MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)

Suggested Answer & Mark Scheme

1 Discuss whether the price mechanism is the best system for the allocation of
scarce resources in the Singapore economy. [25]

Define scarcity, price mechanism, efficiency. (Diagrams)

o Scarcity is a problem faced by all economies and is relative.
o Due to scarcity all economies have to make choices such as how to
produce, what to produce and for whom to produce.
o Discuss and define opportunity costs.
o Discuss price mechanism.
o Discuss allocative efficiency (P = MC); the point where societys needs
are best met in the allocation of scarce resources.
o Discuss productive efficiency; the least cost combination when goods and
services are produced.
o Evaluate efficiency relative to the price mechanism in a perfectively
competitive scenario without externalities.
Discuss the context of Singapore; limited natural resources, unlimited wants,
Singapores adoption of the free market system and its reliance largely on the
price mechanism to allocate resources. Price signals are key drivers in the
economy. Give examples such as the food and beverage industries, retail
industry etc.
Efficiency can lead to growth which can help alleviate scarcity yet may not solve
it because of the unlimited wants of humans. PPC diagram.
On the other hand, with market imperfections and failure both allocative and
productive efficiencies may not materialize and therefore the problem remains.
o Discuss public goods and their provision by government.
o Discuss goods with positive and negative externalities. Examples: issues
in healthcare, education, pollution, congestion etc
o Concentration of market power.
o Income inequality may also cause failure
Conclusion. Price mechanism may be efficient, may alleviate the problem of
scarcity but does not solve it. This is true for private goods but not so for public,
merit and demerit goods and where market power is concentrated. Thus
government intervention becomes necessary.

L3 For an explanation of the efficient functioning of the price 15 21

mechanism, supported by clear, accurately drawn diagrams and
appropriate examples. The case for government intervention is also
clearly explained within the theoretical framework.
L2 For an undeveloped or unbalanced explanation of the efficient 9 14
working of the price mechanism or of the need for government
intervention.
L1 For an answer that shows some knowledge of the efficiency of the 1- 8
price mechanism or of the need for government intervention.

E2 For an evaluative discussion that refers to the need to have both the 34
price mechanism as well as government intervention.
E1 For an unexplained judgement, or one that is not supported by 12
analysis

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme

2 A look at global unit sales makes clear that no region is being spared the
sharp decline in automobile markets, especially luxury cars.
Adapted from http://motoring.asiaone.com, 19 Jun 2009

a) Using demand and supply analysis, explain why there is a sharp decline in
the luxury car market in 2009. [10]

b) Using the concepts of elasticities of demand and supply, discuss how an

indirect tax is likely to affect the consumers and producers of luxury cars.
[15]

Part (a)

Introduction
Briefly explain the meaning of sharp decline in automobile markets

Sharp decline in automobile markets sector lower sales lower output

exchanged
Assuming the sector operates in a free market economy, forces of demand and
supply will determine the equilibrium price and output of cars.
Briefly explain laws of demand and supply and equilibrium.
Explain that output can fall with several possibilities. Firstly decrease in demand
or/and decrease in supply. Secondly, decrease in demand greater than increase in
supply. Lastly, decrease in supply greater than demand.

Main Body

Decrease in demand
Fall in income: global economic slowdown for luxury cars a fall in income will
lead to fall in demand for luxury cars. The demand curve for luxury cars will shift to the
left output fall. (Illustrate with diagram).
Expectation of future income: With the general economy not doing well consumers
expect further fall in income fall in demand for luxury cars fall in output.
Prices of related good: Relatively cheaper alternatives such as other brands of car
consumers will switch from luxury cars to its substitutes fall in demand for luxury
cars output fall.
Other possible factors include change in taste and preferences, government policies,
size and composition of population, prices of related goods etc.

Decrease in supply
Higher cost of production: with the increase in prices of inputs for making luxury cars
higher cost of production fall in supply of luxury cars fall in output.
Smaller number of distributors in Singapore: bigger market overseas such as China
distributors are reallocating to China reduction in the number of sellers in
Singapore fall in supply of luxury cars fall in output.
Other possible factors include change government policies, producers expectation of
price, technology and so on.

Draw diagram to illustrate that decrease in demand and supply of Porsche will lead to
a fall in equilibrium output of the Porsche cars.

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme

Conclusion
Hence the automobile sector, especially luxury cars, has shrunk due to the factors as
mentioned.
Economic analysis should take into consideration the perspectives of both demand
and supply.

