According to economists, a large rise in the cost of car manufacture in the United Kingdom (UK) and a general rise in incomes of households in the UK are likely to affect the sales of cars in different ways. Explain how elasticities of demand can assist in understanding the effect of each of these changes on the sales volume of cars. [10]

This paper explains how the elasticities of demand are useful in understanding the effect of a large rise in the cost of car manufacturing in the United Kingdom (UK) and a rise in incomes for UK households are likely to affect the sales of cars in the UK. In this economics essay, we focus on the price elasticity of demand (PED) and income elasticity of demand (YED), because the rise in the cost of car manufacturing results in a leftward shift of the supply curve, thus necessitating the concept of PED, and the rise in incomes necessitates the use of the concept of YED.

Price elasticity of demand is defined as the degree of responsiveness of the quantity demanded of a good with respect to the change in its own price, ceteris paribus.

Question: What mathematical formulae and diagrams do you think can be used here?

Suppose the cost of production of a car increase, thus resulting in an increase in its price. The use of the concept of PED is useful in evaluating the impact on the quantity demanded of the car. In the case of a Bentley, where the PED is greater than 1 since it comprises a relatively large proportion of income, an increase in the price of a Bentley results in a more than proportionate decrease in the quantity demanded of the Bentley. In the case of a Honda, where the PED is less than 1 since it comprises a relatively small proportion of income, an increase in the price of the Honda results in a less than proportionate decrease in the price of Honda. In both cases, however, we can conclude that the quantity demanded, and hence sales volume, of the different car models fall as prices increases, ceteris paribus.

Income elasticity of demand is the degree of responsiveness of the quantity demanded of a good with respect to the change in income, ceteris paribus. 

Question: What mathematical formulae and diagrams do you think can be used here?

The change in quantity demanded, and hence sales volume, depends on the YED of the car model. If, like a Honda, the car is a normal necessity, where 0 < YED < 1, an increase in income results in a less than proportionate increase in the quantity demanded and hence sales volume. If, like a Bentley, the car is a normal luxury, where YED > 1, an increase in income results in a more than proportionate increase in the quantity demanded, and sales volume will therefore increase more than proportionately. On the contrary, if the car is like an inferior good like a Ford, where YED < 0, an increase in income will result in a fall in the quantity demanded, thereby reducing sales volume of the car.

Overall, the use of elasticities of demand concepts, namely price and income elasticities, are useful in helping us understand the effect of the changes on the sales volume of the different car models. 

Economics Tutor's Comments - This is a strong economics essay which covers quite a few important points and arguments. However, to improve this essay, could the writer have used the concept of cross elasticity, or cross price elasticity (XED)? And could more specific examples have been used to illustrate the economic theory? What else would make this economics essay even better than it is currently? Thank you for reading, and cheers.  

JC Economics Essays - This essays site helps economics students with the A-Levels (Cambridge, A1/S, A2, H1/H2 levels), and the international AS level economics examinations. This blog provides a range of useful content, materials, tips and techniques, and model economics essays that students in the United Kingdom, and internationally, can use to excel in their studies and examinations.

This model essay was contributed by WT, our resident expert who helps economics students appreciate Economics and provides detailed and comprehensive content on economic issues. WT has a wide-ranging interest in Econometrics, Economic History, International Trade, and Game Theory, especially with respect to economics' applications in real life. And as always, S. S., the editor of JC Economics Essays, edited this economics essay. 

Explain the cause of the market failure in the United Kingdom (UK) car industry, with relevant examples.

This economics essay explains that the two main sources of market failure in the British car industry are imperfect competition, especially arising from market power, which leads to productive and allocative inefficiency.

While there are many sources of market failure, such as the failure of the free market to provide public goods, the under-provision of merit goods, while demerit goods are over-consumed if their production and consumption are left to the workings of the free market, one possible cause of the market failure of imperfect competition due to excessive market power in the British car industry. 

The British car market can be characterised as an oligopolistic market. Broadly speaking, the car industry in the UK is known for producing cars such as Aston Martin, Bentley, Daimler, Jaguar, Land Rover, Lotus, McLaren, Mini, and Rolls-Royce, and also popular Japanese cars such as Honda, Nissan, and Toyota. As this market is oligopolistic, there are relatively few sellers, often of large size as can be seen in the examples, a differentiated product, and relatively high barriers to entry, such as patents, technology, and legal barriers. (For the purpose of simplicity in this essay, let us assume that these oligopolies do not collude or form cartels.) Barriers to entry are defined as be man-made or natural obstacles to free market competition, and this is one area where the British car industry suffers. For example, the UK has a strong design and technical base which means that its cars are likely to be highly differentiated products with no close substitutes, which confers a certain degree of market power. 

Question: What economics diagram do you think should be drawn here? How would you explain the diagram to support your arguments?

The net result of this market power is that, according to economic theory, the price of the cars produced will be larger than the marginal cost it takes to produce the car. When P>MC, it means that the industry is allocatively inefficient. Allocative inefficiency is defined as the situation where society’s resources are not being maximised. Large oligopolies, such as Aston Martin, Bentley, Daimler, Jaguar, Land Rover, Lotus, McLaren, Mini, and Rolls-Royce, tend to be allocatively inefficient, and therefore tend to be productively inefficient as well. Productive inefficiency occurs when the price of the product is higher than the average cost required to produce the product, because if the car industry were efficient, P = MC = AC, in a perfectly competitive situation. 

In conclusion, the car industry in the United Kingdom suffers from imperfect competition, with market power resulting in productive and allocative inefficiency.

Economics Tutor's Comment - This is a commendable effort for the A levels, but think of how the examples could be more explicit and targeted towards answering the question. How would make this essay even better? Thank you for reading and cheers. 

JC Economics Essays - This is an economics essays site that can help economics students with their A-Levels economics (A1/S, A2, H1, and H2 levels) as well as the international AS level economics examinations. This economics blog provides a range of useful and relevant content, materials, and essays that students in the United Kingdom, and all around the world, can use to excel in their economics. 

This Economics post with comments was contributed by WT, an Economics expert who helps students understand the beauty of Economics and its applications in real life. WT has a strong interest in Econometrics, Economic History, International Trade, and Game Theory, especially with its applications to real economic situations. This economics post was edited by S. S., the editor of JC Economics Essays. 

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. 

