Email 2011 a Level H2 CS 1 n 2 n Essays

5/26/2018 Email 2011 a Level H2 CS 1 n 2 n Essays

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2011 H2 Economics Paper 2 Essays

Question 1Consumers and producers are generally assumed by economists to be motivated by self-interest.

(a) Explain how, according to economists, the pursuit of self-interest can help to address theproblem of limited resources and unlimited wants. [10]

(b) Assess whether the price mechanism will always allocate scarce resources in the mostefficient manner for all goods and services in a market economy. [15]

Introduction

Clarify key termso Clarify the problem of limited resources and unlimited wantsscarcityo Clarify the concept of self-interest from the perspective of consumers and producers

Consumers seek to max satisfaction given a maximum budget Producers seek to max profits by minimising cost/wastage of resources seek

to be productively efficient or X-efficient

Body:

Use the PPC framework to illustrate the problem of scarcityo Illustrate concepts like choices, opportunity costo Productive efficiency and allocative efficiency

Use the demand-supply framework to show the pursuit of self-interest can help to address theproblem of scarcity

o In the pursuit of self-interest Consumers will increase quantity demanded when price of a good falls, ceteris

paribus. Explain why

Demand curve is downward sloping Producers will reduce quantity supplied when price of a good falls, ceteris

paribus. Explain why

Supply curve is upward slopingo Assuming a perfectly competitive industry and the absence of sources of market failure,

the free market mechanism (which refers to the interaction between the market demandcurve and market supply curve) achieves allocative efficiency and hence helps toaddress the problem of scarcity.

Using the demand-supply diagram, show how consumers and producers, in thepursuit of self-interest, respond to surpluses and shortages

Automatic price adjustment processhow shortages and surpluses areremoved

At the equilibrium price level, consumer surplus and producer surplus aremaximised

Part (b)Assess whether the price mechanism will always allocate scarce resources in the most efficient mannerfor all goods and services in a market economy. [15]

Introduction:o Clarify what is meant by price mechanism can allocate scarce resources in the most efficient

mannero Refers to free market forces achieving efficient allocation of resourcesallocative

efficiency and productive efficiency

Thesis:o The price mechanism can allocate scarce resources efficiently provided these assumptions are

met


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o Perfect competitiono No externalitieso No merit goods and no demerit goods

Personal well-being argument due to imperfect information Externality argument due to pursuit of self-interest

o No public goodso

Perfect informationo No immobility of factors of production (not necessary given that focus is on goods and

services)o Answer in part a already provides an explanation on how allocative efficiency can be achieved

using the demand-supply frameworko Part b can provide an explanation on how productive efficiency can be achieved by the PC firm.

Anti-thesis:o However, the price mechanism fails to achieve allocative efficiency and productive efficiency in

the following cases. Using an economic framework (diagrams where possible), explain eachsource of market failure in detail and compare the efficient output level to the free market outputlevel clearly.

o The market structure is imperfect Monopolistically competition, oligopoly and monopoly

o Externalities are present Due to the pursuit of self-interest

o Merit goods and demerit goods are being produced Due to the consumers underestimating or overestimating their personal benefits

arising from the consumption of the goods as a result of imperfect informationo Public goods are not produced

Due to the two featuresnon-excludable and non-rival.

Conclusion:

o In conclusion, the price mechanism will not always allocate scarce resources in the most efficientmanner for all goods and services in a market economy. It all depends on the nature of the goodand service and the type of market structure the firm is in.

o Possible evaluation:o Hence, government intervention is justified and necessary when there is market failure.

Explain how and why government intervention can help to achieve efficient allocation ofresources in the above cases.

However, government failure may arise

Government intervention may allocate resources less efficiently than ifleft to free market forces because of: E.g.

o Imperfect information The public sector has poor mechanisms available in

deciding how to allocate resources. In the market, pricesare an automatic mechanism through which consumersindicate the value they place on different goods andservices.

