2022 JC2 H2 Prelim Essay Q1 (Suggested Answers)

1 The sales volume of electric cars increasesdespitetheriseinmaterial cost. Highpetrolprices also encouraged drivers to switch away from petrol cars to electric cars.Governments are considering providing subsidies to encourage adoption of electric cars. (a) Explainwhysalesvolumeofelectriccarsincreasesdespitetheriseinmaterial cost.[10] (b) Discuss whether providing subsidies is the best way to further increase salesvolume of electric cars. [15] Suggested Answers for 2022 H2 Prelim Exam – Essay Q1 Question Analysis (3’Cs’ Approach): Command ExplainMaking clear of causal links, supported by economic analysis.Economic analysis: Demand and supply framework Content Rise in material cost how does it affect the market of electric cars? Demand and Supply factors to explain why sales volume of electric carsincrease (Qty)What are demand and supply factors?What are the relevant elasticity factors?What framework and tools of economic analysis to use? Context No specific context Question Approach:This question tests on the demand and supply factorstoexplainwhysalesvolumeof electriccars increase despite rising material cost. Besides demand and supply factors, there can beapplication of elasticity concepts such as PES and XED. Suggested Answer: Introduction (Explain impact of rising material cost on Qty):● Sales volume of electric cars is also known as equilibrium quantity. It is determined bymarket forces such as demand and supply factors.● A rise in material cost such as car body parts can lead to a higher COP of electric cars,profitability falls, producers less willing and able to produce at every price level, hencesupply falls and quantity (sales volume) of electric cars will decrease, ceteris paribus.● However, there are other demand and supply factors changes that will leadtoincreaseinquantity of electric car (sales volume of electric cars). Body Paragraph 1: Increase in demand

● As mentioned in the preamble, factors like high prices of petrol andmoreawarenessthatelectriccarsgenerallyemit lesser pollutionduringitsusagecomparedtopetrol carsleadtoachangeintasteandpreferencestowardselectriccars. Sincepetrol carsrequiredtheuseof petrol tokeepthesecarsmoving, withtheriseinpetrol prices, it will leadtoanincreaseoverall cost to own a petrol car and also more pollutive when driven around, car ownersmight prefer switching over to electric cars that are more environmentally friendlyandnotsubjected to immediate changes in petrol prices. Demand for electric car is likely toincrease. The demand curve shifts rightwards from D1 to D1, Qty increases. Body Paragraph 2: Increase in supply● Overall supply of electric cars is likely to increase despite rising cop.● Due to improvement in technology such as better lithium-ion batteries and more energyefficient car batteries with breakthrough in research and development for electric carsproducers find it profitable producers are more willing and able to supply at all pricelevelssupply for electric car islikelytoincrease. ThesupplycurveshiftsrightwardsfromS0 to S1, Qty increases.● Furthermore, therecouldbeanincreaseinnumber of sellersandexpansionof theelectriccar marketbesidesTesla, Hyundai, morepetrol car companiessuchasFord,Volkswagenand Nio are also expanding into the electric car market, hence increasing the number ofsellersnowwithmoreproducersarewillingandabletosupplyat all pricelevelssupplyfor electric car is likely to increase. The supply curve shiftsrightwardsfromS0toS1, Qtyincreases. Body Paragraph 3: Simultaneous DD SS shift ● Considering that there is an increase in demand and other factors that will increase anddecrease supplysimultaneously, Qtyisindeterminateandtheoutcomeof qtyisdependenton direction and relative extent of shift.● Supplyislikelytooverall still increaseasrisingmaterial cost suchasmorecostlycarbodyparts does not contribute largely to the overall cost of production of an electric car. Thelargest component of cost of productionliesonthelithium-ionbatterieswhereitscost hasdrasticallydecreaseswhichalsoencouragemorecar companiesthat solelysell petrol carsto also venture into electric car market. Overall, leading to supply of electric car increases.

● Demand increases and supply increases, overall equilibrium quantity of electric car willincrease despite rising cost of materials. Asseenfromthediagramabove, theincreaseindemandandanincreaseinsupplyleadstoareinforced increase in quantity of electric car. Body Paragraph 3: Cross elasticity of demand and price elasticity of supply● While thedemandincreaseandsupplyincreasecouldcontributetoriseinsalesvolumeofelectric cars due tothereinforcedeffect, XEDandPESconceptscouldbeusedtoexplainwhy quantity increase despite rising material cost.● Thecrosselasticitydemandfor electriccar withpetrol carispositiveandlikelytobeXED>1, which shows that theyarerelativelyclosesubstitutesasbothpetrol carsandelectriccarsareabletosatisfythesamewantsoftheconsumersbybeingcomfortableformof transportation to consumers destinations without any much differences. Hence whenprices of petrol cars increase, it will leadtomoreconsumersareswitchingover toelectriccars, it will leadtoamorethanproportionateincreaseindemandforelectriccars,leadingtorightward shift of demand and thus sales volume of electric cars will increase more thanproportionately.● The supply of electric car is also relatively price elastic due to the development oftechnologyandstreamlineof theproductionprocessthat speedsuptheproductiontimeforelectriccarsasit takelesser timetoproduce. Thuswithanyincreaseinpriceofelectriccarduetoafall insupply(suchasrisingmaterial costs),itwill leadtoamorethanproportionateincreaseinquantitysuppliedascar producersareabletorespondquicklytothechangesinprices.● Therefore, withdemandfor electriccarsisclosesubstitutefor petrol carsandsupplybeingprice elastic, it can also lead to an increase in sales volume of electric car.ConclusionIn conclusion, a rise in demand, coupled with an overall increase in supply despite risingmaterial cost are the main reasons behind the increase sales volume of electric cars. Inaddition, electric car being a close substitute to petrol cars where its XED is>1 and its supplybeing relatively price elastic will allow producers respond quickly to any increase in prices ofelectric car sale volume to increases.

Mark scheme Knowledge, Understanding, Application and Analysis L3 For a well-developed answer that thoroughly explains how risingmaterial cost affect supply and other possible demand and supplyfactors to explain for sales volume of electric cars increasing. Answer demonstrates excellent knowledge and understanding ofdemandandsupplyanalysis, includingsimultaneousshiftandconceptson elasticity. 8 - 10 L2 For an under-developed answer that explains howexplains howrisingmaterial cost affect supply and other possible demand and supplyfactors to explain for sales volume of electric cars increasing. Answers may not have included including simultaneous shift andconcepts on elasticity. 5 - 7 L1 For a largely irrelevant or smattering answer that demonstrateslittle/someknowledge&understandingof howrisingmaterial costaffectelectric car market and limited use of relevant demand and supplyfactors to explain increasing sales volume of electric cars. Answer may contain conceptual errors. 1 - 4 Marker’s Comments

Discuss whether providing subsidies is the best way to further increase sales volume of electriccars. [15] Question Analysis (3’Cs’ Approach): Command ‘Discuss’ (whether)2 sided arguments + Stand. Support answers with economic analysisContent Consider 2-3 ways that can further increase sales volume of electric carsincluding subsidies. Explain how subsidies works to increase qty of electric cars.Consider the limitations/disadvantages. Explain how other ways work to increase qty of electric cars and consider theirlimitations/disadvantages. What are the criteria to determine which is the best way to further increase salesvolume of electric cars?Context Electric cars Question Approach: T