StudyIB is a complete IB learning portal offering AI tutor Sam, comprehensive subject guides for all IB subjects, practice drills, and expert study resources. It helps International Baccalaureate students excel in their studies with materials aligned to the latest IB syllabus.

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3.1 Price Elasticity of Demand

Economics Questions

Question Bank

1 / 8

medium7 marks

Paper 1 · Q2 · 2025

TaxationElasticity

A government decides to impose a specific indirect tax of $2 per unit on a good with price elastic demand.

Explain, using a diagram, how the imposition of the tax affects the equilibrium price and quantity.

(4M)

Discuss the likely consequences of this tax for consumers and producers.

(3M)

Solution

An indirect tax shifts the supply curve vertically upwards by the tax amount ($2). The new supply curve is S + tax. This increases the equilibrium price from P₁ to P₂ and decreases the equilibrium quantity from Q₁ to Q₂. Because the demand is price elastic (PED > 1), consumers are highly sensitive to price changes. Consequently, the tax causes a relatively large decrease in quantity demanded. Consumers bear a smaller tax incidence compared to producers, who cannot pass the tax on without losing significant sales volume. Producer revenues fall.

Mark Scheme

7 marks

correct diagram showing vertical shift of supply curve and new tax equilibrium

explaining the increase in price and the decrease in quantity

analysis of tax burden sharing based on price elasticity of demand

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2.2 Forces and Newton's Laws

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What shifts the Demand Curve?

Let's look at the factors other than price that cause the entire curve to shift.

0:00 / 4:05

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(48 Annotated Essays · Examiner-Style Feedback · TOK Mentor Community)

The Study Platform Built for IB Students

Know If Your TOK Essay Is Actually On The Right Track

See What High-Scoring TOK Essays Actually Do