(2022) A Level H2 Econs Paper 1 CSQ Q2

a. An increase in productivity is given by an increase in output per unit input while a rise in total output is an increase in overall production.

b. Reason #1: The firm exists in a contestable market where it can be overtaken by potential new entrants should it choose to be complacent

Reason #2: Spending large sums on research and development could allow the firm to continue to maintain its dominance / market power by keeping barriers to entry high through new patents they can register for new technology / products they can develop 

c. The opportunity cost of the S$19 billion invested by the Singapore government:

1. The S$19 billion could have been used for other infrastructural projects such as healthcare facilities /  building schools / improving transport

2. The S$19 billion could have gone into reserves and be invested for potential returns in the future allowing for greater future spending

d. The creation of an innovation culture would likely have benefited the economy in the following ways:

1. Attract more FDI → increase I → increase AD → increase real NY → higher economic growth

2. Firms hire more more factor inputs such as labour → fall in cyclical unemployment

3. Innovation culture → likely improves Singapore’s productive capacity → rightward shift of LRAS → higher potential growth (and lower inflation)

4. Process innovation can lower production costs in Singapore → exports become more competitive → increase (X-M) → increase AD → increase real NY → higher economic growth
   + (X-M) increases → improve BOT

e.

1. The current market for transport is largely dominated by petrol / diesel based cars → which generates significant amount of negative externalities.

2. Extract 5 has cited Nitrogen oxides from petrol & diesel vehicles are linked to heart and lung diseases → thus 3rd parties could suffer health consequences from inhaling gases emitted by petrol & diesel cars.

3. As individuals base their driving decision at Qm where MPC = MPB (explain private costs of individuals in terms of ownership and cost of driving and private benefits in terms of comfort & convenience) but the socially optimal level of consumption should be at Qs where MSC = MSB. MSC = MPC + MEC. Overconsumption thus occurs

4. A subsidy would lower COP for electric cars → prices for electric cars would fall

5. Since electric cars are substitutes for petrol / diesel cars → fall in price of electric cars → decrease demand for petrol / diesel cars → output for petrol & diesel cars will fall and thus move closer to Qs (the socially optimal level)

6. Whether this improves the efficiency of resource allocation warrants more close consideration of the following

   1. How is electricity produced in Singapore (at power stations, which are mostly powered by fossil fuels) → are emissions significantly less compared to petrol / diesel cars

   2. Negative externalities from congestion are the same for both petrol/diesel & electric cars

f. What is comparative advantage

1. A country is said to have comparative advantage in a good if it incurs a lower opportunity cost in the production of a good relative to another good when compared to another country.

2. The theory of CA states that countries can benefit from specialisation & trade by specialising & exporting in what it has a CA in & import what it does not have a CA in.

How government policy can influence a country’s CA in a good

1. Government policies can influence a country’s CA in a good by influencing the opportunity costs associated with the production of a good

2. Through the use of supply-side policies, a country can invest in education & training of its labour force → as the labour force becomes more highly-skilled / educated → wages increase 

3. This can result in a country losing CA in the production of labour intensive goods & gaining CA in the production of goods that are more knowledge-based (elaborate with examples)

4. Creating capital/business friendly environment can also attract FDI / high capital intensive firms to setup shop in a country (e.g. Singapore) → the availability of machinery, equipment, skills provided by FDI can also lower the opportunity costs associated with the production of capital intensive goods, influencing a country’s CA

How other factors can influence a country’s CA in a good

1. Demographic factors → high birth rates in China a few decades ago resulted in a population boom → increasing supply of labour → lower opportunity costs associated with labour intensive goods

2. Natural factor endowment

3. Other countries developing a CA in the good can erode another country’s CA in the good (relative)

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