Examine, with relevant examples, how American car producers might use the price (PED) and income elasticity of demand (YED) concepts to help determine their pricing and output decisions. [15]

This economics essay applies concepts of elasticity to the car market, using real world examples from the USA. Price elasticity of demand measures the responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. It is calculated by taking the percentage change in quantity demanded of a good over the percentage change in price. Income elasticity of demand measures the responsiveness the demand for a good to a change in income, ceteris paribus. It is calculated by taking the percentage change in the demand of a good over a percentage change in income. 

After having defined the two main economic concepts, this essay seeks to explain how they can be used to determine pricing and output decisions with the aid of diagrams before linking them to various car producers and finally evaluating the usefulness of these concepts.

[Insert diagram on price elastic demand showing the loss and gain in revenue when price falls]

With the aim of maximizing total revenue in mind, with a fall in price in a price elastic demand, the firm would gain an area bigger than the area loss. This shows that the quantity demanded will increase more than proportionately, resulting in an increase in total revenue earned by the firm.

[Insert diagram on price inelastic demand showing the loss and gain in revenue when price rise]

Likewise, with the same goal in mind, a rise in the price of a good with an inelastic demand would result in the firm gaining an area bigger than the area loss. This indicates that the quantity demanded will fall less than proportionately, also leading to an increase in total revenue. Hence, by knowing the price elasticity of demand for their goods, the firm would know when to raise or cut prices for its benefit in earning maximum total revenue.

For income elasticity of demand, with regard to positive income elasticity, with an increase in income, the demand rises for the normal good and firms should produce more of them when the country faces strong economic growth. As for negative income elasticity, with an decrease in income the demand rises for the inferior good and firms should produce more when the country is having a recession. With a higher magnitude, the extent of the change in demand increases and the firm should be more responsive in terms of the quantity supplied.

When linking these concepts to various car producers, for price elasticity of demand, the bigger firms such as Ford and Chrysler, experience greater price inelasticity for their cars as they are more luxurious and expensive. For the smaller vehicle firms in the USA whose goods are price elastic, they can reduce this extent through extensive advertising and product differentiation.

For income elasticity of demand, cars might be considered to be as normal goods as they offer more convenience and comfort as compared to taking public transport where it is likely to be more crowded and people have less personal space. In addition, some car companies produce cars of better quality and have established brand loyalty amongst consumers. For these car producers, the income elasticity of their cars is more elastic.

In particular, Ford cars can generally be considered normal goods, and more of these should be produced in a good economic climate. However, if Ford really wants to earn much more, it should produce more of its luxury series, the Lincoln (Lincoln Motor Co. produces what can be considered a luxury American car). However, if Ford produces cheaper, simpler cars, this would only be an effective strategy in an economic downturn because the cheaper, simpler models could arguably be considered inferior goods (relative to the normal and normal luxury goods that Ford produces). 

In conclusion, while evaluating the usefulness of these concepts, price elasticity of demand may not be that effective as the cost involved in production has to be factored in for the car companies to truly earn profits and not merely rely on the demand for them. As for income elasticity of demand, it may not be that useful either as data was taken from past statistics and thus may not be very accurate for today as the economy would have changed.

JC Economics Essays - economics tutor's comments: This part (b) economics essay did make an attempt to answer the economics question posed and in fact used a few American car examples, which is good. It is always a good idea to answer the question directly in Economics examinations. However, this economics paper could have done much better had it given more analysis both in theory and also using more real world examples of American car companies. Overall, it did a good job. Special thanks to A G and T students; the essay was written under examination conditions but has been edited for blog posting. 

Explain possible economic reasons as to why the car population in Singapore grew rapidly from the late 1990s to the early 2000s. [10]

The growth of the Singapore car population indicates that the equilibrium quantity transacted has increased. This is due to a rise in both the demand and supply of cars leading to a rise in quantity supplied and quantity demanded respectively. Some factors affecting the demand for cars include tastes and preferences, level of wealth and income, population and ease of acquiring credit while those economic factors affecting the supply include productivity, government policies and number and size of firms. This Economics essay seeks to use a demand-and-supply diagram to illustrate this development described in the Singapore car market, before explaining the demand and supply factors mentioned above. It would then contextualize the theoretical economic analysis to Singapore by addressing the events which had occurred between the years 1997 to 2008.

[Insert a diagram on increase in demand and supply]

As depicted, an increase in both demand and supply of cars has resulted in an increase in the equilibrium quantity. This addresses the fundamental theoretical reasons for the rapid growth in car population in Singapore over the last ten years.

After having established how a rise in demand and supply has caused the growth in car population, this essay will now look into greater detail the reasons for them. A change in taste and preferences could have resulted in the rise in demand. Car companies could have engaged in more extensive advertising which could have attracted consumers to purchase more cars.

An increase in the level of wealth and income could also have enabled consumers to not only have the willingness but also the ability to afford a car, contributing to the rise in demand as well. This increase in level of wealth and income could have been possible because of economic growth.

Another factor would be population growth. With an increase in population, especially those in the workforce, more people can afford or would need to purchase a car as a mode of transport. Hence, an increase in population growth could have explained the rise in demand for cars.

Furthermore, the ease of acquiring credit could have encouraged more people to purchase cars. The interest rates of loans from banks could have fallen, resulting in cost of borrowing to decrease, therefore consumers found it much easier to afford a car when borrowing money to finance this purchase. Thus, the ease of acquiring credit could possibly account for the increase in demand.

Moving on, with respect to the factors for a rise in supply, one major factor could be higher productivity in the production of cars. With this, using the same amount of resources, car companies can produce a greater number of cars. This in turn addresses the growth in car population.

In addition, Singapore's government policies could have caused a rise in supply. Taxes imposed on cars could have been lowered, which would be appealing to consumers to purchase a car since it is now more affordable. Furthermore, the supply of cars could have been increased if there has been an increase in the Certificate of Entitlement, which allows Singaporeans to own a car. Thus, governmental factors also could have led to the growth in car population. 

Moreover, an increase in the number and size of car firms could have led to the rise in supply of cars. With more car firms entering the market and existing firms expanding, the production of cars would increase as well. This evidently shows an increase in car population.

