2012 h2 revision for ddss

SRJC JC1 H2 Econs / 2012 / Revision Package Page 1

2012 H2 Economics

Semester 2 Revision Package for Lectures

PART II Essay Qns 3 5

QN 3: 2010 A LEVEL The price of sugar, an ingredient in many canned soft drinks, dropped dramatically by 32% between July 2006 and October 2008. Healthy living campaigns meant consumers became more aware of the possible health dangers of consuming too much sugar and they switched to diet drinks that do not contain sugar. Discuss how the combination of the fall in the price of sugar and the healthy living campaigns might affect expenditure by consumers on non-diet and diet canned soft drinks. [25] Introduction

Direction: This essay aims to explain how changes in demand and supply affect the total expenditure of non-diet and diet canned soft drinks, using PED and XED concepts.

Briefly state how equilibrium price and quantity are determined in a free market via interaction of downward sloping demand curve and upward sloping supply curve.

Total expenditure by consumers is calculated by multiplying the price by the quantity sold in the free market

Body

P1: A fall in the price of sugar will lead to a rise in supply of non-diet canned soft

drinks.

E/E1:

A fall in the price of sugar which is an essential factor of production for non-diet canned drink

fall in cost of producing non-diet canned drinks, assuming total revenue constant rise

in profits profit maximizing non-diet canned drinks producers are more willing and more

able to produce non-diet canned drinks a rise in supply of non-diet canned drinks

represented by a rightward shift of supply curve from S0 to S1.

P2: Rise in supply of non-diet canned soft drinks could lead to a rise in total

expenditure on non-diet canned soft drinks.

E/E2:

A rise in SS of non-diet canned soft drinks would lead to surplus of non-diet canned soft

drinks producers would reduce price to clear excess stock as price falls, quantity

demanded rises while quantity supplied falls price keeps on falling until surplus is

eliminated at the new equilibrium point, there is a fall in equilibrium price (from P0 to P1)

and rise in equilibrium quantity (from Q0 to Q1) of non-diet canned soft drinks


Demand for non-diet canned drinks is likely to be price elastic as diet canned soft drinks are

likely to be close substitutes for the former as the taste of the two products are largely the

same, e.g. Pepsi vs. Pepsi Light fall in price of non-diet canned drinks would lead to a

more than proportionate rise in quantity demanded for non-diet canned drinks, ceteris

paribus hence, rise in total expenditure due to fall in price, i.e. area C, is greater than the

fall in total expenditure, i.e. area A

L1/2: Hence with a fall in price of sugar, there is thus a rise in total expenditure on non-diet

canned drinks

P3: Healthy living campaigns will result in a fall in demand for non-diet canned soft

drinks.

E/E3:

Healthy living campaigns such as reduction in consumption of excessive sugar to avoid

diabetes which are successful in changing consumers mindset will result in a change in their

taste and preference away from non-diet canned soft drinks consumers less willing to buy

non-diet canned soft drinks despite the ability to do so fall in demand for non-diet canned

soft drinks represented by a leftward shift of demand curve from D0 to D1 as seen in Fig. 1

P0

Q1

Price

Quantity

P1

Q0

S0

D0

0

S1 E0

E1

Q2

Q2

P0

Q0

Price

Quantity

P1

Q1

S0

D1

0

D0

E1

E0 Fig. 1


P4: With a fall in demand for and rise in supply of non-diet canned soft drinks, total

expenditure on this product could fall.

E/E4:

In the context that the fear of getting excessive sugar-related diseases is greater than the fall

in price of sugar, fall in demand is by a relatively greater extent than the rise in supply as

shown in Figure 2 leftward shift of demand curve by a larger extent relative to rightward

shift of supply curve surplus at original price exerts downward pressure on the price of

non-diet soft drinks fall in equilibrium price and equilibrium quantity of non-diet canned

soft drinks Since equilibrim price falls from 0P0 to 0P1 and equilibrium quantity falls from

0Q0 to 0Q1

L3/4: Overall, fall in total expenditure of non-diet canned soft drinks from Area 0P0E0Q0 to

Area 0P1E1Q1

P5: A fall in price of non-diet canned soft drinks would lead to a fall in total

expenditure on diet canned soft drinks.

