RVHS_H1_Econs_P1_Soln

© RVHS 2024 8843/01 Suggested Answers for JC2 H1 CSQ 1 (a) Compare the change in food prices between 2017 and 2022 with the change in petroleum prices over the same period. [2] Similarity: Prices of both food and petroleum have increased. [1] Difference: Prices of petroleum has increased more rapidly than that of food. [1] (b) Russia’s invasion is placing pressure on global physical supply chains. Additionally, panic buying from consumers as the global economy recovers from the COVID-19 pandemic have further contributed to significant price changes of food. (i) Using a supply and demand diagram, explain the impact of these effects on the changes in the price of food and comment on the significance of price elasticity of supply in this case. [6] Due to the disruption on global physical supply chains, producers will find it more difficult to obtain key resources from abroad so they may have to source elsewhere or incur higher transport costs in order to maintain the steady flow of factor inputs they could get. Due to the increase in input prices, unit cost of production increases, thus producers will be less willing and able to produce food at each price level since it is less profitable to do so, resulting in a fall in the supply of food from So to S1. On the other hand, the panic buying has affected the taste and preferences in favour of food of as consumers started to buy necessities like food supplies in bulk in view of hoarding them in case of future food depletion or price increases. This results in increase in demand for food from Do to D1. With the simultaneous increase in the demand for and decrease in supply of food, there is a reinforcing effect on equilibrium price. At Po, there is a severe shortage QdQs as quantity demanded exceeds quantity supplied. This will cause an upward pressure on the prices of food as the competing buyers bid up the prices of food. Consumers will be less willing and able to buy the food, causing a fall in quantity demanded for food, while producers will be more incentivized to produce more food, causing a rise in quantity supplied of food. This process continues until the shortage is eliminated. This results in a significant increase in the prices of food from Po to P1 in Figure 1.

2 © RVHS 2024 8843/01 urn over Figure 1: Market for Food Significance of PES: PES is significant in accounting for the huge rise in the price of food. The PES of food is likely to be less than