CCT Markers Report / JC1 / H1

JC1 College Common Test Economics (H2) Markers report 1. With the use of a diagram, explain HOW the equilibrium price and quantity is determined in a free market. [3m]
Good: 1. Explained the entire adjustment process to equilibrium price and quantity with reference to diagram.

Equilibrium means the state of balance between the forces of demand and supply. Equilibrium price and quantity is achieved at the intersection of demand and supply curves. If a firm sells a good at P1, the quantity demanded is Q1 and quantity supplied is Q2. This results in a shortage as quantity demanded is more than quantity supplied. To get rid of the shortage, prices are forced to rise. When price rises, quantity demanded decreases as some consumers are deterred from buying and firms are encouraged to increase quantity supplied. Therefore, quantity supplied increases from Q2 to Q0 and quantity demanded decreases from Q1 to Q0. As a result, shortage is removed at the equilibrium point E0, with equilibrium price P0 and equilibrium quantity Q0 where quantity supplied equals to quantity demanded.
Price S0

E0 P0 P1 Shortage D0 Q2 Q0 Q1 Quantity Benjamin Lim 06S23

General weaknesses Most students were able to state that equilibrium refers to the state of balance between the two forces but failed to explain on the adjustment process.

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2.

Farmers said the cold weather has caused a 3% reduction in egg production at a time when demand has increased by 5% due to the upcoming Chinese New Year. With the use of a diagram, explain the impact of the changes mentioned in the headlines on the market price of eggs. [4m] The cold weather reduces the quantity supplied at each and every price, resulting in a leftward shift in the supply curve, from S1 to S2, ceteris paribus. The Chinese New Year on the other hand causes the quantity demanded of eggs to increase at each and every price, resulting in a rightward shift of the demand curve, from D1 to D2, ceteris paribus. The result of the shifts in the demand and supply curves is a shortage in the market for eggs. Consumers who were unsuccessful in obtaining the goods will want to pay more, causing an upward pressure on price. By the law of supply, this increase in price results in an increase in quantity supplied and by the law of demand, the increase in price results in a fall in quantity demanded. Price of eggs will therefore rise until a new equilibrium point is reached where price is higher at P2. Price E2 S1 S0
Good: Identified and explained in detailed the changes to demand and supply, noting the direction and relative extent of shifts in the curves as well using a diagram. Made clear reference to the ceteris paribus assumption as well.

E1 D1 D0 Q0 Q1 Quantity

Ang Wei Zheng 06S02

General weaknesses Most students were able to explain and show diagrammatically how the demand and supply curves change and shift respectively, but many failed to state the assumption of ceteris paribus and some also failed to highlight the relative magnitudes of the shifts of the demand and supply curves.

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3.

The United States offers significant subsidy payments to the US sugar growers. With the use of diagrams, explain how the policy would affect the equilibrium price and quantity for sugar and for artificial sweeteners. [5m] When the United States offers significant subsidy payments to the US sugar growers, the cost of production is reduced. This results in an increase in supply from S0 to S1 as the sugar growers are encouraged to produce more as cost of production is low. However, as demand is constant, the increase in supply results in a surplus. The sugar growers would be forced to lower prices to sell away the surplus. As prices fall, quantity demanded would increase as more would be able to afford buying sugar. If price is allowed to fall enough, the surplus would be removed and a lower equilibrium price P1 and a higher equilibrium quantity Q1 is attained.
Price of sugar S0 S1 Good: 1. Explained that subsidy would affect cost of production (a supply determinant) and hence supply curve for sugar shifts. 2. Explained how new equilibrium price and quantity of sugar is attained with reference to diagram. 3. Explained that the rise in price of sugar will lead to a relatively large fall in demand for artificial sweeteners since they are close substitutes. 4. Explained how new equilibrium price and quantity of artificial sweeteners is attained with reference to diagram. 5. Stated the assumptions for each case; for sugar, assume demand remains unchanged. For artificial sweeteners, assume supply remains unchanged.

P0 P1

D0 Q0 Q1 Quantity of sugar

As the price of sugar falls, quantity demanded for sugar rises. As sugar and artificial sweeteners are close substitutes (since there arent many alternatives of sugar), a fall in price of sugar will cause a relatively large fall in demand for artificial sweeteners. Hence, the demand curve for artificial sweeteners would shift to the left by a large magnitude from D0 to D1. However, as supply does not change, there will also be a surplus. Price is then allowed to fall to attract more sales and a lower equilibrium price and quantity is attained.

