ASRJC J1 2024 H1 WA2 Suggested Answers

1 Anderson Serangoon Junior College 2024 JC1 H1 Economics Weighted Assessment 2 Suggested Answers (a) (i) With reference to Figure 1, describe the trend in average wholesale price (AWP) of brand - name drugs in the US from 2014 to 2023. [ 2] AWP generally increased consistently over the period. AWP increased at a faster rate till 2017 before slowing down. OR Rate of increase fell from 2017 to 2023. AWP generally increased at a decreasing rate (ii) With reference to Extract 1, explain one demand and one supply reason for the general trend identified above. [4] Drug prices have been rising over the years due to higher incomes as a result of steadily rising economic growth. This leads to an increase in purchasing power, which increase consumers’ ability to consume and caused demand for pharmaceutical drugs to rise. The rising cost of raw materials, such as chemicals used to produce the drug, can also result in higher drug prices. When the prices of FOPs rise, expected profits drop, and producers become less willing and able to put up for sale the product and decrease supply. The simultaneous rise in demand and fall in supply cause a shortage, creating an upward pressure on price, and resulting in higher drug prices. (b) “Drug price hikes could help make up for lost revenue as doctor visits and new prescriptions plummeted during the global lockdown.” Using the concept of PED, explain why Pfizer plans to raise prices to make up for lost revenue and comment on the effectiveness of such a plan. [6] The global lockdown could have led to a decrease in revenue for drug manufacturers such as Pfizer due to reduction in number of doctor visits. Revenue is derived from P x Q. R1 [4m]: Pfizer hence attempted to raise prices to compensate for the lost revenue. Extract 1 states that Pfizer plans to raise prices on some of its top sellers. Since these drugs are seen as “life savers” and “have worked well for many patients”, they are likely considered to be essentials with few substitutes. Therefore, demand for these drugs is price inelastic. Furthermore, these drugs are likely to be patented, preventing other firms from producing them. The lack of close substitutes makes the demand for these drugs price inelastic. Therefore, an increase in price will lead to a less than proportionate fall in quantity demanded. As shown in the diagram below, the increase in revenue from the higher price (Area A) is greater than the decrease in revenue from the reduced quantity demanded (Area B). Overall, the revenue increases, and Pfizer’s plans to raise prices could help make up for the initial lost revenue.

2 © ASRJC Comment [2m]: However, the effectiveness of Pfizer’s plans could to “help make up for lost revenue” depends on (Choose 1): (a) The extent of the fall in total revenue due to the global lockdown. As stated, “doctor visits and new prescripti