GCE A'Level CSQ 2021 Question 1- Suggested Answers
(a) Using a demand and supply diagram, explain why the rise in the price of salmon led to the change in price of cod in Norway. [2m]
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Salmon and cod are substitutes in consumption. Since the price of salmon increased, consumers would prefer to switch to a cheaper alternative like cod, which causes the demand for cod to increase. At initial price of cod, P0, there would be a shortage that would exert an upward pressure on price of cod causing it to rise from P0 to P1.
With reference to Extract 1 and Figure 1:
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(bi) Using a diagram, explain the likely impact of the disagreement between fishing workers and boat owners in Iceland on the market for cod in 2017. [2m]
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The disagreement between fishing workers and boat owners would have caused a reduction in their productivity levels and a loss of manpower hours. According to Extract 1, “fishing boats were left idle in the port for over two months.” This would have caused the supply of cod to fall and shift leftwards from SS0 to SS1. At the initial price, P0, there would be a shortage of cod that would cause the market equilibrium price to increase to P1 and quantity to fall from Q0 to Q1.
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(bii) Suppose a maximum price of Iceland cod of 2.25euros per kg had been operating since March 2016.
Explain the impact of such a maximum price would have had on the market for Iceland cod. [2m]
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A maximum price is effective when is it set below the market equilibrium price. According to Figure 1, from July 2016 onwards, the prices of Iceland cod was higher than 2.25 euros per kg. With a maximum price policy in place, the prices would have been capped at 2.25 euros per kg. However, this would cause quantity demanded to be higher than quantity supplied, resulting in a surplus of Iceland cod. This would have caused the market equilibrium quantity of Iceland cod to fall from Q0 to Q1.
(biii) Explain how 'large stockpiles of frozen cod in Iceland' can be used to keep cod prices stable, and identify two difficulties in operating such a scheme. [4m]
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Large stockpiles of cod would have caused the price elasticity of supply of codfish to be more elastic. Given that there is an increase in demand for codfish caused by the increase in the price of Norway salmon, it would have led to a shortage that would push prices upwards. However, a proportionate increase in the price of codfish leads to a more than proportionate increase in the quantity supplied of codfish, ceteris paribus. The increase in quantity supplied as opposed to the price increase would have a greater effect on eliminating the shortage caused by the rise in demand. Thus, prices can remain relatively stable.
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Two difficulties of operating such a scheme according to Extract 1:
1) Seasonal factors where peak cod-fishing season in Iceland is typically between February to April, where subsequently the ability to maintain a certain level of stockpile would be affected. Thus inventories cannot be maintained throughout the year.
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2) Disagreements between fishing workers and boat owners halted production for two months which will also hurt the ability to maintain adequate stockpiles of codfish.
(c) Explain why many small-scale shrimp farmers in India took the decision to shut down production in the short run and leave the market in 2020. [2m]
Small-scale shrimp farmers in India are assumed to have the traditional aim of profit maximization. The COVID-19 pandemic has reduced the demand for tourism services including restaurant and hotel stays. Hence, there would be a fall in derived demand for shrimp, which is a necessary input to operate restaurant businesses. The fall in demand would have caused the average revenue (AR) earned by shrimp farmers to fall. If AR is lesser than average variable costs (AVC), they would have to shut down as continued operation would incur perpetual losses for the firm in subsequent time periods.
(d) Discuss whether Barramundi Asia's plan to increase its scale of fish production is likely to benefit consumers. [8m]
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A typical firm may benefit consumers in numerous ways. For example (1) lower prices and higher quantities that increase consumer surplus, (2) providing high quality and variety of goods and services, (3) improving equitable outcomes.
Thesis Statement: Barramundi Asia’s plan to increase its scale of fish production is likely to benefit consumers.
According to Extract 3, “Barramundi Asia has found it makes both logistical and financial sense to own and operate its entire supply chain.” This suggests that the firm is vertically integrated which allows it to reap economies of scale such as technical economies of scale. Barramundi can use indivisible and specialized equipment to farm their fish. The total cost of acquiring the fixed capital can be spread over an increase in fish production from 4000 tonnes to 50 000 tonnes by 2030. This reduces the unit cost of production causing the AC (AC0 to AC1) and MC (MC0 to MC1) curve to shift downwards. Assuming no change to AR and MR, the firm will now be producing at MR0 = MC1 (E1) at P1 and Q1. At a lower operating cost, the firm is able to pass on these cost savings to consumers in the form of lower prices (P0 to P1) and larger quantities of Barramundi fish (Q0 to Q1). This increases consumer surplus from the blue shaded area to the blue and green shaded area, which is beneficial to consumers. If we were to classify Barramundi fish as a general seafood category, lower prices and higher quantities of fish can also improve equity, where consumers of all income levels can have fair access to basic necessities such as food. This is especially true for individuals living in coastal regions where the main part of their diet includes seafood.
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Furthermore, Barramundi Asia exhibits dynamic efficiency - a term used to describe a firm that engages in innovative methods (R&D) to increase the productivity, quality and/or quantity of goods and services. Referencing Extract 3, Barramundi Asia “uses hi-tech automated farming processes, has genetic expertise, inoculates their fishes and even has local research and development sites”. The firm can farm fish that carry fewer diseases, are more nutritious thereby improving the overall quality of fish offered to consumers. Other benefits to consumers include an “online e-commence presence and home delivery” that further improves consumer welfare.
