2023 ASRJC H2 Econs Prelim Paper 1 Suggested Answers

1 © ASRJC Economics Department 9570/01/JC2 Prelim/2023 Anderson Serangoon Junior College 2023 JC2 Preliminary Examination H2 Economics 9570/01 Suggested Answers and Marker’s Comments Question 1: Big technology firms and the COVID-19 pandemic (a) Compare the changes between Amazon’s sales revenue and profit and suggest a reason for the difference. [3] Amazon’s sales revenue and profit are increasing but its revenue is increasing to a much larger extent than its profit. A reason for the larger increase in revenue could b e that Amazon is increasing its spending on R&D and/or logistics infrastructure to make its delivery services more efficient. Thus, with increased spending (ie costs), the profit that remains is much lower. (b) Extract 1 states that “Families bought iPads an d Macs as work and school went virtual.” Using a diagram, explain how this impacted consumer and producer surplus in the technology market. [5] Extract 1 states that there is an increase in the d emand for products in the technology market. This was a result of the pandemic that resulted in lockdowns in several countries. Since people stayed home more, they were more incli ned to purchasing electronics like laptops and electronic notepads that enabled them to work from home or to attend lessons virtually. This increase in taste and preference in creased the demand for technological products. This is illustrated by the rightward shif t in the demand curve from D 0 to D 1 as seen in the diagram below. At the original price, P 0, a shortage is created and this causes an upward p ressure on price since consumers who were initially unable to obtain the products now bid up prices. The subsequent increase in quantity supplied and fall in quantity demanded will continue until the market reaches a new equilibrium. Thus, both equilibrium price and quantity have increased from P 0 to P 1 and from Q 0 to Q 1 respectively. As seen in the diagram, the increase in demand will lead to an increase in consumer surplus (from area BE 0P0 to area AE 1P1) and producer surplus (from area CP 0E0 to area CP 1E1)

2 © ASRJC Economics Department 9570/01/JC2 Prelim/2023 (c) With reference to Extract 2, explain the likely PED value of Amazon’s e-commerce service. [2] The PED value for Amazon’s e-commerce services is l ikely to be less than 1. This is because there are few close substitutes. Extract 2 states that “you know when you will likely receive a product” when you place an order with Amazon. In contrast, other delivery websites provide no such certainty. Thus, this make s Amazon’s delivery services less substitutable. (d) Explain a barrier to entry that exists in the i ndustry that Amazon operates in. [2] A likely barrier to entry in the delivery market is technical barrier to entry. Given the need to build up a delivery fleet and warehouses with the machinery to sort and transport goods. A large fixed cost is needed to be able to set up s uch a complex logistics infrastructure. This is likely to prevent firms from easily entering the market. (e) Extract 3 states that “firms that survived the COVID-19 crisis are older with greater brand loyalty and more productive.” Discuss the validity of the statement. [ 8] During the Covid-19 crisis, many firms faced a fall in demand for their goods and services due to falling incomes and lockdowns that took place in many countries. While it is true to some extent that older and more productive firms ha d a greater likelihood of surviving this, or in other words, not shutting down, it is n ot a guarantee that such firms would not shut down. The shut down condition for a firm is at an output level where average variable cost (AVC) is more than average revenue (AR). Firms that are older do have a greater ability to survive the Covid-19 crisis. Firms that are older tended to be firms with a greater level of br and loyalty from their consumers. The COVID-19 crisis would cause a fall in demand for fi rms’ goods and service. This is seen in the diagram below where the firm’s demand shifts from AR 0 to AR 1. However, given the brand loyalty that older firms enjoy, it is likely that their fall in demand will be less than the fall to AR 1, which is likely to be less than other firms because consumers may continue to purchase from them rather than from the newer entra nts into the market. For example, when it comes to home furnishing, Ikea has established itself for many years in the market and when consumers think about furnishing their hom es to make it more conducive for working from home, they are more likely to purchase goods from Ikea than other firms.

3 © ASRJC Economics Department 9570/01/JC2 Prelim/2023 Given the likely smaller fall in average revenue, it is unlikely that the older firms like Ikea would reach the shut-down condition. Furthermore, I kea is a large firm that has established itself for many years in the market. Thus, it is likely to have past profits to tide over periods of crises and not need to shut down even if it faces a fall in average revenue. Also, firms that are more productive are more likel y to be producing close to or at productive efficient levels. Thus, this enables the m to lower their cost of production and thus they are less likely to shut down since they would lower their average variable costs as well. If firms are suffering from X-inefficiency prior to the COVID-19 crisis and are unable to get rid of their organisational slack, then such firms will have a greater likelihood of having a fall in AR such that it can go below the AVC. However, it is not necessarily true that older and more productive firms are the only ones that can survive the pandemic. Firms that may not b e old or more productive can also survive the pandemic. As stated in Extract 3, firms that can adapt to the changing market conditions and adopt technologies that help them adapt are also able to avoid shut down. This is not dependent on the firm’s age and product ivity. For example, when pubs faced a loss in revenue due to lockdowns preventing consu mers from patronising their premises, those that were able to pivot and change their production of alcoholic drinks to producing hand sanitizers were best able to find alternative sources of revenue and even increase their average revenue. This would enable t hem to avoid a shut-down situation since they avoided loss of revenue. In conclusion, there is some truth that being older may help maintain revenue and thus enable a firm to avoid shut down. However, this is not always the case. This is seen in the case of Robinsons that shut down in Singapore even though it had stores in Singapore for decades. This is because the more critical issue is the ability of the firm to adapt to the changing circumstance brought about by the pandemic which required firms to be able to move their sales online and still be able to mainta in their consumer base. While Robinsons may have had some past profits to keep them afloat, this only served to delay their eventual shutting down. Thus, being older only provides a limited ability to avoid shut down. That said, it is likely that it is critical for a f irm to be productive to be able to avoid shut down during a pandemic. If a firm is unable to keep its costs low, it is more likely for the average revenue to be below average variable costs, especially in a period of falling revenue. Level Marks Description 2 4-6 Analytical explanation of the benefits of bot h being older (having more brand loyalty and thus likely being larger as well) and more productive. Answer needs to link to the ab ility to survive and