SAJC H2 ECONS P2 (Answers)

1 © SAJC 2014 9732/02 (Preliminary Examinations) St. Andrew’s Junior College Economics Department JC 2 Preliminary Examinations (2014) Suggested Answers H2 Economics Paper 2 (Syllabus 9732)

2 © SAJC 2014 9732/02 (Preliminary Examinations) 1 In recent years, there have been increased environmental awareness and improvements in green technology. These have led to changes in demand for and supply of products and services such as electrical appliances, materials used for packaging and garbage disposal services. Assess how relevant markets could be impacted by the above developments. [25] Suggested Answer Question Analysis:  Impact on markets relate to Pe, Qe and TR.  Markets to be analysed: o The good/service itself o Substitutes o Complements o Factors of production o Competitive supply Note: there is no need to repeat the analysis of the above 5 sub -markets for each of the three goods/service given in the pre -amble. However, all five markets should be showcased in the entire essay to gain top marks.  Demand and supply framework as well as relevant elasticity concepts are required to produce an analytical response to this question. INTRODUCTION  Increased environmental awareness and improvements in green technology were factors that led to changes in demand for and supply of the various markets and also related markets such as their substitu tes and complements as well as their respective factor markets.  Impact on such markets refers to the change in Pe and Qe as well as Total Revenue. Such impact differs both in direction and extent of change, depending on the nature of the goods in question. BODY  Framework to be used – Demand and Supply. With aid of diagram, briefly explain how Pe and Qe might change given a change in factors affecting demand and/or supply. Detailed workings of price mechanism as well as the assumptions are not required. 1) More Environmentally-friendly Electrical Appliances and Packaging Materials  Increased environmental awareness   demand for such goods. Assume constant supply and that PES is high (manufactured goods), there will be increase in Pe and more than proportionate increase in Qe. TR will increase.  Improvement in green technology   supply of such goods due to reduced cost of production. Assume constant demand and that PED is low (due to increased awareness), there will be fall in price and less than proportionate increase in quantity sold. TR will fall.  Combined effects: Assuming that the increase in demand is higher than the increase in supply, Pe and Qe are likely to rise and hence, TR is likely to rise as well. a) Markets for Factors of Production With higher Qe, demand for factors of production fop expected to rise as well. Hence, Pe and Qe as well as the TR in the factor market should also rise, assuming

3 © SAJC 2014 9732/02 (Preliminary Examinations) constant supply in the factor market. Evaluation o Despite the improvement in energy efficiency of certain electrical appliances, there may still be a fall in demand for them due to the increase in awareness. These include energy hungry appliances such as air -conditioners, iron (green technology producing wrinkle -free materials for the ga rment industry). Similarly, improvement in green technology may also reduce use of packaging materials due to improved product design – IKEA’s flat packaging for self - assembling by customers, slimmer home TV screens, etc. o Such fall in demand may negate in crease in demand for electrical appliances and packaging materials, thereby reducing the likely increase in TR. b) Substitutes – Less Environmentally -friendly Electrical Appliances and Packaging Materials (e.g. fridge) o Demand likely to fall due to change in taste and preference towards eco - friendly products. The fall is likely to be significant as both kinds of fridges satisfy very similar wants. o As both eco -friendly and non-eco-friendly fridge usually use the same types of factors of production (trays, door panels, handles, etc), there is likely to be a fall in supply of the non -eco-friendly fridge. Supply curve shifts to the left. [Competitive in Supply] o Given both a fall in demand and supply, Qe will fall. Assuming a larger fall in supply due to prod ucers being more keen to shift production to more eco - friendly fridges to meet consumer demand, the price of non -eco-friendly fridge will rise. c) Complements [to non-eco-friendly fridge such as electricity] o XED of electricity with respect to change in p rice of non -eco-friendly fridge tends to be high as those fridges definitely needed electricity to run! Hence, with a rise in price of non -eco-friendly fridge and a fall in number of such fridges being used (see preceding point), the demand for electricit y will fall significantly as well. o Whether there is a high or low PES value, Pe and Qe are likely to fall and so will TR. 2) Garbage Disposal Services - General   demand for general garbage disposal services due to increased practising of 3Rs – Reduce, Re-use, Recycle (increased environmental awareness)   supply of such services due to reduced cost of garbage collection/disposal (improvement in green technology). This could be due to more efficient garbage compacting machines/lorries, etc.  Combined effects: Fall in Pe, indeterminate Qe. Hence, indeterminate TR for garbage collection firms. Assuming that improvement in technology to reduce cost of garbage disposal has limited effect on reducing cost, TR of garbage collection firms would fall. a) Garbage Disposal Services – Segregated o Increased environmental awareness   demand for segregated garbage disposal bins – plastic, paper, metal, glass, etc. o This will al so indirectly increase demand for more recycling bins/bags to contain separate types of garbage. Market for recycling bins/bags:  in Pe and Qe, hence TR (assuming constant supply).

4 © SAJC 2014 9732/02 (Preliminary Examinations) EVALUATION  Provide suitable arguments to justify which market will be mos t affected by the developments. o E.g. tapping on the increased awareness and improvement in green technology, producers who can produce the most energy -efficient appliances and packaging materials will be able to swing most votes among the consumers, thereby enjoying the most significant increase in Pe/Qe and therefore TR. This could be especially true with generous government incentives to go green as well as aggressive use of advertisements. Such producers will be able to gain most significant increase in market share at the expense of those producers who could not keep up with the production of greener goods and services, nor possess the necessary technology to cut costs in the long run. Marking Scheme Level (Marks) Knowledge, Application, Understanding and Analysis L3 (15 – 21) A thorough and clear explanation based on sound economic framework of how the two triggers could affect at least 4 markets. Real -world applications should be included to secure high marks. Analysis of various natures of the same type of goods and services should be presented to avoid generalisation of arguments and uniformity in answers to these goods of different nature. (e.g. normal garbage versus recyclable garbage). L2 (10 – 14) Gaps in explanation of possible outcome in at most 3 markets. Lack real - world applications. Grasp of basic demand and supply analysis, together with elasticity concepts is observed. Tend to discuss goods and services in silo (single category, without differentiation). L1 (1 – 9) Lack of use of even basic demand and supply framework to explain cause and effect. Fatal errors abound which make the response incoherent or illogical. Listing rather than explaining the points with little economic analysis. Allow up to 4 marks fo