In conclusion, contextualizing the theoretical analysis to Singapore, during the years of 1997 to 2008, there has no doubt been quite a few economic crises, but each time the Singapore economy came through robustly. Beginning with the Asian Financial Crisis in 1997, September 11 and the Dot-com bubble which caused a stock market crash in 2001 as well as SARS in 2003, Singapore’s economy was not severely negatively affected. In fact, the Singapore economy was able to recover quickly and experience a strong economic growth instead. Higher income levels followed this economic growth and therefore resulted in a rise in demand for cars because they were able to afford such a purchase.

On the supply side, government policies arguably played an important role in deciding the supply of cars with the Vehicle Quota System (VQS) which comes along with the Certificate of Entitlement (COE). In the final analysis, the number of COEs must have increased, accompanied by a drop in COE prices, accounting for the increase in supply of cars.

JC Economics Essays - H1 and H2 A level standard economics essays - tutor's comments: While this sound, clear, and interesting economics essay was written under timed examination conditions and is actually a very good analysis of the Singapore car market in Singapore's economic history, it could have done better had it woven the economic theory presented with real life examples instead of waiting till the conclusion to bring in exact Singapore analysis with real world examples. In other words, sound economic theory must be linked to real examples. This economics essay is very strong in economic theory, yet could have done better by using more real world and relevant examples throughout the paper. However, how else would you have made this paper better? Think of other ways to make this analysis more robust. 

Examine how automobile producers might use price elasticity and income elasticity of demand concepts (PED, YED concepts) to help determine their pricing and output decisions. [15]

In order to maximize profits, price and income elasticity of demand concepts can be applied by firms in order to come up with their business strategies. Hence, this essay aims to discuss about the impact of price and income elasticity of demand on automobile firms' decision and how the extent of elasticity can be applied to the relatively monopolistic automobile market. 

Price elasticity of demand measures the responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. The demand for the good is said to be elastic if the change in price results in a more than proportionate change in quantity demanded. Conversely, the demand for the good is said to be inelastic if the change in price results in a less than proportionate change in quantity demanded. Hence, if a firm expects the demand for its good to be price elastic, then it should lower the price. 

[Insert a diagram with both demand elastic and inelastic curves]

A decrease in price will result in a more than proportionate increase in quantity demanded if demand is elastic. Therefore, total revenue is raised.

Conversely, if the firm expects its demand for good to be price inelastic, it should raise the prices to increase its revenue. This is because an increase in price will result in a less than proportionate decrease in quantity demanded.

Firms may also want to differentiate their goods in order to make the demand more price inelastic and hence raising their profits. This is because it enables firms to charge a higher price but yet sell more output, thus raising its total revenue. Product differentiation can be real differences or imaginary differences. Real differences include differences in size, colour and taste, specifications and quality of physical product. These can be altered often through research and development. Imaginary differences include brand loyalty and packaging. These can be done through persuasive advertising and innovative packaging.

Income elasticity of demand measures the responsiveness of the demand for a good to change in income, ceteris paribus. Positive income elasticity of demand of a good means that the demand for the good increases as income increases, conversely as income falls, demand for good falls. These goods are known as normal goods. These normal goods can then be classified into normal-necessity goods and normal luxury goods. Conversely, negative income elasticity of demand of a good means that the demand for the food decreases as income increases. These goods are known as inferior goods. Understanding income elasticity help firms decide in the type of goods to sell under different economic conditions. If a country is facing strong economic growth, firms should sell more normal goods, especially normal luxury goods where an increase in income will result in a more than proportionate increase in demand. However, during an economic downturn, the demand for normal goods falls. Normal necessities fall less than proportionately while normal luxuries fall more than proportionately. Firms may then want to consider producing and selling more inferior goods instead.

In the context of the automobile market which faces monopolistic competition, although there is product differentiation, demand is likely to be price elastic due to high availability of substitutes. Hence, the firms should lower its prices to raise its revenue. However, in terms of product differentiation, a monopolistic market may not have the economies of scale to spread cost overheads. Hence low cost innovation is possible but not high investments on research and development. In the long run, automobile market only earns normal profits.

Secondly, automobiles are considered to be normal luxury good that increases more than proportionately if income increases. Thus if economic growth is strong, they should decrease the price.

However, there are limitations of applying demand elasticity concepts. The estimates are based on past dates and resources hence, the data may not be applicable to current business environment as business conditions would have changed. Changes include a more affluent society due to greater economic growth and hence can represent status quo instead.

In conclusion, automobile producers are able to make use of price and income elasticity to help determine the pricing and output decisions. This allows the firms to raise output more easily and capture a greater market share. Therefore, there are a lot of possible uses for PED and YED concepts as applied to business. 

JC Economics Essays: H1 H2 'A' level Economics Essay part (b): economics tutor's comments - For A level Economics, elasticity concepts are very important - as immediate revision, try to recall the definitions, the mathematical formulae, and what the magnitude of the numbers (or the sign, negative or positive, of the numbers) mean. This would be good economics revision for elasticity questions, and a very useful skill to have during examinations. Then, after recalling the economics material, try to apply the concepts to a particular context - in this case, the context of the economics exam question. Remember that students need to use real world examples in conjunction with economic theories. Economics tutors and examiners always appreciate good examples that are relevant, clear, and well known; however, this economics paper has actually done a rather good theoretical job without having relevant examples of car companies (in the USA, or Europe, etc). How else could this economics paper be better developed or improved? Thanks to students for contributions. 

Explain the likely reasons for the increase in the car population in Singapore, from 370,000 cars to about 515,000 cars, from 1997-2012. [10]

The growth of the car population by almost 40% can be attributed to the rise in demand and supply. There are several factors that might have caused the growth such as changes in tastes and preferences, increase level of income and wealth, decrease in factor prices, increase in productivity, etc. Hence, this essay aims to discuss the demand and supply factors that have contributed to the growth, especially in Singapore.

The growth of car population can be influenced by rising demand. There are several factors that results in a rise in demand of car population. Firstly, a change in tastes and preferences are influenced by reasons such as increased advertising by car firms, encouraging more buyers, and thus the increase in car population. 

Secondly, as the economy prospers, the increase in level of income and wealth also encourages the growth in car population. Rising income levels to rising ability to purchase cars as consumers or households have more disposable income to spend on quality products such as cars. Hence, cars are considered normal goods as demand for cars rises with income. Also, income that is not spent on consumption is often used to purchase assets resulting in the accumulation of wealth. A booming stock or property market raises the wealth of households, thus raising the demand for cars as well.

