“The Central Problem of Economics (CPE) is about scarcity and choice.” Is this statement true? [25 marks]

This paper examines the central problem of economics (CPE). 

One fundamental assumption of economics is that man’s wants are unlimited but the world’s resources are limited. 

In economics, resources refer to the factors of production of land, labour, capital, and entrepreneurship. 

Land refers to natural resources, such as oil, gas, minerals, and water. 

Labour refers to human effort and skill. 

Capital refers to goods that produce other goods, like any machine or equipment that can produce other things. It does not solely refer to financial capital or money or finance. 

Entrepreneurship is the ability to take risks, organise, and plan production effectively, and coordinate the other factors of production in the pursuit of profits. 

All countries have a finite amount of these factors of production of land, labour, capital, and entrepreneurship. 

Based on these assumptions, it is clear that it is not possible to produce all that we want, given that the factors of production are limited while man's wants are unlimited. Some goods will have to be sacrificed to obtain more of other goods. 

Put another way, this situation is one of scarcity, and scarcity necessitates choice. 

This means that a rational choice has to be made of what to produce, how to produce, and for whom to produce. 

Since something has to be forgone, there is a "cost" involved. In a world of scarcity, there is a cost of sacrifice involved in satisfying a particular want. 

This cost is called opportunity cost, and is defined cost of the next best alternative foregone to satisfy the particular want.

The way in which a free market mechanism with minimal government intervention solves the CPE is through the price mechanism.  

The intersection of demand and supply determines the market equilibrium (or market clearing) price and output, which will resolve the issues of what to produce (by signalling the price or value of the good), how to produce (producers will ensure they find cost-effective methods of production), and for whom to produce (those who can afford it). 

In conclusion, the statement “The Central Problem of Economics (CPE) is about scarcity and choice” is true to a large extent, because this is the main problem that all demand and supply models are intended to address, and which all economics students are putting under the microscope. 

I think that although this issue is generally quite simplified as a heuristic, the CPE is indeed about scarcity necessitating rational, logical choices and that is what economics is all about.  

*** ***

JC ECONOMICS ESSAYS Tutor's Comments: Well written, interesting and insightful. Brilliant effort! Do please think of how you would draw and label the PPC/PPF properly? Do also think about other alternative ways of approaching this JC economics question. Other than this economic approach, how else could this economics essay have been answered? Thank you for reading this sample essay, and cheers. 

Generally, individuals and firms are assumed to be motivated by self-interest. Explain the central economic problem of limited resources and unlimited wants. [10]

This essay question is adapted from an actual A level economics essay examination

This economics essay is about the central problem of economics, and explains that the pursuit of self-interest by individuals and firms results in an efficient allocation of earth’s resources through the price mechanism, which solves the problem of scarcity and the central economic questions of what to produce, how to produce, and for whom to produce. Any society, whether capitalistic, socialist, or a command economy, needs to answer these three important economic questions. 

Human wants are unlimited, while the factors of production used to produce goods and services to meet human wants, which are land, labour, capital, and entrepreneurship are limited. Land refers to gifts of nature and natural resources, like physical land, oil, and natural gas. Labour refers to manpower and man’s efforts and “human capital”. Capital in economics often refers to goods that produce other goods, for example, machinery. And entrepreneurship refers to human risk taking and decision making to coordinate the limited resources available, and as Schumpeter once said, entrepreneurs use “creative destruction” to keep the economy humming with new goods and services that displace older goods and services. These four resources are limited, but are most importantly required to produce goods and services. 

However, human wants are unlimited; for example, people need food, clothing, housing, transportation, leisure and entertainment, education, and many other goods and services to meet their material standard of living. This situation of limited factors of production of land, labour, capital, and entrepreneurship, but unlimited human wants, results in scarcity. 

Scarcity necessitates choice, which means that rational economic choices have to be made to allocate the resources to competing uses. One related important economic concept here is the idea of opportunity cost, which is the cost of the next best alternative – rationally, as resources are scarce, allocating resources to one purpose means forgoing the next best alternative. In other words, there are trade-offs that arise from the allocation of the factors of production to competing uses. 

However, there is a solution that addresses the central problem of economics. 

