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Tutorial 23 Section F Case
Tutorial 23 Section F Case
United States as the worlds largest market for wind energy, building wind farms using extensive lowinterest loans from state-owned banks.
China was willing to invest heavily in renewable energy industries, even though wind and solar energy
costs are higher than for coal, precisely because it helps the Chinese economy. In addition, Chinas
policies will help address global warming. Chinese-owned companies would increase their share of
the Chinese market by an additional 10 or 20 percentage points this year. That would give them
almost three-quarters of the domestic market, compared with a quarter for European and American
companies the reverse of the ratio four years ago.
Adapted from New York Times, July 14, 2009
Extract 6: When Protectionism is a good thing
Most public discussions of free trade treat protectionism as a dirty word. The recent debates on the
North American Free Trade Agreement (NAFTA) and current debates on the General Agreement on
Tariffs and Trade (GATT) are a case in point. Protectionism to economists usually means protecting
an inefficient, lazy and often monopolistic national industry against really efficient foreign competition
to the detriment of consumers. This kind of protectionism is economically inefficient and should be
resisted.
This does not mean, however, that protectionism is always bad. To the contrary, there are important
instances in which protectionism is an essential precondition even to economic efficiency. The most
fundamental rule of economic efficiency in a market economy is that the full costs of producing a
product must be included in its price. There must be no subsidies.
When the environmental costs of producing a product are passed on to the larger society, this
constitutes a form of subsidy by the society to the producer. When a country requires that
environmental costs be internalized in prices, this is a step toward greater economic efficiency.
However, when a country with policies that support this form of economic discipline engages in free
trade with one that does not, the tendency will be for more and more production to shift to the latter.
Free trade also has enormous consequences for the standards a society chooses for itself that must
be treated separately from questions of pure economic efficiency. Standards regarding the distribution
of income exemplify the issue. After NAFTA was signed the laboring class, which in the United States
suffered a seventeen percent decline in real wages.
Adapted from http://www.globalpolicy.org
Table 2: India
Subject Descriptor
Growth in Gross domestic
product at constant prices (%)
Inflation (%)
Current account balance (% of
GDP)
2005
2006
2007
2008
2009
2010*
2011*
2012*
9.2
4.3
9.8
6.2
9.4
6.4
7.3
8.3
5.7
10.9
8.8
13.2
8.4
5.5
8.0
4.1
-1.3
-1.1
-1.0
-2.2
-2.1
-2.2
-2.0
-2.0
-4.0
-3.3
-2.6
-5.9
-6.5
NA
NA
NA
Table 3: Singapore
2006 2007 2008
2009
2010*
2011*
2012*
* Estimated value
Subject Descriptor
Growth in Gross domestic
product, constant prices (%)
2005
7.6
8.7
8.2
1.4
-2.0
5.7
5.3
5.1
Inflation (%)
0.5
1.0
2.1
6.5
0.2
2.1
1.9
2.0
3.1
2.7
2.1
2.2
3.0
2.8
2.6 n/a
22.0
24.9
27.6
19.2
19.1
22.0
* Estimated value
22.4
22.7
Questions
a) Using Table 2 and Table 3,
i) Compare the trend of Indias current account balance (% of GDP) to that of Singapores for the
period 2005 to 2009.
[2]
ii)
Explain the likely change in the value of Indias currency for 2010 2012.
b)
Account for the difference in estimation of Indias GDP growth in 2010 in Table 2 and Extract 4.
[4]
c) Discuss and compare the impact of the global recession on Singapore and India.
[2]
[8]
d) Explain the possible economies of scale enjoyed by the renewable energy industry in China. [4]
[10]
Suggested Answers
a) Using Table 2 and 3,
i) Compare the trend of Indias current account balance (% of GDP) to that of Singapores for the period
2005 to 2009. [2]
Difference: Indias current account is in a deficit while Spores current account is a surplus (1m).
Similarity: Both initially experienced improvement followed by a worsening of their respective current account
balances (1m).
Comments:
Did not use the appropriate terms to describe current account balance, i.e. used positive for surplus and
negative for deficit.
Students used the words decrease instead of worsening note: a decrease in surplus is worse than before
while a decrease in deficit is an improvement.
Conceptually, at least over a relatively short period of 5 years: A fall in deficits indicates an improvement and
a rise means worsening; for fall in surpluses indicates worsening and a rise means an improvement.
However, a persistent and ballooning surplus is also undesirable. There is no alarming sign of SG surpluses
ballooning in the given data.
Deprove is not a legitimate word and is not the opposite of improve! While disprove is indeed the opposite
of prove, as in you can try to disprove a hypothesis, you should use words like worsen or deteriorate as the
opposite of improve!
ii) Explain the likely change in the value of Indias currency for 2010 2012. [2]
Based on the improving current account (% of GDP), Indias exchange rate ought to appreciate. This is due to
the increase in demand of rupee as demand for exports increase and a fall in supply of rupee as demand for
imports fall.
Data evidence: The most relevant indicator is the BOP. However, in this instance, only the current account is
available.
May accept any possible reasons found in data.
