YIJC 2026 JC2 H2 Prelim P2 SUGGESTED ANSWER

Rising wages have a dual effect: they increase consumers' purchasing power while also driving up production costs for labour-intensive goods. These have driven up the prices of some essential goods such as healthcare services. a) Explain the likely impact of this increase in consumers’ purchasing power on producers’ revenue and producer surplus on different types of goods. [ [10] b) Discuss whether subsidy is more effective than price ceiling in maintaining the affordability of essential goods. [15] Command Word ‘Explain’ – Give reasons, establish causal links. Content / Concept Words Increase in consumers’ purchasing power consider YED Producers’ revenue Producer surplus On different types of goods (YED to consider different change in demand with the increase in consumers’ purchasing power) Context No specific context Qns Requirement R1: Explain how an increase in consumers’ purchasing power leads to an increase in demand for normal goods where YED>0, and the corresponding effect on producers’ revenue and producer surplus. R2: Explain how an increase in consumers’ purchasing power leads to an decrease in demand for inferior goods where YED<0, and the corresponding effect on producers’ revenue and producer surplus. L3 Band [8 - 10] L2 Band [5 - 7] L1 Band [1 - 4] Suggested Answers Introduction: With the increase in consumers’ purchasing power, the change in the demand for different types of goods can still differ, and that depends on the different nature of the good, determined by the income elasticity of demand.

Requirement 1: Explain how an increase in consumers’ purchasing power leads to an increase in demand for normal goods where YED>0, and the corresponding effect on producers’ revenue and producer surplus. With the increase in consumers’ purchasing power, it will lead to an increase in demand for normal goods, where the income elasticity of demand for these goods is positive. This implied that with a given change in income and purchasing power, the demand for the good will change in the same direction. In this case, with the increase in consumers’ purchasing power, the demand for normal goods, such as essentials like healthcare, will increase, and at the original price level P0 after the demand has increased from D0 to D1 as seen in figure 1 below, there will be a shortage where quantity demanded Qd exceeds quantity supplied Q0. The shortage will result in upward pressure in the price, leading to increase in quantity supplied while decrease in quantity demanded of the goods. The price will continue to increase until it reached P1, where quantity demanded equates to quantity supplied at Q1. At the new equilibrium e1, the shortage is cleared at a higher equilibrium price P1 and quantity Q1, ceteris paribus. Figure 1: Increase in demand for healthcare due to increased purchasing power Producer’s total revenue earned will increase, since both equilibrium price and quantity have increased. As seen in figure 1 above, the area of total revenue has increased from area 0P0e0Q0 to 0P1e1Q1. Producer’s surplus is determined by the difference between producer’s willingness to sell and the actual price sold, and in this case where both equilibrium price and quantity have increased, producer’s surplus will also increase from area aP0e0 to area aP1e1. a e0 e1 Price of Healthcare Quantity of Healthcare 0 D1 P0 Q0 Q1 D0 SS0 P1 Qd

Requirement 2: Explain how an increase in consumers’ purchasing power leads to an decrease in demand for inferior goods where YED <0, and the corresponding effect on producers’ revenue and producer surplus. With the increase in consumers’ purchasing power, it will lead to an decrease in demand for inferior goods, where the income elasticity of demand for these goods are negative. This implied that with a given change in income and purchasing power, the demand for the good will change in the opposite direction. In this case, with the increase in consumers’ purchasing power, the demand for inferior goods, such as low quality canned food, will decrease, and at the original price level P0 after the demand has decreased from D0 to D1 as seen in figure 2 below, there will be a surplus where quantity demanded Q0 exceeds quantity supplied Qs. The surplus will result in downward pressure in the price, leading to decrease in quantity supplied while increase in quantity demanded of the goods. The price will continue to decrease until it reached P1, where quantity demanded equates to quantity supplied at Q1. At the new equilibrium e1, the surplus is cleared at a lower equilibrium price P1 and quantity Q1, ceteris paribus. Figure 2: Decrease in demand for canned food due to increased purchasing power Producer’s total revenue earned will decrease, since both equilibrium price and quantity have decreased. As seen in figure 1 above, the area of total revenue has decreased from area 0P0e0Q0 to 0P1e1Q1. Producer’s surplus is determined by the difference between producer’s willingness to sell and the actual price sold, and in this case where both equilibrium price and quantity have decreased, producer’s surplus will also decrease from area aP0e0 to area aP1e1. a e0 e1 Price of Canned Food Quantity of Canned Food 0 D0 P1 Q1 Q0 D1 S0 P0 QS

Knowledge, Understanding, Application, Analysis L3 Analysis & Application For an analytical answer that addresses the question thoroughly with clear explanation well supported by tools of analysis, Answer is well-focused on question , with the good use of relevant economic concepts, theories or principles. Knowledge & Understanding For an answer that demonstrates an accurate knowledge and understanding of economic concepts, theories related to question. Note: To enter L3, answer should be applied to the context of the sugar market and information given in the preamble. 8-10 L2 Analysis & Application For an under-developed answer that attempts to address the question Answers may be descriptive, lack an analytical approach (e.g. not supported with tools of analysis, incomplete use of graph) or is incompletely explained with gaps in analysis, e.g. missing links. [Or For a one-sided analytical answer that address only one of the two question requirement. For an answer that is supported with some application to the context of the question. There is limited ability to organise ideas or discriminate between relevant and irrelevant materials. Answer has some relevance to the question context but is generic (e.g. pre-learnt answer that is not focused on addressing the question specifically) or addresses only selected parts of the question. Knowledge & Understanding For an answer that demonstrates largely accurate knowledge and understanding of economic concepts, theories related to question (i.e. no major conceptual errors) 5-7

L1 Knowledge & Understanding For an answer that shows limited knowledge and understanding of relevant economic concepts and theories (e.g. basic description or definitions). Few valid points made which are scant and inadequately explained. Answers are mostly irrelevant and inaccurate. Answer demonstrates that the meaning of question is not properly grasped or may contain basic errors of theory. Marks within L1: Note: K=1 - For basic and unexplained knowledge, e.g. an unexplained statement or definition of a concept that showed some correct knowledge but no understanding K=2 - For some additional explanation that shows an understanding of the concept that is not applied to the context of que