TJC H2 ECONS P2 answers

TJC 2018 JC2 Prelims H2 Economics Suggested Answers 1 H2 Paper 2 Suggested Answers 1 Amidst a growing economy and the increased use of personal mobility devices, the food delivery industry has changed the way food reaches consumers. If restaurants and hawkers choose to deliver their food to the doorsteps of customers, they have to pay a small commission fee. Discuss the impact of the above events on the market for food delivery and its associated markets. [25] Question Interpretation Command word/phrase Discuss the impact This is a cause-and-effect question where students are required to consider the impact of factors in the preamble on the different markets and how the impact might vary in different markets. Content impact of above events on the market(s) The ‘cause’ are the various demand and supply factors in the preamble and the ‘effect’ are the price and quantity changes in the various markets Context food delivery… associated markets The context is on food delivery and other food markets associated with it. A relevant response requires students to consider how the factors in the preamble affects the food delivery market and at least two other markets. Students will be required to show a thorough understanding of demand and supply factors, as well as factors affecting the various elasticity concepts, in order for a deep discussion of the impact on different markets. Introduction: Identify the markets to be discussed and recognise what ‘impact on market’ means • In this essay, I will be discussing various markets that will be affected by the events indicated in the preamble, namely the food delivery market, the market for restaurants who use food delivery services , the market for hawkers who use food delivery services and the market for other food businesses who do not use food delivery services. • For each market, I will be discussing the impac t in terms of changes in equilibrium price and quantity in each market, based on the events in the preamble, while considering elasticity factors, as well as any potential effects of one market on another. Body: Market 1: Impact of events on food delivery market • In the market for food delivery, the increase in income levels due to Singapore’s growing economy will likely cause an increase in demand for food delivery. o With the relative high income levels of Singaporeans, food delivery services can be seen to be a normal, necessity good that results in a less than proportionate increase in demand (i.e. 0< income elasticity of demand (YED) <1). As such, the rise in demand will be less than proportionate to the increase in income. o To consider the impact of the rise in demand on equilibrium price and quantity, we should consider the Price Elasticity of Supply (PES) for food delivery services. As there is easy access to personal mobility devices, the supply of delivery workers

TJC 2018 JC2 Prelims H2 Economics Suggested Answers 2 should be easily adjustable in responses to price changes, as such it can be argued that PES is >1.  As such, ceteris paribus, the increase in demand will likely lead to a small increase in equilibrium price and relatively large increase in equilibrium quantity. • Also there will be an increase in supply for food delivery with the increased use of personal mobility devices, which increases the number of delivery workers available to the industry. o To consider the impact of the rise in supply on equilibrium price and quantity, we should consider the Price Elasticity of Demand (PED) for food delivery services. As such services take up a small proportion of the average Singaporeans’ income and because of the convenience of the services, the demand is likely to be price inelastic (i.e. 0<PED<1).  As such, ceteris paribus, the increase in supply will likely lead to a large fall in equilibrium price and a relatively small increase in equilibrium quantity. Fig 1: Market for food delivery services • As seen from Fig 1, with the increase in demand from D 1 to D2 and the increase in supply from S1 to S2 due to the above analysis, there will be a shortage of Q 3-Q4 at the original equilibrium price of P1. As a result, there will be an upward pressure on prices, leading to a fall in quantity demanded and a rise in quantity supplied until the new equilibrium price of P2 and equilibrium quantity of Q 2 is reached. As there is an increase in both demand and supply, there will be a definite increase in the equilibrium quantity from Q 1 to Q 2. However, the effect on equilibrium price depends on the relative shift of demand and supply curves. o [Magnitude, Situation] As the income increase affects the entire population, it is likely to cause a large increase in demand as compared to the increase in supply, as while personal mobility devices are more accessible, there may not be a large increase in supply as there are other viable jobs in Singapore that deliverymen can choose from. As such, there is likely to be an increase in equilibrium price from P 1 to P2 in the food delivery industry. Markets 2 and 3: Impact of events on markets for restaurants and hawkers that take up food delivery services. • Similar to the market for food delivery, the increase in income levels due to Singapore’s growing economy will likely cause an increase in demand for both restaurants and hawkers as people transit from eating at home to eating out. This is because of a higher ability to

TJC 2018 JC2 Prelims H2 Economics Suggested Answers 3 eat out, but it is also due to an increased willingness to eat out – as people’s lives become more hectic, there is less time to prepare food at home and hence eating out becomes a more attractive option. o However, the increase in demand due to the income increase will differ between restaurants and hawkers due to differing YED values. Hawker food are likely to be classified as normal necessity goods (0<YED<1) while restaurant food are more likely normal luxury goods (YED>1). As such hawkers will see a less than proportionate increase in demand due to the increase in income and for the same increase in income of the population, restaurants will be likely to see a more than proportionate increase in demand. • For restaurants and hawkers that use food delivery services, they are likely to experience a further increase in demand for their food as well, as these services have made it more convenient for people to access their food. o However, it is likely that the increase in demand for restaurants are likely to be much larger than the increase in demand for hawkers. This is because food delivery services take up a smaller proportion of the cost of restaurant food, as compared to the cost of hawker food. As such, consumers are more likely to engage food delivery services for restaurants, resulting in a larger increase in demand for restaurant food. • When restaurants and hawkers take on food delivery services, with the requirement of a commission fee, this increases their costs of production and results in a fall in supply by the extent of the commission fee. Fig 2: Market for restaurants using food delivery services Fig 3: Market for hawkers using food delivery services • As can be seen from Figures 2 and 3, the aforementioned events will cause a rise in demand and fall in supply for both the market for restaurants (D 1D2 and S 1S2) and market for hawkers (D3D4 and S3S4) who use delivery services. The effects will both cause a rise in equilibrium price. However, the impact on equilibrium quantity is uncertain. o [Magnitude] It is likely that with two different factors increasing demand (increase in income and convenience from delivery se rvices), both hawkers and restaurants will face a rise in demand that is more