EJC Econs N2023 H2 EQ2 - students

2023 H2 A level Paper 2 Question 2 Bad weather and falls in consumer incomes can have different impacts on the prices of agricultural products such as vegetables, rice and grain. (a) Explain the different impacts on the prices of vegetables due to bad weather and falls in consumer incomes. [10] (b) Discuss the effectiveness of different measures that might ensure stability of food prices to consumers. [15] Part (a) - Question Analysis Approach Command Word Explain – Make clear Start point • Bad weather • Fall in consumer incomes End Point Different impacts on prices of vegetables Content and Context Content • Price mechanism • Price elasticity of demand (PED) • Income elasticity of demand (YED) or Price elasticity of supply (PES) Context Vegetables market. Introduction Equilibrium prices in a market are determined by interaction of demand and supply curves in the market. In this essay, the different effects on the changes in demand and supply on the equilibrium price for the market of vegetables will be elaborated. The events impacting the vegetables market include bad weather and falls in consumer incomes. Requirement 1: How bad weather impacted price of vegetables • The output of some agricultural products is severely affected by variation in weather conditions. • Bad weather conditions such as floods due to monsoons, soaring temperatures and drought because of global warming could bring a poor harvest and producers are now less able to produce vegetables at each and every price level. • Decrease in supply of fresh vegetables is represented by a leftward shift of the supply curve from SS0 to SS1. • In addition, the demand for vegetables is highly price inelastic due to the high degree of necessity as a source of fibre in one’s diet. • At the original price P 0, quantity supplied exceeds quantity demanded and a shortage exists leading to an upward pressure on prices. Since demand for vegetables is price inelastic, an increase in price leads to a more than proportionate decrease in quantity demanded of vegetables. • Hence, a sharp increase in price of vegetables is observed as seen by the increase in price from P0 to P1 in Fig 1.

Requirement 2: How falls in consumer incomes impacted price of vegetables • With a decrease in consumer incomes, perhaps due to an economic recession, there will be a decrease in disposable income (i.e., income after taxes and subsidies) and hence purchasing power. • Assuming vegetables are normal goods, this leads to a decrease in demand, and a decrease in equilibrium price. • Represented by a leftward shift of the demand curve from DD 0 to DD1. Use either the PES or YED explanation: • At the original price P0, quantity supplied exceeds quantity demanded and a surplus exists. Given that supply for vegetables is highly price inelastic due to the nature of vegetables as an agricultural good with long gestation period, even if price of vegetables were to increase, the vegetable firm/farmer will not be as responsive in increasing the quantity supplied and there is a less than proportionate fall in quantity supplied. • Hence, a sharp decrease in price of vegetables is observed as seen by the increase in price from P 0 to P1 in Fig 2.1. OR • A ssuming vegetables are necessit ies given their essential status in a typical diet , the demand for vegetables is likely to be highly income inelastic (i.e., positive YED, 0<YED<1), a decrease in consumer incomes will lead to a less than proportionate decrease in demand for vegetables as seen in Fig 2.2 from DD0 to DD1 • This results in a relatively small decrease in the equilibrium price of vegetables from P0 to P1.

Conclusion • Bad weather has resulted in a significant rise in prices of vegetables due to demand being highly price inelastic. • On the other hand, the fall in consumer income has resulted in a fall in prices of vegetables. Mark Scheme Level Knowledge, Understanding, Application, Analysis Marks L3 Full display of AO1, AO2 and AO3 skills: For an answer that shows well- developed explanation of why a decrease in consumer incomes AND bad weather result in different impacts on prices of vegetables. • clear and accurate explanation of how changes in DD and SS, supported with the use of elasticity concepts to analyse the impact in prices of vegetables • supported with appropriate diagrammatic analysis 8-10 L2 Uneven display of AO1, AO2 and AO3 skills: For an answer that shows under-developed explanation of why a decrease in consumer incomes AND bad weather result in different impacts on prices of vegetables. • lacks depth of analysis (i.e., limited effective use of relevant economic analysis or gaps in diagrammatic analysis) • lacks scope in explaining either event 5-7 L1 Limited display of AO1 and AO2 skills: For an answer that shows limited knowledge of why a decrease in consumer incomes AND bad weather result in different impacts on prices of vegetables. • listing of points, unexplained statements, or descriptive response • many conceptual errors (i.e., using AD/AS analysis, use PED with shift in demand, use XED etc) • smattering of points 1-4

(b) Discuss the effectiveness of different measures that might ensure stability of food prices to consumers. [15] Part (b) - Question Analysis Approach Command Word Discuss  balanced answer + evaluation Start point Policy measures End Point Stability of food prices to consumers Content and Context Content HAL of policy measures (not exhaustive and limited to these): • Price ceiling • Producer subsidies Context Food market Introduction • Government’s microeconomic objective of equity : Ensure stability of food prices, considered basic necessity especially for lower income households. • Due to bad weather conditions and falls in consumer incomes, there are different impacts on prices of vegetables as explained in part (a). These events would also result in a similar impacts on the prices of other food products. • Brief overview of essay: policies of price ceiling and producer subsidies will be elaborated on to ensure stability of food prices. Requirement 1: Price ceiling is an effective policy to ensure stability of food prices to consumers. • [H] A price ceiling is a legally established maximum price that prohibits producers from selling the good above the maximum price set. It is set below the equilibrium price in the market. • According to Figure 3, the price ceiling is set at PMAX. • Price of food falls from P to PMAX. • Consumers are now more willing and able to buy food at Pmax → Shortage Q MAXQ2 is created, where quantity demanded (Q2) exceeds quantity supplied (QMAX). • In times of bad weather and prices of food increases significantly (i.e., at P), price ceiling will be effective in ensuring food prices remain stable (i.e., price falls from P to PMAX). Intermediate evaluation

• [A] The price ceiling, which is compulsory by law, can take effect immediately to ensure the affordability of food in Singapore, which is a basic necessity. Hence, policy may be highly effective in ensuring the stability of food prices. • [L] However, a price ceiling may not be the best policy as the shortage Q MAXQ2 may lead to unintended consequences - the formation of black markets, where producers ignore the price restriction and sell illegally above the maximum price. • Sellers who are able to obtain Q MAX amount of food, are able to sell them up to price P b (Fig 3), as consumers are willing and able to pay up to that price. • Assuming that the demand for food is price inelastic due to the high degree of necessity, the problem of black market is likely to be greater as consumers are willing to pay an even higher price to obtain essential food supplies. • The existence of the black market will worsen the affordability of food, and the stability of food prices,