2022 SH2 H2 Prelim EQ2 (Suggested answer)

2022 NJC H2 Economics Preliminary Examination Essay Question 2 2 (a) Explain whysomeconsumer electronicsmegastoresinSingaporelikeCourtsandHarvey Norman would price match other consumer electronics megastores bycharging the same prices for same products but smaller consumer electronicsstores in the neighbourhood would not.[10] (b) Discuss whether demand or supply factors are more important in explaining thecoexistence of big businesses and small independent businesses.[15] Part (a) suggested answer Introduction ● Consumer electronics stores in Singapore operate in a oligopoly market structure. ● The megastores (i.e. oligopolies) are mutually interdependent thus would price matchother megastores. ● The smaller stores in the neighbour would not match the megastores. Body 1: Explain that some consumer electronics megastores would price match otherconsumer electronics megastores by charging the same prices for the same products. ● InSingapore’sconsumerelectronicsmarket,thereareafewdominantfirms(e.g.Courts,HarveyNorman, Best Denki, Challenger,) andeachof thesemegastoreshassignificantmarket share. ● In addition, there are high barriers to entry in the market. For example, existingmegastores enjoy tremendousbrandloyaltyviatheir respectiveloyaltyrewardprogramwherememberscanaccumulatepointswhichcanbeusedtoenjoyadditional discounts,attractive free gifts, etc. ● Furthermore, eachof themegastoresellsdifferentiatedgoodsthusthereareafewclosesubstitutes e.g. same product fromthe same brand suchasLG, Samsung, Panasonicbut each has different inhouse warranty. ● The megastores are therefore mutually interdependent. ● If a megastore reduces its price, other megastores would have to followsuit i.e. pricematch. If not, they would face a decrease in demand and profit would decrease. Body 2: Explain that smaller consumer electronics stores in the neighbourhood wouldnot price match the megastores because they do not need to and/or are unable to. ● Ontheotherhand,duetotheirsmall scaleofproduction/sales,thesmallerstoresintheneighbourhood would not price match the megastores because the former does notenjoy the level internal economies of scale (IEOS; if any) enjoyed bythemegastores.For example, thesmaller storesarelessable/ unabletoenjoymarketingeconomiesof

scalee.g. withsmaller scaleof production/ sales, advertisingcost of thesmallerstoresis only shared across a smaller amount of output / sales. Asaresult, whenfacedwiththe lowering of prices by themegastores, thesmaller storesareunabletopricematchthe lower prices due to their higher average cost. Conclusion ● In conclusion, consumer electronics megastores would price match other consumerelectronics megastores by charging the same prices for the same products due tomutual interdependency but smaller consumer electronics storesintheneighbourhoodwould not due to their inability to enjoy IEOS.

Mark schemeLevels Descriptors L38 - 10 For an answer that demonstrates knowledge, understanding, application and analysis: EXCELLENTbreadththatconsidersthefollowingeconomicconceptsinexplainingmultipleandbalancedperspectives,viewpoints,relationshipsandfactors.ALLpointschosenshouldbe ofrelevanceandsignificancein answering thequestion. EXCELLENTdepthin economic analysis that reflectsthe following in ALL explanations.✔ Accurate use of economic concepts, clear elaboration, and precise use ofeconomic terminologies, language and phrasing. The answer should also be supported by: Well-labelled and well-referred to diagram(s) / tool(s) of analysis drawn with precision(where appropriate). Relevantexamples andaccurateuse of facts. Logicalstructure. L25 - 7 For an answer that demonstrates knowledge and understanding but lacks application and analysis: At least GOOD breadth that considers the following economic concepts in explainingmultiple and balanced perspectives, viewpoints, relationships and factors. MOST pointschosen should be ofrelevanceandsignificanceinanswering the question. At least GOOD depth in economic analysis that reflects the following in MOSTexplanations.✔ Accurate use of economic concepts, clear elaboration, and precise use ofeconomic terminologies, language and phrasing. The answer should also be supported by: Diagram(s) / Tool(s) of analysis that may not bewell-labelled, may not bewell-referredtoand may not be drawn with precision (where appropriate). Example(s). Logicalstructure. High L13 - 4 For an answer that demonstrates knowledge but lacks understanding, application and analysis: INSUFFICIENTbreadththat considers thefollowingeconomic concept(s). Point(s) chosenmay be of relevance but may not be of significance in answering the question. INSUFFICIENTdepthin economic analysis that may reflectthe following:● Lack ofaccuracyintheuseofeconomicconcepts,lackofclarityinelaboration,andlack of precision in the use of economic terminologies, language and phrasing. Low L11 - 2 For an answer that: Is irrelevant in analysis but may contain an introduction that addresses the question orcontains no economic analysis but may containafewstatements that arerelevant totheconcepts required to answer the question. Contains fundamental conceptual errors in analysis.

Part (b) suggested answer Introduction ● Both demand and supply / cost factors can explain the coexistence of big and smallbusinesses. Body 1: Explain the demand factor(s) that explains the coexistence of big and smallbusinesses. ● The size of a business can be determined by the size of its demand i.e. demand factor. ● Even if a business can enjoy huge average cost savings fromhaving alargescaleofproductionviaenjoyinginternal economiesof scale(IEOS) havingalargeoutput woulddecreasethebusiness’ profitifitfacesamuchsmallerdemandforitsgoods.Thesizeofthe business would thus be limited i.e. existence of small businesses. ● However, ifabusinessfacesamuchlargerdemandthebusinesscanthengrowbigwhileenjoying internal economies of scale. ● A determinant of the size of demand is consumers’ preference. o Small businesses exist (alongside with big businesses) to cater to consumers’taste for varieties and personalised services. For example, in shirt makingbusinesses, small bespoke tailors exist to cater to a small niche group ofconsumers who want custom-fit shirt to look better. o Ontheother hand, theexistenceof amuchlarger sizeof consumerswhovaluelower prices over personalisation explains the existence of big shirt makingbusinesses. o The coexistence of big and small firms can thus be explained by the size ofdemand for the products / goods which is a demand factor. Body2: Explainthesupply/ cost factor(s) thatexplainsthecoexistenceofbigandsmallbusinesses. ● Thesizeof abusinesscanalsobedeterminedtheabilityofthebusinesstoenjoyIEOSi.e. supply / cost factor. o Bespoke shirts can only be hand-made a piece at a time while standardisedshirts can be mass produced by big shirt making business via the use ofmachines. The latter would involve huge capital outlay thus afford hugeenjoyment of internal economies of scale. For example, thebigbusinessescanenjoy plant internal economies of scale via the use of indivisible but highlyefficient shirt making machineries with their large scale of production. o On the other hand, small bespoke tailors exist alongside the big shirt makingbusinesses because of the nature of their peronsalised products.

o Thecoexistenceofbigandsmall firmscanthusbeexplainedbythenatureoftheproducts / goods which is a supply factor. Evaluative conclusion ● In conclusion, both demand and supply / cost factors are important in explaining thecoexistence of big and small businesses. Whether demandor supplyfactorsaremoreimportant in explaining the coexistence of big and small businesses depends on: o The type / nature of goods considered. ▪ For example, if the goods considered are necessity which has hugedemand, then whether a business grows big or small dependsmoreonthesupplyfactor suchastheabilitytoenjoyIEOSHowever, if thegoodsconsideredaresuper luxurysuchhandbagsthat arehandmadewithraremat