According to economic theory, the price mechanism in a free market will always allocate scarce resources efficiently for all goods and services. Evaluate the validity of this statement. [25]

This essay question was adapted from an actual H2 A level economics examination question

This economics essay evaluates whether the price mechanism in a market economy will always allocate scarce resources efficiently for all goods and services. This essay argues that, on the one hand, the price mechanism working in a free market economy will indeed allocate scarce resources efficiently, according to standard economic theory, because of the price mechanism can achieve productive and allocative efficiency. On the other hand, the allocation of scarce resources may not always be efficient, especially when there are market failures and resources are not allocated efficiently, leading to a situation of allocative inefficiency, which distort the workings of the free market.

First, we need to deal with the central problem of economics. Human wants are unlimited, while the earth's factors of production of land, labour, capital, and entrepreneurship are limited. Land refers to gifts of nature such as physical land, natural resources, and oil and gas, among other examples. Labour refers to human ingenuity, effort, time, and talent in the form of “human capital”. Capital in economics often refers to goods that are used to produce yet other goods. And entrepreneurship is the risk-taking, decision-making element that coordinates the other factors of production in an economy. This situation of limited factors of production that could potentially be allocated to different outputs, and the context of unlimited human wants, results in a situation of scarcity. It is important to note that economic scarcity necessitates choice, usually made between competing uses. 

Tutor’s Question: What economics diagram do you think should be drawn here? And how would this diagram back up your arguments?

The price mechanism, through the intersection of demand and supply, determines the optimal price and output and it is from the rational choices of millions of suppliers, producers, and firms meeting the requirements of millions of consumers, individuals, and households that eventually leads to the free market determining what to produce, how to produce, and for whom to produce. Demand is defined as the willingness and ability to purchase a good or service, ceteris paribus, while supply is defined as the willingness and ability to produce a good or service, also ceteris paribus. Oftentimes, one major assumption for this economic theory to work is the situation of perfect competition, where there are many buyers and sellers in a market, selling a homogeneous and non-differentiated good or service, and there are no (or very low) barriers to entry into the market.

Under the market price, consumers seek to maximise utility, and will therefore only consume if they are able to have a positive net benefit from the consumption of these goods and services. Those who are willing and able to pay will obtain the good and service. And the resources used to produce these goods and services will also be efficiently allocated, as producers maximise their profits. As a result, there is productive efficiency, since goods will be produced at the lowest cost combination to ensure profits are maximised, and price will be equal to marginal cost. On the whole, there is also allocative efficiency, since society’s welfare is maximised, and the Pareto efficient situation is reached, where we can only make some people better off by making others worse off in such an economic situation.

On the other hand, there are market failures in the real world, which may impede the efficient allocation of scarce resources. Market failure is the situation where the free market fails to allocate resources efficiently, and there is allocative inefficiency and deadweight loss to society. There are many types of market failure, such as the lack of provision of non-rival and non-excludable public goods, under-consumption of merit goods but over-consumption of demerit goods, externalities both positive and negative and also in consumption and production, imperfect competition leading to excessive market power in a market, imperfect information, factor immobility, and income and wealth inequality in a free market.

One major example is the under-consumption of merit goods. Because rational consumers seek to maximise their own welfare, they do not account for the positive externalities associated with the consumption of their good or service, which could be a merit good. There are many definitions of a merit good, but one definition is that a merit good is a good defined by society or the government to be beneficial to society, often because they bestow positive externalities on society when they are consumed. Externalities are defined as spillover effects to third parties not involved in the production or consumption of the good. Vaccinations provided by the National Health Service (NHS) are examples of merit goods, because they confer positive externalities on society, as when people who are vaccinated help by not infecting others and by making UK society healthier as a whole. However, an individual consumer only considers his marginal private benefit from getting vaccinated, and does not consider the positive externalities his vaccination confers on society – he would not take the positive externalities into account when making his economic decision. This decision results in an under-consumption of the merit good of vaccination, if the decision is left to the workings of the free market, and there is therefore dead-weight loss, as society’s welfare has yet to be maximised due to this under-consumption.

