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CCT Markers Report / JC1 / H1

JC1 College Common TestEconomics (H2)

Markers report

1. With the use of a diagram, explain HOW the equilibrium price andquantity is determined in a free market. [3m]

Equilibrium means the state of balance between theforces of demand and supply. Equilibrium price andquantity is achieved at the intersection of demand andsupply curves. If a firm sells a good at P1, the quantitydemanded is Q1 and quantity supplied is Q2. This resultsin a shortage as quantity demanded is more than quantitysupplied. To get rid of the shortage, prices are forced torise. When price rises, quantity demanded decreasesas some consumers are deterred from buying and firms

are encouraged to increase quantity supplied. Therefore,quantity supplied increases from Q2 to Q0 and quantitydemanded decreases from Q1 to Q0. As a result,shortage is removed at the equilibrium point E0, withequilibrium price P0 and equilibrium quantity Q0 wherequantity supplied equals to quantity demanded.

Benjamin Lim 06S23

Good:1. Explained theentire adjustmentprocess toequilibrium priceand quantitywith reference todiagram.

General weaknessesMost students were able to state that equilibrium refers to the state ofbalance between the two forces but failed to explain on the adjustmentprocess.

TPJC/ econs / 2006

Price

P1

P0

S0

D0

Q1Q0Q2

E0

Shortage

Quantity

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2. Farmers said the cold weather has caused a 3% reduction in eggproduction at a time when demand has increased by 5% due to theupcoming Chinese New Year.

With the use of a diagram, explain the impact of the changes mentionedin the headlines on the market price of eggs. [4m]

The cold weather reduces the quantity supplied at eachand every price, resulting in a leftward shift in the supplycurve, from S1 to S2, ceteris paribus.

The Chinese New Year on the other hand causes thequantity demanded of eggs to increase at each and everyprice, 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 whowere unsuccessful in obtaining the goods will want to paymore, causing an upward pressure on price. By the lawof supply, this increase in price results in an increase inquantity supplied and by the law of demand, the increasein price results in a fall in quantity demanded. Price ofeggs will therefore rise until a new equilibrium point isreached where price is higher at P2.

Ang Wei Zheng 06S02

Good:

Identified andexplained in detailedthe changes todemand and supply,noting the directionand relative extentof shifts in thecurves as well usinga diagram. Madeclear reference to

the ceteris paribusassumption as well.

General weaknessesMost students were able to explain and show diagrammatically how thedemand and supply curves change and shift respectively, but many failed tostate the assumption of ceteris paribus and some also failed to highlight therelative magnitudes of the shifts of the demand and supply curves.

TPJC/ econs / 2006

Q0 Q1

E2

E1

D0

D1

S0

Quantity

PriceS1

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3. The United States offers significant subsidy payments to the US sugargrowers.

With the use of diagrams, explain how the policy would affect theequilibrium price and quantity for sugar and for artificial sweeteners.

[5m]

When the United States offers significant subsidypayments to the US sugar growers, the cost ofproduction is reduced. This results in an increasein supply from S0to S1as the sugar growers areencouraged to produce more as cost of production islow. However, as demand is constant, the increase insupply results in a surplus. The sugar growers wouldbe forced to lower prices to sell away the surplus. Asprices fall, quantity demanded would increase as morewould be able to afford buying sugar. If price is allowed

to fall enough, the surplus would be removed and alower equilibrium price P1and a higher equilibriumquantity Q1is attained.

As the price of sugar falls, quantity demanded forsugar rises. As sugar and artificial sweeteners areclose substitutes (since there arent many alternativesof 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 shiftto the left by a large magnitude from D0to D1.However, as supply does not change, there will alsobe a surplus. Price is then allowed to fall to attractmore sales and a lower equilibrium price and quantityis attained.

Good:1. Explained thatsubsidy would affectcost of production (asupply determinant)and hence supplycurve for sugarshifts.2. Explained hownew equilibriumprice and quantityof sugar is attained

with reference todiagram.3. Explained thatthe rise in price ofsugar will lead toa relatively largefall in demand forartificial sweetenerssince they are closesubstitutes.4. Explained hownew equilibriumprice and quantity ofartificial sweetenersis attained withreference todiagram.5. Stated theassumptions foreach case; forsugar, assumedemand remainsunchanged. Forartificial sweeteners,assume supplyremains unchanged.

