2023 ACJC H2 Price Mechanism Tutorial Answers

1 ©Property of ACJC Economics Dept/2022/Price Mechanism ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics H2 PRICE MECHANISM & ITS APPLICATION Tutorial Worksheet 2 Question 1: Market for bubble tea in Singapore a) With the aid of a diagram, explain the effects of the following events on the market for bubble tea in Singapore: Note • When going through the question approach, do use t he CCC framework to get the students to identify concepts, command word, and context. Concepts include “market”, which indicates the use of demand and supply concepts; skills needed come from the Command word “explain” and “aid of diagram” and Context is the “bubble tea in Singapore”. • Do remind students to draw and label their diagrams in a complete and correct manner. They should also refer to the diagram drawn as they are writing their explanation. a) Increase in workers’ productivity after attending training courses Section A: Discussion Questions SS0 SS1 Price of Bubble tea drinks Qty of bubble tea drinks DD0 P0 P1 Q1 Qo’ Q0 0

2 ©Property of ACJC Economics Dept/2022/Price Mechanism • Factor: An increase in workers’ productivity (measured by output per man -hour) would mean that more bubble tea can be produced by each worker, with no change in the number of hours worked. What this means to the producer is that at each price level, the firm is now able to produce more output; for example, at price level Po, the quan tity supplied has increased from Qo to Qo’. This shows that the supply of bubble tea in Singapore has increased, and it is illustrated by a rightward shift of the supply curve from SS 0 to SS1, as shown above. • Interaction: With the rise in supply, and deman d remaining unchanged, there will be a surplus of QoQo’ at the original price P 0 and this exerts a downward pressure on price, as firms are willing and able to produce a higher quantity of bubble tea drinks, and consumers require a lower price in order to be willing and able to increase their consumption. As price increases, quantity demanded rises and quantity supplied falls, hence reducing the surplus. • Effect: This eventually leads to a decrease in the equilibrium price of bubble tea drink from Po to P1 and a rise in equilibrium quantity from Q0 to Q1. Note • The framework of “Factors, Interaction, Effect” is how to explain the given issues with economic analysis (demand supply framework, in this case). Without economic analysis, answers will score poorly, even if it is logical. • There are different economic frameworks for different topics. • With reference to the skills package, the paragraph writing skill of TEEL (topic sentence, explanation, examples, link), “explanation” in economics usually involves an economic framework or model. For demand supply, that fram ework is “Factors, Interaction, Effect”. The answer provided above does not have a “topic sentence, examples or a link” because these are basic questions and does not require them yet. b) Increased spending on advertisements by bubble tea shops • Factor: An increased spending on advertisements by bubble tea shops leads to more awareness (actual or perceived) of the benefits of their products and hence influence consumers’ tastes and preferences to consume towards bubble tea. As a result, the demand for bubble tea in Singapore would increase and this is represented by a rightward shift of the demand curve from DDo to DD1, as shown above. • Interaction: When demand increases, it creates a shortage of bubble tea of Q 0Qd at the original price P0 on the diagram. This leads to an upward pressure on price as consumers are willing and able to pay higher prices to obtain the bubble tea which is currently in SS0 Qty of bubble tea drinks P1 P0 Price of bubble tea drinks DD1 DD0 Q0 Q1 Qd

3 ©Property of ACJC Economics Dept/2022/Price Mechanism shortage, and bubble tea shops require a higher payment to be willing and able to supply their goods. • Effect: As price increases, quantity of bubble tea demanded decreases while quantity supplied increases. Finally, equilibrium price increase from P 0 to P 1 and equilibrium quantity increases from Q0 to Q1. c) Singapore experiencing negative economic growth and a higher Goods and Services Tax • Factor: Negative economic growth experienced in the year implies a fall in household income. The fall in income reduces consumers’ willing and ability to consume, causing demand to fall. This shifts the demand curve to the left from DD0 to DD1. • Factor: At the same time, the higher GST implies bubble tea shops have to pay more for raw materials (e .g. sugar, milk, tea, cups, etc). This increases the costs of production, reducing firms’ willingness and ability to supply bubble tea at each price level . This is illustrated by a leftward shift of the supply curve from SS0 to SS1. • Interaction: Due to both the demand supply shocks, at initial price (P0), there is a shortage. This causes consumers to compete for the good, bidding up price in the process. • Effect: Price increases until the new quantity demanded and supplied is the same at the new equilibrium point P1, Q1. (Note: Price increases for sure because both the demand and supply shocks, even on their own, would lead to a shortage and therefore price increase. Both shocks reinforce the increase in price.) • Interaction: However, depends on the extent of the shift of the demand and supply curves. The rise in demand is likely to be smaller than the decrease in supply, as Singaporeans tend to already enjoy bubble tea significantly and hence are unlikely to increase their demand of bubble tea to a large extent. • Effect: Therefore, there would be a decrease in equilibrium output from Q0 to Q1, assuming that the increase in demand is smaller than the decrease in supply. (Note: this assumption that demand changes to a smaller extent than supply may not always be. Any persuasive and logic reason for demand to change to a larger extent is also acceptable). Note:

4 ©Property of ACJC Economics Dept/2022/Price Mechanism • Here, “interaction and effect” is done twice because the effect on price is certain, but the impact on quantity is uncertain and depends on whether the demand changes more than the supply. However, it is also accepted to only do “interaction and effect” once, so long the answer considers the extent to which demand changes relative to supply. Both answers will be awarded full credit since the difference is in terms of organisation but contains the exact same economic content. • Alternative acceptable explanation: although the economy is still growing at a slower rate, negative economic sentiments caused by the slowing economic growth might prompt households to start saving ahead of an anticipated rise in unemployment rate / pay cuts. Demand would then fall instead of rise by a small extent. Coupled with the decrease in supply, the market would experience a decrease in equilibrium output while the impact on equilibrium price depends on the extent of the change in demand versus supply.

5 ©Property of ACJC Economics Dept/2022/Price Mechanism Question 2: Supermarkets offer drivers higher pay amidst shortage UK’s 3 largest supermarkets, Asda, Tesco and Sainsbury’s reported increased delivery costs after having to raise wages of their driver. Big supermarket chains, desperate to ensure their food products such as ice-cream, salad and canned drinks gets to their stores, these supermarkets are offering drivers of heavy goods vehicles (HGV) nearly double the market rate. Industry insiders say HGV drivers’ wages have already risen by between 10% and 20% as a result of the shortage HGV drivers. Logistics UK, which represents freight owners including supermarkets, has estimated a shortage of 90,000 HGV drivers. It can take more than si