This solution is the free market, with the price mechanism, which as Adam Smith once said, acts like "an invisible hand" that coordinates the matching of limited resources to competing uses. According to economic theory, this is the intersection of demand and supply that determines the optimal price and the quantity eventually produced, ceteris paribus. Ceteris paribus is the condition that all other factors remain constant; one example here is that, for the price mechanism to allocate resources efficiently, there should be no market failures resulting in allocative inefficiency. 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. In economic theory, the optimal price and economic output of goods and services are the outcome of rational choices of millions, if not billions, of suppliers, producers, and firms meeting the requirements of millions of consumers, individuals, and households. 

In conclusion, the pursuit of self-interest by individuals and firms utilises the price mechanism to address the economic problem of scarcity, and it is the intersection of demand and supply that leads to an efficient allocation of scarce economic resources.

Economics Tutor's Comment - This is an excellent effort for the A levels and covers a few important economic concepts and arguments. However, it takes a slightly different approach compared to other economics essays on the central problem of economics that, for example, talk about signalling, rationing, incentivising effects of prices. What is the limitation of using that kind of approach? Also, it could be improved with the use of an economics diagram, and explaining the diagram could also add higher order reasoning to this paper. Nonetheless, it is still quite clear that this student’s economic theory is quite strong. Always think about what you could do to make your economics essays even better. Thank you for reading. Cheers!  

JC Economics Essays - This economics essays blog helps economics students with the A-Levels (Cambridge, A1/S, A2, A H1/H2/H3 levels), and even the international AS level economics examinations. IB students can also benefit from the economics content in JC Economics Essays. This top-quality economics essays website provides a range of relevant and useful economics content, materials, tips and techniques, and model economics essays that students in the United Kingdom and Singapore, and all around the world, can use to excel in their studies and economics examinations.

This model essay with economics tutor’s comments was contributed by WT, our Economics expert who helps students understand the beauty of Economics and its applications. WT has a strong interest in Econometrics, Economic History, International Trade, and Game Theory. This economics post was edited by SS, the editor of JC Economics Essays.

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. 

The price mechanism will always allocate scarce resources efficiently for all goods and services in a market economy. Assess the validity of this statement made by an economist. [15]

This economics paper assesses whether the price mechanism will always allocate scarce resources efficiently for all goods and services in a market economy. 

On the one hand, it will indeed allocate scarce resources efficiently in economic theory, because of the workings of the price mechanism to 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, which distort the workings of the free market.

On the one hand, the price mechanism allocates scarce resources efficiently in the market economy for goods and services through its signalling, rationing, allocating, and incentive functions. The signaling function is one where the price of a good allows for a re-calibration of the quantity demanded and quantity supplied, allowing goods to be efficiently allocated. 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. Those who are willing and able to pay will obtain the good. Correspondingly, the resources used to produce these goods will also be efficiently allocated, as producers maximise their profits by producing only if the cost of production is less than or equal to the prevailing market price. As a result, there is productive efficiency, since goods will be produced at the lowest cost combination to ensure profits are maximised. On the whole, there is also allocative efficiency, since society’s welfare is maximised, where only those who are able to consume and produce do so. 

Question: What economics diagram do you think should be drawn here? How would this diagram back up your arguments? 

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

Here, we focus on 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 the merit good. Externalities are defined as the spillover effects to third parties who are not involved in the production or consumption of the good. Vaccinations provided for example by the National Health Service (NHS) are examples of merit goods. However, an individual consumer only considers his private benefit from getting vaccinated, and does not consider the positive externalities his vaccination confers on society. This results in an under-consumption of the merit good of vaccination, and there is therefore dead-weight loss, as society’s welfare has yet to be maximized due to this under-consumption.

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?

In conclusion, while the price mechanism allocates scarce resources efficiently in theory, this may not be the case in reality, as there are market failures that challenge the assumptions upon which the efficiency of the price mechanism is predicated. In the real world, with market failures, there is the need for government intervention in the free market to reduce or eliminate market failures so that the free market can produce the optimal outcomes the economists promise. 

