NYJC H2 ECONS Micro CSQ Suggested Answers

1 Question 1 Milk Market on the Milky Way Extract 1: Rising formula milk price Formula milk manufacturers have been spending more on research and development as well as marketing, pushing the wholesale prices of their products up, and in turn resulting in the higher prices seen at retail stores, the Competitio n Commission of Singapore (CCS) has found. A standard can of 900 grams of infant formul a purchased from a regular supermarket costs about S$56 on average, compared to $25 in 2007 The CCS report found that manufacturers spend heavily on research and development as well as marketing campaigns that contain “premiumisation” messages in order to build consumer loyalty and make their products appear to be higher quality. Manufacturers introduce new ingredients that contribute to attributes desired by parents and make promises like improving overall mental function, promoting a healthy intest inal tract and aiding brain and eye development. A premium image is important to these brands because they compete against other brands and their products based on brand name , nutrition and safety. Such strategies appear to have worked, with premium and specialty formula milk making up an estimated 95 per cent of total sales in 2015. Source: Adapted from Channel NewsAsia, accessed 12 May 2017 Table 1: Price of staples over 10 years Goods 2007 2017 Fresh Milk (1 litre pack) $2.63 $2.81 Infant Formula Milk Powder (900gram tin) $25.42 $56 .06 Cheese (pack of 12 slices) 3.89 $4.56 Hen eggs (10) 1.69 $2.17 Ordinary white bread (400gram) $1.21 $1.62 Thai Fragrant Rice (5 kg) $7.87 $13.13 Source: Singapore Department of Statistics, accessed 27 May 2017 Figure 1: Changes in median income and price of infant milk powder in Singapore Source: Various

2 Extract 2: Children over one do not need formula milk While parents may rely on health claims to choose a formula milk brand for their children, experts say such claims meant for children above on e are a “marketing ploy” because the same nutrients can be found in everyday food. Referring to nutrients like docosahexaenoic acid (D HA), taurine and choline which are prominently promoted on milk tins, paediatric dieti tian Meave Graham from Child Nutrition Singapore said: “These nutrients are found in breas t milk and in normal balanced diets. Children do not need special supplements of these n utrients.” These nutrients have been promoted by milk manufacturers as giving health ben efits like brain and eye development, healthy immune system and helping fat digestion. Source: Channel NewsAsia, accessed 30 May 2017 Source: Channel NewsAsia, accessed 27 May 2017 Extract 3: Government shares concerns about rising prices of formula milk The Singapore government shares the concerns of par ents about the rising prices of infant formula milk and will take steps to ensure that opt ions are available for their children, said Senior Minister of State for Trade and Industry (MTI) Koh Poh Koon. A concentrated market, coupled with aggressive mark eting and existing consumer preferences, have raised barriers for new players i n the infant formula milk market in Singapore. Retailers such as supermarkets and pharm acies are keen to stock more of what consumers demand which may further reinforce consum er brand loyalty. They also prefer to obtain formula milk supply only from local authorised distributors and do not consider parallel importing a viable alternative. “The government will simplify and streamline import requirements as well as remove unnecessary barriers to bring in more options for parents” Koh said. He added that there are a number of formula milk products in Singapore acro ss different brands that range from $20 to over $60 per 900g and regardless of brand and price, all milk products sold here must meet the safety and nutrient requirements set by the Agri-Food & Veterinary Authority. Nestle 30% Abbott 25% Mead Johnson 17% Friesland Campina 9% Danone 8% Others 11% Figure 2: Market concentration of infant formula market in Singapore

3 “The Agri-food and Veterinary Authority (AVA) will also tighten its restrictions on labelling and advertising further, including prohibiting the use of nutritional and health claims, and idealised images for infant formula milk,” Koh said. On their part, parents should be careful about unsubstantiated claims from sellers of such products, he added. Source: Adapted from Yahoo News Singapore, accessed 13 May 2017 Extract 4: United States’ WIC Programme In the United States, the Special Supplemental Nutrition Programme for Women, Infants, and Children programme (WIC) provides subsidies for inf ant formula milk. The programme believes that by providing needed assistance to low income mothers, it can help the development of their children and avoid future health issues. The programme provides a benefit card for beneficia ries to use at authorised retailers. With the card, beneficiaries can purchase selected types and brands of infant formula milk at a discounted cost. Since the 1990’s, only three manuf actures have been chosen as the manufacturer of choice for the WIC programme. Thoug h this programme does not provide great profit margins for the manufacturers, it is m ost likely part of the reason that the three WIC manufacturers maintain almost all market share in the United States. Source: United States Department of Agriculture, accessed 28 May 2017

4 Questions (a) (i) Compare the change in price of infant formu la milk powder (900 grams) with that of Thai fragrant rice (5 kg) between 2007 and 2017. [2] • Prices of both infant formula milk and Thai fragra nt rice have increased. • Price of infant formula milk has increased by 120% , more than the price increase of Thai fragrant rice which is 66%. (1) (1) (ii) With the use of a diagram, account for the ch ange in the price of infant formula milk powder as mentioned in (i). [4] • Increase in demand: Increase in income (Fig 1) • Fall in supply (Any 1) o Increase in marketing and R&D costs (Ext 1, para 1 ), or o Increase in COP due to new ingredients (Ext 1, par a 2) • Simultaneous increase in demand and supply Adjustment process (shortage and upward pressure) • Diagram (1) (1) (1) (1) (b) Explain how “premiumisation” affects the price elasticity of demand of infant formula milk. [2] • Premiumisation refers to the addition of new ingre dients to the milk formula by producers and marketing those additions as factors leading to desired attributes to make their products appear to be of higher quality than that of their competitors (Ext 1, para 2) • This will differentiate their products as consumer s will not see their products as perfect substitutes to their competitors’. Thus, demand facing the firm will be more price inelastic. (1) (1) (c) Explain how the high price for infant formula milk in Singapore can represent a form of market failure. [4] • Any one of the sources of market failure o Imperfect information: Over-estimated MPB of formu la milk (Ext 2, para 2), or o Market dominance: Oligopoly market structure leadi ng to market power (Fig 2). • Imperfect information o Explain the over-estimation of MPB: Consumers thou ght the formula milk will be beneficial to their children. o Explain Q perceived and P perceived : Consumers maximise satisfaction by consuming at the output where MPB perceived equals to MPC, with quantity as Qperceived and price as Pperceived . o Explain Q actual and P actua l: If there was no imperfect information, consumers maximise satisfaction by consuming at the output where MPB actual equals to MPC, at Q actual and Pactua l. o Explain the market failure: Since P perceived is greater than Pactua l, and Q perceived is g