TPJC/ econs / 2006

Price of sugar

P1

P0

S0

D0

S1

Q1Q0 Quantity of sugar

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General weaknesses

1. Most students failed to state the assumptions for both markets andfailed to explain the extent of shift of the demand curve of artificialsweeteners.

2. Some mixed up concepts and see them as complements or that sugaris an input to make artificial sweeteners. A few thought sugar andartificial sweeteners are the same.

TPJC/ econs / 2006

Price of sweeteners

P0

P1

S0

D1

D0

Q0Q1Quantity of sweeteners

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4. In the context of the market for book Principles of Economics by N.Gregory Mankiw:

a. What are close substitutes and close complements? Illustrate withexamples. [4m]

Close substitutes are goods that are similar and caneasily be replaced. As a result, the cross elasticity ofdemand is positive and has a big magnitude (>1).Close substitutes also have negative cross elasticity.

An example of a close substitute of the book are othereconomics textbooks.

Close complements of a product are goods whichare often used together with it. AS a result, the crosselasticity 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 theknowledge he has gained.

Nicholas Chia 06S23

Good:1. Ability to use

cross elasticityconcept tosupplement itsdefinitions.

2. Few of thestudents whomanaged toanswer thequestion incontext.

General weaknesses1. 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 closesubstitutes and key words liked joint demand, used together for higherutility 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 thecase for this question, as one could still read Mankiw text without itsworkbook. 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 ofstudents offering H1 & H2 Economics and a simultaneous increase inthe cost of inputs used would impact the market. [4m]

A reduction in number of students offering H1 andH2 economics would cause a fall in demand sinceless students will need the book. A simultaneousincrease in the cost of inputs would cause a fallin supply since input prices of the book thenincreases. When the magnitude of the shift in thedemand and supply curves are equally, that is S0to S1and D0to D1, a new equilibrium is met at E0,at Q1and P0.

When magnitude of shift of supply curve is greaterthan that of the demand curve, that is S0to S2andD0 to D1, a new equilibrium is met at E1 , at Q2and P1, where Q2< Q0and P1> P0.

Therefore, when there is a fall in both demandand supply curves of the book, there will be a fallin equilibrium quantity and an indeterminable shiftin the equilibrium price.

Ang Chuan Ting 06S26

Good:1. Ability to differentiate

that reduction instudents offeringeconomics is a shift onthe demand curve andthe increased in the costof input is a shift of thesupply curve.

2. Explained how newequilibrium price andquantity of books areattained with reference to

diagram.

3. Illustrated clearly on thediagram that equilibriumprice is indeterminateand qty is decreasingwhen both the demandand supply curvesdecreased.

4. Displayed knowledgethat the difference inmagnitudes of the

supply curve with respectto the demand curvecauses equilibrium priceto be indeterminate.

General weaknesses1. Most students were able to illustrate in diagram when both demand

and supply decreased but failed to show further in diagram thatthe difference in magnitudes of either the demand or supply curveswill cause the equilibrium price to be indeterminate and qty to bedecreasing.

2. A handful did the analysis separately with demand curve and supplycurve shifting leftwards with one diagram each.

TPJC/ econs / 2006

P1

S0

D0

S1

Q2 Q0 Qty

D1

S2

Q1

E1

E0 Ee

Price

P0

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3. Although expected to explain when both the demand and supply curvesshift simultaneously, some explained the shifts in demand curve andsupply curve in parts. For example, demand curve shift first leading toa surplus and then a shortage when supply curve shifts more than thedemand curve.

