Microeconomics
Real World Examples
A student-made website that explains diagram theories and collect real-world examples for IB Economics 15-mark questions
Chapter 2 Competitive Markets: Demand and Supply
1. Consumer & Producer Behavior (HL only)
Bias
1️⃣ Rules of Thumb
People buy items priced at $9.99 instead of $10 because they follow a simple rule of thumb that “.99” means a better deal.
2️⃣ Anchoring
Car dealers show a high initial price during negotiations so that any later discount seems reasonable, making consumers more likely to accept a higher final price.
3️⃣ Framing
Consumers choose yoghurt labeled “90% fat-free” rather than “10% fat” because the positive framing changes their perception of healthiness.
4️⃣ Availability
After seeing news about plane crashes, some people overestimate the risk of flying because vivid events are easier to recall.
Bounded rationality
Consumers choose the first acceptable phone plan they see rather than comparing all options because decision-making is too complex.
Bounded self-control
Students procrastinate on assignments and end up studying last-minute because they prioritize short-term comfort over long-term goals.
Bounded selfishness
Shoppers voluntarily donate small change to charity at checkout even though it does not benefit them materially.
Consumers buy used cars without knowing their true condition, leading to poor decisions and potential regret.
Imperfect information
1️⃣ Default Choice
Employees are automatically enrolled into workplace pension schemes unless they opt out, increasing retirement saving participation.
2️⃣ Restricted Choice
Fast-food restaurants provide small menus or limited drink sizes to simplify decisions and encourage healthier or faster choices.
3️⃣ Mandated Choice
Some countries require people to state “yes” or “no” to organ donation when applying for a driver's license, forcing a free but explicit decision.
Choice architecture
Firm business objectives
Amazon:
Amazon provides a strong real-world example of how firms may pursue different business objectives over time rather than a single goal. In its early years, Amazon prioritised revenue maximisation and growth maximisation by aggressively reinvesting profits into logistics infrastructure, cloud computing (AWS), and international expansion, often operating with very low or even negative profits. This strategy enabled Amazon to rapidly increase its market share, particularly in e-commerce and digital services, by exploiting economies of scale and network effects. As the firm became more established, certain divisions—most notably Amazon Web Services (AWS)—shifted closer to profit maximisation, generating high and stable profit margins. However, at the firm level, Amazon can be seen as exhibiting satisficing behaviour, where management aims to achieve acceptable profit levels while prioritising long-term objectives such as innovation, market dominance, and sustained growth. This suggests that the assumption of profit maximisation may be unrealistic for large multinational firms, as real-world businesses like Amazon often pursue multiple objectives simultaneously or sequentially depending on market conditions and strategic priorities.
Chapter 3 Elasticities
1. Price Elasticity of Demand (PED)
Nike Increases Prices On Its Top-selling Sneakers:
(May, 2025) Nike raised prices on its top-selling sneakers, such as the Air Max 270, because it believes demand for these specific products is inelastic. By increasing the price on these popular shoes by $5 to $10, Nike is likely betting that its loyal customer base will continue to buy them despite the higher cost. This strategy is employed to increase revenue and offset rising costs from tariffs, and it is considered effective because the products are inelastic—meaning the quantity demanded doesn't change much when the price does.
2. Price Elasticity of Supply (PES)
Why Computer Chips of TSMC Has Price Inelastic Supply:
-If prices increase, it can take chip manufacturing companies like TSMC up to a decade to build new factories that increase capacity, because of the complexity needed to make these chips; it is very hard to build new capital.
-There is rarely any unused capacity in these factories as the companies try to maximize profits; TSMC, the world's largest chip manufacturer, is fully booked for years to come.
-Chips also update every year, so even though it is easy to store chips for later, there is no point for storage.
3. Income Elasticity of Demand (YED)
Post-pandemic Surge in Luxury Consumption Due to Increase In Consumer Income:
(February, 2022) In 2021 and 2022, China's luxury market saw a strong recovery, with growth of 36% in 2021 and 48% in 2020, driven by increased consumer income and a shift in spending from international travel to domestic luxury purchases. This pattern demonstrated a high Income Elasticity of Demand (YED) for luxury goods, where demand grew more than proportionally to rising incomes. The case illustrates how high YED can benefit brands during economic upturns but also make them more vulnerable to downturns, making it a critical factor for businesses to consider when making investment decisions in the market.
