SRJC_H1_ECONS_ans

1 © SRJC 8819/01/JC2PreliminaryExam/2016/SuggestedAnswers SERANGOON JUNIOR COLLEGE 2016 JC2 H1 ECONOMICS PRELIMINARY EXAMINATION SUGGESTED ANSWERS SECTION A – QUESTION 1 (a) (i) Using Figure 1, describe the trend of oil prices from 2005 to 2016. [2]  Overall fall in oil prices  Sharp fall in oil prices from 08 to 09 [1] OR from 2014 onwards (ii) Using relevant case material, account for the trend in oil prices from 2014 onwards. [4]  Ext 2 “global demand particularly from China, appears to be dropping” OR Ext 3 “slowing China economy”  Implies a global economic slowdown had led to greater uncertainty and pessimism which resulted in a fall in economic activities. Hence a fall in derived demand for oil especially from a large buyer like China  Ext 2 “fracking in USA” created an exponential growth in oil production which led to a rise in global supply of oil.  Both fall in demand & rise in supply reinforced each other to result in a large fall in price of oil (b) Explain the relationship between oil price and food prices as seen in Figure 1. [3]  Direct relationship: fall in price of oil  fall in price of food  Fall in price of oil rise in Qdd of oil, cp.  Since biofuel & oil are substitutes which satisfy the same want, ie generates energy to drive economic activities  fall in demand for biofuel  Fall in TR for biofuel producers since both P & Q fall  less resources are allocated to the production of biofuel  Since biofuel and food are in competitive supply as they require the same inputs such as corn and sugarcane, more resources are diverted to the production of food  rise in supply of food  surplus  fall in price of food.  Thus there is a direct relationship between the prices of these 2 goods (c) Account for the value of price elasticity of supply for oil. [2]  Define PES: Degree of responsiveness of quantity supplied of a good to a change in its price, ceteris paribus.  PES<1: When supply of crude oil is relatively price inelastic, a price rise will lead to a less than proportionate rise in quantity supplied, ceteris paribus.  Reason being it takes time to locate oil deposits and considerable effort is needed to extract it from the ground. Oil drilling is part of a very long and complicated process used to locate, extract, and pump oil from wells. (d) Using Extract 3, explain the likely effects of the ‘growth in supply’ (Extract 1) on producers’ revenue in the markets for oil and one other related product. [6] A growth in supply of crude oil ceteris paribus, will result in a large fall in its price, given PED < 1

2 © SRJC 8819/01/JC2PreliminaryExam/2016/SuggestedAnswers (1) Revenue of oil producers