(2015) A Level H2 Econs Paper 1 CSQ Q1

1a.     DDSS Approach
Increase in demand for better food due to higher incomes in highly populated emerging markets like China, India & Brazil (link to non-price factors of demand such as income levels OR size of market)
          e.g.

          Increase in incomes à increased purchasing power à increased demand for food à increased demand for potash (factor input used for production of agricultural products à derived demand concept) à price of potash increase

          OR

          Increase in size of population à increased demand for food à increased demand for potash (factor input used for production of agricultural products à derived demand concept) à price of potash increase

            Market Structure Approach

Price setting efforts by cartel, whereby the significant market power resultant from collusion by large dominating firms allowed the cartel to set high prices.

1b.     The opening of the new potash mine would create ‘indirect jobs’ as ancillary jobs may be created to serve the people working now working in the area, e.g. eateries, retail shops.

1c.       Uralkali’s decision to leave the potash cartel were due to the following

1.     In view of China’s tough negotiations, Uralkali was doubtful that other firms would be able to maintain their prices as agreed by the cartel

2.     Demand for potash was likely becoming more price elastic as

a.     Farmers willingness to find other methods (degree of necessity lower)

b.     More firms joining the market (increased substitutability)

Therefore, Uralkali might have seen it fit to decrease prices as quantity demanded will increase more than proportionately, leading to an increase in total revenue. To do so, it must leave the cartel.

1d.     The collapse of the potash cartel, would lead to increased competition (from other countries). This could lead to both a fall in demand for potash produced by Canada, there would consequently be a fall in demand for the Canadian dollar due to the fall in demand for Canada-produced potash. The fall in demand for Canadian dollar would lead to a fall in the value of the Canadian dollar

(draw diagram – demand shift left) 

1e.       Demand Management Policies

1.     Expansionary demand management policies such as expansionary fiscal policy could be carried out through an increase government expenditure à increase AD à increase real NY à higher economic growth

2.     Firms will hire more factor inputs to produce the higher level of output, resulting in a fall in unemployment

3.     This may, however, not address the specific issues causing unemployment in this context

            Supply Side Policies

            Policy A – Short Run

            A temporary subsidy could be given for potash, to increase the price competitiveness. This could help to mitigate the decline in potash exports.
Ev: This is however, costly, and could lead to retaliation should it be seen as a protectionist measure by other countries.

Policy B – Long Run

A better and more sustainable policy would be to help workers who become unemployed to learn new skills through subsidies for re-training programmes and education so that such workers will be able to eventually find employment in other sectors 

Policy C – The Alternative

Alternatively, the government could subsidise R&D efforts or efforts to increase productivity for the potash sector, so that they can increase their competitiveness.

Conclusion

If government thinks “potash sector” is NOT worth saving (has a chance of survival) à it should adopt Policy A in conjunction with Policy B. This helps workers to remain employed while finding a way for the workers in the industry to transit in the meanwhile

 

If government thinks “potash sector” is worth saving à it should adopt Policy C instead

1f.         Do cost & benefit analysis and weigh them.

Costs include

1.     Environmental costs

2.     Possible fall in tourism (it was mentioned area was beautiful)

3.     Initial building cost (1.13 to 1.25 billion pounds)

Benefits include

1.     3000 direct and indirect jobs

2.     Reduction in BOP deficit of 10% by 2022

3.     Annual sum of 1.2 billion pounds

Weighing depends on

1.     World developments (what if potash prices fall?)

2.     Project sustainable? (only 30 billion tonnes in the area)

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