IJC_H2_ECONS_P2_Suggested_Answers

PRELIM SUGGESTED ANSWERS ECONOMICS UNIT @ INNOVA JUNIOR COLLEGE 1 2018 H2 Prelim Essay Q1 Question: Discuss the likely combined effects of economic growth and a rise in Goods and Services Tax (GST) on consumers and producers in different product markets in Singapore. [25] Suggested Answer Explain effects of economic growth on consumers and producers in different product markets - Economic growth – rise in real nat ional income and hence rise in household incomes - Impact on product markets depends on the income elasticity of demand of products: ● For normal goods with positive YED, demand would increase. Necessities such as rice (0<YED<1), demand would increase less than proportionate to the increase in inco me whereas for luxury goods such as cars (YED>1), the demand would increase more than proportionate to the increase in income. ➔ For normal goods, consumers’ ex penditure and hence producers’ revenue would increase as both price and quantity increases, ceteris paribus. ● For inferior goods with negative YED such as instant cup noodles, demand would decrease. ➔ Consumers’ expenditure and h ence producers’ revenue would decrease as both price and quantity decreases, ceteris paribus. Explain effects of a rise in GST on consumers and producers in different product markets - GST is an indirect tax on producer which raise unit COP (since GST is imposed on intermediate goods and raw ma terials) and thus decrease SS since producers will reduce production at any given price. The supply curve will shift upwards in a pivotal manner sinc e it is an ad valorem tax (% tax). This means that the higher the initial market price, the larger will be the tax amount and hence both original and new supply curves diverge. - The market price rises and market quantity falls. Impact on consumers’ expenditure and producers’ revenue depends on price elasticity of demand for products. ● Assuming ceteris paribus and similar initial market pr ices of the goods in the 2 markets, when SS falls due to GST, the good with price inelastic demand will result in a more than proportionate increase in price and less than proportionate fall in Qdd.

PRELIM SUGGESTED ANSWERS ECONOMICS UNIT @ INNOVA JUNIOR COLLEGE 2 ➔ Consumers’ expenditure increases (hurt consumers as they pay higher price and enjoy lesser units of good) ➔ Rise in GST would result in less revenue earned by the producers since they need to pay the government the GST from whatever they received from the consumers. Some firms in the market may end up with subnormal profit which may cause them to shut down. ➔ There is a greater negative impa ct on consumers as compared to producers, if demand is more price inelastic than supply. ● On the other hand, if the demand of good is price elastic, then there will be a less than proportionate rise in price and more than proportionate fall in quantity.  Consumers’ expenditure falls. ➔ Hence in thi