RVHS H1 ECONS P1 Solutions

1 2018 RVHS Year 6 Prelims H1 Case Study Suggested Answers Question 1 (a) With reference to Table 2, state what is meant by the value of PED for chilled beef imported from the United States being -1.13. [1] A 1% increase in price of beef will lead to a 1.13% fall in quantity demanded for chilled beef imported from the US. (b) Suppose the price of imported chilled beef rises. Explain why the total spending by Japanese consumers on imported chilled beef from Australia and the Rest of the World might differ. [3] Given the PED values, the demand for import ed chilled beef from Australia is price inelastic while the demand for imported chilled beef from the rest of the world is price elastic. As such, an increase in the price of imported chilled beef from Australia will lead to a less than proportionate fall in quantity demanded of chilled beef from Australia while an increase in the price of imported chilled beef from the Rest of the World will lead to a more than proportionate fall in quantity demanded of chilled beef from the Rest of the World. Since total spending by consumers is given by the product of price and quantity, consumer spending for chilled beef from Australia increases while that from the Rest of the World decreases. (c) Using Extract 1, explain one demand factor and one supply factor that have affected the market for beef in Japan and comment on, with the aid of a diagram, the change in the price and quantity of beef. [8] Change in DD Change in income Given that there is rising income in Japan as mentioned in Extract 1. This will increase the purchasing power of consumers and lead to an increase in demand for normal goods such as beef which results in a rightward shift in demand curve from D 0 to D1. OR Change in taste and preferences: There has been a change in taste and preferences for meat products in Japan due to the shift in the diet of its citizens towards more meat products. This has been branded “diet westernisation” mentioned in Extract 1. This will lead to an increase in the demand for beef which results in a rightward shift in demand curve from D 0 to D1.

2 Change in SS No. of sellers According to Extract 1, there is an increase in number of beef sellers due to the increase in the number of super markets and convenience stores in Japan which leads to an increase in supply of beef. This results in a rightward shift in supply curve from S 0 to S1. Comment on the change in the price and quantity of beef. An increase in demand combined with the increase in supply causes an increase in equilibrium quantity from Q 0 to Q 1 while the change in equilibrium price of beef remains indeterminate as it depends on the relative extent of the shifts in demand and supply. Given that Japan has experienced the most dramatic shift in the diet of its citizen suggest that a significant proportion of the Japanese population has changed their diet in favour of meat hence significantly increasing the demand for meat over time. Hence the extent of increase in supply is less than the increase in demand for beef, leading to an increase in beef prices from P 0 to P1. OR Given that Japan’s population growth has been negative every year since 2009, this would decrease the number of consumers of beef and cause the demand for beef to decrease. This factor would mitigate the increase in demand for beef due to the change in taste and preference/ change in income (depending on what student wrote). Hence the increase in demand is likely to be less than the increase in supply, leading a decrease in the price of beef from P 0 to P1. Other answers also acceptable Signing of the Japan-Australia Economic Partnership Agreement (JAEPA) D1 S0 D0 S1 Price Quantity 0 Q0 Q1 Figure 1: Market for beef P1 P0

3 (d) Explain the impact of the Japan-Australia Economic Partnership Agreement (JAEPA) on the market for chilled beef from United States. [3] Signing the JAEPA allows Australia to export more beef to Japan, this increase in supply of Australian beef in Japan will lead to a fall in price of Australian beef in Japan and an increase in quantity demanded for Australian beef. Since Australian beef and chilled beef from United States are substitutes in consumption, this will lead to a fall in demand for chilled beef from United States. With a fall in demand, there will be a fall in equilibrium price and quantity in the market for chilled beef from United States. (e) Extract 1 states that countries like Australia are ‘shouldering the environmental burden of supplying directly and indirectly to meet Japan’s growing appetite for meat’. Explain why this could be an example of negative externality. [4] Direct – Intensive livestock rearing is a major source of greenhouse gases because of the methane produced by the cattle, which causes global warming. Indirect – As mentioned in Extract 1, Japan imports the bulk of the cattle feed used for its domestic beef production. As such, forests in Australia have to be cleared to meet the demand for cattle feed. With fewer forests, there will now be a larger amount of greenhouse gases entering the atmosphere, thereby increasing the pace and severity of global warming. As such, third parties who are people living in countries like Australia, especially those staying nearer to farms, who are not invo lved in the production or consumption of meat particularly beef which are due for exports to Japan, are the ones bearing the external costs illustrated above i.e. global warming and they are not being compensated for the external costs incurred. (f) Explain, using a diagram, why consumers are likely to bear a greater burden if a tax is to be placed on meat in Japan. [4] If a tax were to be placed on meat in Japan, it is an indirect tax. As such, whether consumers or producers bear a greater burden of the tax depends on relative elasticities of demand and supply. Figure 2 Relative price elasticities and tax incidence Price Qty P1 P0 D1 S0 S1 Q1 Q0 0 P2 A B

4 Given the shift in diets of Japanese towards meat during the past decades, it is likely that the demand for meat in Japan is price inelastic because of the lack of substitutes. Whereas the supply of meat in Japan is relatively more price elastic as Japan is able to import from various countries. When an ad valorem tax, the supply shifts from S 0 to S0+t. Due to the tax, equilibrium quantity falls to Q 1. Consumers bear P 0P1 of the tax per unit while producers bear P0P2 of the tax per unit. In this case, where demand is likely to be relatively more price inelastic than supply consumers are less responsive to prices and as such, they bear a greater tax burden. (g) Discuss whether the data is sufficient to assess if the standard of living of Japan has increased over time. [8] Thesis: The data is sufficient to assess the standard of living of Japan over time Real GDP and population growth rate data Real GDP takes inflation into account by valuing the prices of goods and services produced in the country using base year prices. An increase in real GDP reflects an increase in goods and services produced and this leads to higher real income. With an increase in real income and higher purchasing power, the ability to consume material goods and services increases. In Japan’s case, she experienced real GDP growth from 2012 to 2016, which represents an increase in material well-being. Moreover, in order to have a better measure of the material aspect of standard of living (SOL) of a typical ind