2014 TPJC H2 Prelim Exam Essay Q1

As both climate change and population growth continue to increase, there is reason to believe
that food commodity prices will be higher and more volatile in the decades to come. Between
2000 and 2012, the World Bank global food price index increased to 104.5 percent, at an average
annual rate of 6.5 percent. Countries in EU subsidise both conventional farming and organic
farming.
Source: World Watch Institute, 11 April 2013
(a)

Explain why the prices of food commodity may be high and volatile.

[10]

(b)

Using the incidence of subsidy, discuss whether consumers or producers benefit

more from the subsidies given in different product markets and evaluate the
limitations of such a government intervention measure.

[15]

Suggested Answer for (a)

Question interpretation
The market for food commodity (Eg: Organic, non-organic food) is made up of demand and supply for food
commodity, determined through the interaction between the demand and supply forces via the invisible
hand.
A change in demand or supply or both will trigger off changes in the market for food commodity, i.e. cause
the equilibrium price and quantity to change.
The events, as mentioned in the preamble, will cause demand for food commodity to rise and supply of
food commodity to fall.
This essay will examine the impact of these events on food commodity prices.
-------------------------------------------------------------------------------------------------------------------------------------------------Definitions of key economic terms
The effective demand for food commodity refers to the amount of food commodity that consumers are
willing and able to consume in a given period of time at various prices
The effective supply of food commodity refers to the amount of food commodity that the producers are
willing and able to offer to sale in a given period of time at various prices.
Assumptions:
Ceteris paribus; food commodity as normal goods
Price mechanism: The market for food commodity (Eg: Organic, non-organic food) is made up of demand
and supply for food commodity, determined through the interaction between the demand and supply forces
via the invisible hand.
Preview of the factors that will shift demand and supply:
Briefly identify that prices of food commodity is high due to increase in demand and fall in supply.
Demand Factors:
1. Increase in global population - Rising global food demand
2. Rising global affluence
Supply Factors:
1. Weather shock Climate change, poor harvest
2. Policies promoting the use of biofuels Low food stocks (Competitive Supply)
3. Cost of factor input Rising energy and fertilizer prices
4. National export restrictions

2014 TPJC H2 Prelim Exam Essay Q1

Body/Essay Development
Analysis - Explain how
Demand factors resulted in a
rise in the price of food
commodity
1. Increase
in
global
population - Rising
global food demand
As mentioned in the
preamble,
population
growth
continues
to
increase. Increase in
global demand for food
Dd , c.p.
2. Rising global affluence
Rising global affluence
especially
in
developing/emerging
countries Experience
economic growth
Rising income has led to
significant increase in
purchasing power in
food consumption
Dd
for
food,
c.p.
(Assuming food is a
normal good)

Analysis - Explain how Supply factors resulted in a rise in the price

of food commodity
1. Weather shock Climate change, poor harvest
For example in June 2012, eastern Bangladesh experience
extensive flooding, landslides and flash floods SS, c.p.
2. Policies promoting the use of biofuels Low food stocks
because biofuels and food stocks are in competitive supply
Between 2000 and 2011, global biofuels production increased
If biofuel production continues to expand according to current
plans, the demand of feedstock crops will increase SS of these
crops as food will fall SS
3. Cost of factor input Rising energy and fertilizer prices
Rising oil prices Rising production, processing and
transportation costs in the farms COP SS, c.p.
Rising fertilizer prices COP SS, c.p.
4. National export restrictions
Take on a wide variety of forms: export bans (embargoes), export
taxes, export quotas, and export restricting measures of state
trading enterprises SS, c.p.
Implemented for various reasons such as:
1. Food security
2. Low domestic purchasing
commodity prices

power

combined

with

high

3. Large time gap between harvests of successive crops.

1. Explain why prices are high (Explain via Diagram & Market Adjustment Process)

Initially, the market is in equilibrium. Demand increases, demand curve shifts to the right (Do to D1),
ceteris paribus. Supply falls, supply curve shifts to the left (S0 to S1), ceteris paribus. At the original price
level P0, quantity demanded >quantity supplied by QsQd (shortage develops). There will be upward
pressure on prices.
As price increases, quantity demanded decreases while quantity supplied decreases. The shortage is
gradually reduced and the process will continue till the shortage is eliminated and a new market
equilibrium is reached where Quantity demanded is equal to Quantity Supplied.
Finally the market is back in equilibrium at the intersection of the new Dd curve (D1) and the SS curve
(S1).
With a rise in demand accompanied by a fall in supply, the price would certainly rise, explaining why
prices of food commodity are high. However, the impact on quantity will likely to be indeterminate, since it
is dependent on the relative sizes of the impacts of rises in demand and supply.
2

2014 TPJC H2 Prelim Exam Essay Q1

But the fall in supply is likely to outpace the increase in demand of food commodity. This is due to climate
change which increases the incidence of extreme weather events, production shocks hence, becomes
more frequent. Stronger linkages are also seen between agriculture and energy markets which further
reduce the supply for crops for food. There has been a significant increase in biofuels production in the
last decade.
Hence, this implies that the extent of fall in supply is greater than the increase in demand. Equilibrium
price of food commodity increases to P1 whereas quantity of food commodity falls to Q1.

