RVHS_H2_ECONS_P1_CSQ1_Soln

© RVHS 2017 9757 [Turn over RVHS 2017 Y6 H2 Prelim II CSQ1 Suggested Answers ai. Given the information contained in Table 1, ide ntify the region that had the greatest impact on world oil prices. Justify your answer. [3] • Middle East [1] • Total consumption in the Middle East had an overal l percentage increase of 1.31 percent (DD↑) , which was outstripped by its total production which had an overall percentage increase of 5.44 percent (SS↑) • It had the greatest net increase in oil production (i.e. increase in SS outweighs the increase in DD) compared to the rest of the regions given, causing world oil prices to fall . [Award 1m for identifying the region; 2m for justifying the answer] aii. Besides the return of US oil and Libyan oil pu shing up supply, explain one other reason that has contributed to the change in world oil prices. [2] • According to Extract 1, given the current slowdown in the Chinese and EU economies have led to a poor outlook , consumers are not optimistic about their employment prospects for the future. Thus, expectations of lower future income will lead to a fall in their current demand for final goods and services like cars. The derived demand for oil , which is a factor input in the production of cars, will thus fall. b. What can you conclude from the evidence in Extract 1 about the likely value of the price elasticity of demand of oil? [2] • The value of price elasticity of demand of oil is likely to be less than one (i.e. demand is price inelastic) • Given the increase in supply of oil, according to Extract 1, due to the return of US oil and Libyan oil to the market, if demand for oil is price inelastic due to it being a necessity since it (an industrial raw material and commodity) is a key factor input in the production of many goods and services , there will be a sharp fall in prices.

© RVHS 2017 9757 2 c. Explain how OPEC can ‘stabilise prices by cutting production’ of oil. [3] • OPEC, the cartel of major oil producers’ supplies over 30% of the world’s oil (i.e. market share) would fix production quotas among member sta tes. Through the agreement, OPEC effectively acts as a monopoly for oil setting quan tity to be at the profit-maximizing level of output where MC = MR. • However, when price of oil fell, it threatened the survival of smaller cartel members/ “more vulnerable members”. • If OPEC were to cut the production of oil, it will reduce the total market oil supply, propping up oil prices, achieving the effect of stabilising prices. d. Describe the likely market structure of China’s electric car industry. [2] • Oligopoly. There are a few large dominant firms (V olkswagen, BMW & General Motors). OR high barriers to entry (economies of scale, Extract 2) and branding (Extract 4). e. Discuss the factors affecting the choice of comp etition strategies in China’s electric car industry. [8] Firms within the electric car market can und