2016 Prelim Essay Question 2

Transcription

1 216 Prelim Essy Question 2 In recent yers, the price of nturl fertilisers for orgnic brown rice production hs risen nd helthy living cmpigns re seeing more consumers switching from nonorgnic white rice to orgnic brown rice. Assess the relevnce of elsticities of demnd nd supply in understnding the impct on the expenditure by consumers on non-orgnic white rice nd orgnic brown rice. [25] Exminer's Comments This question ws generlly well ttempted by students. The mjority of them re ble to pply the vrious elsticities concepts to the question correctly. The best nswers were those who were very systemtic in their pproch. They strted with the reson for the supply of brown rice flling, nd linking it smoothly to the concept of PED to rgue tht the quntity would either fll by more thn proportionlly or less thn proportionlly. They then conclude how the expenditure would then chnge, before discussing how relevnt the vrious elsticities concepts were. These best responses nlysed cliniclly the impct on consumer expenditure using relevnt, ccurte nd well-drwn supply nd demnd digrms. Good use of nlysis llowed high mrks to be ccessed by, for exmple, mking reference to the own-price nd cross-elsticities of demnd nd lso showing how shifts in both supply nd demnd curves might ffect expenditure. The best nswers from these cndidtes showed the combined effects of the two chnges on single digrm for orgnic brown rice, with good evlutive comment bsed on the reltive size of shifts in the curves Those scripts who scored t the upper L2 did reltively competent job but missed out on other elsticity terms such s cross elsticity concepts. Furthermore, mny of these scripts did not use digrms fully, for exmple they did not show the digrm where both supply nd demnd curves shifting for orgnic brown rice, or did not drw digrm for white rice t ll. Weker scripts, those t the lower L2 rnge, re those tht did not explicitly ddress the relevnce of the vrious elsticity concepts. These scripts ppered to be ddressing the question s, "Assess the impct of the bove events on the expenditure by consumers on non-orgnic white rice nd orgnic brown rice", insted of the question s set. Those t L1, besides committing the bove misinterprettion, they lso hve conceptul errors in shifting the demnd nd supply curves, s well s in the elsticities concepts themselves. Mny scripts left out the Ltin phrse ceteris pribus in their definitions of elsticities. Another misconception tht should not be ppering in your prelims scripts is on how elsticity concepts work. It is the price chnge leding to the proportionl response of quntity. Students should not be strting from quntity chnge nd led tht to the proportionl chnge in prices. Finlly, you should not write "PED for rice is price inelstic". Insted, you should write either "Demnd for rice is price inelstic, or the PED of rice is less thn 1 in mgnitude." Interestingly, the lst 2 conceptul flws were lso seen in cse study 1, when students were nswering the first question bout how the vlue of PEf new housing might chnge over time.

2 Additionl comments Conceptul Issues For points on competitive supply, consider the chnge in equilibrium quntity of rice before exmining the impct on the supply of the other good in competitive supply. It is not ccurte to ssume tht decrese in supply of one good will utomticlly result in n increse in supply of the other good tht is in competitive supply. PES should be irrelevnt to exmining the direction of chnge in totl expenditure when demnd shifts. Note tht it is possible for 2 different PES vlues, one price elstic supply nd one price inelstic supply to led to the sme increse in totl expenditure when demnd increses. So while it is true tht different PES vlues cn led to different increses in expenditure, tht is not got to do with PES > 1 versus PES < 1 type of rguments. Hence PES is lrgely not relevnt for most discussions rised by the cndidtes. The use of cross elsticity of demnd requires students to ssess not just the sign of CED, but lso its likely vlue. Without considering if the CED is > or < 1, one just need to use the concept of complements or substitutes without using the CED concept. In the context of this question, the size of CED is prticulrly importnt to ssess the net effect of n increse in demnd of white rice due to n increse in price of brown rice nd fll in demnd due to the chnge in tstes nd preferences wy from white rice. A significnt number of cndidtes could identify nd justify the relevnt elsticity vlues but could not pply them correctly to nlyse their relevnce on expenditure. A smll number of cndidtes mistook nturl fertilisers to be complement of orgnic brown rice. Tke note tht nturl fertilisers re inputs in the production of orgnic brown rice. The demnd for nturl fertilisers is derived from the demnd for orgnic products. Other Issues Some cndidtes introduced in new scenrios into the question. E.g. new producers joining the mrket supply, chnge in income levels, etc. While such introduced scenrios cn be considered s evlution points, they should not be introduced nd chnge the min nlysis expected of this question. E.g. rguing for n increse in supply of brown rice becuse of technologicl dvncements (introduced scenrio) outweighing the fll in supply due to n increse in its cost of production (given scenrio) nd then continue nlysis bout the impct of totl expenditure ssuming this rise in supply of brown rice Suggested Answer: Introduction Focus: Assess the relevnce of PED, PES, YED & XED in impcting the consumer expenditure in ech mrket given rise in the price of nturl fertilizers nd helthy living cmpigns. Key Definitions: Consumer expenditure (CE): Totl mount of money tht consumers spend on product. [CE = P x Q] PED: Mesures the degree of responsiveness of quntity demnded to chnge in the price of the good itself, ceteris pribus. PES: Mesures the degree of responsiveness of quntity supplied to chnge in the price of the good itself, ceteris pribus. YED: Mesures the degree of responsiveness of demnd of good given chnge in income, ceteris pribus. XED: Mesures the degree of responsiveness of demnd of good to chnge in the price of nother good B (substitutes / complements), ceteris pribus.

