TJC H1 ECONS EQ3 Ans

Suggested Answer for H1 Prelim EQ3 Malaysia will begin imposing its tourism tax on hot els from Aug 1 this year, starting from RM2.50 (S$0.80) per room each night, according to d etails published on the Royal Malaysian Customs Department's website. Concurrently, recovery from the Global Financial Crisis has seen a rise in business activities and increasing income levels. (a) Explain how scarce resources are allocated in the free market. [10] (b) Discuss how the above factors may affect the total consumer expenditure on different types of hotels in Malaysia. [15] Question Dissection a) Explain how scarce resources are allocated in the free market . [10] Schematic Plan Explain a process: Identify the start & end point Define scarcity and establish the link between scarcity & resource allocation. Resource allocation End point Define free market. Price mechanism start point Introduction • Explain scarcity and how it necessitates choices regarding resource allocation. • Explain the 3 categories of choices each society have to make. Body • Illustrate how resources are allocated among competing needs via the price mechanism, using DD-SS models. • Explain how the price mechanism determines the distribution of goods or services produced. Conclusion (summary)

Suggested Answer for H1 Prelim EQ3 Suggested Answer Comments The central problem of economics is scarcity, which refers to the situation where limited resources are insufficient to meet society’s unlimited wants and needs. Due to scarcity, it is i nevitable that choices have to be made and every choice involves s acrifice. In economics, the value of the next best alternative t hat had to be forgone to satisfy a particular want is termed opportunity cost. All societies face the same fundamental economic pr oblem of scarcity and require a method of allocating scarce resources. There are three main categories of choice, arising from t he problem of scarcity, to be made in any society: ‘what and how much’, ‘how’ and ‘for whom’ to produce. How these decisions are made depends on the economic system of the society. The free market refers to an economic system where all economic decisions are ta ken by individual households and firms, and with no govern ment intervention. In a free market, resources are allocated via the p rice mechanism. Any change in demand or supply in one market affect s the product and factor prices within that market and also other related markets. Producers and consumers respond to these price chan ges by channeling resources from declining markets to expa nding ones. Thus, scarce resources are automatically allocated among competing uses. Suppose, in Figure 1(a), the demand in the market f or hotel accommodation increases from D 1 to D 2, resulting in a shortage of Q1 – Q 5 at the original price level P 1. The shortage creates an upward pressure on price, which signals to producer s a need for resources to be employed into the hotel market. The higher price raises the profitability of providing hotel accommo dation, thus providing the incentive for firms to produce more, thus increasing quantity supplied. Define scarcity and explain how scarcity necessitates choices regarding resource allocation A summary followed by a detailed illustration of how the price mechanism allocates scarce resources among competing needs Trigger – an  in DD for hotel Explain the price mechanism adjustment process – shortage upward pressure on price  s Figure 1 (a): Market for hotel accommodation S1 Quantity Q1 Price P2 P1 Q2 D2 S3 S4 Quantity Price Q3 D3 D1 Figure 1(b): Declining market P3 P4 Q4 0 0 Q5

Suggested Answer for H1 Prelim EQ3 To raise output, firms in the hotel market employ m ore resources, which increases the demand and prices of relevant f actors of production. Rising factor prices however, results in higher production costs for firms in other markets. For instance, the higher demand for buildings is likely to increase the rental costs fo r office buildings, causing firms in other markets to experience a high er cost of production and therefore a fall in supply. In Figur e 1 (b), the decrease in supply in the declining market is illus trated by a leftward shift of the supply curve from S 3 to S 4. The equilibrium price in the declining markets rises from P 3 to P 4 while the equilibrium quantity falls from Q 3 to Q4. At the same time, the upward pressure on prices in the hotel market will cause consumers who are unwilling to pay more to drop out of the market, thus decreasing quantity demanded. Pric e will continue to increase until P 2 where the shortage is eliminated. Overall, the increase in demand for hotel accommoda tion causes equilibrium price to rise from P 1 to P 2 and the equilibrium quantity to rise from Q 1 to Q 2. The fall in the equilibrium quantity from Q 3 to Q 4 in the declining market and the rise in the equilib rium quantity from Q1 to Q 2 in the hotel market shows how the price mechanism can adjust to allocate resources away from the declinin g market towards the production of hotel accommodation which is in h igher demand. The rise in price allows hotel accommodation, which is in shortage, to be rationed to consumers who are able and willin g to pay at the higher price P 2. In conclusion, in a free market, resources are allocated among competing needs via the price mechanism. Explain how resources may be diverted away from declining markets Show that resources are diverted towards hotel market Continuation of the price mechanism adjustment process – upward pressure on price  d Explain how the price mechanism determine the distribution of service produced Mark Scheme Knowledge, Application / Understanding and Analysis L3 Answers that explain scarcity and the rationale for resource allocation. Answers analyse thoroughly how the price mechanism influences the allocation of scarce resources to produce desired g oods and services which are distributed to consumers who are able and willing to pay. Answers in this level are characterised by well-str uctured paragraphs AND a logical flow of arguments. 7 – 10 L2 Answers may have good knowledge of price mechanism, i.e. may illustrate the working of the price mechanism or the DD/SS fra mework using an example WITHOUT making reference to resource allocation. OR Answers may explain how the price mechanism influences the allocation of scarce resources to produce desired goods and services BUT lack rigour. 4 – 6 L1 Answers may have some knowledge of the price mechan ism but with significant conceptual errors or are very descriptive. 1 – 3

Suggested Answer for H1 Prelim EQ3 Question Dissection b) Discuss how the above factors may affect the total consumer expenditure on different types of hotels in Malaysia. [15] Schematic Plan Introduction • Define total consumer expenditure (TCE). • State approach or provide an overview of the answer. Body (1) – Impact of tourism tax • Explain how tourism tax may affect SS of hotels PED analysis is relevant in determining outcome on TCE • Illustrate & explain with examples o PED<1: m.t.p in P compared to in Q TCE o PED>1: m.t.p in Q compared to in P TCE Evaluative Conclusion • Analyse the combined effects on TCE for different types of hotel. • Any relevant evaluative comment, e.g. how the impact may differ in the long run. Body (2) – Impact of economic recovery • Explai