VJC_H2_ECONS_P2_Suggested_Answers

1 Suggested answers to 2018 VJC H2 Prelims Paper 2 Question 1 Electric Vehicles (EVs) that run on lithium batteries are gaining popularity due to the growing concern over air pollution. Advancements in EV technology has also led to cost improvements for carmakers. Discuss the impact of the above events on the market for electric vehicles and its related markets. [25] Introduction Prices of electric vehicles and prices of its related markets are determined by demand and supply in a free market. Demand refers to the quantity of a good or service that consumers are willing and able to buy at various price, in a given time period, ceteris paribus. Supply refers to the willingness and ability of a frim to offer a good or service for sale at various prices in a given time period, ceteris paribus. This essay seeks first to explain how price and quantity of EV and its related goods can be affected by the various events and a conclusion can then be made about the total revenue of each market. Body 1) Market for Electric Vehicles (EV) Rise in demand for EVs due to change in taste and preferences EVs are gaining popularity as governments worldwide are creating more awareness of the benefits to the environment of switching to EVs. This change in taste and preference towards EV will result in a rise in demand for EV as c onsumers increase their willingness to consume EVs, causing the demand curve to shift rightwards from D1 to D2 Rise in supply for EVs due to fall in marginal cost of production Advancements in EV technology could lead to more innovative and cost efficient production processes. These improvements in production methods is likely to lead to a fall in marginal cost of production, resulting in an increase in supply as production is now more profitable and hence firms are more willing to supply the good. This causes the supply curve to shift rightwards from S 1 to S2 Impact on P, Q and TR Extent of rise in supply is likely to be greater than the rise in demand of EVs The rise in demand and rise in supply of EVs will lead to an unambiguous increase in the equilibrium quantity of EVs. However, the impact on the equilibrium price will depend on the extent of the shifts in demand and supply. Currently, the DD for EV may be rising but to a smaller extent as consumers may not be very receptive to embrace the relatively new technology and a new type of vehicle. In addition, the lack of charging stations in the country may also make it less convenient to own an EV deterring consumers from switching. Government schemes to incentivize the use of EV may also have been introduced rather recently and it would take time for consumers to react and adjust their consumption patterns. On the other hand, with advancement in technology, the efficiency gains from improved methods of production may be significant such that marginal cost of production is significantly reduced, hence