RI 2023 H2 Y6 Common Test - Examiner's Report

ECONOMICS Higher 2 Syllabus 9570 Examiner’s Report Year 6 Common Test 2023 R a f f l e sI n s t i t u t i o n N u r t u r i n g t h e T h i n k e r , L e a d e r & P i o n e e r TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane, SINGAPORE 575954

Y6/9570/CT/2023 2 © RI 2023 [Turn Over ECONOMICS Y6 H2 Common Test 2023 Paper 9570/02 Paper 2 Question 1 While some countries such as Malaysia provide subsidies on electricity, other countries like Singapore allow the free market to determine its price. In 2022, the price of electricity in Singapore surged from $0.18/kWh to $0.32/kWh, partly due to a rise in the price of imported natural gas. (a) Explain the possible reasons for the surge in price of electricity in Singapore. [10] (b) Discuss whether providing subsidies for electricity is the best way for Singapore to improve outcomes for society. [15] Part (a) Introduction: - As stated in preamble, electricity prices are determined by the free market → free forces of demand and supply. - “Surge” means significant extent of rise in price: ▪ likely due to both rise in demand and fall in supply; ▪ coupled o with price-inelastic demand for a change in supply; and o price-inelastic supply for a change in demand Body: Explain 3 reasons (1 DD, 1 SS and PED or PES) for the sharp rise in price of electricity A. Demand Factor Possible Factors: ▪ Economic recovery as borders open and economic activities resume ▪ Covid measures and work-from-home/or easing of Covid measures leading to more people going outdoors for entertainment and recreation – thus higher demand for electricity. Elaboration: Economic recovery (rise in income) together with easing of Covid measures: ▪ Rise in demand for manufactured goods as well as services/recreation/entertainment as safe distancing measures cease and incomes start to rise (apply YED concept – these goods are normal goods → YED>0) – rise in demand for electricity as electricity is a factor input (derived demand). Economic Analysis: As shown in Figure 1, w ith the rise in demand, the demand curve shifts from D Do to DD1. This causes a shortage of Q0Q2. With this shortage, consumers bid up prices to compete for these goods. As prices rise, some consumers leave the market as they can no longer afford it and there is a fall in quantity demanded from Q2 to Q1. A higher price entices firms to increase the quantity supplied from Q0 to Q1 due to greater profitability. The final equilibrium price rises to P1 and quantity rises to Q1.

Y6/9570/CT/2023 3 © RI 2023 [Turn Over Applying PES: Supply of electricity is price -inelastic as it takes time for Singapore to incr ease quantity supplied since the input – natural gas has to be imported. Time is needed to sign new contracts or find more foreign producers. As a result of producers not being able to respond to price changes, it will require a significant increase in price to clear the shortage → surge in prices. B. Supply Factor ▪ From preamble, there is a rise in price of imported natural gas that is an input for generating electricity. This makes up the bulk of the cost of producing electricity. The cost of production rises significantly since Singapore is reliant on imported natural gas and is a price-taker. Economic Analysis: As shown in Figure 2, w ith a rise in production cost, firms are less willing and able to supply electricity at the prevailing price P0. As a result, the supply of electricity falls. The supply curve shifts from SS0 to SS1. With the resultant shortage, prices are bidded up (as with earlier analysis). Applying PED: Demand for electricity is price-inelastic as there are lack of close subs titutes → it is used in daily lives to power electrical appliances and thus essential for businesses and households. As a result of consumers not being responsive to price changes, it will require a significant increase in price to clear the shortage when SS falls → surge in prices.

Y6/9570/CT/2023 4 © RI 2023 [Turn Over C. Combined Effect As shown in Figure 3, b oth the rise in demand and fall in supply lead to a net shortage and the final equilibrium price rises from P0 to Pf. Furthermore, given price-inelastic demand and supply, the price rose significantly for the shortage to be corrected, accounting for the surge in price of electricity. Mark scheme: Examiners’ comments: This question part require s students to use a demand -supply framework to analyse why prices rose significantly in the year 2022. Students need to explain one demand factor and one supply factor to explain the surge in prices, and then apply PED and PES to account for the huge extent of rise in price. Knowledge, Application, Understanding, Analysis L1 ▪ A descriptive response ▪ Glaring conceptual errors ▪ No theoretical framework/no link to DD-SS framework ▪ Confused between DD and SS factors 1 – 4 L2 ▪ Evidence of use of DD -SS framework but with some gaps/flaws in analysis ▪ Analysis lacks relevant details ▪ Underdeveloped explanation of DD and SS factors ▪ Application to the context of electricity is weak ▪ DD and SS curves shift w/o any appln of PED or PES ▪ did not apply to preamble of rise in price of natural gas ▪ no adjustment process ▪ If answer uses firm analysis and couches response in terms of monopolistic pricing 5 - 7 L3 ▪ good analysis of both DD and SS factors (including PED or PES) ▪ well applied to the context of electricity ▪ applied PED or PES 8 - 10

Y6/9570/CT/2023 5 © RI 2023 [Turn Over This question was mostly adequately attempted with good use of a demand-supply framework. But the quality of the responses varied significantly across scripts. In many cases, answers failed to recognise that in the context of Singapore, natural gas is an input used to generate electricity. Some answers instead erroneously stated that natural gas is a substitute to electricity. Moreover, links to changes to demand were not always well-explained – with some answers stating that the cause of demand rise was a rise in population without any justification as to why there can be a population rise in one specific year 2002. Responses that linked demand factors to Covid measures or easing of Covid measures tend to be more convincing in their discussion. A glaring problem that surfaced once again was the failure to apply price elasticities of demand and supply to the question. As a result, the rigour in analysis was compromised. We have been through this. As a rule of thumb, elasticities are usually useful in a discussion of change in price for a high mark question – more so when the cue word ‘surge’ means a large extent of change in price. There were some answers that combined a DD -SS framework with a firm (MR -MC analysis) – pointing to market power as one of the reasons for the surge in price . However, market power explains price-setting ability, which does not really explain why prices rose , unless there was a rise in market p ower. Moreover, even a price -setter will face changes in exogeneous factors that affect its demand and cost conditions. Generally, a simplification in the form of demand -supply framework is used in markets for oil, airlines and electricity when the context is about market conditions affecting equilibrium price and quantity. Some other areas for improvement: ▪ Weak explanation of adjustment process. ▪ Stating price-inelastic demand or supply without a clear or convincing reason. Merely stating no close substitutes is not a sufficient justification for PED. Students should instead elaborate clearly on the use of electricity to households and firms to highlight its importance. ▪ Many times, PED was mentioned without a clear link to a change in the supply. PES w