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 pri