Practise explaining consumer choices, shifting demand and applying elasticity calculations, diagrams and revenue effects to real market evidence.
In April 2020 electricity prices increased on average by 10% in the UK. In the same month, a record number of 668371 consumers switched to cheaper electricity suppliers.
Which one of the following can explain the behaviour of those consumers who switched to cheaper electricity suppliers?
Consumers experienced habitual behaviour
Consumers aimed to maximise their utility
Consumers had poor computational skills
Consumers aimed to minimise their utility
In the USA 96 million consumers have never switched banks. 39% of consumers had accounts at the same bank as their parents. 13\% of consumers said that the process of switching involved too much time and effort.
With reference to switching banks, explain the difference between 'herding' and 'inertia'.
Which one of the following will cause a movement along the demand curve in the market for rice?
An increase in the global population
An increase in real incomes
A decrease in the price of noodles
A decrease in the price of rice
Many hotels offer an all-you-can-eat breakfast buffet. 80% of hotel guests go to the breakfast buffet three times for food but only 10% visit five times.
With reference to hotel breakfasts, explain why the above information illustrates 'diminishing marginal utility'.
Sources for use with Section C.
The markets for rubber, tyres (tires) and rubber gloves
Figure 1 World price of rubber, US$ per kg, May 2019–May 2020
Extract A Rubber price falls as car and tyre production fall
Between January and May 2020 the world price of rubber fell from $1.67 to $1.35 per kg. This was caused by a significant decrease in demand for tyres that are made from rubber. Tyre production uses 75% of the world’s natural rubber.
Over the same period, tyre sales fell by 35% in Europe, 42% in North America and by 33% in South America. There was a large decrease in car production in all of these regions as a result of the temporary closure of car factories. Car usage also fell, resulting in fewer tyres needing to be replaced. Cars and tyres are complementary goods.
Extract B Rubber production and pollution from tyres
Rubber trees grow best in a climate where there is heavy rainfall and temperatures between 20°C and 35°C. Farmers in Thailand, Indonesia, China and West Africa provide 85% of the world’s natural rubber supply. Rubber trees take 6 years to produce their first crop. Consequently, the supply of rubber is price inelastic.
Between 2000 and 2019 the demand for rubber tyres increased resulting in deforestation. 3 million hectares of forests in the Mekong region of South East Asia were lost to make space for rubber plantations.
A research study into car emissions found that tyres emitted 1 000 times more PM2.5 particles than emissions from exhaust fumes. This study was based on testing one fully loaded car and one type of road surface.
Long-term exposure to PM2.5 results in respiratory diseases and reduced lung function in children and adults, increased risk of lung cancer, and cardiovascular disease affecting the heart and causing strokes.
Further problems are caused when tyres are sent to landfill. Tyres contain chemicals and heavy metals that are released into the environment over time. These cause cancer and genetic mutations.
Tyre recycling has helped to reduce the number of tyres in landfill from one billion in 1991 to 60 million in 2018. In the USA 43% of the recycled tyres are used to produce energy. These recycled tyres produce 25% more energy than coal. The ash from the tyres is less polluting than burning coal.
Extract C Profits of manufacturers of rubber gloves
Rapidly rising demand for rubber gloves across the world enabled the Malaysian rubber glove manufacturer, Top Glove, to achieve a 366% increase in profits in the second quarter of 2020. This was caused by a substantial increase in sales of rubber gloves to the healthcare sector.
Define the term 'complementary goods' (Extract A, line 8).
The table shows the number of new car sales and the average annual earnings per person in China for 2021 and 2022.
Ceteris paribus, calculate the income elasticity of demand for new cars. Show your workings.
Sources for use with Section C
The market for rice
Figure 1 Index of the world price for rice, July 2022 to July 2023 (July 2016 = 100)
Extract A Rice price rising
The global price of rice increased by over 19.6% between July 2022 and July 2023. Rice consumption in Africa and Asia is growing rapidly, as populations increase and incomes rise. In 2022 the population grew by 2.45% in Africa and by 0.83% in Asia. This compared to a 0.06% increase in Europe. In 2022 average real income growth was approximately 4% in Asia and 3.85% in Africa. In advanced economies the average increase in real incomes was only 2%.
Figure 2 Estimated price elasticities of demand in Japan for selected food groups
Extract B The impact of rice production
Rice production contributes 12% of global methane emissions and 1.5% of all greenhouse gas emissions. Vietnam’s paddy fields, where the rice is grown, produce more carbon emissions than the country’s transportation network. Producing one kilogram of rice requires 2 500 litres of water. Rice production uses over 33% of the world’s irrigation water.
