HCI 2023 Econs Suggested Essay Answers (students) updated

Suggested Answers to A Level 2023 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit Question 1 The amount of goods and services that can be produced in an economy is insufficient to satisfy the wants of its population. This leads to the economic consequences of scarcity and choice. (a) Explain how a production possibility curve can be used to show the concepts of underutilisation of economic resources and the opportunity cost. [10] (b) Discuss whether it is possible to increase the total production of goods and services in an economy without resulting in environmental damage or other unintended consequences. [15] ------------------------------------------------------------------------------------------------------------------------------------------ Suggested Answer (a) Introduction The Production Possibility Curve shows all the different maximum attainable combinations of goods and services that can be produced in an economy, when all available resources are fully and efficiently used at a given state of technology. When available resources are not utilized or underutilized (unemployed or underemployed?), production takes place at a point within the curve. Also, since resources are scarce, production of one good must imply trading-off the production of another good in that economy. Hence, all production of goods and services has an opportunity cost. Body R1: Explain how the PPC can show underutilisation of economic resources When the economy is producing at a point within the PPC, the economy is not fully utilising its resources as any point on the PPC frontier shows the combination of the maximum amount of consumer and capital goods that can be produced with efficient use of all available resources. If the economy is producing at potential and fully utilising all its resources, the economy should be anywhere on the PPC frontier. In diagram 1 below at point A, the economy is producing inside the PPC and thus is not fully utilising its resources. This is because firms and the government can decide to produce more consumer and capital goods by utilising greater use of existing resources (i.e. reducing unemployment of resources) and by utilising its resources more efficiently (i.e. reducing underemployment of resources). This will result in increased output of both capital and consumer goods as illustrated in the diagram at point C. Point C (along the curve) shows the combination of the maximum amount of consumer goods and capital goods that can be produced with efficient use of all available resources. Hence points on the PPC illustrate efficient and full employment of all available resources and points within illustrate possible underutilisation of resources.

Suggested Answers to A Level 2023 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit R2: Explain how the PPC can show opportunity cost The standard PPC is usually concave to the origin, due to the Law of Increasing Opportunity Cost. From the diagram below, the opportunity cost of the 1st unit of capital goods is 5 units of consumer goods. To obtain the 2nd unit of capital goods, 10 units of consumer goods have to be foregone and so on. Thus, the opportunity cost increases together with the production of capital goods. The opportunity cost increases because resources in the economy are not perfectly homogeneous or equally suited in the production of all goods. Some resources are just better suited for the production of some goods than they are for other goods. For example, the steel which is used in car production will eventually get harder to procure. Car producers would then have to source for a similar metal with the quality not being as good as steel. This means that more and more of this metal would have to be transferred from the production of another good and taken from another industry (e.g. production of construction tools) to make up for the lack in quality of this substitute metal in making cars. However, resources that are least suited for production of consumer goods will be deployed first. Hence, to produce the 1st unit of capital goods, the opportunity cost is only 5 units of consumer goods. As the production of capital goods increases, resources that are increasingly more suitable for consumer goods production have to be re-deployed. This leads to more and more units of consumer goods being sacrificed. i.e. increasing opportunity cost. Since the slope of the PPC represents the opportunity cost of an additional unit of the good on the horizontal axis, the increasing opportunity cost gives rise to a PPC that becomes steeper and steeper as we move from point A to E. Level Descriptors Marks L3 Breadth ● Covers both (R1) on how the PPC shows underutilisation of economic resources and (R2) on how the PPC shows opportunity cost Depth ● Analyse and explain with the tools of analysis of a PPC diagram with accurate annotations and figures to illustrate the concepts ● Explain with rigour and in depth. 8-10 L2 Lacking in any one of the L3 criterions 5-7 L1 ● Largely irrelevant response ● Descriptive response with non-existent or minimal or application of economic concepts or theories ● Serious and pervasive conceptual errors 1-4

Suggested Answers to A Level 2023 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit (b) Discuss whether it is possible to increase the total production of goods and services in an economy without resulting in environmental damage or other unintended consequences. [15] R1: Explain how total production increases with no or minimal unintended consequences An increase in total production of goods and services in an economy can be illustrated with both a shifting out of the PPC frontier and a movement of actual production within the frontier to a point on the frontier. In other words, the increase in total production of goods and services must represent both actual (movement of point A to point B) and potential (shifting out of the PPC frontier) growth. With both actual and potential growth and the resulting increase in production of goods and services, firms will increase their derived demand for labour. Hence, there will be no demand-deficient unemployment, ceteris paribus as the economy is producing on the PPC frontier at point B, utilizing all available resources in the economy at the full employment level. The economy can also be said to be productively efficient from the economy’s perspective and the material standard of living will have increased. This is illustrated below in the diagram. Ev1: Possible unintended consequences with an increase in total production With an increase in total production of goods and services, there is depletion of the limited amount of resources. Hence the amount of factor inputs available could be reduced in the future. Subsequently, the outward shifts of the PPC frontier will be at a decreasing rate, and this will reduce the ability of the economy to increase the production of goods and services for future generations. This will have an unintended consequence where the general price level of goods and services will start to rise since the actual growth rate will now be greater than the potential growth rate. This would imply that the output gap, and hence demand-deficient unemployment will decrease but with a resulting rise in the GPL as a trade-off. Alternative R1 using AD/AS framework: R1: Explain how total production increases with no or minimal unintended consequences Non-inflationary sustained growth is achieved when AD shifts right in tandem with AS. This results in an increase in both actual and potential growth, an increase in employment or a decrease in demand-deficient unemployment and price stability.

Suggested Answers to A Level 2023 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit Referring to the diagram below, an increas