2022 A Level H1 econs CSQ1 answers

© ASRJC Economics Department 1 H1 GCE A Level Examinations 2022 Question 1: The Housing market – Global perspectives Suggested Answers (a) With reference to Figure 1, compare the trend in the real house price index for Singapore with that of Germany and Turkey over the period shown. [3] The real house price index for both Singapore and Germany generally increased over the period shown [1], while that of Turkey fell over the period shown [1]. The increase in real house price index for Singapore is larger than for Germany[1]. (b) With reference to Extract 1, explain how well-functioning housing markets where the ‘consumer is sovereign' can affect the supply of houses. [4] In a well -functioning housing market, the price mechanism performs the signaling and incentive functions and thus solves the problem of resource allocation. In a market, there is consumers’ sovereignty. This means that consumers would determine how resources are to be allocated based on their willingness and ability to pay and this in turn would affect the supply of housing. Thus, housebuilding firms would respond to changes in housing prices brought about by changes in demand. Cities are growing at unprecedented rates coupled with a growth in their population sizes. This leads to an increase in demand for housing. The increase in demand results in a shortage of housing. Consumers will compete for the limited quantities available and offer higher prices. The higher price signals to firms that there is a shortage of housing. It also provides a "financial incentive" for firms to increase quantity supplied of hous es as they become more profitable. Price continues to increase until a new market equilibrium is attained. We can thus see that where consumer is sovereign, the quantity of hous es supplied would increase with an increase in demand. (c) Using price elasticity of demand, explain how 'an increase in stamp duty' (Extract 2) is likely to affect total expenditure on private housing. [5] The increase in stamp dut y would cause an increase in the cost of production for housebuilding firms, as it is a tax they must pay on the sale of a house. As cost of production rises and hence fall in profitability , the supply of private housing will fall. This is represented by a leftward shift of the supply curve from SS0 to SS1 in fig. 1. This fall in supply resulted in shortage and an increase in equilibrium price (P0 to P1) and a decrease in equilibrium quantity (Q0 to Q1).

© ASRJC Economics Department 2 The demand for private housing tends to be more price inelastic, as a 12% increase in prices has led to a less than proportionate decrease in the quantity demanded (Ext 2). The increase in consumers’ expenditure due to rise in price (illustrated by area X) is more than the fall in consumers’ expenditure due to the less than proportionate fall in quantity demanded ( as shown by area