H2 Economics Tutorial Package

Topics 2, 3 and 4: Price Mechanism and its Applications

By the end of this tutorial package, students should be able to:

Content: a) Explain how the price mechanism allocates scarce

resources in the free market through its functions
b) Identify demand, supply and elasticity factors
c) Interpret the values of different types of elasticities
d) Explain how the demand, supply and elasticity factors
affect the market
e) Represent the changes in demand, supply and various
forms of government intervention on a demand and supply
model
f) Apply elasticity concepts to revenue/expenditure, price,
quantity
g) Evaluate the impacts of the various forms of government
intervention
Case study a) Data interpretation
skills: b) Trend analysis
c) Use the case evidence and content knowledge approach
in answering case study questions
Essay skills: a) Basic essay writing: Introduction – Body – Conclusion
b) Paragraph writing structure: PEEL approach
c) Quality paragraph writing: Relevance (Theory and
Context), Accuracy and Clarity
d) Question analysis
e) Evaluation skills

Summary of Theme 2.1 Question Types

1. How given factors affect price, quantity, total revenue/expenditure and
their extent.
Market(s) 2. Provide own factors to explain a given outcome on price, quantity or
total revenue/expenditure.
3. Impact on factor markets (e.g. labour)
4. (Relative) impact of given events on consumers/producers
Agent(s) 5. Usefulness of elasticity concepts in guiding consumers', producers'
and governments' decisions
Policies 6. Impact of policies on markets and economic agents

© Eunoia Junior College Economics Department 2023 1

Section A: Multiple-choice questions

1. The diagram shows the demand curve for good X.

What could cause a movement along the curve from M to N?

a. A fall in income
b. An increase of price of good X
c. A fall in the cost of producing good X
d. An increase in the price of a complementary good

2. As petrol and diesel are in joint supply, ceteris paribus, what will be the result of an
increase in the demand for petrol?

Price of petrol Price of diesel

a. fall fall
b. fall no change
c. fall rise
d. rise fall
e. rise rise

3. The demand for smartphones increases, while the cost of producing them
decreases.
What will be the effect on the price of smartphones and on the quantity traded?

Price Quantity traded

a. fall uncertain
b. rise uncertain
c. uncertain increase
d. uncertain decrease
e. uncertain uncertain

© Eunoia Junior College Economics Department 2023 2

4. The diagram shows the demand and supply curves for a commodity.

Which of these pairings are correct?

Area Represents
a. 0ACQ Consumer surplus
b. 0PCQ Consumer expenditure
c. 0BCQ Producer surplus
d. ABC Producer revenue
e. APC Societal welfare

5. Which of the following are normal goods?

(i) A good with price elasticity of demand of 0.5
(ii) A good with price elasticity of demand of 2
(iii) A good with income elasticity of -0.5
(iv) A good with income elasticity of demand of 0.7
(v) A good with income elastic of demand 3

a. (i) and (ii)

b. (ii) and (v)
c. (iv) and (v)
d. (iv) only
e. (v) only

6. The diagram illustrates the effects of placing a specific tax equal to JM on a good.

Which area represents the total tax receipts?

a. XJKY
b. XJLY
c. XJMZ
d. JKM

© Eunoia Junior College Economics Department 2023 3

 Section B: Questions on demand and supply factors and elasticity concepts

Q1 Adapted from 2019 H2 A-Levels CSQ1 (a)

With reference to the following extract, identify a demand factor and explain
how it has affected the demand for coal in the US:

In the US, a boom in power generation from cheaper, cleaner gas produced
using a technique called fracking has led to a coal being replaced as a source
of energy.
Your answer:
change in price of substitute (cheaper, cleaner gas)
a fall in the price of one good would lead to a fall in demand for the other good.
There is a boom in power generation from cheaper, cleaner gas produced using a technique called fracking
This is illustrated by a rightward shift in the supply curve for gas from SS0 to SS1 in figure a, resulting in a fall in price from
P0 to P1 in the clean gas market (to eliminate the surplus at P0).
The fall in price of clean gas leads to a fall in demand for coal since both can similarly satisfy consumer needs. This is as
consumers switched away from the relatively more expensive coal to the relatively cheaper clean gas. This is
represented by the leftward shift of the demand curve for coal from DD0 to DD1 in Figure b.

Q2 2017 A-Levels CSQ1

Table 1: Income elasticity of demand of Japanese consumers for meat
products in Japan
Beef 0.76
Poultry 0.02
Pork 0.38
Table 2: Price elasticity of demand of Japanese consumers for chilled beef
imported from different countries
Australia (-) 0.92
United States (-) 1.13
Rest of World (-) 1.18
Extract 2:
A 1% increase in the price of Australian chilled beef for example, would
cause imports of US chilled beef to increase by 0.74%, and chilled beef from
the rest of the world to increase by 1.34%.

a) With reference from Table 1, explain which meat product is considered

more of a necessity for consumers in Japan. [2]
Your answer:

© Eunoia Junior College Economics Department 2023 4

 b) Suppose the price of imported chilled beef rises. Explain what would happen
to total spending by Japanese consumers on imported chilled beef from
(i) Australia [2m]
Your answer:

(ii) Rest of world [2m]

Your answer:

(iii) LEVEL UP Question!

