VJC_H1_ECONS_answers

1 H1 Prelim Case Study Question 1 a (i) Describe the trend in India’s food prices from 2012 to 2018 [2] Food prices were generally increasing [1], with the increase slowing down from 2014 onwards [1] (ii) What might Figure 1 and 2 suggest about the price elasticity of demand for food in India? [3] Price elasticity of demand measur es the degree of responsiveness of quantity demanded of a good to a change in its price, ceteris paribus The demand for food is likely to be price inelastic where the increase in price in Figure 1 led to a less than proportionate fall in quantity consumed. As a result, the increase in expenditure from an increase in price is greater than the loss in expenditure from a decrease in quantity demanded, leading to a rise in expenditure as seen in Figure 2. Award 1m for the identification of PED of food Award up to 2m for an explanation of the link between Price and TE using the concept of elasticity b With the aid of a diagram, explain and comment on how a food subsidy might affect the consumers, producers and the government in India. [8] A subsidy is a payment made by the government to producers to encourage the production of certain good and services, but not made in exchange for any goods or services. To analyse the impact on the various economic agents, we will look at expenditure for consumers, revenue for firms and government expenditure. Before government intervention, the initial equilibrium is at point E 0, where DD0 intersects SS0, to give equilibrium price P0 and quantity Q0. A subsidy lowers the cost of selling food, therefore producers are willing to offer the more for sale at every price. This is represented by a downward shift of the supply curve, by the amount of the subsidy, from SS0 to SS1,

2 At the initial equilibrium price of P0, quantity demanded is Q0 and quantity supplied is Q2, resulting in a surplus of Q0Q2. Producers will lower the price in order to get rid of the surplus, which results in a rise in quantity demanded, and a fall in quantity supplied. This will continue until quantity demanded equals quantity supplied to arrive at a new equilibrium point of E1, with a lower equilibrium price P1 and a higher quantity Q1. Impact on Economics Agents Consumers’ expenditure decreases from 0P0E0Q0 to 0P1E1Q1. Due to the demand for food being price inelastic, the increase in expenditure from an increase in quantity (Q 0AE1Q1) is less than the decrease in expenditure from a decrease in price (P 1P0E0A), resulting in an overall fall in expenditure. Producers see an increase in overall revenue from 0P 0E0Q0 to 0P 2BQ1, which is the sum of consumers’ expenditure plus the subsidies from the government. The government will see an increase in gover nment expenditure by the area P1P2BE1. Evaluation: The extent of the above changes on the various economic agents will depend on the relative price elasticity of demand and sup