NJC H2 ECONS P2 Answers

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

 NJC 2017 9757/02/A/17 1 Examiners’ Report for 2017 H2 Economics Preliminary Examinations- Paper 2 1 Mobile devices such as smartphones are available in different models. The recovery of the global econo my and the rise in labour cost are likely to affect the sales of various models of smartphones in different ways. (a) Explain how elasticities of demand can assist in un derstanding the effect of each of these changes on the sales volume of different models of smartphones. [10] (b) Assess the likely combined impact of both of these changes on the revenue earned from the sale of different models of smartphones. [15] Suggested Answer: Introduction • Define sales volume. • The recovery of the global economy and rise in labo ur would cause changes in the market equilibrium, a ffecting both equilibrium price and quantity. • The use of price elasticity of demand (PED) and inc ome elasticity of demand (YED) can be used to illus trate the extent of change in the market for smartphones. Body 1: Use of PED concpet Identify and explain the supply factor that would cause the change in quantity of smartphones • Supply Factor: Rise in labour cost → increase in cost of produc)on fall in quantity supplied at every price levels supply decreases → equilibrium quan)ty decreases ( movement along the demand curve), hence fall in sal es volume • However, the extent of the fall in sales volume dep ends on price elasticity of demand for different mo dels of smartphones • Define PED • The magnitude of the PED value tells us the type of demand the good has, i.e.: demand is price elastic (PED>1) or price inelastic (PED<1) • Different models of smartphone have different PED value. • Smartphone models such as iPhone 7 Plus, Samsung Galaxy S7 are more luxurious. • Demand for these smartphones are relatively price elastic with |PED| > 1. • Hence given a rise in price quantity demanded for l uxury smartphone models will decrease more than proportionately. • Sales volume thus decreases by a larger extent, from Q 0 to Q 1. • Smartphone models includes basic specifications. • Demand for these smartphones are relatively price inelastic with |PED| < 1. • Hence given a rise in price, quantity demanded for smartphones decreases less than proportionately sales volume thus decreases.

 NJC 2017 9757/02/A/17 2 Body 2: Use of YED concept Identify and explain the demand factor that would cause the change in quantity of smartphones • Rise in income, demand can increase or decrease depending on the sign of YED • For normal smartphones demand will increase given an increase in income level • Smartphones that are seen as necessities (income-in elastic), YED < 1, demand will increase less than proportionately relative to the change in income resulting in a smaller increase in sales volume. • Luxury smartphones (income-elastic), YED > 1, deman d will increase by a larger extent, resulting in a significant increase in sales volume. • Insert diagram. • Whereas for inferior smartphones (negative income-elastic), YED < 0, demand will decrease given a rise in income, leading to a fall in sales volume. Conclusion: • Rise in the labour cost of smartphone manufacture w ill cause supply of smartphones to fall and equilib rium quantity to fall, however the extent of the fall in sales volume will depend on the PED value of the d ifferent smartphone models • Rise in income can cause demand of smartphones to i ncrease or decrease depending on the magnitude of Y ED and hence sales volume can increase or decrease Mark Scheme: Levels Description L3 (8-10) • EXCELLENT breadth that considers the following econ omic concepts in explaining multiple and balanced perspectives, viewpoints, relationships and factors. ALL points chosen should be of relevance and significance in answering the question. • Consider both kinds of PED values (less and more than 1) and two out of three kinds of YED values (YED<0, 0<YED<1 and YED>1) • EXCELLENT depth in economic analysis that reflects the following in ALL explanations. There was an accurate use of economic concepts, clear elaboratio n, and precise use of economic terminologies, language and phrasing in ALL explanations. • Explanation the factors determining the PED and YED values of different model of smartphones • Include the definition, sign and magnitude of PED and YED concepts in the explanation Figure 1: Market for smartphone - Impact of a decrease in Supply on smartphones of different PED values 0 Qty of smartphones Price DE P1 Q1 S1 S0 DIN Q2 P2 e0 e2 e1 P0 Q0

 NJC 2017 9757/02/A/17 3 Th e answer should also be supported by: • Well-labelled and well-referred to diagram(s) / too l(s) of analysis drawn with precision (where appropriate). • Relevant examples and accurate use of facts. • Logical structure. L2 (5-7) • GOOD breadth that considers the following economic concepts in explaining multiple and balanced perspectives, viewpoints, relationships and factors. MOST points chosen should be of relevance and significance in answering the question. • At least 3 out of the following explained: PED<1 PED>1 YED<0 0<YED<1 YED>1 • GOOD depth in economic analysis that reflects the following in MOST explanations. There an accurate use of economic concepts, clear elaboration, and pr ecise use of economic terminologies, language and phrasing in most explanations. • Some explanation of the factors determining the PED a nd YED values of different model of smartphones • May not include the definition, sign and magnitude o f PED and YED concepts in the explanation The answer should also be supported by: • Diagram(s) / Tool(s) of analysis that may not be we ll-labelled, may not be well-referred to and may not be drawn with precision (where appropriate). • Example(s). • Logical structure. L1 (1-4) • INSUFFICIENT breadth that considers the following e conomic concept(s). Point(s) chosen may be of relevance but may not be of significance in answering the question. • INSUFFICIENT depth in economic analysis that may reflect the following: • Lack of accuracy in the use of economic concepts, lack of clarity in elaboration, and lack of precision in the use of economic terminologies, language and phrasing.

 NJC 2017 9757/02/A/17 4 Suggested Answer for part (b) Introduction: • Define sales revenue to be the product of price and quantity • The combined impact of a rise in labour cost and a rise in income may increase or decrease the sales r evenue, depending on the PED and YED of the smartphone models Body: All possible scenarios as below: PED Change in TR given an increase in labour cost and the PED value in the previous column YED Change in TR given an increase in income and the YED value in the previous column Combined impact on TR Economical Smartphone Models CASE 1 < 1 increase 0<YED< 1 increase increase Luxury Smartphone Models CASE 2 > 1 decrease > 1 increase indeterminate Inferior Smartphone Models CASE 3a < 1 increase < 0 decrease indeterminate CASE 3b > 1 decrease < 0 decrease decrease Evaluation: • The sales revenue for the economical smartphone mod els will increase while the sales revenue for infer ior smartphone models will decrease. For the luxurious smartphone models, the outcome on sales revenue is uncertain. However, as the demand for such models is income elastic, it is likely that the increase in demand is more significant than the decrease in supply therefore sales revenue increases. • The assumption of ceteris paribus doesn't hold in r eal world, other factors such as c