Japan began to import chilled beef from Malaysia too, and the PED value is
-1. What would happen to total spending by Japanese consumers if the
price of imported chilled beef in Malaysia rises too? [2m]
Your answer:

c) Using the information in Extract 2, calculate and interpret the cross

elasticity of demand in Japan
(i) between Australian chilled beef and US chilled beef.
Your answer:

© Eunoia Junior College Economics Department 2023 5

 (ii) between Australian chilled beef and chilled beef from the rest of the world.
Your answer:

(iii) LEVEL UP Question!

It was later reported that the value of cross elasticity of demand for Australian
chilled beef with respect to a change in price of US chilled beef is 1.23. Why
does this value differ from the value of cross elasticity of demand for US
chilled beef with respect to the change in price of Australian chilled beef that
you calculated in (i)? [2m]
Your answer:

3 2012 A-level CSQ1

Extract 1:
Cotton prices have soared 73% in the past year… Cotton growers in Brazil
plan to increase output in 2011. Planting in 2010 for the 2011 harvest may
rise to 1.1 million hectares from 830,000.

What can you conclude from the evidence in Extract 1 about the price
elasticity of supply of cotton in Brazil? [2m]
Your answer:

© Eunoia Junior College Economics Department 2023 6

 4 Ref 2018 CSQ1
Extract 1 and 2
The demand for sugar-sweetened beverages (SSBs) is generally price
elastic. Research has shown that imposing a tax will increase the price of
SSBs by 20%, and that will reduce the overall consumption by 24%. Fiscal
policies focused on price are designed to influence consumers to make
healthier choices when buying drinks, for example, by making sodas more
expensive than bottled water.

(a) State the economic concept you would use to measure the relationship
between the change in the price of SSBs as sales taxes are imposed and
the resulting change in the demand for bottled water. [1]
Your answer:

(b) Explain the value you would expect to get from this measurement. [3)
Your answer:

© Eunoia Junior College Economics Department 2023 7

Section C: Short-structured questions

Question 1

Market for Electric Cars

Cobalt is an important component for making lithium-ion batteries used in electric
cars. There are plans to classify cobalt as a “strategic substance,” to allow the Congo
government to tax foreign mining companies at higher rates.

Source: The Guardian, 6th February 2018

Explain the impact of the above factors on the market for cobalt and electric cars.

Identity and explain the following:

1. the relevant demand or supply factor

2. the direction in which the demand or supply curve shifts
3. impact on equilibrium price, quantity, total revenue/consumer expenditure
Impact on P, Q & TR/CE Diagram
Impact on Cobalt Market (Factor Market)
Price
Supply factor:

Impact on supply curve:

Impact on equilibrium price, quantity & TR/CE:

0 Quantity

Explanation (PEEL)
Point:

Explain/Economic Concept + Elaborate/Example/Extract

Link back to equilibrium P & Q & TR/CE:

© Eunoia Junior College Economics Department 2023 8

 Impact on P, Q & TR/CE Diagram
Impact on Electric Cars Market (Product
Price
Market)

Supply Factor:

Impact on supply curve:

Impact on equilibrium price, quantity & TR/CE:

Explanation (PEEL) 0 Quantity

Point:

Explain/Economic Concept + Elaborate/Example/Extract

Link back to equilibrium P & Q & TR/CE:

© Eunoia Junior College Economics Department 2023 9

Section D: Essays

Question type: Price Mechanism

Question 1: Adapted from 2016 H2 RI Prelim

a) Explain the role of price mechanism in the efficient allocation of scarce resources
in a market economy. [10]

Question type: How given factors affect price, quantity, total revenue and their
extent.
Question 2: 2012 H2 A Level

Most brands of car are available in different models. A large rise in the cost of car
manufacture and a rise in incomes are likely to affect the sales of various models of
car in different ways.

a) Explain how elasticities of demand can assist in understanding the effect of each of
these changes on the sales volume of different models of car. [10]

b) Compare and contrast the likely combined impact of both these changes on the
revenue earned from the sales of different models of car. [15]

Question type: Provide own factors to explain a given outcome on price,

quantity or total revenue.
Question 3: 2022 H2 NYJC Promo

Reported changes in the smartphone markets cited leading smartphone producers are
facing growing disruptions in critical resource supplies leading to rising costs. At the
same time, due to the global income growth of 2.6% this year, smartphone producers
are seeing consumer preferences shifting from 3G to 5G network-ready devices.

b) Discuss how the demand and supply factors above would affect the market for
different types of smartphone devices. [15]

Question 4: 2013 H2 A Level

The Urban Redevelopment Authority (URA) announced that prices of private
residential properties in Singapore rose by 1.3% in the third quarter of 2011, but the
rise in the prices has been slowing for eight consecutive quarters. At the same time it
reported that the total supply of new private residential properties nearing completion
was at a record high.
b) Discuss the different supply and demand factors and their likely importance in
determining the reported changes in the prices of private residential properties in
Singapore. [15]

© Eunoia Junior College Economics Department 2023 10

Question type: Impact on factor markets (e.g. labour)