Difficult to put a monetary value on external benefits andcosts

o Lack of incentives In the private sector, there is a strong incentive to

produce efficiently because lower costs mean higherprofits, and high costs mean losses and even businessfailure. Bankruptcy weeds out inefficiency in the privatesector but the public sector does not have thismechanism at its disposal to eliminate inefficiency.


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Question 2

Singapore is facing an aging population issue. By 2030 senior citizens are expected to comprise

almost 20% of the population.

Using economic analysis, discuss the effects of this demographic change on product markets in

Singapore. [25]

Introduction:o Clarify what is meant by the effects of this demographic change in Singapore

o Singapore is facing an aging population More dependent on certain goods and services Change in taste and preference for goods and services Workforce is expected to shrink, hence

Economic growth is likely to slow down fall in national income

Fall in supply of labour rise in wage rates increase in cost ofproducing goods and services

Body:o Analyse the effects of this demographic change on product markets in Singapore

o Choose product markets that are positively affected and negatively affected by thechange

Analyse changes to eqm price, quantity and TR generated in each of theseproduct markets

Consider welfare issues? Changes to consumer and producer surplus?o Choose product markets that illustrate shifts in demand curves and supply curveso Choose product markets that enable the application of elasticity of demand concepts

PED, PES, YED

o Analyse the impact on the market for health care and medical products and services like walkingsticks, hearing aids, surgery, pharmaceutical products

o The market for basic health care services is likely to expand. Why? Overall increase in demand for basic health care services

Increase in demand for basic health care services as the elderly willneed these services more than the young (necessity)

However, fall in demand for basic health care services as incomes fallo Health care services is deemed to be a normal good

YED is positive The demand for basic health care is likely to be income

inelastic as it is a necessity

YED is between 0 and 1

Hence the extent of fall in demand for healthcare service is likely to less than proportionate tothe fall in income, ceteris paribus

Overall, the demand for basic health care services is likely to increase asthe increase in demand for it due to it being a necessity is likely to begreater than the fall in demand for it due to falling incomes

o Eqm price and quantity and hence total revenue generated in themarket for basic health care services is likely to increase, ceterisparibus

o Expanding market for basic health care services

Overall fall in supply of basic health care services


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Aging population smaller workforce rise in wage rates increasein the cost of providing basic health care services shift supply curve ofhealth care services to the left

Ceteris paribus, the eqm price of basic health care services will increasebut the eqm quantity of health care services will fall

Whether total revenue increases or falls depends on the PED for basic

health care serviceso The demand for basic health care services is likely to be price

inelastic as it is a necessityo Hence, for a given increase in the price of basic health care

services due to a fall in its supply, its quantity demanded will fallless than proportionately

Hence total revenue will generated in the basic healthcare service industry will increase

Combined shifts in demand and supply for the market for basic health careservices

Increase in demand and fall in supplyo Eqm price for basic health care services will increaseo Whether eqm quantity increases or falls depends on the relative

shifts in demand and supply curves It is likely that the demand for basic health care services

will increase by a greater extent than the fall in supply ofhealth care services

Hence, eqm quantity is likely to increase

Hence, TR generated in the market for basichealth care services likely to increase.

o Analyse the impact on luxury health care services

o Analyse the impact on the market for healthy food vs unhealthy foodo Market for healthy food likely to expand. Why?o Market for unhealthy food likely to shrink. Why?

o Assuming population size does not change (must have this assumption), an increase in theproportion of elderly in the population implies a fall in the proportion of youth in the population

o Which markets that cater to the youth will be adversely affected?

Conclusiono In conclusion, the demographic change in Singapore will affect some markets positively but other

markets negatively.o However, the success and survival of product markets in Singapore are not just affected by

demographic changes. Other factors also play a role in their success and survival. What arethey?


