SAJC 2024_JC2 H2_Econs_CSQ_Prelims_Suggested Answers

St Andrew’s Junior College JC2 Preliminary Examinations H2 Economics – Paper 1 (9570/01) Suggested Answers

2 © SAJC 2024 9570/01/Aug/24 (a) (i) Explain the likely market structure that global chemical fertiliser companies are likely to be operating in. [2] • Likely market structure is oligopoly. • From extract 1, it was mentioned that the global fertiliser market is controlled by a handful of companies, which implies a high 4 firm concentration ratio. (ii) Explain how the type of market structure identified in a(i) has allowed these firms to “capture mega profits” (Extract 1). [2] • Oligopoly firms have high pricing ability due to their large market share given the high barriers to entry. • With a high ability to set high prices at profit maximising point where MC=MR , each firm can earn high total revenue at a higher price and the corresponding output. High revenue allows high profit, if cost remains low or remain unchanged. OR • Due to their large market share and high output, each firm can benefit from significant internal economies of scale , which in turn lowers their average costs. If total revenue remains constant, the reduction in average costs leads to lower total costs, thereby increasing profit. (b) In the light of the current and potential challenges faced by chemical fertiliser firms, discuss whether firms should consider expanding their production of fertilisers. [8] Introduction: First requirement: Should • Governments are encouraging increased fertiliser production to address shortages and support agriculture. Firms may benefit from government incentives and support. • High global demand for fertilisers can address food security. Expanding production can increase market share and revenue. Higher demand can lead to increased profits Second requirement: Should not • Constrained natural gas supplies are expected to keep production costs high and volatile for nitrogen fertilisers, raising operating expenses and reducing profits for firms as increased costs are passed on to consumers. • Environmental and sustainability concerns are decreasing demand for chemical fertilisers, leading to lower sales and profits for firms as regulatory pressures and shifts towards sustainable practices reduce prices and output. Synthesis: Consider both sides and come to a valid conclusion Intro As firms aim to maximize profits through expansion, both their costs and revenues are significantly impacted. If the increased output aligns with market demand and effective pricing strategies are implemented, the firm can benefit from improve