RI Y5 Promo Distinction Scripts 2021

ECONOMICS Higher 2 Syllabus 9757 DISTINCTION SCRIPTS YEAR 5 PROMOTIONAL EXAMINATIONS TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane, SINGAPORE 575954 Raffles Institution Nurturing the Thinker, Leader & Pioneer

ECONOMICS Case Study: (c) Discuss the impact the COVID -19 pandemic has on the profits of an ecommerce company in the US. [8] The Covid-19 pandemic has led to an increase in demand for ecommerce sales. This has an impact on the profits of an ecommerce company in the US, where profit is total revenue (TR) – total cost (TC). The company is assumed to want to maximise profits. The pandemic has led to the temporary closure of many physical stores and restrictions on movement (Ext. 1), which results in more consumers having to shop online for the goods. Since shopping online also reduces the risk of infection in public areas, the taste and preferences of the consumers may shift towards ecommerce (Ext. 1), resulting in greater willingness and ability to purchase online goods and a higher demand. Since there are less alternatives due to physical shops being closed, the reduced number of physical stores results in the demand for goods online being more price inelastic. This leads to a shift in the demand curve from AR0 to AR1, (and shift in MR from MR0 to MR1), ceteris paribus. Holding cost curves constant, the increase in demand results in a new profit maximising output level Q1 where MC = MR1, up from Q0. At this new equilibrium, price increased from P0 to P1, while average cost falls from C0 to C1. Assuming the firms has been making normal profits before, it now has supernormal profits of area P1abC1. This results in greater profits from the firm, ceteris paribus. However, costs for the company may also increase due to labour costs. Given that many ecommerce companies, including Amazon and Walmart are hiring over 150,000 workers each (Ext. 2), this leads to an increase in demand for labour. Assuming labour supply remains constant, there is a large shortage that pushes wages up significantly (to incentivise more workers to work). This leads to an increase in workers’ wages, which could have an impact on the TC for the firm since they may also need to hire more workers to cope with the additional demand for their goods. Given wage rate of workers is a variable cost, since the firm has to pay more wage costs if workers work longer hours or if it hires more workers (to increase outputs of online sales), this leads to an upward shift of the MC and AC curve to MC1 and AC1, respectively.

Holding demand constant, when MC increases, there is a new profit maximising output level that decreased to Q1. Price increases from P0 to P1 and average cost also increases from C0 to C1. If the firm used to make supernormal profit of area P0abC0, it now makes normal profits, hence there is a fall in profits, ceteris paribus. Overall, it