Tutor’s Question: What economics diagram do you think should be drawn here to support the merit good argument, which shows that markets do not always work efficiently?

Another example is the failure of the free market to produce public goods if there is no government intervention. A public good is one that is non-rival and non-excludable. Non-rival in consumption means that one person’s consumption of the good will not result in less of the good being available to others – or the consumption of the good does nothing to reduce the quality or quantity of the good for others, such as public lighting in the streets, where the amount of light cannot be “used up”. As a result, the marginal cost of the next user is theoretically zero, and if allocative efficiency means to produce where price equals to the marginal cost, and the marginal cost of producing the good is zero, then it follows that no private firm would produce the good only to  charge zero dollars (at the allocative efficiency level). And non-excludable means that non-payers cannot be excluded from consuming the good, for example national defence – it defends everyone in the country, including those who have not paid for it, such as foreigners or travellers, such as tourists. Therefore a rational firm would not produce this good because of the problem of free riders, where one who has not paid for the good has the ability to consume it. The government is the only decision-making body that has the willingness and ability to produce a public good, like street lighting and defence, as it has the mandate to do so for the welfare of its citizens (and therefore the willingness) and can raise the revenues to do so from compulsory taxes (and therefore the ability to do so).

In conclusion, while the price mechanism allocates scarce resources efficiently according to economic theory, this may not always be the case in reality, as there are market failures that challenge the assumptions upon which the efficiency of the price mechanism is predicated. Some government intervention is required in the free market to make it genuinely “free”, and to let the price mechanism work as it should. In the real world, with market failures such as the failure of the free market to produce public goods or the underconsumption of merit goods, or imperfect competition in the market, there is a strong need for government intervention in the free market to reduce or eliminate market failures so that the free market can go a long way to produce the optimal outcomes that the free market economists promise.

Economics Tutor's Comment - This is a top-quality, excellently-argued, and very strong economics essay which covers quite a few important points and arguments. The candidate's use of economic theory for market failure is quite strong in this economics essay and the anti-thesis arguments have been well-explained. Could more real-life examples have been used to demonstrate the arguments or the strength of the points? What else would make this economics essay even better than it is currently? Thank you for reading, and cheers! 

JC Economics Essays - This economics essays blog helps economics students with the A-Levels Economics examinations (Cambridge, A1/S, A2, H1/H2 A levels), and the international AS level economics examinations. IB students can also benefit from the economics materials and content in JC Economics Essays. This economics blog provides a range of useful and relevant economics essays, learning materials, study tips and techniques, and model economics essays that students in the United Kingdom, Malaysia, and Singapore, as well as worldwide, can use to excel in their studies and economics examinations.

This model economics essay was contributed by WT, our resident expert who helps students understand the beauty of Economics. She has wide-ranging academic interests in Econometrics, Economic History, International Trade, and Game Theory. And as always, SS, the editor of JC Economics Essays, edited this economics essay and also provided comments and pointers. Several editions and versions of this economics essay have been very popular, but do not accept them at face value and always think about how you would approach this economics question instead. Thank you for reading and cheers. 

View: The Economic Impact of Disruptive Tech on Singapore's Economy

This economics article is contributed by a kind reader

This economic perspectives essay deals with the rise of new, disruptive technologies, and their impact on Singapore's economy - and what Singapore can do to prepare for this technological change.

Today, the advance of new and disruptive technologies is unfolding on many economic fronts. While not every emerging technology will drastically transform the business or community landscape, some technological trends and changes do indeed have great potential to disrupt the economic status quo, massively altering the way people live and work. 

