JC Economics Essay Series #95 – Cross Elasticity of Demand & Related Markets

JC Econs Essay Cross Elasticity of Demand & Related Markets Model Answers 

An e-book reader, also called an e-reader, electronic book reader, or e-book device, is a mobile electronic device that is designed mainly for the purpose of reading digital e-books, magazines, textbooks, etc. Such readers are popular due to its portability. This is cos an e-reader is able to hold tens of thousands of books while weighing less than one book. Of course, nowadays, smartphone can also act as ebook reader, although they may lack the optimised portability, readability, and battery life over mainstream e-readers like Kindle from Amazon.

Developments in modem technology such as faster internet connections have had major impacts on the demand and supply of e books and associated products such as e-book readers and mass market paperback.

Assess how these developments will likely affect the markets for e-books and its associated products. [25]


Market for E-Books & Application of Elasticity Concepts

Suggested Answer: Part (a)

Impact of latest developments on the markets depend on the interaction between demand and supply. Interpretation of developments in modern technology: Faster internet connection has made online material accessible to more consumers and technology changes have influenced consumer choices for reading by making more options available and affected production techniques for instance. The developments will have impact on several markets namely that of the e-book readers, e-books and mass market paperback markets affecting equilibrium price and quantity.


Development: Market 1: E-books

Technological Improvements allow for books to be digitized and sold online in the form of e-book downloads.

Demand Rises (Possible reasons)
Faster broadband access (complementary service) has allowed for faster search for e books and there is faster and high quality streaming of downloads. Increase in demand for e-books as consumers can browse through many online stores for ebooks at the convenience of their house. E-book downloads from internet sites offer greater flexibility → wider genre to choose from (quick access and comparison) → can preview pages or chapters of the book before buying

E-books also made popular due to falling prices and accessibility of e-book readers such as Amazon Kindle, Ipad etc. (Possible to introduce cross elasticity of demand concept here) -Demand for e-books is becoming relatively price elastic → many online platforms available such as Amazon, ebooks.com etc. (Different types of ebooks)/ Mass market paper backs are close substitutes.


Supply Rises (Possible reasons)
Supply rises as many book producers begin to collaborate with online e-book stores Technological improvements means that online storage cost is lowered significantly i.e. for the writers, cheaper to distribute books online than to have physical publisher printing and distributing their book. Even that PED>1 as supply increases, price falls and quantity demanded increases by a more than proportionate amount (Students can propose PES to evaluate demand shift)


Overall Impact on e-books downloads
With increase in SS and rise DD reinforcing one another → Qty increase substantially from Q to Q1. Justification for shifts (Any logical judgement): Rise in the supply of e-books is likely to outstrip the rise in demand. Part of the demand for e-books will be lost to that of illegal downloads and streaming, not to mention sharing between users. Therefore overall prices of e-books will fall from P to P1. 

Empirical for learning purpose: E-books are gaining popularity and prices have fallen for most mainstream books. The rate at which e-books are bought is increasing more than hardcopy books across titles- more so for popular titles. However, dominant companies like Apple have been suspected of price fixing while colluding with certain publishers causing a price hike for the popular books.



Market for Mass Market Paperback Books

Market 2: Mass market paperback

[Students could consider 1 or 2 shifts based on the preamble]

Demand Falls [Possible reasons]
With the release of new portable readers eg. Amazon Kindle and Ipad2 → tastes and preferences changing away from mass market paperback (deemed to be bulkier and not as portable/convenient). Demand tends to be price elastic because books has many substitutes and mass market paperback also have close substitutes in the form of e-books [cross elasticity of demand is positive]. If so with the falling prices of e-books, there will be a fall in demand for mass market paperback.

Supply Rises (Possible reasons)
*We also accepted answers that suggest that producers will shift resources away from mass market paperback and therefore ss will fall. Improvement in technology allows cheaper and more efficient printing Supply rises from SS to SS1. Supply relatively price elastic → easy to increase quantity supplied through mass production so any price change would lead to a more than proportionate change in quantity supplied, ceteris paribus.


Diagram 2: Mass market paperback
[Students could consider 1 or 2 shifts based on the preamble]


Overall Impact on market for mass market paperback
With increase in SS and fall in DD reinforcing one another price should fall from P to P1. 

Justification for shifts (Any logical judgement): Given that printing cost is a substantial cost of production, supply may have increase slightly more than demand over the years. Given that e books and readers are rather recent developments, demand might not have fallen that significantly

Evaluation: Students can use a discussion of CED (degree of substitutability) to comment on

Empirical for learning purpose: According to Nielsen BookScan, book sales are still rather healthy. Prices are falling but it appears that quantity bought has increased (suggesting that PED >1) as data shows that expenditure is still increasing.



Market for Hardware- E-book Readers & Elasticity Concept Applications

Market 3: Hardware- E-book readers

E-book and e-book readers are strong complements (XED: Large negative number).

Demand Increases
Technology allows for storage of hundreds of e-books within a portable device: Jointly demanded for. Rising demand for faster and better quality e-book downloads which are cheaper than hardcopy books which necessitate storage space

SS Increases
Technological improvement → lower production cost; More producers in the market → Amazon Kindle, Ipad1 and Ipad2, Samsung Galaxy. Slate by HP etc. Attracted by increased expected profitability in market.


