EJC Econs 2022 A-Level H2 P1 Q2

Suggested Answers for 2022 A-Level H2 P1 Qn 2 (a) Distinguish between a rise in total output and a rise in productivity. [2] A rise in total output refers to an increase in the amount of goods and services produced but a rise in productivity refers to an increase in goods and services produced per unit of resource in a given time period. (b) Explain one reason why a firm with significant market power and long-run excess profits might choose to spend large sums on research and development (R&D). [2] • According to Extract 6, Volkswagen is investing heavily on battery-powered technology to become the world leader in battery-powered. With significant market power, a firm with significant market power like Volkswagen enjoys long -run supernormal profits and this enables the firm to carry out R&D. P rocess innovation helps to reduce average costs of production, while product innovation helps to increase demand for its products and also make demand more price inelastic which would raise the firm’s revenue. • Hence, such firms are incentivised to spend on R&D to maintain high barriers to entry to retain its dominant position and make larger or at least maintain its supernormal profits. (c) Explain, with reference to Extract 8, what might be the opportunity cost of the $19 billion invested by the Singapore government to build the country into a global R&D hub. [2] • Opportunity cost refers to the value of the next best alternative forgone. • The opportunity cost of the $19 billion invested by the Singapore government to build the country into a global R&D hub is the increase in real GDP that could be gained by investing the $19 billion on training of local talents or the gain in society welfare by building more hospitals. (d) Explain how the creation of an innovative culture in Singapore is likely to have benefitted the Singapore economy. [6] • The creation of an innovative culture in Singapore is likely to help Singapore achieve sustained economic growth. Sustained growth occurs when an economy’s national output increases over an extended period of time without inflationary pressures. This happe ns when there is both actual growth and potential growth. • An innovative culture would likely bring about greater inflow of foreign direct investment (FDI) as foreign companies deemed Singapore to be more profitable for doing business (Extract 8) as an inn ovation culture allows for more product and process innovation. An increase in FDI would increase the investment expenditure (I) in Singapore hence increasing aggregate demand (AD).

• This results in an unplanned run down of stocks and firms step up on production by hiring more factors of production, including labour. As factor income increases, induced consumption increases as well, causing real national income to increase by multiples from Y1 to Y2. Hence an innovative culture would bring about actual growth and a fall in demand- deficient