NYJC Prelims 2013 (modified)

NYJC Prelims 2013 (modified)

NYJC Prelims 2013 [modified] Suggested Answers

Technological improvement like faster broadband and internet connections has made the production and consumption of e-books more convenient. Such development has major impacts on the demand for and supply of print and non-print materials.

(a) Explain how the markets for print and non-print materials might be affected by these developments. [10]

With technological improvement like faster broadband and internet connections, the production and consumption of non-print materials, like e-books, have been made increasingly simpler. At the same time, such developments will also affect the market for print materials, like books, magazines, newspapers, to name a few. The effects on the two markets will be discussed in greater detail in subsequent paragraphs.

Demand is the willingness and ability of consumers to purchase goods and services at a given point of time. The technological improvement mentioned in the extract has made non-print materials increasingly portable and accessible. This has led to a change in consumers’ taste and preferences in favour of non-print materials, especially so for tech-savvy consumers. The demand for non-print materials hence increases, shifting the demand curve to the right as seen in Graph 1 [See Graph 1 in Images/Photo gallery]. On the other hand, given that print materials are close substitutes of non-print materials, the demand for print materials will experience a fall and the demand curve will shift leftwards, as seen in Graph 2 [See Graph 2 in Images/Photo gallery].

Supply is the willingness and ability of producers to produce goods at a given point of time. Faster internet connections and other technological improvement have helped to make the production process of non-print materials more efficient. This reduces the time involved, and hence the cost of production, to produce the same amount of materials as before. Hence, producers are now more willing and able to produce more non-print materials at each and every price level, represented by the rightward shift in the supply curve as seen in Graph 1.

On the other hand, since print and non-print materials are goods in competitive supply, the increase in demand for non-print materials will reduce the supply for print materials, assuming producers produce both print and non-print materials. This is because the increase in demand for non-print materials has imposed an upward pressure on prices leading to an increase in quantity supplied for non-print materials. Given resource constraint, producers will have to channel away resources from the production of print materials, to meet the increase in demand for non-print materials. Hence, the supply curve for print materials will shift to the left, as seen in Graph 2.

On the overall, both the demand and supply for non-print materials increase. The magnitude of shift in the demand curve is expected to be larger than that of the supply curve. This is due to the increasing proportion of tech-savvy consumers, which tend to be attracted to non-print materials. On the other hand, although the improvement in technology has made the production process more efficient and reduced the cost of production of non-print materials, this is expected to be of a small extent since marketing, administrative and machinery costs still make up a large proportion of the total production costs. Hence, the equilibrium price increased from P1 to P2, and the equilibrium quantity increased from Q1 to Q2.

As for print materials, both demand and supply fell. The fall in demand is expected to be of a larger magnitude than that of the supply curve. This is because in an increasingly technology-friendly environment, consumers are increasingly moving towards high-technology items, like non-print materials. Hence, equilibrium price decreased from P1 to P2, and equilibrium quantity decreased from Q1 to Q2.

In the long run, as the environment gets increasingly high-tech and technology-intensive, more consumers will turn towards non-print materials. This will continue to impose a downward pressure on the price of print-materials such that producers may eventually find it worthwhile to cease the production altogether. Hence, it is possible that the non-print materials may eventually completely replace print materials in the long run.

(b) Assess how price elasticity of demand, income elasticity of demand and cross elasticity of demand could be of relevance to a publisher of print materials. [15]

There are many types of objectives which producers may aim to achieve, including sales maximisation and profit maximisation. To achieve his objectives, a producer has to be clear in his decision making process which usually includes pricing, product innovation and marketing strategies. To facilitate his decision making process, a producer makes use of several economics concepts like price elasticity of demand (PED), income elasticity of demand (YED) and cross elasticity of demand (XED). This essay will explain and assess the relevance of these elasticity concepts to a publisher of print materials, which includes a wide range of products like comics, journals, brochures and textbooks.

PED measures the degree of responsiveness of the quantity demanded to a change in the price of the good itself. YED measures the degree of responsiveness of demand of a good given a change in income. XED measures the degree of responsiveness of demand of a good to a change in the price of another related good.

