2023 VJC H2 Economics Preliminary Examination answers

2023 H2 Economics VJC Economics Department 1 Suggested Responses to 2023 VJC H2 Economics Preliminary Examination Paper 1 — Case Studies CSQ1: The evolving demand for commodities (a) Using a relevant elasticity concept, explain the relationship between t he price of lithium-ion batteries and demand for sodium-ion batteries. Lithium-ion batteries and sodium-ion batteries are substitutes as they are both used as energy storages for electronic devices such as electric vehicles. [1] This means that their XED value is positive and when the price of lit hium-ion battery rises, it will cause a rise in demand for sodium-ion battery. Hence, pr ice of lithium-ion batteries and demand for sodium-ion batteries have a positive relationship. [1] [2] (b) Explain how the trend of lithium prices in Figure 1 would have impacted the total revenue of lithium-ion battery producers. According to Figure 1, lithium prices have fallen over the years. Since li thium is a factor input for lithium-ion batteries, this will lead to a fall in marginal cost of production for lithium-ion batteries. [1] The fall in MCOP will lead to a rise in supply for lithium-ion batter ies, creating a surplus at the initial price level and put a downward pressure on its price. [1] The demand for lithium-ion battery is likely to be price inelastic, since there are not many close substitutes in terms of energy density. [1] Thus, the rise in SS leading to a fall in price will lead to a l ess than proportionate rise in quantity demanded, causing a fall in total revenue earned by lithium-ion producers. [1] [4] (c) Explain whether the invention of sodium-ion batteries would i ncrease the profit level of battery maker CATL. With the invention of sodium-ion batteries, a new alternative to existing bat teries such as lithium-ion batteries, demand for CATL’s products will li kely rise due to consumers switching to this new product. [1] The rise in DD and MR will lead to CATL producing at higher output levels and charging a higher price, causing a rise in total revenue earned. [1] However, CATL would have also incurred higher fixed costs when they conducted their research and development on the invention of sodium-ion batteries such as building labs and obtaining specialised equipment. [1] This rise in fixed cost would lead to a rise in total cost incurred by CATL. [1] Whether the profit level of CATL will rise depends on whether the rise in total costs from R&D outweighs the rise in total revenue from sales of the battery. [1] OR Since the energy density of sodium-ion batteries is not as good as lithium-ion batteries, the rise in demand may be marginal, causing a fall in total profits for CATL as t he rise in total cost likely outweighs the rise in total revenue. [1] [4]

2023 H2 Economics VJC Economics Department 2 Max 4 marks out of 5 possible marks (d) Explain why it may be worthwhile for multinationals to make moves into Indonesia (Extract 2) when Indonesia banned exports of nickel ore. The benefit of multinationals to make moves into Indonesia with the nickel ore export ban is the cost savings from sourcing their nickel ore elsewhere which might be more expensive. The cost of doing so is the costs of setting up the proces sing facilities in Indonesia e.g., construction costs. [1] It may be worthwhile for multinationals to make moves into Indonesia if th e benefit outweighs the cost of doing so. [1] [2] (e) With reference to the data, discuss whether Indonesia’s mineral exports ban is likely to improve the living standards of its citizens. Introduction Indonesia’s mineral exports ban will incentivise multinationals to move into the country and set up processing facilities. This policy will have both positive and negative impact on the living standards of Indonesians, which comprise both material and non-material aspects. Body Side 1: Positive impact on Indonesians’ SOL The mineral exports ban may improve living standards of its citizens through stimulation of economic growth. The mineral exports ban will encourage multinational co rporations to invest in Indonesia and set up their processing facilities in the country to secure the supply of these minerals such as nickel ore. For instance, German chemical c ompany BASF and French mining and metallurgy company Eramet have already announced their plans to build mineral processing facilities in Indonesia (Ext 2). The inflow of foreign direct investments will lead to a rise in investment expenditu re (I) and a rise in aggregate demand (AD) of Indonesia’s economy. When AD increases, causing AD to exceed output, firms will experience an unplanned fall in inventories and increase production by hiring more FOPs including l abour. In [8]

2023 H2 Economics VJC Economics Department 3 return, households receive more factor income from firms and spend more on domestic goods. This results in a rise in induced consumption (Cd) and thus AD and fi rms again experience an unplanned fall in their inventories. Firms would once more increase t heir production by hiring more FOPs including labour. Receiving more factor income from firms, households will again spend more on domestic goods. Assuming the economy is operating with spare capacity, the initial increase in AD will eventuall y trigger multiple rises in real GDP from Y to Y’ due to the multiplier effect. The economy achieves actual economic growth. With the rise in national income, assuming national income increases more significantly than population, real GDP per capita increases. This implies a rise in citizens’ purchasing power to consume more goods and services, leading to an improvement in their material standard of living. Possible to bring in PG and sustained EG too (must link to sustained improv ement in material standard of living). Side 2: Negative impact on Indonesians’ SOL In the long run, Indonesians may also suffer lower non-material SOL if the country is successful in moving up the value chain. When multinationals move into In donesia due to the mineral exports ban, there will now be both mineral mining activiti es and mineral processing activities in the country. If the processing activities also involve high energy consumption that are “dirty” or engage in illegal toxic waste dumping acti vities, there may be increased pollution and poorer air quality, potentially leading to health implications among residents living near these sites. This reduces quality of life and hence non-material SOL. Historically, the nickel mining industry in Indonesia has a dirty track record with opaque rules and regulations (Ext 3). If there is now incr eased mining activity, or if the mineral processing industry is regulated by the same government body that is lax and uncommitted to environmental protection, Indonesians will likely suffer lower non-material SOL from a more polluted environment. AND/OR (but note that the entire response must cover both material and non-material SOL) While the ban incentivises some multinationals to invest in Indonesia, it also caused some unhappiness among some countries. According to Extract 2, the European Commission is seeking to eliminate this “unlawful export restrictions”. In the interim, some European countries might retaliate by imposing import tariffs on Indones ian’s exports, affecting their export revenue (X). This will lead to a fal l in Indonesia’s AD, causing their AD to be lower than output. Firms will experience an unplanned r ise in inventories and decrease production by hiring less FOPs including labour. As a result, Indonesia may suffer a recession. With lowered purchasing power, households will consume less goods and services, leading to a