Case Study 2008

National Junior College Economics Unit 2009

Case Study

- H2 Economics -

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Assessment Format at ‘A’ Levels (Paper 1)

2 hrs 15 mins (40%)

- 2 sets of questions based on 2 condensed write up, each on a multi-faceted economic issue or policy decision including a set of data

____________________________Case Study H2 Economics




Case Study H2 Economics

Before you get started,

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1. Skim read the case study, get a feel of the case material.

2. Get a feel of any numerical data : units used, headings of columns and time trends ?

• look for any underlying themes, mark/highlight the paper accordingly.

3. Read all the questions carefully, think about how your themes may fit in

4. Re-read the case study, noting all the relevant concepts.




Case Study H2 Economics___________________________________________________________________

General principles on improving case study techniques

• writing your answers - note the directive/command words and mark allocation.

• aim for a balanced answer

• relate to the relevant theories

- skill is to extract from case study and not reproduce it

- use information to support a point made in your own words, written evidence to be indicated by quotation marks.





(a) (i) Describe the trend in oil prices from 1997 to 2005 [2]

Specific trend :

- oil prices have been fluctuating with significant dips in 1997 to 1999 and 2001 – 2002, Or

- oil prices have increased by about 80%, Or

- oil prices in 2005 was almost twice the price of that in

1997

General trend : Oil prices have been rising

• General trend

• Specific trend





(ii) Describe the trend in private vehicle ownership in China from 1997 to 2005 [2]

Specific trend :

- private vehicle ownership has been increasing at an increasing rate, Or

- private vehicle ownership has increased by about 620%, Or

- the number of privately owned vehicles in 2005 was about 7 times the number in 1997.

General trend : Private vehicle ownership has increased.

• General trend

• Specific trend





(iii) Using demand and supply analysis, account for the significant change in oil prices [6]

• identify and explain that change in oil prices is brought about by an increase in demand and a decrease in supply.

• explain the magnitudes of shifts in demand and supply curves

• use elasticity concepts to explain the significant increase in oil prices.

• illustrate using the demand and supply diagram.





Decrease in supply due to declining oil production.

Increase in demand due to a change in consumers’ income

(iii) Using demand and supply analysis, account for the significant change in oil prices [6]

• identify and explain that change in oil prices is brought about by an increase in demand and a decrease in supply

- with rising income in China, more consumers are willing and able to purchase normal goods such as motorbikes and cars at any given price. Demand for inferior goods such as bicycles have therefore fallen as more Chinese are trading them in for motorbikes and cars. This increase in demand can be illustrated by a rightward shift of the demand curve from D0 to D1 as shown in figure 1.

- In Daqing, the supply of oil is declining at a rate of 4% a year. Although there has been a discovery of new oil, this does not add up to much as the addition of about “700,000 barrels a year is less than what the main field produces in a day.” The decrease in oil supply can be illustrated by a leftward shift of the supply curve from S0 to S1 as shown in Figure 1.





The extent of the rightward shift of the demand curve for oil is likely to be greater than the leftward shift of the supply curve; with the huge population in China, it is likely that with rising incomes the increase in demand for motorised vehicles will be substantial.

The discovery of new oil may have helped to lessen the decrease in oil supply.

• explain the magnitudes of shifts in the demand and supply curves




• Use of elasticity concepts to explain the significant increase in oil prices.


To analyse the extent of the significant change in oil prices due to supply factors, the PED value of oil must be considered.

To analyse the extent of the significant change in oil prices due to demand factors, the PES value of oil must be considered.

Demand for oil is price inelastic due to the lack of substitutes as a source of alternative energy. So when the supply of oil decreases, quantity demanded decreases less than proportionately relative to the increase in price.

Supply of oil is price inelastic due to the difficulty in finding new oil fields and that “both injection and extraction wells must be drilled with a margin of error of no more than 50cm in order to drain ever last nook and cranny of the reservoir.” So when demand increases, quantity supplied increases less than proportionately relative to the increase in price.





An increase in demand and a decrease in supply, coupled with a price inelastic demand and supply, have resulted in oil prices rising significantly from P0 to P1 as shown in figure 1.

