PJC_H2_ECONS_P2_Q1_Suggested_Ans

1 PJC 2018 H2 P2 Question 1: Over the past decade, the average price of milk powder has risen about 120 per cent. Large milk powder companies such as Abbott and Nestle said it was due to research and development to improve formulas and rising costs. Aggressive advertisements have also led parents to choose ‘premium’ milk powder over standard milk powder. As milk powder is seen as a necessity for growth and development of infants in the early years, many have raised concerns over the large increase in price. a) Explain how the above-mentioned factors might have caused price of milk powder to rise in Singapore. [10] b) Discuss the measures government can undertake to prevent prices of goods such as the milk powder from rising too high. [15] Part (a) As mentioned in the preamble, factors such as market dominance of large firms, demand and supply factors have caused prices of milk powder to rise by a large extent. The rise in cost of production would have caused the price of milk powder to rise over the past decade. Due to improved formulas and rising cost possibly due to labor and ingredient cost, the cost of producing milk powder would have risen. As shown in the diagram, as cost in the production of milk powder increases, firms are less willing and ab le to produce milk powder. Supply curve shift left from S1 to S2. Given that are only a few substitutes for different brands of milk powder and coupled with the fact that it is a necessity for growth and development of infants in the early years, demand for milk powder is price inelastic. As such, a fall in SS would result in price to rise by large extent and quantity to fall by small extent. Thus prices of milk powder have increased over the past decade. Fig 1: Fall in SS Furthermore, due to aggressive advertisements, parents have a change in taste and preference towards the ‘premium’ milk powder over standard milk powder. As such, there is a rise in demand for ‘premium’ milk powder from companies such as Abbott and Nestle. As shown in the diagram, as more parents switch from standard milk pow der to ‘premium’ milk powder, demand for milk powder would rise, shifting demand from DD to DD2. At the original price P1, a shortage was created as Qd was greater than Qs. This therefore create an upward pressure on the market price. Thus prices rose from P1 to P2 in response to the rise in demand for milk powder. As more parents change their taste and preferences for ‘premium’ milk powder, firms are also more entice to produce ‘premium’ range of milk powder so as to profit from the changing trends. As such, the rising demand for ‘premium’ milk powder have resulted in an overall rise pri