AJC_H2_ECONS_P2_Answer(1)

2018 JC2 H2 Economics Preliminary Examination – P2 Sample Answers Anderson Junior College Economics Department Page 1 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. Supp ly 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 Pa