Question 5: 2019 A Level

A firm in Singapore is facing an increase in demand for its goods which has led to an
increased demand for labour. Its demand for labour is also inelastic. In addition, large
numbers of its workers born in the 1960s (‘baby-boomers’) have been retiring,
reducing the number of workers available to the firm.

a) With the aid of a diagram, explain how this firm’s total expenditure on its workforce
will have changed as a result. [10]

b) Discuss whether making changes to the foreign worker levy is likely to be the most
effective way the Singapore government can address the labour shortages
experienced by such firms. [15]

Question 6: 2012 H2 RVHS Prelims

Despite the recession, many countries have imposed the mandated minimum wages
for workers.

a) Explain how such minimum wages might affect the total earnings of workers in an
industry. [10]

b) Discuss the impact of the recession on the labour market on these countries. [15]

Question type: Impact of given events on consumers/producers

Question 7: 2014 H2 A Level

In 2012 the UK had very poor harvests for grain and potatoes, which are major
ingredients of many of the foods of UK consumers and also provide feed for much of
Britain’s livestock. At the same time there was a decline in the real incomes of many
UK citizens, especially those on low incomes.

b) Using economic analysis, discuss the impact these events are likely to have had on
UK consumers and farmers. [15]

© Eunoia Junior College Economics Department 2023 11

Question type: Usefulness of elasticity concepts in guiding producers'/
governments'/ consumers' decisions

Question 8: 2018 H2 A Level

The average price of tickets for two concerts performed by singer-song writer Ed
Sheeran in November 2017 at the Singapore Indoor Stadium was S$180. Tickets went
on sale six months earlier and both concerts sold out almost immediately. Some tickets
were later being offered for resale at prices well above their face value.

a) Using supply and demand curves, explain why there is an excess demand for
tickets and why there is a high resale price. [10]

b) Discuss possible strategies that concert organisers could use to improve the market
outcome for this type of concert for producers and consumers. [15]

Question type: Impact of policies on markets and agents

Question 9: 2020 H2 EJC Prelims

India implements a price floor for sugar. Due to a fall in the price of stevia, an
alternative sweetener, coupled with favourable weather conditions, the sugar
surplus in India grew sharply. These market conditions have increased pressure
on the Indian government to remove the price floor.

a) Account for the sharp increase in sugar surplus. [10]

b) Discuss whether removing the price floor is the best way for the Indian
government to address the sugar surplus. [15]

Question 10: 2020 A Level

Concerns about future shortages of water resulted in Singapore’s national water
agency, PUB, increasing the price of water by 30% from 2017. By 2060, Singapore’s
total water demand could almost double.
a) Explain why a shortage of water might still exist after the rise in the price of
water. [10]
b) Discuss whether the government policy of increasing the price of water is the
only effective way to overcome future water shortages. [15]

© Eunoia Junior College Economics Department 2023 12

Section E: Case Study
Question 1: 2011 A Level H2 Examination CSQ

The UK air travel market

In January 2009 the UK government decided to support a third runway at Heathrow

Airport, committing to a significant expansion of air travel. Alongside this decision,
however, the Government set a target that carbon emissions from UK air travel in 2050
should be at or below 2005 levels.

Extract 1: Meeting the UK air travel target and reducing carbon emissions

Demand for air travel in the UK has grown by 130% over the past 20 years. This is
against a backdrop of an increase in GDP of 54% and a significant fall in air fares.
Given forecast real income growth of around 150% in the period to 2050 we project
that the demand for air travel could grow by over 200% from 230 million passengers
per year in 2005 to 695 million passengers in 2050.

However, the increase in demand for air travel will result in higher carbon emissions.
There have been talks about measures to tackle this issue. Imposing a tax on the
carbon emissions of aircraft and limiting the capacity of UK airports could reduce
demand growth to 115% by 2050. In addition there is scope for a significant shift to
high-speed rail travel on domestic journeys and short-haul trips to mainland Europe,
which could reduce demand for air travel by up to 8% by 2050. This will, however,
require significant investment in rail travel. There is also some scope for substitution
of videoconferencing for business travel. This could lead to a reduction of up to 30%
in business demand for air travel by 2050. Carbon emissions could also be reduced
by an improvement in the efficiency of aircraft engines and in air traffic management.
In addition alternative fuels will help to cut emissions.

Source: Committee on Climate Change Report, December 2009

Extract 2: Fresh taxes needed to curb rise in air travel

More taxes on air travel are needed if Britain is to meet its climate change obligations
according to Government advisers. In a report published today, the Committee on
Climate Change (CCC) has called for drastic action to curb the predicted growth in air
travel including higher taxes on air fares. Holidaymakers are already facing a sharp
increase in Air Passenger Duty which, by the end of next year, will mean a family of
four flying to America will pay £240 in tax. ‘Air tickets are going to get a lot more
expensive, but people will become a lot richer over the next 40 years. If you’re going
to limit the growth in demand, you do need rising prices,’ said the Committee’s chief
executive. ‘It’s not that demand has to fall in order for us to meet the target, demand
can increase but only in a limited way.’

Despite calling for curbs on airport expansion, the Committee stopped short of calling
for plans for Heathrow’s third runway to be abandoned.