3 Development 1: Consider the impct of rise in price of nturl fertilizers in both orgnic brown rice mrket nd non-orgnic white rice mrket. (rise in the price of nturl fertilizers re ssumed to hve no impct on the supply of non-orgnic white rice mrket) Development 1: Consider rise in price of nturl fertilizers Orgnic Brown Rice Mrket Non-orgnic White Rice Mrket Price of orgnic brown rice S 1 Price of non-orgnic white rice food X E P o E P o Q 1 Q o Fig 1. Mrket for orgnic brown rice Qty of orgnic brown rice Assume tht nturl fertilizers re used in the production of orgnic brown rice(i.e. fctor of production): Rise in price of nturl fertilizersà increses the unit cost of product à fll in Sf orgnic brown rice from So to S 1 à less units of orgnic brown rice is supplied t every price à [briefly explin djustment process] à rise in eqm price from Po to, fll in eqm qty from Q to Q 1. D Q Q 1 Qty of non-orgnic white rice Fig 2: Mrket for non-orgnic white rice Rise in price of nturl fertilizers à fll in SS of orgnic brown rice à fll in qty dd of orgnic brown rice à rise in DD for nonorgnic white rice since they re substitutes (CED>) à demnd curve shifts right from Do to D 1 à more units of non-orgnice rice is demnded t every price à rise in both eqm price & qty from Po to, Qo to Q 1 à rise in CE from PoEoQ to E1Q 1. D D 1 The DD for orgnic brown rice is likely to be price elstic (PED> 1) due to vilbility of non-orgnic rice s substitutes to orgnic brown rice. Hence, rise in price of orgnic brown rice led to more thn proportionte fll in quntity demnded of orgnic brown rice. WRT Fig 1, rise in the price of orgnic brown rice (due to fll in SS) leds to fll in CE due to more thn proportionte fll in qty dd (i.e. re E Q Q 1 X) s compred to smller rise in CE due to the rise in P (i.e. re P X)à CE on orgnic brown rice flls from PoEoQo to E1Q 1. Note students cn lso rgue tht demnd for brown rice to be price inelstic due to the price being of low proportion of income for most households. Comment on Relevnce of DD elsticities:

4 PED is relevnt in explining the impct on CE in the mrket for orgnic brown rice s it explins how qty dd of orgnic brown rice chnges wrt rise in the price of orgnic brown rice due to fll in its supply. XED is relevnt in explining the impct on CE in the mrket for non-orgnic white rice s it explins how DD of non-orgnic white rice (nd therefore its P & Q) is ffected due to rise in the price of orgnic brown rice, when the supply flls. YED is irrelevnt here s there is no chnge in income mentioned in the premble. PES is irrelevnt to explin chnge in expenditure when demnd shifts since P nd Q lwys chnge in the sme direction.

