EJC Econs 2021 A-Level H2 P1 Q1 SAMS

Suggested Answers for 2021 A-Level H2 P1 Qn 1: Changes in the market for seafood (a) Using a demand and supply diagram, explain why the rise in the price of salmon led to the change in the price of cod in Norway. [2] Salmon and cod have a positive cross elasticity of demand (XED) as the 2 goods are substitutes. Hence, t he rise in the price of salmon leads to a rise in demand for cod as consumers switch from consuming the relatively more expensive salmon to the relatively cheaper cod. Figure 1: Market for cod With a rightward shift of the demand curve from DD0 to DD1, a shortage exists at the current market price P0, causing an upward pressure on prices. Hence, the price of cod rose in Norway. (b) With reference to Extract 1 and Figure 1: (i) Using a diagram, explain the likely impact of the disagreement between fishing workers and boat owners in Iceland on the market for cod in 2017. [2] The disagreement between fishing workers and boat owners in Iceland would have caused a fall in supply of cod as ‘fishing boats were left idle for over two months’ meant that no fisherman was fishing and thus lowering supply of fish including cod. This is reflected by a leftward shift of the supply curve from SS0 to SS1. Figure 2 At original price P0, quantity demanded Qd exceeds quantity supplied Qs, creating a shortage that exerts an upward pressure on price. As price increases, quantity supplied rises while quantity demanded falls. Price continues to increase until the shortage is eliminated. As a result, equilibrium price rises and equilibrium quantity falls.

(ii) Suppose a maximum price of Iceland cod of €2.25 per kg had been operating since March 2016. Explain the impact of such a maximum price would have had on the market for Iceland cod. [2] Between March to June 2016, the maximum price had no impact as the market equilibrium price was below €2.25 per kg. After June 2016, the maximum price would have been effective , and price of Iceland cod would fall to €2.25 per kg since the market equilibrium price was above the maximum price. (iii) Explain how ‘large stockpiles of frozen cod in Iceland’ can be used to keep cod prices stable, and identify two difficulties in operating such a scheme. [4] The ‘large stockpiles of frozen cod in Iceland’ can be released onto the market to increase supply, preventing a shortage from arising and pushing prices up. Since February to April is the peak cod -fishing season, the disagreements between fishing workers and boat owners have caused delays in fishing. This would affect the amount of stockpiles accumulated, which would in turn reduce Icelandic government’s ability to release the stockpiles to stabilise prices. Another difficulty is the high costs incurred for storage of frozen cod. (c) Explain why many small -scale shrimp farmers in India took the decision to shut down production in the short run and leave the market in 2020. [2] Due to the pandemic, Indian exporters are facing significant fall in demand for shrimps from major buyers like France, and the US. This translates into a large fall in average revenue (AR), for these small-scale shrimp farmers. To shut down production in the short run and leave the market in 2020, it means that they were unable to cover at least their variable costs (P < AVC). (d) Discuss whether Barramundi Asia’s plan to increase its scale of fish production is likely to benefit consumers. [8] Command Discuss whether – benefits and costs Start Point Plan to increase its scale of fish production (iEOS) End Point Benefit consumers – in terms of lower price (P), higher quantity (Q) Content iEOS, performance/Impact question type Context Barramundi Asia (oligopoly) P1: Barramundi Asia’s plan to increase its scale of fish production will benefit consumers Barramundi Asia's intention to expand the size of Barramundi's fish production by owning and managing its whole supply chain was mentioned in Extract 3. As a result, Barramundi Asia will be able to grow and raise its output level by leveraging its production facilities in Singapore and Australia and enjoy internal economies of scale (iEOS). Marketing iEOS Barramundi Asia may start creating specialised departments, such as marketing, production, cost, processing cost accountant, marketing manager, etc. when it increases its output,

adhering to the principle of the division of labour. This enables the company to focus on more crucial tasks, such as import and export issues, bank loans, government concessions, etc. Due to the fact that administrative costs do not rise in step with output, Barramundi Asia will benefit from lower production costs per unit, resulting in marketing internal economies of scale. Technical iEOS Because of the large scale production and the mechanical benefit of using huge machinery, Barramundi Asia may potentially benefit from technical internal economies of scale. Due to the vast size of the facility, lower unit costs of production may be experienced as less energy, fewer employees, and correspondingly lower installation costs are needed. Benefits to Consumers – Lower prices Barramundi Asia could operate with falling long run average costs due to improvements in the production process. In addition, the abovementioned iEOS enjoyed by Barramundi Asia as a result of growth would probably result in lower prices because average cost (AC) and marginal cost (MC) would fall from AC 0 to AC 1 and MC 0 to MC 1 in the short run, respectively, as illustrated on Figure 3 below. This would result in Barramundi Asia making higher profits from normal profits (P0 = C0) to supernormal profits (shaded area). Assuming that Barramundi Asia passes on the cost savings to consumers in the form of lower prices from P0 to P1 as a result of this increase in profits, and customers will benefit from higher consumer surplus from AB0P0 to AP1D and hence consumer welfare. Figure 3: iEOS leading to supernormal profits for firm and lower price for consumers Benefits to Consumers – Improved quality Barramundi Asia may potentially be dynamic efficient as they leverage on the supernormal profits (shaded area P1C1DE in Figure 3) to carry out R&D and innovation such as product innovation to produce fish that are of higher quality for consumers (larger and more nutritionally). This is evident from Extract 3, where it was stated that due to high automated farming techniques, Barramundi Asia is currently harvesting fish that weigh 5 kg. As Barramundi Asia uses its supernormal profits to expand its online presence and home delivery services, customers may also benefit from shorter delivery times. P2: Barramundi Asia’s plan to increase scale of production will not benefit consumers However, consumers may not benefit from an increase in industry concentration if Barramundi becomes a monopoly (unlikely) or the dominant player in an oligopolistic market because of more market dominance. Prices may increase and options for consumers may be come limited. With fewer rivals in the market, this could indicate that demand for fish from Barramundi Asia will become more price inelastic, and the average revenue (AR) and marginal revenue (MR) curves will become relatively steeper from AR 0 and MR0 to AR1 and MR1, as illustrated on Figure 4 below. As a result, Barram undi Asia would be producing at profit - maximising output level of Q1 and set a higher price for its fish from P0 to P1. This indicates that A D E

customers from lower-income families may be less able to purchase fish at this higher price than consumers from higher-income households, resulting in more inequity. Figure 4: Increase industry concentration might le