SRJC H2 ECON P1 ANSWER

1 © SRJC 9732/01/JC2PreliminaryExam/11 Question 1 Suggested Answers (a) Using Figure 2, (i) Summarise the variations in the stockpiles of wheat. [2]  The stockpiles of wheat are expec ted to increase overall. (1m)  The stockpiles fell from 2007 to 2008, rose from 2008 to 2010 and are expected to fall thereafter. (Any two variations – 1m) Markers’ Report Data interpretation:  Candidates need to be more careful with data interpretation. E.g. o “There is an overall rise in stockpiles from 2007 to 2010” - this statement is not given full credit because the entire period runs from 2007 to 2011. Hence, the statement should be rephrased as “There is an overall rise in stockpiles from 2007 to 2011”. (ii) Account for the abovementioned variations. [2] Stockpiles of wheat depend on the global consumption and global production of wheat (0.5m) – For example, when global consumpt ion was less than global production from 2008 to 2010, the stockpiles rose. However, when the global production is expected to dip below global consumption from 2010 to 2011, the stockpiles are expected to fall. 1.5m – 1m for why stockpiles rose (fell) and 0.5m for why stockpiles fell (rose) Markers’ Report Question interpretation:  Candidates should take note that they are instructed to use Figure 2 to answer (ii) as given in the question. (b) With the aid of a diagram, analyse why prices of food commodities are expected to surge and remain volatile. [5] The export ban by Russia reduces the world supply of wheat (Extract 2). Additionally, Russia is one of the top producers of wheat in the world (Figure 1). Besides that, the rise in demand for biofuels (Extract 1) leads to a rise in the derived demand for food commodities such as rice and wheat which are factors of production for biofuels. shortage Price Quantity of food commodities P1 Q0 S1 D0 0 S0 E0 E1 P0 Q1 D1 Q3 Q2

2 © SRJC 9732/01/JC2PreliminaryExam/11 The fall in supply will shift the supply curve to the left from S 0 to S 1 and the increase in demand will shift the demand curve to the right from D 0 to D 1, causing a huge shortage of Q2Q3 at the original price of 0P0. Eventually, a new market equilibrium is reached at point E 1 where quantity demanded will once again be equal to the quantity supplied. In this instance, there is a surge in the price of food commodities from 0P 0 to 0P1. Volatility in the price of food commodities could be explained by the unpredictable changes in the demand for and supply of food commodities. In other words, when the demand for and supply of food commodities fluctuate, the price of food commodities would fluctuate as well. L2 3-5  Good application of demand and supply analysis with detailed reference made to a diagram  For 4m and above: Detailed explanation that takes into account simultaneous changes in demand for and supply of food commodities or application of relevant elasticity concept  Detailed explanation without accounting for the volatility in prices – max. 4m L1 1-2  Smattering answers  Glaring inadequacies are evident, e.g. incomplete diagram and incorrect explanation of the price adjustment process Markers’ Report Question interpretation:  Some candidates did not respond to the question, i.e. they did not explain why there would be a large rise in price of food commodities. This is despite drawing a diagram that illustrates both a rise in demand for and fall in supply of food commodities. In this case, the candidates should have commented that when demand rises and supply falls, there is a large shortage at the original equilibrium price. Hence, there would be a steep rise in the price of food commodities. (c) Explain why the members of the Singapore Bakery and Confectionery Trade Association are “unlikely to be able to absorb more than a 10% increase” in the price of flour. [3]  Flour is an important factor of production in the bakery and confectionery industry and an increase in price of flour will lead to a rise in variable cost of production for this industry. (1m)  Hence, if price of wheat rises by more than 10%, it is likely that TR < TC  subnormal profits. (1m)  Additionally, if TR < TVC in the short run, firms would have to shut down. (1m) Markers’ Report Question interpretation:  Some candidates explained that TR would rise wh en price of confectionery rises as demand for it is price inelastic. This is irrelevant because it does not explain why the Association cannot absorb more than 10% increase in price of flour!

3 © SRJC 9732/01/JC2PreliminaryExam/11 (d) Evaluate the effectiveness of the “back to basics” strategy adopted by firms. [8] Intro (1m for introduction or conclusion) Aim of firms: maximise profits during a time when rivals face a fall in demand for their products (Extract 3, paragraph 3) 1. 2m  Produce no-frills items with basic functions – these products could have negative income elasticity of demand and henc e sell well in a recession environment  fall in income, rise in demand for these products, ceteris paribus  rise in TR  ceteris paribus, rise in profits for the firms 2. 2m  Reducing the variety of items and mass-producing them (Extract 3, paragraph 4)  reap economies of scale, e.g. marketing economies of scale  reduce unit cost of production  Raise profits per unit, ceteris paribus 3. 1m Evaluation (2m):  Strategy depends on economic conditions: Revert back to following strategy in times of economic growth – When there is economic growth and the incomes of the people increase, we can expect a substantial rise in demand for goods that have high positive income elasticity such as rice cookers and smart phones with more sophisticated functions. Therefore profit-maximising producers can step up production in anticipation of the increase in demand. Hence back to basics strategy may not work in times of economic growth. Conclusion The product differentiation evident in the above anal ysis is borne out of the need to survive in the economic recession. With a threat to profits, firms need to come up with strategies to maintain revenue, if not to raise revenue, and to lower cost. As previously explained, the back to basics strategy could lead to a rise in TR and a fall in TC. As a result the following could happen: the TR is 0P 2DQ2 while TC is 0FEQ2. Hence the profits is FP2DE. In this case, by adopting the back to basics strategy, the firm could earn supernormal profits. E F DD = AR MR 0 Q 2 Quantity Price, revenue, cost P2 D AC1 MC1

4 © SRJC 9732/01/JC2PreliminaryExam/11 Level Marks Descriptors L3 6 – 8  Clear explanation of BOTH cost and revenue advantages  Well-explained evaluation  A reasoned conclusion/intro for 8m L2 4 – 5  Some explanation of both cost or revenue advantages but not consistently thorough  Some attempts at evaluation   Clear explanation of cost OR revenue advantage only – max 5m L1 1 – 3 Smattering of ideas. Some explanation of impact of cost or revenue advantages but lacking economic analysis. Markers’ Report Question interpretation  Some candidates explain the impact of the back to basics strategy on consumers and discuss whether their welfare rises or falls. However, th is answer ignores the question requirement of evaluating the effectiveness of the strategy, that is, the impact of the strategy on the firms’ profits.  Some candidates thought that it was a question on evaluating the effectiveness of the price and non-price strategy (i.e. product differentiation) of the various market structure which geared them towards explaining the effects on revenue in d