2024 TYS H2 Economics Paper 1 CSQ Answers (HCI)

Suggested Answers to A Level 2024 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit Question 1: Supermarkets in the United Kingdom (UK) and Singapore (a) Using the information in Table 1, compare the change in forecast total retail grocery sales to that for online sales in the UK between 2021 and 2026. [2] Table 1 Year 2021 2022 2023 2024 2025 2026 Forecast total retail grocery sales (billions pounds) 212 214 216 220 224 229 Online sales as % of forecast total retail grocery sales 10.5 10.6 10.8 11.2 11.4 11.7 Calculations from Table 1 % change in forecast total retail sales 0.9 0.9 1.9 1.8 2.2 Online sales (billion pounds) 22.3 22.7 23.3 24.6 25.5 26.8 % change in online sales 1.9 2.8 5.6 3.6 4.9 Both forecast total retail grocery sales and online sales in UK between 2021 and 2026 are expected to increase. [1] Online retail sales is expected to increase at a faster rate. [1] (b) Explain two factors that are likely to determine the forecast increased demand for online shopping. [4] Demand is the willingness and ability of consumers to pay for the good or service. In this case, there is an increase in willingness of consumers to use online shopping. 1. Change in taste and preferences Convenience of online shopping has caused an increase in demand for the service. Evidence from the e xtract states that consumers can order and have goods delivered without having to step out of the house. [2] 2. Increase in income Online shopping would increase with income as most are normal goods which have positive income elasticity. As income increases, the willing and ability to use online shopping will increase. [2] (c) Using the evidence in Extracts 1 and 2, explain two features of UK supermarkets that demonstrate the characteristics of an oligopoly. [4] 4-firm market concentration ratio of 67.9% (Figure 1) indicates the market is dominated by a few large firms. [2] UK supermarkets are mutually interdependent, as there are only a few dominant firms in the industry, any dominant firm, before it decides, has to consider the reactions of the other rival firms in the industry. In extract 2, Tesco is the market leader and other retailers may follow the pricing changes made by Tesco. [2] (d) With reference to Extracts 1 and 2, explain one possible reason why supermarkets might seek to control their supply chains. [2] Cost is rising due to inflation and this will shrink supermarkets’ already thin profit margin (Ext 1 ). By controlling their supply chains, the cost of inputs at every stage of production can be reduced, hence raising/m aintaining profit, assuming no change to revenue. or

Suggested Answers to A Level 2024 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit By controlling the supply chain, the firm can prevent new competitors if the firm can prevent new firms from access to key resources. This raises barriers to entry, and helps incumbent supermarkets maintain their revenue and profits, assuming no change to costs. (e) If Sheng Siong and DFI decide to merge, discuss whether the CCCS should intervene in the merger due to adverse effects on consumers and other supermarkets in Singapore. [8] Introduction CCCS’ decision to intervene in the merger will depend on its impact on consumers, namely consumer su rplus, choice and quality, as well as whether it will drive smaller supermarkets out of the market. Consume r surplus is the excess of what consumers are willing and able to pay over the price they actually pay. R1: CCCS should intervene If Sheng Siong and DFI merge, their market share will be 48.1% indicating the merged firm gains market power. With reference to Figure 1, this increase in market share increases demand (say for Sheng Siong) from AR0 to AR1 and the demand becomes more price inelastic. This raises price from P0 to P1 with a corresponding increase in output from Q0 to Q1. This increase in price will lead to fall in consumers’ surplus. At the same time, variety may be reduced too, restricting the choices. Figure 1: Impact of merger There could also be adverse impact on other supermarkets in Singapore in terms of loss in market sha re and profit as demand for their goods fall, especially if the merged entity is able to intensify competit ive tactics to eliminate the smaller supermarkets. R2: CCCS should not intervene However, a larger supermarket enjoys internal EOS which lowers unit cost, such as from bulk purchase. Internal economies of scale (iEOS) is reaped when a firm increases its scale of production. IEOS refers to a fall in unit cost of production when scale of production increases. As a firm increases its scale of production, this will lead to a downward movement along the LRAC as it reaps internal economies of scale. In the short run, this will translate to lower average and marginal costs than before from AC0 and MC0 to AC1 and MC1. Price charged falls from P0 to P1 and output transacted increases from Q0 to Q1, where the equilibrium price and output is obtained by equating MC=MR. Therefore, the merged firm will enjoy cost saving s as its average costs will fall in the long run and if th e cost savings is passed on to consumers in the form of lower price, it will also raise consumer surplus, benefitin g the consumers

Suggested Answers to A Level 2024 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit Figure 2: Impact of increasing scale of production in the short run In addition, it may enjoy greater profits and if channeled to enhance quality of products/service, c onsumers may benefit. Summative Conclusion Given that the CCCS aims to ensure that mergers would not “lead to a substantial lessening of competition” (Ext 4), it should intervene as a merger leads to very high combined market share of 48.1%. Moreover, as there is a limit to gains from economies of scale to bring cost savings (Extract 1 para 4), consumers will unlikely benefit from lower prices if there is a merger. Hence, it is more likely that consumers will suffer after the mer ger and hence CCCS should intervene. Mark scheme To score L2 you need to address the two requirements with appropriate reference to case material: ● Explain why CCCS should intervene due to the adverse effects of the merger ● Explain why CCCS need not intervene due to benefits enjoyed To score E2 you need to refer to case material to: ● Evaluate the extent of the benefits or adverse effects of the merger ● Arrive at a substantiated a stand stating whether CCCS should intervene (f) Discuss whether price competition is the best way for supermarkets to raise revenue. [10] Introduction Supermarkets may adopt price competition as one way to increase their revenue. It may also consider non-price strategies as an alternative to raise revenue. This essay will discuss whether price competition is the best way to do so. R1: Price competition can help raise revenue By reducing price (i.e. firm chooses not to profit maximise where MR=MC), the quantity demanded for the firm’s product will increase. If demand is price elastic, the increase in quantity demanded will increase m ore than proportionately from Q 0 to Q 1 compared to the reduction in price from P 0 to P1 resulting in an increase in total revenue from 0P0aQ0 to 0P1bQ1 as total revenue is the product of price and quantity.

Suggested Answers to A Level 2024 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit Figure 3: Impact of price competition on a firm R2: Other methods to raise revenue Non-price strategies can raise revenue as well. This is done by increasing the demand for the firm’s pro duct. If the firm increases demand for its products from AR0 to AR1, total revenue will increase from 0P 0AQ0 to 0P1BQ1. This can be achieved through providing quality assurance (in the case of Aldi and Lidl Extract 1 para 5), red