2025 ASRJC Paper 1 - Mark Scheme

1 © ASRJC Economics Department 9570 / JC2 Prelim / 2025 Anderson Serangoon Junior College 2025 H2 Economics Prelim Paper 1 Suggested answers Question 1: The travel industry: A dilemma for the government (a) With reference to Table 1 and using a demand and supply diagram, explain the relationship between air fares and passenger airline revenue between 2019 and 2020. [3] Between 2019 and 2020: Air fares decrease, TR decrease 🡪 positive/direct relationship Reason: fall in DD due to government policy of lockdowns and fear of contagion > fall in SS due to expectations of fall in profits (or due to lockdowns so planes cannot fly) 🡪 P falls, Q falls therefore TR falls Alternatively: Can accept diagram showing fall in demand only ● Explain Fall in DD ● Recognise that TR = PxQ ● P and Q fall 🡪 TR falls OR Increase in SS with inelastic demand P falls and Q increases by less than proportionately TR falls (b) With reference to Table 2, compare the income elasticity of passenger demand for air travel between short -haul and long -haul flights for both developed and developing countries. [2] Similarities: ● Both have positive income elasticity of demand ● YED for long haul flights > short haul flights for both developed and developing countries. Difference: For developed countries, YED for both short-haul and long-haul flights is lower than for developing countries. (c) With reference to Extract 1, explain the effect of information failure on the tourism market. [3] ● Using evidence from Extract 1, give examples of MPB perceived – “magical moments, picture-perfect scenery” ● Divergence between MPB perceived and MPB actual, where MPB perceived is > than MPB actual ● Explain overconsumption: -> At market equilibrium Qe: MPB perceived = MPC 🡪 but MPB actual < MPB perceived 🡪 at Qe: MPC>MPB actual 🡪 over- consumption of a particular destination 🡪 welfare loss

2 © ASRJC Economics Department 9570 / JC2 Prelim / 2025 Alternative case where compare MPC perceived and MPC actual ● Eexamples of MPC perceived and examples of MPC actual from Ext 1 – “crowded to the point of discomfort, noisy” ● Divergence between MPC perceived and MPC actual, where MPC perceived is lower than MPC actual ● Explain over-consumption (d) With reference to Extract 2 and using the concept of minimum efficient scale, explain why airports tend to be natural monopolies. [4] Minimum efficient scale refers to the output level where LRAC is at a minimum i.e there is no cost savings from further increase in output. A natural monopoly refers to a situation where a single firm can supply a good to the entire market at a lower unit cost. Airports have high MES which means that their LRAC falls continuously over a very large output level. Reason ● This is due to the ratio of fixed costs to variable costs is very high. For example, with reference to Extract 2, the costs of constructing airports like airport terminals, runways, control towers etc cost millions or billions of dollars. ● This allows them to enjoy huge economies of scale which is the cost savings from higher output level. For example, when output (such as services to passengers or flights) increases, the fixed cost is spread over an increasing output such that the cost per unit of output falls continuously. This explains the plan for the King Salman International Airport to increase the number of passengers from 120m to 180m. ● This also acts as a huge barrier to entry making it difficult for new firms to enter the market and compete with the existing firm. This allows the natural monopoly to produce at a larger scale than any potential competitors, which leads to lower average costs. ● With a given market demand , King Salman International Airport, which has high MES due to its capacity to serve 120 m passengers and more, is sufficient to supply all the airport services in Riyadh. Thus, for airports like the King Salmon International Airport, it can only be a natural monopoly. (e) Discuss whether adopting new technology is the best way for travel agencies to remain competitive. [8] Travel agencies can remain competitive by using price and non-price strategies

3 © ASRJC Economics Department 9570 / JC2 Prelim / 2025 R1: Adopting new technology reduces costs and therefore enable the travel agency to be more price competitive. (Answers can also include how technology can increase non-price competitiveness) The use of technology helps to increase efficiency, i.e more output with the same amount of inputs and so help to reduce costs of production. Extract 3 mentions that technology can be used to ‘streamline operations and reduce costs’ and social media ‘enables a small number of staff to handle large number of inquiries’ and many other tasks. For example, hotel and airline bookings, collection of data, planning for new itineraries can be more effectively done with the use of technology, which saves time and manpower. The travel agency can also use social media to advertise its services which is much cheaper than using traditional media like newspapers and magazines and it would also have a wider reach and greater flexibility in responding to more recent trends. So cost is spread over a larger output. From Figure 1, the original equilibrium output is where MCo = MR at Qo and the price charged is Po. But with the cost savings from the use of technology, the MC and AC curves shift rightwards to MC1 and AC1. The new equilibrium output is at Q1 and the prices is now lower at P1. As the firm is a able to charge a lower price, it is able to compete with other travel agencies which did not use technology. R2: However, it is also important that travel agencies adopt non-price strategies to remain competitive. ● Travel agencies operate in a monopolistically competitive industry where the key feature is product differentiation. So each travel agency must employ non-price strategies to differentiate its products from other travel agencies to remain competitive. ● As mentioned in the extract, the ‘human touch’ is needed for travel agencies to be competitive. Travel agencies must value-add to their services to meet known and unknown needs and wants of customers. For example, it can provide 24/7 customer support, create unique and tailored experiences for customers of different demographics.

4 © ASRJC Economics Department 9570 / JC2 Prelim / 2025 ● (For example, in SG, many of our seniors have purchasing power and are in better health, and so travel agencies can customized programmes to cater to this group of seniors. Also, many Singaporeans are very well travelled and well informed. A travel agency can focus on niche markets such as adventure tourism and eco-tourism.) ● The aim of the travel agency is to effectively change tastes and preferences of customers to its product so that it can capture a bigger slice of the market. This can be seen as a rightward shift of the demand curve as well as a more inelastic demand curve as customers become loyal to the travel agency. Other travel agencies that lower price will not lead to large switch of consumers to the rival firms. Conclusion ● A travel agency must adopt new technology as it is the best strategy to reduce costs as it can boost productivity in all aspects of the business and therefore makes it more price competitive but technology alone is not sufficient for a travel agency to remain competitive. ● Technology is easily available and accessible to all firms and so a travel agency will not be much of an advantage compared to another travel agency and so price difference may not be very significant if travel packages are similar. ● Travel agencies provide a service and so the ‘human touch’ in the form of meeting more of the needs of customers is not something that technolgy can replace.