RI T2W4 Price+Mechanism+and+its+Applications Mark+Schemes

Y5 H2 Economics 2024 T2W4 Class Test 1 – Price Mechamism and its Applications (Mark Schemes) © Raffles Institution 1 Essay (Tuesday Group) The airlines industry made a dramatic recovery in 2022 and 2023, bouncing back from record pandemic-era losses to near-2019 levels. Economy-class fares are up 21 per cent compared with 2019. At the same time, oil and fuel prices spiked when the Russia-Ukraine war began in 2022. (a) Explain possible reasons for the increase in price of air tickets. [10] (b) Discuss the likely effects of the rise in price of air tickets on the total revenue of the airlines market and a related market. [15] Part (a) Question requirements: need 2 factors ▪ Requirement 1: at least one demand factor ▪ Requirement 2: ▪ at least 1 supply factor – reference must be made to jet fuel price as one of the supply factors ▪ Combined Effect Possible Ideas: 1. Demand Factor ▪ ‘revenge’ travel after prolonged lockdown /and also to visit families, friends and relatives after relaxation of travel restrictions ▪ rise in income due to economic recovery after Covid-19 ▪ air travel as a luxury good (YED > 1) – as income rises, demand rises more than proportionate. ▪ With reference to Figure 1, the rise in demand causes the demand curve to shift from D1 to D2. The shortage at prevailing price P0 causes consumers to bid up prices. ▪ detailed explanation of adjustment process (adjustment process needs to be explained only once in detail) ▪ The final equilibrium price rises from P1 to P2. Price Quantity of air tickets D1 S1 Q1 P1 O Figure 1: Market for air tickets D2 Q2 P2 Shortage

Y5 H2 Economics 2024 T2W4 Class Test 1 – Price Mechamism and its Applications (Mark Schemes) © Raffles Institution 2 2. Supply Factor ▪ From preamble, price of jet fuel rose. As jet fuel is an important input for airlines, production cost increases significantly. At the prevailing price, firms are willing to produce less. Thus, supply falls and the supply curve shifts leftwards from S1 to S2 as shown in diagram below . This results in a shortage and analyse effect on prices that rise to P2. 3. Combined Effect Both a rise in demand and a rise in supply result in a net shortage and the effect on price is determinate. Prices rise from P1 to P2 as shown in Figure 3 below. Price Quantity of air tickets D1 S2 Q2 P2 O Figure 2: Market for air tickets S1 P1 Q1 Shortage Price Quantity of air tickets D1 S2 Q1 P1 O Figure 3: Market for air tickets D2 Q2 P2 S1

Y5 H2 Economics 2024 T2W4 Class Test 1 – Price Mechamism and its Applications (Mark Schemes) © Raffles Institution 3 Mark Scheme: Knowledge, Application, Understanding, Analysis L1 • Response hardly linked to economic analysis and is fraught with conceptual inconsistencies • Rambling without use of economic concepts and theoretical framework • Poor understa