Question 23M.3.HL.TZ0.1
| Date | May 2023 | Marks available | [Maximum mark: 28] | Reference code | 23M.3.HL.TZ0.1 |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Calculate, Define, Explain, Recommend | Question number | 1 | Adapted from | N/A |
Capsicum prices reach NZ$24 per kilogram
The price of capsicums, a common vegetable in New Zealand, reached an all-time high of NZ$24 per kilogram (kg) in 2021. Vegetable prices in New Zealand rose 15 % in 2021, driven by higher prices for cucumbers, lettuce, capsicums and broccoli.
A consumer prices analyst said “prices for many vegetables typically rise in winter. However, we are seeing larger rises than usual for this time of the year and for a greater number of vegetables.” It has been suggested that price increases are larger than usual because of the market power of the supermarkets in New Zealand.
Figure 1 illustrates a decrease in supply in the market for capsicums in New Zealand.
Figure 1
High profits: New Zealand considers breaking up supermarket duopoly¹
New Zealand’s supermarket industry is dominated by two huge firms, Foodstuffs and Woolworths. Together, their stores control about 85 % of the total market, giving them significant market power.
A report by the New Zealand Commerce Commission has found that these supermarkets are making huge profits and charging some of the highest prices in the OECD².
A government official said the government would “do whatever it takes to make sure New Zealanders get a fair deal at the checkout”.
The major retailers appear to avoid competing strongly with each other, particularly on price. Meanwhile, competitors wanting to enter the market or expand face significant barriers to entry, including a lack of suitable sites for large scale stores.
The government has strict regulations limiting the sites that can be used for building supermarkets. The big supermarkets have been buying the limited sites in order to prevent competitors from entering the market.
It has been reported that the entry of a German retailer into the Australian supermarket industry, which was also dominated by two firms, has increased competition, cut prices by around 13 % and saved customers more than NZ$2 billion per year.
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¹ duopoly: a market dominated by two firms
² OECD: The Organisation for Economic Co-operation and Development
Figure 2 illustrates a market in which two firms act as a monopolist in the market for cheese by colluding on the price they charge.
Figure 2
[Source: Taunton, E., Stuff Limited, 2021. Capsicums hit $24 a kilo as vegetables lead sharp rise in food prices [online]
Available at: https://www.stuff.co.nz/business/125735364/capsicums-hit-24-a-kilo-as-vegetables-lead-sharp-rise-in-food-prices [Accessed 15 March 2022] Source adapted.
McClure, T., 2021. ‘Extraordinary profits’: New Zealand considers breaking up supermarket duopoly [online]
Available at: https://www.theguardian.com/world/2021/jul/29/extraordinary-profits-new-zealand-considers-breaking-up-supermarket-duopoly-woolworths-foodstuffs [Accessed 15 March 2022] Source adapted. Copyright
Guardian News & Media Ltd 2023.
Ryan, P., 2019. ALDI’s attack on the supermarket duopoly has ‘helped strangle inflation’ [online] Available at:
https://www.abc.net.au/news/2019-05-02/aldi-breaks-supermarket-duopoly-kills-inflation/11073342 [Accessed
15 March 2022] Source adapted.]
Using the information in Figure 1, calculate the price elasticity of demand for capsicums when the price increases from NZ$18 per kg to NZ$24 per kg.
[2]
Any valid working (correct %Δ Qd or %Δ P, provided the formula is not inverted) is sufficient for [1].
= –0.82 or 0.82 or (repeating) or 9/11
An answer of –0.82 or 0.82 or without any valid working is sufficient for [1].
For full marks to be awarded, the response must provide valid working.
The majority of candidates were able to identify the relevant prices and quantities and use the correct formula for PED. However, many candidates inverted the formula, used the final price/quantity as the denominator when calculating percentages or did not correctly round to 2 decimal places or show as a repeating decimal.
Calculate the loss in consumer surplus resulting from the increase in the price of capsicums from NZ$18 per kg to NZ$24 per kg.
[2]
(0.5 × 40 000 (40 – 24)) – (0.5 × 55 000 (40 – 18))
OR
Change in CS = 0.5 (55 000 + 40 000) × 6
Any valid working is sufficient for [1]
= $285 000
An answer of 285 or 285 000 (or –285 or –285 000) without any valid working is sufficient for [1].
For full marks to be awarded, the response must provide valid working and include correct units.
Candidates generally performed the calculation correctly, either by calculating the initial and final CS or by calculating the area of the relevant trapezium. However, it was very common to see responses which did not express the answer in 000s and/or $.
Calculate the revenue per kilogram (after tax has been paid) to producers when the price is NZ$24 per kg.
