2025 ASRJC Paper 2 - Mark Scheme

1 © ASRJC Economics Department 9570/02/JC2 Prelim /2025 Anderson Serangoon Junior College 2025 H2 Economics Prelim Paper 2 Suggested answers Question 1 1 The price of a cup of coffee has surged, due to poor crop yields in drought-hit Vietnam, while coffee consumption in Southeast Asia continues to rise due to growing affluence. In Singapore, regular coffee drinkers have noticed rising prices at their usual chains, with international brands such as Starbucks and Bacha Coffee seeing larger price increases than local brands like Heavenly Wang, Ya Kun, and neighbourhood coffee shops. (a) Explain how elasticities of demand can assist in understanding each of the effects of poor crop yields and growing affluence on the prices of different brands of coffee drinks. [10] (b) Discuss the impact of a rise in the price of a cup of Starbucks coffee on their revenue and the revenue of retailers selling related goods. [15] Part (a) Suggested Answer Key Points The price of coffee drinks is determined by demand and supply factors, which are influenced by poor crop yields and growing affluence. The concepts of price elasticity of demand (PED) and income elasticities of demand (YED) can help to explain how the pric es of different brands of coffee drinks are affected when supply falls due to poor crop yields and when demand rises because of growing affluence for both international and local brands of coffee drinks. R1: PED helps explain how poor crop yields affect the prices of different brands of coffee drinks. Poor crop yields will cause prices of coffee drinks to increase due to a fall in supply. Bad weather, such as droughts and floods directly disrupts agricultural production. This disruption often leads to a significant reduction in the supply of crop yield including coffee plants. Since coffee beans are a factor of production of coffee, the rise in price of coffee beans due to poor crop yield will lead to a rise in cost of production for coffee drinks. This results in a leftward shift of the supply curve fro m SS0 to SS1 as shown in Figure 1. Figure 1 Introduction Q2 Q1 Qi Q0 Pi Pe P0 DDi SS0 Quantity of Coffee Drinks Price SS1 DDe

2 © ASRJC Economics Department 9570/02/JC2 Prelim /2025 The extent of impact of a rise in cost of production on prices of different brands of coffee drinks will depend on the different PED value. Demand for international brands such as Starbucks and Bacha Coffee are likely to be price inelastic in demand (represented by the DDi curve) due to the brand’s strong advertising and brand loyalty. As the fall in supply from SS0 to SS1 will lead to a shortage of Q0Q2 amount at the original price, P0. This exerts an upward pressure on the market price. As price increases , quantity demanded falls and quantity supplied rise. As demand for international brand’s coffee drinks is price inelastic, the rise in price leads to less than proportionate fall in quantity demanded. This means that in order for the market to clear and reach a new equilibrium, the rise in price has to be greater in order for the decrease in quantity demanded sufficiently to clear the shortage. Thus, there is a larger rise in prices of international brand coffee drinks from P0 to Pi. On the other hand, demand for coffee at local brands such as Heavenly Wang, Ya Kun, and neighbourhood coffee shops are likely to be price elastic ( represented by the DDe curve) due to the availability of many substitutes. Since demand is more price elastic, a smaller price increase is required to induce the necessary increase in quantity demanded in order to clear the shortage. Hence, the rise in price will be to a smaller extent from P0 to Pe. Hence, PED helps explain how poor crop yields affect the prices of different brands of coffee drinks when there is a full in supply. R2: YED helps explain how growing affluence affects the prices of different brands of coffee drinks. Growing affluence leads to an increase in demand for coffee drinks. When household incomes rise, purchasing power also increases, enhancing consumers’ ability and willingness to spend. Since coffee drinks are considered normal goods, higher incomes result in a rise in demand for them. This results in a rightward shift of the demand curve as shown in Figure 2. Figure 2 The extent of the increase in demand for coffee drinks depends on their YED value. Demand for international brands such as Starbucks and Bacha Conclusion Qe Q0 Qi 0 Pe P0 Pi Quantity of Coffee Drinks Price DD0 SS DDi DDe

3 © ASRJC Economics Department 9570/02/JC2 Prelim /2025 Coffee is likely to be income elastic, as these are normal-luxury good. As a result, demand for such brands is likely to rise by a larger extent from DD0 to DD e as shown in Figure 2 from. Consequently, the price of international brand coffee drinks increases more significantly from P₀ to Pₑ. On the other hand, demand for coffee drinks from local brands such as Heavenly Wang, Ya Kun, and neighbourhood coffee shops is likely to be income inelastic as they are considered normal-necessity goods that form part of daily consumption. Thus, demand is likely to shift to a smaller extent as shown in Figure 2 from DD 0 to DD i , leading to a smaller rise in price from P0 to Pi. In conclusion, poor crop yields and growing affluence have different impacts on the prices of coffee drinks. The concepts of price elasticity of demand (PED) and income elasticity of demand (YED) are essential in explaining the extent of these price changes across different brands.

4 © ASRJC Economics Department 9570/02/JC2 Prelim /2025 (b) Discuss the impact of a rise in the price of a cup of Starbucks coffee on their revenue and the revenue of retailers selling related goods. [15] Suggested Answer Key Points Changes in the equilibrium price and quantity in one market can influence related markets. An increase in the price of a cup of Starbucks coffee will not only affect Starbucks’ revenue, but it is also likely to have spillover effects on other markets. R1: A rise in the price of a cup of Starbucks coffee may either increase or decrease its revenue, depending on the price elasticity of demand (PED) for their coffee. An increase in the price of a cup of Starbucks coffee would reduce the quantity demanded and, consequently, affect the total revenue (TR) earned by Starbucks. The extent of this change, and whether total revenue rises or falls as a result of the price incr ease, depends on the price elasticity of demand (PED) for Starbucks coffee. Assuming that the demand for Starbucks coffee is price inelastic, because of consumers’ strong preferences for the coffee chain brand, particularly among loyal fans and supporters. With an increase in price from P 1 to P2 as seen in the diagram below, quantity demanded falls less than proportionately from Q1 to Q2. The total revenue lost due to the decrease in quantity demanded (Area B) is smaller than the total revenue gained from the higher price (Area A). Therefore, this leads to an overall increase in the total revenue earned by Starbuck for this group of consumers. On the other hand, if the demand for Starbucks coffee is price elastic for a segment of consumers who are highly sensitive to price, due to the presence of close competitors such as Bacha coffee, Luckin and The Coffee Bean and Tea Leaf, then an increase in price from P1 to P2 as seen in the diagram below would lead to a