NYJC_H2_ECONS_P2_(Micro_Suggested_Answers)

1 2018 JC2 H2 Econs Prelim Paper 2 Section A 2018 JC2 H2 Econs Prelim Paper 2 Question 1 1 Analysts are forecasting a sharp rise in oil prices by t he end of this year as a re sult of a reduction in oil flows in Iraq due to fighting between government forces and Kurdish militant groups. In addition, oil production is still being withheld as part of a pact between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers to tighten the market. In the main growth areas of Asia, consumption remains strong especially in China and India, the world’s top importers. Adapted from https://www.reuters.com/article/oil-prices, 23rd Oct (a) Explain how the above-mentioned factors might hav e caused a sharp rise in oil prices. [10] (b) Discuss whether a subsidy or a maximum price control is more effective in increasing the affordability for petrol due to the rise in oil prices. [15] (a) Question Analysis Command Explain Content Demand, Supply, Elasticities Context Oil Market Synopsis: Students are required to identify the 1 demand and 2 supply factors from the preamble that caused the increase in oil prices. After which, they have to use PED and PES concepts to account for the sharp (magnitude) increase in prices. Intro: - State what determines price in a free market. (demand and supply) - The reason for the ‘sharp’ rise in oil prices can be attributed to: o Rise in Demand “…consumption remains strong especially in China and India…” o Fall in Supply “…fighting between governm ent forces and Kurdish militant groups…” together with “…a pact between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers…” Coupled with: o The PED and PES of oil being price inelastic. Body 1: • Demand for oil rose due to rapid growth of emerging economies, China and India. Oil is required as a factor input for production processes. Thus, due to industrialisation in China and India, the demand for oil rose. • Supply falling due to reduction in flows in Iraq due to fighting between government forces and Kurdish militant groups. As there was political and social instability in Iraq, the supply of oil was disrupted. (Iraq holds 12.1% of OPEC crude oil reserves). • Supply of oil production being withheld as part of a pact between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers to tighten the market so as to reduce the glut due to the boom of US shale oil output. This will help to maintain the price of oil so that oil producers will not suffer from low oil prices if supply continues to rise. Body 2:

2 • Demand of oil is price inelastic as it is a form of necessity for production processes. • Supply of oil is also price inelastic as the construction time of oil rig is likely to be long. Changes in quantity supplied is also likely to be less resp onsive to price changes as oil production is being withheld as part of a pact betw