E/E5:

A fall in price of non-diet canned soft drinks rise in quantity demanded for non-diet drinks,

ceteris paribus since non-diet canned soft drinks and diet canned soft drinks are

considered as substitutes as they satisfy the same want fall in demand for diet soft drinks

from DD0 to DD1 as shown in Figure 3 Since equilibrim price falls from 0P0 to 0P1 and

equilibrium quantity falls from 0Q0 to 0Q1 overall, fall in total expenditure of non-diet

canned soft drinks from Area 0P0E0Q0 to Area 0P1E1Q1

surplus

Price

Quantity

P1

Q2w

S0

D1 0

S1

E0

E1

P0

Q1

D0

Q3 Q0

Q2

P0

Q0

Price

Quantity

P1

Q1

S0

D1

0

D0

E1

E0 Fig. 3

Fig. 2


Evaluation:

However, it is worth noting, the trend towards healthy living is on the rise such that

consumers could view diet and non-diet soft drinks as weak substitutes for each other.

Hence, a fall in price of non-diet soft drinks would lead to a less than proportionate fall in

demand for diet soft drinks, ceteris paribus fall in equilibrium price and quantity by a

smaller extent fall in total expenditure of diet soft drinks by smaller extent.

Conclusion:

In my opinion, successful campaign on healthy living might eventually lead to a rise in

demand for diet soft drinks as consumers switch over from non-diet soft drinks in the

context that diet soft drinks is a healthier substitute for non-diet soft drinks with less sugar

content rise in demand for diet soft drinks rise in both equilibrium price and quantity

rise in total expenditure of diet canned soft drinks instead while total expenditure on non-diet

canned drinks could be expected to fall in the long run.


QN 4: IJC 2010 prelim Developments in modern technology and increasing availability of books, magazines, newspapers and other printed publications on the Internet have had major impact on the demand and supply of print media and associated services. Assess how the markets involved might be affected by these developments. [25] Introduction 1. Developments in modern technology and increasing availability of books, magazines,

newspapers and other printed publications on the Internet:

Developments in modern technology e.g. Faster internet access, e-Book readers such as Kindle & Nook, tablet computers such as the iPad and other hardware and software available to cater to needs of consumers who switch to reading electronic version of newspapers, magazines and books

Newspapers, magazine and books increasingly available from online stores 2. Market equilibrium is affected by demand and supply. Define demand & supply. Body Market for Print Media P1: Technological developments and increased availability of reading materials

online have resulted in more people purchasing online reading materials such as books, magazines and newspapers.

Explanation/Examples:

Developments in modern technology e.g. faster Internet speed & lower Internet subscription prices more people have Internet access

Also development of complementary goods to online media like e-Book readers such as Kindle, smartphones and tablet computers such as iPad.

In addition, supply of e-books and magazines are available at lower prices due to its much lower costs of production compared to print media.

Link: All the above meant that it is more convenient and cheaper to read books, magazines and newspapers online. Hence, this will lead to a fall in demand for print media. P2: The demand for print media will fall due to the technological developments in

the online media market. Explanation/Examples:

Online reading materials are good substitutes for print media because they have similar content. With a high positive cross price elasticity of demand, the fall in prices of reading e-books and other reading materials online leads to a more than proportionate fall in demand for print media, ceteris paribus.

Demand curve for print media products mentioned above shift to the left.


P3: Ceteris paribus, the fall in demand for print media results in a fall in its price and quantity traded.

Explanation The decrease in demand will shift the demand curve to the left from D0 to D1, causing an initial surplus of Q0Q2 at the original price of 0P0. This surplus will exert a downward pressure on price as producers try to get rid of their excess stock. As price falls, consumers will increase their quantity demanded of the good, causing a movement down the new demand curve D1. At the same time, some producers will also reduce the quantity supplied of the good. Eventually, a new market equilibrium is reached at point E1 where quantity demanded will once again be equal to the quantity supplied. Both the new equilibrium price and quantity exchanged are lower following a decrease in demand. Hence the equilibrium price of print media will decrease from 0P0 to 0P1 and equilibrium quantity will decrease from 0Q0 to 0Q1. Evaluation 1. In the long run, the supply of print media will fall because publishing houses suffer from

fall in total revenue (see diagram above) and profits. As supply curve shifts to the left, there will be an even greater fall in quantity traded of print media. Although supply has fallen, price is also likely to fall because the fall in demand can be expected to be greater than the fall in supply as technology improves and devices such as e-Book readers become more affordable. Also, supply of print media may not fall greatly because newspaper and magazines publishing companies earn portion of revenue through advertising sales, print circulation remains useful.