© Eunoia Junior College Economics Department 2023 13

The report was welcomed by environmental groups. One campaigner said, ‘this report
is a reality check which should finally put an end to Government plans to allow a huge
expansion in air travel. The Committee says that technology can signficantly cut the
impact that individual flights have on our climate – but if air travel grows to the
dangerous level that the industry is pushing for, these benefits will be completely
outweighed.’ However, the air travel industry insisted that it could meet the carbon
reduction targets without restricting demand for flights. ‘We have already seen a 70%
improvement in carbon emissions in the last 40 years. We believe limiting emissions
is the answer rather than limiting people’s ability to travel. From 2012 carbon
emissions from UK flights will be included in a European Union (EU) scheme, whereby
any increase in emissions above the 2005 baseline will have to be matched by
equivalent reductions elsewhere, paid for by the air travel industry,’ said the executive
chairman of the Airport Operators Association.

The chief executive of a short-haul airline added: ‘The key to sustainable air travel is
technology not taxation, and the way to make sure it happens is by setting minimum
standards for aircraft emissions.’

Source: David Millward, Daily Telegraph, 8 December 2009

Extract 3: Raising air fares would lower the chances of more environmentally
friendly aircraft

The ability to travel combined with a fall in air fares has driven the surge in demand
for flights, not just to the UK, but throughout Europe. But a recent report by the Civil
Aviation Authority, produced in September, confirms that there has been an
exceptional surge in migrant travel to and from Europe. It is this, rather than an
increase in holiday or business travel, that has led to the increase in demand for flights
since 1990. The question is whether this rise will continue and there is evidence that
the rise is beginning to level off. If that is the case, one has to question whether there
is any real justification in artificially forcing up air fares, which will not only make air
travel the preserve of the rich, but also deny airlines, many of which are making losses
at the moment, the money they need to invest in cleaner, more environmentally
friendly aircraft in the future.

Source: David Millward, Daily Telegraph, 9 December 2009

Extract 4: The rise in flights to visit friends or relatives

In recent years, an increasingly globalised world economy has led to a rise in labour
mobility and migration, particularly within Europe. At the same time, there has been a
relaxation of regulatory restrictions on aviation markets and this has encouraged
increases in flights.

There is a subset of leisure passengers who travel for the purpose of ‘Visiting Friends
or Relatives’ (VFR). Between 2000 and 2007, whilst total passengers to and from the
UK grew by one-third, those travelling for the purpose of VFR increased by over three-
quarters, much more than the growth in business and holiday travel.
Looking forward, the current worldwide economic downturn is likely to impact upon
VFR traffic, both through falls in UK GDP and changes in migration patterns. For these

© Eunoia Junior College Economics Department 2023 14

people, travel for VFR purposes is an indication of the desire to build and maintain
relationships. The analysis in this study has been carried out using data which cover
a period of significant change in terms of the increase in the number of countries
belonging to the EU, the migration flows this has enabled and the liberalisation of the
EU air travel market (giving rise to more affordable air travel). In the light of these one-
off developments, it may not be realistic to assume continued growth of the same
magnitude.

Source: UK Civil Aviation Authority Report: International Relations – The Growth in

Air Travel to Visit Friends or Relatives, 2009

Table 1: Estimates of elasticities for flights from UK airports

Price elasticities Income elasticities

of demand of demand
Business flights to UK destinations n/a 1.4
Leisure flights to UK destinations -1.0 1.5
Business flights to non-UK destinations n/a 0.6
Leisure flights to non-UK destinations -0.2 0.7
n/a = not available
Source: UK Department for Trade, 2009

© Eunoia Junior College Economics Department 2023 15

Questions

(a) With reference to the data in Table 1, explain the effect on the total
revenue from leisure flights to UK destinations of
(i) a fall in price. [2]
(ii) a rise in income. [2]
(b) Explain one possible reason for each of the following.
(i) why the demand for leisure flights to non-UK destinations is less [2]
price elastic than that for UK destinations
(ii) why the income elasticity of demand for business flights to UK [2]
destinations is higher than that for non-UK destinations
(c) Explain the likely value of the cross-elasticity of demand between high- [2]
speed rail travel and air travel.
(d) Explain either one demand or one supply factor that has led to a rise [2]
in VFR travel
(e) With reference to the data where appropriate, and using economic [8]
analysis, discuss the effects of globalisation and improved technology
on the market for air travel.
(f)* With reference to air travel and/or other parts of the travel industry, [10]
discuss whether taxation or improved technology is the key to
achieving a more efficient allocation of resources.
[Total: 30 marks]
* Please attempt this question only after ‘Market Failure’ topic.