In fact, in late 2016, Singapore’s Prime Minister Lee Hsien Loong singled out technological disruption as the defining challenge among the economic issues Singapore is currently grappling with. As Prime Minister Lee (2016) correctly remarked, old economic and production models are not working, while new models are coming thick and fast. Singapore has to adjust and to keep up with these important trends, because of rising technology and globalisation. He is right. And technological disruption will happen over and over again, relentlessly. Both Singapore government and business leaders must not only know what’s new on the horizon, but also start preparing strategically for its impacts.

We could learn from economic history, which has already shown us clearly that earlier disruptive technologies, such as the personal computer for example, had the ability to sink technological market leaders, who were focused on their existing and most profitable markets and did not see or understand the threat looming upon them. Many examples readily come to mind, for example, Finland’s now-extinct Nokia phones, which once were prevalent consumer goods. And economic history already showed us that once new technological disruption takes hold, it typically enables a larger population of less-skilled or less affluent people to do more at lower cost, which previously could only be accomplished by specialists, who were oftentimes essentially technological gatekeepers. Personal Computers, for example, brought incredible computing power to individuals at a fraction of the cost of minicomputers, replacing the technological specialist and centralised data centers in the process.

Let’s examine the Singapore economy. Nearly every key sector in Singapore's economy is likely to face technological disruption in the next few years. Among the economic sectors likely to experience significant disruption in the near future are retail, Infocomm Technology (IT), financial and insurance sectors, administration and support sectors, and the accommodation and food sectors. In the longer term, up till 2020, economic sectors such as manufacturing, health, social services, and transportation and storage are also likely to be disrupted by technology. One example highlighted by Prime Minister Lee had illuminated the phenomenon of economic disruption in the taxi business in Singapore, which had been seeing greater competition from private car hire services such as Uber and Grab. All over the world, Uber and Grab are disrupting the taxi industry, but commuters are benefiting from better and more responsive service, but taxi companies and drivers find their business negatively impacted. 

In responding to these technological changes, PM Lee noted that one possibility was to close Singapore off from technological disruption and try to stop people from using the new technology, and the other possibility was to embrace technological change and let the technological disruption happen, but help the incumbents, especially the taxi drivers who would be negatively impacted, adapt to the changes. And PM Lee noted that taxi drivers had been level-headed about the competition, and had in fact made useful economic recommendations to the government on ameliorating the impacts of these technologies and adapting to their economic consequences.

And the Singapore government can play an even larger role in many areas to counter disruptive technology. It must ensure a deep pool of talent by investing in education, and developing and re-training and up-skilling people and raising human capital. In fact, Singapore's schools are giving students a lot of exposure to start-ups areas worldwide, and sending them to intern with venture capitalists and big tech companies. This is a useful and relevant development. Since a strong economy is built on a skilled workforce after all, SkillsFuture – Singapore’s funding programme for retraining and upgrading skills – is important. It has to be said that Singapore's schools are preparing its students well for the new economy of the future, and training them in values and skills to be future-ready for the 21^st century, where the skills and competencies needed are different, and where the new jobs will be different from the jobs of today. And in addition to upgrading workers in their current careers, the Singapore government is also helping retrenched workers to transition into new jobs.

And Singapore’s legislation and technological regulation must also catch up with changing and ever-evolving business processes. The Singapore government could also be an early adopter of some of these high technologies, setting an example for local businesses and giving them an opportunity to test some of these processes and establish a track record. For example, Fintech (financial technology) is at the centre of many of these processes, and another related big piece is data, data regulation, and IP (intellectual property) protection.

Beyond building up deeper capabilities and talents, investing in Singapore's legislation and regulation, Singapore should also promote a culture of entrepreneurship as well. Entrepreneurs play an important role in any economy, not just because they do business for themselves and create new jobs and prosperity, but also because they are resourceful and optimistic, and give Singaporeans the quiet confidence that anything is possible. They are often early technological adopters. Maybe, if Singaporeans are more entrepreneurial, we can not only survive technological changes, but also ride the wave of innovation and creativity to a brighter economic future. In other words, the future is not set - and we should start preparing for it now. 