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CCT Markers Report / JC1 / H1 Price of sweeteners S0

P0 P1 D0 D1 Q1 Q0 Quantity of sweeteners

General weaknesses 1. Most students failed to state the assumptions for both markets and failed to explain the extent of shift of the demand curve of artificial sweeteners. 2. Some mixed up concepts and see them as complements or that sugar is an input to make artificial sweeteners. A few thought sugar and artificial sweeteners are the same.

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4.

In the context of the market for book Principles of Economics by N. Gregory Mankiw: What are close substitutes and close complements? Illustrate with examples. [4m] Close substitutes are goods that are similar and can Good: easily be replaced. As a result, the cross elasticity of 1. Ability to use cross elasticity demand is positive and has a big magnitude (>1). concept to Close substitutes also have negative cross elasticity. supplement its An example of a close substitute of the book are other definitions. economics textbooks. Close complements of a product are goods which are often used together with it. AS a result, the cross elasticity of demand is negative and has a big magnitude. Close complements of the book are economic workbooks and worksheets to allow the students to practice the knowledge he has gained.
Nicholas Chia 06S23 2. Few of the students who managed to answer the question in context.

a.

General weaknesses 1. Most students answered the question out of context. 2. A handful of students did not give definition with desired key words like easily replaced, almost identical features, similar functions, etc for close substitutes and key words liked joint demand, used together for higher utility or more effectively for close complements. 3. Many concluded that for close complements, not having its accompanying counterparts will be totally useless, which is not the case for this question, as one could still read Mankiw text without its workbook. Again, showed that students dont apply to context.

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b.

With the use of diagram(s), explain how a reduction in the number of students offering H1 & H2 Economics and a simultaneous increase in the cost of inputs used would impact the market. [4m]

Price S2 S1 S0 P1 P0 E1 E0 Ee

Good: 1. Ability to differentiate that reduction in students offering economics is a shift on the demand curve and the increased in the cost of input is a shift of the supply curve. 2. Explained how new equilibrium price and quantity of books are attained with reference to diagram.

D0 D1 Q2 Q1 Q0 Qty

A reduction in number of students offering H1 and 3. Illustrated clearly on the H2 economics would cause a fall in demand since diagram that equilibrium less students will need the book. A simultaneous price is indeterminate and qty is decreasing increase in the cost of inputs would cause a fall when both the demand in supply since input prices of the book then and supply curves increases. When the magnitude of the shift in the decreased. demand and supply curves are equally, that is S0 to S1 and D0 to D1, a new equilibrium is met at E0, 4. Displayed knowledge that the difference in at Q1 and P0. When magnitude of shift of supply curve is greater than that of the demand curve, that is S0 to S2 and D0 to D1, a new equilibrium is met at E1 , at Q2 and P1, where Q2 < Q0 and P1> P0. Therefore, when there is a fall in both demand and supply curves of the book, there will be a fall in equilibrium quantity and an indeterminable shift in the equilibrium price.
Ang Chuan Ting 06S26

magnitudes of the supply curve with respect to the demand curve causes equilibrium price to be indeterminate.

General weaknesses 1. Most students were able to illustrate in diagram when both demand and supply decreased but failed to show further in diagram that the difference in magnitudes of either the demand or supply curves will cause the equilibrium price to be indeterminate and qty to be decreasing. 2. A handful did the analysis separately with demand curve and supply curve shifting leftwards with one diagram each.
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3. Although expected to explain when both the demand and supply curves shift simultaneously, some explained the shifts in demand curve and supply curve in parts. For example, demand curve shift first leading to a surplus and then a shortage when supply curve shifts more than the demand curve. 4. Some still couldnt differentiate between price and non-price determinants and thus, ended up drawing movement along the demand and supply curves.

If you are the sales manager and you are tasked to increase the total revenue from sales of the book: What pricing policy would you adopt if demand is price elastic?
Price

(i)

[5m]

Good: 1. Explained what it means when demand is price elastic.

A

P0 P1

Loss in TR
C

Gain in TR Q0 Q1

D0

Quantity

2. Good explanation of the responsiveness of quantity demanded to price reduction and its impact on TR with reference to diagram drawn.

