H1 WA2 (Full Answer with Examiners' Report)

Ques%on: Recent developments in the market for rice Extract 1: Rice prices surge to fresh 15-year high Rice prices have surged to a fresh 15-year high, fuelled by strong demand and lingering supply concerns. Thai white rice climbed for a third straight week to reach US$659 a tonne on Dec 27, according to the Thai Rice Exporters AssociaJon. That is the highest since October 2008 and brings the increase in prices to about 38 per cent in 2023, aOer top shipper India restricted exports and dry weather threatened producJon. Rice is vital to the diets of billions of people in Asia and Africa, and the latest run-up in prices could fan inflaJonary pressures and hike import bills for buyers. Some naJons have been ramping up purchases to build sufficient stockpiles amid fears that the impact of El Nino will further Jghten supplies in the coming months. Source: straits-mes.com, 27 December 2023 Figure 1: Price indices of rice and wheat from 2020 to 2023 Source: asia.nikkei.com, 31 December 2023 Extract 2: Rice export bans and price caps are a food crisis risk for Asia The demand and supply diagram is a diagram that Economics students learn by heart. It puts together supply, demand and prices in a single diagram. The graph is the stuff that makes markets Jck, whether for iPhones or bowls of rice. As an associate professor at the School of Economics at the University of the Philippines, prior to her move into government, Cielo Magno imprinted the supply-and-demand graph on her students’ minds. Typically, supply slopes upward: When prices rise, suppliers are willing to produce more; demand generally slopes downward: At higher prices, consumers buy less. Then Magno became her country’s finance undersecretary, building a reputaJon for speaking her mind. On Sep 1, she posted a common version of the diagram on social media: “I miss teaching …,” she added. Soon aOer, she was fired. Though Magno didn’t explicitly say it then,

through her post, she was quesJoning the government’s decision to introduce a price cap for rice. If the supply-demand diagram is Economics 101, then price caps are Government 101, distorJng how markets are supposed to work. And rice is right now the target of many. Sadly, Magno’s travails in the Philippines aren’t an excepJon. Across Asia, naJons are trying to bend supply and demand curves, abempJng to control the cereal grain’s prices. Carelessly, they are sowing the seeds of a potenJal food crisis. Source: channelnewsasia.com, 19 September 2023 Extract 3: As El Nino bites, Indonesians struggle with record-high rice prices Rising rice prices and reduced availability can lead to food insecurity, parJcularly for low-income households. This can create feelings of hunger, anxiety, and frustraJon, increasing the risk of social unrest and protests. Acknowledging the pressures from rising rice prices to consumers and the more than 15 million households that grow food, President Joko Widodo last year draOed in the military to help with planJng, and subsidised ferJliser distribuJon. DistribuJng drought-tolerant rice seed varieJes to farmers in affected regions was also important. In the longer term, the government should conJnue to invest in improving irrigaJon infrastructure, including rehabilitaJng exisJng canals and building new ones, to enhance water management and reduce dependence on rainfall. Early warning systems to monitor weather condiJons and provide Jmely informaJon to farmers about potenJal droughts, also allow them to take preventaJve measures. This should go hand-in-hand with providing training to farmers on drought-tolerant agricultural pracJces, water conservaJon techniques and post-harvest storage. Source: channelnewsasia.com, 1 April 2024 Ques%ons (a) With reference to Figure 1, compare the trend in the price of rice and wheat over the period January 2022 to December 2023. [1] The price of wheat generally fell while the price of rice generally increased. [1] OR The price of wheat is more volaJle than the price of rice: there has been large increases and decreases in the price of wheat as compared to rice. [1] Examiners’ Comments Students were generally able to idenJfy the overall trend for both rice and wheat. However, common mistakes made include idenJfying the wrong Jme period; instead of start of 2022 to end of 2023, they idenJfied start of 2022

to start of 2023. Some weaker students also described the graph in detail rather than providing the overall trend. Students should focus on the values represented by the axes. Many did not realise that the axis represented price indices and not absolute prices. (b) With reference to Extract 1: i Using a diagram and the concept of price elasJcity of supply, explain why there has been a surge in the price of rice. [5] There has been an increase in the current demand for rice from DD to DD’ due to consumers’ expectaJons that the future price of rice will increase significantly (Extract 1: “Some naJons have been ramping up purchases to build sufficient stockpiles”). [1] At the same Jme, the supply of rice is price inelasJc in the short run as rice requires Jme to grow. [1] At the original equilibrium price P , there is a shortage since quanJty demanded exceeds quanJty supplied of rice. This puts an upward pressure on its price. [1] As price rises, this will cause a fall in quanJty demanded but a rise in quanJty supplied. However, as the supply of rice is price inelasJc, the increase in quanJty supplied is less than proporJonate, so price has to increase more from P to P’’ instead of merely to P’ (if supply was price elasJc) to induce a large enough increase in quanJty supplied to meet quanJty demanded and clear the shortage. [1] Diagram (with reference) [1] Examiners’ Comments Many students misinterpreted the ques1on and either explained a supply fall with price inelas1c supply or a simultaneous fall in supply and demand. Many students were also unable to provide a relevant determinant of PES to explain the price inelas1c supply. Some students were able to suggest that supply of rice was price

inelas1c due to the nature of its long harvest period which was not explicitly stated in the extracts. Students should focus on the use of the word “surge” which indicates that the price increase is to a greater extent, needing them to draw a comparison between price elas1c and price inelas1c supply. ii Explain what is meant by the price elasJcity of demand. [2] The price elasJcity of demand refers to the responsiveness of quan%ty demanded of a good to changes in its price, ceteris paribus. [2] Note: Words that are bolded and underlined must be present in answer to get full 2m. Examiners’ Comments Students were generally able to provide the definiJon of PED. However, many missed out the keyword “its”, there is a need to explicitly write out the word “its” to show that the responsiveness of the Qd is due to a change in the price of the good itself and not the price of other goods. Some also quoted the formula for calculaJng PED which is not the same as the definiJon. Common mistakes such as not including the phrase “ceteris paribus” also resurfaced. iii Using the concept of price elasJcity of demand, explain the likely impact on consumer spending when the price of rice increases. [4] The demand for rice is price inelasJc due to the lack of subsJtutes (Extract 1: “Rice is vital to the diets of billions of people in Asia and Africa”). [1] Therefore, as the price of rice increases, the quanJty demanded for rice falls less than proporJonately. [1] Since consumer spending is calculated using price x quanJty, there will be a net rise in consumer spending [1] since the increase in spending from the rise in price outweighs the fall in spending from the fall in quanJty demanded. [1] Note: A diagram is not necessary. Examiners’ Report Most of the students only managed to get half the credit for this quesJon. Students were generally able to idenJfy that the