Thirdly, the price and availability of related goods also contribute to the growth of car population. Substitutes are goods which are considered to be alternatives to each other and be in competing demand. In this case, a substitute for owning a car could be taking cabs in order to travel around. A rise in the price of cab fares raises the demand for cars as consumers may switch away from the one that they perceived to be more expensive. On the other hand, complements are goods that when consumed together gives rise to higher combined utility than if the goods were consumed individually. Complements are said to be in joint demand. A complement in this context can be the roads. The availability of well-constructed and well-planned roads can stimulate the demand for cars as there will be greater ease of travelling.

Lastly, the greater ease of acquiring credit can also increase the demand for cars. Consumers often borrow to finance their expensive items such as cars. For example, a reduction in interest rates or relaxation of financing rules will encourage more consumers to borrow to consume expensive goods such as cars, thus causing the demand for cars to rise. 

Apart from the rise in demand, the growth of car population can also be influenced by the rise in supply. Firstly, a fall in the prices of variable inputs lowers the marginal costs. In this case, a fall in the prices of steel of cars decreases the cost per unit output thereby increasing supply.

Secondly, higher productivity means more output can be produced using the same amount of resources, thus increasing supply. Technological advancements can allow greater output to be generated as it is more efficient and done with lesser error. 

Lastly, the entry of new firms in the car market increases the supply of cars. An increase in size of existing firms also increases the supply as firms raises the total capacity of the industry. The expansion of firm may also result in greater economies of scale, thus lowering production cost.

In the context of Singapore, thriving economic growth have increase the level of income and the affluence of people. Hence, this becomes a contributing factor as cars become affordable and many would prefer to have a car for ease of travelling.

Also, with increasing cost of public transport, which may be considered a substitute, many may switch to buying cars instead. The rising demand for cars can also be partly due to the breakdown in public transport that affected the level of confidence of it, hence people may choose to switch to cars instead. The better transport networks such as roads and highways in Singapore encourage more people to travel by car as this mode of transport is the most efficient way of getting around Singapore.

However, in Singapore, the supply of cars is limited by the government through rising car taxes and Certificates of Entitlement (COE). The rising cost of owning a car deters people from buying despite the ease of travelling.

In conclusion, we can see that the car population growth in Singapore is largely stimulated by rising demand instead of supply. Hence, in the long run, the government may aim to reduce car population by increasing the prices of car and COE to curb demand. This way, as the price of COE increases and prices of car takes a large proportion of income, people may be deterred from it.

JC Economics Essays - H1 H2 'A' Level Economics: economics tutor's comments - This economics essay is generally well written, as it is clear cut, direct, to the point, and addresses the requirements of the economics question directly. Always remember to answer the economics question as it is posed and structured, so that the examiner knows that you are addressing the question directly. In this case, the economics essay question requires the student to use the skill of application - apply the theoretical demand and supply model to the car market context of Singapore, to explain the rise in the population of cars.

It should be noted that familiarity with the standard workhorse model of introductory economics, demand and supply, is very important. (Most economics courses cover this useful economic model early on because of its central importance to economics, both at A levels and at first year undergraduate, university, and college economics courses too.)

This economics student, in his writing, has demonstrated the skill of verbal application and can explain the various factors affecting demand and supply. This is good.

However, the economics essay answer could have been greatly improved with the use of an economics diagram, and in this case the diagram should show both demand and supply increasing. Always remember to use good, clear, relevant, well-labelled and useful economics diagrams to answer economics examination questions.

Special thanks to J, A, S, and other economics students for their kind, invaluable and useful contributions. Thanks for reading, and cheers. 

Explain the concept of comparative advantage and, using relevant examples from the USA, explain the likely factors that determine the comparative advantage of the United States. (15 marks)

Introduction - International Trade

This Economics essay is about international trade, and discusses the likely factors that determine the comparative advantage in trade for the USA. 

Comparative Advantage

What is "comparative advantage"? Comparative advantage is the idea that a country should trade in a good in which it has the lowest opportunity costs in producing that good. Even if a country has absolute advantage in the production of all goods than another country, the idea of comparative advantage is that the opportunity costs matter and that hence both countries can still trade, and gain from trade.

Generally, trade models built upon the theory of comparative advantage have the following assumptions: Perfect mobility of the FOP (factors of production), which means that resources used in one industry can be substituted for another perfectly; constant returns to scale, which means that doubling the inputs in each country leads to a doubling of total output; there are no externalities arising from production and/or consumption (and by extension there are no other associated market failures); and transportation and other transaction costs are negligible.

Factors Affecting Comparative Advantage

What determines comparative advantage, and in this particular context the comparative advantage of the USA?

Dynamic Concept - Dynamic Comparative Advantage

First, it should be noted that comparative advantage is a dynamic concept, which means that it can and does change over time. Some companies enjoy a comparative advantage in a product they have produced for several years, only to find that eventually they face increasing competition as rival producers from other countries enter the market. For instance, Ford used to be able to sell their cars competitively overseas, but with the rise of Korean cars and Japanese cars - predominantly Japanese cars - now, many people worldwide perceive Japanese and Korean cars as good as, if not better, than American cars.

Factors of Production - Quality and Quantity

Also, the quantity and quality of the factors of production available would definitely affect the comparative advantage of the USA (in particular, the natural resources that a country possesses, the size and efficiency of the available labour force, the productivity of the existing stock of capital inputs, and the skill and organisational talent of its entrepreneurs and risk-taking businessmen). Focusing narrowly instead on labour and capital, to focus this Economics paper, any economy can improve the quality of its labour force and increase the stock of capital available to therefore expand the productive potential in industries in which it has a comparative advantage. In the case of the USA, this means that the US government can focus on improving the productivity of its labour force and raising employment, as well as focusing on their current capital-intensive approach to production.

Industrial Policy and R&D?

In Singapore, in contradistinction to the USA, there has been industrial policy that aims to direct comparative advantage, since after all comparative advantage is indeed a dynamic concept. Investment in research and development can lead to dominance in certain industries, and industrial policy helps to keep this keen and targeted (R&D is very important in industries where patents give some firms significant market advantage, and hence market dominance). In the case of the USA, military firms (once termed the military-industrial complex) can be seen as an area in which R&D served to keep the comparative advantage of the USA in military weaponry and high technological areas.

