TJC H2 Prelim 2024 P1 Suggested Answers

2024 JC2 H2 Economics Prelim Paper 1 Suggested Answers 1 Question 1: The clothing and fast fashion industry Suggested Answers (a) With reference to Figure 1, compare the percentage change in price index of food to that of clothing from 2019 to 2022. [2] Similarity [1]: • The percentage change in both price indices have increased over the period. Difference [1] – any one of the below: • While the percentage change in price index for food has been positive over this period, the percentage change in price index for clothing has been negative except after mid 2021. OR • The percentage change in price index for food has always been higher than that for clothing. (b) With reference to Extract 1, (i) Explain why the value of price elasticity of demand (PED) of clothing will change. [2] • Given “the wallet is fixed and with price of clothing going up” (Extract 1), this suggests that the proportion of income spent on clothing is increasing. [1] • Hence, the value of PED of clothing is increasing/getting larger/bigger [1]; demand of clothing is becoming more price elastic. (ii) Using a demand and supply diagram, explain why “retailers can’t expect the price increases to translate into higher profits” (Extract 1). [4] • Given from (bi) that the demand for clothing is becoming more price elastic, the rise in price of clothing will lead to a more than proportionate decrease in quantity demanded, ceteris paribus. [1] • The fall in revenue due to the decrease in quantity demanded (area Q 2BCQ1) is likely to exceed the increase in revenue due to the increase in price (area P2ABP1). [1]

2 • Assuming that the cost of production remains constant / ceteris paribus, profits of producers will fall. [1] (c) (i) Explain why the market fails from the production of fast fashion. [4] • [P] When deciding on the amount of clothing items to produce, a producer only considers his own private costs and benefits and ignores the external costs on third parties. The marginal private benefit (MPB) of clothing production is its marginal revenue, while the marginal private cost (MPC) is the marginal cost of production. [1] • [ET] However the production of these items give rise to external costs on third parties who are not directly involved in the production or consumption of the good. For example, production of clothing lead to pollution of water sources (Extract 2), which may lead to medical costs incurred by people who stay use these water sources. [1] • [DQQ] The presence of marginal external cost (MEC) crea