2022 SH2 H2 Prelim EQ1 (Suggested answer).docx

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 elab