TMJC 2023 A Level H2 EQ1 AP Answers

2023 A Level H2 Economics Suggested Answers to Paper 2 EQ1 © TAMPINES MERIDIAN JUNIOR COLLEGE 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 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 to Part (a): Requirement 1: How a PPC shows the concept of underutilisation of economic resources The Production Possibility Curve (PPC) outlines all possible combinations of 2 goods that could be produced by an economy assuming the full and efficient utilisation of a fixed quantity of resources such as land, labour, capital and enterprise in a given state of technology. Assuming that an economy produces 2 kinds of goods – capital goods and consumer goods – its PPC is as illustrated below: Points inside the PPC such as U show combinations of capital goods and consumer goods that the economy produces when it underutilises its fixed quantity of resources. At U, the economy produces Cx quantity of consumer goods and Kz quantity of capital goods. U represents an underutilisation of resources because the economy could have produced more capital goods at Kx (and produce the same amount of consumer goods at Cx) by operating instead at X, or produced more consumer goods at Cz (and produce the same Capital Goods Consumer Goods 0 PPC X Y Z Kx Ky Kz Cx Cy Cz U L M PPC 1

2023 A Level H2 Economics Suggested Answers to Paper 2 EQ1 © TAMPINES MERIDIAN JUNIOR COLLEGE of amount of capital goods at Kz) by operating instead at Z, or produce more of both goods at Cy and Ky by operating at Y. Therefore, points inside the PPC represent an under-utilisation of economic resources because resources could be utilised more fully and efficiently in order to increase production towards the PPC which represents the economy’s productive capacity i.e., the maximum quantities of output that it can produce at full employment. Requirement 2: How a PPC shows the concept of opportunity cost Scarcity arises as a consequence of unlimited wants but limited resources. As limited resources are insufficient to satisfy unlimited wants, choices need to be made regarding which wants to satisfy and which wants to forgo. Opportunity cost refers to the value of the next best alternative forgone when a choice is made. With respect to the PPC diagram shown earlier, as the economy chooses to move from X to Y and increase the production of consumer goods from Cx to Cy, it needs to contend with a fall in capital goods production from Kx to Ky. This is because as resources are limited and fully employed, the allocation of more resources to the production of consumer goods leaves less resources for the production of capital goods. Hence Kx - Ky is the opportunity cost of increasing the production of consumer goods from Cx to C y. The negative slope of the PPC i.e., ∆ Capital Goods / ∆ Consumer goods shows the concept of opportunity cost. Moreover, due to resources being imperfect substitutes for each other and not equally adaptable to alternative uses, as the economy increases production of consumer goods and moves from L to M, resources that are increasingly unsuited to consumer good production (and increasingly suited to capital good production) are being transferred from capital good production to consumer good production. This implies increasing opportunity costs since larger and larger quantities of capital goods are forgone for every additional unit increase in consumer good production. The concavity of the PPC to the origin shows the increasing opportunity cost of consumer good production. L3 Thorough address of both requirements / Thorough address of 1 requirement + Cursory address of the other. Answer is thorough, precise, logical, well-reasoned using theory. 8 – 10 L2 Thorough address of 1 requirement / Cursory address of both requirements. Answer is relevant to the question, but theory is incompletely explained. 5 – 7 L1 Both requirements hardly addressed / Cursory address of 1 requirement. Some knowledge shown but does not indicate that the meaning &/or requirements of the question has been properly grasped. Basic errors of theory or an inadequate development of analysis. Mostly irrelevant and only contains a few valid points made incidentally in an irrelevant context. 1 – 4

2023 A Level H2 Economics Suggested Answers to Paper 2 EQ1 © TAMPINES MERIDIAN JUNIOR COLLEGE Suggested Answer to Part (b): Requirement 1: Use a PPC to explain how an increase in the total production of goods might be achieved An increase in the total production of goods would suggest actual economic growth taking place in the economy It is measured by percentage increase in real Gross Domestic Product (GDP) and is shown by a movement of a combination within the PPC to a combination that is either closer or on the PPC. E.g. from point U to points Y or Z. The economy would now produce more of both consumption and capital goods. It is also possible for an economy to enjoy an increase in the total production of goods through sustained economic growth , which r efers to higher real output (actual economic growth) accompanied by lower price level . It o ccurs when actual growth is accompanied by an increase in potential capacity / potential growth which is illustrated as an outward shift of the PPC , from PPC to PPCx . Hence, the e conomy is capable of producing more consumption and capital goods, from Cy to Cx and Ky to Kx respectively. Potential economic growth/ an outward/rightward shift in the PPC from PPC to PPCx can be caused by an increase in quantity &/or quality of productive resource or an improvement in the state of technology. For example, an improvement in labour productivity through Singapore’s SkillsFuture or an advancement in technology through adoption of Artificial Intelligence. Assuming that the aggregate demand (AD) in the economy is high enough, potential growth will allow the economy to produce a previously unattainable combination of output as it is now possible to produce more from a given resource base, from combination Y to combination X. Requirement 1 Evaluation: The extent of increase in total production of goods enjoyed by an economy could be dependent on various factors, from the size of the multiplier to the other context of the economy. As a small and open economy, Singapore faces a small multiplier, k, where k = 1 / MPW, (MPW = marginal propensity to withdraw) due to the large withdrawals in terms of a high marginal propensity to save (MPS) and marginal propensity to import (MPM). The high saving rate is due to its compulsory savings via Central Provident Fund (CPF) contributions by their people and the high imports of raw materials and final goods is due to its lack of natural resources. It is thus difficult for Singapore to raise its total production of goods to its desired level as its AD is not likely to increase by the full extent. T he size of k is likely to be a significant limiting factor to the effectiveness of a very expansionary demand management policy to generate actual growth and increase its production of goods, even in times of recession. Requirement 2A: Increase total production of goods and services results in environmental damage

2023 A Level H2 Economics Suggested Answers to Paper 2 EQ1 ©