SRJC H2 ECONS 9757 P1 QP

1 © SRJC 9757/01/JC2PreliminaryExam/2017 [Turn over ECONOMICS 9757/01 Higher 2 PAPER 1 11 September 2017 2 hours 15 minutes Additional Materials: Answer Paper SERANGOON JUNIOR COLLEGE JC2 Preliminary Examination READ THESE INSTRUCTIONS FIRST Write your name and civics group on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use an HB pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all questions. Start your answer to each case study question on a new sheet of writing paper. Fasten your answers to each question separately. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists of 7 printed pages and 1 blank page.

2 © SRJC 9757/01/JC2PreliminaryExam/2017 Answer all questions. Question 1 The automobile and energy industries Figure 1: The world price of lithium (US$) Source: Metalary, accessed Aug 2017 Extract 1: The electric car revolution is accelerating Electric cars will outsell fossil-fuel powered vehi cles within two decades as battery prices plunge, turning the global automobile industry upside down and signalling economic turmoil for oil-exporting countries. The Bloomberg New Energy Finance (BNEF) forecast says adoption of emissi on-free vehicles will happen more quickly than previously estimated because the cost of building cars is falling so fast. The seismic shift will see electric cars account for a third of the global automobile fleet by 2040 and displace about 8 million barrels a day of oil production - more than the 7 million barrels Saudi Arabia exports today. China, the US and Europe will drive demand for battery powered cars over the next 25 years, according to BNEF. These governments which have already been the most advanced in providing subsidies and installing charging points, will reap the benefits sooner than other emerging economies like India. "Electric cars are intrinsically cheaper than gas or oil fuelled cars because they're simpler and their maintenance is a lot easier,” said Francesco Starac, Chief Executive Officer of Enel SpA, in an interview in Rome. While traditional car suppliers may be hurt by electric vehicle growth, some commodities will get a lift. Demand for lithium will rise significantly when electric vehicles become mainstream as the commodity is a vital component for lithium-ion batteries. Extraction of lithium from brine requires a lengthy evaporation process that lasts between 8 months to three years. Source: Bloomberg, July 2017 $3,000 $4,000 $5,000 $6,000 $7,000 2008 2009 2010 2011 2012 2013 2014 2015

3 © SRJC 9757/01/JC2PreliminaryExam/2017 [Turn over Extract 2: Should Tesla be worried about competition? Tesla Superchargers are a network of 480-volt fast-charging stations built by Tesla Inc. to allow longer journeys for their all-electric manufactured vehicles through quick charging of the vehicle's battery packs. Such convenient charging options to its car users has given Tesla a competitive edge, given that no other player has been able to replicate this kind of network so far. While other car makers are working on fast charging alternatives, competing with Tesla on the charging network might be tough for other automakers, given its first mover’s advantage. Tesla is the only automaker exclusively developing electric cars on a significant scale and this gives it an edge over other automakers that also need to focus on their traditional models. Source: Forbes, 4 Jan 2016 Extract 3: Intense competition leads to low profit margins for automakers Japanese automakers Toyota and Honda have among the highest profit margins in the business at 13.8% and 13.1%, respectively. In contrast, General Motors (GM) has a relatively lower margin of 8.5% and Ford the lowest with a margin of 8.2%. The biggest reason for the difference between Japanese and American manufacturers’ profit margins is the weak Japanese yen. The yen depreciated by 29.2% against the US dollar over the past two years. Toyota exports about 56% of the vehicles it manufactures in Japan—more than both Nissan and Honda. This helps it to achieve higher margins. Japanese automakers are also known for using common components across different models. This results in significant cost savings for the manufacturer. However, in the US, labour problems and significant healthcare costs contribute to their lower profit margins. The automobile industry in general has lower profit margins primarily because of intense competition and compliance to stringent fuel emission standards and fuel efficiency requirements. Source: Market Realist, 5 Feb 2015 Extract 4: Car industry: What Australia could learn from state support around the world Car manufacturing is a proud pillar of the western world's industrial history, but the industry was facing serious problems which afflicted automotive superpowers such as the US, the UK, France and now Australia, where Toyota will close all of its factories by 2017. But in recent years some of those countries have at least stopped the decline of the industry. Government intervention has been key in rebuffing the global pressures such as cheaper labour elsewhere, deteriorating consumer confidence and excess factory capacity that have seen car plants shut all over the world since the credit crunch exposed an over-expanded and over-leveraged industry. The US was the most successful example of intervention with the managed bankruptcies of GM and Chrysler which were supported financially by the government. "Despite being seen as a free market, the US had an industrial policy to rescue those car manufacturers and get them to shift to new low- carbon vehicles," said Professor David Bailey of Aston University. Without government intervention, the US car industry would not have survived on its current scale, he said. If it were a free market, two of Detroit's biggest companies would have gone bankrupt as they were not fleet-footed enough for a global car market that had seen the likes of Toyota enter GM and Chrysler's backyard. But the Bush and Obama administrations took the view that the collapse of two- thirds of the US automobile industry would have ramifications that stretched far beyond the industry, with hundreds of thousands of jobs at risk in the supply chain. Source: The Guardian, 10 Feb 2014

4 © SRJC 9757/01/JC2PreliminaryExam/2017 Extract 5: Big six energy firms braced for government price crackdown UK Prime Minister, Theresa May, said the energy market was not working after a flurry of price rises by the big six companies – British Gas, E.ON, EDF Energy, npower, ScottishPower, and SSE – and dozens of smaller suppliers. A government crackdown is expected, most likely in the form of a price cap on the standard variable tariffs affecting nearly two-thirds of households. Steep hikes in fuel bills by the big six, who control more than 80% of the market, have prompted calls for action by consumer groups. The suppliers have blamed a series of factors, from smart meter installation costs and green energy policies to, most frequently, rising wholesale energy costs. But the energy regulator Ofgem said in January that while wholesale costs had gone up, they were not large enough to warrant passing on to consumers. Source: The Guardian, 17 Apr 2017 Questions (a) Describe the trend in the world price of lithium from 2008 to 2015. [2] (b) With reference to Extract 1, what can you conclude about the price el