[2]
Any valid working (eg division by 1.2) is sufficient for [1]
= $20
An answer of 20 or $20 without any valid working is sufficient for [1].
For full marks to be awarded, the response must provide valid working and include correct units.
A response that calculates total revenue and that produces a correct answer of $800 000 may be awarded [1].
The question was generally answered incorrectly. Despite similar questions appearing in the specimen paper and in both May 2022 and November 2022 examinations it appears that candidates did not know how to perform the calculation.
With reference to Figure 1, explain why the price elasticity of demand for capsicums would change if the price continued to increase beyond NZ$24 per kg.
[4]
A response that does not make some reference to the diagram (eg linear demand curve; capsicums; a calculation) may be awarded a maximum of [3].
Stronger responses explained clearly why PED changes along a linear demand curve, often using a mathematical approach. However, a large number of responses simply explained and applied the law of demand.
Define the term market power.
[2]
Responses were generally good with candidates referring to the idea of price-setting ability. Weaker responses referred only to the ability to "influence" or to "control".
[4]
It is clear that many candidates had not been prepared adequately for this question. With section 2.11 of the subject guide explicitly linking market power to market failure it is to be expected that candidates should be able to explain why the profit-maximizing position for a monopoly is different from the allocatively efficient position, resulting in underallocation of resources and market failure, and to recognise a welfare loss. Many candidates asserted incorrectly that "high" prices would mean that market failure had occurred or that abnormal profit equates to market failure. Furthermore, many referred to productive inefficiency (not in the current syllabus) stating incorrectly that it leads to allocative inefficiency. Some candidates who demonstrated good conceptual understanding neglected to follow the instruction to use "specific reference to the information in Figure 2" and so could not earn full marks.
Using the data provided in Figure 2, calculate the profit earned by these firms if they are operating at the profit-maximizing level of output in the market for cheese.
[2]
Profit = (26 – 18) 80
Any valid working is sufficient for [1].
= $640 000
An answer of 640 or 640 000 without any valid working is sufficient for [1].
For full marks to be awarded, the response must provide valid working and include correct units.
Generally well-answered, although with a concerning number of unit errors (ignoring the $000s).
Using the text/data provided and your knowledge of economics, recommend a policy which could be introduced by the New Zealand Commerce Commission to limit the possible abuse of market power in the supermarket industry in New Zealand.
[10]
Refer to Paper 3 markbands for May 2022 forward, available under the "My tests" tab > supplemental materials.
Possible policies may include (but are not restricted to):
- Legislation to force supermarkets to sell part of their business/their land
- Removing barriers to the entry of new competitors
- Sponsoring or facilitating a new competitor
- Price regulation
- Government ownership/nationalization
- Government policy to release more land for building shops/retail activities (deregulation)
- Fines that arise from fair-trading laws (anti-trust legislation)
- Windfall tax on super normal profits
- Any other valid policy.
A wide range of approaches was adopted for the "policy question". Responses which scored well mostly:
- Selected one clear policy (or two complementary policies where a second policy was introduced to address a limitation of the first).
- Selected a policy which was appropriate given the context presented.
- Ensured that their response fully explained the recommended policy, incorporating relevant theory, using appropriate terminology throughout the response and using data provided to support the recommendation and offer a balanced synthesis/evaluation.
Responses were able to achieve full marks with a fairly concise answer which met these requirements. Diagrams (although not expected/required) were often used effectively to support the theory/explanation. However, many "price ceiling" diagrams used were often accompanied by generic notes on the stakeholder effects rather than the mechanism and possible limitations of the policy in the context provided.
Candidates who did not score highly tended to demonstrate some of the following weaknesses:
- Listing/outlining several policies instead of recommending and explaining one policy.
- Summarising the data provided instead of using it to support the recommendation.
- Neglecting to provide a balanced synthesis. Many answers simply explained without any balance.
- Misreading the data provided and making unrealistic assumptions.
- Neglecting to provide details of the suggested policy. Weaker responses cited deregulation (without any details), fines (without details of the associated infringement), anti-monopoly legislation (without details), supply-side policies (without details) or "encourage foreign firms" (without stating how this could be achieved).
Some weaker policy suggestions included:
- Indirect taxation on groceries.
- Policies to prevent mergers.
- A percentage tax based on market share.
- Privatisation.
- Minimum price legislation.
Some responses also tended to stray into LRAS analysis while many of those who suggested a maximum price argued that "the shortage would leave room for new entrants" without discussing the lack of attractiveness of a price-controlled industry to new entrants. Most candidates who suggested subsidies or price controls drew a perfectly competitive market diagram and referred to one product only.
It appears that many students were more focused on explaining theory rather than thinking as a policymaker addressing a real-world issue.