Yet Other Factors - Inflation, Protectionism, and Non-price Competitiveness

There are also other factors affecting the comparative advantage of countries, which may be important or relevant in the case of the USA. These other factors are inflation rates, protectionist measures, and nonprice competitiveness of producers in terms of product design and other such preference-related measures.

First, long-term rates of inflation compared to other countries would worsen competitiveness and hence cause a decline in the comparative advantage of that particular good. This would affect all producers not just the USA per se.

Secondly, in terms of protectionism, import controls such as tariffs and quotas can be used to create an artificial comparative advantage for domestic producers. In the case of the USA, protectionist measures are sometimes used (as Ha Joon Chang once mockingly said, this was akin to "kicking away the ladder").

Lastly, the nonprice competitiveness of producers, such as the product design, reliability, and the quality of after-sales support also affects comparative advantage. In this area, the USA has a lot of fans and some of its products are quite popular worldwide, for instance the infamous or for that matter famous iPhone and other Apple products.

JC Economics Essays: Economics Tutor's comments - This Economics essay on international trade in the context of the USA is short, sharp, and to the point - and it does make an attempt at addressing the requirements of the Economics question. There are many good elements in this writing and analysis that are worthy of learning and study. However, the usual tutor's questions are: how can this paper be made better? For instance, think about the conclusion - this Economics paper does not have a conclusion that brings in the relevant real world context of the USA. How would you craft an evaluative, nuanced, and clear conclusion for this Economics paper? Also, what other economic ideas or real-world arguments can you think of? Finally, think about the alternative approaches and methods in which you could approach this Economics question. Think through the process of writing, especially for examinations, tests, and term projects. Thanks for reading and cheers!

Discuss the advantages and disadvantages of Electronic Road Pricing in the United Kingdom. [25]

Discuss the advantages and disadvantages of Electronic Road Pricing in the United Kingdom. [25]

Tutor's Note: My site will start having more and more Economics materials and interesting Economics topics from around the world, rather than just purely having material from Singapore or from pure Economic theory only. See here, as an illustration, for an example of an Economics essay on China's economy on JC Economics Essays. 

Introduction

This paper discusses the economic advantages and disadvantages of Electronic Road Pricing (ERP) in the United Kingdom (the UK). First, a few definitions are in order: what is ERP? ERP is the idea of congestion charges, where a charge is imposed on cars that drive within a restricted zone during certain times of the day. This paper discusses the economic advantages and disadvantages of ERP in the United Kingdom’s context.

Advantages of Electronic Road Pricing in the UK

First, ERP raises revenue for the UK government effectively, because the demand for road trips is relatively inelastic, especially during peak hours during the day. According to economic theory, relatively inelastic demand suggests that when prices are raised, revenue will increase, ceteris paribus. If the UK government gets more tax revenue, other taxes can be decreased, the government can spend more on public transport, or the budget deficit in the UK can be reduced. Hence, this method of raising revenue can be considered a major advantage.

Second, ERP can increase social efficiency. In a free market, the consumption of car trips is heavily over-consumed. This is because when people are driving, they ignore the negative externalities of congestion and pollution, and only consider their own marginal private costs and benefits. Externalities are third party spill-over effects, and can be negative or positive. In the case of cars, they produce many negative externalities to other people who are not involved in the use of private cars. The marginal social cost of driving is thus much greater than the marginal private cost of driving. 

In fact, empirically, congestion costs the UK economy billions every single year in lost output and wasted time. Pollution from cars is also a significant contributor to carbon dioxide emissions in the UK. Road charging should encourage people to look for other forms of transport which do not pollute as much. Therefore it makes sense for the government to charge a much higher price of driving in congested areas because this will make drivers internalise the externality.

Disadvantages of Electronic Road Pricing in the UK

On the other hand, there are of course certain disadvantages of ERP in the UK. First, it seems to be an intrusion on liberty. To drive one will need countless documents or be monitored by technology. The driver’s movements on the roads and whereabouts might be tracked, which could affect his freedom.

However, this point does not seem rather strong because most times when consumers use electricity or Internet access, their movements and usage are tracked as well, and hence this cannot be considered an infringement of liberty.

Secondly, the government seems to be just using ERP to raise money, which may not be politically acceptable. There could be the perception that this idea does not tackle negative externalities, but is instead a new method of raising revenue from the people.

However, that is indeed one of the reasons for the existence of income tax, Value Added Tax, and every other type of tax. Raising money from a new tax enables other taxes to be lowered or spending to be increased, and therefore this need not necessarily be negative.

Thirdly, ERP increases inequality in the UK. This is true to an extent. This is because a road pricing charge is a higher percentage of a tax for those with low incomes, relative to those with higher incomes, and as such impacts the poor more than the rich who can easily afford to drive, even with congestion charges.

However, buying a car and paying for petrol also affects inequality in the UK. If concern about the equality of income distribution is an issue, the government can alter other taxes and benefits, by taxing differently and redistributing the proceeds. A tax which increases efficiency – in this case solving the market failure of negative externalities – need not be stopped on equity grounds. It is always possible to compensate the effects to others by different redistributions of income, which is outside this paper’s arguments.

Conclusions

In conclusion, ERP clearly has both advantages and disadvantages for the UK government. First, ERP raises revenue for the UK government effectively, because the demand for road trips is relatively inelastic, especially during peak hours during the day. Second, ERP can increase social efficiency and force drivers to internalise their externalities, thus solving a market failure. On the other hand, there are of course certain disadvantages of ERP in the UK. First, it seems to be an intrusion on liberty. Secondly, there could be the perception that this idea does not tackle negative externalities, but is instead a new method of raising revenue from the people. Thirdly, ERP increases inequality in the UK by impacting the poor more than the rich.

In the final analysis, however, given that the core economic issue here seems to be the market failure of negative externalities affecting the socially efficient level of output, then ERP is indeed a good method of solving a particular market failure in the UK, and all other considerations seem to be secondary rather than primary to the core issue. 