© Eunoia Junior College Economics Department 2023 16

Question 2: 2016 H2 ACJC Prelim

The Market for Steel

Table 1: Crude steel production (million tonnes)

Country \ Year 2010 2011 2012 2013 2014
China 638.7 702.0 731.0 822.0 822.7
United Kingdom 9.7 9.5 9.6 11.9 12.1
WORLD 1,433.4 1,538.0 1,560.1 1,650.3 1,670.1

Source: World Steel Association

Table 2: Crude steel consumption (million tonnes)

Country \ Year 2010 2011 2012 2013 2014
China 587.6 641.2 660.1 735.1 710.8
United Kingdom 8.8 9.0 8.4 8.5 9.6
WORLD 1,308.2 1,411.8 1,439.3 1,528.4 1,537.3

Source: World Steel Association

Figure 1: Global steel prices (US$/tonne)

Figure 2: Employment in UK Steel Figure 3: UK Industrial Production Index

Manufacturing (thousands) (1990=100)

Fig 2 & 3 Source: www.independent.co.uk

© Eunoia Junior College Economics Department 2023 17

Extract 1: Niobium the boutique commodity
Applications of niobium have increased steadily over the years. About 90 per cent of
niobium is used in the steel industry, primarily in oil and gas pipelines, automobiles,
bridges, high-rise buildings and welded pipes. Resistant to corrosion, niobium
strengthens and lightens steel. Adding niobium reduces the weight of a car and
improves fuel efficiency; it also significantly reduces the amount of cement required in
the construction of building and bridge structures.

The growth and evolution of niobium also extends into the field of medicine (magnetic
resonance imaging that produce detailed images of the inside of the body), electronics
and nanotechnology (e.g. developing quantum computers which can process multiple
data simultaneously, with unlimited capacity).

Brazil is the largest producer of niobium in the world; niobium is the country’s third
most important mineral export. Two firms in Brazil alone make up 92 per cent of global
niobium production with Canada producing the remaining 8 per cent. As of 2010,
China was the largest consumer of niobium, accounting for 25 per cent of total
consumption. This reflects the size and importance of China’s steel industry - China
was the largest producer of stainless steel, with its share in world production rising
from 1-2 per cent in the 1990s to 37 per cent in 2010.

Adapted from “The Evolution of the Niobium Production in Brazil”,

Materials Research, vol. 18 no. 1, Jan/Feb 2015 & Argonaut Research, 29 April 2016

Extract 2: The changing niobium landscape

Niobium is hard to find and currently mined in only three places on Earth. 84 per cent
of the global supply comes from one company - Companhia Brasileira de Metalurgia
& Mineracao (CBMM) in Brazil. London-based Anglo American is the second largest
niobium producer in the world and also mines in Brazil. The third niobium producer is
Niobec, which mines in Canada.

The demand for niobium remains high due to its use in the production of quality steel.
Yet, prices fell last year as slumping oil and gas markets led to fewer metal pipe
purchases, according to niobium producer, Anglo American, which wants to cut debt
after a collapse in commodity prices. Anglo American is a global and diversified mining
business, with a mining portfolio that includes copper, platinum, diamonds, coal, iron
ore and manganese, nickel, niobium and phosphates.

Despite the money to be mined in niobium, divestments have taken place in the past
few years for considerable compensation. In 2011, CBMM sold a 30-percent stake to
Asian steelmakers at US$3.9 billion in two transactions – a consortium of five Chinese
steelmakers, and a consortium of Japanese and South Korean companies. In late-
2014, Iamgold divested its Niobec mine to a consortium for US$530 million to focus
on its core gold mining business. In the most recent transaction, Anglo American
announced on 28 April 2016 that it was selling its niobium business in Brazil for US$1.5
billion to China Molybdenum. The company’s decision was another step in its quest to
sell non-core assets and cut back debt against a backdrop of volatile commodity
prices.

Adapted from The Globe and Mail, 18 May 2016 & Reuters, 2 September 2011

© Eunoia Junior College Economics Department 2023 18

Extract 3: Chinese steel firms expanding in Africa
China produces too much steel. With 800 million tons of steel a year, the country
makes up half of world production in 2014 - adding to the current global glut. Chinese
steel is at its lowest price in over a decade and most firms producing the commodity
in the country are loss-making as construction slows in the world’s second largest
economy. Market analysts are not surprised to see China’s steel sector shrinking
because “a lot of that growth was artificially supported by government subsidies”.

But with overcapacity continuing, Chinese steelmakers are exporting a large amount
of the metal to other markets at low prices, hurting the sector and prompting trade
participants to cry foul on what is perceived as dumping. Yet, instead of shrinking its
steel sector, Chinese firms are expanding steel production in Africa. According to a
Shanghai-based trade publication, Chinese firms are taking a longer view of Africa’s
potential given that African steel demand is expected to hit 300m tonnes per year by
2050. African sources of iron ore and basic steel could also give China a more stable
supply to feed its industry.

There is a further reason why China has to play the long game in African minerals -
Chinese firms use a stick-at-it-strategy because of their newcomer status. In contrast
with firms from Britain and France which have roots going back to African countries’
colonial days, Chinese firms have had to prove their reliability. They hope that good
behaviour during a crisis - even if it loses them money in the short run - will secure
them better contracts in the future.

Adapted from The Economist, 13 July 2015 & CNBC.com, 18 November 2015

Extract 4: UK steel crisis

More than one in six workers in Britain’s steel industry is facing the axe after Tata
Steel, one of Europe’s leading steel manufacturers, confirmed it was cutting almost
1,200 jobs as part of a radical shakeup. The announcement increases pressure on the
government over its handling of the crisis.