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Question 3(a) Explain how the different features of monopolistic competition and oligopoly affect the

price and output determination in these market structures. [10](b) Recession will affect firms in different ways, depending on what they produce and the

market structure in which they operate. Discuss the likely effects of a recession ondifferent firms. [15]

Introduction: Clarify the characteristics of monopolistic competition Clarify the oligopoly Clarify what is meant by price and output determination

o Ability and incentive/necessity to set price and output to maximise profits

Body Use two different diagram to explain price and output determination in the two different market

structureso One diagram for MPC firmo Another diagram for oligopoly

Explain how the characteristics of MPC firm requires the MPC firmo To be able to set price or output and to be able to practice independent pricing policy

Differentiated products ability to set its own price Close substitutes ability to set price is limited Low entry and exit barriers to entry Many small firms relative to market size

Downward sloping demand curve

MPCs demand curve is relatively more price elastic than oligopoly

o To always maximise profits in the long run because It can only make normal profits in the long run due to low barriers to entry and

exit

Explain why. Include AR, MR, LRAC and LRMC curves into the diagram to show profit-

maximising MPC firm making normal profits in the long run

Assume non-collusive or competitive oligopoly. Explain how the characteristics of oligopoly firmrequires the oligopoly firm

o To be able to set price or output but prices tend to be rigid in the oligopoly marketstructure because of mutual interdependency between oligopoly firms

Usually differentiated products ability to set its own price High entry and exit barriers to entry A few dominant firms in the market

Downward sloping demand curve and kinked demand curve

Oligopolys demand curve is relatively less price elastic than MPC firm

o Assuming a profit-maximising competitive oligopoly (kinked demand curve), It can only make supernormal profits in the long run due to high barriers to entry

and exit Explain why.

Include AR, MR, LRAC and LRMC curves into the diagram to show profit-maximising oligopoly firm making supernormal profits in the long run

o Oligopoly firms tend to maximise profits in the long run but it does not necessarily have todo so. It can pursue other objectives in the long run so long as it makes at least normalprofits (diagram and elaboration not necessary due to mark allocation and demands ofthe question).


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Part b:Recession will affect firms in different ways, depending on what they produce and the marketstructure in which they operate. Discuss the likely effects of a recession on different firms. [15]

Introduction: Define recessionfalling national income for at least two consecutive quarters in a year

Body: Impact of recession on firms producing normal goods

o YED for normal goods is positive AR curve will shift to the left elaborate(profit-max price and output will fall) Ceteris paribus, profits will fall

Some firms in MPC market structure will make subnormal profits and they willhave to leave the industry because in the long run, firms in MPC market structurecan only and must make normal profits due to low barriers to entry

Oligopoly firms are more likely to survive because they might initially already bemaking substantial long run supernormal profits. Hence the fall in demand willreduce their level of supernormal profits but they might still be able to make a

smaller level of LR supernormal profits or at least normal profits.

o Impact of recession on firms producing necessities Normal good; YED is between 0 and 1

o Impact of recession on firms producing luxuries Normal good; YED is greater than 1

Impact of recession on firms producing inferior goods

Conclusion: During a recession, firms producing normal goods will suffer, with those producing luxuries

suffering to a greater extent than those producing necessitieso Oligopoly firms have more financial resources to survive a recession than MPC firms

During a recession, firms producing inferior goods will benefit Evaluate why Apple, a firm producing normal/luxury goods has done so well in the face of a

recessiono Factors, other than income, also affect the demand for the good and in turn the profits of

the firm producing the good

Question 4(a) Describe the process whereby an increase in government expenditure can lead to a bigger

change in national income. [10]

(b) Discuss the extent to which conflicts in government macroeconomic objectives limit thescope for the use of fiscal policy in any economy. [15]

Refer to Interconnected slides


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Question 5In the study of macroeconomics, investment can take many forms including foreign directinvestment, fixed capital investment and investment in human capital.

