2023 RI H1 Econs Prelims (Examiner's Report)

1 RAFFLES INSTITUTION 2023 YEAR 6 PRELIMINARY EXAMINATIONS Higher 1 ECONOMICS 8843/1 Examiners’ Comments Question 1 (a)(i) With reference to Figure 1, describe the trend in cotton prices during the period 2018 to 2022. [2] • Overall, cotton prices rose. • Cotton prices fell in 2020 OR • Cotton prices fell from 2019 to 2020 Examiners’ Comments: - Most managed to provide the overall trend and a refinement correctly. - Candidates need to remember that there is no need to provide figures in their answers. (ii) With reference to Extract 1, explain how ‘extreme rainfall in India’ may affect the extent of change in price of cotton in 2021. [3] • Identify that cotton prices rose the most in 2021. • From Extract 1, heavy rainfalls in India caused the supply to fall. This led to the supply curve to shift leftwards from S0 to S1. A shortage results and prices are bided up. • From Extract 1, India is “part of the top 10 cotton exporters”; it “alone contributes over 26% of global cotton production”. The fall in supply of cotton in India will have a huge impact on the total world supply. In this regard, the huge shortage that ensues will cause world prices to rise very significantly in 2021. Alternative Approach: Demand for cotton is price inelastic as it is an essential input for clothing and furniture. As shown in Figure 1, the price is likely to rise more than H Figure 1: World Market for Cotton

2 proportionately from 0P0 to 0P1 compared to the fall in equilibrium quantity from 0Q0 to 0Q1 as a result of a decrease in supply of cotton. Examiners’ Comments: - Most candidates could identify the supply determinant and applied the market adjustment process to analyse the effect on equilibrium price and quantity. - However, there were answers that could not identify from Extract 1 the evidence for India’s impact on the world cotton supply and hence the significant increase in the world price of cotton. - Answers that applied PED concept as the reason for the huge rise in price tend to misuse the term ‘habitual consumption’. Cotton is a resource, thus the price-inelastic demand for cotton should be linked to its importance as an input. (b) Using Extract 2, and with the help of an appropriate diagram, explain the likely impact of a removal of cotton subsidies by the USA on the standard of living of cotton farmers in a developing country like India. [5] • Clarify standard of living – both material (amount of goods and services available for the average individual to consume within a given period of time) and non-material (qualitative aspects of welfare which will include heath levels, literacy rate). • From Extract 2, significant subsidies to US cotton farmers were removed. This led to a rise in cost of production for US cotton farmers and resulted in a fall in supply, represented by a leftward shift of the supply curve. Price of cotton in US rose sharply as a result of a shortage at the prevailing price of cotton. • The rise in US cotton prices eroded away US’s export price competitiveness such that US cotton exports are now relatively more expensive compared to cotton from developing countries such as India. • Since cotton from India and the US are substitutes, global consumers will switch to cotton from India. Th is will result in an increase in demand for India’s cotton , as shown by a rightward shift of the demand curve from D D0 to DD1. Ceteris paribus, the shortage in India’s cotton market will generate an upward pressure on its market price until a new equilibrium is reached where DD1 equals to SS. Both price and quantity increase to 0P1 and 0Q1 respectively [“higher prices farmers would get for their cotton”]. • Given that total revenue is PxQ, cotton farmers will experience an increase in total revenue and an increase in purchasing power. This increases their ability to consume more and better-quality goods and services such as healthcare, clean drinking water, thus raising their material standard of living. As these farmers will have greater ability to access better healthcare services, they are more likely to experience an increase in life expectancy. Moreover, access to clean drinking water, which is not easily afforded by everyone, will also lower their su sceptibility to falling ill and improve the quality of their life, improving their non-material SOL. 0 SS0 DD0 Q0 Q1 E0 E1 • • Quantity of cotton DD1 Price ($) Figure 2: Market for cotton in India P1 P0

3 Examiners’ Comments: - Most candidates were able to explain how the removal of subsidies for US cotton farmers brought a positive impact on India’s cotton farmers’ total revenue and linked it appropriately to improvement in their SOL. - However, many wasted their time by lifting significant amount of case material regarding the large amounts of subsidies US cotton farmers have been receiving which did not add value to their answers. - The relationship between US ’s cotton and India’s cotton needed to be stated clearly – that they are substitutes which would then provide the justification for the rise in demand for India’s cotton. - It is important to state that TR is the product of price and quantity of the good rather than merely identifying that the areas representing TR have increased. - A fairly large number of candidates were able to draw the link between TR and purchasing power and hence applied it relevantly to the impact on SOL of cotton farmers in India. - However, there were others who chose to use the AD-AS model to explain how demand for India’s cotton exports increased (given the loss in price competitiveness of US’s cotton) bringing about a rise in RNY and SOL for India’s cotton farmers. While it is possible that the rise in demand for India’s cotton exports could have contributed to a rise in her net exports (since cotton exports is a significant % of India’s exports), the rise in RNY impacts the Indian economy and SOL of the average citizen in India rather than just cotton farmers. (c)(i) ‘Cotton pesticides now contaminate land, air, food and drinking water in the USA, India, Pakistan, Uzbekistan, Brazil, Australia, Greece and West Africa’ (Extract 3). Distinguish between a private and public good. [4] Distinguish requires a comparison between differences, in this case the characteristics of private and public goods. • Private goods are excludable while public goods exhibit non excludability, hence the former can be provided via price signals in the free market while in the latter, because of the free-rider issue, there will be zero provision by the market. As a result, non -payers can be excluded from enjoying the benefits of private goods such as food since it is not prohibitively costly to exclude them. Meanwhile, non -payers cannot be excluded from enjoying the benefits of a public good such as air since it is impossible to exclude non- payers. • Private goods are rivalrous while public goods are non -rivalrous. As such, the consumption of a private good such as food by one individual can reduce the quantity available for others. Meanwhile, consumption of a public good such as air will not reduce the amount available for others. Hence the marginal cost of providing for an additional user is zero for public goods, resulting in no price should be charged for public goods for an efficient allocation of resources. • Rejectable in the case of private goods while non -rejectable for public goods . If a consumer does not like the private good, they can reject it . On the other hand, the collective supply of a public good for all means that it cannot be rejected by people (for e.g. nuclear defence or flood defence project). • Thus, while the free market will allocate resources to produce private goods (though not necessarily in op