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Economics · Oct / Nov 2023 · Paper 21 · Question 5

0455

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One reason why the price of houses in cities such as Hong Kong, London, and New York is very high, is the low price elasticity of supply of houses. Trade unions in some of these cities are calling for more affordable housing for workers. Governments are also trying to implement various microeconomic policy measures to reduce the price of houses. In addition, the stability of the housing market can impact upon the effectiveness of monetary policy.

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  • 5(a)[2]

    Identify two monetary policy measures. Changes in: interest rates (1)

    money supply (1)

    foreign exchange rates (1). 2 Accept, but do not expect, quantitative easing as an alternative to money supply. If more than two measures are given, consider the first three.

  • 5(b)[4]

    Explain two microeconomic policy measures that can be taken by a government to reduce the price of a product. Logical explanation which might include:

    maximum prices (1)

    e.g. maximum rents / rent controls (1)

    subsidies (1)

    reduce cost of production (1)

    e.g. housing subsidies (1)

    nationalisation (1)

    government sets lower prices (1)

    direct provision of goods (1)

    increase supply of goods (1)

    e.g. government providing public housing (1)

    regulation (1)

    e.g. prohibiting foreign house buying (1)

    reduce demand (1)

    deregulation (1)

    allowing more firms in the market / more competition (1)

    lower (sales) taxes (1)

    if sellers reduce prices as a result (1). 4 Examples could be related to any market – does not have to be housing market. If more than two policy measures are given, consider the first three.

  • 5(c)[6]

    Analyse the key determinants of price elasticity of supply of a product. Coherent analysis which might include:

    availability of stocks (1)

    finished goods which are unsold (1)

    with a high level of stocks, supply will be elastic (1)

    level of spare capacity (1)

    factors of production available but unused (1)

    e.g. workers not working full time (1)

    supply will be more elastic if levels of spare capacity are high (1)

    time period under consideration (1)

    short run / long run (1)

    short run has inelastic supply (1)

    with at least one fixed factor of production (1)

    which makes it more difficult to produce (1)

    long run has elastic supply (1)

    when all factors of production are variable (1)

    making it easier to produce more (1)

    difficulty of production process / length of production time (1)

    produce that is easy to produce will be more elastic (1)

    e.g. bread is easier to produce compared to a smartphone (1). 6 Also accept an approach based on why PES may be inelastic as shown in third bullet point.

  • 5(d)[8]

    Discuss whether or not trade unions benefit workers. In assessing each answer, use the table opposite. Why they might:

    collective bargaining can result in higher wages
    better working hours and working conditions can be negotiated
    trade unions may protect employment giving more job security
    trade unions may influence governments to give favourable policies for workers, e.g. maternity pay
    trade unions may provide services for workers e.g. training. Why they might not:
    higher wages negotiated by trade unions may increase costs of production, firms may reduce number of workers to cut costs
    may promote industrial actions / strikes, reducing productivity, reducing wages of workers
    may reduce competitiveness of the economy, reducing investment and therefore reducing the demand for workers.
    workers may not agree with the objectives of a trade union
    workers may feel that the fees to join a trade union are too high compared to the benefits they could receive from membership. Level Description A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sided of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and / or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 Guidance Level Description There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 A mark of zero should be awarded for no creditable content.
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