1. Although current account (as % of GDP) improves, current account might worsen as there is GDP growth.
This means that demand for imports may have increased and exports fallen, demand for India's currency has
decreased and supply of India's currency increased, depreciation of currency.
2. The lowered inflation in India signals a more stable economy bringing in more FDIs, demand for currency
increases, leading to an appreciation of India's currency
Not accepted:
There is Economic Growth in India, they will demand for imports hence supply of currency
increases and depreciation. (Need to discuss relative growth rates)
A fall in inflation rate resulted in cheaper export prices and higher export revenue and thus higher
demand and appreciation of rupees. (Need to discuss relative inflation rates).
1m for correct reason 1m for correct prediction. 0m if student only give prediction and incorrect reason.
Comments:
cannot distinguish between internal vs external value of currency
assuming government intervention on the exchange rate
b) Account for the difference in estimation of Indias GDP growth in 2010 in Table 2 and Extract 4. [4]
State the difference (1m):
The projected growth in Table 2 8.8% (IMFs prediction)
In Extract 4 last paragraph, some predicted Indias growth to shrink to 2.6% in 2010.
Difference in the growth rate predicted depends on the extent of importance of the external sector on India.
Extract 4 says India is dependent on outsourcing (affects Indias exports) and remittances (affects
Consumption). With the weakened global demand, outsourcing to India may decrease hence affecting Indias
growth through X and less remittances will mean less ability of the Indians to consume affecting C.
3m for relevant evidences and linking to economic analysis.
Comments:
Mere summary of Extract 4 without usage of economic model, i.e. Did not link outsourcing to X or
remittances to C no econ framework will result in loss of marks.
Use NPIA to explain but not according to the Extracts intention
Growth in GDP at constant prices does not take into account inflation hence the growth rate in Table 2 is
higher than the prediction given in Extract 4!!??
c) Discuss and compare the impact of the global recession on Singapore and India. [8]
Introduction
The impact of the global recession has both similar and different impacts on Singapore and India, namely on
GDP, current account, employment and inflation.
Body (Use data 2007-2009)
Compare the data
GDP
Indias GDP growth fell to 5.7% in 2009 but
thereafter is predicted to rise to more than 8%.
Spores GDP growth was negative in 2009 but
is predicted to pick up in 2010, slower than
India.
It seems that Spore is more badly affected by
the crisis than India.
Current account
Spores current account balance fell drastically
by almost 10% from the peak of 27.6% of GDP
in 2007 to 19.1% in 2009, which accounted for
the negative GDP growth. Indias current
account balance has always been negative
which does not affect growth as it is an
insignificant portion of GDP.
Unemployment rate
Spores unemployment rate also rose to 3% in
2009. This is demand deficient unemployment
which is related to the negative GDP growth.
Note: Candidates should use AD-AS diagram to illustrate the impact of crisis on Singapore and India. It
is incorrect to draw AD of India and AD of Singapore in one diagram with the same AS.
Conclusion
Generally, there is a negative impact on both Singapore and India but it is more severe in Singapore esp. on her
GDP and current account due to her dependency on trade as an engine of growth while India has a relatively
larger domestic market.
L1
L2
1-3
4-6
7-8
Comments:
were not able to identify the correct data for use recession was in 2007-2009
use more own knowledge than the case material, especially for Singapore (trade = 4x our GDP)
When there is global recession, it causes prices of raw materials to go up and Singapore being heavily
dependent on imports will suffer from import price push inflation!!!??
Lifting from case without using AD/AS model to explain why Singapore will suffer more than India as a result
of the global recession
Some students compared what was likely to happen instead of using the data to discuss what really
happened
Compare the effects of policies (FP, MP & protectionism) instead of the recession on the 2 ctys
Compare the use of policies in the 2 countries India can use FP, MP & protectionism but Singapore can
only use exchange-rate centred MP to improve the economy after the recession
d) Explain the possible economies of scale enjoyed by the renewable energy industry in China. [4]
The context is Industry
External economies of scale are the correct concept as these are costs savings accrued to firms when
the industry expands.
Concentration Good infrastructure e.g. Industrial Park especially to cater to firms in this industry.
Network of supporting industries to provide services to the main industry e.g. banking services; industries to
supply key inputs or raw materials.
Ready pool of skilled or trained workers
Information - Sharing of R + D findings via Trade publications
However, some marks will be awarded for internal economies of scale but the marks will be capped.
Internal economies Technical, marketing, financial, risk-bearing and administrative & managerial.
Examples
Technical Economies due to Research EOS Larger budget for research is spread out over larger output
Large production plants for solar panels give rise to specialization of labour and gains from indivisibilities.
Comments:
Failed to realize the most relevant EOS are external rather than internal EOS.
Merely stating 2 EOS and no elaboration.
Gave general examples with no reference to the renewable energy market. Some could not even explain
generic EOS correctly.
Gave reasons for why China may enjoy EOS instead of explaining the sources of EOS
Never link EOS to fall in unit cost.
Confusion over financial EOS and protectionism: Students explained that the government gives cheap loans
as a form of financial economies. This is cannot be accepted as it is a protectionistic measure adopted by
the Chinese Government to help the industry.
e) In light of the data, to what extent is protectionism justified? 10]
Introduction
Define protectionism.
