NJC H2 Economics Prelim P1 Ans

National Junior College 2023 SH2 H2 Economics Preliminary Examinations Paper 1 – Case Study Question 1 Questions & Suggested Answers (a)(i) Using information in Extract 1, identify an d explain one demand factor that caused the change in volume of the coffee beans over the period January 2020 to March 2020. [2]  Fall in demand for coffee consumption was because consumers refrained from dining out due to fear of contracting the virus during Covid-19. This resulted in a fall in demand for coffee, thus a fall in demand for coffee beans, leading to a fall in volume of coffee beans. (a)(ii) Using information in a(i) and with the aid of a dia gram, explain how the change in demand in the coffee beans market has had an impact on the durian market. [4]  The fall in demand for coffee beans led to a fall in its price and a decrease in quantity supplied, ceteris paribus.  Given that coffee beans and durian cultivation are substitutes in production, when faced with falling prices, farmers diversified into more profitable crops such as durians.  This led to an increase in supply of durian from S 0 to S 1, thus a fall in the price and increase in quantity of durian. (b) Using information in Extract 2, explain why cof fee farmers took the decision to shut down production in the short run and leave the market. [3]  Fall in demand for coffee beans led to a fall in a verage revenue (AR).  Average variable costs (AVC) were rising given ris ing fertiliser costs.  This resulted in coffee farmers shutting down prod uction in the short run and leaving the market since AR is less than AVC. (c) Explain why Vietnam is likely to see a change i n its comparative advantage away from the production of coffee beans. [3]  Higher opportunity cost in the production of coffee is the reason behind Vietnam’s change in comparative advantage away from the production of land-intensive coffee bean.  This is because of the potential loss of natural resource land where total arable land is predicted to fall by 2050 if predictions of a 2 degree celsius temperature rise holds true. (d) Discuss the extent to which coffee shop chains like Starbucks and Luckin are likely to engage in non-price competition. [8] Introduction:  The mutual interdependence and the differentiated nature of product of competitive oligopolies like coffee shop chains Starbucks and Luckin makes it likely for these firms to engage in non- price competition, given the uncertainty of outcome from competitive tactics.  Price Competition, however, is not altogether absent. Body: Price Quantity 0 Market for durian S0 S1 P0 P1 Q1 Q0 D0

Thesis: Coffee shop chains like Starbucks and Lucki n are likely to engage in non-price competition  High barriers to entry and a few large firms domina ting the market in the coffee shop chains industry mean that the decisions of these firms are mutually interdependent. Explain the market structure High barriers to entry: Marketing strategies – advertising and branding  Coffee shop chains like Starbucks is a well established brand name with strong consumer loyalty.  Starbucks has its own loyalty rewards program and ordering app and is setting the industry benchmark for price and products since its entry in to the Chinese market. This is due to large expenditure on advertising and promotion to create a strong bra nd image, giving Starbucks greater market power such that consumers do not see rival’s product as close substitutes.  Any potential entrant is forced to match up to that expenditure should it wish to enter and compete in the market. Number and size of sellers  Each of the few large firms in the coffee shop chai ns industry - Starbucks, KFC’s K-coffee and convenience stores Lawson and Family mart are among the top five in China. Each firm produces a significant share of total market output and has considerable influence over price. Mutual interdependence and price rigidity  Each firm’s actions will have a significant impact on its rivals and likewise the firm in return is significantly impacted by the actions of their rivals.  Prices tend to be similar between oligopolists and are stable with time. Price rigidity  If a firm lowers its price in an attempt to increas e revenue and if rival firms decide to lower their price rather than risk losing a share of the market, quantity demanded will thus only increase less than proportionately. The demand curve facing the firm if it lowers price is relatively price inelastic.  On the other hand, if a firm raises its price and if the price increase is not followed by rival firms, its sales will fall rapidly. The quantity demanded will thus fall more than proportionately as the demand curve facing the firm if it raises its price is relatively price elastic. Other rival firms will not follow the price increase because by keeping their prices constant, they can capture a larger market share from the firm that has raised its price.  Both price changes will result in fall in total rev enue and profit for the oligopolistic firm, ceteris paribus. Nature of product  Starbucks and Luckin differentiated product offerin gs are each firm’s such that consumers are less likely to view rival firms’ product as a close substitute, giving each firm greater market power.  Starbucks focus on a cozy environment - comfortable chairs and art – where people can stay and socialise makes its PED<1 due to a lack of close and available substitute in a casual atmosphere to relax with friends or in solitude. In addition p roduct development in handcrafted brews can attract new customers, as such brews can be tailored to each consumer’s taste.  Luckin on the other hand focuses on convenience in delivery and takeout I addition to the quality of its coffee beans and milk used and that their coffee making is supervised by a barista who won the World Barista Championship. Anti-Thesis: Coffee shop chains like Starbucks and Luckin may engage in price competition  Price competition is not absent altogether in the coffee shop chains industry.  From Extract 4, to increase market share, Luckin en gaged in price competition, capitalising on low prices, increasing quantity demanded and revenue.  Luckin utilises internet technology to inform and a ttract consumers of their lower prices at consumers’ convenience with an emphasis on using quality coffee beans and milk, and the high standard of its brewing process which supervised by a barista who won the World Barista Championship. This reduces Luckin substitutability to that of rivals such as Starbucks, and that consumers will be less responsiveness to changes in rival’s price.  Within three years, Luckin expanded, operating 5,323 coffee shops catching up with Starbucks.  Overall rise in revenue. Evaluative Conclusion:  The uncertainty of the outcome from competitive tac tics means that coffee shop chains like Starbucks and Luckin prefer non price competition to a large extent to increase revenue and gain market share.

 A change in market conditions, however, such as a f all in demand resulting from economic recession may see firms temporarily engaging in pri ce competition so as to cover the cost of excess production capacity. (e) Discuss the extent to which indirect taxation i s better than agriculture sustainability certification in eliminating the impact of negative externalities arising from coffee beans cultivation. [10] Suggested answer Introduction:  Negative externalities from production occurs when its production creates an external cost to society that affects third parties as a spill over effect in which no compensation is paid.  Deforestation and/or depletion of ground water resu lting from coffee cultivation cause a spill over effect on the environment. Body: Explain how negative externali