TMJC 2022 A Level H2 EQ2

2022 A Level H2 Economics Suggested answer to Paper 2 EQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE Essay Question 2: The Singapore government announced in the 2018 Budget that the goods and services tax (GST) would rise from 7% to 9% sometime between 2021 and 2025. The intended consequence of this change is to raise tax revenue. However, following the coronavirus (Covid -19) outbreak in 2020, the incomes of many households fell. (a) With the aid of diagrams, explain why an increase in GST and a fall in the incomes of many households are each expected to cause a fall in expenditure on luxury goods. [10] (b) Discuss whether the increase in GST is likely to raise tax revenue and whether it will lead to unintended consequences. [15] Part (a): Command word/phrase With the aid of a diagrams, explain why To utilise economic diagram(s) and economic reasoning (demand, supply , and price elasticities) to explain the changes on consumer expenditure (CE) Content Increase in GST Fall in incomes of many households Expenditure Show understanding of the concept of taxation and its impact on CE with application to PED. Explain impact of changes in income on CE with application to YED. CE = P x Q Context Luxury goods PED for luxury goods is likely to be greater than 1. YED for luxury goods is likely to be greater than 1. Suggested Answer: Introduction Consumer expenditure is the product of price and quantity. How an increase in GST and a fall in the incomes of many households will impact consumers’ expenditure (CE) on luxury goods is dependent on the shifts of demand or supply, and also relevant elasticity concepts such as price elasticity of demand (PED) and income elasticity of demand (YED). ✓ T: Defined CE ✓ R: Addressing intent of Qn

2022 A Level H2 Economics Suggested answer to Paper 2 EQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE Two Requirements: 1. Impact of an increase in GST on expenditure of luxury goods a) Explain the change in CE due to changes in SS factor: o GST is an indirect tax paid through the producers / sellers on the consumers’ behalf. o ↑GST by 2% points → ↑unit COP of luxury goods → ↓ supply of luxury goods from S1 to S2 as shown in Figure 1 → shortage occurs at initial price OP1 which exerts an upward pressure on prices →↑price of luxury goods from P1 to P2 & ↓Quantity from Q1 to Q2 where the market clears → the changes in CE depends on PED. Figure 1: o PED refers to the degree of change in quantity demanded in response to a change in the price of the good, ceteris paribus. PED differs between goods and for a specific good, between consumer groups, determined by extent of substitutes, importance in consumption and consumers’ income. o Demand for luxury goods such as electronic products can be considered price elastic as unlike necessities, they are goods that consumers can do without it. o Given that PED>1 for luxury goods → ↑ in price from P1 to P2 as shown in Figure 1, cause a more than proportionate ↓ in quantity demanded from Q1 to Q2→ ↑CE (Area A) due to ↑ price < ↓CE (Area B) due to ↓Qty → overall ↓CE from OP1E1Q1 to OP2E2Q2 2. Impact of a fall in the incomes of many households on expenditure of luxury goods b) Explain the change in CE due to changes in DD factors: o ↓ incomes of many households → ↓purchasing power → ↓DD if it is a normal good. ✓ EA/ R : Explain the impact of increase in GST on SS for luxury goods. ✓ EA/ R/ C : Applied the concept of PED to analyse changes in CE. ✓ EA/ R/ C : Explain the impact of fall in the incomes of many households on

2022 A Level H2 Economics Suggested answer to Paper 2 EQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE o Since a luxury good is a normal good, there will be a fall in its demand. o The impact on demand for a good or service is dependent on the nature of the good or service. The extent of change in demand would depend on the income elasticity of demand (YED). o Income elasticity of demand measures the degree of responsiveness of demand for a good to a change in incomes, ceteris paribus. o Since YED > 1 for luxury goods → A fall in income will result in a more than proportionate ↓ in DD for luxury goods from D1 to D2 as shown in Figure 2 → ↓ equilibrium price from P1 to P2 & equilibrium quantity from Q1 to Q2 → ↓ CE from 0P1E1Q1 to 0P2E2Q2 since CE = P x Q and the extent of fall in CE will be significant since DD falls by a greater proportion compared to the fall in incomes. Figure 2: Conclusion: Both a n increase in GST and a fall in the incomes of many households are expected to cause a fall in expenditure on luxury goods. DD for luxury goods. ✓ EA/ R/ C : Analysed changes in CE ✓ R: Link to answer the qn Level Knowledge, Application/Understanding and Analysis Marks L3 • For a well-developed analysis on how each event leads to a fall in expenditure (CE) on luxury goods, with the use of well-labelled and well-explained diagrams. • Application and analysis of the relevant elasticity concepts, PED and YED to explain the fall in CE 8 – 10 L2 • Relevant answer but theory may be incompletely explained. • Attempts to apply elasticity concepts e.g., PED, YED, but lacks adequate analysis. 5 – 7

2022 A Level H2 Economics Suggested answer to Paper 2 EQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE Part (b): Command word/phrase Discuss whether… To examine and present the different aspects of a problem or subject, and give a judgement Content Increase in GST … raise tax revenue Unintended consequences of an increase in GST Explain impact of increase in GST on tax revenue with application to PED. Apart from the intended impact on tax revenue, students can analyse plausible unintended consequences on the low-income group households. Context Preamble: Singapore No specified context in the question itself. However, students are encouraged to bring in examples from Singapore. Introduction • Impact of increase in GST (indirect tax) - fall in supply of goods and services, equilibrium price increases, quantity falls. • Impact of the increase in GST on tax revenue depends on the nature of the good (PED). ✓ T: Defined GST as a type of indirect tax ✓ R: Addressing intent of Qn 1. Impact of an increase in GST on tax revenue collected  ↑GST by 2% points → ↑unit COP of goods further → ↓ supply of goods further from S1 to S2 → ↑price of goods further to P2, instead of P1 & further ↓Quantity from Q1 to Q2  Amount of tax revenue received by the government = tax per unit x quantities of the good taxed  The amount of tax revenue collected is influenced by the PED of a good ✓ EA/ R : Explain the impact of increase in GST on SS for luxury goods. • Some ability at graphs but incomplete explanation . Partial analysis of events on the luxury goods on either changes in demand or changes in supply and link to CE. L1 For an undeveloped answer that • is descriptive, lacking in application of economic theory, and/or • contains serious and pervasive conceptual errors, and/or • is largely irrelevant. 1 – 4

2022 A Level H2 Economics Suggested answer to Paper 2 EQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE a) Impact on tax revenue when the demand of a good is price elastic.  The demand for organic food and luxury cars is likely price-elastic. For organic food, consumers can switch to other substitutes such as non-organic food instead. For luxury cars, as expenditure on these goods take up relatively a high proportion of one’s income, demand is likely price -elastic. When demand is price -elastic, an increase in price would lead to a more than proportionate f