4. Some still couldnt differentiate between price and non-price

determinants and thus, ended up drawing movement along the demandand supply curves.

c If you are the sales manager and you are tasked to increase the totalrevenue from sales of the book:

(i) What pricing policy would you adopt if demand is price elastic? [5m]

When demand for the textbooks is price elastic, Iwould lower prices of the books. Since demand isprice elastic, by lowering the price of the book, it wouldbring about a more than proportionate increase inquantity demanded. By lowering prices from P0 to P1,quantity demanded would increase from Q0 to Q1.This is shown by a downward movement along thedemand curve from A to B. The gain in total revenueearned from increase in quantity demanded is morethan the loss in total revenue from a decrease in price.Thus total revenue increases from a reduction pricing

policy.Benjamin Lim 06S23

Good:1. Explained whatit means whendemand is priceelastic.

2. Goodexplanation of theresponsiveness ofquantity demandedto price reductionand its impact onTR with reference todiagram drawn.

General weaknesses1. Most students were able to state that when demand is price elastic,

price should be reduced to increase TR but many do not explain whyTR would increase.

2. There are also many who do not explain with reference to the diagramthey have drawn.

TPJC/ econs / 2006

Price

P1

P0

D0

Q1Q0

A

C

BLoss in TR

Gainin TR

Quantity

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(ii) What measures would you undertake if a rival supplier reduces itsprice? [5m]

If a rival reduces its price, people would rather buy therivals 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 myrivals so I would not lose out totally. Since demand formy books is price elastic, a decrease in price wouldalso increase my total revenue as seen in c(i).

In the long run:The constant decreasing of prices would not be agood idea in the long run as profits would be lost. I

would instead practice product differentiation to makemy books stand out from my rivals. For example,advertising. By advertising, I would create more publicawareness for the books I am supplying. I would alsoinclude free gift cup or promotional offers that comealong with each book purchased. This would make thedemand for my book more inelastic and reduce mycross elasticity of demand with other suppliers suchthat I need not fear a price reduction from my rivals

Benjamin Lim 06S23

Good:1. Able to use theconcepts of Ep andEab relevantly in this

question

2. Good explanationof short run and longrun measures andthe ability to seehow price reductioncannot be sustainedin the long run.

General weaknessesMost students were able to state that they would follow suit by a reductionin price and cite some examples of non-price competition although theycould have done better by giving description of the methods.

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(iii) Would an increase in the pocket allowances of Economics studentshave any impact on the TR earned by your company? [5m]

If we consider the Economics book produced by mycompany as a luxury good (as students are not requiredto purchase it), an increase in pocket allowances of

Economics students would greatly affect the totalrevenue of my company. Demand for luxury good wouldincrease by a very high percentage with increase inincome (in this case, pocket allowances) as compared toincrease in demand for normal goods. With increase indemand for the product of my company, ceteris paribus,total revenue would increase substantially.

If we consider the book as an inferior good (as comparedto another more comprehensive Economics book), mycompany total revenue would decrease as with increase

in pocket allowance, more consumers choose to buy themore comprehensive book instead of the inferior goodmy company sells. Demand for our product falls andhence total revenue falls.

Sim Fatimah Bte Mohammed 06S03

This is among thefew scripts thatreflect knowledgeof the kind of goods

when incomechanges. Generally,the student showedunderstanding ofincome elasticity.However, thestudent would needto express thepercentage change/proportionatechange in demandas income changesmore accurately.

Using diagram toexplain might help toshow the change inTR after change inincome.

General weaknesses1. Economic concepts namely income elasticity is required to explain the

outcome of a change in pocket allowances. This is neglected by manystudents.

2. Many of the scripts also reflect lack of knowledge on the nature/kind ofgoods normal good (essential vs luxury good) and inferior good in thecontext of income change.

3. Some students may state normal goods without the economicunderstanding of such goods.

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5. In the context of rental market:

a. What is price ceiling? [2m]

Price ceiling is the maximum legal price (imposed bythe government) that a good could be sold at. The price

ceiling is below the point of equilibrium.

Akbar Ali B Habibrahiman (06S20)

Good:1. Defined priceceiling2. Stated thecondition necessaryfor it to be effective

Take note: A graphwas drawn herebut no explanationswere given. Justwhat is this graphtrying to illustrate?

