VJC_H1_Econ_Answer

1    Answers to 2014 H1 Economics Prelim Exam Section A Case Study Question 1: ai) Describe the trend of the world’s cement production from the year 1994 to 2012. Increased (1) at an increasing rate (1). 2m aii) Using demand and supply analysis, account for the trend in the world’s cement production. Rise in demand (2) Cement demand by China has increased exponentially by 437.5% in 20 years, while use in the rest of the world increased by 59.8%. Cement is a raw material used for the construction of new infrastructure (roads, bridges, dams and houses). Fall in supply (2) Sand is used in the production of cement and the increase in price of sand (Extract 1) would cause an increase in Marginal Cost and result in a decrease in supply. As cement demand has risen exponentially in China and China uses 58% of the world demand, rise in demand is likely to be greater than the fall in supply. With demand rising by more than supply, the equilibrium quantity would have increased. (1) From Fig 1 can justify that since production has gone up, quantity sold has increased hence the rise in demand is greater than the fall in supply. 5m bi) What is meant by price elasticity of demand? Price elasticity of demand measures the responsiveness of quantity demanded for the good to a change in its prices (1), ceteris paribus (1) formula also get (1) 2m bii) Explain how the rise in price of sand would affect Singapore’s import expenditure on sand. Total Expenditure (TE) is price of sand x quantity demanded of sand (1). Demand for sand is inelastic as evident by Extract 2 “Singapore is not ready for high tech transformation in construction (1). When the price of sand increased, quantity demanded of sand would fall by a less than proportionate amount, the effect on TE would increase since the rise in TE from the rise in price would offset the fall in TE from the fall in quantity demanded(1). 3m c) Account how the production of sand has resulted in market failure. Market failure is said to occur when the free market does not allocate resources efficiently or does not allocate resources that best satisfies society’s wants. 6m

2    From society’s point of view, there is an over production of sand because of the presence of negative externalities. Negative externalities occur when third parties who are not producing sand are affected adversely. From Extract 1 “major impact on the rivers, coastal and marine ecosystems” and Extract 2 “deplete fish stocks and c ause erosion, risking landslides and flooding”. Analysis of Negative Externalities Diagram Assumption: There are no external benefits (positive externalities), MPB = MSB = DD With the presence of Negative Externalities: (Note the sequence) 1. Negative externalities cause a divergence between MPC and MSC (MSC > MPC). 2. If the output is determined by market forces, profit maximising private producers of sand will only consider their private benef