2025 TYS H2 Economics Paper 2 Essay Answers (HCI)

Suggested Answers to A Level 2025 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit Question 1 Some firms charge a different price to different groups of consumers for the same product. These differences in price are not related to cost differences. (a) Using examples, explain why a firm is able to charge a different price to different groups of consumers for the same product. [10] (b) Discuss whether the gains outweigh the losses to consumers and producers from this type of pricing strategy. [15] Part (a) INTRODUCTION A firm is able to charge a different price to different groups of consumers for the same product and these differences in price are not related to cost differences because the firm is practising price discrimination. For price discrimination to occur, there are three conditions: the price-setter firm has monopoly power, the markets can be effectively segmented and resale must be prevented between markets, and the price elasticities of demand differ for different markets. BODY R1: Price-setter with monopoly power and separate markets to prevent resale The firm must be able to set its price, indicating that the producer has some market power. A producer wishing to practise price discrimination effectively should have a degree of monopoly power so that consumers who are charged the higher price find it difficult to turn to an alternative supplier who might offer lower prices. For example, a cinema screening a certain movie at a particular location and timing has monopoly power as movie goers cannot turn to other cinemas for the same show in the same location and at the same time. Similarly, a pharmaceutical company selling a particular drug, e.g. for diabetes, has monopoly power as patients cannot turn to other companies for the same drug. OR*: In addition, an airline selling air tickets to a specific destination at a particular date and time has monopoly power as passengers cannot turn to other airlines for the same deal. The producer must be able to segregate and keep the market in separate and identifiable groups, such as by geographical boundaries or age group. This will ensure that there will be no seepage between markets, i.e. no resale. That is, it is impossible or prohibitively costly for consumers to buy in the lower-priced market and sell to other consumers in the higher- priced market. For example, at the point of movie ticket purchase, identification cards for students and seniors are verified before tickets are sold to them at a lower price compared to normal adult pricing and at the entry into the cinema, the ticket held is again visibly checked to prevent seepage. Another example would be pharmaceutical companies usually use patent laws and trademarks to restrict the unauthorized importation of their own products from other countries. In the U.S., the FDA's strict approval processes f or re-imported drugs serve as a significant legal hurdle, as drugs sold abroad are often technically unapproved for the domestic market even if they have the same active ingredients. OR*: In addition, as names are collected at the point of air tickets sale, passengers who buy the air tickets earlier at a lower price cannot resell the tickets at a higher price later. R2: Different Price Elasticities of Demand in Different Markets Different buyers have different degrees of willingness to buy a product, and this is reflected by their different price elasticities of demand. Hence, if a firm has two markets with different price elasticities of demand, the firm will charge a higher price in the market for consumers with a relatively less price-elastic demand and quantity will only fall less than proportionate and a lower price in the market for consumers with a relatively more price -elastic demand and quantity will rise more than proportionately. For example, students and seniors versus adults can be charged different prices for the same cinema show, since a similar ticket price takes up different proportions of their incomes and hence the price elasticity of demand for these different segments of the customers would be different, with students and seniors having a relatively more price elastic demand whilst adults have a relatively more price inelastic demand. Although it does not cost a movie -theatre operator less to fill a seat with a student than an adult, charging students at a lower price allows the operator to earn more revenue than if fewer of them would attend at the higher adult fare.

Suggested Answers to A Level 2025 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit Another example, pharmaceutical companies usually charge higher prices for drugs with the same active ingredients in more developed countries compared to lower prices in less developed countries as the price of the drug takes up a lower proportion of income in more developed countries compared to less developed countries. By charging a higher price in more developed countries with lower price elasticity of demand (PED) and a lower price in less developed countries with higher PED, it allows the company to earn more revenue. OR*: In addition, passengers who buy air tickets earlier are charged a lower price as they have more time to source for substitutes and hence PED is higher, compared to passengers who buy air tickets later/ last minute are charged a higher price as they have less time to source for substitutes and the degree of necessities for travelling at a particular date is high, resulting in lower PED. Overall, this allows the airline to earn more revenue. Note: *Due to time constraints, 2 examples for each condition should suffice. CONCLUSION In conclusion, if the above three conditions are fulfilled, a firm will be able to practice price discrimination. No need 3rd degree PD diagram, not in syllabus. Mark scheme To score L3 your need to address the two requirements: ● Explain how monopoly power and segregation of markets with no seepage allows PD with eg. ● Explain how different PED allows PD with eg. Part (b) INTRODUCTION This essay will discuss whether the gains outweigh the losses to consumers and producers from third degree price discrimination. BODY R1: Gains and Losses to Consumers Gains Under third degree price discrimination, the lower income consumer group belonging to the more price -elastic demand market will be able to consume a good or service which they could otherwise not be able to afford. As shown in Figure 1, assuming the initia l uniform price charged by the firm is P 0, a lower price of P 1 will cause quantity to increase more than proportionately from Q0 to Q1 and consumer surplus to increase from P0AB to P1AC. Consumer choice will also increase as they have more variety of cheaper goods to choose from. For example, students and seniors will get to enjoy lower prices and more options from restaurants offering cheaper students’ and seniors’ meals.

Suggested Answers to A Level 2025 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit Losses However, under third degree price discrimination, consumers with more price-inelastic demand are charged a higher price. Hence, as shown in Figure 2, assuming the initial uniform price charged by the firm is P 0, a higher price of P 1 will cause quantity to fall less than proportionately from Q0 to Q1 and consumer surplus to fall by P0P1BA. For example, drugs in more developed countries can easily cost at least 2-4 times more compared to those sold in less developed countries and/or last- minute air tickets (bought within 21 days of departure) can easily cost at least 25% more compared to tickets bought 6 months earlier. Ev1: Whether the gains outweigh the losses to consumers The gains will outweigh the losses to consumers especially if the goods are essential items like food, transport and healthcare, as the lo