Economics Tutor's Comment - This is a rather strong economics essay which covers quite a few important points and arguments, but it could do so much more. The candidate's use of economic theory is quite strong in this economics essay. Could more examples have been used, or could the example of the NHS have been even better utilised to make the point? Perhaps another market failure - the lack of provision of national defence - would have also been brought in to buttress the arguments. 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 site helps economics students with the A-Levels Economics (Cambridge, A1/S, A2, H1/H2 levels), and the international AS level economics examinations. This blog provides a range of useful economics content, materials, tips and techniques, and model economics essays that students in the United Kingdom, and also in countries such as Malaysia and Singapore, can use to excel in their studies and examinations.

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

Consumers and producers are generally assumed to be motivated by self-interest. Explain how the pursuit of self-interest can help to address the central economic problem of limited resources and unlimited wants. [10]

Adapted from an actual economics essay examination

This economics paper explains that the pursuit of self-interest results in an efficient allocation of resources through the price mechanism, which addresses the problem of scarcity. 

Human wants are unlimited, while earth's resources of land, labour, capital, and entrepreneurship are limited. This results in scarcity. What is scarcity? It refers to the situation where resources that are limited are not able to meet the requirement of unlimited wants. However, there is a solution to meeting these two different imperatives - and that is the free market, with its price mechanism, which as Adam Smith said, acts like "an invisible hand". 

The price mechanism means that it is the intersection of demand and supply that determines the price and the quantity eventually produced. It is the rational choice of millions of suppliers, producers, and firms meeting the requirements of millions of consumers, individuals, and households. 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. 

The price mechanism addresses the central problem of economics, coordinating resources to their best uses, and solving the problem of what to produce, how to produce, and for whom to produce, because it serves the important four functions of signaling, rationing, allocating, and incentivising. The signaling function is one where the price of a good allows for a re-calibration of the quantity demanded and quantity supplied. As the price of a good increases, indicating a more pronounced situation of scarcity, the quantity demanded of a good falls, while the quantity supplied rises, ceteris paribus. The converse is also true, where the fall in the price of a good, which indicates an amelioration of scarcity, results in an increase in the quantity demanded and a fall in the quantity supplied.

Given the prevailing market prices, buyers who seek to maximise their utility will demand the good. Under this demand function, those are willing and able to pay for the good are able to obtain it, while those who are not willing or able to pay will go without the good. Meanwhile, producers who are willing and able to produce the good at a cost below or equivalent to the prevailing market price will produce it, as they are incentivised to maximise profits, while those who produce at a cost above the market price will not. This also determines the allocation of resources that go into producing this good.

In conclusion, the pursuit of self-interest utilises the price mechanism to address the problem of scarcity, achieving an efficient allocation of resources.

Economics Tutor's Comment - This is a very strong effort for the A levels and covers quite a few important points and arguments. The candidate's use of economic theory is quite strong in this economics essay. However, one should not and cannot rest on one's laurels. What would make this economics essay even better? Thank you for reading. Cheers!  

JC Economics Essays - This economics essays site helps 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 economics content, materials, tips and techniques, and model economics essays that students in the United Kingdom, and all around the world, can use to excel in their studies and examinations.

This model essay with sample comments was contributed by WT, our resident 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 applications to real life. This economics post was edited by S. S., the editor of JC Economics Essays.

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JC Economics Essays - Our popular, useful, and relevant economics website is mainly about H1, H2, H3 Economics, A level Economics, & economics essays in general, and beyond A level economics essays, this economics site is even for undergraduate and masters level essays (on a variety of interrelated topics such as economics, economic history, and economic development). Thank you very much for reading, and cheers! 

Explain how the concepts of demand elasticity can shed light on the luxury goods market.

This paper explains concepts of demand elasticity, namely price elasticity of demand, income elasticity of demand, and cross elasticity of demand, as well as how these economic concepts can shed light on the luxury goods market, in particular, looking at fashion retail brands such as Prada and Gucci.

Firstly, price elasticity of demand can shed light on the luxury goods market; it measures the responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. The demand for a good is said to be price elastic if a given percentage change in its prices causes a more than proportionate change in its quantity demanded, ceteris paribus. Conversely, the demand for a good is said to be price inelastic if a given percentage change in its price results in a less than proportionate change in its quantity demanded, ceteris paribus. A fall in price will result in a more than proportionate increase in quantity demanded for good that is price elastic. Conversely, given the same decrease, it will result in a less than proportionate increase in quantity demanded for a good that is price inelastic. While branded goods such as bags, shoes, or clothing from Prada and Gucci, can be considered demand elastic because they take up a large proportion of an individual's income, they can also arguably be considered demand inelastic because, to people who really desire these goods and have a strong taste and preference for these goods, there are no close substitutes for these goods. Therefore, it can be argued that changes in price would not affect the quantity demanded for these highly sought after goods that much.

