NJC_H2_ECONS_P1_Answers

National Junior College Economics Department Preliminary Examinations 2017 Paper 1 Answer Booklet Senior High 2 H2 Economics (Syllabus 9757)

1 © NJC 2017 9757/01/A/17 Examiners’ Report for 2017 H2 Economics Preliminary Examinations- Paper 1 Case Study Question 1 (a) Compare the price of copper relative to the price of aluminium over the period from September 2012 to November 2015. [2 ] The price of copper has fallen relative to the price of aluminium. [1] The price of copper is above that of aluminium throughout the period, [1] (b) Using a demand and supply diagram, explain why the price of copper “has fallen steadily in recent years” (Extract 2). [5 ] Fall in Demand (2 marks) • There is a fall in demand due to the slowdown in th e Chinese economy. As mentioned in Extract 2, “sharp slowdown in industrial activity i n China is disastrous for copper producers.” Copper is used in the construction of e lectricity infrastructure (ie. the demand for copper is a derived demand ). As China moves from being an investment-led economy to being consumer-led, there are less inves tment projects requiring such infrastructure, resulting in a fall in demand for c opper. As China consumes 45% of the copper output, it has a significant impact on the demand for copper in the world market. • Other acceptable demand factors: o The crackdown on corruption at state-run energy com panies slowed down the construction of electricity infrastructure projects (grid-laying projects) which required the use of copper. This resulted in a fall in the derived demand for copper. o There is increasing use of aluminium as a cheaper s ubstitute of copper in the making of power distribution cables. As the price o f aluminium is about one- quarter of that of copper, it is a more attractive option to use for making power distribution cables. This caused a fall in demand for copper. • Increase in Supply (1 mark) • There is an increase in supply as more mines have e ntered the market. As mentioned in Extract 2, it takes years to build a mine. Many fir ms started investing in new mines in the past during the boom years. It was only in recent years that these mines were completed, and started to come into operation. This has result ed in the increase in supply of copper in the past 1-2 years.

2 © NJC 2017 9757/01/A/17 Figure 1 • The fall in demand and increase in supply resulted in a surplus of copper of Q 3Q4 at the original price of P 0 in the market. This created downward pressure on the price of copper, as producers reduced price in order to sell their e xcess stocks. As prices fall, the quantity demanded for copper increased, resulting in a new equilibrium at a lower price of P 1. (c ) With reference to the data, what evidence is there to suggest that the market for copper could be oligopolistic in nature? [3]