PJC_H2_ECONS_P2_Suggested_Ans___Markers_Report

Pioneer Junior College (Economics Department) 1 PJC 2016 H2 Prelim Exam Paper 2: Question 1 Question: Global warming has reduced the harvest of high quality coffee beans. This has affected many independent boutique cafes in Singapore which have grown in recent years due to rising affluence and more sophisticated taste for specialty coffee. In addition, these cafes are also facing soaring rents, alongside labour shortages and stiff competition. Using economic analysis, discuss the impact these ev ents are likely to have on farmers of coffee beans, consumers of specialty coffee and owners of boutique cafes. [25] Introduction These events that are mentioned in the preamble will affect the demand and supply hence affecting the consumers and producers differently through changing the market equilibrium price, quantity, total expenditure and total revenue. Body Para 1 The farmers of high quality coffee beans are likely to be badly affected by the experience rising total revenue due to the effects of growing taste for high quality coffee beans and global warming. However, the impact on their profits is less certain. With growing taste for high quality coffee beans, there will be higher demand for high quality coffee beans causing the demand curve to shift rightwards from D1 to D2 as shown in Figure 1. At the same time, global warming reduces the harvest of high quality coffee beans causing the supply of high quality coffee beans to fall, thus the supply curve shift leftwards from S1 to S2 in Figure 1. The combined effect of a rise in demand and a fall in supply will lead to a sharp rise in the equilibrium price of high quality coffee beans from P 1 to P 2. However, the change in equilibrium quantity is uncertain as a rise in demand will lead to a rise in equilibrium quantity while a fall in supply will lead to a fall in equilibrium quantity. Thus, the effect on equilibrium quantity depends on the extent of change in demand and supply. Figure 1 Fall in Supply > Rise in Demand for high quality coffee beans E1 Price of high quality coffee beans D1 D2 S1 S2 P1 P2 0 Q1Q2 Qty of high quality coffee beans E2

Pioneer Junior College (Economics Department) 2 If demand for high quality coffee beans were to rise more than the fall in supply, the equilibrium quantity will rise. This is favourable for the coffee bean farmers as both the rise in equilibrium price and quantity will cause the total revenue to rise for the farmers. However, if the supply of high quality beans were to fall more than the rise in demand, then the equilibrium quantity will fall from Q 1 to Q2 as shown in Figure 1. In this case, since equilibrium price rise but equilibrium quantity falls, the effect on total revenue is uncertain. Evaluation In this case, the effect on total revenue will depend on the size of price elasticity of demand (PED). Since the demand for coffee bea