General weaknesses1. 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? [2m]

Government could have seen the increase in aparticular good is very fast and in order for the good tobe available to the lower income group the governmentcould have stepped in by imposing a maximum price.

Akbar Ali B Habibrahiman (06S20)

Good:Recognized thatprice ceilings areprimarily targetedat the lower incomegroup

General weaknesses1. 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. Evenin a monopoly, the seller still needs to consider the position of thedemand curve when setting prices.

2. Confusion of the context. The rent here refers to rented housing, notof rented shops or video rental.

3. Ignoring the context. Many students used examples of food items likerice or chillies when the focus of the question is on rents.

TPJC/ econs / 2006

Price

Quantity

PC

PE

S

D

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c. Who gains and loses? [5m]

Gains and losses depend on the effectiveness of theprice ceiling, which would depend on the objectivesof the price ceiling. If it was to ensure equity indistribution, price control fails as due to the rise of black

markets where consumers can turn to, thus affectingequity in distribution of goods. Gain here refers toconsumers, and loss, the suppliers due to the decreasein the price of the commodity.

If it was to limit supply, it works as the price ceilinglimits the amount producers supply and again lossgoes to the suppliers. Consumers gains due to thedecrease in prices.

If it was to prevent prices from rising excessively, it

works to the extent that black markets are controlledand price of the goods are sold at the price ceiling.Gains in presence of black markets would be the blackmarkets. While loss refers to both consumers andsuppliers as consumers pay more and suppliers sell ata lower price.

David Ng (06S08)

Good:Different approachfrom the usualeconomic answerand ability to identify

it depends on theobjectives of theprice ceiling.

General Weakness1. 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 theoutcome be more desirable if a subsidy is imposed instead of a priceceiling? [5m]

In fig. 1, it shows what happened when a subsidy isimposed. Due to given subsidy, cost of production

is lower, suppliers are willing to produce more thuscausing a rightward shift in supply curve from S1 to S2.Hence, equilibrium position shifted from E1 to E2. Bycomparing Fig 1 & Fig 2, the outcome would be moredesirable if a subsidy is imposed. This is because moreis being supplied and no shortage occurred in the caseof subsidy, as shown in Fig 1. Consumers can afford itas 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 marketmay arise. When there is a black market, price is set at

Pb which is higher than the equilibrium and the ceilingprice, thus making the service unaffordable to lowerincome group.

Neo Deng Kai (06S13)

The student is ableto highlight the keydifferences betweenthe 2 governmentmeasures and usethese points to

justify that subsidyis more desirableas they benefit theconsumers more.It would be good ifthe student couldalso surface the areaof concern relatedto subsidy. Forexample, the funding

problem related tosubsidies and thatsubsidy may breedinefficient firms inthe longer run.

General weaknesses1. Some students shift the DD curve and analyze from there which they

get caught in explaining how it is desirable to the consumers whenprice increases.

2. Some students shifted the SS curves leftward instead of rightward.

3. Some other students shifted both DD & SS curves without explainingwhy. There were confusion between shift of the DD/SS curves andmovement along the DD/SS curves.

4. Instead of explaining it in the context of the rental market, somestudents talk about rice, clothes etc (their own choice of products).

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6. Identify the type of market structure for each of the following industry.Justify your answer. [6m]

a. provision of enrichment workshopsb. provision of public utilities.

a. The provision of enrichment workshops is a form of

monopolistic competition.

Firstly, there are many such firms in the industry. Thereare many workshops currently that cater to the learningneeds of different individuals in the market.

The commodity presented here within the differentfirms in the industry may serve the same purpose. Allenrichment 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 enrichmentworkshops low start up costs. If the workshops is notdoing well (earning subnormal profits), it can alwaysback out of the industry.

Good:

The keycharacteristics ofeach form of marketstructure are clearlyelaborated uponto substantiate thewriters answer. Andthe use of exampleswas provided aswell.

b. The provision of public utilities can be considered anatural monopoly. Like in Singapore, the Public UtilitiesBoard (PUB) is responsible for supplying utilities to ourhomes and charging us thereafter.