JC Economics Essays: Tutor's Commentary - As promised, this site offers more than just topics of interest to Singapore, but also other countries and international events, situations, and much more material. Hopefully this will help you in your Economics revision, and at any rate you can get to learn more about other countries and their economies, or their economic situation, and see how general Economics concepts can be applied to different countries' contexts, and the international context as well. Observe that from a student's viewpoint (as well as an Economics tutor's viewpoint), solving congestion utilises general economic principles that apply not just to Singapore, but to other countries' contexts as well. In other words, always think of how you can APPLY Economics to DIFFERENT contexts, topics, and subjects. As usual, the usual tutor's comments apply: think of what the relevant diagrams should be; how would you improve on this answer, and how can you approach this Economics question other than using this approach? Thanks for reading, and cheers! (Acknowledgement: This Economics essay was written by a student who worked with me.) 

(b) How far would the knowledge of demand elasticities be useful to a govt in devising policies that discourage the use of private cars? [15]

(b) How far would the knowledge of demand elasticities (PED, YED, XED) be useful to a government in devising policies that discourage the use of private cars? [15]

To discourage the use of private cars, there are a few policies that the government can implement. The government can implement policies to curb car ownership, curb car usage, or encourage the use of public transport. This paper argues that the knowledge of demand elasticities is useful to help governments in terms of car ownership, car usage, and public transport strategies, and to a large extent this knowledge is quite useful for helping the government make good decisions to tackle road congestion.

Firstly, car ownership can be reduced through a variety of measures. Car ownership can be discouraged by taxing the purchases of new cars, thus making them more expensive, thereby reducing the quantity demanded. Taxes shift the supply curve of cars to the left, thus reducing the equilibrium quantity demanded. Alternatively, an equivalent policy is to set a quota below the free market equilibrium quantity. A quota is a mandatory number of cars that limits the car population. By controlling car ownership, the population growth of cars is curbed and with a smaller car population, there will indirectly be fewer cars on the road.

Alternatively, car usage can be controlled directly using road pricing whereby motorists are charged for using congested roads. For example, in Singapore we have ERP. Electronic Road Pricing is a road toll system that reduces the usage of cars. This reduces the number of cars on that road, hence lowering the extent of traffic congestion.

Finally, lowering the fares or improving the quality and accessibility of public transport, for instance, lowering the fares of SMRT trains or raising the quality of SBS buses, encourages people to switch away from driving private cars to using public transport, hence reducing the usage of cars and traffic congestion in the process.

The knowledge of PED, YED, and XED are quite useful in helping governments devise policies to discourage the use of private cars. PED can be applied here. If demand is price elastic, a low tax rate is able to significantly reduce the quantity demanded. Hence an indirect tax is a suitable policy to curb car usage or ownership. However, if the demand is price inelastic, a very high tax rate is required to significantly reduce the quantity demanded. Hence indirect taxes are likely to be politically unpopular because the imposition of a very high tax rate can result in the government being perceived as being more interested in raising revenue rather than in curbing car usage. Hence a quota is probably politically more acceptable because the government is perceived to be controlling the quantity directly rather than trying to raise revenue. However if the government were to auction off the quota permits, they might again be accused of trying to raise revenue rather than fight traffic congestion.

YED can also be applied here. Knowing the income elasticity of demand enables the government to estimate the extent of the change in demand in response to a change in income. So as income rises with economic growth, the government is then be able to better determine how much car taxes should be raised so as to prevent car population and usage from rising. If the demand for cars is income elastic (i.e. normal luxury), car ownership and usage taxes have to be raised frequently and/or substantially as the country experiences economic growth. Again, the government might be seen as being more interested in raising revenue than in curbing traffic congestion so indirect taxes are likely to be politically unpopular while a quota is likely to be politically more acceptable.

Cross elasticity of demand (XED) measures responsiveness of the demand for a good to a change in the price of another good. It is calculated by taking the percentage change in the demand for the good over the percentage change in the price of the other good. XED can be applied here as well. Since public transport are substitutes to private cars, knowing the cross elasticity of demand for cars with respect to the price of a public transport enables the government to know whether cutting public transport fares is an effective way of curbing car usage. Alternatively, by improving the quality and accessibility of public transport, this makes it a closer substitute to private cars, hence raising the cross elasticity of demand between the two goods. Hence, for a given reduction in the price of public transport, there is a greater impact in curbing the demand for car usage.

In conclusion, knowing the various demand elasticities is to a certain extent quite useful in helping a government decide on which policy to choose. However, it is probably less useful in helping the government decide how much to tax or what fares to charge for public transport. This is because elasticity figures are estimated based on pass data, so they are not fully applicable to the current context as economic conditions tend to change over time. Hence, all elasticity figures should be considered carefully.

JC Economics Essays - Tutor's Commentary: This essay paper was written under exam conditions, and is still well structured, much like the companion complementary part (a). However, as usual, the usual questions apply: how can I make this essay better? How can I use an economics diagram to make this paper better? It has a good structure and is well crafted, yes. May I use this approach in my other Economics essays, or is this only applicable to this type of questions or only to elasticities? A quick word of advice here: please do not swot/ mug/ memorise Economics essays - try to understand the underlying structure, pattern, and system of writing, and always think to yourself - how can I make this essay better and more structured? Why do I prioritise the points this way? Why do I write like this? And how can I be better than I am already? Think hard and you will succeed.

(a) Discuss whether the demand for cars is likely to be elastic or inelastic with respect to price and income. [10]

(a) With reference to the market for private transport in Singapore, discuss whether the demand for cars is likely to be elastic or inelastic with respect to price and income. [10]

This essay discusses whether the demand for private cars is elastic or inelastic, with respect to both price and income. First, some definitions are in order. Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in the price of the good, ceteris paribus. It is calculated by taking the percentage change in quantity demanded over the percentage change in price, ceteris paribus. Also, income elasticity of demand (YED) is defined as the measure of the responsiveness of demand to a change in income, ceteris paribus. It is calculated by taking the percentage change in demand over the percentage change in income, ceteris paribus. This economics paper discusses whether the demand for private cars is likely to be elastic or inelastic with respect to price and income, using the concepts of PED and YED.

Firstly, let us discuss PED, and whether the demand for cars is elastic or inelastic. According to economic theory, demand is likely to be relatively more elastic if a good is not considered a necessity, and more inelastic if a good is considered a necessity. Firstly, with a well-developed public transportation network, Singapore residents have many alternatives or substitutes to driving as they can travel to almost any part of the country by bus, train, or taxi. With the new Circle Line and the upcoming Downtown Line in Singapore, the public rail network has become even more comprehensive and provides wide reach and access to the public. Given the ready availability and accessibility of public transport in Singapore, there are viable substitutes to travelling by car, and thus private transport is definitely not a necessity but more of a luxury. So the overall demand for private cars is arguably likely to be price elastic.