L3 8-10 Answer shows a thorough and complete explanation of relevant demand

and supply factors, the relative shifts and elasticities and provides
accurate and developed explanation of their respective effects on the
luxury cars market using diagrams.
L2 5-7 Answer shows attempt to explain the relevant demand and supply factors
and their respective effects on the luxury cars market, is unbalanced and
with or without diagrams.
L1 1-4 Answer is mostly irrelevant and only consists of a smattering of valid
points. Basic theoretical errors may be made such as the explanation of
the relevant demand and supply factors.

Part b

Introduction
Explain what indirect tax is and how it would affect the market.

An indirect tax is a tax on a good or service. It falls on the producers and thus
increases the cost of production. However it may be passed on to the consumers in
the form of higher prices.
Illustrate with diagram the shifting of supply to the left with the imposition of the
indirect tax.

Main Body
Explain the impact of indirect tax on consumers and producers of luxury cars.

Impact on price, output and revenue

Consumers have to pay a higher price, output falls and producers revenue falls.
Explain incidence of tax.
With reference to the diagram, show the initial equilibrium price and output. When
indirect tax is imposed, the supply curve will shift upward by the full amount of the tax
imposed. At the initial equilibrium price, there will be an excess demand of luxury
cars. This will cause the price of luxury cars to rise and quantity of luxury cars to fall.
These changes will occur until a new market equilibrium is attained with a higher
equilibrium price and a lower equilibrium quantity. Students are to identify the
incidence of tax on the consumers, the incidence of tax on the producers and the
total revenue received by the government from the diagram.
Then with the diagram, given the demand curve for luxury cars which is more elastic
than the supply curve, the consumers bear a smaller tax burden while the producers
bear a greater tax burden.
Another scenario can be the demand for luxury cars relatively more inelastic to the
supply curve, the consumers bear a greater tax burden while producer bear a
smaller tax burden.

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme
Conclusion

Evaluation: The incidence of a tax depends on the relative elasticity of demand and
supply of a product. The more elastic the demand curve is relative to the supply
curve the smaller is the incidence of tax on buyers relative to that incurred by
suppliers.

L3 9-11 For a good analytic discussion which shows application to the given
context. Answer should examine the effects with reference to the elasticity
of demand and supply of luxury cars.
L2 6-8 For an undeveloped explanation that gives the impact on consumers and
producers without analysis to explain them.
L1 1-5 Answer is mostly irrelevant and only consists of a smattering of valid
points.
E2 3-4 For an evaluative assessment based on economic analysis.
E1 1-2 For an unexplained assessment or one that ids not supported by analysis

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme

3. Discuss the view that oligopoly is the most common market structure in
Singapore. [25]

Define briefly the four market structures

o No of sellers
o Barriers to entry
o Perfect knowledge
o Product differentiation
o Types of competition
o Types of profits
o LR equilibrium of the different structures. (At minimum diagrams for
monopoly and oligopoly)

Discuss the various factors that favour oligopolies in Singapore

o Few sellers
o Large capital outlay
o Economies of scale
o Intensity of competition
o Consumers taste and preferences for big firms
o Entrepreneurial talent pool
o Examples; telecommunications, banking & finance, hospitals,
transport etc.

Discuss the opposing view that despite the presence of oligopolies there
exist numerous examples of firms that fit the MC model as well as some
that fit the monopoly model.
o Diseconomies of scale
o Niche markets
o Personalized services
o Natural monopolies etc.
o Examples; Restaurants, food courts, dental and medical clinics,
PUB etc.

L3 For an explanation of a balanced view on the dominant market 15 21

structure, supported by clear, accurately drawn diagrams and
appropriate examples. The answer is clearly explained within
the theoretical framework.
L2 For an undeveloped or unbalanced explanation of the different 9 14
market structures showing the preponderance of one structure
L1 For an answer that shows some knowledge of the market 1- 8
structures.

E2 For an evaluative critical discussion supported by analysis. 34

E1 For an unexplained judgement, or one that is not supported by 12
analysis

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme
4 Global oil prices have been rising again steadily since the first quarter
of 2006. This will have macroeconomic consequences for all countries.
Economic Outlook, IMF, June 2007.

a) Explain how the undesirable effects of rising oil prices will impact
Singapores economy. [10]

b) Discuss possible measures that Singapore can adopt to lighten the

undesirable effects of rising oil prices. [15]

a)
Explain the relevance oil to an economy. Define AD, AS
Explain the internal effects
o Cost push inflation; Oil price rises will lead to higher production costs
giving rise to increases in the GPL
o Wage price spiral
o Effects on employment, investment and growth
Explain the external effects
o Effects on trade, CA and BOP
Costs of production increases will lead to higher export prices
relative to imports; changes to the TOT
Export revenues will be affected depending on export elasticities
In the long run, demand for exports tend to be elastic hence
export revenues may fall leading to current account deficits
o Effects on exchange rates
Weakening of current account balances may affect capital
accounts as investors get nervous.
A depreciating Singapore dollar is likely to worsen imported
inflation which may lead to intervention by MAS to support the
dollar; possible negative impact on foreign reserves.

