2016 H1 Economics CSQ 2 answers

© Property of Anderson Junior College 1 GCE ‘A’ Level 2016 H1 Economics Case Study (Suggested Answers) Question 2: Problems in commodity markets (a) Using the data in Table 1, compare the changes in the prices of tropical beverages with those of food during the period 2000-2013. [4] Similarity: Both the prices of tropical beverages and prices of food generally increased Difference: Prices of tropical beverages increased 74% over the years while prices of food increased more significantly by 155%. (b) (i) With reference to Extract 5, and using supply and demand analysis, explain how upward pressure on demand, combined with increased agricultural production costs, is likely to influence the world price of food. [6] The upward pressure for demand is due to continued population and economic growth and greater use of biofuels (Ext 5). This leads to an increase in demand for food and a rightward shift of the demand curve from D 1 to D 2. At the same time, demand for food is price inelastic (PED<1) as the degre e of necessity is high. Thus, the demand curve is steeper as shown in the diagram below. The supply for food is likely to be price inelastic as it takes a longer time to grow and harvest agricultural crops. Since the production process is long and complex, it is harder for producers to respond to change in price. Increased agricultural production costs means that there is higher cost of producing food which leads to a fall in supply. This results in the leftward shift of the supply curve as shown from S 1 to S2. At the initial price, P1, there is a shortage of food, indicated by the distance QdQs. Consumers will compete for the limited quantities available and offer higher prices. Producers, recognising the shortage, will begin asking for higher prices. There will therefore be an upward pressure on price , causing a movement along the demand and supply curves until the new equilibrium price of P2 at new equilibrium E2 is reached. S2 S1 D2 Price of food P2 P1 E2 E1 D1 Qty of food Qs Qd

© Property of Anderson Junior College 2 As a result, world price of food increases significantly. (b) (ii) How might increased investment in agricultural technology affect your conclusion about the world price of food? [2] With increased investment, there could be an improvement in production techniques or technological progress. This will increase productivity (Ext 5) resulting in a lower cost of production per unit of output of agricultural product and increasing the supply of food The increase in productivity due to more investment also means that there is spare capacity in the industry. It is now easier to increase the production