H1 econs CSQ1 2021 Suggested Answers

1 © Anderson Serangoon Junior College Economics Department H1 CSQ1 GCE A Level Examinations 2021 Suggested Answers (a) (i) With reference to Figure 1, summarise the main changes that occurred in the crude oil price during the period 2014-2018. [3] • Crude oil prices generally decreased during the period 2014 to 2018. • The most significant period of decrease happened from 2014 to 2015. • After which, crude oil prices gradually increased from 2016 to 2018. (ii) Extract 1 states that 'If indeed demand for crude oil falls and supply rises, price will be bound to respond in the predicted direction.' Using a supply and demand diagram, explain the impact of these changes on the price of crude oil. [4] The fall in demand due to slowdown in China and increase in supply due to agreed increase within OPEC would likely lead to a fall in the price for crude oil. The slowdown in major economies such as China and Europe would likely lead to a fall in consumers’ income and hence purchasing power would decrease. With that, demand for consumer goods and services decreases. Since oil is an input to produce energy that in turn, is an input for production of goods/services, the (derived) demand for oil falls in the crude oil market from D1 to D2 as shown in Fig 1. Extract 1 states that “OPEC countries agreed to increase oil production”. This would lead to an increase in supply of crude oil, shown by the rightward shift of supply curve from S1 to S2 as Fig 1 shows. The fall in demand and rise in supply led to a surplus of Q2Q0 at the original price P0. Producers will find that they are unable to sell all of their output at P 0 and compete to sell their excess stock by lowering prices. As price decreases, consumers seeking to maximise satisfaction will increase quantity demanded while producers reduce quantity supplied. This downward pressure on price causes a movement along the demand curve (D2) as well as a movement along the supply curve (S2). The process continues until the surplus is eliminated with a new market equilibrium at E 1. Thus equilibrium price for crude oil would decrease to P1. 1m for fully labelled diagram (b) With reference to Extract 2 and Extract 3, explain the different causes of the changes in the price of oil in the US and the price of food in Guatemala and comment on the significance of the elasticity of demand or supply in these cases. [6] In Extract 2, because of the lockdowns across the world due to the Covid-19 pandemic, it had kept people at home and severely restricted mobility. Without being able to travel out for work or leisure, there is lack of commuting between places via any form of transport and it was almost impossible to head out to consume goods and services. With the various economies suffering from the lockdowns, production in many countries will S2 Surplus E2 E1 Price Quantity of crude oil D2 D1 P1 P2 S1 Fig 1 Q2 Q