Anti-Thesis Statement: Barramundi Asia’s growth expansion plan may cause harm to consumers, especially in the long run.
It is clear that Barramundi Asia is adopting an aggressive growth strategy with the ambition of increasing its output dramatically. This explains why the firm “is yet to be profitable” as they incur large costs to “expand its operations across its three farming sites” with the intention of adding new farms. Suppose the expansion plans come to fruition, Barramundi Asia may be able to drive out incumbent firms and increase their market share to the point where they monopolize the Barramundi fish market in the region. The AR curve will shift rightwards from AR0 to AR1 and become more price inelastic (steeper) due to an increase in demand for their fish and a lack of available substitutes to choose from in the market. Previously, the profit-maximizing output level is at MC0 = MR0 which corresponds to P0 and Q0. With the shift in the market, the new profit-maximizing output level will be MC0 = MR1 which corresponds to P1 and Q1. The firm is said to have market power where it is able to restrict output and command higher prices when compared to if the firm is a perfectly competitive firm (Ppc & Qpc). This reduces consumer surplus from the green and blue shaded area to only the blue shaded area, hurting consumers. This may also cause inequity as low-income individuals are priced out of the market.
In conclusion, Barramundi Asia’s plan to increase its scale of fish production may be both beneficial and harmful to consumers. However, consumers may overall benefit from it. Barramundi also known as the Asian sea bass can be considered a luxury item, attracting high-income consumers who do not mind paying a higher price for high-quality fish. The issue of inequity can also be disregarded as consumers have a wide variety of other food items to choose from. Barramundi Asia will also have to consider that there is a huge availability of other species of fish for consumers to choose from and thus may not be able to set very high prices thereby preserving consumer surplus.
(e) Due to fears over climate change and a growing demand for plant-based diets, many consumers are changing from animal protein to vegan alternatives.
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Discuss whether demand factors or supply factors have a greater impact on the market for fish in the long run. [10m]
A greater impact on the market for fish refers to the extent of change (either increasing or decreasing) in price and quantity. Non-price determinants of demand and supply can influence the market for fish in the long run. In my answer, I will attempt to justify which factor would have the greater impact.
Thesis statement: Demand factors may result in a greater change in the price and quantity of fish in the long run.
With the internet boom, consumers are now more educated and empowered to make better consumption decisions. Conscious consumers are now opting towards consuming “healthy and sustainable food choices”. This represents a change in consumer’s taste and preferences where they would substitute farmed or wild caught fish with plant-based substitutes like “seafood and algae”. This would cause the demand for fish to fall especially in the long run as more consumers catch on to the idea of living more healthily and sustainably. This would cause the demand curve to shift leftwards from D0 to D1. At the initial price level P0, there would be a surplus of fish. Producers will be forced to reduce prices to eliminate the surplus causing market equilibrium price of fish to fall from P0 to P1 and market equilibrium quantity to fall from Q0 to Q1 at E1. The extent of fall in demand would depend on several factors such as (1) how close of a substitute do consumers view fish and plant-based seafood to be which may be influenced by “the right taste and texture and thus sufficient consumer appeal”, (2) what proportion of the population are the “target consumer group that worry about our planet”, (3) how receptive consumers are to make the switch . According to Novish, “the growth in consumption of plan-based seafood will move much faster than meat alternatives since consumers are already in the know”. This may cause the demand curve to fall by a large extent, which causes the market equilibrium price and quantity to fall by a greater extent, especially in the long run as this sustainability movement continues to gain momentum.
Anti-Thesis statement: Supply factors may result in a greater change in the price and quantity of fish in the long run.
According to Extract 1, the stall in the supply of Icelandic codfish is due to the disagreements between fishing workers and boat owners. This reason, which was explained in (bi) may impact the market for fish. However, this is likely to have a short run impact once the Icelandic government intervenes in the disputes. Furthermore, it is an isolated case that occured in Iceland pertaining to only cod fish. A bigger supply factor would have to do with the issue of current sustainability efforts and overfishing. The overfishing problem have reduced the ability of fishes to repopulate themselves sustainably and overtime, there will be no more fishes in the seas. This will cause the supply of fish to fall which causes the supply curve to shift leftwards, resulting in a shortage of fishes, thereby pushing the market equilibrium price up from P0 to P1 while causing the market equilibrium quantity to fall from Q0 to Q1. The extent of fall in supply of fish in the long run would depend on how severe or widespread the overfishing problem is globally. If countries stepped in to enact property rights and laws to prevent overfishing or there are emergence of large-scale farmed fish firms like Barramundi Asia, then the extent of fall in supply would be smaller. The extent of impact on price and quantity of fish due to the fall in supply can also be determined by the price elasticity of demand (PED) of fish. As a general food category, there are a wide availability of substitutes for consumers to choose from. Thus the PED value of fish is likely to be price elastic. A fall in supply of fish causing the price to rise would cause market equilibrium quantity to fall by a larger extent than the fall in price.
In conclusion, it is likely that demand factors do have a greater impact on the market for fish in the long run. It is believed that the movement towards healthy and sustainable living will continuing to strengthen. Consumers will have a greater variety of sustainable plant-based foods to meet their consumption needs. Thus demand is likely to fall by a larger extent compared to the fall in supply. With that, in the long run, the market equilibrium price and quantity of fish would overall fall.