2026 EJC H2 Econs P1 Prelim ANS

2026 EJC Prelim H2 Economics P1 CSQ1 Question 1: The Economics of the Attention Economy SAMS (Suggested Answer & Mark Scheme) ai) Using Table 1, summarise the trend in global social media ad revenue between 2022 and 2024. [1] Global social media ad revenue increased throughout the period. [1] for overall trend aii) With the aid of a demand and supply diagram, account for the trend in ai). [5] ● Advertisers have increased their demand for social media advertising space due to changing tastes and preferences towards these high engagement ads as seen from extract 1 where there has been an explosive popularity of short-form vertical videos. There is thus an increase in derived demand for social media advertising space, reflected by a shift in demand from D1 to D2. ● At the same time, social media platforms experienced a fall in cost of production due to how generative AI has automated ad creation and distribution as seen in Extract 1 as well. This has led to an increase the supply of social media advertising space from S1 to S2. ● The increase in demand is likely to outweigh the increase in supply, as advertisers aggressively shift towards social media ads and platforms take time to increase their production capacity. ● This leads to a shortage of Q4Q3 at the existing price P1, resulting in an upward pressure on prices. Quantity demanded decreases and quantity supplied increases until a new equilibrium is established. Consequently, price increases from P0 to P1 and quantity increases from P0 to P1. ● Since both price and quantity increase, total revenue increases from 0P1AQ1 to 0P2BQ2. [1] for explaining the increase in demand [1] for explaining the increase in supply [1] for price adjustment process [1] for identifying the area of total revenue [1] for diagram (with increase in supply < increase in demand) © EJC Economics Department 2026

b) Explain how "network effects" function as a barrier to entry in the social media market and how it affects long run profitability. [4] Barriers to entry (BTE) are anything that prevents or impedes the entry of new firms into an industry, thereby protecting incumbent firms from competition. A social media app's primary value is social connection. Users choose an app not because it has superior technology, but because their friends and family are already on it [Extract 1]. This creates a high switching cost; leaving a dominant network like Instagram to join a new platform means losing instant connection to one's social circles. Incumbent tech giants (like Meta) will not have their market shares competed away by new entrants, preserving firm demand. This would allow these dominant social media firms to retain and sustain supernormal profits in the long run. [1] for definition of BTE [1] for contextualisation of BTE [1] for how market share is preserved [1] for how supernormal profits are preserved c) Discuss the effects of market dominance by tech giants (e.g., Meta) on efficiency. [8] Question interpretation QA Framework Details Approach Command word Discuss Question type Impacts of market dominance Start point Market dominance by tech Giants like Meta End point Achievement/Worsening of efficiency Content Content (Scope of coverage) • R1 – Negative impact on efficiency • R2 – Positive impact on efficiency Context USA (in extract 2) Requirement 1: Market dominance by tech giants (e.g., Meta) will have a negative impact on efficiency Market dominance has a negative effect on allocative efficiency. Allocative efficiency represents the output level where society's welfare is maximised, which is achieved at the firm level where price equals marginal cost 𝑃=𝑀𝐶. © EJC Economics Department 2026

Fig 2: Allocative inefficiency with market dominance As a dominant firm possesses immense market power, it faces a downward-sloping demand (average revenue) curve and acts as a price-setter. To maximise its profits, the firm restricts its output to the level where its marginal cost equals marginal revenue 𝑀𝐶=𝑀𝑅. Since its price on the demand curve lies above marginal revenue, it charges a price that is higher than its marginal cost which is seen in Extract 2 where Google used its 𝑃>𝑀𝐶 dominance to set placement fees well above competitive levels. This leads to an under-production of the ad placements and an under-allocation of scarce resources. The resulting under-production creates a deadweight loss represented by Area DEF, meaning society's total economic welfare is not maximised and there is allocative inefficiency. Requirement 2: Market dominance by tech giants (e.g., Meta) will have a positive impact on efficiency Market dominance can have a positive effect on long-run dynamic efficiency. Dynamic efficiency refers to the situation when firms invest in technology so that productivity and product quality improve over time, which is heavily driven by product innovation—the creation of new, improved, or highly differentiated products and services. Dominant firms protected by high barriers to entry can sustain large supernormal profits even in the long run due to the high price setting ability that they have stemming from their market dominance. This allows them to divert their supernormal profits to product and process innovation to improve product quality and productivity respectively, achieving dynamic efficiency. This is seen in Extract 2 where the immense supernormal profits generated by tech giants allowed them to aggressively reinvest tens of billions of dollars annually into cutting-edge artificial intelligence (AI), custom microchips, and algorithmic research to continuously enhance the quality of user experience. Summative Evaluation: Overall judgement on whether market dominance by tech giants (e.g., Meta) will have a negative or positive impact on efficiency The overall effect of market dominance by tech giants on economic efficiency is net-positive, though this outcome is ultimately supported by balanced government regulation. While dominance breeds allocative inefficiencies, the 2026 Google DOJ remedies prove that targeted court orders, such as forced data-sharing, can successfully promote competition. However, policymakers must avoid over-regulation and preserve the supernormal profits required for dynamic efficiency. This is even if, as Meta’s 1,500 layoffs show, this high-stakes R&D requires painful trade-offs. Therefore, net efficiency is maximised when a robust antitrust framework curbs exploitation of market dominance while maintaining the massive profit incentives required to promote dynamic efficiency. Level Knowledge, Application/Understanding, and Analysis Marks L2 For a well-developed answer that has: ● good scope and balance – explains both the negative and positive impacts of market dominance on efficiency ● good application to context – uses the case material where appropriate, to support analysis 4 – 6 L1 For an under-developed answer that: 1 – 3 © EJC Economics Department 2026

● lacks scope and balance – some knowledge of either the positive or negative impacts of market dominance on efficiency ● lacks application to context – limited use of case material to support analysis Level Evaluation Marks E ● A well-reasoned judgement on the effects on market dominance on efficiency 1 – 2 di) With the use of an example, explain how there may be imperfect information when youths consume social media. [2] ● Imperfect information arises when economic agents lack critical information to make rational decisions on choices and resource allocation. ● When youths consume social media, they consider the time they spend on it as the perceived marginal private cost (MPCp) but may not know that the actual marginal private cost (MPCa) is higher due to declining attention spans, increased emotional fatigue,