D0

S0

S1

D1

P1

P0

Price per unit ($)

Quantity (units)Figure 1 – Market for oil




(b) (i) With reference to Extract B, identify the form of integration between Vale and Inco? Explain your answer [2]


Horizontal integration.

Both firms are rivals in the iron ore industry and at the same stage of production.




(b) (ii) Explain one disadvantage of Rio Tinto’s expansion and how this may be overcomed. [5]


• Identify that Rio Tinto is experiencing internal diseconomies of scale.

• State one disadvantage of Rio Tinto’s expansion, explaining how the expansion led to an increase in average cost of production.

Define internal diseconomies of scale.

internal diseconomies of scale can arise because of loss of coordination, control and lack of communication (any one reason and elaborate), which increased Rio Tinto’s average cost of production.

• Explain how Rio Tinto may be able to reduce average cost of production.





• Explain how Rio Tinto may be able to reduce average cost of production (any one reason)

- training its staff to drive more gently to extend the life of its tyres

- Organisational / financial economies of scale

- technical economies of scale through the automation of equipments to labour costs and therefore average cost of production, which have been rising due to the chronic shortage of skilled and unskilled labour





(c ) Explain the assumption necessary for the statement “rising prices have brought rising profits” to hold true (Extract B) [3]

• Profits = TR – TC

• For rising prices to have brought about rising profits, total cost must have assumed to either remain constant or to have increased by less than the increase in TR brought about by the increase in prices.





(d) Critically assess the Chinese government’s measure to ensure the affordability and availability of oil. [10]

• identify Chinese government’s objective : to ensure affordability and availability of oil. Measure : indirect subsidy

D

S

S + subsidy

P1

Q1

Price

Quantity

P3

P2

Q2

• initially due to high demand and relatively low supply, equilibrium price and quantity of oil at P1 and Q1.

•supply curve shifts downwards by the amount of the subsidy from from S to S + subsidy.

•Effects of the subsidy : price level – market price decreased from P1

to P3 , but price does not decrease by the full amount of the subsidy.

•Quantity transacted increased from Q1 to Q2 units.

0

Figure 2 – Market for oil

• the provision of the indirect subsidy lowers the cost of production of each unit of the good by the amount of the subsidy.





Evaluation (based on government’s objective):

• Policy appropriate only in the short term.

• Opportunity cost of subsidies; diverting limited resources away from important areas like healthcare, education or national defence.

• Incentive to exploit the use of subsidies if oil is brought to China and resold in other markets.

Subsidising oil production is a costly and unsustainable method. Subsidy is likely to be supported from the revenues of corporate taxes and cash flow from foreign investment.

In the long term, these subsidies will be unsustainable; the government may run into budget deficits trying to maintain these subsidies.





Measures for long term consideration :

•Reducing dependency on crude oil by looking for alternative sources of fuel

• dampening the demand for oil by taxing users eg. Petrol tax

• shifting focus from heavy manufacturing industries to service industries thereby lowering the usage of oil.




SH1 H2 Economics Common Test

29th June 2009 (Monday), 8.15am

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What is the format ?

All topics (topics 1 to 3.1) covered in Term 1 and 2.

• 1 compulsory case study (30 marks) time allocated : 1 hour 10 mins

• 1 essay question (choose 1 out of 2) (25 marks) time allocated : 45 minutes

equal weightage.

Common test mark contributes 20% towards SH1 year end results.

What are the topics covered ?




Things to note for common test:

1. Seating arrangement plans will be available on KM from the 1st June 2009 onwards.

2. Please bring along your identification card and calculator (acceptable model)

What happens if you fall ill on the day of the economics paper?

Inform your subject tutor.

Pass your original MC to your tutor.

Note: Parent’s letter will not be accepted.

SH1 H2 Economics Common Test29th June 2009 (Monday), 8.15am________________________________________________________




____________________________SH1 H2 Economics Common Test – 29th June 2009

Online assessment on KM to help you to revise the topics covered.

KM: Student centre -> Economics -> Revision Workbook -> holiday quiz

One last note …….



Case Study 2008

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Transcript of Case Study 2008