2026 EJC H2 Econs P2 Prelim ANS

2026 EJC Prelim Exam H2EC P2 EQ1 SAMS (Suggested Answer and Mark Scheme) 1 Land is a scarce resource and must be allocated among competing uses (residential, commercial, industrial and recreational). (a) Explain how a production possibilities curve can be used to illustrate the concept of opportunity cost and how the price mechanism can help to allocate scarce resources. [10] (b) Discuss whether demand factors or supply factors have greater impact on residential property prices. [15] Question Analysis Part (a) Framework Details Approach Command word Explain how -10m explain for R1 and R2 -No EV needed Context No specified context Start Point Scarcity End point ● PPC can be used to illustrate opportunity cost ● Price mechanism can allocate scarce resources Content R1: A production possibilities curve can be used to illustrate concept of opportunity cost. R2: The price mechanism can help to allocate scarce resources via the three functions. Downward sloping and concave shaped PPC illustrates the concept of opportunity cost. The price adjustment process illustrates the functions of the price mechanism. Introduction ● With the problem of scarcity with limited resources and unlimited wants, it implies that choices must be made in the allocation of resources amongst different uses to produce the goods and services that we desire. When making choices, there will be an opportunity cost incurred. ● The price mechanism can allocate scarce resources amongst unlimited wants and produce the optimal amount of goods and services that maximises social welfare. Prices facilitate resource allocation as they fulfil the three functions of signalling, incentivising, and rationing. R1: A production possibilities curve can be used to illustrate concept of opportunity cost. © EJC Economics Department 2026

The production possibility curve (PPC) is a curve that shows all the possible combinations of the maximum quantity of two goods that a country can produce within a specified period of time with all its resources fully and efficiently employed at a given state of technology. ● The assumptions of the PPC are: o All available resources (labour, land, capital and entrepreneurship) are used to produce only two goods – e.g. consumer goods and capital goods. o Within the given time period, the quantity and quality of resources remain the same. o Resources are fully and efficiently employed to produce the goods. o Within the given time period, the level of technology remains the same. Figure 1: Production Possibility Curve (PPC) ● Opportunity cost is defined as the value of the next best alternative forgone and is reflected by the downward sloping PPC. Given that the limited resources have been fully and efficiently employed, if the economy chooses to produce an additional unit of capital goods, it will need to give up some units of consumer goods (and vice versa). For example, from Point C to D, to produce 1 more unit of capital good, the economy needs to forgo 3 units of consumer goods. ● Increasing opportunity cost is reflected in the concave shape of the PPC to the origin. The opportunity cost of the 1st unit of capital good is 1 unit of consumer good (ie. 20 to 19 units forgone). To produce the 2nd unit of capital good, 2 units of consumer goods had to be forgone. The 3rd unit of capital good requires sacrificing 3 units of consumer goods. ● It is because resources are not homogenous. Take labour for example - some workers have skills and talents that make them more suited to producing consumer goods rather than capital goods (consider the skills of a farmer vs. a mechanic). Eventually, as more capital goods need to be produced, the workers who are less suited to produce capital goods will gradually be tapped upon, hence incurring a higher opportunity cost. R2: The price mechanism can help to allocate scarce resources via the three functions of signalling, incentivising, and rationing. (no need to elaborate in full for all three functions) © EJC Economics Department 2026

● Firstly, prices act as a signal from consumers to producers to answer, “What to produce?” when allocating scarce resources amongst unlimited wants to determine the types of goods and services to be created. ● So, consumers use price as a signal to inform producers what goods and services they are able and willing to buy, which allows the producers to know what to produce and allocate the necessary resources to produce the goods and services. ● Secondly, another role of prices is an incentive for producers to answer, “How much to produce?” and “How to produce?” when allocating scarce resources amongst unlimited wants. Figure 2: A shortage at P0 ● This shortage exerts an upward pressure on price as consumers compete for the limited good. The higher price signals and incentivises the profit-maximising producers to increase quantity supplied along the supply curve since the good is more profitable to produce (Law of Supply). Profit-motivated producers are incentivized to allocate more resources and produce more of the good, addressing “how much to produce”. ● Moreover, when the prices of FOP rises, it incentivizes producers to use switch to another relatively cheaper, alternative resource, addressing “how to produce”. This is because higher input prices mean higher unit cost of production and lower unit profit for producers, assuming same revenue. Profit-motivated producers are then incentivized to look for cheaper, alternative factor input. © EJC Economics Department 2026

● With the increase in price, consumers are less willing and able to consume. This means that the higher price both signals and incentivises consumers to reduce quantity demanded along the demand curve (Law of Demand). ● Price will continue to rise until the shortage of QsQd is eliminated and market equilibrium is reached again at point E. ● The last role of prices is a rationing tool for producers to answer, “For whom to produce?”. ● Prices ration goods specifically to those who have 'effective demand' - those consumers who are both willing and able to pay the market price. ● When the price of a good/service rises, the low-income consumers will not be able to afford the good/service. The rising price will ensure that the limited goods/services produced are rationed to only those with high income and can afford to pay the rising price. ● That also means that profit-motivated producers will allocate more resources to produce the goods and services for higher income group and allocate less resources to the lower income group. Mark Scheme Level Knowledge, Understanding, Application, Analysis Marks L3 For an answer that shows a well-developed explanation of how the production possibilities curve is used to illustrate the concept of opportunity cost, and how the price mechanism is used to allocate scarce resources via the three functions. ● Relevant, thorough answer that is precise, logical and reasoned ● Strong ability to apply theory to the questions and the context, and the analysis is clear with illustrations (e.g. graphs), relevant examples, depth and scope 8-10 L2 For an answer that shows an under-developed explanation ● Relevant answer but theory may be incompletely explained ● Some ability to apply theory to the question and the context, but the analysis lacks clarity, depth and/or scope 5-7 L1 For an answer that shows limited knowledge ● Shows some knowledge but has not properly grasp the meaning of the question ● Mostly irrelevant and contains a few valid points made incidentally in an irrel