(2016) A Level H2 Econs Paper 2 Essay Q1

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1. The price of a pair of jeans can be as little as S$20 or as much as S$500.

(a) Explain what might cause price elasticity of demand and cross elasticity of demand to be different for different products. [10]

For Both Elasticities,Explain:

• Definition

• Formula

• Sign

• Magnitude

What Causes PED differ for different products

Determinants of PED 

1. Degree of necessity 

2. % of income 

3. Number and availability of substitutes 

4. Provide example of branded vs non-branded jeans as example to explain the determinants above 

What Causes XED differ for different products

1. Relationship of goods – illustrated by sign 

2. Closeness of goods – illustrated by magnitude 

3. Example branded jeans and non-branded jeans are substitutes for one another but not close. 

4. Jeans and t-shirts can be complements for one another. 

(b) Assess the likely effects of a rise in price of one brand of jeans on the revenue earned by both retailers of that brand of jeans and those who sell other related goods. [15]

Impact on revenue earned by retailers of a specific brand of jeans when there is a rise in price in the same brand of jeans 

• If branded jeans – price elastic (low degree of necessity, high % of income) , Increase in price, quantity demanded will fall more than proportionately -> fall in TR 

• If non-branded jeans – price inelastic (high degree of necessity, low % of income), Increase in price, quantity demanded will fall less than proportionately -> increase in TR 

Impact on revenue earned by those who sell other related goods when there is a rise in price of one brand of jeans 

• Other retailers of jeans (substitutes) – XED concept  

• an increase in price of a specific brand of jeans will result in an increase in demand for other brands of jeans -> increase in TR for retailers of other jeans brands (could be significant given they are close substitutes)

• Retailers of T-shirts – XED concept

• An increase in price of a specific brand of jeans will result in a fall in demand for t-shirts which are complements for jeans -> decrease in TR for retailers of t-shirts (unlikely to be significant considering that while they are complements, they may not be very strong complements) 

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