When demand for the textbooks is price elastic, I would lower prices of the books. Since demand is price elastic, by lowering the price of the book, it would bring about a more than proportionate increase in quantity demanded. By lowering prices from P0 to P1, quantity demanded would increase from Q0 to Q1. This is shown by a downward movement along the demand curve from A to B. The gain in total revenue earned from increase in quantity demanded is more than the loss in total revenue from a decrease in price. Thus total revenue increases from a reduction pricing policy.
Benjamin Lim 06S23

General weaknesses 1. Most students were able to state that when demand is price elastic, price should be reduced to increase TR but many do not explain why TR would increase. 2. There are also many who do not explain with reference to the diagram they have drawn.
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(ii)

What measures would you undertake if a rival supplier reduces its price? [5m] If a rival reduces its price, people would rather buy the rivals goods which are cheaper as opposed to mine. Cross elasticity of demand may be high as different suppliers are considered to be good substitutes. In the short run: I would reduce my prices until it is the same as my rivals so I would not lose out totally. Since demand for my books is price elastic, a decrease in price would also increase my total revenue as seen in c(i). In the long run: The constant decreasing of prices would not be a good idea in the long run as profits would be lost. I would instead practice product differentiation to make my books stand out from my rivals. For example, advertising. By advertising, I would create more public awareness for the books I am supplying. I would also include free gift cup or promotional offers that come along with each book purchased. This would make the demand for my book more inelastic and reduce my cross elasticity of demand with other suppliers such that I need not fear a price reduction from my rivals
Benjamin Lim 06S23 Good: 1. Able to use the concepts of Ep and Eab relevantly in this question 2. Good explanation of short run and long run measures and the ability to see how price reduction cannot be sustained in the long run.

General weaknesses Most students were able to state that they would follow suit by a reduction in price and cite some examples of non-price competition although they could have done better by giving description of the methods.

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(iii) Would an increase in the pocket allowances of Economics students have any impact on the TR earned by your company? [5m] If we consider the Economics book produced by my company as a luxury good (as students are not required to purchase it), an increase in pocket allowances of Economics students would greatly affect the total revenue of my company. Demand for luxury good would increase by a very high percentage with increase in income (in this case, pocket allowances) as compared to increase in demand for normal goods. With increase in demand for the product of my company, ceteris paribus, total revenue would increase substantially. If we consider the book as an inferior good (as compared to another more comprehensive Economics book), my company total revenue would decrease as with increase in pocket allowance, more consumers choose to buy the more comprehensive book instead of the inferior good my company sells. Demand for our product falls and hence total revenue falls.
Sim Fatimah Bte Mohammed 06S03 This is among the few scripts that reflect knowledge of the kind of goods when income changes. Generally, the student showed understanding of income elasticity. However, the student would need to express the percentage change/ proportionate change in demand as income changes more accurately. Using diagram to explain might help to show the change in TR after change in income.

General weaknesses 1. Economic concepts namely income elasticity is required to explain the outcome of a change in pocket allowances. This is neglected by many students. 2. Many of the scripts also reflect lack of knowledge on the nature/kind of goods normal good (essential vs luxury good) and inferior good in the context of income change. 3. Some students may state normal goods without the economic understanding of such goods.

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5. a.

In the context of rental market: What is price ceiling? Price ceiling is the maximum legal price (imposed by the government) that a good could be sold at. The price ceiling is below the point of equilibrium.
Price S

[2m]
Good: 1. Defined price ceiling 2. Stated the condition necessary for it to be effective Take note: A graph was drawn here but no explanations were given. Just what is this graph trying to illustrate?

PE PC D Quantity

Akbar Ali B Habibrahiman (06S20)

General weaknesses 1. Most students were able to give the definition but many missed out the condition. 2. Some also used the term efficient rather than effective. b. Why would a government want to impose price ceiling? Government could have seen the increase in a particular good is very fast and in order for the good to be available to the lower income group the government could have stepped in by imposing a maximum price.
Akbar Ali B Habibrahiman (06S20)

[2m]

Good: Recognized that price ceilings are primarily targeted at the lower income group

General weaknesses 1. Excessive use of words like unfair, exploitation, unreasonable. People enter into a transaction because it is MUTUALLY BENEFICIAL. The equilibrium price cannot be determined by the sellers alone. Even in a monopoly, the seller still needs to consider the position of the demand curve when setting prices. 2. Confusion of the context. The rent here refers to rented housing, not of rented shops or video rental. 3. Ignoring the context. Many students used examples of food items like rice or chillies when the focus of the question is on rents.

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c.

