EJC H2 ECONS Essay1 Suggested ans and mark scheme

1 EQ1 Toy building brick companies like Lego have increasingly switched away from using cheaper oil-based plastics to sustainable plant-based ones. Such a move will enhance their image, hence mitigating the effects of a pessimistic economic outlook. Additionally, parents are opting for mobile interactive ga mes as an avenue for imaginative play for their children. Discuss how the above might affect expenditure by consumers on toy building bricks and its related goods. [25] Introduction Consumer expenditure on goods and services can be derived by multiplying price by quantity consumed. Equilibrium price and quantity is determined by the demand and supply of the good or service. Changes in demand and supply can be caused by factors such as economic outlook and changes in taste and preferences. Such factors will lead to changes in consumer expenditure on toy building bricks as well as its related goods such as mobile interactive games and toy building bricks related guide books. Body P1: Switching from cheaper oil-based plastics to sustainable plant-based ones could lead to a fall in supply of toy building bricks thus affecting consumer expenditure. Sustainable plant-based plastic costs more than th e traditional oil-based ones. This switch will lead to a rise in cost of production for toy companies such as Lego. This means that the producer will need to receive a higher mi nimum amount of price for each corresponding unit in order to produce it. Producers such as Lego will reduce their supply thus causing a rise in equilibrium price and a fall in quantity. The change in expenditure will depend on the price elasticity of demand for toy building bricks. Price elasticity of demand (PED) measures the responsiveness of a change in quantity demand due to the change of the price of the good itself ceteris paribus. Due to the availability of many close substitutes such as other types of toys and games which helps develop imagination and creativity such as Playdoh and K’Nex, consumers are very responsive to the changes in price of toy building bricks. A rise in price will lead to a more than proportionat e fall in its quantity demanded. The fall in supply is represented by a leftward shift of the supply curve from So to S1. Consumer expenditure changes from area B+C to A+B. As the fall in expenditure (area C) due to the fall in quantity is greater than the rise in expenditure (area A) due to rise in price, consumer expenditure for toy building bricks will fall.

2 P2: The new environmental image of toy bui lding bricks and the pessimistic economic outlook will affect its demand thus affecting consumer expenditure. As consumers become more environmentally conscious, they tend to prefer to purchase more environmental friendly products such as toy building bricks made of sustainable plant-based plastics resulting in a rise in demand. This rise in demand however can be either mitigated or offset by a fall in demand due to the pessimistic economic outlook. The overall impact depends on the income elasticity of demand (YED) of toy building bricks. YED measures the responsiveness of consumer demand due to the change in income. Toy building bricks are considered normal goods. Therefore the sign of YED is positive. The pessimistic economic outlook will result in consumers reducing their demand for normal goods in favour of inferior goods as they expect a fall in their purchasing power. EV: Toy building bricks are also luxury goods as they are not essential and crucial for survival. Their YED value will be more than 1 meaning that there will be a more than proportionate fall in demand. This fall in demand will be able to offset the rise in demand due to the change in taste and preferences. Demand will fall causing a leftward shift in the demand curve from Do to D1. The fall in price (Po to P1) and quantity (Qo to Q1) will result in a fall in consumer expenditure. P3: The combined fall in demand and supply of toy building bricks will result in a change in its consumer expenditure. The fall in demand and supply will result in a fall in quantity for toy building bricks. The change in price depends on the extent of the fall in demand and supply. Ev: The extent of the fall in supply is greater than the fall in demand. This is because plastic is the main raw material in the production of toy building bricks. Therefore there will be a substantial increase in its production costs causing a large fall in its supply.

3 The initial price is at Po where the initial demand Do and supply So curves intersects one another. With a leftward shifts in both demand and supply curves, a shortage of QdQs arises as quantity demanded (Qd) is greater than quantity supplied (Qs) at the initial price Po. This shortage will result in an upwards pressure on price. This upwards pressure on price will lead to a rise in quantity supplied and a fall in quantity demanded. Price will continue to rise until it reaches P1 where Qd = Qs at Q1. There will be an overall rise in price and fall in quantity. As PED>1, consumer expenditure will fall. P4: The rise in price of toy building bricks and change in taste and preferences will result in a rise in demand and consumer expenditure on mobile games. With children getting more tech savvy and the development of games that cultivate imagination and creativity, consumer demand for mobile interactive games will increase. The rise in price of toy building bricks will al so affect the demand for these games depending on the cross elasticity for demand (XED) to the good. XED measures the responsiveness of the demand of a good due to a change in price of its substitute or complement. The sign of XED can be positive or negative depending on whether the other good is a substitute or a complement. Toy building bricks and mobile games are substitutes as they both competitively satisfy similar wants resulting in a positive XED for the goods. Both goods help cultivate imagination and creativity of children. A rise in the price of toy building bricks will increase the demand for mobile games as consumers switched to the cheaper alternative. Their XED value is also high meaning that they are close substitutes as children are getting more tech savvy allowing them utilise these games with ease. Therefore, the rise in price of toy building bricks will result in a more th an proportionate rise in demand for these games. Coupled with the change in taste and preferences for these games, demand will increase by a large extent causing consumer expenditure to rise exponentially due to the rise in price and quantity. This could offs et the effects of the pessimistic economic outlook despite the YED of these games being more than 1 as they are not a form of necessity. Consumer expenditure will therefore increase. P5: Rise in price of toy building bricks will lead to a fall in demand for its guide books thus reducing consumer expenditure on them. The rise in price of toy building bricks will also affect the demand for its complements. Their XED sign is negative. These guide books (such as Avengers, Star Wars, etc) are considered a complementary good to toy building bricks as it allows the users to explore other methods of using them. The rise in price in toy building bricks will lead to a fall in its consumption leading to a fall in demand for these books. However their XED will be less than 1 meaning that these guide books are not essential in the usage of toy building bricks. Consumer can still create toy models based on their own imagination and creativity without the use of these guide books. Therefore the fall in demand for these books will be small causing consumer expenditure to fall by a smaller extent. However, the effects of the pessimistic economic outlook will cause consumer expenditu