Question 21M.1.SL.TZ1.1a
| Date | May 2021 | Marks available | [Maximum mark: 10] | Reference code | 21M.1.SL.TZ1.1a |
| Level | SL | Paper | 1 | Time zone | TZ1 |
| Command term | Explain | Question number | a | Adapted from | N/A |
Explain how the price mechanism reallocates resources when there is a decrease in the supply of a good.
[10]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
Answers may include:
- definitions of price mechanism, resources, supply
- diagram to show how a decrease in supply leads to a reallocation of resources
- explanation of how a decrease in supply shifts the supply curve left, creates excess demand at the original price, incentivizes producers to increase price, provides signals and incentives to consumers to change their consumption patterns, switches demand to less expensive goods and causes a reallocation of resources
- examples of goods where a decrease in supply has affected the allocation of resources.
Generally, this question was not answered well by a majority of the candidates. While many candidates were able to explain the mechanics of a decrease in supply in terms of the leftward shift of the supply curve, the subsequent increase in price and decrease in quantity demanded, few were able to extend this analysis further by relating it to the signalling and incentive functions of price and the impact on resource reallocation. In addition, definitions of supply, price mechanism and resources were often absent and good developed examples were rarely provided.
