SRJC H2 ECON P2 ANSWER

1    © SRJC 9732/02/JC2PreliminaryExam/11 1 Recent developments, such as improvement in the state of technology, nation-wide wireless internet access and phenomenal growth in emerging economies like China and India, have affected the demand for and supply of netbooks, laptops, desktop computers and similar products. Discuss how the abovementioned markets could be impacted by these developments. [ 2 5 ] Intro  Demand refers to the willingness and ability of consumers to buy a good at various prices, ceteris paribus while supply refers to the willingness and ability of firms to produce a good at various prices, ceteris paribus. The actions of buyers and sellers in the market will determine the market equilibrium price and output.  From figure 1: o If the price is P 1, quantity demanded > quantity supplied  shortage of Q 1Q2  consumers who are willing and able will bid up the prices in order to get the good while producers will respond to the higher prices by  quantity supplied. o If the price is P 2, quantity supplied > quantity demanded  surplus of Q 1Q2  producers will lower prices in order to get rid of excess stocks while consumers will respond to the lower prices by  quantity demanded. o The above processes will continue until the shortage and surplus are eliminated at P0 where quantity demanded is equal to quantity supplied. Hence, equilibrium price is P0 and output is Q0. Body a) With improvements in technology, it makes it possible for wireless internet access to be available to many people, thereby  supply of wireless internet service. Eg:  Recent developments in mobile internet allow people to have access to broadband-on- the-go with the aid of a small device.  From figure 2, such  in supply of wireless internet service from SS 0 to SS 1   price from P 0 to P 1 and  quantity from Q 0 to Q 1. Since wireless internet service is a complement for wireless-enabled mobile devices such as netbooks and laptops   demand for such mobile devices from DD 0 to DD 1 in figure 3  shortage  Upward Figure 1 price Quantity 0 SS0 DD0 P2 P0 P1 Q0 Q1 Q2 Figure 2 price Quantity of wireless internet service 0 SS0 DD0 P0 P1 Q0 Q1 SS1 Figure 3 price Quantity of netbooks and laptops 0 SS0 DD0 P0 P1 Q0 Q1 DD1

2    © SRJC 9732/02/JC2PreliminaryExam/11 pressure on price. Eventually, a new market equilibrium is reached where quantity demanded will once again be equal to the quantity supplied   equilibrium price from P0 to P1 and  equilibrium quantity from Q0 to Q1. Briefly explain IED  Income elasticity of demand (IED) measures the degree of responsiveness of DD for a good due to a change in consumers’ income, ceteris paribus.  A good that has positive income elasticity of demand is one in which the demand for the good rises when the income rises and falls when income falls, ceteris paribus. Such goods are known as normal goods. A good that has negative income elasticity of demand is one in which the demand for the good falls when the income rises and rises when income falls, ceteris paribus. Such goods are known as inferior goods.  For 0<IED<1, DD is said to be income inelastic because these goods are necessities whereby  income  less than proportionate  demand (there is only so much an individual needs to consume for a necessity), ceteris paribus. For IED>1, demand is said to be income elastic because these goods are luxury goods. When incomes are rising strongly and consumers go ahead with “big-ticket” items, the demand for luxury goods will rise more than proportionately.  DD for these consumer electronic products is likely to be income elastic as they are not a necessity and can be generally treated as luxury goods.  Phenomenal growth in China and India   national income   purchasing power  significant  demand for these consumer electronic products  greater rightward shift in DD curve from DD 0 to DD2, rather than from DD 0 to DD1 in figure 4  larger shortage at prevailing market price  greater  equilibrium price and  equilibrium quantity from P 0 to P2 and from Q0 to Q2 respectively a) With improvements in technology  more output can be produced using the same amount of resources   cost of production   profits, ceteris paribus   supply of these consumer electronic products  From figure 5,  supply of consumer electronic products  surplus  Eventually a new market equilibrium is reached where quantity demanded will once again be equal to the Figure 5 price Quantity of consumer electronic products 0 SS0 SS1 DD P0 P1 Q0 Q1 Figure 4 price Quantity of consumer electronic products 0 SS0 DD1 P1 P2 Q1 Q2 DD2 DD0 P0 Q0

3    © SRJC 9732/02/JC2PreliminaryExam/11 quantity supplied   equilibrium price from P 0 to P 1 but  equilibrium quantity from Q 0 to Q1 Briefly explain CED  Cross elasticity of demand (CED) measur es the degree of responsiveness of demand for a good due to a change in price of a related good, ceteris paribus.  If its sign is (-), both goods are complements because  price of good Y   quantity demanded for good Y   demand for good X. If its sign is (+), both goods are substitutes because  price of good Y   quantity demanded for good Y   demand for good X  For 0<CED<1, demand is said to be cross price inelastic because these goods are weak complements or substitutes whereby  price of good Y  less than proportionate  demand for good X (complements) or less than proportionate  demand for good X (substitutes), ceteris paribus. For CED>1, DD is said to be cross price elastic because these goods are strong complements or substitutes whereby  price of good Y  more than proportionate  demand for good X (complements) or more than proportionate  demand for good X (substitutes), ceteris paribus.  Netbooks and laptops are likely to be strong substitutes for desktop computers because they serve similar needs of performing work by students or office workers. In other words, the demand for desktop computer is highly cross price elastic with respect to the price of netbooks and laptops.  With  price of netbooks and laptops  more than proportionate  demand for desktop computers, ceteris paribus  surplus  downward pressure on prices  new equilibrium price and quantity are lower Conclusion Improvement in technology is a key factor whic h drives the markets for the said items and similar products. This coupled with a busy lifestyle whereby people are required to access their work while on the move would mean that the markets for new mobile devices will only grow while the markets for old devices will shrink in the long run.   Marking Scheme   Level Marks Description L4 20 – 25  Thorough analysis on how all three recent developments can influence the markets and how the markets are related  Strong application of simultaneous shifts and elasticity concepts is evident L3 15 – 19  Good analysis on how the recent developments can influence the markets and how the markets are related  At least two recent developments are considered  Application of simultaneous shifts and elasticity concepts is evident  At least one elasticity concept is applied L2 12 – 14  Some analysis on how the recent developments can influence the markets and how the markets are related  Not all three recent developments are considered  Application of simultaneous shifts or elasticity concepts is evident L1 10 – 11  Some simple but accurate analysis, e.g. single shifts in demand/supply curve, is evident  No application of simultaneous shifts and elasticity concepts  How the markets are related are not considered 1 – 9  Smattering of points with limited understanding on how the recent

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