(2016) 8819 H1 Econs Paper CSQ 2 Suggested Answers by Mr Eugene Toh (A Level Economics Tutor)

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a. Both prices of food and prices of tropical beverages saw a general increase.

Prices of food increased throughout 2000 - 2013 while prices of tropical beverages saw a fall in prices in 2001 and from 2012-2013.

The extent of increase in prices of food is greater than the increase in prices of tropical beverages.

bi. There is an upward pressure on demand due to the continued population growth leading to an increase in the size of the market and thus an increase in demand. At the same time, the economic growth has led to high income levels of consumers thus increasing demand for food as well. Taken together, demand increases from DD0 to DD1

The increased agricultural costs increase the cost of producing food, thus decreasing supply from SS0 to SS1.

The combined effect of the above events causes food prices to rise from P0 to P1

bii. An increase in investment in agricultural technology, if significant, can lead to a

significant fall in the cost of production, hence a significant rightward shift in supply from SS0 to SS1, thus causing a fall in the world price of goods from P0 to P1.

ci. Coffee is likely to be price inelastic since it takes up a small proportion of most consumers’ income and is considered by many to be a necessity, hence an increase in supply from SS0 to SS1 will lead to a huge fall in price from P0 to P1.

cii. When the demand for coffee is price inelastic, a severe price fall will lead to a less than proportionate increase in the quantity demanded for coffee. The total revenue earned from coffee will fall, negatively impacting the incomes of coffee producers

ciii If PED is low, a severe price fall will lead to a less than proportionate increase in

quantity demanded for coffee and this will reduce export revenues from coffee. 

(X-M) falls causing AD to fall from AD0 to AD1, causing a fall in RNY from Y0 to Y1, hence lower economic growth.

Firms will hire fewer factor inputs in response to the falling real output, hence less labour is employed leading to higher cyclical unemployment.

di. (no longer tested in H1 curriculum)

dii. (no longer tested in H1 curriculum)

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