In the diagram above, in the long the supply of print media will fall as some traditional publishers leave the market. As a result the supply curve shifts to S1. The simultaneous

P0

Q2 Quantity of print media

D0

E0

P1

Q3

S0

0

E3

S1

Q0

Price of print media

D1

Q1

Q0 Q1 0

S0

P0

Price

P1

E0

E1

D0

D1

Q2 Quantity


impact of a fall in demand that is greater than fall in supply results in a surplus or print media that drives down its price to P1 and also reduces quantity traded to Q3.

2. Impact on newspapers and magazines is more significant than books, as electronic books complementary devices such as iPad and Kindle are mainly targeted at serious readers. Also, they are luxury goods that may be out of reach of the lower income groups.

3. Fall in demand for print media is more significant in developed countries because of greater access to internet, higher incomes and more IT-savvy population.

Market for Associated Services i. Market for services of traditional booksellers

P4: The traditional booksellers will also be adversely affected. Equilibrium price and quantity traded of their services will fall.

1. Demand for booksellers services e.g. Borders is a derived demand for print materials

Falling demand for print newspapers, magazines and books Fall in demand for booksellers services.

2. Supply of services also fall due to expectations of declining profits 3. DD> SS equilibrium price and quantity traded. Evaluation Impact depends on how booksellers compete and market themselves through innovative strategies. ii. Online Publishers services

Online book publishing services can format, print and publish books quickly and affordably. A book can go from manuscript form to a handsome bound volume through a printing method called print-on-demand (POD) publishing. With this technique, books are printed and shipped as they are ordered, which eliminates the need to have large print runs and costly warehouses stacked with books, common practices in the traditional publishing world. P5: Both demand and supply of online publishing services will increase and so will

its price and equilibrium quantity. Explanation 1. Demand for online publishing services derived from demand for electronic versions of

newspapers, magazines and books. 2. Rising demand for electronic newspapers, magazines and books rise in demand

for online publishing services 3. Expectations of rising profits rise in supply of online publishers 4. In addition, many traditional publishers have switched to producing electronic

versions of newspapers, magazines and books further increase in supply. 5. The simultaneous rise in demand and supply of online publishing services

equilibrium quantity traded. Assuming that rise in supply is greater than rise in demand due to the rapid technological progress that lowers cost of publishing significantly, there will be a fall in the price of such services.


Conclusion

Technological developments have contributed to the lower price and rise in quantity traded

on online reading materials. Consequently there is also a rise in demand for services of

online publishers. The adverse impact of these changes is on print media which has

suffered a fall in both price and quantity traded and inadvertently loss of revenue and profits.

Traditional bookstores are also adversely affected as a result of this growing trend towards

online media.

Knowledge, Understanding, Application and Analysis

L3 For an answer that shows an in-depth analysis of the impact of development in technology and increasing availability of newspapers, magazines and books on the demand and supply of print media and associated services. Well-developed, coherent arguments with good supporting examples are provided.

L2 For an answer that shows undeveloped analysis of the impact of development in technology and increasing availability of newspapers, magazines and books on the demand and supply of print media and associated services. However, the answer lacks solid economic analysis. Application to the world context is limited.

L1 For an answer that shows undeveloped analysis of the impact of development in technology and increasing availability of newspapers, magazines and books on the demand and supply of print media and associated services. Some basic theoretical errors and/or inadequate economic analysis observed. Answer is mostly irrelevant and contains only a few valid points.


REPLACED WITH NEW QN:

QN 5: 2012 SRJC JC 1 H1 MYE

Cotton prices have increased sharply in the last two years.

