NYJC H2 Economics P2 Answers

Nanyang Junior College  2014 JC2 Prelim Examinations  H2 Economics Paper 2  Suggested answers:  Question 1:  2014 is the most profitable year ever for chicken producers. Fast food restaurants such as KFC, McDonalds, Wendy’s and Burger King are betting on the birds due to rising costs of other meats. However, the outlook is bearish outside the US as feed costs rise and an outbreak of avian influenza erode demand in China, the second- largest consumer. Bloomberg report, 2014 (a) Using economic analysis, explain how the above changes will affect the chicken market in US and in China. [10] (b) Discuss how different restaurants in China might respond to the challenges mentioned in the report. [15] (a) INTRO  Establish how chicken markets could be impacted o Changes in demand and supply factors o Effects on price and quantity on US and China’s chicken markets BODY Explain the effects on US Chicken Market  “Fast food restaurants such as KFC, McDonalds, Wendy’s and Burger King are betting on the birds due to rising costs of other meats.”  price of beef/pork rises  restaurants change their preferences towards substitutes of beef/pork  demand for chicken rises  demand curve shifts to the right from D0 to D1, shortage at price P0 results in upward pressure in price (explain using Fig. 1)  price and quantity rises

Explain the effects on China Chicken Market  “However, the outlook is bearish outside the U.S. as feed costs rise” feed costs rise  cost of production rise since cost of rearing chickens rise  supply of chicken falls as farmers are profit motivated (rise in cost of production which affects profitability makes farmers less motivated to increase production)  supply curve shifts to the left S0 to S1  price rises while quantity falls  “However, the … outbreak of avian influenza erodes demand in China”  consumers’ fear of contracting the virus from consuming chicken  demand for chicken falls  demand curve shifts to the left from D0 to D1  price and quantity falls  Combined effect: demand falls more than supply since the outbreak of avian influenza results in greater fear of consumers and China is the second-largest consumer  price and quantity falls (explain using Fig. 2)

CONCLUSION  Impact on chicken markets in China and US will differ as price and quantity of chicken rises in US while price and quantity falls in China.  The impact of such changes in China’s chicken market will affect the different types of restaurants that make use of chicken meat. L3 Clear detailed explanation of how the chicken markets in China and US are affected in terms of effects on price and quantity using both demand and supply factors. (US Chicken Market – 1 demand factor) (China Chicken Market – 1 demand and 1 supply factor) 7-10 L2 Undeveloped explanation of how the chicken markets in US and China are affected. 5-6 L1 Mere listing of factors with little reference to demand and supply concepts. 1-4 (b) INTRO  Establish that chicken is used as a raw material for meals in restaurants  Identify the different kinds of restaurants that will be affected differently due to the challenges faced in the context of China  Acknowledge that some restaurateurs will respond to the challenges using elasticity concepts where relevant BODY  Restaurants that make use of chicken for most of the food items sold (KFC, Dicos, Popeyes, chicken rice restaurants, etc) o P chicken rises due to rise in feed costs  COP (cost of preparing chicken meals) rises  supply for chicken meals falls o “ outbreak of avian influenza”  demand for chicken meals falls

o Impact on restaurants: Demand for chicken meals falls more than supply  price and quantity for chicken meals fall  total revenue for restaurants falls (explain using Fig. 3)  o How will restaurants respond:  If restaurants are unable to cover their costs due to the falling revenue  shut down their restaurants since they are persistently making losses  Some restaurants may choose to change their menu to gain sales in other food areas such as complements of chicken.  KFC restaurants in China on the other hand have taken measures to ensure food safety and to win back the trust from customers as a hope to regain back their sales.  Restaurants that do not make use of chicken for the food items sold (fish/seafood/vegetarian restaurants, etc) o Impact on restaurants: Since these restaurants do not make use of chicken in their meals, they are not impacted by the rise in Pchicken (due to rise in feed costs) which may translate to higher priced chicken meals o How will restaurants respond:  While restaurants which use chicken in their meals experienced a fall in total revenue from the chicken meals sold, those restaurants that do not make use of chicken will be able to boost their sales as quantity of other non-chicken-related meals sold rises  total revenue rises (explain using Fig. 4)  These restaurants that do not make use of chicken for their meals will take this situation as an advantage to advertise their restaurants to gain greater sales.

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L1 Generic explanation of how different restaurants in China might respond without much economic analysis. 1 – 5 L2 Generally clear explanation of the effects of the challenges on restaurants and how they might respond. 6 – 8 L3 Clear discussion of how different types of restaurants have differing effects from the challenges and therefore respond differently, making use of elasticity concepts. 9 – 11 E1 Unexplained judgment. 1 – 2 E2 Judgment based on analysis. 3 – 4

Question 2:  Despite the existence of supermarket chains like Fairprice and Giant, the newest local online grocery retailer Redmart, is confident that online grocery shopping will catch on in a big way here as time-starved consumers will i