2024 SAJC JC1 H1 Price Mechanism and its Applications Part 2 Tutorial

1 Price Mechanism and its Applications Part 2 Elasticities of Demand & Supply Section A: Short Excerpts from Case Studies Question 1 [2016 MI H2 Prelim] Extract 1: Tougher times for Amazon As Amazon marks its 20th anniversary this year, it is also facing fiercer competition in the market of e-readers in Britain. First, traditional players such as John Lewis and D ixons raised their game – particularly with “click and collect” services. John Lewis uses its sister food chain, Waitrose, as a “physical” collection point for web purchases of th eir e-readers as an example of how established chains are finally starting to act smar ter. Amazon lacks its own network of physical stores, although it has begun offering a c lick-and-collect service by opening “lockers” in selected sites. Second, Tesco’s successful launch of its own-brand, low-cost Hudl tablet and the expansion of its TV-and-film streaming service Blin kbox are aimed at Amazon’s Kindle Fire tablet and LoveFilm movie service. Source: The Straits Times, 23 October 2013 Questions (i) Explain how the value of price elasticity of demand for Amazon’s electronic reader has changed with the entry of new rivals such as Tesco. [2] (ii) With reference to the concept of price elasticity of demand and the extract, explain the expected impact of a price fall on Amazon’s total revenue from the sale of electronic readers. [3]

2 Question 2 [Adapted from 2023 TMJC H1 Prelim] Extract 4: Water pricing in Singapore There are three components to the water price in th e monthly bill: water tariff, water conservation tax and waterborne fee. The Water Tariff covers the costs incurred in various stages of water production process and is charged based on the volume of water consumed. The Water Conservation Tax (WCT) was introduced in 1991 to encourage water conservation and to reflect its scarcity value. WCT is imposed as a percentage of the water tariff to reinforce the message that water is precious from the very first drop. The Waterborne Fee goes towards meeting the cost of treating used water and maintaining the used water network. It is charged based on the volume of water usage. Source: pub.gov.sg/watersupply/waterprice , accessed 26 July 2023 Questions (a) Explain the impact of the price elasticity deman d for water on the extent of the tax revenue earned from the imposition of a ‘water conservation tax’. [5]

3 Question 3 [Adapted from 2023 RI H1 Prelim] Figure 1: World Cotton Prices (US$) Source: Macrotrends, March 2023 Extract 1: Cotton Farmers in India and Pakistan Bea r the Brunt of Extreme Hear, Unpredictable Rainfall Farmers have been growing cotton in India and Pakis tan for thousands of years. Both countries’ economies are thriving because they have been part of the top 10 cotton exporters along with the US, China, and Brazil. Ind ia alone contributes over 26% of the global cotton production. But that shared history and benefit is under threat because of weather volatility. The year 2021 will remain etched in the memory of Anantha Ku mar Pichaipillai, a cotton farmer from Tamil Nadu. For the first time in eight years, he did not grow cotton. Extreme rainfall wreaked havoc on his cotton farm. Source: The Wire, 11 Feb 2023 Questions (a) (i) With reference to Figure 1, describe the trend in c otton prices during the period 2018 to 2022. [2] (ii) With reference to Extract 1, explain how ‘extreme r ainfall in India’ may affect the extent of change in price of cotton in 2021. [3] $0.73 $0.82 $0.67 $0.93 $1.12 $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 2018 2019 2020 2021 2022

4 Question 4 [Adapted from 1991 H1 A Level) The data below shows the estimates of the price elasticity of demand for selected foods in the U.K: Price elasticity of demand Beef -0.74 Bread -0.25 Fresh potatoes -0.14 Fruit juices -0.65 Margarine -1.27 Price elasticity of supply Short Run Long Run Fresh potatoes 0.65 1.34 With reference to the table above, a) Explain why all the price elasticities of demand are negative. b) How would total revenue for a fruit juice producer change when there is an increase in the price of fruit juice? c) How would consumer expenditure on margarine change when the price of margarine increases? d) Explain why beef has a lower price elasticity of demand compared to margarine. e) Explain why there is a difference in the short run and long run values of price elasticity of supply for fresh potatoes.

5 Question 5 [2015 JJC H1 Prelim] Figure 1: Steel and Iron Prices Questions (i) Compare the patterns of price changes for Chinese domestic steel prices and iron ore prices from December 2010 to August 2014. [2] (ii) Explain the difference in value of the price elast icity of supply of a manufactured good such as cars with that of a prima ry product such as iron ore. [3] Question 6 [2023 NYJC H1 Prelim] Extract 1: Global prices of Cannabis are expected to fall Cannabis is a plant, that may take up to 8 months t o grow, has been used for various purposes mainly recreational and medicinal purpose. Cannabis is often used recreationally as it can produce feelings of euphoria, relaxation, and altered perception. Common medical applications of cannabis include management for chronic pain, reducing nausea and vomiting in patie nts undergoing chemotherapy and reducing seizures in certain forms of epilepsy. The legality of cannabis varies from country to country and even within different regions or states. Some countries have legalised ca nnabis for both recreational and medicinal use, while others still have strict l aws against its use, possession and production. Legalisation of cannabis, enables firms to grow the plant and removes all legal prohibitions against it such that it would be available to the adult general population for purchase and use at wi ll, similar to tobacco and alcohol. Across the globe several countries, for ex ample Canada, Thailand, Mexico and some states in the US, have legalised cannabis. Domestic Steel Price Iron Ore Price

6 Figure 1: Forecasted Global price and revenue of cannabis With more countries expected to legalise cannabis, a global collapse in the price of cannabis is inevitable. The industry’s revenue i s forecast to rise swiftly from $9 billion in 2018 to $42 billion in 2027. That makes cannabis one of the fastest- growing industries in America, and, in fact, among the fastest-growing industries in history. Adapted from https://www.linkedin.com/pulse/global-cannabis-price-collapse- jim-plamondon (2018) Questions (a) Using Extract 1, identify and explain two factors that would determine the price elasticity of supply of cannabis. [4] (b) Using a diagram and information in Figure 1, ex plain the price elasticity of demand for cannabis. [4]

7 Question 7 [2023 YIJC H1 Prelim] Extract 2: China intervenes to manage commodity prices Chinese policymakers have been trying to tame surging commodity prices - from coal to copper - that have squeezed manufacturers' profits in the world's second biggest economy. The government has been releasing stockpiles of coal and metals such as copper and zinc to fabricators and m anufacturers to ease the rapid rise in prices. China’s premier Li Ke Qiang said the country will s trengthen control of commodities prices that have hurt businesses. He st ressed the need to strengthen market regulation of raw materials to ea se the cost pressure of enterprises amid rising global commodities prices. Source: Reuters, 4 August 2021 & Hellenic Shipping News, 12 April 2021 Question Using the concept of price elasticity of sup