Paper 3: the HL-only IB Economics policy paper explained

Format, timing and weighting

Paper 3 is HL only; SL students do not sit it. It lasts 1 hour 45 minutes with 5 minutes of reading time and is worth 30% of the HL grade.

There are two compulsory questions and you answer both. Each is built on a short scenario with data and is worth 30 marks: a series of calculations and short explanations ending in a 10-mark policy recommendation.

Split your time roughly evenly, about 50 minutes per question. Do not let a stubborn calculation eat the time you need for the two policy recommendations, which carry the most marks.

The calculation types that appear

Paper 3 is quantitative. Expect the four elasticities (PED, PES, YED, XED) and interpreting their sign and size; consumer and producer surplus areas; and the welfare effect of an indirect tax or subsidy, meaning the consumer share, producer share, government revenue or cost, and welfare loss.

Also expect price controls (the size of a shortage or surplus under a price ceiling or floor); the Keynesian multiplier from marginal propensities and the resulting change in output; comparative advantage from opportunity-cost ratios and the gains from trade.

And the international set: exchange rate conversions and the percentage appreciation or depreciation; the welfare effects of a tariff (changes in consumer surplus, producer surplus, government revenue, the deadweight welfare loss, and the fall in imports); real values found by deflating a nominal figure with a price index (real GDP, real income); and the real interest rate found by subtracting the inflation rate from the nominal interest rate.

Worked example: a specific tax

Suppose demand is P = 20 minus Q and supply is P = 2 plus Q, with a specific tax of 6 per unit. Without the tax, equilibrium is where 20 minus Q equals 2 plus Q, so Q = 9 and P = 11.

With the tax the supply price becomes P = 8 plus Q, so 20 minus Q equals 8 plus Q gives Q = 6, a consumer price of 14 and a producer receipt of 8. Government revenue is the tax times quantity, 6 times 6 = 36.

The welfare loss is the triangle between the old and new quantity: one half times the tax (6) times the fall in quantity (9 minus 6 = 3), which is 9. Always show each of these steps rather than only the final figure.

Worked example: the multiplier

If the marginal propensity to consume is 0.8 and there are no other leakages, the multiplier is 1 divided by (1 minus 0.8), which is 5. An injection of 100 million then raises equilibrium output by 5 times 100 million, which is 500 million.

If instead the marginal propensity to save is 0.1, the tax rate is 0.2 of income and the marginal propensity to import is 0.1, the multiplier is 1 divided by (0.1 plus 0.2 plus 0.1), which is 2.5.

State the formula, substitute the numbers, then compute the change in output. Do not round the multiplier before you use it.

Structuring the 10-mark policy recommendation

The final part of each question asks you to recommend a policy or the best response to the scenario. Treat it like a mini Paper 1 part (b): define the problem, weigh two or three policy options with a diagram where it helps, and commit to a justified recommendation.

Use your own calculated results as the evidence. The examiner wants the recommendation grounded in this scenario and these numbers, not a generic essay.

Evaluate the trade-offs: short-run versus long-run effects, who bears the cost, feasibility, and the assumptions behind your figures, then state which policy you recommend and why.

Which EconLearn calculators map to each type

Practise each type with a matching walkthrough. Elasticities: /calculate/price-elasticity-of-demand, /calculate/price-elasticity-of-supply, /calculate/income-elasticity-of-demand and /calculate/cross-price-elasticity.

Surplus and welfare: /calculate/consumer-surplus, /calculate/producer-surplus and /calculate/deadweight-loss. Tax effects: /calculate/tax-incidence. The multiplier: /calculate/spending-multiplier, /calculate/mpc-and-mps and /calculate/tax-multiplier.

Trade: /calculate/comparative-advantage and /calculate/opportunity-cost. Real values: /calculate/real-gdp, /calculate/gdp-deflator, /calculate/inflation-rate and /calculate/real-interest-rate. Exchange-rate percentage changes use /calculate/percentage-change.

Common Paper mistakes

Writing only a final answer: show the formula, the substitution and the units to keep the method marks.

Rounding too early and carrying the error through every later part.

Treating the 10-mark recommendation as another calculation instead of an evaluated argument.

Ignoring your own calculated numbers in the recommendation.

Running out of time on question two because a calculation in question one was left to fester.

How this is examined

• Paper 3 is HL only, both questions are compulsory, and the 10-mark policy recommendation at the end of each is where the evaluation marks live; leave time for it.
• Always show formula, substitution and units; most Paper 3 marks are method marks you keep even if the final number is slightly off.
• Do not round intermediate results; a rounded elasticity or multiplier propagates into every later part.
• Use your own calculated figures as the evidence in the policy recommendation; a generic essay that ignores the data is capped.

Key terms

price elasticity of demandconsumer surplusproducer surpluscomparative advantagetariffspending multiplier