JC Economics Essays - In recent posts on this economics blog, we have made a slight change in focus. We are now re-branding and re-marketing ourselves as an economics essays blog with opinions. While the economics essays, case studies, and other educational resources for A level Economics (H1, H2, or H3) are still available (along with undergraduate and GCE, GCSE, and other examination paper resources), in future, JC Economics Essays will be an economics resource with views, perspectives, and opinions. 

We want to share economics views and perspectives, to move beyond purely model essays aimed at improving grades. Not many economics tutors and students, especially those from A level economics tuition centres, actually have a real or novel opinion on a wide range of economics issues. Some of them do, and we want to share their opinions more widely. While, quite naturally, it is still important for economics students to get good grades, it is more important to have an informed opinion. We want to do more, and be more as a blog. We want to aspire to higher objectives. We also want to have a unique editorial and language style, and promote writing and perspectives on economic issues. And we hope you continue to support us and our change in focus. Thank you for reading, and cheers. 

View: If it is too good to be true, it probably isn't always - China's economic statistics

This article is contributed by a kind reader of JC Economics Essays

For many economists and pundits who long believed that China’s incredible provincial and national economic growth figures seemed too good and neat to be accurate, they now have reliable confirmation of their scepticism. While long dismissed as speculation or myth, there is now official news confirming their suspicions. 

What happened?

In 2017, the Chinese government finally admitted that some of its outstanding economic data was made up… which means that some of the economic figures were invented, created, man-made.

Before these shocking revelations, there had been many suspicions: an economic study by Harry X Wu in June 2015 estimated that from 1978 to 2012, China’s Gross Domestic Product (GDP) grew by 7.6%, which would be around 2.6% lower than the official 9.8% economic figure. Perhaps he got closer to the truth than we realise. In fact, it might have been interesting to note that Wu’s (2014) results indicated that Chinese Total Factor Productivity (TFP) growth was negative from 2007 to 2012. Over-building, over-capacity, under-utilisation, and the advance of the Chinese state into private sector markets were also substantially dragging China’s economic growth down.

Yet, despite this doom and gloom in the economic analysis, and the many suspicions, it was reported cheerily in official news that China’s economy expanded by 6.7% in the third quarter of 2016. Economists have sometimes wondered why China’s economic growth figures often look right on track to hit the central government’s target economic growth rates.

And in January 2017, China’s northeastern Liaoning province, which relies on the production of steel as its economic growth engine, reportedly inflated its economic growth figures from 2011 to 2014. 

The sheer scale of this economic deception is quite staggering. This province has a population of about 43 million, which makes it bigger than California in the USA. And this is the first time the Chinese government has publicly admitted to faking official economic statistics at any level. 

Also, what makes this economic case even more surprising is that fiscal revenues in Liaoning were inflated by at least 20% during the same period, and some other economic data there were also fabricated. These actions can be partly attributed to the incentives that rational and utility-maximising Chinese officials face when it comes to economic data. It is said (in Chinese) that Chinese officials produce the economic numbers, and the economic numbers produce officials in turn, which means that massaging economic data can help one get ahead in Chinese officialdom. People respond to economic incentives.

It can be quite breath-taking to think that the economic books are cooked. Some of the faked economic figures are in fact quite dramatic. According to the news agency Reuters, one county in Liaoning province reported an extra fiscal revenue of 847 million yuan (around US$131.3 million) in 2013, more than double the actual figure. And in one of the years, Liaoning’s GDP growth figures were reported at 9.5%, far above the current figure of a mere 2.7%. A pittance! 

And Liaoning had failed to hit government economic targets in key economic metrics in 2016, including economic growth, fixed asset investment, and exports. Since 2014, when Liaoning stopped inflating its economic growth figures, fixed asset investment, an important proxy measure of construction work, had been declining 60% to 70% per annum.