Also accept DD> SS

Also accept DD> SS

2. Explain why prices are volatile (Explain via elasticity concepts - Ep & Es)
Provide reasons to explain why prices of food commodity are volatile
Instability on the supply side (Es<1): Food commodity which is agricultural products is consumed by
everyone in the world despite level of wealth. Due to the unpredictable weather pattern changes and
natural disasters, the world supply of food commodity is unstable and changes according. Therefore, this
unpredictable movement in supply of food commodity will result in major price fluctuations. Furthermore,
the supply of food commodity tends to be more price inelastic than that of the manufactured products as
it requires a period of time for the crops to grow before they could be harvested.
Reinforce with the

Price elasticity of demand: Demand of food commodity is likely to be price inelastic (Ep<1) since food
is a necessity to all.
Diagram 2

Diagram 3

Increase in Demand coupled with constant Supply

Fall in Supply coupled with constant Demand

Illustrate with diagram

Given an increase in demand for food from D0 to

D1, the more price inelastic the supply, the greater
the price change. Hence, given that the supply of
food commodity tends to be more price inelastic
Prices of food commodity experiences
volatility.

Illustrate with diagram

Given a fall in supply of food from S0 to S1, the
more price inelastic the demand, the greater the
price change. Hence, given that the demand for
food commodity tends to be more price inelastic
Prices of food commodity experiences
volatility.

Conclusion - Provide a possible linkage to part (b)

Simple Evaluation: Price of food commodity is high and volatile due to the instability on the supply side
coupled with an inelastic demand curve. Since demand for food commodity is price inelastic, hence there will
be a more than proportionate increase in price and less than proportionate decrease in quantity.
Therefore, there is a need for government to intervene through the use of policies to ensure that the food is
made available to everyone in the country since it is a necessity and that this rise in food commodity prices
does not aggravate poverty, food insecurity, and malnutrition.

2014 TPJC H2 Prelim Exam Essay Q1

Marking scheme
Level

Descriptor

Marks

L3

Well-elaborated answer that uses demand-supply analysis to explain

how the events in the preamble cause demand to increase and supply
to fall, and explains why prices of food commodity may be high and
volatile, with explanation of diagram and market adjustment process.

7-10

Shows application to the context.

L L3:
The combined effect on Q & P must be well justified + simple evaluation
that the extent of the increase in price depends highly on the price
elasticities of demand and supply.
Max 8marks if there is no use of elasticity concepts to explain why
prices of food commodity may be volatile.
L2

For an answer that shows some understanding/application of how the

events in the preamble affect demand and supply.

5-6

Attempts to explain why prices of food commodity may be high.

L1

For an answer that shows a descriptive knowledge of demand and

supply of food commodity. And/or an unexplained diagram.

1-4

2014 TPJC H2 Prelim Exam Essay Q1

Suggested Answer for (b)

Question interpretation
In this part of the essay we will first need to explore what are the negative impacts of high food
commodity prices which therefore lead to the need for the EU government to intervene with subsidies.
Following on, examine whether consumers or producers benefit more from the subsidies given by the
EU government in both conventional farming and organic farming.
Limitations of subsidies given to farming in the EU.
---------------------------------------------------------------------------------------------------------------------------------------------Definitions of key economic terms
Subsidy Spending by the government that helps to lower the costs of production and therefore has
the effect of increasing supply. A subsidy can also be thought of as the reverse of a sales tax.
Rationale of providing subsidies in agricultural sector in EU
Subsidies is provided to conventional farming, organic farming and biofuel producers
Subsidies to domestic farmers may be viewed as a form of protectionism as it helps to lower the costs
of production and therefore has the effect of increasing supply. It also achieves its objectives of:
Micro Reasons:
1. Improving agricultural productivity, so that consumers have a stable supply of affordable food
2. To ensure food security At the domestic level, to ensure sufficient food production to support the
ever growing population and to reduce reliance on imported food
3. Climate change and sustainable management of natural resources (Organic Farming)
Macro Reasons:
4. To ensure that EU farmers can make a reasonable living (Protectionism)