(a) Explain the concepts of price elasticity of demand and price elasticity

of supply. [10]

(b) Discuss whether the concept of price elasticity of demand alone is

sufficient to explain the sharp increase in cotton prices. [15]

PART A

Introduction:

Define PED: degree of responsiveness of quantity demanded of a good due to a change

in the price of good itself, ceteris paribus.

Define PES: degree of responsiveness of quantity supplied of a good due to a change in

the price of the good itself, ceteris paribus.

Direction: This essay aims to explain the concepts of PED and PES in terms of definition,

sign and degree using relevant examples.

Body:

P1: The sign of PED is always negative because of the inverse relationship between

price and quantity demanded.

E/E1: The sign of PED is always negative because it reflects the Law of Demand which

states that there is an inverse relationship between price and its quantity demanded.

For example, when the price of cars rises, consumers purchasing power will be

reduced they are less willing and less able to buy cars Qdd for cars fall, ceteris

paribus.

P2: The absolute value of PED determines the degree of PED of a good.

E/E2: When the absolute value of PED is greater than one, it means that demand for a

particular good is price elastic for example, demand for holiday package is very

likely to be price elastic should it take up a relatively large proportion of consumers

income any increase in price of holiday package will lead to a more than

proportionate fall in Qdd of holiday package, ceteris paribus because the consumers

will be very sensitive to a price increase since any further increase in the price of

holiday package will mean that consumers are left with very little of their income

depriving them of their other expenses to satisfy their wants.


When the absolute value of PED is less than one, it means that demand for a

particular good is price inelastic for example, demand for food is price inelastic

because it is considered a necessity any rise in price of food will lead to less than

proportionate fall in Qdd of food, c.p because the consumers need food to survive so

it is not possible to drastically reduce quantity demanded.

P3: The sign of PES is always positive because of the relationship between price and

quantity supplied.

E/E3: The sign of PES is always positive because it reflects the Law of Supply which states

that there is a direct relationship between price and its quantity supplied. For

example, when the price of wheat rises, the producers would be more willing and

more able to produce wheat due to higher expected returns Qss of wheat rises,

ceteris paribus.

P4: The absolute value of PES determines the degree of PES of a good.

E/E4: When the absolute value of PES is greater than one, it means that supply of a

particular good is price elastic for example, supply of mobile phones is very likely

to be price elastic since they are manufactured in comparison with growing

agricultural crops, thus takes a relatively shorter time to produce as compared to the

long gestation period of agricultural crops any increase in price of mobile phone

will lead to a more than proportionate rise in Qss of mobile phone, c.p because the

producers can easily respond to the price increase by increasing the production of

mobile phones in a relatively short time.

When the absolute value of PES is less than one, it means that supply of a particular

good is price inelastic for example, supply of oil is relatively price inelastic

because the availability of the crude oil which is an input to produce oil is limited

any rise in price of oil will lead to less than proportionate rise in Qss of oil, c.p

because it takes time and a lot of effort to extract crude oil from the ground.

Conclusion:

Both PED and PES are illustrated by the extent of the movement along demand and supply

curves respectively. PED or PES concept is useful in determining the extent of change in

equilibrium price and quantity should there be a change in supply or demand respectively.


PART B

INTRODUCTION 1. Clarification of terms

In a free market, the equilibrium price is determined by the interaction of demand and supply forces.

Demand refers to the quantities of a product that buyers are willing and able to buy at various prices per period of time, ceteris paribus, whereas supply refers to the quantities of a product that sellers are willing and able to sell at various prices per period of time, ceteris paribus

2. Direction of essay

Price elasticity of demand can be useful in explaining the sharp increase in cotton prices. However it could also be due to other reasons such as SS of cotton being price inelastic and the simultaneous increase in demand and fall in supply of cotton.

BODY Thesis: Yes, PED is useful in explaining the sharp increase in cotton prices.

12

SRJC 8819/01/JC1 MYE/Markers Report/2012

Part (B) INTRODUCTION 1. Clarification of terms

In a free market, the equilibrium price is determined by the interaction of demand and

supply forces.

