SAJC 2019-2023 JC1 H2 Economics Final Exams Answers

2024 JC1 H2 Economics FE Revision Package Answers 1 2024 JC1 H2 Economics Final Examinations Revision Package Suggested Answers Section A: Case Study Questions Question 1: Singapore’s Grocery Retail Market (Source: 2019 SAJC Final Examinations) Suggested Answers (a) (i) With reference to Figure 1, identify and explain the type of market structure operating in the Singapore grocery retail market. [2] Oligopoly. The 3 firm concentration ratio is 91%. (b) (ii) Identify and explain one possible barrier to entry that may exist in the grocery retail market in Singapore. [2] 1) Financial barriers Existing supermarkets e.g. FairPrice has large financial reserves for advertisements, partnerships with other companies such as Grab or even to engage in price war. Potential entrants must match FairPrice’s financial reserves to engage in non -price and price competition against FairPrice. Inability to do so may prevent them from entering. 2) Cost barriers Huge Capital Outlay/sunk costs and iEOS. To enter, potential entrants need to incur high sunk costs in the form of warehouses, shop spaces and delivery vehicles in order to set themselves up as a supermarket in Singapore. Any inability to bear such high costs, will prevent new firms from entering. Substantial iEOS: Potential entrants may not enjoy high iEOS. Hence, they may not be able to pass on any cost savings to consumers in terms of lower prices. This in turn mean that they may not be able to price their goods competitively and choose not to enter eventually. 3) Control of certain goods Inability to negotiate contracts with sellers of certain goods e.g. essential agriculture products because existing supermarkets have already established long term contracts with sellers will find themselves unable to sell the agricultural products. New firms may not enter knowing that they are unable to offer products that meet consumers’ needs.

2024 JC1 H2 Economics FE Revision Package Answers 2 (iii) Using Extracts 1 and 2, explain how the grocery retail firms in this market structure might compete with each other. [4] Mutual Interdependence between the small number of firms – i.e. high rival consciousness . Because of mutual interdependence, they may engage in price competition (and price wars) i.e. if a rival firm lowers price, they will have to also lower price. In addition to price competition, they may engage in non-price competition, particularly when firms choose to keep prices unchanged. Price competition E.g. • FairPrice engaged in price competition by reducing price of household essential items to match what its rivals do. • FairPrice partnered Grab to offer a new membership programme to allow members to enjoy rebates. Non-price competition • Sheng Siong Group launched rebate credit card to attract consumers to create convenience in payment • Partnership between NTUC and GRAB build brand loyalty schemes amongst its customers since members can enjoy member-exclusive events e.g. private movie screenings. (b) To what extent has the entry of e-commerce grocery retail firms like Redmart and Amazon affected the ability of an existing firm such as NTUC FairPrice to make large profits? [8]

2024 JC1 H2 Economics FE Revision Package Answers 3 Schematic Plan Anti-Thesis: FairPrice’s ability to make large profits has not been affected and could be even stronger Thesis: Entry of new firms has affected the ability of FairPrice to make large profits Market share eroded with entrance of e- commerce grocery firms. • AR↓ due to market share being eroded. Greater choices PED >1 • Lower price and output at profit maximising point • Smaller supernormal profits ; assuming no change in AC and MC E-commerce only accounts for 15% of the market share • Consumers still prefer shopping at typical supermarkets. Hence, no significant AR↓→ retain larger supernormal profit. • Existing supermarkets still enjoy large iEOS (low AC). Hence able to pass cost saving to consumers in terms of lower price. New e- commerce firms cannot match price despite offering convenience. • AR remain high but with a low AC → maintain ability to earn large profits In LR, firms adopt strategies to counter the presence of e-commerce grocery firms • Make stores more enticing → If successful, AR rise →Profits continues to be large if not larger • Set up online stores too → If successful, AR rise→ Profits continues to be large, if not larger Introduction: Explain how an existing supermarket (a firm) have ability to make large profits. • Oligopolistic market structure – Few large firms • Substantial Market share → each firm faces high demand • Can retain LR supernormal profits Conclusion. It all depends on existing firms’ ability to compete against e-commerce grocery stores by better meeting the consumers’ taste and preference. Successfully meeting the changing consumers’ taste and preferences will allow existing firms to retain its ability to earn large profits.

2024 JC1 H2 Economics FE Revision Package Answers 4 Introduction: Firms’ objective is to produce and charge a price that maximises profit at MC=MR. Since supermarkets i.e. grocery industry falls under the oligopolistic market structure, they should be able to retain supernormal profits in the long run. Thesis: The entry of e -commerce grocery stores might negatively affect FairPrice’s ability to make large profits - FairPrice suffers a fall in Supernormal Profits Initially, FairPrice is an oligopoly firm with 50% market share, it should be earning supernormal profits. However, as E -commerce firms such as RedMart and Amazon enter grocery industry to compete against FairPrice, this will reduce their market share and demand (i.e. AR/DD falls). This in turn reduce ability to earn large profits. As a result of the fall in AR/DD, supernormal profits should fall. From the diagram below, AR falls from AR1 to AR2, together with MR from MR 1 to MR2. The profit maximising price and output will be P2 and Q2 respectively. In addition, there is lower ability to reap iEOS at Q2 than at Q1. Therefore AC rises. Given AR falls and AC rises, average profit will fall. Total revenue falls from 0P1AQ1 to 0P2DQ2, and supernormal profits fall from P1ABC to P2DEF.

2024 JC1 H2 Economics FE Revision Package Answers 5 Anti-Thesis: The entry of e-commerce grocery stores might not affect FairPrice’s ability to make large profits Although “More and more Singaporeans, especially digital natives and busy PMEBs1 prefer the convenience of shopping online”, there is still a substantial segment of customers who prefer to buy from traditional supermarkets, such as non-digital natives, elderly and students who do not have the means to make online purchases. In fact, o nline sales still account for less than 15 per cent of overall supermarket sales, which means that the bulk of supermarket sales still comes from purchases made at FairPrice’s physical stores. This means that ability to make large profits will not be negatively affected significantly. In addition, to retain their ability to earn large profit, FairPrice could also revamp themselves to meet the taste and preferences of digital natives. From the extracts, FairPrice could revamp by setting up online stores, promising same day delivery, making stores more enticing by offering one -stop services e.g. integrated health and wellness concept that has everything you need to live, feel, look and eat well. These will entice more consumers to visit their physical stores. These strategies may help FairPrice to avoid a fall in AR/DD or even may even increase. If brand loyalty is established, value of PED will even fall. From the