There is one firm in the industry, the distinctionbetween the firm and the industry disappears.

The commodity provided is unique; there are no closesubstitutes for utility.

There are significant barriers to entry. One examplewould be government regulations. The monopoly isissued licensing to provide utilities to every homeand there makes it difficult for new entrants to

enter. Furthermore, the natural monopoly requiresheavy capital and funds and it is not profitable toaccommodate two firms.

Michelle Lee 06A04

General weaknesses1. Majority of the students merely listed out the characteristics of each

form of market structure without making reference to the type ofindustry 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. [5m]

Firms can compete in price competitions or non-pricecompetition. In price competition, firms compete inthe prices of their products. In this case, firms keep aclose 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 soas to attract more consumers.

In non-price competitions, firms can firstly competein advertising. Aggressive advertising can help firmsto build their reputation and establish their brand.

This can be seen in hair parlors industry. Firms suchas Reds and Jean Yip advertise for themselvesaggressively so as to let the public know of their firmshence increasing demand.

In non-price competition, firms can also compete bydifferentiating their products. Taking hair salons in theneighbourhood for example. Besides hair services,they will also provide nail services or other services toattract consumers. Chua Yong Ming Marcus (06S29)

Good:Recognizedthat question isasking for ways.Discussion of both

price and non-pricecompetition.Illustrated each casewith examples.

Take note: givingdiscounts meantlowering price andhence that should becounted as a formof price competitionand should not becited as an example

under non-pricecompetition!

General weaknesses1. 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 marginalapproach to explain the determination of price and output level of aperfectly competitive firm and that for a monopolist firm. [6m]

Perfectly competitive firm

Profit maximizing is when the marginal revenue (MR)is equals to the marginal cost (MC). In a perfectlycompetitive firm, the firm is a price taker and it takesthe equilibrium price decided by the industry thus thedemand and the price curve is illustrated by a straightline, it can only determine the amount of quantity itwants to sell. It determines the output level where theMC 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.

Good:1. Recognized thatat the firm level,the PC firm facesa perfectly elasticdemand curve.2. Accurate labelingof the equilibriumpoint and thecorresponding priceand quantity.3. Recognized thatthe profit maximizingcondition is MC =MR.4. Clear explanation

of how prices aredetermined in a PCindustry and firm.

However:1. No mention PE&QEin the exposition.2. It is more accurateto speak of ahorizontal ratherthan a straight linedemand curve.3. MR = MC says

nothing about thetype of profits thefirm earns. Thecondition MR = MCdoes not guaranteenormal profits orsupernormal profits.

General weaknesses1. Many students thought that profit-maximising condition in a PC firm is

P = MC. This is only incidental. Profits are ALWAYS maximized whereMC = MR regardless of the market structure. PC firms are unique

in that they face a perfectly elastic demand curve which means thattheir MR is also the price. Unless students are able establish the linkbetween the MR and the price in PC firms, marks will not be awardedfor laying claim that P = MC is the profit-maximising condition.

2. Ignored the context / writing out of point. Some students focused onthe P and output determination at the industry level where dd = ss.Others discussed the LR normal profits and why PC firms are bothproductively and allocatively efficient.

TPJC/ econs / 2006

$

Quantity

MC

DD = P = AR = MRE

QE

PE

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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 anact of consumption or production which spills over toa 3rdparty who is not directly involved in the act of

consumption or production.

An example of a negative externality is 2ndhandsmoke. When a smoker smokes, he adversely affectsthe people around him. Second-hand smoke cancause health problems to those who do not smoke.Hence the marginal private benefit is greater thanthe marginal social benefit as the smoker is thebeneficiary satisfying his addiction whereas the peoplearound him inhale the second-hand smoke from himfrom him, causing them to have health problems.

Tan Ming Kiat 06S01

A good clear andconcise answer.

General weaknesses1. 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 curvesdownward sloping.

3. There were many good answers where students were able to explainthe divergence between the marginal social cost and marginal privatecurves due to negative externalities of pollution due to production.

TPJC/ econs / 2006

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