5 Development 2: Consider the impct of the helthy living cmpigns in both brown rice mrket nd white rice mrket. Development 2: Consider helthy living cmpigns Price of orgnic brown rice Price of non-orgnic white rice food P E P o E o Q o Q 1 Fig 3. Mrket for orgnic brown rice Qty of orgnic brown rice Assuming tht helthy living cmpigns successfully led to consumers being more informed of the possible helth benefits of consuming orgnic brown rice à chnge consumers tste nd preference towrds orgnic brown rice à switch to consuming orgnic brown rice à rise in DD for orgnic brown rice from D to D 1 à rise in eqm price nd qty from P to, nd Q to Q 1 à rise in CE on orgnic food from P E Q to Q 1. Do D 1 D 1 Q 1 Q Qty of non-orgnic white rice Fig 4: Mrket for non-orgnic white rice Successful helthy living cmpigns in chnging tste nd preferences towrds orgnic brown rice à ssume tht the DD for non-orgnic white rice flls from D to D 1 s consumers switch from consuming nonorgnic white rice to orgnic brown rice à fll in eqm price nd qty from P to, Q to Q 1 à CE decreses from P E Q to Q 1. D Comment on Relevnce of DD elsticities: XED is irrelevnt in explining the impct of the rise in brown rice on the CE in the mrket for non-orgnic white rice. The rise in price of brown rise is cused by demnd chnge, nd not chnge in supply. If students rgue using competitive supply, explining tht frmers strt to devote more fctors of production into producing brown rice due to their expecttions of price increse from the helthy living cmpign, thus reducing the supply of white rice. Then they cn mke use of PED to discuss the impct of expenditure on white rice. Otherwise PED is not relevnt here. Similr to the previous discussion on the previous pge, PES nd YED continue to be irrelevnt in explining the impct on CE in both mrkets due to helthy living cmpigns. Anlyse the combined net impct on the mrket for orgnic brown rice: If students rgue tht PED < 1, fll in supply will led to rise in PQ. Furthermore, helthy living cmpign will increse the demnd for orgnic brown rice thus lso incresing PQ. Combining the 2 events, consumer expenditure will increse overll. If students strt from PED > 1, then there will be 2 offsetting chnges to PQ. They should hve grph showing the combined shift with the pproprite justifiction on which curve shifts more, with the pproprite conclusion regrding consumer expenditure.

6 Anlyse the combined net impct on the mrket for non-orgnic white rice: If students only shift the demnd to the left due to the cmpign, then consumer expenditure could only fll. If students lso include competitive supply justifiction to rgue tht supply would fll, together with n explntion tht PED < 1, due to white rice being necessity for most Asins, expenditure cn then rise. They re then expected to tke stnd on wht is the overll effect regrding consumer expenditure. Conclusion Conclude with the relevnce of the elsticities concepts (PED & CED re more relevnt while PES & YED re less relevnt) nd the likely impct on the totl expenditure on the 2 mrkets with evlution. Mrking Scheme Level Descriptor Mrk L3 Upper An excellent nswer which nlyzed well how the combintion of events impct on the expenditure by consumers on non-orgnic white rice nd orgnic brown rice. Both bredth nd depth evident. Shows strong bility to exemplify nd ble to pply them to the context of the question. Judgements on the relevnce of the elsticities concepts re given (PED & XED re more relevnt compred to PES & YED). Lower L2 Upper Lower L1 Upper Lower A competent nswer which nlyzed well how the combintion of events impct on the expenditure by consumers on non-orgnic white rice nd orgnic brown rice. No discussion of PES nd YED t ll will be cpped t 18. An nswer which explined well how the combintion of events impct on the expenditure by consumers on non-orgnic white rice nd orgnic brown rice. There is sufficient scope but lcks depth (or vice vers). Some judgements on the relevnce of the elsticities concepts re given. The following nswers will be cpped t upper L2, mx 15 nlysis mrks. No discussion of CED t ll No grph for white rice mrket, but only drw grph for brown rice No grph showing combined shifts for both demnd nd supply for brown rice For n nswer which explins the events on the impct on the expenditure by consumers on non-orgnic white rice nd orgnic brown rice. However, theoreticl nlysis my not be so ccurte. Digrms to illustrte concepts re missing/incomplete. Answers who did not explicitly discuss the relevnce of the elsticities concepts will be cpped t low L2. An nswer which shows some understnding of the question nd hs limited scope nd depth. The context of the question is not considered. Digrms my not be used to illustrte theoreticl concepts. An nswer which struggles to nswer the question with mjor misconceptions or question hs been misred Evlution E2 For n evlutive ssessment bsed on economic nlysis. 3-4 E1 For unexplined ssessment. 1-2