2025 DHS Paper 2 - Mark Scheme

1. Prices of agricultural goods tend to be volatile, with prices rising sharply in some years, then falling drastically in others. To stabilise farmers’ income, the European Union’s (EU) Common Agricultural Policy (CAP) ensures that prices of agricultural goo ds do not fall to unsustainably low levels, promotes agricultural goods both within the EU and globally, and allocates funds to support adoption of new technologies to deal with extreme weather. (a) Explain why prices of agricultural goods tend to be volatile. [10] (b) Discuss the appropriateness of measures that can stabilise farmers’ incomes. [15] Question analysis Command word Explain why Explain the reasons Content Prices Price mechanism, non -price determinants of demand and supply, price elasticities of demand and supply Context Agricultural goods Approach Explain why prices of agricultural goods tend to be volatile by explaining changes in demand and supply, coupled with relatively price inelastic demand and supply, that causes sharp rises and/or decreases in equilibrium price Suggested answer Introduction Prices are determined in the free market via the forces of demand and supply. The prices of agricultural goods tend to be volatile (i.e. sharp increases and decreases) as a result of large changes in its demand and supply, as well as a relatively price inelastic demand and supply. Overview Body Requirement #1: Price volatility – Sharp increase in price An increase in world population could have led to an increase in demand for agricultural goods; coupled with a relatively price inelastic supply, this could have led to a sharp increase in its price. A rising world population would mean that there is more consumers in the market, which would lead to an increase in demand for food, a necessity, which in turn would have led to increase in derived demand for agricultural goods such as wheat, rice, and soy . In the diagram, we see that market demand has increased from DD to DD’. At the same time, the supply of such agricultural goods tend to be Point Explain

relatively price inelastic since it takes time to grow and harvest agricultural crops. At the original price, there is therefore a shortage generated since quantity demanded exceeds quantity supplied (Q D > Q). This creates an upward pressure on price. As price increases, utility -maximising, budget -constrained consumers will cut back on quantity demanded, while profit- maximising producers increase quantity supplied to capture marginal profits. However, since supply is relatively price inelastic, the increase in quantity supplied would be less than proportionate to the increase in price; hence price would have to increase further to P’’ (as compared to P’) in order to clear the shortage in the market. Therefore, this could have contributed to the volatility of prices of agricultural goods. Market adjustment process Diagram Link Requirement #2: Price volatility – Sharp decreases in price Favourable weather conditions could have led to a bumper crop, causing a large increase in supply of agricultural goods; coupled with a relatively price inelastic demand, this could have led to a sharp fall in its price. The supply of agricultural crops is heavily dependent on weather conditions due to the nature of the good. Highly favourable weather conditions would have led to a bumper crop, significantly increasing supply. In the diagram, we see that market supply has increased from SS to SS’. At the same time, the demand for such agricultural goods tend to be relatively price inelastic since these agricultural goods are usually deemed as necessities. At the original price, there is therefore a surplus generated since quantity supplied exceeds quantity demanded (Q S > Q). This creates a downward pressure on price. Similar to the market adjustment process as described above, as price decreases, profit -maximising producers will reduce quantity supplied to avoid marginal losses. On the other hand, utility -maximising, bu dget-constrained consumers will increase quantity demanded. However, since demand Point Explain Market adjustment process

is relatively price inelastic, the increase in quantity demanded would be less than proportionate to the decrease in price; hence price would have to fall further to P’’ (as compared to P’) in order to clear the surplus in the market. Therefore, this could have contributed to the volatility of prices of agricultural goods. Diagram Link Conclusion The volatility in agricultural prices would mean that farmers’ incomes will also be similarly unstable. Governments have to consider various measures to stabilise their incomes, and this will be further explored in part (b). Link to part (b) LORMS L3 Answer is relevant and students analysed both situations where prices of agricultural goods have increased and decreased. This is supported with detailed diagrams. 8 – 10 L2 Answer is relevant; however, student may have only explained one situation where prices of agricultural goods have increased (both the change in DD/SS and the use of PED/PES). This is supported with detailed diagrams – max L2 – 6m. Note: No use of elasticity concepts, but both situations of increase and decrease in prices are explained via large changes in DD/SS conditions – max 7m. 5 – 7 L1 Answer is largely irrelevant and/or there are major content errors and/or gaps present in the analysis. 1 – 4 Part (b) Question analysis Command word Discuss Multiple perspectives required Content Measures to stabilise income Price floor, promoting demand, technological innovations for weather resistant crops, and their limitations

Context Agricultural goods and farmers Approach Explain at least two measures that can stabilise farmers’ incomes (e.g. price floor and measures to promote demand) and its possible limitations. Note: Students can also bring in policies not mentioned in the preamble, e.g. indirect subsidies. Suggested answer Introduction Prices of agricultural goods tend to be volatile as it depends more on the weather and the climate than other sectors. Hence, there is a need for the government to intervene with appropriate measures to support farmers’ incomes, such as through price floor s, to increase market demand and to promote innovations to develop weather -resistant crops. However, these are not without their limitations. Overview Thesis 1 Requirement #1: Price floor to protect farmers’ income One measure that can stabilise farmers’ incomes is a price floor, which is a legally established minimum price set above the market equilibrium price. This prevents the market price from falling below a sustainable level. Suppose there was a bumper crop that resulted in a large increase in supply in the market, causing market price to fall to P’. As established in part (a), the demand for agricultural goods is price inelastic due to its high degree of necessity. Hence, a fa ll in price will only generate a less than proportionate increase in quantity demanded, leading to a fall in total revenue received by farmers from OPEQ to OP’E’Q’. Setting a price floor at P F will prevent prices falling. This will however create a surplus in the market since quantity supplied exceeds quantity demanded (Q S > Q). Assuming that the government buys up this surplus, this will increase producer revenue since both the price and quantity traded increased, from OPEQ to OPE’’QS. Point