SRJC H2 ECONS P2 Essays Suggested Answers

1 ©SRJC 9757/02/Prelims/2018 2018 JC2 Preliminary Examination 9757 H2 Economics Paper 2 Suggested Answers 1 The rising price of healthcare is coming under closer scrutiny as medical inflation rate climbed up to 15% in 2015. (a) Explain the role of prices in addressing the fundamental problem of economics. [10] (b) Discuss the relative importance of demand and supply factors in influencing Singapore’s medical inflation rate. [15] Introduction The fundamental problem of economic is that of scarcity where there is limited resources to fulfil the unlimited wants. As a result that there is a need to make decision about resources allocation regarding what & how much to produce, how to produce and for whom to produce. This essay aims to explain how price mechanism will help address the above decisions such that resources will be allocated efficiently. Body P1: In a free market economy, prices help determine what and how much to produce The free play of market forces of demand and supply determines price which then acts as a signal to firms to allocate scarce resources. The consumers signal their demand for the goods by offering a price that they are willing and ab le to pay for the good. The producers will then respond by producing the quantity of the goods that they are willing and able to produce for the price that is offered to them. For example, in Figure 1, the initial equilibrium price is at P1 and the equilibrium quantity of private condominium exchanged between consumers and producers is Q1. If demand for private condominium rises and supply remains unchanged, a shortage will occur as quantity demanded is greater than quantity supplied. As a result unsuccessful consumer will signal their willingness and ability to purchase the good by bidding up the prices. Producers will then respond to the price signal by increasing allocating more resources towards the production of it to increase the quantity supplied since it is now more profitable to do so. At the same time consumers who are unwilling to pay the higher price will reduce the quantity demanded. Price will rise until new equilibrium is reached at price P2 and quantity Q2. At output Q2, quantity demanded equals to quantity supplied and consumer surplus and producers surplus are maximised as shown by area P2ce1 and P2ep respectively. The right amount of goods is thus produced from society’s point of view, assuming no externalities. p e e1 c Price market for private condominium Q1 Q2 P2 Qty D1 D2 S1 P1

2 ©SRJC 9757/02/Prelims/2018 L1: Hence prices which is driven by demand and supply forces helps address the problem of what goods and how much to produce such that there will be efficiency in resource allocation. P2: In addition, prices also help determine how to produce Firms make decisions on how to produce based on their profit maximising objective. The decision making process concerns on how to pr oduce include many decisions, for example, should the firm use more machines or labour, where should the factory be located and how should the factors of production should be combined to generate an efficient combination of resources to ensure a profit maximising level of output. In the long run all inputs are variable and therefore the firm is able to choose the best combination of inputs that gives the firm the lowest unit cost possible. Firms tend to use more of resources with lower prices and less of resources with higher prices. If capital is relatively cheaper than labour, then to lower his costs, the firm will switch to using more capital and less labour. For example the rising labour cost in Singapore as seen many restaurants turning to using iPad to take orders instead of relying on waiter. L2: Thus prices of factor of production will help firms determine how to produce such that the least cost combination of input is used and there is no wastage in the use of resources. P3: Lastly, prices also help determine for whom to produce Different people are willing and able to pay different prices for a good. This is partly due to differences in incomes and tastes and preferences. In a market economy, consumers’ dollar votes or the willingness and ability of consumers to pay for a good determine the pattern of resource allocation. Those who are able and willing to pay a higher price will exert a greater influence on resource allocation. L3: This illustrates that price consumers are willing to pay largely influences resource allocation decisions where the consumer is king in the free market. Conclusion Due to the problem of limited resources and unlimited wants, factors of production must be utilised as efficiently as possible to produce the goods and services most desired by the society. Economists believe that prices that are driven by demand and supply forces will address the problem without government intervention. L3: 8-10 • Good knowledge and explanation of the fundamental economic problem • Clear explanation of how prices can help address the question of what and how much to produce, how to produce and for whom to produce. • Answer should also show the role of prices in achieving allocative and productive efficiency • Detailed price adjustment process with well labelled diagram L2 5-7 • Some understanding of the fundamental economic problem. • Some attempt to explain how prices can help address the question of what and how much to produce, how to produce and for whom to produce • Weak/no attempts to show the role of prices in achieving allocative and productive efficiency • Diagram and price adjustment process explained in answer.

3 ©SRJC 9757/02/Prelims/2018 (b) Discuss the relative importance of demand and supply factors in influencing Singapore’s medical inflation rate. [15] Introduction Prices of medical services in Singapore has risen rapidly as evident from the climb in medical inflation rate to 15% in 2015. In this essay we will be examine the demand and supply reasons for the sharp rise in prices and determine the most important factor that drives the rising price of medical services in Singapore. Body P1: Ageing population in Singapore is the most important demand reason for the rise in medical inflation rate. In Singapore the number of citizens aged 65 and above is increasing rapidly, as population growth slows. The size of this group of citizens doubled from 220,000 in 2000 to 440,000 today, and is expected to increase to 900,000 by 2030. As such demand for healthcare services is expected to increase significantly. This is because older people are more likely to develop complex and chronic diseases, like diabetes. Furthermore one such disease is also likely to cause another and stay with us for life. P2: The rise in medical tourism could be another demand factor that contribute to the medical inflation rate. There has been a growing number of overseas pat ient seeking treatment in Singapore. This increasing numbers of patients could be largely due the increasing number of excellent medical infrastructure in Singapore. Several world-class medical facilities have been added in the recent past. One such example of the quality healthcare service provided can be seen in the four-year-old Mount Elizabeth Novena Hospital. The hospital has 13 operating theatres and provides a wide range of specialised medical and healthcare services. It attracts a large number of foreign patients and has built a reputation for offering top-of-the-line medical care as well as facilities that are on par with five-star hotels. Ev: Although Singapore may still be among the region's top dogs when it comes to medical tourism, its neighbours are swiftly closing the gap. Lower costs and the growing availability of quality care in neighbouring coun