Britain’s steel industry has been battered by falling steel prices, high energy costs,
cheap imports and the strength of the pound. Tata said imports of steel plate into
Europe had doubled in the past two years and imports from China had quadrupled.
The steel crisis threatens severe knock-on effects, with jobs threatened throughout the
supply chain for the industry. In addition, many towns with steel plants rely on the
sector’s skilled workers to spend money in local shops and other businesses.

Karl Köhler, chief executive of Tata Steel’s European operations, said “The European
commission needs to do much more to deal with unfairly traded imports – inaction
threatens the future of the entire European steel industry.” Tom Westley, chairman of
the UK’s Westley Group foundry business, said that in the short run, ministers might
need to intervene to save the industry. “When prices of products become so low ...
you have to have a longer-term strategy. Perhaps we have got to give some level of
subsidy to keep this industry alive and look at it as a national asset rather than [in
terms of] costs.”

Adapted from The Guardian, 20 October 2015

© Eunoia Junior College Economics Department 2023 19

Questions
(a) Account for the trend in global steel prices from 2011-2014. [2]

(b) Explain the decision of niobium producers such as Anglo American to divest [4]
its interest of niobium mining.

(c) Explain how “government subsidies” in Extract 3 affect resource allocation [3]
in China’s steel sector.

(d) Using a demand-supply diagram, explain how “the strength of the pound” [3]
would affect the market for steel in the UK.

(e)* Discuss the factors which the UK government could consider in deciding [8]
whether or not to protect the country’s steel industry.

(f)** With reference to Extracts 2 and 3, assess whether the move by some [10]
Chinese steelmakers to expand steel production in Africa or to buy into the
niobium business is a sound strategy.

[Total: 30 marks]

*Please attempt this question only after ‘International Trade’ topic.

** Please attempt this question only after ‘Firms and Decisions’ topic.

© Eunoia Junior College Economics Department 2023 20

Question 3: Adapted from TJC 2017 H1 Promo

Commodity Oils

Table 1: Palm oil in selected economies (million tonnes)

Production Consumption
2011/12 2012/13 2011/12 2012/13
Indonesia 25.9 31 7.1 2.9
Malaysia 18.2 19 3.0 2.1
Thailand 1.5 2.1 1.1 1.8
China 0 0 5.8 2.3
Nigeria 0.8 0.9 1.3 1.4
World Total 50.7 52 48.9 49

Source: United States, Department of Agriculture

Extract 1: Commodity oils and fats - palm oil

In 2006, palm oil accounted for 52% of the total world oils and fats exports. Its rival,
soybean oil, was a distant second at 19%. Palm oil demand was significantly increased
by 10.6% in 2006. Over the same period, soybean oil use has grown rapidly, up by
5.3%. Both palm and soybean oils are widely used in everything from food to fuel.
Nonetheless, palm is generally the cheapest commodity vegetable oil and by reason
of its availability and low cost, it is an important component of the increasing intake of
oils and fats in the developing world.

Traditionally, the main non-food uses for palm oil have been in the manufacture of
soaps and detergents and in the production of greases, lubricants and candles. Today,
about 80% of the palm oil produced globally is used as food. Palm oil which is orange
red in colour is refined, bleached and deodorized to produce the universally known
bright golden cooking oil. Its excellent properties make it an ideal domestic and
commercial cooking oil.

Source: http://www.soyatech.com

Extract 2: Golden Agri-Resources (GAR) Q1 and Q2 earnings

GAR starts the year 2013 with strong quarter-on-quarter performance with net profit
for the first quarter of 2013 growing by a remarkable 176% to US$113 million,
compared to US$41 million in the previous quarter. GAR has been able to grow its
year-on-year palm oil production through an increase in area of mature plantations by
approximately 14,760 hectares as well as favourable weather conditions. The age
profile of GAR’s plantations is favourable, with average age around 14 years, providing
a solid foundation for the company’s long-term growth. Of the 464,300 hectares, 23%

© Eunoia Junior College Economics Department 2023 21

are immature and young plantations and 49% are at their prime age of 7 to 18 years
that produce optimum yield and contribute strongly to production.

However, weaker palm oil prices in Q2 2013 sent earnings at GAR down for the
second consecutive quarter. Golden Agri said the lower second-quarter earnings were
mainly due to a 25% decline in average crude palm oil market prices. Chief executive
Franky Widjaja said in a statement: "Investing in the palm oil business is a long-term
strategy and we will continuously strive to expand the size of our planted area and our
downstream operations.”

Source: www.goldenagri.com.sg

Extract 3: Malaysia revitalizing palm-oil biofuel sector

The Malaysia government plans to subsidise palm-oil biofuel production, two industry
sources told Reuters, possibly reviving the country's biodiesel industry. "The
government has come to understand that they need to support this high-value
product," said a source familiar with the plan. The move to subsidise palm-based
biofuel will remove some 100,000 tonnes of palm oil from the market by end-2011, the
sources said, with Malaysian palm oil production forecasted to rise to 17.6 million
tonnes this year. The United Nations has cited the use of biofuels as a way to diversify
the energy mix and ease reliance on costly crude oil. Hence, there is rising demand
with the Malaysia government pushing towards biofuel use as Libyan unrest threatens
crude oil supplies. Although the Malaysia government has started to implement the B5
mandate (a blend of 5% of palm methyl esters in diesel) in stages, domestic
consumption of biofuel is not expected to increase sharply in the near term, despite
higher crude oil prices.