Overall Impact on market for e-book readers.
With increase in SS and increase in DD reinforcing one another quantity bought will increase

Propose 1 shift more than the other (Eg demand has increased more than supply given rising affluence/portability of ebook readers and its multi functions has caused demand to increase more than supply)

Possible evaluation: The change in price and whether demand or supply shifts more depends on the different brands. For example- a more popular brand like Ipad has probably experienced a more significant increase in demand than change in supply because it is not just an e-book reader but serve other functions.


(Possible) Technological changes in the internet have huge implications on the way people access and appreciate reading. While it is difficult to isolate the impact of such a change on a particular market, cheaper and faster broadband access has definitely caused books in general to be accessible to more causing demand to increase. This has changed the way titles are marketed and it is likely that revenue will rise for mainstream authors.


Possible evaluative comments:
Overall however, it is possible that mainstream authors and large publishers (working with online platforms) will have an overall increase in revenue given that the overall e books mass market paperback bought would both be increasing.

Internet piracy rampant difficult and costly to enforce intellectual property laws online (regulations/legislations pertaining cyberspace rather undeveloped)→ Therefore demand for ebooks does not rise as much.


Long term development
Hinges on how the book publishers can collaborate with online stores to increase security of the use of their ebooks, eg to reduce sharing between users Increased popularity of particular ebooks observed can be capitalized to raise mass market paperback sales (quantity) through eg signing of hardcopy books and revenue can be gained from other related memorabilia.


Marking Scheme:
L3: Answer shows excellent knowledge of demand and supply forces and how these affect equilibrium price and equilibrium quantity, and shows excellent knowledge of market equilibrium (inclusive of: market equilibrium condition clear analysis of simultaneous shifts Le. recognition that equilibrium price or quantity maybe reinforced and the other equilibrium will be indeterminate; recognition that extent of shift of demand and supply affects the equilibrium which is indeterminate elaboration of price mechanism). 

Answer is balanced in consideration of demand and supply forces. Answer includes the different extent of shifts of supply with sound reasoning Excellent consideration of elasticity concepts (including CED, PED &/or PES) and its relevance in influencing market equilibrium. Excellent rigour in economic analysis and development. Excellent use of diagrams that is adequately explained. Excellent attempts at contextualisation with a variety of relevant examples. Answer good knowledge of demand and supply forces and how these affect equilibrium price and equilibrium quantity, and shows knowledge of market equilibrium (i.e. includes market equilibrium condition).

Answer is balanced in consideration of demand and supply forces. Good consideration of elasticity concepts (i.e. CED and PED &/or PES) and its relevance in influencing market equilibrium. Good rigour in economic analysis and development. Good use of diagrams that is adequately explained (which includes diagrams with simultaneous shifts). Some attempts at contextualisation with some relevant examples. “To be awarded higher L3 students must analyse all 3 markets (at least 2 diagrams with analysis) showing substitute and complement relationships.


L2: Answer shows adequate knowledge of demand and supply forces how these affect equilibrium price and equilibrium quantity. Answer is balanced in consideration of demand and supply forces. Some consideration of elasticity concepts (i.e. at least one elasticity concept) and its relevance in influencing market equilibrium. Some rigour in economic analysis and development. Relevant diagrams drawn but not well explained or clear explanation in absence of diagrammatical analysis. Minimal or no contextualisation.

Answer shows adequate knowledge of demand and supply forces and how these affect equilibrium price and/or equilibrium quantity. Answer lacks balance in consideration of demand and supply forces. Minimal or no consideration of elasticity concepts and its relevance in influencing market equilibrium. Lack of economic analysis and development; Minimal or no contextualisation.


L1; Analysis of markets underdeveloped (Eg. Only have market analysis of 1 market while others underdeveloped); Answer shows some knowledge of how equilibrium price and/or equilibrium quantity may be affected, without clear linkage to demand and/or supply forces. 

Errors and inconsistencies occur in the explanation, showing lack of understanding of the economic concepts. Minimal or no contextualisation. Answer is mostly irrelevant. Only few valid points which do not clearly address the question.

E1: Mainly unexplained judgement.
E2: Judgement based on analysis.



JC Economics Tutor’s Comments:
1. Students generally displayed reasonable demand/supply analysis Poor elasticity application-state elasticity concepts without appropriate use to evaluate extent of change in P and Qty; Could not explain the link between developments in modern technology with the shift (eg. just replicate lecture notes explanation) A number of students just did a single shift in ALL markets analysed. Not enough scope in discussion.

2. Quite a number of students overwrite on the reasons shifting demand and supply leaving very little time for the rest of the analysis. Very few students could make sense of the XED application. It is disturbing that there are still students who cannot tell the different between change in demand Vs quantity demanded and supply Vs quantity supplied Although examiners did not expect an empirical understanding of the context there were a number of students who gave sweeping evaluative statements that were illogical (eg. demand for e-book readers will not rise as much in the future because kids will inherit the readers from their parents)

3. Some students thought e-book readers refer to the people reading the e-books Somehow there were students who discussed smartphones (and even game consoles!) in their answers. They should read the preamble clearly since the markets for analysis have been given to them. When there are 2 (combined) shifts the final change in P and Q (whether it increase or falls) depends on extent of shifts firstly not elasticity! Some students just explained and drew the demand/supply analysis without commenting on the outcome on P and Qty (VERY IMPORTANT!)

4. Total revenue was not required for this question.


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