L3 For an answer that shows a good and thorough understanding 8 10

of the effects of higher oil prices on the AD and AS. The
argument is well organized and developed with the ability to
apply with the use of good examples.
L2 For an undeveloped answer that shows knowledge of the 57
effects of higher oil prices on some of the components of AD
and AS. However, the explanation lacks sound economic
analysis and may not be well organized.
L1 For an answer that has some valid points. But there might be 1- 4
basic errors of theory or insufficient coverage and development
of answer.

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme
b)
o Demand Policies & Evaluation
o Measures to raise AD
o Fiscal policy; subsidies to oil importers to prevent the rise in GPL. A
short term measure that may help alleviate the problems but unlikely to
be appropriate for the long term.
o Monetary policy; changes to the interest rates to raise consumption
and investment and hence the AD. Given that the Singapore economy
is small and open this policy may be inappropriate as it is likely to be
ineffective.
o Exchange rate policy; the previous policy of gradual appreciation
should help to cushion the impact of the high oil prices. However, over
appreciation will lead to the undesirable effect of reducing export
competitiveness especially if demand for exports is elastic. Singapores
cost competitiveness may also be affected negatively.
o Investment policy; searching out higher growth areas to raise the AD.

o AS policies & Evaluation

o Combating imported inflation; reduce the dependence on oil by
switching to substitutes. The resulting change in elasticities may help
lower the prices and hence lead to lower imported inflation.
Alternatives to oil may not be cost effective or viable.
o Reducing cost of production; measures to reduce costs such as
wages, rent, taxes and other business costs should help boost AS.
o Improving productivity: better use of technology, training and upgrading
of skills should also help boost the AS.

L3 For an answer that has a good and thorough understanding of 9 11

the workings of the policies within the Singapore context. The
answer is well organized with sufficient in-depth analysis.
L2 For an answer that has some knowledge of the various policy 58
measures that can be adopted. However, the answer is lacking
in depth and without reference to Singapore.
L1 For an answer that shows some knowledge but with 1- 4
inaccuracies in theory, insufficient coverage and development
of answer.

E2 For a critical evaluation of policy measures in terms of their 34

effectiveness, efficiency and appropriateness to Singapores
context.
E1 For an unexplained judgement, or one that is not supported by 12
analysis

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme
5. Globalisation has gathered immense momentum, is irreversible and will
have far reaching economic impact on countries that are integrated.

a) Explain the impact of globalisation on the components of aggregate

demand in an economy. [10]
b) Discuss the appropriate policy measures that government may
undertake in the face of such challenges. [15]

a)
o Define globalisation, components of AD
o Discuss impact on Consumption
o Fall in prices, Increase in C
o Economic integration and exposure to global lifestyle increase C
o Increase in economic growth, income levels, SOL
o However, low skilled workers may become redundant suffer the
reverse.
o Discuss impact on Investment
o New markets for producers
o Greater competition leads to innovation, profits
o May lead to overheating of economy.
o Discuss impact on Government
o Increase G to develop skilled workforce to attract investment
o Increase G to built better infrastructure to raise productivity
o Government need to identify niche markets and growth drivers.
o Developing countries may not have the expertise
o Discuss impact on Exports and Imports
o Minimising or removal of trade barriers.
o Trade imbalances: surplus and deficits
o Possible counter effects by countries with deficits

L3 For an answer that shows a good and thorough understanding 8 10

of the effects of globalisation on the AD. The argument is well
organized and developed with the ability to apply within the
context of relevant countries. E.g. Singapore
L2 For an undeveloped answer that shows knowledge of the 57
effects of globalisation on some of the components of AD.
However, the explanation lacks sound economic analysis and
may not be well organized.
L1 For an answer that has some valid points. But there might be 1- 4
basic errors of theory or insufficient coverage and development
of answer.