In China today, the falsification of local economic statistics apparently still happens in some areas from time to time, and the government will occasionally issue stern warnings of heavy punishment for those who fake official economic figures. Enforcement seems to remain an issue for China as it continues its economic rise. There are many economic implications: Investors may have to think twice about investing in China; their economic figures have to be taken with a pinch of salt; and most importantly, and surely not just tongue in cheek, there should be many, many jobs for real statisticians in China. 


JC Economics Essays. This is an economics blog with opinions. This economics article was contributed by SS. We thank our readers for their kind and generous personal contribution to this economics blog. The views and perspectives expressed in this article are the author’s own views and based on his own research and are all made in his own private capacity. The sources are available online and also publicly, although the framing and opinions are his. To recap, JC Economics Essays is an economics resource also has useful sample or model economics essays, economics questions, A level Economics examination techniques and economics case studies. Thank you for reading and cheers. 

Explain how benefits to the USA economy can arise from specialisation and exchange. [10]

This economics paper explains how the United States of America’s (USA) economy benefits from specialisation and exchange. 

A country has a comparative advantage in producing a good if it has a lower opportunity cost of producing that good as compared to another country. According to David Ricardo’s law of comparative advantage, the USA will specialise in the production of goods in which it has a comparative advantage in, and use it to trade for goods in which it has comparative disadvantage in. International trade refers to the exchange of goods and services across international boundaries. The theory of comparative advantage theorises that trade arises because different countries have different opportunity costs.

By specialising and exporting goods in which the USA has a comparative advantage in while conversely importing goods in which it has a comparative disadvantage in, she would be able to increase her overall consumption of goods and services as compared to the situation under autarky – defined as the situation without trade. Hence, USA citizens would be able to consume beyond their Production Possibilities Curve (PPC) as a result of increased consumption possibilities. According to ‘The World Factbook’, agriculture and services comprise 1.2 and 79.6 percent of USA’s gross domestic product (GDP) in 2014 respectively. Gross domestic product is defined as the total value of final goods and services produced in a country's domestic area over a given period of time, usually a year. A developed country with a strong technological and capital base such as the USA would have a comparative advantage in the production of high-tech and high-value services, such as banking and shipping. In turn for exporting these, it imports goods such as agriculture from other countries which have a comparative advantage in producing agriculture, such as land-abundant Thailand, or a labour-abundant country such as the People's Republic of China which would produce labour-intensive economic products.

Aside from higher consumption possibilities, there exists other benefits to the USA economy arising from international trade. International trade allows for the USA to produce for a larger world market, thus enabling economies of scale to be reaped. Economies of scale refer to the fall in Long Run Average Costs (LRAC) as output increases. Foreign competition also forces domestic producers to innovate, cut costs and improve product quality. A case in point would be the consumer electronics industry – where American multinational technology company Apple has had increased competition from foreign competitors such as rival Samsung. The exploitation of economies of scale and greater competition improves both productive and allocative efficiency, thereby enabling the USA to better utilise scarce resources in maximising its economic welfare.

Opening up to international trade helps the USA attract Foreign Direct Investment (FDI). FDI arguably results in not just technological transfer, but also the transmission of ideas, technical expertise, and managerial skills, all of which are important contributing factors to the USA’s long-run economic growth. According to ‘The World Factbook’, the USA is the largest recipient of Foreign Direct Investment (FDI) in the world, with a total of 2.8 trillion USD in 2013.

Besides attracting FDI, engaging in international trade also facilitates structural economic change. Developing an economic structure that supports the exporting of goods leads to the expansion of services such as shipping, air travel, banking and finance services. The economy would therefore mature and develop, becoming less dependent on manufacturing, diversifying into higher-value services. This is evident in the USA economy, where the industry sector only comprises 19.2 percent of USA’s GDP, as compared to the service sector which comprises 79.6 percent.

In conclusion, specialisation and international trade brings about many benefits to the USA economy, and are not limited to those listed above.