Secondly, income elasticity of demand can shed light on the luxury goods market; it measures the responsiveness of the demand for a good to a change in income, ceteris paribus. Positive income elasticity of demand refers to the increase in demand for a good when income increases. Such goods are known as normal goods. Normal goods can be sub-divided to normal-necessity and normal-luxury goods. A normal-necessity good is income inelastic, which means that a rise in income will result in a less than proportionate change in demand whereas a normal-luxury good is income elastic, which means that a rise in income will result in a more than proportionate change in demand. Negative income elasticity of demand refers to the decrease in demand for good when income increases. Such goods are known as inferior goods. Inferior goods occur because rising income levels cause consumers to switch from lower quality product to a higher quality product as they are able to afford better alternatives. With these economic theories and concepts in mind, the luxury goods market is clearly in the realm of normal luxury, because as incomes rise in China, more Chinese have reportedly started buying branded goods, more than proportionately, especially Louis Vuitton. In fact, as incomes rise in Singapore, many have also started buying more branded goods as part of their lifestyles, and thus clearly we can utilise this concept both for the consumer – to understand their behaviour and the type of the goods that they are buying – as well as from the view of the retailer, who would do well to sell branded goods in a rising economic situation of high economic growth, and rising disposable incomes.

  

Third, cross elasticity of demand measures the responsiveness of demand for a good to a change in price of another good, ceteris paribus, and can be used to understand the luxury market. Positive cross elasticity of demand means the demand for a good and the price of another good change in the same direction. This suggests that the goods could be substitutes. Several substitutes to luxury goods are normal necessity goods, such as normal clothing brands or mass market brands, because no one has to only buy branded items. Negative cross elasticity of demand means that the demand of a good and the price of another good changes in the opposite direction. This suggests that the goods could be complements. For example, Prada and LV have complements for all their items, ranging from bags to wallets, to clothes and shoes. Thus, understanding cross elasticity is useful and relevant in the real world.

In conclusion, PED, YED, and XED can shed light on the luxury goods market, and demonstrate the usefulness and relevance of demand and supply analysis and the extent of the changes on differing types of goods. However, we should be alert to the fact that the ceteris paribus condition must hold for the analysis to be sound, and in real life often ceteris paribus does not hold, but, in general, elasticity of demand concepts are useful in understanding the luxury market and any other market. 

JC Economics Essays - Written under strict examination conditions, this H1/ H2 A levels economics essay on the luxury goods market was inspired by a few economics students and a field trip to Marina Bay Sands Singapore to see luxury brands, and eventually refined to be improved for sharing on this economics blog. The question is: what was good about this essay that made it receive a high grade by different economics examiners? Do think about it. Thanks for reading and cheers. 

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. 

Assess the relevance of price elasticity of demand, income elasticity of demand, cross elasticity of demand and price elasticity of supply in explaining the effects of a worldwide recession and an increased fear of flying on the airline industry. [15]

Apart from considering how changes in price is affected by the changes in demand and supply, it is also important to take into account the responsiveness to the change in price, income and other goods. Thus, this essay aims to discuss the relevance of the various elasticities of the changes in demand and supply and the limitations of the concept. 

Price elasticity of demand measures the responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. The demand for a good is said to be price elastic if a given percentage change in its prices causes a more than proportionate change in its quantity demanded, ceteris paribus. Conversely, the demand for a good is said to be price inelastic if a given percentage change in its price results in a less than proportionate change in its quantity demanded, ceteris paribus.

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

As shown, the steeper the demand curve, the more price inelastic. A fall in price will result in a more than proportionate increase in quantity demanded for good that is price elastic. Conversely, given the same decrease, it will result in a less than proportionate increase in quantity demanded for a good that is price inelastic.

