from comparative advantage and liberal trade policies.China's economy is highly dependent on exports to finance growth despite benefiting from trade surpluses.

Natural Monopoly

Severn Trent Birmingham - water company operating in areas of Birmingham and regulated by the government.

Monopolistic Competition

Taxis, Clothing stores (compete with quality not price)

Competitive market

Rice market, wheat market, agricultural commodities

Income inequality

1. Sweden: Gini coefficient ~0.26 → relatively equal income distribution

2. South Africa: Gini coefficient ~0.63 → very high income inequality.

Negative externality of consumption/production + regulations

Bangladesh textile industry causing chemical, environmental deterioation

EU Emissions Trading Scheme limits CO₂ emissions via cap-and-trade.

London congestion tax, UK sugar tax

Sydney no public smoking

Nationalisation

UK railway services re-nationalized due to poor private sector performance.