Secondly, according to economic theory, demand is more likely to be relatively more elastic if it takes up a larger proportion of one's income, and vice versa. Also, for most households, the combined cost of car ownership and usage due to the monthly installments for the car loan, car park fees, maintenance costs, and the ERP (Electronic Road Pricing) charges typically forms a large proportion of their income. If a good forms a large proportion of one’s income, then the demand for the good tends to be more price elastic, and therefore, it can be strongly argued that the demand for cars in Singapore is likely to be price elastic as well, given the high costs of car ownership and usage taking up a large proportion of one's income. 

However, for some people, public transport is arguably not a close substitute, and driving is considered as a necessity, perhaps because they are rich enough to be more than able to afford a car, or perhaps they work in areas which are simply too inaccessible by public transport. For example, air force pilots tend to work in far-off places, as airbases are often not easily accessible by public transport. Hence, for such higher income individuals, or individuals who work in inaccessible places, their demand for cars is probably less price elastic. Also, for richer individuals and households, the cost of car ownership and usage forms a smaller proportion of their income so their demand for cars is also arguably possibly less price elastic.

Secondly, let us discuss YED, and whether the demand for cars in Singapore is income elastic or inelastic. A normal necessity good has 0 < YED < 1, which means that it is income inelastic, while a normal luxury good has YED > 1, which means that it is income elastic. Compared to other transport modes like buses, trains, and taxis, private cars are likely to be perceived by most people to be the highest quality among all the various modes of transport because cars are simply faster, more comfortable, and offer more privacy. Hence, when income rises, people are more likely to switch away from other transport modes to travelling by private car. Hence, a private car in Singapore is likely to be a normal luxury rather than a normal necessity. Thus a rise in income leads to a more then proportionate increase in demand for private cars.

However, as income rises, car buyers tend to upgrade from smaller cars to bigger and more luxurious ones, for example from Cherry QQs to BMWs, and also from less prestigious brands to more prestigious ones, so higher end car models and brands tend to be more income elastic.

In conclusion, the demand for cars is likely to be price elastic, and at the same time, it is also likely to be income elastic. In Singapore, with a dense transport network for a small land area, people will view public transport as a viable alternative to cars, making the demand for cars relatively more price elastic. Furthermore, car costs are a large proportion of people's incomes in Singapore, given the high costs of car ownership and usage charges in Singapore. On the other hand, car buyers as a whole are much richer than most segments of Singaporean society, and would tend to switch to buying more luxurious cars with an increase in income. This is supported by the fact that Singapore’s economic growth was high in 2011. Hence, in the final analysis, my view is that the demand for cars in Singapore is likely to be price elastic and income elastic.

H1, H2, H3 A levels JC Economics Essays - Tutor's Commentary: This is a very well structured, clear cut, and well written economics paper. It was edited only for some simple grammar, spelling, and typos issues, but composed mainly by the student, given her understanding of the issue and the context. Observe the excellent use of examples that are pertinent to Singapore's case and context, which addresses the requirements of the essay question. At the same time, observe the Economics behind the writing - there is solid economic theory at the A level standard. A well-written, well-thought out economics paper should look something like this ... but also do remember as usual that in my website Economics diagrams are not included. Should there be a diagram here? Why should there be a diagram, and why not? What economics diagram would you draw, and what would it show exactly, and why? Think about it. Perhaps you should also read the next post, which addresses the next part (part (b)) of the essay question. Always bear in mind that you should read with a critical, thinking mind. Thanks for reading and cheers. 

Special thanks to AG for her kind and useful contribution. She achieved a grade A for her H2 Economics at A levels and then proceeded to the Nanyang Technological University to read mathematics, on a Ministry of Education Teaching Award. 

(b) Examine how the car producers might use the price and income elasticity of demand concepts to help determine pricing and output decisions. [15]

Singapore’s car population grew by almost 40% from 370 000 in 1997 to 515 000 today. - Adapted from Singapore’s Ministry of Transport

(b) Examine how the car producers might use the price and income elasticity of demand concepts to help determine pricing and output decisions. [15]

Car producers can use the price and income elasticity of demand concepts to help determine pricing and output decisions. This essay discusses how car producers can use the concepts. First, PED measures the responsiveness of the quantity demanded of a good for a given change of its price, ceteris paribus. On the other hand, YED is defined as the responsiveness of the demand of a good to a change in income, ceteris paribus.

First, PED can be used to help firms. Let us assume that firms aim to maximise total revenue. If demand is price elastic, as prices fall, this will lead to a more than proportionate increase in quantity demanded, which leads to a rise in total revenue. On the other hand, if demand is price inelastic, as prices rise, there will be a less than proportionate fall in quantity demanded, hence raising total revenue also. The implication here for car producers is that they can make use of this knowledge to determine their pricing strategies.

For example, the many major car producers have competitors producing similar products e.g. Toyota, Volkswagen and Hyundai. Therefore, such cars are relatively elastic in demand because they have many substitutes. Therefore such producers should lower the price to increase total revenue.

On the other hand, some exotic or luxurious car producers such as Ferrari or Rolls Royce have fewer competitors and very a differentiated product, so the demand for their cars is relatively price inelastic. Hence, such car producers should lower raise the price to increase total revenue.

YED is also useful to car producers. Normal goods have positive YED, where a normal necessity has a YED between 0 and 1, whereas a normal luxury good has a YED of more than 1. A normal good is defined as any good whose demand increases as income increases, where a necessity has a demand curve that increases less than proportionately to an increase in income, whereas a luxury has a demand curve that increases more than proportionately to an increase in income. Hence firms should produce more normal goods in general if the general level of income rises in an economy.

On the other hand, inferior goods have negative YED. An inferior good is defined as any good whose demand increases as income decreases. Hence, firms should produce more inferior goods when there weak economic growth and income decreases.

Also, the higher the magnitude of YED, the greater the extent of the change in demand and hence the more the firm should respond in producing output. For example, Geely and Cherry QQ are inferior goods and more should be produced in a downturn, whereas Nissan and Toyota are normal (can be considered normal necessity) goods and more should be produced in an upturn, and Ferrari and Porsche are normal luxuries, and even more should produced in an economic upturn. Therefore, even the extent of the change matters when it comes to producing output.