I shall be using the date to discuss whether protectionism is justified.
Body
Protectionism is justified.
Correct Market Failure
It helps to address global warming in China, hence it
corrects market failure which arises due to negative
externalities. (Extract 5, para 3)
It allows internalization of external costs by the producer,
through the imposition of taxes. (Students are expected to
use the SMB/SMC model). Without protectionism,
governments would be hesitant to impose taxes on
producers to correct market failure, as that would make
them less competitive compared to foreign products which
Protectionism is unjustified
Inefficiency
It encourages complacency and inefficiency among
producers. (Extract 6, para 1)
Consumers suffer in terms of higher prices and
poorer quality of goods. Solar energy industry in
China may not develop a comparative advantage if
they become complacent and inefficient. There
may also be incorrect identification of the solar
energy industry as one with potential CA.
1-3
4-6
7-8
1
2
Comments:
Insufficient use of case material, students gave arguments for and against protectionism based on lecture
notes instead.
Didnt grasp the idea in the extract. E.g. protectionism is justified to internalize externality.
10
Consolidation is sweeping the sector, too. Shanghai Ballion, which has nearly 5000 stores, has won
permission to take over four rivals. Beijings ultimate goal is to create a small number of big players
that will be strong enough to compete with the multinationals at home and expand overseas.
Source: Business Week Online, 17 January 2005
Extract 6: Supermarkets in the UK: a model for Chinas retail sector? Tesco may have to sell
off stores
Tesco, the UKs biggest supermarket group, maybe forced to sell off some of its shops in what would
be a dramatic intervention aimed at curbing the retail giants dominance. There is a call for
government regulators to intervene to force Tesco into divestment, the process of selling off stores.
The UKs top four supermarkets have a huge market share which is continuing to grow. In the next ten
years Tesco could have 1200 smaller convenience stores in addition to its large supermarkets. Asda,
one of Tescos major competitors, is poised to follow suit. Ten years ago supermarkets did not
compete in the smaller convenience store market. In the four years to 2004, 7377 independent
convenience shops, more than 20% of the total, closed. In addition, the buying power of the
supermarkets is so great that their suppliers complain that they are forced to sell to supermarkets at
very little profit.
There is certainly a case for divestment, says the policy director at the New Economics Foundation.
The market place is being strangled by the big four. However, a spokesperson for Tesco said, I think
the public interest would need to be looked at in a proper manner by government regulatory
authorities and I would hope that when they talked to us and looked at our operations in detail they
would come to the view that divestment was a bad idea.
Source: Observer, 6 November 2005
2004 (%)
2005 (%)
28.1
30.5
Asda
16.6
16.7
Sainsbury
15.4
15.7
Morrisons
13.9
11.3
11
Table 5: Singapore retail sector: retail sales index for selected types of outlet
Index at Current Prices (1997=100)
Type of outlet
Department
stores
Supermarkets
Provision
and
sundry shops
Total retail sales
2000
2001
2002
2003
2004
104.3
99.9
100.4
99.6
108.4
123.0
138.3
147.1
158.5
151.1
100.6
104.6
109.6
113.8
123.2
128.4
133.1
129.8
140.9
158.6
Source: www.singstat.gov.sg
Questions
(a) Compare the change in retail sales in Singapore by type of outlet between 2000 and 2004. [2]
(b) Explain two reasons why supermarkets are growing so quickly in China.
[4]
(c) (i) Describe the type of market structure operating in the UK grocery sector in 2004.
[2]
(ii) Explain how the firms in this market might compete against each other.
[4]
(d) Discuss the policy of divestment in the case of Tesco explaining clearly how this might affect
consumer welfare.
[8]
(e) In the light of the data provided, if you were an economic advisor to the Singapore government,
would you recommend that it should follow the example of the Chinese authorities and encourage
supermarket development? Justify your answer.
[10]
12
Suggested Answers
(a)
Compare the change in retail sales in Singapore by type of outlet between 2000 and 2004.
Suggested answer:
Similarity: Retail sales in Singapore increased for all 3 categories between 2000 and 2004. [1m]
Difference [1m]:
Retail sales for Supermarkets increased at the fastest rate by about 23% while that of Department
Stores at about 4%.
OR
Retail sales increased the most for Supermarkets and the least for Department stores.
Note: Though supermarket experienced the highest increase, it does not mean the sales is
the highest. We need absolute figures to be sure.
Teaching point: Use of index nos. For weaker classes, teachers might want to provide additional
exercise for students to try on the spot. One good exercise would be Nov 2008 qn ai & aii)
Table 5: Singapore retail sector: retail sales index for selected types of outlet
Index at Current Prices (1997=100)
Type of outlet
2000
2001
2002
2003
2004
Department stores
104.3
99.9
100.4
99.6
108.4
Supermarkets
Provision and
sundry shops
123.0
138.3
147.1
158.5
151.1
100.6
104.6
109.6
113.8
123.2
128.4
133.1
129.8
140.9
158.6
13
[2]
Calculations:
Department stores
Supermarkets
Provision and sundry shops
108.4-104.3/104.3*100 = 3.93 4
151.1 123.0/123*100 = 22.85 23
123.2 100.6/100.6*100 = 22.47 22
Note: The base year is 1997 and not 2000. We need to perform the above calculations to see
the % change from 2000 to 2004.
