2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(a)(i) Describe the trends of global recorded music sales revenues and digital music sales revenues from 2003 to 2009. [2]
Global Recorded Music Sales (US$ billions)
30 25 20 15 10 5 0
19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09

Global recorded music revenue falling

Digital Physical

Digital music sales revenue increasing

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(a)(ii) Account for the trends identified. [4] Global recorded music revenue: fall in demand due to piracy (source: Extract 2 & 3) fall in total revenue Digital music sales revenue: increase in demand (Extract 1) &/or increase in supply (Figure 2) increase in total revenue

Failed to provide reason for fall in global music revenue

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(b) Estimate the value of the cross elasticity of demand for paid digital music with respect to the price of: [6] (i) Music CDs
Positive (1m) Greater than 1 (1m) Close substitutes that can be consumed to satisfy the same want for paid music, increase in price of music CDs will lead to a more than proportionate increase in demand for paid digital music (Extract 1) (1m)

(ii) Broadband services

Negative (1m) Less than 1 (1m) Complements but broadband services is not the only complement available for paid digital music, increase in price of broadband services will lead to a less than proportionate decrease in demand for paid digital music, can be inferred from Extract 2 (1m)

Poor content knowledge Substitute vs Joint Supply

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(c) From Figure 2, identify and explain the price elasticity of demand of digital music [Hint: consider changes in price and total revenue], showing your reasoning. [4]

Figure 2 shows that supply is rising (1m) Figure 2 also shows that the industrys digital revenues have increased (1m) Assuming demand is constant, price is falling with supply increasing (1m) Since TR increased with price falling, PED is greater than 1, ie demand for digital music is price elastic (1m) Many did not attempt

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(d) With the aid of a diagram, analyze the effects of piracy on total revenue of music companies and societal welfare. [4] From Extract 2, demand for paid music falls (1m) Surplus created at original equilibrium price, overall, price and quantity fall, diagram, TR falls (1m) Consumer surplus decreases (1m) Producer surplus decreases (1m)
Price of music (CD & Digital) S P P D

D Q Qty of music (CD & Digital)

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(d) With the aid of a diagram, analyze the effects of piracy on total revenue of music companies and societal welfare. [4]

From Extract 2, demand for paid music falls (1m) Surplus created at original equilibrium price, overall, price and quantity fall, diagram, TR falls (1m) Consumer surplus decreases (1m) Producer surplus decreases (1m)
Price of music (CD & Digital) S P P D

D Q Qty of music (CD & Digital)

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(d) With the aid of a diagram, analyze the effects of piracy on total revenue of music companies and societal welfare. [4]

From Extract 2, demand for paid music falls (1m) Surplus created at original equilibrium price, overall, price and quantity fall, diagram, TR falls (1m) Consumer surplus decreases (1m) Producer surplus decreases (1m)
Price of music (CD & Digital) S P P D

D Q Qty of music (CD & Digital)

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(d) With the aid of a diagram, analyze the effects of piracy on total revenue of music companies and societal welfare. [4]

From Extract 2, demand for paid music falls (1m) Surplus created at original equilibrium price, overall, price and quantity fall, diagram, TR falls (1m) Consumer surplus decreases (1m) Producer surplus decreases (1m)
Price of music (CD & Digital) S

Either draw demand or supply

P P D

D Q Qty of music (CD & Digital)

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(e) With reference to the data, evaluate the measures already taken by music companies to counter falling sales revenue from paid music, and suggest alternative measures they can take. [10]
(From Extract 1) music companies are facing falling CD sales rising digital music sales. But overall global music sales revenues are falling still. Explain measures that have to do with increasing consumer choice with respect to paid digital music (Extract 2): 1) Music companies diversified their sources of revenue, offering new ways for consumers to buy and access music. Increase demand by increasing ease of accessibility to paid music for consumers. 2) Recent innovations in this sector include differentiated pricing for songs by different artistes, and a relaxing of digital rights management to increase digital albums appeal to consumers. Increase demand by catering better to consumers tastes and preferences.

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(e) With reference to the data, evaluate the measures already taken by music companies to counter falling sales revenue from paid music, and suggest alternative measures they can take. [10] (Explain that measures seem insufficient to counter falling sales, and why: Extract 1 shows evidence of sharp fall in sales of music CDs measures taken do not address the fall in demand for music CDs. Extract 3 shows evidence of stagnating digital music sales by global music companies, despite innovations. Eg Apple. Measures alleviate but do not address problem of piracy/illegal online file-sharing.Insufficient to boost digital music sales significantly.

2011 JC1 H2 ECONOMICS MYE SECTION A QUESTION 1

(e) With reference to the data, evaluate the measures already taken by music companies to counter falling sales revenue from paid music, and suggest alternative measures they can take. [10]
Other measures more innovations to make product more attractive to paying consumers of music, eg by having promotional deals for buyers of CDs, stopping illegal online file sharing by stepping up law enforcement procedures, tapping on new social media to promote sales of digital music. Also, may need government to step in to protect intellectual property rights. Overall, more needs to be done to counter trend of falling music sales (Figure 1), as the data suggests that the measures in place are insufficient to boost digital music sales significantly.

Failed to provide evaluation (E1, E2)