Who gains and loses? Gains and losses depend on the effectiveness of the price ceiling, which would depend on the objectives of the price ceiling. If it was to ensure equity in distribution, price control fails as due to the rise of black markets where consumers can turn to, thus affecting equity in distribution of goods. Gain here refers to consumers, and loss, the suppliers due to the decrease in the price of the commodity. If it was to limit supply, it works as the price ceiling limits the amount producers supply and again loss goes to the suppliers. Consumers gains due to the decrease in prices. If it was to prevent prices from rising excessively, it works to the extent that black markets are controlled and price of the goods are sold at the price ceiling. Gains in presence of black markets would be the black markets. While loss refers to both consumers and suppliers as consumers pay more and suppliers sell at a lower price.
David Ng (06S08)

[5m]
Good: Different approach from the usual economic answer and ability to identify it depends on the objectives of the price ceiling.

General Weakness 1. Quite a number of students went on to mention the evils of black market where consumers loses out, without explaining the benefits of the price ceiling. 2. Some did not elaborate on their answer or drew diagrams without explanation.

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d.

Explain how a subsidy works with the use of a diagram. Would the outcome be more desirable if a subsidy is imposed instead of a price ceiling? [5m] In fig. 1, it shows what happened when a subsidy is imposed. Due to given subsidy, cost of production is lower, suppliers are willing to produce more thus causing a rightward shift in supply curve from S1 to S2. Hence, equilibrium position shifted from E1 to E2. By comparing Fig 1 & Fig 2, the outcome would be more desirable if a subsidy is imposed. This is because more is being supplied and no shortage occurred in the case of subsidy, as shown in Fig 1. Consumers can afford it as price falls from P1 to P2 in Fig 1. Whereas in Fig 2, quantity supplied Qs is less than quantity demanded, Qd. As a result, there is a shortage and black market may arise. When there is a black market, price is set at Pb which is higher than the equilibrium and the ceiling price, thus making the service unaffordable to lower income group.
Neo Deng Kai (06S13) The student is able to highlight the key differences between the 2 government measures and use these points to justify that subsidy is more desirable as they benefit the consumers more. It would be good if the student could also surface the area of concern related to subsidy. For example, the funding problem related to subsidies and that subsidy may breed inefficient firms in the longer run.

General weaknesses 1. Some students shift the DD curve and analyze from there which they get caught in explaining how it is desirable to the consumers when price increases. 2. Some students shifted the SS curves leftward instead of rightward. 3. Some other students shifted both DD & SS curves without explaining why. There were confusion between shift of the DD/SS curves and movement along the DD/SS curves. 4. Instead of explaining it in the context of the rental market, some students talk about rice, clothes etc (their own choice of products).

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6. a. b. a.

Identify the type of market structure for each of the following industry. Justify your answer. [6m] provision of enrichment workshops provision of public utilities. The provision of enrichment workshops is a form of monopolistic competition. Firstly, there are many such firms in the industry. There are many workshops currently that cater to the learning needs of different individuals in the market. The commodity presented here within the different firms in the industry may serve the same purpose. All enrichment workshops cater to the needs of learning. The only difference is due to product differentiation, where different enrichment workshops are slightly different in terms of their teaching and focus. There is freedom of entry in this industry as enrichment workshops low start up costs. If the workshops is not doing well (earning subnormal profits), it can always back out of the industry.
Good: The key characteristics of each form of market structure are clearly elaborated upon to substantiate the writers answer. And the use of examples was provided as well.

b.

The provision of public utilities can be considered a natural monopoly. Like in Singapore, the Public Utilities Board (PUB) is responsible for supplying utilities to our homes and charging us thereafter. There is one firm in the industry, the distinction between the firm and the industry disappears. The commodity provided is unique; there are no close substitutes for utility. There are significant barriers to entry. One example would be government regulations. The monopoly is issued licensing to provide utilities to every home and there makes it difficult for new entrants to enter. Furthermore, the natural monopoly requires heavy capital and funds and it is not profitable to accommodate two firms.
Michelle Lee 06A04

General weaknesses 1. Majority of the students merely listed out the characteristics of each form of market structure without making reference to the type of industry given. 2. Some of the students also confused the meaning of public utilities, giving examples such as public transport, landlines as well.
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7.

In what ways do firms compete? Illustrate with examples. Firms can compete in price competitions or non-price competition. In price competition, firms compete in the prices of their products. In this case, firms keep a close watch on the rivals pricing strategy. When the rivals lower the price, firms will also lower their price, however, if rivals raise their price, firms will not do so. Secondly, firms can also compete by giving discounts, free gifts, free samples or packaging. For example, supermarkets such as Giant, gives weekly discounts so as to attract more consumers. In non-price competitions, firms can firstly compete in advertising. Aggressive advertising can help firms to build their reputation and establish their brand. This can be seen in hair parlors industry. Firms such as Reds and Jean Yip advertise for themselves aggressively so as to let the public know of their firms hence increasing demand. In non-price competition, firms can also compete by differentiating their products. Taking hair salons in the neighbourhood for example. Besides hair services, they will also provide nail services or other services to attract consumers.
Chua Yong Ming Marcus (06S29)

[5m]

Good: Recognized that question is asking for ways. Discussion of both price and non-price competition. Illustrated each case with examples. Take note: giving discounts meant lowering price and hence that should be counted as a form of price competition and should not be cited as an example under non-price competition!