Examiners report:
In response to this question candidates simply needed to make comparative statements on the
changes in retail sales by type of outlet. Acceptable comments included the facts that sales had
risen in all types of outlet over the period, sales had increased most in supermarkets and sales
had increased least in departmental stores. Candidates did not do well if they simply observed the
changes rather than making comparative comments. A surprising number of candidates
misinterpreted the data here. Many thought that sales were highest in supermarkets, others that
the data showed price changes in some way. Careful and thoughtful interpretation of the data was
required to score both marks available.
14
(b)
[4]
Suggested answers:
Increase in Demand
1. Rising incomes
The increase in incomes of the middle class in urban areas, allowing them to purchase more
imported goods which are available usually in big supermarkets. These goods are likely to be
positive and income elastic and demand will rise more than proportionate with income.
2. Government intervention
The Chinese government encourages supermarkets by shutting down street markets, and thus
inevitably forcing consumers to shop at supermarkets and thus increasing the demand for
supermarkets.
Increase in supply
Lower trade barriers with entry into WTO
Easing on rules to set up firms in China and imports like grocery products, attract more
international firms to set up supermarkets in China and thus increase the supply of supermarkets
in China.
*1m for the identification of a factor and a further mark for an explanation
Examiners report:
This question was well answered by most candidates. Few were unable to identify and then
explain the reasons for the development of supermarkets in China since the reasons were so
clearly signposted in the text. Most candidates scored well, although the Examiners are less
impressed by those who paraphrased the text extensively. They preferred answers that were
succinct and to the point, whilst at the same time answering the question in sufficient depth.
(ci)
Describe the type of market structure operating in the UK grocery sector in 2004.
Suggested answers:
The market structure in the UK grocery sector would be an oligopoly [1m] because four
supermarkets dominated the market with MCR4 = 74%. [1m]
Note: To justify whether the market structure is indeed oligopoly and once a table of market
shares by different firms is given, it is a MUST to calculate MCR. MUST link MCR to a few
dominant firms which is a unique characteristic of oligopoly beside mutual
interdependence.
Examiners report:
This question was also answered very well. Most candidates identified the market structure as
oligopolistic and justified this in terms of the small number of firms controlling the large share of
the market as shown in the data.
15
[2]
cii)
Explain how the firms in this market might compete against each other.
[4]
Suggested answers:
2m for explaining why firms will use non-price competition rather than price due to mutual
interdependence (Cambridge highlighted many candidates left out this point)
2m for elaborating on non-price competition (link it to increasing in demand and reduce
PED)
Firms in this market would choose to engage in non-price competition due to mutual
interdependence.
There are only a few firms under oligopolistic market structure and thus each firm has to
take into account the actions/reactions of other firms and as a result, there is price
rigidity.
If an oligopolistic firm increases price, other firms will not follow and it will lose its
consumers to the competitors, and quantity demanded will fall more than proportionate
leading to a loss in revenue. If it reduces price, other firms will respond by reducing their
prices as well and the quantity demanded will increase less than proportionate and result
in lower revenue for all.
Hence, oligopolies will more likely engage in non-price competition.
They would compete through advertising in the media to create increased brand
recognition for their supermarket.
They would also attract new clients and retain existing clients through special promotions
and marketing strategies by having lucky draws or having a system that recognize
customer loyalty so as to increase demand for their products.
By offering services that are unique to their consumer base such as free home deliveries
for senior citizens, phone-in or online orders, they would also ensure that demand for
their products are more price inelastic.
Examiners report:
In response to this question candidates showed knowledge of the ways in which firms compete in oligopoly, but
these were often described rather than explained. The kinked demand curve was often introduced together with
the statement that it deterred firms from competing on price. This usually led on to a description of types of nonprice competition such as advertising or special promotions or types of collusive behaviour. What was often
lacking here was the underlying explanation of why these types of competition arose in this type of market. The
reason is the mutual interdependence or rival consciousness caused by the fewness of the firms in the market.
Although this could be inferred from the kinked demand curve diagrams that were usually provided, it was very
often only implied rather than explained.
16
(d)
Discuss the policy of divestment in the case of Tesco explaining clearly how this might
affect consumer welfare.
Note: This is a typical Higher Order Skills question. So it should be written in a form of
mini-essay.
The style and approach would be similar to writing an AWEsome essay using thesis, antithesis and synthesis for structure.
General Mark Scheme for 8m HOS Questions:
L3
Elaborate (Extend to include analysis)
Analyse use relevant theory to aid explanation
Apply place explanation in context of evidence from the data
Balanced view
Justified conclusion
L2
Consolidate (Add some details application)
Explain the economic concepts more in depth.
Clarify give examples from data with more elaboration
Consider both sides but lopsided
No justified conclusion.
