2009 ACJC Prelim Exam Econ H2 Essay Question 1 Recently, many industry experts have been signalling the death of print media, amid the increasing availability of books, magazines, newspapers and other printed publications on the Internet. (a) Explain how the rise of the Internet has affected the market for newspapers.

[10]

(b) Assess the relevance of price elasticity of demand, income elasticity of demand and cross elasticity of demand to a magazine publisher. [15]

Part (a) Explain how the rise of the Internet has affected the market for newspapers. [10] Rise of the Internet = increasing availability of books, magazines, newspapers and other printed publications on the Internet (a) Demand for newspapers

Definition: Willingness and ability of consumers to purchase newspapers at a given price over a period of time

Online news : strong substitute for newspapers. There will be a higher demand for online news than for newspapers.

Growing global affluence and the increasing Internet access to households (even in developing countries) encourage people to read online news, hence reducing the demand for newspapers.

Conclusion: The demand curve for newspapers will shift left. (b) Supply of newspapers

Definition: Willingness and ability of producers to make a specific quantity of newspapers available to consumers at a given price over a period of time

A wider selection of news from around the world to publish in their newspapers, cost-savings for the newspaper companies. The supply curve for newspapers may shift right.

Newspaper companies earn a significant portion of revenue through advertising sales. The supply curve for newspapers will remain constant (not shift left/right)..

For simplicity, we assume that the supply curve for newspapers remains constant. (c) Market equilibrium: Students to explain diagram

P SS

DD

P0

Q0 Q of newspapers

P1

E1 E2

DD1 O Q1

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Mark Scheme

Able to provide a clear explanation and application of both demand and supply in context, with the correct use of a diagram.

Students claiming that supply remains constant must also explain this claim. 7-10L3

Able to provide an unbalanced explanation and/or application of both demand and supply in context. 5-6 L2

Able to identify some effects of the rise of the Internet on the market for newspapers, without a diagram. 1-4 L1

Part (b)

Assess the relevance of price elasticity of demand, income elasticity of demand and cross elasticity of demand to a magazine publisher. [15] 1. Explain the economics concepts involved

Price elasticity of demand (PED) Income elasticity of demand (YED) Cross elasticity of demand (XED)

2. thesis (a) PED allows the magazine publisher to know his pricing policy (ie. whether he should raise or reduce the price of his magazine to generate more sales revenue)

When demand for the magazine is price elastic, reducing price will increase total revenue. Magazine publisher will generate more sales revenue by increasing supply and hence reducing price.

When demand for the magazine is price inelastic, increasing price will result in loss in total revenue.Hence, the magazine publisher will generate more sales revenue by reducing supply and hence raising price.

In order for the magazine publisher to identify the level of PED for the magazine, he needs to refer to the key determinant of PED and XED the availability and closeness of substitutes (presence of competition).

If the magazine has many close substitutes, then there is usually high competition due to high readership. Thus, such magazines have high PED and XED. To generate more sales revenue, he should increase supply to reduce price.

If the magazine is unique, then there is usually low competition due to an exclusive readership. Hence, such magazines have low PED and XED. Hence, the magazine publisher has to keep the price high to attract more readers to purchase the magazine. To generate more sales revenue, he should reduce supply to raise price.

(b) XED allows the magazine publisher to know the relationship of his magazine with other goods/services and the extent of how his sales revenue is affected by the demand for the related goods/services

In order for the magazine publisher to identify the level of XED for the magazine, he has needs to refer to the key determinant of XED the presence of substitutes and complements.

The presence of substitutes will reduce the demand and sales revenue for printed magazines.

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o To survive in this highly competitive market, the magazine publisher has to identify complementary goods/services that can help promote his magazine and hence generate more sales revenue. When the demand for the complementary goods/services rise, the demand for his magazine will rise too.

(c) YED allows the magazine publisher to know the extent of how his sales revenue is affected by his readers income level

In order for the magazine publisher to identify the level of YED for the magazine, he has needs to refer to the key determinants of YED

In a recession, the magazine publisher can expect the overall demand for his magazine to fall,

3. Present arguments for the antithesis (a) PED, YED and XED are not so relevant to a magazine publisher

If the magazine has high PED, price-reducing policy will lead to price competition and a price war where only the readers stand to benefit from lower prices of magazines.

People usually limit their time for reading magazines (eg. during leisure time), so we may not necessary see an increase in demand for magazines when their income rises.

Using XED analysis he needs to seek the partnership and approval of the suppliers of the complementary goods/service to allow his magazine to be sold at their premises.

To be able to accurately use these elasticity tools, the magazine publisher needs to collect and depend on empirical data and evidence,

(b) Other tools of analysis are also required

The magazine publisher needs to consider ways to reduce costs. He will need to monitor the cost structure to ensure that his publishing firm is cost-effective.

In addition to retail and subscription sales, the magazine publisher earns a significant portion of revenue through advertising sales.

Mark Scheme

Able to discuss the effectiveness of PED, YED and XED as business strategies in context.

Able to suggest at least one other tool of analysis, eg. cost-effectiveness, advertising revenue model

9-11L3

Able to provide a sound but unbalanced discussion of the effectiveness of PED, YED and XED as business strategies in context. 6-8 L2

Able to explain PED, YED and/or XED, not necessarily in context. Unable to provide relevant examples of magazines to illustrate the degree of

PED. 1-5 L1

E2 Judgment based on analysis. 3-4

E1 Mainly unexplained judgment. 1-2

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