JC Economics Essays - This is a model H1/H2 A level Economics essay for a part (a) question of 10 marks. This economics response was kindly contributed by Wilson YWS, a former economics student, and (after editing by an experienced economics tutor) is generally quite well written, especially for a 10 mark question under examination conditions. We can look forward to more H1 economics or H2 economics essays from Wilson in the future. 

However, how can this economics essay be even better written? What other salient points should have gone into the construction of this essay, and what economics diagrams would have been drawn to give this economics essay an even better mark? Also, conversely, what did this economics student include that was good to have but not really necessary? Do always think through the essays that you write and seek to do better each and every time. 

Thank you for reading, and cheers. 

Compare and contrast the various types of economic efficiencies. [10]

Compare and contrast the various types of economic efficiencies. [10]

The fundamental economic problem is a problem of scarcity, necessitating choice. This is because human wants are potentially unlimited, but resources are limited, and hence choices have to be made, “efficiently”, between competing uses for the same resources. The scarce resources, or factors of production, are land, labour, capital, and entrepreneurship. Land refers to resources, gifts of nature, and other natural factors. Labour refers to human effort and work. Capital refers to any good that can be used to produced another good. Entrepreneurship refers to risk-taking, organisation, and business acumen, among other things. It can be said that efficiency is concerned with the optimal production and distribution of society’s scarce resources. This economics essay compares and contrasts the various main types of economic efficiencies – productive efficiency, allocative efficiency, dynamic and static efficiency, X-inefficiency, social efficiency, and Pareto efficiency.

Productive Efficiency

First, productive efficiency occurs when the maximum number of goods and services are produced with a given amount of inputs. This will occur on the production possibilities curve or production possibilities frontier (PPC or PPF), meaning that any point along the PPC will be productively efficient. On the PPC, it is impossible to produce more goods without producing fewer services. Productive efficiency will also occur at the lowest point on individual firms’ average cost curves (AC curves). This is because productive efficiency can be thought of as the method of least cost production, which means that production costs are minimised. Productive efficiency is not the same as the other types of efficiencies.

Think: how would you draw the PPC?

Allocative Efficiency

Second, allocative efficiency occurs when goods and services are distributed according to society’s preferences or when they are allocated in accordance with maximising society’s welfare. An economy could be productively efficient but produce goods that people that do not need, and this would be allocatively inefficient. In other words, allocative efficiency is a subset of productive efficiency, where productive efficiency is a necessary condition of allocative efficiency. (A necessary condition is a condition for some state of affairs that must be satisfied before the state of affairs can be obtained.) It should be noted that allocative efficiency occurs when the price of the good produced by a firm equals the marginal costs of production.

Dynamic Efficiency

Third, dynamic efficiency refers to efficiency over time, whereas static efficiency refers to efficiency at a particular point in time. The first concept has the element of time taken into consideration whereas the other does not consider time. Dynamic efficiency involves the introduction of new technology and working practices to reduce costs over time, whereas static means “at a fixed point in time”. Basically, this concept of dynamic means that there are changes over time whereas static means that time is held, as it were, frozen.

X-inefficiency

Fourth, X-inefficiency occurs when firms do not have incentives to cut costs. This is usually associated with monopolies, which usually pursue rent-seeking behaviour rather than think of how to lower costs. For instance, a monopoly which makes supernormal profits may have little incentive to get rid of surplus labour. Therefore, a monopolistic firm’s average costs may be higher than necessary.

Social Efficiency

Social efficiency occurs when externalities are taken into consideration and occurs at an output where the social cost of production (SMC) = the social benefit (SMB), or alternatively, the marginal social costs (MSC) = the marginal social benefits (MSB). This is closely related to both the concepts of allocative and Pareto efficiency, also known as Pareto optimality. Pareto efficiency or optimality is defined as a situation where it is not possible to make one party better off without making another party worse off. Hence, Pareto efficiency is socially efficient and also allocatively efficient, at society’s level.

Conclusion

In conclusion, there are many efficiency concepts in Economics and it is important to understand economic efficiency. Many of the concepts are related and can be understood in relation to each other.