L1
Knowledge/Recognise (Description)
Identify the key theory without explanation or/and key evidence without
explanation
Outline: give a list of relevant factors
Consider 1 side no evidence of discussion.
78
46
13
17
[8]
Introduction
The policy of divestment arose because there is increasing concentration of market power for
supermarkets as they start operating small convenience stores, leading to the closure of many
independent smaller stores.
In addition new firms may not be able to enter the market as the current large supermarket chains have
a cost advantage over independent convenience stores.
- I shall be discussing how the policy of divestment in the case of Tesco explaining clearly how this might
affect consumer welfare.
Body
Thesis Divestment in the case of Tesco will have Antithesis Divestment in the case of Tesco
a positive impact on consumer welfare
will have a negative impact on consumer
Explain the gain in consumer surplus when more welfare
competition is introduce (using a diagram comparing
PC vs monopoly)
By setting up convenience stores in these
areas, the larger supermarket chains have a
cost
advantage
over
independent
Price/revenue/costs ($)
convenience
stores
due
to
their
ability
to reap
MCM = SSPC
substantial EOS.
The divestment for Tesco (selling off of their
convenience stores) actually will result in less
of ability to reap EOS.
PM
a
This may then lead to higher prices (P1 to P2)
due to increase in cost of production for Tesco
PPC
b
when it could not enjoy the same amount of
EOS
Fall in EOS reaped from Q1 to Q2
Price/revenue/costs ($)
MC1=
MR SSPC
0
P2
P1
QM
-
QPC
MCM
AR
output
18
In the light of the data provided, if you were an economic advisor to the Singapore
government, would you recommend that it should follow the example of the Chinese
authorities and encourage supermarket development? Justify your answer.
Note: There is not much evidence in the case material. This question requires certain own
knowledge to do well.
State
Explain
Exemplify
With Data
Introduction (clarify what the China government is doing & the criteria
for assessing whether Singapore should follow suit)
The China government is encouraging supermarketisation and closing down
traditional street markets. Whether the Singapore government should follow
suit would depend on the economic situation in Singapore.
Advantages
of
developing
supermarkets & Chinas rationale
- The
Chinese
authorities
encouraged supermarketisation
because the existing retail
system was inefficient and
inadequate for the development
of the economy.
- Growth and modernization of the
retail
market
also
lacked
direction as the ownership of
19
[10]
Elaborate
with
ECONOMICS
analysis
COST &
REVENUE
advantages
Explain
Exemplify
With Data
20
market.
Evaluation
Synthesis/
Stand
The cost savings between supermarkets and neighbourhood shops are still
not substantial since there is more marketing EOS rather than technical EOS.
Consumers are willing to pay slightly more in neighbourhood shops for the
convenience they offer. So, supermarketism actually reduces consumers
welfare.
Note: Saucer shaped LRAC for co-existence of big and small firms.
- From Table 5, we can see both supermarkets and provision and sundry
shops increased healthily by 22-23% even when there is no government
intervention.
- As the economic advisor for Singapore, I would say that Singapore has
different needs from those of China in terms of supermarket development
and should not follow suit.
- I would recommend a non-intervention approach, allowing both the large
firms and the small firms to operate simultaneously.
- Ultimately, in the long run, market forces would allow only the fittest firm
that is most cost efficient to survive.
-
L3 (6-8)
L2 (4-5)
L1 (1-3)
E2 (2)
E1 (1)
Provide a balanced view and include both the advantages and disadvantages of
further supermarket development with economic analysis. These will be
considered in the context of the Singapore economy.
Provide both advantages and disadvantages but then to be lopsided. Explanation
still lacks economic analysis.
One-sided and discuss only the advantages or disadvantages of supermarket
development and/or there will be limited reference to the Singapore economy.
This level may be characterized by a no of descriptive points drawn from the data.
make a recommendation based upon a sound examination of the costs and
benefits for the Singapore economy of further supermarket development. Expect
comparisons between Singapore and China and UK.
make a recommendation but only the costs and benefits are considered. There
may be points made that are not based upon evidence. There will be only limited
comparison with China.
Examiners report:
This question gave candidates the opportunity to consider the arguments for and against
supermarkets in the Singaporean context. The data provided two examples of different
government policies towards supermarket development. In China, government policy has been to
encourage supermarket development in a variety of ways. In the UK, the government is
21
considering a policy to reduce the market power of supermarkets. Candidates were questioned on
these opposing approaches in the earlier questions. The reasons for the differing approaches to
policy are clearly related to the differing conditions in China and the UK. Clearly whether further
supermarket development was appropriate for Singapore depended on the circumstances in
Singapore. An appreciation of this was essential for a successful answer here. Some candidates
did very well. They considered the data provided as a whole and recognised the underlying
themes and issues. For example, it was clear from the data that the reason that the Chinese
government encouraged supermarket development was that the distribution of goods in China is
inefficient. This was because of the fragmented market. This could hardly be applied to Singapore,
where the wet markets appear to complement other retail outlets. Successful answers considered
such issues in an analytical framework. Good candidates provided a thoughtful conclusion after
summarising the issues from a Singaporean context. The less successful approaches simply
provided a few arguments for and against supermarkets with little reference to Singapore. These
approaches were usually descriptive and failed to grasp the relevant themes inherent in the data.