Body/Essay Development
Reasons for government intervention via subsidies Negative impact on the various stakeholders
given high food commodity prices
Consumers:
Consumer will be negatively affected by the high food commodity prices. TE
Consumers experience higher cost of living which adversely affects their standard of living. The impact
could be more adverse for low-income consumers as a larger proportion of income is spent on food
commodity since it is a necessity to fulfil their basic needs.
Producers:
Farmers High food commodity prices may result in EU farmers losing export competitiveness as they
become complacent with the increase TR received. Hence, they are reluctant to engage in R&D
Biofuel producers Biofuel producers experience increase in cost of production due to the fall in
feedstock crops & rising prices and hence see falling profits.
Society:
The difference in purchasing power determines for whom the goods are produced. Hence, only goods
that people are willing and able to buy are produced. The needs of the poor may not be met as the
market mechanism will allocate nothing to those who cannot pay. Hence, there is unfair allocation of
resources. Societys welfare is not maximised as the needs of the poor in the population are not fulfilled.
As such, the free market has failed to achieve a socially desirable allocation of resources to maximize
social welfare.
5

2014 TPJC H2 Prelim Exam Essay Q1

Explain subsidies
The rationale for implementing subsidies is to help farmers so that their food crops (Organic & Nonorganic) & biofuels are now cheaper and thus, increase profit and also as it is a basic necessity for
households, so the subsidies help households especially the poor afford it Solving the issue of
inequity.
A subsidy given by the government has the effect of decreasing the marginal cost of production.
Imposing a subsidy will shift the supply rightwards, i.e. supply increases. Farmers will now need a lower
price to offer the same quantity for sale. (Explain with reference to a diagram)

1. Subsidies given to conventional farming

2. Subsidies given to organic farming

Conventional farmers who grow feedstock crops

(particularly maize, oilseed crops, and sugar
cane) as food or for the production of biofuel:

Organic farmers who grow feedstock crops

(particularly maize, oilseed crops, and sugar
cane) as food:
Demand for organic food is relatively more price
elastic as it takes up a larger proportion of
consumers incomes. Demand is also seen to be
on the rise due to changing tastes & preferences
of consumers as they become more health
conscious. This is made possible due to the
availability of substitutes.
Illustrate with diagram

Demand for feedstock crops grown by

conventional farming is generally price inelastic
as it is a necessity & lacks availability of close
substitutes be it as a food source or an essential
FOP for biofuel.
Illustrate with diagram
Given that supply of feedstock crops is price
inelastic in the SR as it requires a period of time
for the crops to grow before they could be
harvested. Therefore the farmers are not able to
respond to a change in demand and price.

The imposition of a subsidy lowers equilibrium The imposition of a subsidy lowers equilibrium
price. Equilibrium quantity increases.
price. Equilibrium quantity increases.
The size of the governments subsidy The size of the governments subsidy expenditure
expenditure is determined by the new equilibrium
is determined by the new equilibrium quantity and
quantity and multiplied by the subsidy per unit.
multiplied by the subsidy per unit. The consumers
The consumers do not receive the full amount of
do not receive the full amount of the subsidy; in
the subsidy; in fact they enjoy the price lower
fact they enjoy the price lower than before.
than before.
[Relate back to the Qn]: The more price elastic
[Relate back to the Qn]: The more price
the demand, the more producers (farmers) will
inelastic the demand, the more consumers will
benefit from the subsidy. Hence, for the case of
benefit from the subsidy. Hence, for the case of
subsidies towards organic farming in EU
subsidies towards conventional farming in EU
countries, the farmers benefit more than the
countries, the consumers benefit more than the
consumers.
farmers.
CC: It must be noted that in the LR, as SS becomes more price elastic due to the possibility to vary all
factors of production. However, the impact of subsidies on consumers and producers remain the same.
Positive impact of subsidies on food commodity
Conventional Farming
Organic Farming
i. Consumers
i. Consumers
Consumers now get to enjoy food, which is a Organic food are now made relatively cheaper
necessity at lower prices because of the subsidy
than before and hence, more consumers can now
Food are now make available to the poor in
get to enjoy organic food at lower prices because
of the subsidy They will enjoy greater
the EU countries They will enjoy greater
consumer surplus and lower cost of living.
6

2014 TPJC H2 Prelim Exam Essay Q1

consumer surplus and lower cost of living.

