H2 Prelim Econs Paper 2 Suggested Answers

1 Anderson Serangoon Junior College 2022 JC2 H2 Economics Prelims Suggested answers PAPER 2 Question 1 1. Global electricity prices surged in 2021, driven by the rapid economic rebound and colder winters and warmer summers. Policymakers should be taking action to soften the impacts on the most vulnerable and to address the underlying causes. Source: IEA.org, accessed August 2022 (a) Using demand and supply analysis, explain how rapid economic rebound and colder winters and warmer summers may have led to the surge in electricity prices. [10] (b) Discuss the policies that might be used by a government to alleviate the sharp increase in electricity prices. [15] Suggested answer: Part (a) Rapid economic rebound and colder winters and warmer summers are both contributing demand factors which led to a surge in electricity prices. The surge in prices could also be due to the supply of electricity being price inelastic. Electricity is central to modern life and clean electricity is pivotal to energy transitions, but in the absence of faster structural change in the sector, rising demand over the recent years could result in volatility in electricity prices. The rapid economic rebound has led to an increase in income for many households. The increase in income results in an increase in purchasing power and increase in ability and willingness to consume normal goods. Normal goods are goods where a rise in income would lead to a rise in its demand. Conversely, a fall in income would lead to a fall in the demand for a normal good such as electrical appliances . Normal goods comprise of necessities and luxury goods. Electrical appliances and electricity are complement goods, as use of electricity is essential to ensure their proper functioning of the electrical appliances . Hence the increase in income will lead to an increase in the demand for electricity by households. The increase in demand will lead to a shortage of electricity in the market and upward pressure on equilibrium price and increase in quantity. In addition, when there is a rapid economic rebound, to meet the demand for normal goods, firms would tend to increase production of goods. If the production of these goods requires the use of electricity as a factor of production, there would be an increase in the derived dema nd for electricity. Next, with more extreme weather conditions in 2021, such as colder winters, warmer summers and droughts across the globe in countries such as United States, Mexico, China and Iraq, there would be an increase in the demand for electricity by households as demand for heating purposes such as the use of heaters during colder winters and also air -conditioners to tide the people through the hot summers increase exponentially.

2 The rise in demand for electricity from D0 to D2 will lead to a shortage of electricity Q0Q3 at the original price, P0. This exerts the upward pressure on