HCI_H1_ECONS_P1_ans

HWA CHONG INSTITUTION C2 Preliminary Examination 2016 Higher 1 Economics Case Study Question 1 Suggested Answer (a) With reference to Extract 3, explain why the value of the price elasticity of supply of new housing in UK might change over time. Define PES [1m] Price elasticity of supply measures the degree of responsiveness of quantity supplied of a good to a change in its own price, ceteris paribus. State + Explain that in SR: PES<1 [1m] Need time to build houses and in the short term, there is a "lack of materials and labour… bricks running out… construction workers left the industry" State + Explain that in LR: PES likely >1 [1m] Availability of materials as "brick makers reopen plants" and skilled workers as former military personnel join the construction industry and traini ng schemes help to train them to become skilled workers. [3] (b) (i) What is meant by price elasticity of demand? Price elasticity of demand measures the degree of responsiveness of quantity demanded of a good to a change in its own price, ceteris paribus. [1] (ii) With reference to Table 1, how far does the concept of price elasticity of demand help to explain the difference in the electricity charges during day and night? State that the electricity charges are higher in the day, compared to the night. [1m] Explain that the different prices charged for the usage of electricity could be due to difference in the price elasticity of demand. [2m] - Firms/producers would raise price to increase its total revenue if the demand for the good is price inelastic. However if the demand for the good is price elastic, the firm would lower price to increase its total revenue. - The difference in the electricity charges could be due to differences in price elasticity of demand. Day prices are higher as demand for electricity is more price inelastic due to higher degree of necessities in the day time where electricity is required for the functioning of the economy when most people are awake, e.g. business and production activities, school, households etc. Night prices are lower as demand is more price elastic due to lower degree of necessities. Most activities are not essential to be conducted in the night when most people will be resting. - In this case, the electricity company, Good Energy, would charge a higher price during the day, compared to the night. Explain that the different prices charged could be due to difference in demand (for electricity to function the economy) and supply (cost of production). [2m] - During the day (peak period), there is a higher level of demand for electricity to function the economy. Thus, the demand for electricity during the day (peak period) is higher, compared to the demand for electricity at night (off-peak period). [6]

- The cost of production is also higher in the day (peak period) compared to the night (off-peak period). During the night (off-peak period), nuclear a