AJC H2 ECONS P2 Answer

2018 JC2 H2 Economics Preliminary Examination – P2 Sample Answers Anderson Junior College Economics Department Anderson Junior College JC2 2018 H2 Economics Preliminary Examination Essay 1 Singapore’s visitor arrivals hit new record highs in 2017. This has resulted in the growth of tourism-based services. Discuss the demand and supply factors that can account for the reported change in the volume of tourism-based services in Singapore and evaluate which is likely to be the most significant factor. [25] Demand factors: ● Better than expected global economic recovery  increase in income. As income increases, the concept of income elasticity of demand can be applied. Income elasticity of demand measures the responsiveness of demand to a change in income, ceteris paribus. Given that demand for tourism-based services is income elastic, as it is a luxury good, the increase in income would have resulted in a more than proportionate increase in the demand for tourism-based services, resulting in a significant increase in its equilibrium quantity. This accounts for the increase in volume of tourism-based services. ● The Singapore Tourism Board and its industry partners also have engaged in marketing efforts to promote tourism in the country, such as through various campaigns and by tapping on online platforms. This could have resulted in a change in taste and preference in favour of tourism in Singapore. This again will result in an increase in demand. ● Entrance of budget airlines into the air travel market increases the supply of air travel, reducing the price of air travel. As air travel and tourism-based services are close complements, the demand for tourism-based services is highly negatively cross elastic in relation to price of air travel. Cross elasticity of demand measures the responsiveness of demand of one good to a change in price of another good, ceteris paribus. A lower price of air travel will increase the quantity demanded of it and hence demand for tourism-based services would increase by more than proportionately. ● As demand increases, the concept of price elasticity of supply can be applied. Price elasticity of supply measures the responsiveness of quantity supplied of a good to a change in its price, ceteris paribus. Supply of tourism-based services is relatively price elastic given the availability of spare capacity. There has been an expansion in the tourism industry over the years with creation of more tourist spots. Given the increase in demand due to above-mentioned factors, the demand curve shifts from Dd0 to Dd 1 as shown in Fig. 1. Price would increase, causing a more than proportionate increase in quantity supplied of tourism services from Q 0 to Q 1. This accounts for the reported change in volume of the tourism-based services.

2018 JC2 H2 Economics Preliminary Examination – P2 Sample Answers Anderson Junior College Economics Department ❖ Supply factors: ● There has also been many government initiatives to support competitiveness and innovation in the industry. For instance, the Singapore Tourism Board provides grants to support companies in areas of capability development, event development and product development. This could reduce the cost of production incurred by the firms, increasing supply of tourism-based industries. ● Technological advancement also enables firms to adopt more automation in provision of tourism-based services, such as the use of self-service kiosks. With the use of technology, output per unit of input increases, reducing cost per unit of output. This increases supply of tourism-based services. ● As supply increases, the concept of price elasticity of demand can be applied. Price elasticity of demand measures the responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. Demand for tourism-based services in Singapore is price elastic due to availability of substitutes such as tourism-based services in other countries. Given the increase in supply due to the factors mentioned earlier, the supply curve shifts from Ss 0 to Ss 1 as shown in Fig. 2 below. The reduction in price due to the increase in supply will result in a more than proportionate increase in quantity demanded of tourism-based services from Q 0 to Q1. This accounts for the reported change in volume of the tourism-based services. Price Quantity of tourism-based services0 Dd0 Dd1 Ss0 Q0 Q1 P1 P0 Fig. 1 Price Quantity of tourism-based services0 Dd0 Ss0 Q0 Q1 P1 P0 Fig. 2 Ss1

2018 JC2 H2 Economics Preliminary Examination – P2 Sample Answers Anderson Junior College Economics Department ● Both the increase in demand and supply will result in an increase in the quantity of tourism-based services as shown below from Q 0 to Q 1, hence the increase in the volume of tourism-based services. ❖ EV: Demand-side factors, particularly the global economic recovery, is likely to be the most significant factor contributing to the increase in volume of tourism in Singapore. The economic recovery was stronger than expected, hence income increases to a large extent, amplifying the increase in demand. In addition, in recent years, Singapore has developed various high-end tourism experiences such as the Gardens by the Bay, the Integrated Resorts and Universal Studios. As these services appear more luxurious, the YED value is much greater than one, causing a more significant increase in demand due to the increase in income. Supply factors mentioned earlier are likely to be less significant as their effects tend to be gradual in nature, and unlikely to cause the significant rise in volume of tourism-based services. Knowledge, Application/Understanding and Analysis L3 For an answer that applies thorough economic analysis, with consideration of context, in accounting for the increase in the volume of the tourism-based services. 15-20 L2 For an answer that applies some economic analysis in accounting for the increase in volume of the tourism-based services. 9-14 L1 For an answer that shows knowledge of factors that might account for the increase in volume of the tourism-based services. 1-8 E3 For an answer that uses analysis to support an evaluative conclusion on the most significant factor that accounts for the increase in the volume of the tourism-based services. 4-5 E2 For an answer that makes some attempt at evaluation or a conclusion about the most significant factor that accounts for the increase in volume of the tourism-based services. 2-3 E1 For an answer that gives an unsupported evaluative statement. 1 Essay 2 Price Quantity of tourism-based services0 Dd0 Ss0 Q0 Q1 Ss1 Dd1

2018 JC2 H2 Economics Preliminary Examination – P2 Sample Answers Anderson Junior College Economics Department Ten years ago, it seemed like Walmart had monopoly power when it came to retail. Today, Walmart has been displaced by an online retailer, Amazon. Walmart has had to deal with risks and uncertainty like the trend towards e-commerce and slower economic growth while trying to compete. (a) Explain the factors that a firm considers in deciding whether to be larger. [10] Factor Elaboration Constraints 1. Need to consider how constraints may affect the willingness or ability to grow. For instance, government policy may prevent firms from growing (prevent merger) or the amount of financ ial capital or loans that firms can get access to will also determine if a firm can fund expansion. Advantages (Benefits) Revenue advantages 1. Higher market share may mean that demand becomes more price inelastic  due to lower availability of substitutes  firms can now choose to increase prices to increase revenue rather than lower prices  more sustainable m