2024 ASRJC Prelims H1 Econs (A)

1 2024 Preliminary Examination H1 Economics Suggested Solutions and Markers’ Comments Question 1: Agriculture and food (a) (i) With reference to Figure 1, identify the difference in the change in prices between field crops and intermediate foods and feeds. [1] Difference: Change in prices of field crops is greater than change in prices of intermediate foods. (1m) (a)(ii) Using a relevant elasticity concept and with the aid of a diagram, explain how an increase in demand could account for this difference in the change in prices between field crops and intermediate foods and feeds. [4] Price elasticity of supply (PES) measures the degree of responsiveness of quantity supplied of a good to a change in its price, ceteris paribus. Using PES, intermediate foods are already processed product and so there are available stocks hence supply is more price elastic than that for field crops. However, field crops require long periods of growth making the supply more price inelastic as well as they are easily perishable and so firms cannot keep large amounts of stocks. With an increase in demand, the shortage can be more easily remove as producers respond to the price increase of intermediate food by increasing quantity supplied by more than proportionately as they have available stocks. Thus, there is a smaller increase in the price of intermediate food than field crops is sufficient to clear the shortage. (b) With reference to Extract 2, use a supply and demand diagram to explain a possible effect on the market for durians of both: • China’s insatiable demand for durians • Farmers of other crops switching to growing durians instead [5] Increase DD + Increase SS (no. of sellers) Demand factor The demand for durians increases due to increase in the tastes and preferences for durians especially from China which accounted for 91% of global demand which surged by 400% between 20021 and 2022. This causes the demand curve to shift rightwards from D0 to D1. Supply factor In Extract 2, it is also mentioned that more Thai farmers of other crops are incentivized to grow durians due to expectations of higher profits from durians. This increases the number of sellers in the durian market. This increase in supply is evident by the 80% rise in the area under durian cultivation. This causes the supply curve to shift rightwards from S0 to S1.

2 The rise in demand and increase in supply of durians will lead to increase in equilibrium quantity. However, the impact on the equilibrium price is indeterminate and will depend on the relative extent of the shifts in demand and supply. Increase in DD > Increase in SS If the increase in demand outweighs the rise in supply for durians as Extract 2 mentioned that China’s "craze" for durian has been the driving force behind the 400% surge in global demand for the fruit between 2021 and 2022 but the increase supply may not be as huge because durian trees take a few years before they bear fruits. At the original price P0, there will be a shortage of Q2Q3 units, leading to an upward pressure on prices. As price increases, quantity supplied will increase (movement along S1) and quantity demanded will decrease (movement along D1) until a new equilibrium is achieved at the E1. The equilibrium price of durians will increase from P0 to P1 while the equilibrium quantity will increase from Q0 to Q1. Students could explain the alternative scenario where increase in SS > increase in DD. They will arrive at an outcome with increase in equilibrium quantity and decrease in equilibrium price. (c) Comment on how far the price elasticity of demand (PED) concept explains the change in household expenditure on food given the increase in food prices mentioned in Extract 3. [6] Price elasticity of demand measures the degree of responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. Total expenditure = PXQ Demand for food is likely to be price inelastic (PED<1) as it is seen as a necessity and there are no close substitutes. Here, food is defined as a broad category. Therefore, when food prices increase, there will be a less than proportionate decrease in quantity demanded. The increase in expenditure from the increase in price is greater than the fall in expenditure from the fall in quantity demanded for food. Hence, this should lead to an overall increase in household expenditure. (Illustrate with a diagram if possible) Comment Price of durians Quantity of durians P1 Q1 S0 D0 0 S1 E0 E1 P0 Q0 D1 Q3 Q2

3 However, in Extract 3, it is mentioned that actual household expenditure fell despite an increase in food prices. This could be because the ceteris paribus assumption for PED does not hold. For instance, government could have given subsidies to households, like our SG CDC vouchers. Households may be buying the same amount of food, but they pay less because of the subsidies. Other possible reasons - There could be a fall in demand for food due to fall in tastes and preferences for food because of campaigns that create increased awareness of the need to reduce food wastage or how excessive eating is bad for health. Or there could be a fall in real income due to a recession or rise in inflation rates. This would decrease the demand for food. The combination of fall in quantity demanded due to rise in price and fall in the amount bought due to fall in demand would overall cause total expenditure on food to fall. - Since Extract 3 mentioned that households switched to other alternatives, it suggests that the reporters are now defining food in terms of its narrow sense. There are many different items in the grocery basket and each item has substitutes. Although overall food prices increase but prices of some items may not have changed or may have decreased. For example, when price of beef increases, households can switch to chicken if its price did not change as chicken is now relatively cheaper. Similarly, households can switch from a more expensive to a cheaper brand of milk or bread. In this sense, we say that different food items have close substitutes and PED>1. Thus when prices of some food items increase in price, households decrease their quantity demanded for these items by more than proportionately (by switching to relatively cheaper close substitutes) which leads to a decrease in the household expenditure. Overall Stand: Presumably, the research findings were based on the original composition of food items in the grocery basket and by right, total expenditure would increase when price increased if food is defined broadly, and PED is price inelastic. But if consumers can switch to relatively cheaper alternative food items, the composition of food items in the basket changes and this could lead to an overall decrease in household expenditure on food. Marking Guide Strong responses are expected to explain the following: - Explain why PED for food is < 1 and what is meaning of PED<1 - Explain effect on total expenditure - Provide a relevant comment which should cast some justified doubt on the view expressed. (d) With reference to Extract 1, discuss whether increase spending on agriculture research and development (R&D) is likely to benefit the macro-economy. [8] Introduction The macro economy is with reference to economic growth (actual, potential, sustainable and inclusive economic growth), inflation and unemployment rate.

4 R1: Explain how increase spending on agriculture R&D will lead to sustained growth and fall in inflation rate. Increased R&D leads to more technological breakthroughs where less resources are needed to produce a given output (eg slower farmland expansion). This increases productive capacity as the same amount of resources can produce more goods than before. The LRA S curve shifts rightwards from LRASo to LRAS1 and the maximu