Nov 2010 1 The price of sugar, an ingredient in many canned soft drinks, dropped dramatically by 32% between July

2006 and October 2008. Healthy living campaigns meant consumers became more aware of the possible health dangers of consuming too much sugar and they switched to diet drinks that do not contain sugar. Discuss how the combination of the fall in the price of sugar and the healthy living campaigns might affect expenditure by consumers on non-diet and diet canned soft drinks. [25]

Context Non-Diet Drinks price of sugar dropped: Price of input fell => COP fell => SS of non-diet soft drinks increase => affecting total expenditure

Concepts

DD, SS, PED & TE

Diet Drinks Healthy living campaigns => greater dd for diet soft drinks ie substitute non-diet soft drinks with diet soft drinks Affecting total expenditure on Both diet & Non-diet drinks Introduction: State relationship between sugar & non-diet canned soft drinks: sugar is an input in the production of non-diet canned drinks State the relationship between non-diet & diet canned drinks => substitutes DD, SS, PES, CED & TE

Analysis To consider the initial effect of fall in price of sugar on the TE of Non-Diet Drinks Market for Non-Diet Drinks Market for Non-Diet Drinks (b) If dd is elastic (a) If dd is inelastic Fall in price, TE rises Fall in price, TE fall

Elaborate on factors affecting PED of non-diet soft drinks: Degree of necessity ( for those with sweet-tooth, there will be little substitutes) TE will fall [Demand will be inelastic: TE fall - Diagram (a) above] To consider both the effect of fall in price of sugar & Healthy living campaigns on demand for non- diet & Diet Drinks Market for Non-Diet Drinks ( c) If dd is inelastic (necessity) Healthy Living campaign in demand < SS => TE fall, P & Qty Market for Diet Drinks (d) If CED is positive but low DD curve shift right a little Rise in price, TE rises, P & Qty

Factors affecting CED: closeness of substitute, this may be affected the extent consumers are able to get used to the taste of diet drinks. For those with sweettooth, the CED may be positive but low as shown by the scenario in diagram (c) & (d) above In contrast, for consumers who are relatively health conscious or diabetic patients, their CED will be positively high between Non-Diet & Diet drinks & PED for Non-Diet Drinks will also be higher as they deem it more healthy to opt for drinks with less sugar.

Market for Non-Diet Drinks (e ) If dd is elastic (not addicted) Healthy Living campaign in demand > SS => TE fall, P & Qty

Market for Diet Drinks (b) If CED is positive and high DD curve shift right by alot Rise in price, TE rises by a greater extent, P & Qty

Conclusion: In conclusion when price of sugar fell simultaneously with the implementation of healthy living campaign,

For market on non-diet drinks: Both DD & SS curves shift but the extent of the fall in DD curve is dependent on how close is the substitute between non- diet & diet drinks: TE on Non-diet Drinks will fall but the extent of fall will be greater if price elasticity of demand for it is more elastic & the Cross elastic demand between non-diet & diet coke is positively higher. There is a favourable effect of the health campaign on the TE of Diet drinks : For the market on diet drinks, the demand curve shift right and there is a movement up along the supply curve. This means that TE will definitely increase and the extent of the increase in TE is positively correlated with the extent of the increase in its demand as health conscious consumers substitute away from non-diet coke in favour of diet coke. Advice: It is important for students to draw well-labelled diagram, with good explanation on the shift & movements in relation to how they have impacted the total expenditure in the two markets.