MI_H2_ECONS_(9757_02)_Answers

2018 Preliminary Exams H2 Economics Paper 2 Microeconomics Suggested Answers 1. The price of water in Singapore will be increased by 30%. Rising costs of resources and the use of more complex development approaches have exerted upward pressure on the costs of producing and delivering water. Source: Minister for the Environment and Water Resources Masagos Zulkifli, 2017 Discuss the demand and supply factors that determine the price of water and assess which is the most important factor. [25] Question Requirement: Command word: Discuss Concept: Demand, supply and relevant elasticities concept Context: Singapore Explain why price of water increased by a large extent due to demand and supply factors and the relevant elasticities concept. Conclude which factor is the most important factor contributing to the large increase in price of water. Requirement Suggested Answer Introduction: State the variables and market to be analysed as well as the demand and supply factors. The price of water in the water market is affected by the increase in cost of production of water, increase in income and increase in Singapore’s population size. The extent of large increase in price of water is determined by the price elasticity of demand, income elasticity of demand and price elasticity of supply. Body 1: Analyse how increase in COP affects price of water As mentioned in the preamble by the Minister for the Environment and Water Resources, there is an increase in cost of producing water due to more complex ways of producing water. With an increase in cost of production, producers find it less profitable to produce water, hence supply of water falls, leading to an increase in price and a fall in quantity. To find out the extent of increase of price of water, we need to look at the Price Elasticity of Demand (PED). PED of water measures the degree of responsiveness of a change in quantity demanded of water due to a change in price of water, ceteris paribus. Given that water has a high degree of necessity as households require water in their daily activities and certain industries such as the wafer fabrication industries require the use of water in its production process, PED of water is price inelastic. Hence, an increase in price of water leads to a less than proportionate fall in the quantity demanded for water.

Requirement Suggested Answer Figure 1: Impact of increase in COP of water As seen in the diagram above, the original price is at P0. When supply falls from S0 to S1, given the price inelastic demand curve, Di, price has increased by a larger extent to Pi as compared to the price elastic demand curve, De. Since price increased by a large extent due to the fall in supply and the price inelastic demand curve, this factor is likely to be important in explaining the large extent of the increase in price of water. Body 2: Analyse how increase in i