Demand refers to the quantities of a product that buyers are willing and able to buy at various prices per period of time, ceteris paribus, whereas supply refers to the quantities of

a product that sellers are willing and able to sell at various prices per period of time, ceteris paribus

2. Direction of essay

Price elasticity of demand can be useful in explaining the sharp increase in cotton prices. However it could also be due to other reasons such as SS of cotton being price inelastic and the simultaneous increase in demand and fall in supply of cotton.

BODY Thesis: Yes, PED is useful in explaining the sharp increase in cotton prices.

P1 Price elasticity of demand could be used to explain the sharp increase in price

of cotton.

E/E Explanation of how prices of cotton rise due to fall in supply

Droughts could have hit major cotton producing countries like China and

India. When this happens crops are destroyed and thus supply of cotton will

be reduced. This would result in a shortage, which would cause price to rise.

The spike in price could be due to demand for cotton being price inelastic

o This is because there are few close substitutes for cotton which is a

key material for making clothes.

o From figure 1, De represents the demand curve for a good with a price elastic demand. Di represents the demand curve for cotton with a price

inelastic demand.

o When supply falls from S0 to S1, the resulting shortage causes a greater percentage rise in price for Di than De.

L Hence, prices of cotton increases sharply from P0 to Pi instead of P0 to

Pe.

Price

0

S0

De

Di

Quantity

P0

Pi

S1

Pe

Q0 Qi Qe Figure 1


Anti-Thesis: There are other reasons to explain the sharp increase in cotton prices.

P2 Price elasticity of supply could be used to explain the sharp increase in price of

cotton.

E/E Explanation of how prices of cotton rise due to rise in demand

With rising incomes across the world due to economic growth, purchasing power of people would increase. Hence, DD for normal goods such as clothing will increase.

Since cotton is used as an input in the production of many products such as clothing, the demand for cotton rises as it is a derived DD for these final goods.

The spike in price could be due to supply for cotton being price inelastic o This is because it takes time for the cotton plant to grow. o From figure 2, Se represents the supply curve for a good with a price

elastic demand. Si represents the demand curve for cotton with a price inelastic supply.

o When demand increases from Do to D1, the resulting shortage results in a greater percentage rise in price for Si than Se.

L Hence, prices of cotton increased sharply from P0 to Pi instead of P0 to

Pe.

Qi Qe Quantity

Price

0

Se Pi

Pe P0

D0

Q0

D1

Si

Figure 2


P3 In reality, ceteris paribus assumption does not hold. The sharp increase in

cotton prices could be due to the simultaneous increase in demand and fall in

supply. The DD is likely to be greater than the SS since there are many uses

for cotton.

E/E Price adjustment process

From figure 3, initial equilibrium price is P0 and quantity is Q0. The increase in demand could be seen by the rightward shift of the demand curve from D0 to D1 , while the fall in supply could be seen by the leftward shift of the supply curve from S0 to S1.

When this happens, a shortage of Q2 to Q3 is created at price P0. This creates an upward pressure on price as unsuccessful consumers would bid up the prices. When price increases, other consumers will reduce their quantity demanded, as it is now more expensive to purchase cotton.

At the same time producers will increase their quantity supplied as it now more profitable. Price will adjust till quantity demanded equals to quantity supplied and a new equilibrium is attained at price P1 and quantity Q1.

L Hence the increase in demand reinforces the fall in supply to result in a sharp

increase in cottons equilibrium price from P0 to P1.

Conclusion

We can use PED to explain the sharp increase in price of cotton. In my opinion, the

simultaneous DD and SS of cotton which reinforces each other is a more significant reason for the sharp increase in price of cotton.

Level Description

L1

For an answer which shows description knowledge of the usefulness of the elasticity concepts. Glaring conceptual errors are evident.

L2

For an answer which addresses either the thesis / anti-thesis.

For an answer which may address the thesis and anti-thesis but there are some inadequacies in the analysis.

L3

For an answer which thoroughly addresses the thesis and anti-thesis with the aid of relevant diagrams.

E1 For an unexplained assessment on the usefulness of the elasticity concepts.

Q3 Quantity

Price

0

S0

P1

P0

D0

Q0

D1

S1

Figure 3

Q2 Q1


E2 For an evaluative assessment on the usefulness of the elasticity concepts.

2012 h2 revision for ddss

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