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme
b)
o Consumption and production can lead to market failure as a result of
externalities, monopoly power and other efficiencies.
o For instance pollution is not taken into consideration in the production
process; increased demand for motor vehicles lead to higher air
pollution.
o Policies to correct these and evaluation. Fiscal policy: taxes, regulation
etc.
o Evaluation: difficult to quantify externalities and hence the amount of
tax may be inappropriate.
o Overheating of the economy due to supply bottlenecks
o Supply is unable to meet the demand
o Policy measures: Exchange rates, FP, MP, SS policies
o Evaluation: time lags with FP, dependence on elasticities for MP, long
run timeframe for SS policies.
o Lack of expertise
o Attract & depend on foreign talent to help create and grow new and
existing industries; especially true for dynamic economies like
Singapore where foreign talent helps create new enterprises, grow
existing enterprises into regional and global players and build up new
economic sectors.
o Foreign professionals and skilled workers attract foreign investments.
o Evaluation: foreign talents may not have the national interest at heart.
o Trade deficit
o Reasons for such deficits to arise; lack of CA yet continue producing
the good, may lead to consequences such as unemployment. Yet it
may not be easy to shut down such industries.
o Adoption of protectionistic measures etc.
o Evaluation: retaliation from other countries, domestic consumers may
become worse off, lack of growth etc.

L3 For an answer that has a good and thorough understanding of 9 11

the workings of the policies within the context of any economy.
The answer is well organized with sufficient in-depth analysis.
L2 For an answer that has some knowledge of the challenges and 68
the various policy measures that can be adopted. However,
the answer is lacking in depth, unbalanced and without
examples.
L1 For an answer that shows some knowledge but with 1- 5
inaccuracies in theory, insufficient coverage and development
of answer.

E2 For a critical evaluation of policy measures in terms of their 34

effectiveness and appropriateness to a relevant country.
E1 For an unexplained judgement, or one that is not supported by 12
analysis

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme
6 The Chinese Premier Wen Jiabao said that as the economic crisis is
spreading, Britain and China should explore the potential for
cooperation and guard against trade protectionism.
Chinadaily, 02 Feb 2009

Discuss whether countries should resort to trade protectionism when

faced with an economic crisis. [25]

Define free trade and protectionism. Discuss briefly the concept of

comparative advantage. Discuss briefly the implications of an economic
crisis.
Explain briefly the key protectionistic devices such as tariff and non-tariff
barriers. Explanation of tariffs is required but diagram not required.
Quotas, exchange controls, voluntary agreements, embargoes,
administrative procedures etc.
Discuss and evaluate the circumstances under which trade protectionism
may be justified during an economic crisis.
o Jobs and domestic output protection especially under a severe
global economic crisis; some local industries may get wiped out by
foreign competition.
o Short term measure of correcting balance of payments deficit:
unchecked deficits may lead to exhaustion of foreign reserves and
increases the external debt burden.
o Infant industry argument: small fledgling firms need to be protected
for a period of time during which they are able to gain comparative
advantage and are able to compete in the international arena;
structural changes may cause some firms to lose comparative
advantage and countries may need help to restructure these firms
failing which unemployment costs may be higher than protection
costs.
o Dumping; anti-dumping tariffs may be justified if foreign firms are
attempting to sell their goods at below cost.
o Preventing overspecialization and diseconomies of scale; these
may lead overreliance on some sectors of the economy and reduce
the competitiveness of the industry making them vulnerable to
economic changes.
o Prevention of resource depletion. E.g. minerals.
o Strategic goods; some key industries such as food, water and
national security are too critical to be left to foreign providers.
o Evaluate some of the above arguments: essential imports may
become too costly; loss of societal and world welfare; perpetuates
domestic inefficiency; earmarking wrong industries to specialize in;
invites retaliation etc.

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 MILLENNIA INSTITUTE PRELIM 2 (PAPER 2)
Suggested Answer & Mark Scheme
Explore and evaluate the circumstances under which protectionism may
not be justified even when faced with an economic crisis.
o Comparative advantage; the benefits it accrues; specialization,
economies of scale, increased efficiency and competitiveness.
o Trade and job creation; increased volume of trade
o Evaluate: dependency on other countries for essentials such as
steel, food etc.; lack of diversification of economy; existence of
transport and marketing costs.
Conclusion. Alternative policies; stimulate local consumption, FTAs etc.

L3 For a well developed explanation of the arguments for 15 21

protectionism discussing both its advantages as well as
disadvantages, balanced by arguments for free trade and its
advantages.
L2 For an undeveloped or unbalanced explanation of the 9 14
arguments for protectionism
L1 For an answer that shows some knowledge of the arguments 1- 8
for protectionism with inaccuracies.
E2 For an evaluative discussion on whether protectionism is ever 34
advantageous over free trade, considering short vs. long run
etc.
E1 For an unexplained judgement, or one that is not supported by 12
analysis

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