They tended to focus upon a limited section of the data and failed to consider the data as a whole.
These tended to be awarded a mark in the lower level and often they scored few marks for
evaluation
22
23
2007
%
2008
%
Japan Airlines
24.13
21.32
15.62
14.22
Qantas Airways
13.74
13.38
Singapore Airlines
11.11
11.16
24
Questions
(a)
(i)
From Chart 1, compare the trend of Singapores carbon dioxide emissions and carbon
dioxide emissions per capita from 1990 to 2007.
[2]
(ii)
[1]
(iii)
Evaluate measures that the Singapore government can adopt to deal with the alleged
negative externalities of air travel.
[8]
(b)
Using Extract 3, analyse how the market for air passenger travel in Asia Pacific has changed.
[4]
(c)
Explain how the internet has affected the ability of the airlines to practice price discrimination.
[4]
(d)
(i)
The Asia-Pacific airline industry has been described as oligopolistic. What evidence
in the data supports this?
[1]
(ii)
Discuss how the firms in the airline industry might compete against each other and
how this might affect the society.
[10]
(i)
From Chart 1, compare the trend of Singapores carbon dioxide emissions and carbon
(a)
25
[2]
26
(1)
(1)
[1]
(iii)
Evaluate measures that the Singapore government can adopt to deal with the alleged
negative externalities of air travel.
27
[8]
Limitations
Compliance issue e.g. monitoring and deterrence
28
Conclusion
Use environmentally friendly fuel and aircrafts
Use Green fuels
Technological solution
LT best to resolve the problem at its source. The basic source of air pollution comes from the use
of dirty or fossil fuels. Government can encourage the development and use of green fuels via
subsidies for R +D and adoption.
Noise pollution
Similarly government can encourage the development and use of environmentally friendly aircrafts
e.g. quieter engines. Citing airports away from residential areas e.g. Changi Airport is located near
the sea to minimize noise and air pollution.
Essentially, high altitude pollution may worsen global warming which affects EVERYONE. This calls
for a consolidated international effort in reducing it and thus funds will be collected to pump into R &
D to come up with more environmentally friendly aircrafts or biofuel.
*to score level 3 marks for this question, students must evaluate 2 measures, of which 1 must be from the
text (marketable permits).
(b)
Using Extract 3, analyse how the market for air passenger travel in Asia Pacific has changed.
Note to tutors:
Highlight to students the question is on the market of air travel and the correct
economic framework is DD-SS analysis.
Last year, many students used revenue-cost framework.
So this question requires answers that shift demand and supply.
Base on the data, there is more air travel and prices are lower, it means there is an
increase in demand and supply but the increase in supply outweighs demand.
Also, always use words such as From Extract 3, para 1 to show the examiner you
are indeed using information from the data.
29
[4]
State
Change in demand (1m):
Ext 3, para 1: rapid growth in GDP leads to an
increase in demand for air passenger travel
Elaborate
Increase in income signals an increase in
purchasing power and since air travel is a
normal good, the demand rises when income
increases.
DD - P and Q
Change in supply (2m):
Ext 3, para 2: Presence of low-cost carriers Since this means an increase in number of
such as Tiger Airways, Cebu Pacific and service providers.
AirAsia increase the supply
SS - P and Q
However, Ext 3, para 2: Rising fuel costs Since cost of production is higher.
leads to a fall in the supply of air passenger
travel
SS - P and Q
Stand: (We want to show price indeed fall based on the case study)
Supply must increase as increased presence of low-cost carriers outweigh the increase in fuel
costs
Price
Final
stand
Increase
in
passenger
be more than
demand for it,
lower (extract 2,
prices)
and
S1
(1m):
supply of air
travel is likely to
S2
the increase in
hence price is
undercutting of
Fig 1: Market output
for airis higher.
passenger travel
(*not
necessary
for
students to draw dig for
D2 tutors to illustrate)
P
P1
D1
Q
(c)
Q1
Qty
Explain how the internet has affected the ability of the airlines to practice price
discrimination.
Note for tutors:
You may want to perform a life demonstration on buying an online air ticket and
showing live how airfares change within a short timeframe.
You can also show the class the article Airlines told to end price discrimination by
Stephen Castle
30
[4]
Highlight to students that this question requires 2 points as answers can either be
for or against the increased ability to practice PD
From Extract 2, para 4,
Evidence from Data
airlines have a better idea of who their
customers are
more competitive market as consumers can
now compare prices more easily with the
Internet
2m for each point and max 3m for those who do not give 2-sided arguments
31
Independent.co.uk
Airlines told to end price discrimination
By Stephen Castle Tuesday, 8 June 2004
Europe's airlines have been forced to end price differences of up to 300 per cent offered on the same flights in
different countries, after a six-month inquiry into their ticketing policies.
Europe's airlines have been forced to end price differences of up to 300 per cent offered on the same flights in
different countries, after a six-month inquiry into their ticketing policies.