Adapted from: Reuters and Global Agriculture Information Network GAIN Report
2011

Extract 4: Time to revise policies for cooking oil?

The Malaysia government had started subsidising cooking oil since 1992. Every year
the government will give out more than 1 billion ringgit in subsidy to help push down
the price of cooking oil. However, in reality, 30% to 35% of the subsidised cooking oil
often goes into the wrong hands - restaurant operators, hawkers and small-scale food-
based industries. Some also claimed that 10% of the total domestic subsidised
cooking oil quota was smuggled into neighbouring countries. Thus, there will be a 505
million ringgit subsidy cut on cooking oil in 2014 in an effort to plug Malaysia’s budget
deficit. Cooking Oil Stabilisation Scheme was also implemented from June 1, 2007 to
curtail the increase in price to relieve the burden of the lower income group. The ceiling
price of cooking oil in Malaysia has been fixed and includes 1 kg polybag (1.85 ringgit)
and bottle packaging ranging from 0.5kg (2.50 ringgit) to 5kg (13.35 ringgit). An issue,
which often crops up is that whenever a festive season is approaching, there will bound
to be a shortage in cooking oil despite Malaysia being one of the world largest palm
oil producers and the raw material is plentiful the whole year through.

Source: The Star & Astro Awani, 2013

© Eunoia Junior College Economics Department 2023 22

Questions

(a) Using Table 1,

(i) Explain what might happen to the world price of palm oil in
2012/2013. [2]

(ii) Identify the country that has had the greatest impact on
world prices. Justify your answer. [3]

(b) Using economic analysis, comment on how a rise in the price of

“costly crude oil” might affect the demand for biofuels. [4]

(c) Using the information provided in Extract 2, what can you conclude
about the price elasticity of supply of palm oil? [2]

(d) Explain how “favourable weather conditions” (Extract 2) could have

resulted in a fall in earnings for the palm oil industry. [4]

(e) With the aid of demand and supply diagrams, explain how
subsidies in the palm oil industry will affect the allocation of
resources between palm oil and crude oil. [5]

(f) Using Extract 4, discuss the measures taken by the Malaysian

government to curb the price of cooking oil. [10]

[Total: 30 marks]

© Eunoia Junior College Economics Department 2023 23

Question 4: 2021 A Level H2 Examination CSQ

Changes in the market for seafood

Extract 1: Higher cod prices hit Europe's fish consumers

Cod is a sea fish and is the second-most-consumed fish in Europe, behind tuna in first
place and ahead of salmon in third. However, Europe's consumers are facing higher
cod prices (see Figure 1). This is because of increased demand for Norway's cod
caused by the rising price of salmon, and a prolonged disagreement in Iceland
between fishing workers and boat owners. Norway and Iceland are two of Europe's
major producers of cod.

Norway's cod prices have risen by around 25 per cent from a year ago to €2.00 per kg
after a 45 per cent rise in salmon prices over the same period led consumers to look
for alternative fish.

In Iceland, disagreements between fishing workers and the boat owners have left
fishing boats idle in the ports for over two months.

An analyst said that large stockpiles of frozen cod in Iceland have been able to keep
prices low for now despite the fall in output, but these stockpiles had started to reduce.
He said, 'The peak cod-fishing season in Iceland is typically between February to April,
meaning current delays in fishing could reduce supplies and affect prices later in the
year.'

The disagreements in Iceland are mostly over the wages for fishermen and fishing
industry taxes. The Icelandic government has said it does not want to get involved, but
the stalemate in talks means it may be forced to intervene.

Figure 1: European cod prices (Norway and Iceland), January 2014 to January 2017

© Eunoia Junior College Economics Department 2023 24

Extract 2: Shrinking prospects for shrimp farmers as India faces a global slump

The cascading effects of the Covid-19 (coronavirus) pandemic in 2020 have had a
striking impact on shrimp trade in India - farmers of the shellfish have been losing their
livelihoods, and experts are expecting more disruption to come.

Around 80 per cent of all farmers in the village of Baguran Jalpai, which is close to the
Bay of Bengal, have switched to shrimp farming recently because of relatively high
revenues. But fears of losing all their hard-earned income at a single stroke have been
growing with the spread of Covid-19.

Sunil Mahata, a shrimp farmer who lives in the village, expects heavy losses if the
situation doesn't change in the next few months. 'I invested around US$6500 for
200000 tiny shrimp just ten days before India's lockdown was announced. I have to
spend money on feeding the shrimp and also on medicines for my family.'

An industry expert said, 'The cold storages were full of seafood and the smail-scale
shrimp farmers were forced to sell their product at 10 per cent of the normal price to
get rid of it. I fear that many of them will go out of business. Large quantities of seafood
were destroyed because there was no storage place left.'

India is the second largest fish producer in the world, with a total production of 13.7
million tonnes in2018-19. The industry employs over 16 million people in the seafood
business.