Secondly, income elasticity of demand measures the responsiveness of the demand for a good to a change in income, ceteris paribus. Positive income elasticity of demand refers to the increase in demand for good when income increases. Such goods are known as normal goods. Normal goods can be sub-divided to normal-necessity and normal-luxury good. A normal-necessity good is income inelastic, which means that a rise in income will result in a less than proportionate change in demand whereas a normal-luxury good is income elastic, which means that a rise in income will result in a more than proportionate change in demand.

Negative income elasticity of demand refers to the decrease in demand for good when income increases. Such goods are known as inferior goods. Inferior goods occur because rising income levels cause consumers to switch from lower quality product to a higher quality product as they are able to afford better alternatives.

 

Cross elasticity of demand measures the responsiveness of demand for a good to a change in price of another good, ceteris paribus. Positive cross elasticity of demand means the demand for a good and the price of another good change in the same direction. This suggests that the goods could be substitutes. Negative cross elasticity of demand means that the demand of a good and the price of another good changes in the opposite direction. This suggests that the goods could be complements.

Price elasticity of supply measures the responsiveness of quantity supplied of a good to a change in its price, ceteris paribus. The supply of a good is price elastic if a given percentage change in its price causes a more than proportionate change in its quantity supplied. Conversely, the supply of a good is said to be inelastic if a give percentage change results in a less than proportionate change in its quantity supplied.

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

As shown, the steeper the supply curve, the more price inelastic. A fall in price will result in a more than proportionate decrease in quantity supplied for a good that is price elastic. Conversely, given the same decrease, a price inelastic good will show a less than proportionate decrease in quantity supplied. 

In the context of price elasticity of demand, the elasticity of air travel can be analysed using the factors that affect price elasticity of demand, such as availability of substitutes, degree of necessity and proportion of income.

Firstly, the greater the availability of substitutes and the more homogenous the good is, the higher the price elasticity of demand. In terms of air travel, there is no close substitute that is as efficient and as fast as the plane when travelling long distances. In order to travel across the latitudes, there is almost no close substitute for air travel. Hence, air travel can be considered price inelastic of demand. However, some may argue that in the case of short distance travelling, there are substitutes such as trains, cars and public transports that may be as efficient on a well-developed transport network system. Hence, the degree of substitution may differ and is subjective. 

Secondly, the higher the degree of necessity, the lower the price elasticity of demand. Since air travel is usually for leisure and relaxation, the degree of necessity may be low for most households that go on a vacation for leisure. Hence air travel can be considered as price elastic of demand. However, the degree of necessity is debatable especially in the case of businessmen as air travel may be a necessity in order to improve sales or make profits. Thus, in this case, air travel is price inelastic of demand. 

Thirdly, the larger the proportion of income spent, the more price elastic. Air travel is usually costly, especially when it is long distance or for longer period of time. Hence, it is price elastic. 

In the context of income elasticity of demand, air travel is considered normal luxury good for most households hence it is considered income inelastic. However, some may consider air travel as a normal necessity especially when business travelling is concerned. Thus, whether a normal good is a necessity (income inelastic) or is it a luxury (income elastic) depends on individual. 

In the context of price elasticity of supply, it can be explained via a long run and short run concept. In the short run, air tickets are booked in advance and cannot be cancelled immediately, supply is fixed, and hence supply is less elastic. However, in the long run, people’s fear of flying may cause a decrease in supply since demand is extremely low. Hence, supply becomes more elastic.

However, there are limitations of applying the demand elasticity concept. In this situation, the fear of flying cannot be measured by elasticity as the changes in tastes and preferences are un-quantifiable. Thus, the impact is not taken into consideration causing the fall in demand to be less than expected, especially in the long run. In addition the cross elasticity is inapplicable as there is no close substitute. The various elasticities are also derived from past data that may be outdated and hence inapplicable for current economic situation.

In conclusion, responsiveness towards changes in price increase is not constant due to the changing economic situation and in reality, several other factors are also able to influence the elasticity instead of being ceteris paribus. Thus, the effect on the airline industry can be only explained to a certain extent.