In conclusion, PED and YED are very useful concepts for car producers. On the other hand, it is more likely that producers may aim to maximise profits than revenue, hence, knowing elasticity is insufficient because we also need to consider costs. Total profit is equal to total revenue minus total cost. Furthermore, elasticities are estimated based on past data, and therefore may not be very useful if current economic conditions have changed drastically. Hence, in my opinion, elasticity concepts – while important – need to be understood in their nuances.

Junior College Economics Essays - Tutor's Commentary: This is the second part (part (b)) of the question addressed earlier, written by the same hardworking, clever student of mine, and was written under timed, stressful, examination-like conditions. (Of course, he did write the paper after consultation with me, and then I did work through the paper again to clean it up and improve upon our joint project... but that's another story.) The real question is: is it possible to write this under examination conditions? The ANSWER: It is definitely possible to craft a paper of this standard or EVEN better whilst under examination conditions during the A levels. However, do remember to add in diagrams (what diagrams would be really useful here?) and explain those diagrams to convince your Economics examiner to give you a really good grade.

(a) Explain why Singapore's car population grew by almost 40% from 1997-2012. (Rephrased question...)

Singapore’s car population grew by almost 40% from 370,000 in 1997 to 515,000 today. - Adapted and amended from Singapore’s Ministry of Transport (MOT) report. 

(a) Explain the likely reasons for the above development described in the Singapore car market. [10]

Introduction - Demand and Supply Factors

The rising car population in Singapore could be due to an increased demand for cars, or an increased supply for cars, or both, a simultaneous shift in both the demand and supply of cars. This Economics essay discusses the likely factors affecting demand and supply in the context of the car market in Singapore. Some major factors affecting demand are tastes and preferences, income and wealth, price of related goods, population and demographic changes, and ease of acquiring credit. Some of the factors affecting supply are prices and quantities of inputs affecting the costs of production, productivity, government policies, and numbers and size of firms.

Advertising by Car Sellers

First, rising tastes and preferences in favour of driving can force demand to shift to the right. For example, more persuasive advertising by car sellers can persuade people to have a preference for cars. In Singapore, there are many car showrooms along Ubi Road that show colourful and attractive car advertisements. There has also been a great interest in buying higher-end luxury cars, such as Ferraris and Porsches. 

Rising Incomes and Wealth Raise Demand

Second, rising incomes and wealth levels can shift demand to the right also. This is because economic growth leads to higher income levels, which increases demand for normal goods. Normal goods are goods that face increased demand when income rises, ceteris paribus. In Singapore, the Singapore economy has experienced strong economic growth from 1997 to 2008, and this could have affected the demand for cars, which can be considered either normal necessity goods or normal luxury goods.

Substitutes - Public Transport 

Third, there are related goods that can affect the demand for cars. Public transport can be considered a substitute for cars. A substitute is defined as any good that can replace another good. For instance, recently Singapore public transport fares have increased, thus causing some commuters to switch to buying cars instead.

Increases in Population - Foreign Talent Policy

Fourth, if the population increases, demand shifts to the right also. This is because more people entering the labour force and increased immigration will lead to increase the demand for all goods and services, including cars. For example, in Singapore, there is a famous foreign talent policy, which increased the number of foreigners in Singapore. Most of these foreigners could have bought cars and thus demand shifts to the right as a result.

Ease of Acquiring Credit, Falling Interest Rates, and Increased Demand for Cars

Fifth, an increase in the ease of acquiring credit causes demand to shift to the right, because a fall in interest rates makes it cheaper for households to borrow to buy cars. With recent events in the banking industry in Singapore, with Malaysian banks CIMB and RHB entering the markets in the last ten years, credit has become more easily available, thus shifting demand for cars to the right.

Supply Factors: First, Costs of Production

On the other hand, an increase in the car supply also affects the car market by increasing the vehicle population in Singapore. First, the lower price of car material inputs shifts supply to the right; for instance, cheaper steel lowers the marginal cost of production of cars, thus increasing the supply of cars.

Productivity and Technological Improvements

Secondly, productivity increases also shifts supply to the right, because with technological improvements, the marginal cost of production also falls, shifting supply to the right. For instance, overseas car companies, such as Ford car company, could have technological improvements which could increase the number of cars produced, which are imported into Singapore.

Singapore Government Policies

Third, government policies such as the lowering of car taxes or an increase in the quota of cars allowed also increase supply. For instance, if car dealers in Singapore face lower taxes or if the number of Certificate of Entitlements (COEs) is increased, supply shifts to the right. COEs are certificates allowing Singaporeans to buy cars. However, while a complete economic analysis of the impact of COEs is a more complicated exercise compared to simple supply and demand analysis, COEs as a system of quotas do limit the number of cars on the roads. 

Number and Size of Car Firms

Fourth, as the number and size of firms increase, supply will also shift to the right. For example, there are more car dealers in Singapore selling a wider range of cars such as Honda and Toyota. This could have also led to an increase in the supply of cars in Singapore.

Interaction of Market Demand and Supply: Demand is the More Likely Factor

In conclusion, while both demand and supply factors are likely determinants, the demand factor most likely for the increase in Singapore’s car population is the increase in Singapore's population. This is because Singapore’s population increased rapidly and massively from 3 to 5.5 million in 10 years. On the other hand, the supply factor most likely to allow an increase in car population is likely to be government policies, in the form of increasing the number of COEs issued from 1997 to 2008, thus indirectly raising the supply of cars on the roads.

JC Economics Essays - Tutor's Commentary: This Economics essay was written under timed conditions and was written by a JC 1 (Junior College year one) student. He eventually excelled in his studies, even beyond economics, and accepted a bond-free university scholarship to Nanyang Technological University (NTU), reading Public Policy and Global Affairs (PPGA) programme. He was one of my excellent English students when I was teaching in Secondary School. 

How you can improve this essay response is of course by adding a Demand and Supply diagram, with proper explanation and analysis. Now this is the thing - this excellent "A" grade student of mine did have the diagram in his original paper, but do remember that I am a luddite and so there's no DD-SS diagram here. He did need to explain and analysis the diagram beyond just drawing the curves. Be sure always to draw diagrams and explain them in your examinations. Usual Economics tutor's question applies: how can I make this economics essay better, or how can I improve on my essay writing skills? Thank you for reading, and cheers!