Indian exporters fear that major buyers like France, Italy, Spain, the United States (US)
and Portugal might be forced to reduce their orders, as their economies will take a
long time to recover from the damages of the pandemic.

An exporter said India's shrimp production will not be the same as before, as farmers
have become reluctant to invest in shrimp because of the situation with the pandemic
- many will leave the market. The shrimps farmed in India are mostly used in hotels
and restaurants across the globe, and the whole hospitality and dining sector might
take a hit if the pandemic keeps customers away. But maybe the situation won't be as
bad as is being envisaged. We should wait and watch rather than becoming too
negative over it.

Source: The Fish Site, 23 April 2020

Extract 3: Barramundi Asia rolls out ambitious growth plan

Singapore-based Barramundi Asia has big plans for growth. The company farms the
barramundi fish in deep seawater off Singapore's southern isles, as well as around the
Islands of the Kimberley off northern Australia and a new farm set up in Brunei's
waters. The company is working to scale annual production up to 50000 tonnes of
barramundi by 2030. Barramundi Asia uses hi-tech automated farming processes,
harvesting when its fish get to four to five kilograms in size.

'The overwhelming growth in fish farming for the future is still here in Asia,' said the
chief executive officer (CEO). 'Singapore is an international financial hub, and has

© Eunoia Junior College Economics Department 2023 25

proximity to our key business activities in Brunei and Australia as well as our local
research and development sites.'

Currently, the company's production is around 4000 tones, with around 700 tonnes
produced in Singapore and 3000 tonnes produced in Australia. It makes around
SG$20 million in annual revenue - not enough to make it profitable yet. But that is due
to the company's aggressive growth plans for the next ten years. By expanding its
operations across its three farming sites, Barramundi Asia says it is on track to produce
more than 11 000 tonnes of barramundi fish by 2023. And that could grow by even
more if the company adds more new farms.

Because of the geographic distance between its farming operations, Barramundi Asia
has found it makes both logistical and financial sense to own and operate its entire
supply chain: breeding and processing the fish, managing the farms, as well as
running a sales and marketing operation.

Barramundi Asia says it can produce its own vaccines and has methods of farming
barramundi fish from small fry to fully-grown fish, as well as a sophisticated sales and
marketing operation with online shops, home delivery and a strong brand. It also now
has genetics expertise, after starting to work with Temasek Life Sciences, a non-profit
organisation specialising in fish genomics and breeding programmes.

Can we get to 50000 tonnes? I believe so. It's not going to be easy but we're quite
confident,' said the CEO. 'I do believe we have the capabilities in place to deliver on
our expansion plans. I'm very high in confidence we can make it happen.’

Source: SeafoodSource, 28 January 2020

Extract 4: 'Plant-based seafood is the logical next step'

Plant-based foods are trending as consumers opt for healthy and sustainable food
choices. Novish is a producer that specialises in 100% plant-based substitutes for fish.
According to the company, natural aromas inspired by the plants, seaweed and algae,
offer a delicious flavour. The products are 100% vegan and soy-free. Their first fish-
free range of foods will be presented during an event in the Netherlands, Europe, being
held in January 2020.

The company says plant-based seafood is the logical next step in view of overfishing'
(where the stock of fish in the seas is reduced by unsustainable amounts) and other
sustainability challenges associated with seafood.

Similar to meat alternatives, our key challenge is to develop products which have the
right taste and texture, and thus sufficient consumer appeal. We have launched our
first series of products which have received excellent feedback. We will introduce other
products that taste like uncoated salmon burgers and tuna steaks which are more
challenging but certainly very feasible', the company said.

The target consumer group is people who worry about our planet and, therefore, want
to switch from animal proteins to plant-based alternatives. The company expects the

© Eunoia Junior College Economics Department 2023 26

growth in consumption of plant-based seafood will move much faster than meat
alternatives since consumers already know about the sustainability and health issues.'

Source FoodingredientsFirst.com, 14 January 2020

(a) Using a demand and supply diagram, explain why the rise in the
price of salmon led to the change in the price of cod in Norway [2]

(b) With reference to Extract 1 and Figure 1:

(i) Using a diagram, explain the likely impact of the

disagreement between fishing workers and boat owners in
Iceland on the market for cod in 2017. [2]

(ii) Suppose a maximum price of Iceland cod of €2.25 per kg

had been operating since March 2016.

Explain the impact such a maximum price would have had

on the market for Iceland cod. [2]

(iii) Explain how large stockpiles of frozen cod in Iceland' can be

used to keep cod prices stable, and identify two difficulties
in operating such a scheme. [4]

(c)* Explain why many small-scale shrimp farmers in India took the
decision to shut down production in the short run and leave the
market in 2020. [2]

(d)* Discuss whether Barramundi Asia's plan to increase its scale of fish
production is likely to benefit consumers. [8]

(e) Due to fears over climate change and a growing demand for plant-
based diets, many consumers are changing from animal protein to
vegan alternatives.

Discuss whether demand factors or supply factors have a greater

impact on the market for fish in the long run [10]

[Total: 30 marks]

© Eunoia Junior College Economics Department 2023 27