General weaknesses 1. Quite a number of students only discuss non-price competition. 2. Some did not elaborate more on their answers and did not provide examples.

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8.

Assuming the goal of firms is to maximize profit, use the marginal approach to explain the determination of price and output level of a perfectly competitive firm and that for a monopolist firm. [6m] Perfectly competitive firm
$ MC E PE DD = P = AR = MR Good: 1. Recognized that at the firm level, the PC firm faces a perfectly elastic demand curve. 2. Accurate labeling of the equilibrium point and the corresponding price and quantity. 3. Recognized that the profit maximizing condition is MC = MR. 4. Clear explanation of how prices are determined in a PC industry and firm. However: 1. No mention PE & QE in the exposition. 2. It is more accurate to speak of a horizontal rather than a straight line demand curve. 3. MR = MC says nothing about the type of profits the firm earns. The condition MR = MC does not guarantee normal profits or supernormal profits.

QE

Quantity

Profit maximizing is when the marginal revenue (MR) is equals to the marginal cost (MC). In a perfectly competitive firm, the firm is a price taker and it takes the equilibrium price decided by the industry thus the demand and the price curve is illustrated by a straight line, it can only determine the amount of quantity it wants to sell. It determines the output level where the MC curve cuts the MR curve from below at point E. This is where the firm is profit maximizing where MR = MC and the firm can earn normal profits.

General weaknesses 1. Many students thought that profit-maximising condition in a PC firm is P = MC. This is only incidental. Profits are ALWAYS maximized where MC = MR regardless of the market structure. PC firms are unique in that they face a perfectly elastic demand curve which means that their MR is also the price. Unless students are able establish the link between the MR and the price in PC firms, marks will not be awarded for laying claim that P = MC is the profit-maximising condition. 2. Ignored the context / writing out of point. Some students focused on the P and output determination at the industry level where dd = ss. Others discussed the LR normal profits and why PC firms are both productively and allocatively efficient.

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8.

continue Monopolist firm

$ MC a P1 c Good: 1. Identified the profit maximizing condition. 2. Accurate labeling of the equilibrium point and the corresponding price and quantity. However: The question requires only that you explain the determination of price and output. There is no need to discuss the welfare effects. This is a general problem faced by most students.

b MR Qe DD = P = AR Quantity

A monopolistic firm is the only firm in the industry thus it can either set the price or the quantity of the good but not both. It is profit maximizing at Qe where MC = MR. Thus it decides its output at level at this point. However to earn a higher profit, it restricts its output and sets the price at the demand curve at point a, P1. When it should be at point c of pareto optimality where the demand and supply curves meet. This results in market inefficiency as P > MC and the deadweight loss represent by the shaded region where the welfare of society is lost.
Zhu Yanling 06A05

General weaknesses 1. Some students were not able to identify the profit-maximising price and output in a monopoly, reading the price off point b rather than point a. 2. Some students mistook monopolistic firm for a monopolistic competitive firm. 3. Students also confused (a) profit-maximising with (b) supernormal profits or (c) producing at the minimum point of the LRAC. These are 3 separate concepts.

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9.

Define externalities. Illustrate with an example of a negative externality. [4m] An externality is an additional benefit or cost from an act of consumption or production which spills over to a 3rd party who is not directly involved in the act of consumption or production. An example of a negative externality is 2nd hand smoke. When a smoker smokes, he adversely affects the people around him. Second-hand smoke can cause health problems to those who do not smoke. Hence the marginal private benefit is greater than the marginal social benefit as the smoker is the beneficiary satisfying his addiction whereas the people around him inhale the second-hand smoke from him from him, causing them to have health problems.
Tan Ming Kiat 06S01 A good clear and concise answer.

General weaknesses 1. A handful of students gave poor definitions of externalities. 2. A number of students who draw graphs to illustrate their examples are draw their benefit curves upward sloping and their cost curves downward sloping. 3. There were many good answers where students were able to explain the divergence between the marginal social cost and marginal private curves due to negative externalities of pollution due to production.

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