CJC_H1_ECONS_Answers

1 2018 CJC H1 Prelim CSQ 1 Answers Suggested Answers: (a) (i) With reference to Table 1, describe the trend in the price of sugar between January 2015 and December 2016. General Trend: Increasing trend of the price of sugar from January 2015 to December 2016. [1] Refinement: Sharp fall in the price of sugar from Jan to Mar 2015 OR Sharp rise in the price of sugar from Mar to Jun 2016 OR Sep to Dec 2016. [1] [2] (ii) With reference to Extract 1 and using a demand and supply diagram, explain the price changes of sugar in 2016. 2 Possible Approaches: Approach 1: Price increased from Jan to Sep 2016, price fell from Sep to Dec 2016 (explain using DD/SS shifts) Approach 2: Price increased from Jan to Sep 2016 (explain using DD/SS shifts), Sharp increase from Mar to Jun 2016 (explain using PED/PES analysis) Increase in Price from Jan – Sep 2016 [3m] Increase in DD due to rise in income of middle class from emerging economies, assuming sugar is a normal good. [1] Fall in SS due to adverse weather conditions in Brazil (El Nino) [1] Simultaneous shift = shortage at P e, leading to rise in Equilibrium Price + Diagram [1] Other accepted answers: Increase in current DD due to consumers’ expectations of higher future sugar prices. Approach 1: Fall in Price from Sep – Dec 2016 [2m] Increase in SS due to producers’ expectations of more sustainable profit [1], ceteris paribus, the sugar price will fall in certain periods when there is a surplus at the P e. [1] Approach 2: Sharp Rise in Price from Mar – June 2016 [2m] Given a fall in SS, PED is inelastic due to lack of close substitutes for sugar [1], it will lead a sharp increase in price. [1] OR Given an increase in DD, PES is inelas tic due to lack of spare capacity [5] Fig 1: Increase in Price of Sugar [1]

2 / lengthy period of harvest [1], thus, price of sugar will increase sharply. [1] (b) To what extent is the global deficit in sugar likely to lead to an improvement in standard of living of sugar growers in Brazil. Standard of living measures the welfare of the average citizen in an economy and it consists of both the material and non-material aspects. Material SOL considers the quantity of goods and services consumed by an average citizen while non-material SOL reflects the qualitative aspect of life such as the life expectancy and level of education. Thesis: The deficit in sugar will improve the SOL of growers in Brazil PED of Sugar likely to be less than 1, given the lack of close substitutes. Thus, a global deficit in sugar market will increase price, leading to a less than proportionate fall in quantity demanded of sugar, increasing the TR of sugar growers. Profits = TR – TC, assuming TC stays constant, profits will increase for sugar growers. The increase in profits will thus increase the disposable income of the growers and this will increase their purchasing power and ab