2022 SH2 H2 Prelim EQ1 (Suggested answer)

1 Microchips are a crucial element in the manufacturing of final goods such as cars andconsumer electronics. COVID-19 pandemic in 2020 had lockdowns which resulted inbottlenecks in the supply chain for semiconductors and changed preferences towork-from-home. Global economic growth is projected at -4.9% in 2020. (a) Explainwhyasignificant shortageof microchipsexistsduringCOVID-19pandemicin2020. [10] (b) Discuss whether consumers or producers are more likely to bear the cost of thechange in microchip prices.[15] Part (a) suggested answer Introduction ● Theevents mentionedinthepreamblecausedanincreaseindemandandadecreaseinsupplyof microchips thus resulting in a shortage of microchips. Body: Demand for microchips ● Duetothepandemic, global growthisprojectedtobeat-4.9%.Thismeansthatmosteconomieswould be in a recession in 2020. There will be a decrease in thedemandfor car (output), thederived demand for microchips will decrease.● However, thepandemic alsobrought about lockdowns andwork fromhomearrangements. Dueto the work from home arrangement, there is a change in taste and preference towardsconsumingmoreelectronic products suchas laptops, monitors andprinters. Asmicrochipsisaninput factor to manufacture theelectronic products, withtheincreaseinthedemandfor laptops(output), the demand for microchips will increase.● The fall in income and the change in taste and preference have contradictory effects on thedemand for microchips.● The overall increase in demand for the microchips is illustrated by the rightward shift of thedemand curve from D0 to D1 in Figure 1. Fall in supply of microchips ● The supply of microchips has fallen due to the supply shock/government policy.● WiththeCOVID-19lockdowns across different countries, thegovernment policy has causedthesupply of microchips to decrease as theproducers arefacedwithsupply chaindisruptions andproduction constraints. Hence, supply of microchips decreases andis illustratedby theleftwardshift in supply from S0 to S1 in Figure 1.

Fig 1: Market for microchips Significant shortage of microchips ● The shortage of microchips is significant due to large increase in demand andlargefall inthesupplyof microchips.● Hence, thelargeextent of rightwardshift indemandandleftwardshift insupplyhaveresultedinsignificant shortages of microchips. Conclusion ● There is a significant shortage of microchips, due to the high demand and fall in supply.

Mark schemeLevels Descriptors L38 - 10 For an answer that demonstrates knowledge, understanding, application and analysis: EXCELLENTbreadththatconsidersthefollowingeconomicconceptsinexplainingmultipleandbalancedperspectives,viewpoints,relationshipsandfactors.ALLpointschosenshouldbe ofrelevanceandsignificancein answering thequestion. EXCELLENTdepthin economic analysis that reflectsthe following in ALL explanations.✔ Accurate use of economic concepts, clear elaboration, and precise use ofeconomic terminologies, language and phrasing. The answer should also be supported by: Well-labelled and well-referred to diagram(s) / tool(s) of analysis drawn with precision(where appropriate). Relevantexamples andaccurateuse of facts. Logicalstructure. L25 - 7 For an answer that demonstrates knowledge and understanding but lacks application and analysis: At least GOOD breadth that considers the following economic concepts in explainingmultiple and balanced perspectives, viewpoints, relationships and factors. MOST pointschosen should be ofrelevanceandsignificanceinanswering the question. At least GOOD depth in economic analysis that reflects the following in MOSTexplanations.✔ Accurate use of economic concepts, clear elaboration, and precise use ofeconomic terminologies, language and phrasing. The answer should also be supported by: Diagram(s) / Tool(s) of analysis that may not bewell-labelled, may not bewell-referredtoand may not be drawn with precision (where appropriate). Example(s). Logicalstructure. High L13 - 4 For an answer that demonstrates knowledge but lacks understanding, application and analysis: INSUFFICIENTbreadththat considers thefollowingeconomic concept(s). Point(s) chosenmay be of relevance but may not be of significance in answering the question. INSUFFICIENTdepthin economic analysis that may reflectthe following:● Lack ofaccuracyintheuseofeconomicconcepts,lackofclarityinelaboration,andlack of precision in the use of economic terminologies, language and phrasing. Low L11 - 2 For an answer that: Is irrelevant in analysis but may contain an introduction that addresses the question orcontains no economic analysis but may containafewstatements that arerelevant totheconcepts required to answer the question. Contains fundamental conceptual errors in analysis.

Part (b) suggested answer Introduction ● The increase in microchips costs will be a burden on the consumers of cars and consumerelectronics and cause a fall in consumers’ surplus. ● Thecars andconsumerelectronicsmanufacturersalsohavetobearpartoftheincreaseincosts,thoughthefull impact onthecarsandconsumerelectronicsmanufacturersalsorequiresacloserlook at theimpact of increaseinpriceof microchips ontheir total revenueof car andconsumerelectronics. ● Whether or not theconsumers or theproducers of carsandconsumerelectronicsbearagreaterburden depends on the relative price elasticity of demand and price elasticity of supply. Body Body 1: Explain the impact of increase in microchips costs on the consumers and producers of microchips ● The increase in price of microchips will have an impact on the consumers of microchips(smartphone/laptop/car manufacturers) and the producers of microchips.● For consumers of microchips (smartphone/laptop/car manufacturers), thereis lack of substitutesavailablefor microchips andhighdegreeof necessity tousemicrochips toproducetheir output.Hence, demandfor microchips is relatively price-inelastic, asillustratedbythedemandcurveDDin Figure 1 below.● In contrast, supply of microchips is likely to be price elastic due to shorter manufacturingtimeperiod and the existence of spare capacity. Hence, producers of microchips may be able torespond quickly tothehigher market prices by increasingthequantity suppliedof microchips ofby increasing production. This is illustrated by the supply curve in Figure 1 below.● In Figure 1 below, the per unit cost increase is givenby bP1 , whereconsumers bear agreaterincidence of price increase of P0 P1 and the producersbears a smaller incidence of bP0. Figure 1: Impact of increase in microchips costs on the consumers and producers of microchips

In the consumer electronics (as smartphones and computers) market, consumers rather than theproducers may bear a greater burden of the increase in costs of microchips. ● For smartphones and computers, there is a high degree of necessity to use thesedevices foreducation, communicationandentertainment. Hence, demandconsumer electronics is relativelyprice-inelastic, as illustrated by the demand curve DD in Figure 1.● In contrast, supply of consumer electronics is likely to be price elastic due to shortermanufacturing time period and the existence of spare capacity. Hence, producers of consumerelectronics may beabletorespondquickly tothehighermarketpricesbyincreasingthequantitysupplied of consumer electronics of by increasing production. This is illustrated by the supplycurve in Figure 1 below.● In Figure 1 below, the per unit cost increase is givenby bP1 , whereconsumers bear agreaterincidence of price increase of P0 P1 and the producersbears a smaller incidence of bP0 . Evaluative conclusion ● The extent of burden of anincreaseinmicrochips costs onconsumers andproducers dependson the relative price-elasticity of demand (PED) and price-elasticity of supply of the goods itself.● The extent of burden of anincreaseinmicrochips costs onconsumers andproducers dependsonthe extent ofshiftofsupplygiventhedifferingrelativeimport