Rice growers often use an insecticide to protect the crop from insects. In the USA these insecticides contributed to a 44% decline in the bee population in 2020. On average, 90% of rice is consumed in the country in which it is grown. This limits the environmental damage caused by transporting rice abroad.
Extract C Indian Government intervention in the market for rice
The rice sector contributes $51.58 billion to the Indian economy. India exports rice to 150 countries. The Government supports rice growers by providing subsidies. These subsidies are used by farmers to invest in capital goods and to purchase fertiliser and water used in 5 production. This can lead to over-farming that results in lower quality rice crops. In 2021 the Indian Government spent $6.9 billion on subsidising rice production. In 2022 the Government decided to reduce expenditure on these subsidies. However, this caused mass protests from farmers that led to the Government increasing these subsidies to their previous levels. 10
With reference to Figure 2, explain whether demand for each of the four selected food groups is price elastic or price inelastic.
In the USA the price elasticity of demand for residential natural gas is -0.1 .
Explain one reason why the price elasticity of demand for residential natural gas is only -0.1 .
The diagram shows the demand curve for a chocolate bar in Spain.
Retailers reduce the price of the chocolate bar from €1.50 to €1.30.
Which one of the following can be deduced from the diagram?
Total revenue will rise by € 13500
Total revenue will rise by € 58500
Total revenue will decrease by €6000
Total revenue will decrease by €45000
The diagram shows the demand curve for bottled energy drinks.
Which one of the following points has the value of -1 for price elasticity of demand?
The table shows the estimated price elasticity of demand for different car types in Norway.
Demand for all three car types is price inelastic
Demand for all three car types is price elastic
An increase in the price of diesel cars will result in an increase in the total revenue for diesel car manufacturers
An increase in the price of electric cars will result in an increase in the total revenue for electric car manufacturers
The table shows the estimated income elasticity of demand for four items.
Which one of the following can be deduced from the table?
Caribbean holidays are an inferior good
Demand for healthcare is income elastic
Electricity is a normal good
Demand for bus travel is price inelastic
Sources for use with Section C.
The market for sugar
Figure 1 World price of sugar, US$ per kg, June 2016–June 2019
Extract A Global production of sugar
Between August 2017 and August 2018 the world price of sugar fell as a result of favourable weather leading to good harvests. In 2018, India, the world’s second largest sugar producer, and Thailand, the world’s fourth largest sugar producer, had record levels of production. In 2018 global production was 11% higher than in 2017. In 2018 world production was so high that there was a surplus of 17 million tonnes. This led to large quantities of sugar being held in storage.
In recent years, consumption of sugar has fallen because of increasing health concerns. There is also competition from substitutes such as artificial sweeteners. In the USA, Europe, China and Australia sugar consumption has fallen or remained unchanged.
Sugar is grown in 119 countries. It takes sugar cane one year to mature in countries with warm temperatures and two years in cooler countries.
Extract B Overconsumption of sugar
In the USA the recommended maximum amount of sugar consumption is 50 grams per day. In the USA average consumption is 73 grams per day. The human body can comfortably process 25 grams a day. However, any sugar consumption in excess of 25 grams per day will normally be processed into body fat. This is contributing to obesity. One study found that a high sugar diet increased the risk of heart disease by 38%. Another study found that excess sugar consumption caused an increased risk of many types of cancer. A further study found that men who consumed 67 grams or more of sugar per day were 23% more likely to experience depression than men who consumed less than 40 grams per day.
Extract C Indian subsidy for sugar production
The Indian Government subsidises sugar growers that export sugar. Before the subsidy, exports were 620 000 tonnes per year. After the subsidy was introduced exports rose to 3.3 million tonnes per year, helping to make India the world’s second largest producer of sugar. The size of the subsidy will increase from 55 rupees a tonne in 2018 to 138 rupees a tonne in 2019. This increase in subsidy is expected to increase exports to over seven million tonnes per year. Production in India was 20.3 million tonnes in 2017 and increased to 33.0 million tonnes in 2019.
The Governments of Brazil and Australia have complained to the World Trade Organization that these subsidies give Indian producers an unfair advantage. They argue that these subsidies contribute to lower world prices, making the market unprofitable for many growers outside India.
Define the term 'substitutes' (Extract A, line 9).