(a) Explain what is meant by these different types of investment. [10](b) Discuss how far supply-side policies can be used to stimulate these different types of

investment. [15]

Question 5(a) Almost all candidates had a good knowledge of human capital with the vast majority also showing

some understanding of foreign direct investment. Fixed capital investment was correctly definedby the majority, but it was (surprisingly) less well understood than the other two concepts with asignificant minority of candidates thinking it was hot money flows or investment in stocks andshares.

(b) This question produced some strong, relevant evaluation of the policies in terms of theireffectiveness, especially with regard to the human capital investment policies, and to the idea thatany supply-side policies are ineffective without sufficient demand. However, the explanations ofhow policies affected investment tended to be stated rather than explained. It appeared thatcandidates were adapting rote-learned answers for determinants of investment and/or

evaluationof supply-side policies. The most relevant responses came from those who thoughtcarefully about the question and recognised, for example, that investment in human capital andfixed capital investment could themselves attract further investment in the form of FDI. There wassome misunderstanding about what counted as supply-side policies and what did not: forexample, some candidates wrote in detail about the effects of interest rates or exchange rateswithout establishing whether these were supply-side policies or being presented as a betteralternative.

Question 6The Singapore economy is open to the world, in trade and investment. This is both a matter ofpolicy and necessity because of our size and limited resources. In 2008, our trade to GDP ratiowas 360%, the highest in the world.

(Ministry of Trade and Industry, Singapore, 2009)

Discuss whether the openness of the economy is beneficial or harmful to the standard of living inSingapore. [25]

Introduction: Define key terms

o Globalizationo Opennesso SOLmaterial and non-material

Body: Singapore as an importing country:

The openness of the economy is beneficial to Singapores SOL:

o Absence of Tariff diagram for Singapore as an importing country Increase consumer surplus without tariffs increase material SOL

No restrictions on imports greater variety of goods and services available

to Singaporeans increase material SOL

In line with the theory of comparative advantage, Singapore imposes norestrictions on imports, hence she is able to import raw materials andintermediate and final imports from foreign countries with a comparativeadvantage in the production of the good or supply of raw materials.

Keep cost-push inflation low (because tariffs add on to cost ofproduction, hence the absence of tariffs keep cost push inflation low);


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Singapore lacks natural resources, heavily dependent on imported rawmaterials and food

o Lower prices increase consumer surplus increase materialSOL

Trade creation. No trade diversion

However, the absence of protectionist measures may affect the SOL of certain groups ofworkers in Singapore adversely

o Structural unemployment increases in industries that Singapore has lost her CA affect the SOL of unemployed adversely

Singapore as an exporting countryo Sign FTAs with other countries to reduce restrictions on our exports

Beneficial to Singapores SOLo Able to more fully exploit available IEOS as she produces for not just the domestic

market but the international market Fall in LRAC as scale of production increases cheaper products increase

consumer surplus increase material SOL

Not beneficial to Singapores SOL:o Increased industrialization

More pollution lower non-material SOLo More production devoted to exports and less for domestic consumption

Singapores current standard of living cannot be as high as it could potentiallyhave been?

Singapore as a recipient of FDIo Remove restrictions on inward FDI

Beneficial to Singapores SOL:o Helps Singapore to achieve both actual and potential growth

Increase current and future SOL

Not beneficial to Singapores SOL:o

Singapore as a source country of FDIo Sign FTAs with other countries to remove restrictions on Singapores outward FDI

Beneficial to Singapores SOL:

Not beneficial to Singapores SOL:

Singapore as a recipient of foreign labour and foreign talent (not necessary)o Remove restrictions on foreign labour and foreign talent

Beneficial to Singapores SOL:

Not beneficial to Singapores SOL:

Singapore as a source country of foreign talent (not necessary) Beneficial to Singapores SOL:

Not beneficial to Singapores SOL:Conclusion

Email 2011 a Level H2 CS 1 n 2 n Essays

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