2011 Essay Question 2

Question

Singapore is facing an ageing population issue. By 2030 senior citizens are expected to comprise almost 20% of the population.

Using economics analysis, discuss the likely effects of this demographic change on the product markets in Singapore. [25]

Answer

Students should discuss the effects of ageing population on three goods. Although one of the three goods should be directly related to ageing population, such as pharmaceuticals, the other two goods should be indirectly related to ageing population, via a change in consumers’ income.

Demand and Price Elasticity of Supply (Pharmaceuticals)

Ageing population in Singapore will lead to an increase in the demand for pharmaceuticals. As older people are more prone to illnesses, ageing population will lead to an increase in the demand for pharmaceuticals. When this happens, the price and the quantity will rise. When the demand for pharmaceuticals rises, whether the price or the quantity will rise by a larger proportion will depend on the price elasticity of supply. The supply of pharmaceuticals is likely to be price elastic as the production time is likely to be short given that they are mass produced on assembly line which is highly automated. Furthermore, pharmaceuticals can be stocked in large quantities as they are small in size. Therefore, the quantity is likely to rise by a larger proportion than the price.

Supply and Price Elasticity of Demand (Pharmaceuticals)

Ageing population in Singapore will lead to a decrease in the supply of labour in the economy.  As people will leave the labour force when they reach the retirement age, ageing population will lead to a decrease in the supply of labour in the economy. When this happens, wages will rise which will lead to a rise in the cost of production and hence a fall in the supply of goods, including pharmaceuticals, which will lead to an increase in the price and a decrease in the quantity. When the supply of pharmaceuticals falls, whether the price or the quantity will change by a larger proportion will depend on the price elasticity of demand. The demand for pharmaceuticals is likely to be price inelastic due to the high degree of necessity. Furthermore, pharmaceuticals do not have close substitutes as traditional Chinese medicine differs quite substantially from pharmaceuticals in terms of the active ingredients. Therefore, the price will rise by a larger proportion than the decrease in the quantity.

Combined Effects

The increase in the demand and the decrease in the supply of pharmaceuticals in Singapore will both lead to a rise in the price. Although the increase in the demand will lead to a rise in the quantity, the decrease in the supply will lead to a fall in the quantity. Students need to consider the relative price elasticities of demand and supply and the relative changes in the demand and the supply to determine the effect on the quantity.

The relative price elasticities of demand and supply
Due to the elastic supply, the increase in the demand is likely to lead to a large increase in the quantity, and due to the inelastic demand, the decrease in the supply is likely to lead to a small decrease in the quantity. Therefore, the quantity is likely to rise, assuming the changes in the demand and the supply are equal. Students need to draw a diagram showing a simultaneous shift in the demand and the supply curves.

The relative changes in the demand and the supply
The number of foreign workers in Singapore is constantly increasing due to the loose foreign worker policy. In Singapore, it is relatively easy for firms to employ foreign workers so long as they satisfy the dependency ratio ceiling and are willing to pay the foreign worker levy. Furthermore, the number of immigrants in Singapore is constantly increasing due to the high standard of living, low personal income tax, etc. Therefore, ageing population is unlikely to lead to a significant decrease in the supply of labour in the economy, if at all. Therefore, the increase in the demand for pharmaceuticals is likely to be greater than the decrease in the supply and hence the quantity is likely to rise.

Combining the effects of the relative price elasticities of demand and supply and the relative changes in the demand and the supply on the quantity, the quantity is likely to rise substantially.

Other Goods

Ageing population in Singapore will lead to a fall in consumers’ income. When people reach the retirement age, they will leave the labour force and hence will stop earning income. Furthermore, when the cost of production in the economy rises due to the increase in wages, firms will decrease production and hence the demand for labour. When this happens, some people will lose their jobs and hence their income. Students should discuss the effects of a fall in consumers’ income on two goods, preferably one normal good, such as air travel, and one inferior good, such as public transport.

Air Travel (Normal Good)

When consumers’ income falls, whether the demand for a good will rise or fall will depend on the income elasticity of demand. As the income elasticity of demand for air travel is positive, which means that it is a normal good, a decrease in national income will lead to a decrease in the demand. When this happens, the price and the quantity will fall. The supply of air travel is likely to be price inelastic as the production time of airplanes is likely to be long and airplanes cannot be stocked in large quantities due to their large sizes. Therefore, the price is likely to fall by a larger proportion than the quantity.

When wages rise due to the decrease in the supply of labour in the economy, the cost of production of air travel will rise which will decrease the supply. When this happens, the price will rise and the quantity will fall. The demand for air travel is likely to be price inelastic due to lack of close substitutes as rail travel differs quite substantially from air travel in terms of accessibility, travelling time and comfort. Therefore, the price is likely to rise by a larger proportion than the fall in the quantity.

The decrease in the demand and the decrease in the supply of air travel will both lead to a fall in the quantity. Although the decrease in the demand will lead to a fall in the price, the decrease in the supply will lead to a rise in the price. Students need to consider the relative changes in the demand and the supply to determine the effect on the quantity. There is no need to consider the relative price elasticities of demand and supply (refer to Economics – A Singapore Perspective, Chapter 3). As discussed earlier, ageing population is unlikely to lead to a significant decrease in the supply of labour in the economy, if at all. Furthermore, a fall in consumers’ income is likely to lead to a large decrease in the demand for air travel due to the high income elasticity of demand as air travel is a luxury. Therefore, the decrease in the demand for air travel is likely to be greater than the decrease in the supply and hence the price is likely to fall. Students need to draw a diagram showing a simultaneous shift in the demand and the supply curves.

Public Transport (Inferior Good)

As the income elasticity of demand for public transport is negative, which means that it is an inferior good, a decrease in national income will lead to an increase in the demand. When this happens, the price and the quantity will rise. The supply of public transport is likely to be price inelastic as the production time of buses and trains is likely to be long and buses and trains cannot be stocked in large quantities due to their large sizes. Therefore, the price is likely to rise by a larger proportion than the quantity.

When wages rise due to the decrease in the supply of labour in the economy, the cost of production of public transport will rise which will decrease the supply. When this happens, the price will rise and the quantity will fall. The demand for public transport is likely to be price inelastic due to the high degree of necessity and lack of close substitutes as private cars are substantially more expensive. Therefore, the price is likely to rise by a larger proportion than the fall in the quantity.

The increase in the demand and the decrease in the supply of public transport will both lead to a rise in the price. Although the increase in the demand will lead to a rise in the quantity, the decrease in the supply will lead to a fall in the quantity. Students need to consider the relative price elasticities of demand and supply and the relative changes in the demand and the supply to determine the effect on the quantity.

The relative price elasticities of demand and supply
Due to the inelastic supply, the increase in the demand is likely to lead to a small increase in the quantity, and due to the inelastic demand, the decrease in the supply is likely to lead to a small decrease in the quantity. Therefore, the effect on the quantity will depend to a large extent on the relative changes in the demand and the supply.

The relative changes in the demand and the supply
As discussed earlier, ageing population is unlikely to lead to a significant decrease in the supply of labour in the economy, if at all. Therefore, the increase in the demand for public transport is likely to be greater than the decrease in the supply and hence the quantity is likely to rise.

Combining the effects of the relative price elasticities of demand and supply and the relative changes in the demand and the supply on the quantity, the quantity is likely to rise. Students need to draw a diagram showing a simultaneous shift in the demand and the supply curves.

Conclusion

To be discussed in class.

A more elaborate answer to 2011 Essay Question 2 will be provided in the economics tuition class.

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