Firstly, PED is relevant to a publisher of print materials as it can guide him in his pricing strategies, depending on the price elasticity of demand of the product he is selling, eventually helping him increase his total revenue. Take the case of a producer selling journals, magazines and comic books. The demand of these products is relatively price elastic as there are many close substitutes in the market. In this case, the producer should reduce prices as this will lead to a more than proportionate increase in the quantity demanded, thereby increasing his total revenue. [See Graph 3 in Images/Photo gallery]

On the other hand, in the case where a producer sells textbooks and key reference books used in schools or universities, he may adopt the converse strategy instead. The demand for such printed materials is relatively price inelastic. The producer should hence increase price, which will lead to a less than proportionate decrease in the quantity demanded, hence increasing the total revenue of the producer. [See Graph 4 in Images/Photo gallery]

Secondly, YED will be relevant if consumers do experience an income change, for example in the case of an economic boom or a recession. A producer with knowledge on YED concept can make better decisions in the type of products to sell as well as marketing strategies when there is a change in income. For example, if the economy is experiencing a boom, the publisher can focus on selling highly luxurious products, like journals and exclusive magazines. These products have highly positive YED values. Given an increase in consumers’ income, there will be a more than proportionate increase in demand for these products, hence increasing the total revenue of the publisher.

On the other hand, if the economy is in a recession, the publisher can instead focus on selling either inferior goods, like lower quality or second-hand books, or necessities like textbooks. Inferior goods have negative YED values, which means that a fall in consumers’ income will lead to an increase in the demand for these products, thereby increasing the publisher’s total revenue. Necessities have low YED, so a fall in income will lead to a less than proportionate fall in their demand. At the same time, the producers could consider marketing his products as being value-for-money, for example “buy one get one free” strategies which may appeal to consumers in times of recession.

Lastly, the concept of XED is relevant as it helps the publisher better understand the relationship between his goods and other related products, especially substitutes like non-print materials. In addition, the publisher can better recognise the degree of competition he is facing and hence guide him in his pricing and product differentiation strategies.

Non-print materials have highly positive cross elasticity of demand in relation to print materials. This means that when publishers of non-print materials reduce prices, it will lead to a more than proportionate fall in the demand for print materials. The publisher of print materials may hence consider reducing the prices of his products, in response to a fall in his rivals’ price, in order to prevent a loss of existing and potential consumers. However, it should be noted that this may eventually result in a price war, which explains why producers tend to avoid using pure pricing strategies. Instead, publishers look to product differentiation strategies as well.

The publisher of print materials can engage in product differentiation, through innovation to improve the quality and appearance of his products, and advertising strategies to appeal to the larger mass. This makes the products less substitutable, reducing the XED of the products in relation to other related goods. The publisher will then be less affected by rival firms’ pricing policies.

Conversely, there can be situations where elasticity concepts may not be very relevant to a publisher in achieving his objections. The concepts explained above are highly relevant when it comes to maximising sales revenue. However, many producers may aim to profit maximise instead. While raising sales revenue does indeed help a producer increase profit (since Total Profit = Total Revenue – Total Costs), it does not take into consideration the cost structure and factors involved.

To profit maximise, firms produce up to the point where MR = MC, while sales revenue maximisation will mean that output is produced up to where MR = 0. Hence, to profit maximise, costs concepts like Economies of Scale may be more relevant to a publisher than elasticity concepts. Furthermore, concepts like YED is highly dependent on the economic conditions, if there is no change in consumer’s income, then YED may not even be relevant at all.

On the overall, the concept of cross elasticity of demand may be of greatest relevance to a publisher of print materials. This is because in an increasingly technology-embracing environment, print materials have progressively become more substitutable and replaceable by non-print materials like e-books, resulting in the high XED values between both types of products. It is hence of utmost importance that the publisher understands the concept of XED and recognises the likely impact of rival firms’ strategies on the sales of his products. Only then can he adopt the right decisions to prevent a loss of existing and potential consumers.

PED is also of high relevance here, especially so if the publisher sells a wide variety of printed products, ranging from highly substitutable comic books to less substitutable textbook products. Equipped with knowledge on PED concept, the publisher can make appropriate pricing strategies for each type of product, according to their respective price elasticity of demand.

However, it should be clear that while elasticity concepts are of relevance, there exists limitation to elasticity information. Firstly, elasticity information are historical figures, which may not serve as a useful predictor to gauge the responsiveness of quantity demanded and demand, especially in fast-changing environment. Furthermore, such information and data are estimates and their reliability is subjected to the strength of the data collection process. These reasons may limit the usefulness of elasticity information, despite that the concepts may be relevant to the publisher.