2024 HCI Prelims H1 EC Paper 1 mark scheme

HCI H1 Economics Preliminary Exams 2024 Case Studies Suggested Answers Question 1: Trends in the market for e-commerce (a) With reference to Figure 1 and the concept of ‘price sensitivity’ mentioned in Extract 1, explain what could have led to the growth in the global e-commerce sales revenue. [4] In Extract 1, it was mentioned that “Online shoppers tend to be more price sensitive compared to traditional brick -and-mortar shoppers.” This means that demand goods sold through e-commerce could be price elastic. [1] In Extract 1, “the ease of comparing prices across different online retailers and the abundance of options available make it convenient for consumers to find the best deals”. This could be due to high degree of substitutability of goods sold online. [1] In Extract 1, “consumers are more likely to switch to alternative online stores offering lower prices. In addition, e-commerce firms often use promotions, discounts, and special offers to attract customers and drive sales.” A lower price leads to more than proportionate increase in quantity demanded. [1] The increase in sales revenue due to lower prices outweigh that of loss in revenue due to increase in prices. Figure 1 shows an increase in e-commerce sales revenue over the years. [1] (b) With reference to Table 1, explain the likely value of the price elasticity of supply for the goods sold through e-commerce. [2] The likely value of Price Elasticity of Supply (PES) for the goods provided through e - commerce retailers is likely to be more than 1. In other words, the supply of the goods are price elastic. [1] This could be explained by the durable nature of the products offered by these online retailers, namely electronics, fashion, toys which allows the online retailers to easily stock up and keep the stocks of good available. [1] (c) With the aid of a demand and supply diagram, explain one demand factor and one supply factor that could have caused the supermarket industry in China to be left ‘high and dry’. (Extract 2) [6] In Extract 2, “consumption habits began steadily shifting from in -store to online” and “took away the demand from supermarket by about 12% per year on average”. Thus demand fall due to competition with e -commerce (lower price of substitutes in terms of e -commerce goods and services reduce demand for supermarket goods and/or the change in taste and preference) [2] In Extract 2, “With rentals and growing wage pressure by an average of 8% per year from 2015 to 2020. This shows that supply for supermarkets goods and decreases due higher cost of production.[2]

DD-SS Diagram to illustrate the changes above [1] Explanation of DD-SS diagram [1] SS decreased less than DD decreased (based on the extracts) – with both equilibrium price and quantity decreased (d) Explain how a ‘stronger Singapore dollar also made the decision to purchase goods from other countries via live streaming affordable’ (Extract 3) [2] Stronger Singapore Dollar refers to an appreciation of the Singapore dollar [1] Singapore importers can buy more goods from other countries (eg. China) for the same amount of S$. This means that imported goods from the other countries will become cheaper in Singapore. With a lower price in terms of S$, this will leads to higher quantity demanded for other countries imports. [1] (e) (i) “When I watch a live stream, I always get very hungry to buy the item. It’s very fun to watch, it fuels your need for it. But sometimes I buy already then regret, because it’s fuelled by emotional decisions” Explain why the statement above from Extract 3 is normative. [2] A normative statement is a type of statement that expresses a value judgment or opinion about what ought to be, rather than what is. It reflects beliefs, ideals, or what is considered desirable, and is often based on ethical, moral, or subjective criteria.[1] In the statement above it shows the opinion of the person who expresses her thoughts on the issue of goods that were bought via livestream. [1]

(ii) With the aid of a diagram, explain how ‘fear of missing out (FOMO)’ might lead to an inefficient allocation of resources in terms of imperfect information and comment if government intervention is required. [6] Extract information and explanation of imperfect information [2] The free market allocates resources efficiently on the assumption that all consumers and producers have full or perfect information about the market and products and hence are able to make optimal choices to maximize their welfare. However, in reality this is not true due to incorrect information. Consumers may make bad choices because they have been “misinformed” or received the wrong information from sellers. Consumers may overestimate their true Marginal Private benefits from buying goods through livestreaming. In the Extract 3, Ms Goh mentioned that “sometimes I buy already then regret, because it’s fuelled by emotional decisions,” and “she acknowledges that she often bought more than what she needs” Imperfect info diagram with explanation of overconsumption/deadweight loss in the diagram [2] ● With imperfect information, consumer demand is higher and Q1 represents the free market equilibrium output where MPC = MPB perceived. ● The optimal level of market equilibrium outcome of Q2 units of goods and services is now truly the private optimum because at this level of output: MPC= MPB actual Impact on Society’s Welfare ● By increasing consumption from Q 1 to Q2 , Area Q1Q2AC is the additional total private benefit gained while Area Q1Q2AB is the additional total private cost incurred. Since total private cost gained exceeds the total private benefit incurred, area ABC represents the deadweight welfare loss due to over-consumption of Q1 – Q2. Hence there is market failure when imperfect information exists. Comment [2]: Candidates may argue if government intervention is required or not. For example, in Extract 3, livestreaming is seen an integral part of a wider e -commerce landscape such as in China. It may bring in considerable economic advantages and possibly

tax revenue for the government. The government may be reluctant to intervene based on the advantages to the economy. Candidates may also argue for stricter rules to be imposed by the government if “livestreaming” may result in significant mis -information on the part of the seller to gain greater sales. It may create substantial social and economic disparity if not proper ly regulated. (f) With reference to the data, assess if standard of living for an average resident have improved with the rise of e-commerce. [8] E-commerce has significantly transformed how residents shop, work, and interact with the economy, ultimately influencing their standard of living. R1 – E-commerce has affected material standard of living Increased Convenience and Accessibility: E-commerce platforms allow residents to shop from the comfort of their homes, making it easier to access a wide variety of products and services worldwide. This convenience can save time, reduce transportation costs, and provide access to goods t