ii. Farmers
Conventional farmers
who grow feedstock
crops
(particularly
maize, oilseed crops,
and sugar cane) for the
production of food
Farmers who engage
in
conventional
farming
gets
an
increase
in
TR,
assuming
cost
remains constant

ii. Farmers
Conventional farmers Farmers who engage in organic farming gets an
who grow feedstock
increase in TR, assuming cost remains constant
crops
(particularly
significantly. This is because as shown in
maize, oilseed crops,
the diagram above, the main bulk of the subsidies
and sugar cane) for the
are enjoyed by the farmers. And because the
production of biofuel
demand for organic food is price elastic, a small
Biofuel
producers
decrease in price will result in a more than
which use feedstock
proportionate increase in quantity demanded for
crops
(particularly
organic food TR
maize, oilseed crops,
and sugar cane) in
their production (e.g.
as an essential FOP)
will benefit as the
subsidy allows them
to reduce their cost of
production.
This
allows them to enjoy
greater profits.

iii. Society
iii. Society
In general, with subsidies on food commodity Organic farming works in harmony with nature
rather than against it. This involves using
SS of food Px Food are now made
techniques to achieve good crop yields without
available to the poor in the country Improve
harming the natural environment or the people
inequity problem
who live and work in it. The research and
Subsidies on food commodity will also benefit
development into new technologies generates a
food related industries as they see a in COP
positive externality because it creates knowledge
due to a in food prices
that other forms can also use. These positive
externalities make the marginal social benefit of
R&D greater than the marginal private benefit
significantly increase positive externalities caused
by reduced use of fertilizers and pesticides in
conventional farming.
Organic farming methods hence, meet many of
the environmental and social concerns of policy
makers and the public By increasing
production of organic food, production subsidy
improves allocative inefficiency and hence greatly
reduce welfare loss due to over-production of
food crops which use fertilizers and pesticides
CC: As the cost involved in conversion and
management of organic agriculture is large,
depending on the amount of subsidy given,
conventional farmers may not be willing to switch
over to organic farming. Hence, the aim to
increase positive externalities through providing
subsidies towards organic farming will not be
effective.
iv. Macro
Farmers in EU countries whom enjoy subsidies will be able to continue their production at a lower cost
and this provides them with an advantage in terms of competitiveness in exports Improvement in
current account, c.p. BOP improves
7

2014 TPJC H2 Prelim Exam Essay Q1

Negative impact of subsidies on food commodity

Conventional Farming

Organic Farming
i. Consumers
Subsidies towards organic farming benefit both

the poor and the rich households alike as

everyone enjoys the same benefits of the
subsidy. It seems that the subsidies then will
mainly benefit the richer as organic food to begin
with are relatively dearer than non-organic food.
Thus, equity in income distribution could be
worsened.
ii. Farmers
With the current practice of heavily subsidizing food commodity in EU countries, the farming industries
have less incentive to continually lower costs as compared to rivals in other countries. Over time, this is
indeed a serious issue as foreign farmers become more competitive whilst the local farmers become
addicted to the subsidies and stay complacent.
iii.
Society
Biofuel producers in the EU countries who get to
enjoy these subsidies also benefit from lower cost
of production and consume feedstock crops
beyond its true opportunity cost. This distortion in
the opportunity cost distorts the comparative
advantage of the country and as a result
specialise in the production in a wrong industry
distorts the efficient allocation of resources
further.
Subsidies to conventional farming Lower COP
SS hence, use of fertilisers & pesticides
is a form of negative externalities, which refers to
the costs of production which fall on people other
than the producers or consumers (harmful effect
on 3rd parties) pollute water channels resulting
in fish kills and the destruction of other aquatic
life, degradation of fertile land, loss of biodiversity
etc the price mechanism over-allocates
resources to the production of food commodity
welfare loss to society occurs
Subsidies will lead to firms and their shareholders gaining significantly which may worsen the income
equality in the country
iv.

Macro Impacts

Subsidies may distort opportunity cost of the country as the price of food is artificially low. This makes it
especially difficult for developing countries to compete with EU countries in terms of farming as it
encourages European agri-businesses to export huge quantities of food worldwide that poor farmers
cannot compete with on price. Such an act is seen as part of an unfair trade system rigged in favour of
the richer countries Viewed by trading partners as an act of protectionism and may turn out to be selfdefeating or create a beggar-thy-neighbour effect.
These subsidies are also a huge strain on the government budget and there is huge opportunity cost
attached to the subsidies. Money which could have been spent on other important sectors of the
economy such as health, education and infrastructure which can help to promote long term growth of the
country and affect standard of living wastage and misallocation of economic resources
8

