RVHS H2 ECONS P2 Soln

1 RVHS 2018 Y6 H2 Prelim II Essay Q1 (Section A) When adverse weather in Malaysia led to a dramatic fa ll in the production of vegetables for export, this led to a rise in the price of fresh vegetables in Si ngapore. This will affect different types of firms -- vegetables farmers in Malaysia as well as supermarkets and hawker stalls in Singapore. Explain why different types of firm came to diffe ring decisions about the increase in the price of vegetables or vegetable-based products, and discuss how their revenue would be affected. [25] Suggested Mark Scheme (a) Knowledge, Application/ Understanding and Analysis L3 Developed explanation of: (i) Why different types of firms make different pricing decisions [must consider three types from the following: M’sia farmer (≈PC firm), Large supermarket in Sg (≈Oli), Hawker stalls (≈MC firm)] (ii) How TR is affected ‘Developed’ – Uses economic analysis involving PED (with relevant determinants to justify), features of market structures affecting firm’s pricing decision 15-20 (18) L2 Undeveloped explanation of pricing decision made by at least two types of firms & impact on TR OR Developed explanation made by one type of firm & impact on TR ‘Undeveloped’ – Descriptive, superficial reference to features of market structures without linking to pricing decisions and TR appropriately 9-14 (12) L1 Smattering of valid points i.e. some knowledge of factors that might affect pricing decisions and how elasticity can affect TR 1-8 (5) E3 Arrives at an analytically well-reasoned judgement about the key factors that determine the extent of price increases 4-5 E2 Makes some attempt at a judgement about possible factors that determine the extent of price increases 2-3 E1 Unsupported statement about possible factors that affect price increases 1

2 Suggested points:  Adverse weather in M’sia  ↓SS of fresh vegetables  ↑P  ↓Qd  ↑P of fresh vegetables  ↑COP of veg-based products  ↓SS  ↑P  ↓Qd • Extent of ΔP and ΔQd depends on PED and also mkt structure i.e. mkt which a firm operates in • Essay considers different pricing decisions by: o Vegetable farmers in M’sia; o Large supermkst in Sg; o Hawker stalls in Sg (I) M’sia vegetable farmer Pricing decision: • M’sia farmers as a whole operate in an industry which approximates perfect competition  each firm produce an insignificant mkt share + homogeneous product (veg)  likely takes the mkt price as determined  price setting decision based on this Impact on TR: • ↓SS of fresh vegetables  ↑P  ↓Qd • Extent of ↓Qd depends on their PED • As Sg supermkts/ hawker stalls may also have some stockpiles from previous months  PED likely > 1  Qd ↓ more than proportionately  TR ↓ for M’sia farmers • EV: In short run, perhaps PED may be < 1 as alternat ive suppliers of vegetables may not have been found OR contractual agreements prevent any changes in P • If so, then M’sia farmers may enjoy ↑ TR received (II) Large supermkts in Sg Pricing decision: • ↑P of fresh veg  Direct ↑P + Indirect ↑P of veg-based products • Large supermkts in Sg (e.g. FairPrice/ Cold Storag e) operate like an oligopoly, given few dominant firms, each selling differentiated products • Kinked demand curve theoy to explain why price will not increase unless it is excessive. With that TR is unchanged. • EV: Nonetheless, large supermkts tend to have substantial ‘buying’ powers too! Given that they are the only few firms who buy fresh veg from M’sia suppliers or veg based products from suppliers • Better able to negotiate for good P/ veg at good rates  Able to limit the rise in price of veg + veg based products from suppliers  Decision on what P to charge (whether it will ↑ or ↓) is based on competitors’ actions, and perhaps their own costs/ revenue Impact on TR: • For veg + some veg-based products  these are generally regarded as food with few close substitutes (i.e. necessity/ food items needed for daily consumption • PED likely < 1  ↑P  ↓Qd less than proportionately  TR ↑for large supermkts in Sg • EV: If supermkts compete aggressively based on P, then they may absorb more of the P rise instead OR they may hold their prices. If so, then TR may not necessarily ↑

3 (III) Hawker stall in Sg Pricing decision: • ↑P of fresh vegetables  ↑COP of veg-based products  ↓SS  ↑P • Hawker stalls in Sg operate in monopolistic competiti on, each stall producing an insignificant share of the mkt, while selling slightly differentiated products • While each firm can decide on P to charge, they need to be mindful that the DD for their products is likely to be relatively price elastic (PED>1) due to availability of many close substitutes  Limited scope to ↑P, despite rising cost Impact on TR: • Since PED likely > 1 for a specific category of hawker food which offers veg + veg-based products  ↑P  ↓Qd more than proportionately  TR ↓for affected hawker stalls in Sg (unless they have prior stocks of veg to fall back on) • EV: Stalls which do not use veg as an ingredient will not be affected • If costs ↑ but they cannot ↑P  may suffer short term losses since TR is insufficient to cover TC Essay Q2 (Section A) Product markets in Singapore face differing levels of contestability. (a) Explain why some product markets in Singapore exhib it higher levels of contestability than others. [10] Suggested Answer Contestable markets are markets in which there are only a few firms (typically the oligopolies and monopolies) but, because of the threat of potential entrants, behave in a competitive manner. Oligopolies are characterised by a few dominant firms in the market selling either homogeneous or differentiate d products while monopolies are characterised by one firm selling a unique product with no close substitutes in the market. Some markets exhibit higher levels of contestability i.e. face higher threat of competition because of some conditions exist that make the market more contestable. Easier access to technology in certain industries have made them more contestable than others. In the case of the sharing economy, disruptive technologies arising from advancement in functions of smart devices such as smartphone applications, Global Positioning Systems (GPS) have made sharing of information and assets cheaper in the taxi industry. This has allowed firms like Grab and Ryde to enter the oligopolistic taxi industry (with existing dominant firms e.g. Comfort Delgro and SMRT) which were previously less contestable unless new entrants have the financial resources to obtain the physical resources required to set up the business. Lower sunk cost in certain industries have made them more contestable than others. Sunk costs refer to costs that have already been incurred by the firms and cannot be recovered even if the firms choose to leave the industry. The amount of sunk costs affects a firm’s decision to enter the industry. In the distribution of water, electricity and rail transport industry where sunk costs are high, such industries usually exhibit lower levels of contestability since they act as substantially high barri er. Potential entrants need sufficient resources to cover the high start-up capital and also risk making huge losses if they decide to leave a market prematurely. For e.g. in the water and electricity industry, high sunk cost is incurred to lay power grids and water pipelines through households thus making these industries are less contestable.

4 Lastly, nature of BTE which are relatively easier to circumvent in certain industries have made them more contestable than others. Generally, barriers to entry whic h are protected by law or granted by the government e.g. patents, licenses etc are the hardest to overcome. This is evident in the issuance of licenses by the government to regulate how and which fir