The announcement came at the end of an investigation by the European Commission into the fares charged by 18
European airlines including British Airways, Air France, Lufthansa, SAS, British Midland, and Virgin Atlantic. BA
and SAS admitted having the different ticket charges but Giles Gantelet, spokesman for Loyola de Palacio, the EU
transport commissioner, said all airlines had now ended the practice. "A little bit of naming and shaming has
achieved results," he added.
One example discovered was of a return flight from Frankfurt to Berlin which cost 88 (59) when purchased in
Germany but 268 in Belgium. A 50 per cent differential was found in a flight between the UK and Germany.
Although the internet has revolutionised airline ticket sales, many companies still structure their systems so that
travellers have to use a website geared to their country of residence. As personal information and credit card
addresses have to be provided, and tickets often have to be mailed out, there is no opportunity to circumvent the
system by using a site belonging to the same company in another country. Similar factors have applied to
purchases made via travel agents or direct from airlines sales' offices.
However EU law means that companies are not allowed to discriminate between European customers on the
grounds of their place of residence.
Of the 18 airlines contacted by the commission, 16 responded, with most saying that they did not operate in this
way, and others saying they had stopped the practice. Italy's Alitalia said that, due to its current financial crisis, it
was unable to give a proper response and Olympic Airlines of Greece failed to reply.
However a test by the commission confirmed that all airlines had ended the practices. Mr Gantelet said: "In rare
cases some restrictions may still exist for certain paper-based tickets, but all electronic tickets are now available
throughout the EU without discrimination, except - in some cases - for differences in handling fees. As a result,
price levels are now similar for all EU residents." He added that the commission would continue to monitor the
airlines to make sure the problem does not return.
Steve Double, head of news at BA, said: "It is an issue which we were always comfortable with and we were
always confident of the outcome." Yesterday's announcement also marks a successful outcome for the
Commission, which might have had difficulty making a legal case stick.
The Commission's powers over airline prices are limited, although it could take action if it judged that there had
been a breach of EU treaty provisions, which lay down a level playing field for business within the internal market.
32
(d)
(i)
The Asia-Pacific airline industry has been described as oligopolistic. What evidence
in the data supports this?
[1]
Market share MCR4 has been greater than 60% over the past 2 years and thus show the presence
of a few dominant firms which is a characteristic of oligopoly.
Note to tutors:
Highlight to students, usually for a question on oligopoly, when a table with market share is
given and it is a MUST to calculate the Market Concentration ration rather then using other
information high barriers to entry which is true for monopoly or homogeneous product which
is also true for perfect competition or non-price competition which is true for monopolistic
competition..
Always give evidence that shows the unique characteristics (a few dominant firms and
mutual interdependence) of oligopoly.
Unless such unique characteristics are absent in the case material, then settle for the 2 nd
best answers such as high barriers to entry, etc which are still characteristics of oligopoly.
(ii)
Discuss how the firms in the airline industry might compete against each other and
how this might affect the society.
Note:
For such Higher Order Skills Question, use the following steps:
1. Come up with the economic framework.
2. Insert evidence from the data
There are two parts to the answers methods of competition and impact on society.
A 10 marks question warrants a proper introduction, body and conclusion.
A possible framework:
Competition in air-travel
Possible Methods of Competing
Price-cut by budget airlines
As there is price rigidity, airlines will engage in
Impact on society: Benefits or costs?
non price competition
Impact on society: Benefits or costs?
Conclusion: Which is more likely?
Introduction
I will be examining how the airlines might compete against each other in an oligopolistic industry and
how this might affect the society.
Body
Evidence from the extract includes:
Increase in contestability in the market (extract 2 deregulation of the airline industry)
Methods of competition:
1. Price-cutting by budget airlines as they offer no-frills service
2. Due to price-rigidity, there will be non-price competition by full-fledged carriers
33
[10]
34
But if the non-price competition is in the form of persuasive advertising, the higher costs
may be translated to unnecessary increase in airfare.
Good, balanced analysis based on the case material and good use of economic analysis
Explains the strategies of airlines using economics and with some references made to the case
material and mentions impact on society.
Describes strategies of airlines in a general manner (no/minimal use of economics) and with little
reference to case material; no or little mention of impact on society
Attempts to synthesise when there are conflicting views.
Provide good synthesis and a reasoned conclusion
35
7-8
4-6
1-3
1
2
2005
2006
2007
SMRT
SBS
SMRT
SBS
SMRT
SBS
SMRT
SBS
$1.69
$1.69
$1.69
$1.69
$1.72
$1.72
$1.75
$1.75
Adult
Senior Citizen
Child & Student
36
37
(i)
Summarise the changes in the maximum adult fare per ride charged by SMRT and
SBS Transit from 2004 to 2007.
[2]
(ii)
[2]
(iii
)
[4]
(b)
With the aid of a diagram, explain the losses incurred by SBS Transit from operating the
North-East Line in 2003.
[4]
(c)
(i)
How far does the data suggest that the level of competition is raised in the MRT
system?
