YJC_H2_ECONS_P2_answers

2018 H2 Prelims P2 Q1 The use of drones for aerial photography and racing are growing in popularity among the wider public. In the next five years, consumer drone sales volume is expected to increase more than tenfold, while average selling price for drones will continue to decline. Discuss the different demand and supply factors and their likely importance in determining the anticipated changes in sales volume and price of consumer drones. [25] Suggested answer Introduction The anticipated changes in sales volume and price of consumer drones can be explained through the application of demand and supply analysis along with elasticity concepts of PED and PES. The projected increase in sales volume (or increase in equilibrium quantity) can be explained through anticipated increases in both demand and supply of consumer drones whilst elasticity concepts can be applied to explain the significant increase in the sales volume of consumer drones. The projected price of consumer drones could be explained through the simultaneous increases in both demand and supply, with analysis on the extent of shift in the curves. DD factors DD factor #1 (change in taste and preferences) DD factor #2 (rise in income or expected rise in future income) DD factor #3 (changes in technology) The anticipated increase in sales volume for consumer drones could be explained by a rise in demand for consumer drones. The increase in demand could be due to a change in taste and preferences towards the use of consumer drones. As there is a trend towards the application of consumer drones in areas such as aerial photography or a hobby, this increases the desirability of consumer drones to consumers which increases their willingness to purchase consumer drones at the different price levels. This results in an increase in demand for consumer drones. The increase in demand could be due to an improvement in household income. Given the positive economic sentiments in economy and the anticipated positive economic growth into the next 5 years, income of households is likely to rise thereby increasing the purchasing power of consumers. Given that drones are likely to be a normal good (or even luxury good), when the income levels of consumers rise, they are likely to increases the ability and willingness of consumers in purchasing drones at different price levels. This increases the demand for drones. The increase in demand could be due to an improvement in the technology of consumer drones (e.g. more power – faster, fly higher, carry heavier load, more lasting batteries). As one of the uses of the consumer drones is in racing, consumers could be always looking to upgrade to more powerful drones. This will create an increasing willingness of consumers in purchasing drones, causes the demand for drones to increase.

Relative importance of the DD factors (evaluation) While all 3 factors are likely