(2021) A Level H2 Econs Paper 1 CSQ Q1

CSQ1: Changes in the market for seafood 

a.         Salmon and cod are substitutes for each other.

An increase in the price of salmon will thus lead to an increase in demand for cod as consumers will switch to consuming cod instead of salmon  increase in demand for cod from DD0 to DD1 increase in price of cod in Norway from P0 to P1.

bi.        The disagreement between fishing workers and boat owners have left fishing boats idle in the ports for over two months. This suggests that such disagreements may lead to stoppages in production(fishing) of cod for a period of time  leading to a fall in supply of cod  as supply shift to the left from SS0 to SS1  increase in price of cod from P0 to P1 

bii.       A maximum price is only effective when set below the equilibrium price. From March 2016 to July 2016, the equilibrium price is below 2.25 – the maximum price will do nothing.

            From July 2016, the maximum price of 2.25 will kick in. A shortage of QsQd will occur since at the maximum price of 2.25 – producers are willing to supply at Qs while consumers will buy at Qd. 

            Note: Diagram not likely required since its only 2m. Draw anyway if you have time since you have 8m of CLT which should have given you some excess time.

biii.      How would stockpiling have worked

1.     Purchase cod at low prices when there are no shortages, freeze and stockpile

2.     Release frozen cod to the market when there are high prices / shortages

3.     This will increase the supply and eliminate the shortage – reverting prices to normal

Frozen cod is perishable

1.     Frozen cod is perishable – there is a limited shelf life even if you freeze it

2.     The longer you store – the lower the quality (or perceived quality) which may affect the ability to sell off stockpiles

Costly to stockpile

1.     There are costs involved in stockpiling i.e. warehousing and temperature control (sub-zero degrees AC is expensive to maintain)

2.     This means that the longer you stockpile – the more the costs associated with maintaining such stockpiles, which may make it not worthwhile to stockpile cod for excessively long periods of time

c.         Shut-down condition = AR < AVC

It was mentioned in the extract that shrimp farmers were forced to sell product at 10% of normal price  we can thus estimate that revenues have fallen significantly (90% drop!)

This would unlikely have meant that the AR was not likely to have been able to cover the AVC (e.g. investing US$6500 for 200,000 tiny shrimp & electricity for cold storage) 

d.         What happens will the company increases it scale of production

1.     The company will likely derive internal economies of scale, specifically technical economies of scale & marketing economies of scale

2.     This will allow the firm to decrease its long run average costs associated with production

How might consumers benefit

1.     Consumers might benefit if the firm pass on these cost savings to consumers in terms of lower prices

Would consumers likely benefit

1.     The firm may charge lower prices / may not charge lower prices even if it derives savings

2.     Whether it charges lower prices may also depend on the presence of competition in the industry – this information is not available, but logically there would be other firms out there producing these types of fish that this firm produces

3.     So the likelihood of lower prices are high

4.     With increased scale of production, the firm may achieve supernormal profits. There is thus, also the possibility of the firm carrying out research and development to improve the quality of the products which can also benefit the consumer

e.         Demand factors

            Changes in taste and preferences

Consumers who are worried about the climate  change in taste and preferences  fall in demand for fish

Likely to have long term impact (a large % of the world seems to be trending towards that direction)

Fall in incomes

Decrease in incomes  decreased purchasing power  fall in demand for fish

Temporary – unlikely to have long term impact

            Supply factors

Farmers shutting down operations due to the pandemic  Decrease in number of sellers  fall in supply for fish

Temporary – post-pandemic, there may be some recovery especially since barriers to entry/startup costs are likely quite low

            Which factors have a greater impact on the market in the long-run

It appears that demand factors will likely have a greater impact on the market in the long run

Note: Answers for this question will likely be quite open-ended / varying responses likely acceptable as long as reasonable

 

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