[2]
(ii)
The transport analysts were skeptical about the potential benefits of a merger between
SMRT and SBS Transit as the 'economies of scale would be limited'.
[6]
38
(a) (i) Summarise the changes in the maximum adult fare per ride charged by SMRT and SBS Transit
from 2004 to 2007. [2]
Table 1 Maximum Adult Fare per Ride (2004 2007)
2004
2005
2006
2007
SMRT
SBS
SMRT
SBS
SMRT
SBS
SMRT
SBS
$1.69
$1.69
$1.69
$1.69
$1.72
$1.72
$1.75
$1.75
Adult
Senior Citizen
Child & Student
With reference to Table 2: Higher fare for adults and concessionary rates for elderly, children and students.
Adults are charged a higher price given that their demand is relatively price inelastic (the fares would
constitute a small proportion of their income.
This is an e.g. of 3rd degree PD. [2m]
Table 3 SMRT Fare Structure (by distance)
Fare per ride
Fare per km
$0.66
$0.21
$0.88
$0.09
:
As distance (km), the fare charged per
$1.70
distance.
$1.75
Distance travelled
Up to 3.2 km
3.21 km to 5.6 km
:
28.01 km to 30.0 km
Over 30.0 km
With reference to Table 3: Passengers travelling on longer distances (or larger 'blocks') incur a lower fare
per kilometre.
This is an e.g. of 2nd degree PD. [2m]
39
(b) With the aid of a diagram, explain the losses incurred by SBS Transit from operating the North-East
Line in 2003. [4]
SBS Transit "natural monopoly" over the NEL given the huge fixed / start-up cost, the firm's AC and
MC curves will be continuously falling over the entire range of output. [1m]
At profit maximising output level Q E, AC > AR subnormal profit / loss (represented by Area ABCP E)
incurred by SBS Transit. Low demand due to low occupancy rate of the HDB flats along NEL less
passengers. [1m]
Costs/Rev/Price
A
PE
C
AC
MC
MR
AR=DD
Qty
QE
2m for correct diagram but no penalty for drawing a U-shaped AC & MC as penalty will be given for wrong
explanation.
Students can also draw normal monopoly diagram as the infrastructure is actually built by LTA, not the rail
operator.
(c) (i) How far does the data suggest that the level of competition is raised in the MRT system? [2]
On the one hand, the objective appears to have been met as the rail industry has now 2 players SMRT
and SBS Transit OR there is improvement in quality of service fully automated train services by NEL. [1m]
However, one must bear in mind that SMRT runs N-S Line and E-W Line; while SBS Transit N-E Line (from
Extract 1) each operates systems that are independent of each other as they cater to different regions of
Singapore two mutually exclusive monopolies. [1m]
(ii) The transport analysts were skeptical about the potential benefits of a merger between SMRT and
SBS Transit as the 'economies of scale would be limited'. To what extent do you agree with the
above view? [6]
Statement with Elaboration and Exemplification
Rail industry huge capital outlay Substantial internal (technical) EOS thus with a merger, the
combined company is able to further spread the sunk cost as it would be producing at a greater scale
enjoys lower per unit cost.
However, this is based on the implicit assumption that the technologies on which the N-S & E-W lines and
NEL are the same, which in fact are not (Extract 2 Para 3). Also, they operate different routes so strictly
speaking not the same kind of service.
40
While a merger would allow the firm to enjoy various other types of internal EOS (marketing, administrative
and risk-bearing apply to context), the cost savings that can be derived from these EOS is limited.
Conclusion:
Hence a merger between SMRT and SBS Transit would bear little cost advantages.
L3
L2
L1
Good explanation and application on why technical EOS may not be a good reason for
lowering costs and how cost savings are indeed minimal.
Explained EOS with some reference to context.
Explained EOS with no/little reference to context.
5-6
3-4
1-2
(d) "When market dominance exists, consumer exploitation is inevitable" Discuss whether the data
supports this view. [10]
Introduction
Market dominance may lead to the exploitation of consumers because of the higher price they pay and the lower
quantity which is transacted on the market.
However, firms with market dominance may also enjoy economies of scale which may benefit consumers in the
form of lower prices and better quality products in the light of competition for greater market share which entices the
firms to engage in R&D.
Body
Thesis: Consumer exploitation inevitable
41
PMC
A
PPC
B
C
AC
MC
E
MR
AR=DD
Q
Qty
PMC > PPC
E
Loss of consumer
surplus = area DEPPCA
42
Conclusion
The level of market dominance influences the conduct of firms in the industry. Although a larger degree of market
power may lead to the exploitation of consumers, there are also instances when more market power might actually
be beneficial instead.
Furthermore, given various government regulators and competition law present, SMRT and SBS Transit would be
less able to engage in activities that would exploit the consumers.
L3
L2
L1
E2
E1
Excellent explanation of concepts and well supported with relevant evidences; balanced view with
conclusion.
Applied to context but lopsided view
Explained why market dominance is bad for consumers with no/little reference to context.
OR
Purely lifting evidences from the passage without link to economic concepts.
Judgment based on analysis (justified conclusion)
Mainly unexplained judgments
43
7-8
4-6
1-3
2
1