2014 TPJC H2 Prelim Exam Essay Q1

CC: To make situation worst, as a result of European Sovereign Debt Crisis, EU countries are already
facing a huge budget deficit. Hence, spending such substantial amount on food commodity subsidies will
put further strain on the countries finances. This will result in adverse effects on the society i.e. loss in
consumers & business confidence C & I Multiple in PONY & worsen the countrys BOP.
Furthermore, the government may increase taxes in the future to fund the subsidies this creates
disincentive to work as higher income taxes stifle the motivation of individual workers Labour
productivity falls Affects EG and international competitiveness of the EU countries.
Evaluative Conclusion
It must be noted that EU provision of subsidies to both conventional farming and organic farming at the
end of the day is not solving the root cause of the problem which is high and volatile food commodity
prices. Subsidies are only effective in solving the rise in price of food commodity but are not able to solve
the volatility in prices due to the instability on the supply side coupled with an inelastic demand curve.
Hence, countries in EU should look at implementing alternative policies to tackle this issue.
With continued rising food commodity prices, the amount spent by EU government on such subsidies will
not be sustainable. The benefit of affordable prices for the poor will come at a very high opportunity cost.
These subsidies are at best temporary measure as it distorts the efficient working of the price mechanism.
Alternative Policy:
[What is it & How it works]
Eg: Increase productivity through the use of machineries, making the production process automated to cut
down on COP (improve the efficiency and productivity of firms) thus, gaining competitiveness. EU
countries can also choose to spend less on subsidies and more on agricultural research, to improve crop
varieties and livestock, which could benefit developing countries.
Limitations:
Such a measure takes a long time as compared to providing direct subsidies and farmers may not be
willing to adopt the change towards automation due to stubborn-ness and fear towards picking up new
skills. Thus, it is difficult to change the mindset of the farmers.
It takes time to alter the production process/improve crop varieties and livestock in a farm, so this
method does not offer immediate solutions to more pressing, urgent problem of rising food prices.
Also, it may be draining on government resources.
As each policy has its advantages and disadvantages, no single policy is perfect in solving the problem
associated with high and volatile food commodity prices. Therefore, countries in EU should instead use a
combination of policies rather than only subsidies so as to allow them to complement each other
overcome each others limitations.
However, it should be noted that government failure can also occur. It risks increasing inefficiency instead
of reducing it.
Hence, it is important that the government weigh the cost and benefit before deciding on the measures
to be taken.

2014 TPJC H2 Prelim Exam Essay Q1

Marking scheme
Level

Descriptor

Marks

L3

Clear and well-developed answer that attempt to identify the reasons for
government intervention through the use of subsidies and whether consumers or
producers benefit more from the subsidies given in different product markets.
Policy is thoroughly explained and evaluated with constant use of real world
examples. Candidate is able to recognise that subsidies can only solve the
problem of rising food prices and not volatility and proceed on to counter
propose alternative policies with evaluation. Candidate must be able to link and
span analysis to macro perspective.

9 - 11

LL3: A well-developed answer that attempt to identify the reasons for government
intervention through the use of subsidies and whether consumers or producers
benefit more from the subsidies given in different product markets and is
thoroughly evaluated with constant use of real world examples. Alternative policies
are being proposed and evaluated. (Max 9 marks)
Good explanation that attempt to identify the reasons for government intervention
through the use of subsidies and whether consumers or producers benefit more
from the subsidies given in different product markets. Some attempt at evaluation of
subsidies and limited usage of real world examples
L2

6-8
HL2: A well-developed answer that explains whether consumers or producers
benefit more from the subsidies given in different product markets. Policies
explained are thoroughly evaluated with the use of real world examples

L1

E2

E1

For an answer that attempt to identify the reasons for government intervention
through the use of subsidies & whether consumers or producers benefit more from
the subsidies given with irrelevancies and errors.
Well-explained or elaborated judgement.
Well explained conclusion that there is a need for a combination of policies as
each policy has its advantages and disadvantages. Hence subsidy is not the
only available policy to solve the problem of high and volatile food prices. To
obtain the optimal outcome, a combination of policies is needed to complement
each other to overcome each others shortcomings.
Able to specifically pin-point the effectiveness / flaw and suggest a way to tweak
or improve on it.
Well explained answer that explains that government failure can occur. Hence,
there is a need for proper monitoring of policies to minimise government failure.
Well explained answer that justifies a policy mix to use in the short run and the
long run.
Mainly unexplained judgement. Listing instead of explanation.
Brief or vague conclusion that simply recognizes that a combination of policies
is needed or limitations in government intervention due to government failure
without elaboration.
Well-rehearsed evaluative conclusion like cocktail of policies & CBA analysis
(Max 2m)

1-5

3-4

12

10