Chapter 4 Government Intervention in Microeconomics
1. Subsidy
Subsidy For China's EV:
(November, 2023) Between 2009 and 2022, over RMB 200 billion in subsidies and tax relieves were provided to manufacturers and consumers. This direct government intervention successfully boosted both supply and demand, leading to massive industry growth and making China the world's largest EV market, accounting for half of global sales by 2022.
As the market matured, the policies shifted. Consumer purchase subsidies were fully withdrawn by the end of 2022, and tax exemptions are being phased out. This demonstrates the principle of removing market intervention once an industry becomes competitive.
Increase In Indirect Tax For Cigarette In Minnesota:
(March, 2021) The number of Minnesotans who smoke has fallen nearly 40% over the last two decades. But that decline has slowed in recent years and there are still more than 500,000 smokers in the state. The House Preventive Health Policy Division approved a bill Wednesday that seeks to further reduce those numbers by raising taxes on cigarettes, cigars and tobacco products, and funding new campaigns to help people quit smoking and stop others from starting. Sponsored by Rep. Jennifer Schultz (DFL-Duluth), HF1721 would increase the tax on a pack of cigarettes by $1.50, bringing the total excise tax to $4.54 per pack.
2. Indirect Tax
3. Price Floor
Minimum Wage In California:
(August, 2025) The minimum wage in California is $16.50 per hour as of January 1, 2025, and will increase to $16.90 per hour on January 1, 2026, which acts as a price floor in the labor market. However, others argue that since this will increase the price of labor, there will be an excess of labor, in other words, more unemployment, because companies won't be willing to pay that much.
4. Price Ceiling
Price Ceiling For COVID-19 Swab Test In Indonesia:
(October, 2020) In October, 2020, Indonesia set a price ceiling of Rp 900,000 for COVID-19 swab tests to address cost disparities at private labs. The ceiling, based on government analysis, includes labor and overhead costs. Previously, some hospitals charged over Rp 2.5 million.
Chapter 5 Common Pool Resources and Negative Externalities
1. Negative Externalities of Production
Correcting Negative Externalities of Production: Pigouvian Tax
UK Landfill Tax:
(October, 1996) The UK Landfill Tax is a Pigouvian tax designed to correct a negative externality of production caused by waste disposal. When firms send waste to landfill, they generate pollution, long-term environmental damage, and land-use costs that their private costs do not reflect. The tax increases the cost of landfill disposal for producers, with the standard rate rising from £10/tonne in 1996 to £126.15/tonne in 2024-25. By making producers internalize these external costs, the government aims to reduce over-production of waste and encourage recycling and cleaner production methods. As a result, landfill volumes have significantly declined over time, showing that the tax has helped align marginal private cost closer to marginal social cost and reduce market failure.
Correcting Negative Externalities of Production: Tradable Permits
UK Airline Pollution Permits:
(June, 2022) In 2021, the UK allocated 4.4 million free permits under the UK Emissions Trading Scheme (UK ETS) to airlines. Tradable permits can efficiently reduce emissions by setting a cap and allowing trading. As a result, airlines can reduce emissions by selling leftover permits to other airlines. EasyJet was the biggest beneficiary of the scheme, with permits worth a potential £40m left over at the end of 2021, followed by British Airways with £23.5m worth of permits. However, this is a wrong demonstration of tradable permits, as the UK government overestimates the carbon emissions, and the permits distributed are enough for the entire industry to dodge a carbon emissions cap-and-trade scheme entirely.
2. Negative Externalities of Consumption
Correcting Negative Externalities of Consumption: Pigouvian Tax
London Congestion Charge:
(17 February, 2003) On 17 February 2003, the London scheme was introduced: drivers entering a defined central zone during weekdays must pay a daily charge (initially £5) for private vehicles.
This is an example of a Pigouvian tax because it charges road users for the negative consumption externalities they produce (congestion, delays, pollution) so that private decisions better reflect social cost.
The result: in the first six months, there was about a 20- 30% reduction in vehicles entering the zone, and traffic speeds improved.
Correcting Negative Externalities of Consumption: Nudge (HL Only)
Plain Tobacco Packaging:
(Originated in 2012, Australia) Australia’s 2012 introduction of mandatory plain tobacco packaging serves as a landmark example of using nudge theory to address the negative externalities of smoking. Unlike outright bans or heavy taxes, this policy subtly alters the choice architecture for consumers by removing all branding elements (logos, colors, distinctive fonts) from cigarette packs. Instead, packs feature standardized olive-brown packaging with large graphic health warnings and brand names in a uniform small font.