IBDP Economics

The given question is question 2.(a) from the November 2018 Economics Paper 1. N18/3/ECONO/HP1/ENG/TZ0/XX . For Question 2. (b), click here . Oligopolistic firms are a small number of firms which have a relatively large control over the market share. There are two types of oligopoly- collusive and non-collusive. While all firms maximize their profits, they can either compete through price or non-price factors. In a collusive oligopoly, firms may either collude through formal or tacit collusion. In a formal collusion, all the firms reach an agreement on a common price for their products which is generally very high. All the firms may benefit from this agreement, however, some who try to still benefit more may cheat and sell their products at a lower price. For instance, if two firms were originally selling their products and receiving $20M each as profit, then after formally colluding, they could receive a profit of $50M each. In game theory, the following situation can be

Fiscal policy is a demand side policy that is implemented by the government. There are two types of fiscal policy - Discretionary fiscal policy and automatic fiscal policy. Discretionary fiscal policy allows the government to manipulate the economy by implementing contractionary or expansionary fiscal policy with the help of instruments such as government spending, 'G', and tax rates, 'T'. On the other hand automatic fiscal policy utilizes progressive taxation and unemployment benefits as a tool to stabilize the economy. Automatic fiscal policies operate independently without much need for government intervention, therefore, it allows the government to focus on other issues. Progressive tax increases and reduces government revenue proportionately more than rise or fall in income. This leads to less unrest in aggregate demand therefore there is greater price stability. Similarly, unemployment benefits increases with rise in unemployment levels and vice versa. This sup