(2022) A Level H1 Econs CSQ 1 Suggested Answers
(2022) A Level H1 Econs Paper 1 CSQ Q1
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2022 A Level H1 CSQ Q1
a. Housing prices were increasing for Singapore & Germany while decreasing for Turkey
Housing prices were increasing at a faster pace for Germany compared to Singapore from Jul 2017 to Apr 2018, but increasing at a faster pace for Singapore compared to Germany from Apr 2018 to July 2019.
b. Consumer sovereignty is the idea that consumers influence production decisions since firms will respond to the dollar vote made by consumers’ preferences.
In well-functioning housing markets where the consumer is sovereign, an increase in demand for housing by consumers will result in prices for housing. The higher prices for housing will then result in firms increasing their quantity supplied for housing as they respond to the higher prices.
c. Price elasticity of demand measures the degree of responsiveness of a change in quantity demanded given a change in price, ceteris paribus.
When “average asking prices have risen by 12%, corresponding demand for such housing has fallen by proportionately less” suggesting that demand for housing in Singapore is price inelastic.
An increase in stamp duty will result in an increase in cost of production for housebuilding firms → decrease in supply from SS0 to SS1 → increase in price from P0 to P1 → as quantity demanded falls less than proportionately → increase in total expenditure on private housing
It is possible that private housing is a subset of housing where demand is more price elastic (‘private homes will be even less affordable for Singaporeans’ suggests that private home prices take up large % of Singaporeans’ incomes) → increase in price will lead to more than proportionate fall in quantity demanded → decrease in total expenditure on private housing.
d. When individuals make purchases for a home, he/she will likely consider only their private costs and benefits associated with the purchase. Private costs will include the cost of purchasing the home, renovation costs while private benefits include the benefits associated with having shelter. Individuals will thus choose to consume at Qm where MPC = MPB. Yet, there exists positive externalities associated with home ownership. Positive externalities are benefits conferred to third parties who are not directly involved in the production or consumption of the good, in the case of home ownership, neighbours benefit from owners improving their appearance and resale values as it positively impacts the values of surrounding properties, general public benefits from lower neighbourhood crime and higher youth academic achievement while society in general benefits from a greater sense of belonging.
Such positive externalities are represented by MEB, which causes MSB to diverge from MPB.
The socially optimal level of consumption should be at Qs where MSC = MSB. Since consumption is at Qm rather than Qs, there is underconsumption, resulting in a deadweight loss and thus market failure occurs
e. Table 1 within Extract 1 shows that the average number of days for the housebuilding planning process takes 196-201 days. This contributes to the length and complexity of the production process which would make supply relatively price inelastic. In this case, the information does support the view.
Yet, the information would be inadequate for us to make an overall assessment on the short run price elasticity of housing given that there is no information available on the average number of days for land purchase, land clearance, construction & administering the sale of houses - these are also important in determining the actual total length of production.
Lastly, the availability of inventory such as presently available and unsold homes in the market is also a key contributor to the short run price elasticity of supply of housing. For example, a lack of available unsold homes in the market will make supply more price inelastic.
f. Impacts of lower interest rates on the macro-economy
As interest rates fall → more consumers borrow to purchase large ticket items → increase in C → increase in AD → increase in real NY → higher economic growth
(impact not likely significant due to high import leakages in context of SG)
As interest rates fall → more investments are profitable at lower interest rates → increase in I → increase in AD → increase in real NY → higher economic growth
Higher real NY → individuals see increase in disposable income → more purchasing power → improvements in material SOL
Impact of lower interest rates on home loans
More than 85% of Singaporeans are homeowners.
Many homeowners take a loan when purchasing their homes
The lower interest rates will reduce the interest payments required for their home loans → increase disposable income made available for other goods & services → improve material standard of living
Impact of lower interest rates on housing prices
Lower interest rates → increase demand for housing as home loans become cheaper → increase prices of housing
As prices of housing increase → property price inflation increases
Housing will become more expensive → reduce material standard of living
As housing become more expensive there will be spillover effect to commercial & industrial properties as investors may look to buying of more ‘value’ property classes for rental → commercial & industrial properties become more expensive
Higher rentals overall for commercial & industrial properties → increase COP for businesses → lower supply → higher prices → erodes purchasing power of consumers → fall in material SOL
Students can weigh the different factors & look towards what is happening in reality to discuss actual impacts on standard of living in Singapore
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