2021 RI H1 Econs Prelims (Examiner's Report)

1 Raffles Institution 2021 H1 Prelim Suggested answer scheme and comments on specific questions Case Study Question 1 (a) Describe the main changes in the markets for bicycle and e -bikes in Germany from 2015 to 2020 [3] Mark scheme: • There was an increase in the quantity of e-bikes sold per year from 2015 to 2020. [1] • There was a fall in the quantity of bicycles sold per year from 2015 to 2020. [1] • The combined market for bicycles and e-bikes has grown from 2015 to 2020. [1] • Others: o The quantity of e-bikes increased throughout the years while that of bicycles fluctuated with an overall fall. Markers’ Comments Most candidates were able to give a general trend and a refinement to score both marks. A handful still insisted on rewriting the year to year data (b) With the help of a diagram, use supply and demand analysis to explain how the COVID -19 pandemic has been responsible for the changes in the market for bicycles in countries like the USA. [6] Mark scheme: • Accurate diagram [1]; correct axis, direction of shifts • Explain consequence for market for bicycles in countries like the US as a result of the COVID-19 pandemic [5] o Increase DD for bicycles [1] - Increased interest in cycling as people are avoiding public transport given infection risk - Cycling allows people to engage in physical exercise while conforming to social distancing guidelines) → increase in number of avid cyclists - With restrictions on dining in and shopping to reduce the risks of infection, there has been a surge in demand for delivery services, including food and online shopping. As such, there is a rise in demand for bicycles by riders who use it to deliver these items. Change in tastes and preference s in favour of cycling → consumers want more of bicycles → there are now more buyers willing and able to buy at each price level → increase DD [“Demand has almost tripled” (Extract 2)] → demand curve shifts to the right from Do to D1. o Decrease in SS of bicycles [1] - Disruption in bicycle industry’s supply chain → due to the coronavirus, many factories in East Asia, the cent re of the bike industry’s supply chain (Extract 1) were shut down. This led to fall in supply of factor inputs → increase in prices of many of the bicycle components such as drivetrains, derailleurs and brakes (Extract 2 - “prices for pretty much everything – components, replacement parts – are rising”). - Higher costs of production for bicycle manufacturers and suppliers → decrease SS → supply curve shifts to the left from So to S1 o Explain price adjustment process and final effect [3] - With the fall in supply and an increase in demand, at the existing market price of P0, the effect on equilibrium price is determi nate as both will cause it to rise eventually to P1. But the effect on quantity is uncertain.

2 - However, it is likely that the rise in demand is greater than the fall in supply. This is because many of the bicycle components are manufactured exclusively in Asia such that if these countries shut down, there will be a “national – international even – bike shortage” (Extract 1). At the same time, while some companies have managed to increase production such that there are “lots and lots of bikes flowing into bike shops every day, they are selling even faster”. - The combined effect will be a net shortage, which increases price and quantity eventually to P1 and Q1 respectively. Markers’ Comments: This question was generally done well by most candidates as they could identify correctly the demand and supply factors in the case material. They then used a well -illustrated diagram to explain the effects on price and quantity with a number of them making an attempt to justify (give reasons) why they felt demand or supply could have changed more. (c) With reference to Extract 2, explain the link between price elasticity of supply and the increased lead times experienced by bicycle companies. [3] Mark scheme: • Define price elasticity of supply • Clarify lead time • Comment on link between increased lead time and the PES value o Increased lead time is due to the more price inelastic supply for bicycles during the pandemic. o “Lead times grew to six months, then eight” (Extr act 2) because t o meet the rising demand for bicycles, bicycle companies would be operating much closer to their full production capacity. [1] o Many have “increased production, but there’s not enough capacity to fill all orders” (Extract 2) further highligh ts that most of them would be operating closer to their full production capacity as their current inventories start to run low. With less spare capacity available, companies are less able to respond quickly to the increase in prices of bicycles brought about by the rising demand. [1] o This means that the quantity of bicycle supplied increases less than proportionately to the rise in prices resulting in an increased lead time. [1] 0 Quantity of bicycles S0 S1 D1 D0 P0 Q1 Q0 Figure 1: Bicycle market P1 E0 E1 a b Price

3 Markers’ Comments: Many missed out on the increased lead time and explained why lead time was long. This meant that the idea of a more price inelastic supply of bicycles will not be grasped correctly. (d) Using a production possibility curve, explain how the investment by Shimano in Osaka and Yamaguchi will impact Japan’s economy. [4] Mark scheme: • Accurate diagram. [1] • Investment by Shimano would include “cutting -edge manufacturing equipment and software” and expansion of existing production facilities →. [1] • Explain that in current period, investment in more capital goods will make Japan having fewer resources available for the production of consumer goods → lead to a fall in production and consumption of consumer goods → represented movement along PPC0 from point A to B. [1] • Explain how in the longer term, the rise in investment will increase the amount of capital stock [increase in quality and quantity of resources] available in the economy → increase in the Japanese economy’s ability to produce more consumer and capital goods in the future. The increase in productive capacity is represented by an outward shift of the PPC from PPC0 to PPC 1 → levels of consumer and capital goods that could not be produced previously would be attainable. [1] Markers’ Comments: Most candidates could only analyse that the increase in investment increases productive capacity for the economy which is only in the future . They were unable to consider that in the short run, there would be reallocation of more of the scarce resources to capital goods hence a tradeoff in terms of consumer goo ds forgo ne. PPC diagrams were surprising not well illustrated with poor labelling of axes and skewed shifts of the PPC. Some drew the AD -AS diagram instead which was not fulfilling the question requirement. (e) Protecting subways against flooding caused by extreme weather is “an enormous undertaking”, but “the cost of doing nothing is much more expensive.” [Extract 5] Discuss the factors that a government must consider before spending more money on subways in cities. [10] Mark scheme: • Assume government’s objective is to maximise social welfare as well as to achieve macro goals of sustained economic growth, low unemployment and price stability. A B

4 • Factors to consider are benefits and costs to society, economy, constraints faced by the government, available informa tion to the government and potential unintended consequences. • Possible arguments for more government spending on subways: o Enhance consumer welfare. Non- monetary benefits: - reduced travelling time due to less disruptions and greater comfort - greater accessibility due to imp rovement in infrastructure