JC Economics Essays – Tutor’s Commentary: This is a good introduction to the various “efficiencies” that Economics has to offer, not just at ‘A’ levels, but also at O, AS levels and introductory undergraduate Economics as well. ‘A’ level Economics can be quite esoteric, it is true, and this Economics material might seem difficult. Think positively instead: how could you make this Economics essay comprehensible and easily understood by you? Let’s do some counterfactual experiments here. Put yourself in the role of the Economic tutor, the examiner, or the lecturer, and you were marking this essay paper. If you were an Economics tutor, how would you judge this essay? What were its strengths and weaknesses, and why do you think – as a professional Economics tutor – those parts of the Economics essay were strengths or weaknesses? Thanks for reading, all the best and good luck!

(b) Discuss what influence the rate of interest might have on the level of investment in an economy [15]

(b) Discuss what influence the rate of interest might have on the level of investment in an economy [15]

This paper discusses the influence the rate of interest might have on the level of investment in an economy. Investment refers to a process of accumulating capital, where goods are used in the production of other goods. There are two types of investment, the first being fixed capital such as machineries, plants and equipment, and second type of investments includes inventories such as raw materials and unsold goods. The cost of borrowing money or the cost of credit is important for businesses that depend on borrowed capital. The decision to invest depends on the expected returns on investment (MEI) and cost of investment (i/r). Investments will be profitable as long as MEI is more than interest rate. Hence the rate of interest definitely has an impact on investment, although there are some limitations and other factors that need to be considered in this paper.

There exists an inverse relationship between interest rates and investments. If the rate of interest decreases, then investment will increase, ceteris peribus. Projects with lower expected returns will now appear profitable and so more investments will occur. When interest rates are at 4%, projects with returns of 2% and below appears unprofitable I*, and will not be undertaken. If it falls to 2%, these projects will now become profitable, thus investments increase.

THINK: Insert theoretical diagram. What economics diagram do you think this will be?

Also, when rates of interest falls, people may save less but can consume more. This may increase production and employment and national income in the economy. Producers that need to meet higher consumption will invest more.

The extent of increase in the level of investment due to a fall in interest rates depend on the responsiveness of investment decisions to interest rate changes which in turn depends on economic conditions, business confidence and source of investment. Keynes suggested the interest elasticity of demand for capital goods – during a recession – businesses are pessimistic, and even decreases in interest rates may fail to stimulate investments.

Interest rates alone are also insufficient to influence the level of investment, but the expected yield is also crucial in determining investments. The expected returns are important in that a fall in interest rates that is accompanied by a fall in expected returns may not result in greater investment. Even without any increases in interest rates, if the MEI curve shifts up, there will be more investment at each interest rate than before. The increase in expected returns could result from either a fall in the cost of capital goods, increased efficiency of machines due to technological advancement or favourable changes in government policy such as decreases in profit taxes or any increase in business confidence.

Expected yield may end up being more important in certain circumstances – for example in Singapore, where investment is largely foreign. Most investments take place when businesses are optimistic about the profitability of their projects. The reduction in corporate tax for example, will increase the expected yield of business projects and encourage greater investment expenditures.

Therefore, the rate of interest is only one of many factors that affect the level of investment in an economy. Its impact depends on the responsiveness of the investment to interest rates. If the elasticity of investments to interest rates is elastic than an increase in interest rates will lead to more than proportionate increase in investments and vice versa.

JC Economics Essays - Economics Tutor's Comment: This economics paper could be improved. However, this is quite a good approach, although many relevant real life, real world examples are lacking and more details could be further added. This economics paper is quite strong in theory and the candidate clearly knows her work. Although it was written under model "A" level examination conditions, still think - how could this economics paper be further improved and made better? How could the conclusion be made more argumentative, more evaluative, more considered and better nuanced? Remember that an evaluative conclusion that gives a susbstantiated, justified, and nuanced opinion can score high, good marks. Suggested possible exam grade: 11.5 / 15.