JC Economics Essays – H2 A levels – Economics tutor’s comments: This economics paper seeks to address the adapted examination question on elasticities and their relevance, to a specific context. This paper develops the arguments and ideas around the economics question, which is good - always answer the question posed. As it is a part (b) question adapted from an A level Economics question, there was an earlier part (a) to it which dealt with explaining the various elasticity concepts on offer. As an assignment or a training exercise, perhaps think to yourself or check out the various definitions - definitions (as well as mathematical equations) for the various types of elasticities: PED, YED, XED (or CED), and PES. What good points are there to praise about this economics paper? A thesis, anti thesis, and synthesis approach to the essay is clearly and obviously used, which should please practically all Economics tutors and examiners when they are marking. It might be a very good idea to make examiners happy when grading papers. However, there are a few simple problems with this economics essay. First, the conclusion is a bit too concise and does not push the envelope, and certainly could be improved upon. How could you help this candidate improve on her conclusion, by writing it better? Also, what other aspects of this essay could be improved upon - what have you noticed is missing from this essay that could have been written in? Think about it. Special thanks to the kind, valuable, and beautiful contributions of AG and other students for this economics blog. 

The terrorist attack on New York City, USA, on September 11, 2001 precipitated a worldwide recession and an increased fear of air travel, which massively affected the demand for travel by air. This led to the closure of some major airlines in the world. Explain how the worldwide recession and the closure of some of the major airlines affected the market for air travel. [10]

Due to the terrorist attack of 9/11, there were many economic effects - recession and an increased fear of flying would lead to a decrease in demand whereas the subsequent closure of some of the major airlines of the world would lead to a decrease in supply. Recession refers to negative economic growth that affects consumption since economic growth is the key determinant of changes in average household income. Hence, this essay aims to discuss how recession and closure of major airlines affect the demand and supply and thus the equilibrium price and output of the market for air travel. 

Negative economic growth or economic decline causes a decrease in demand as it influences the average household income causing a decrease in level of income and wealth. Income refers to the earnings per time period. A fall in income due to economic decline leads to falling ability to purchase goods, in this case air travel ticket or packages. Decreasing income also leads to fall in disposable income for travelling. Thus, demand falls as a result. 

Economic decline also leads to a decrease in economic activities and hence business activities. With decreasing business activities, the need for business travels fall, contributing to the decrease in demand for air travel, shifting demand curve leftwards.

In addition, in the times of poor economic outlook or situation, the ease of acquiring credit may fall due to the need to maintain the financial stability. Hence, consumer may find it harder to borrow to finance expensive items, including holidays. Thus, demand for air travel may decrease significantly as well. Stringent financing rules that discourage borrowing also contribute to the fall.

On the other hand, closure of some of the major airlines would have a significant impact on the supply for air travel, especially when major firms are usually responsible for a significant proportion of the supply. Closure of major airlines decreases the number of firms in the industry, shifts the supply curve leftwards, decreasing supply. This can also be caused by a decrease in size of existing firms as it decrease the total capacity of the airline industry.

Terrorist attacks causing major closures and financial crisis can be considered as supply shocks, disrupting and reducing the supply of air travel, shifting supply curve leftwards. 

However, the extent of decrease in demand and supply may differ, resulting in differing price and output equilibriums. 

[Insert diagrams of market of air travel to show the difference in the fall of supply and demand causes price and output equilibriums to shift differently]

If the supply decreases to a greater extent since it involves the closure of major airlines, the price increases as supply curve shifts leftward to a larger extent than the demand curve falling. However, if the decrease in demand is a larger extent compared to the decrease in supply fuelled by fear of flying, the price decreases instead.

In conclusion, the extent of shift of demand and supply curves eventually determines the equilibrium price and output. In the long run, a new equilibrium may be reached as the economy recovers and consumers regain their confidence. Hence, this change in price is a short run outcome for the market for air travel.

JC Economics Essays (H2 'A' Level Economics Essay): economics tutor's comments - There are many economics examination questions that make reference to contemporary world events, and 9/11 is one of the major events in the world that students should know about. The focus of this essay question is, however, about the market for air travel, and in particular the economics concepts of demand and supply. How are the factors of demand and supply related to the scenario described? Fundamentally, economics students should be able to link the theoretical model of demand and supply to economics questions during examinations. This ability to link real world examples and context to economic theory is a real skill that should be developed. The usual questions apply - how would you improve this essay to make it more developed? How would you further the arguments? Think of how you would write your economics essay in response to the question. If you are able to recall the factors affecting demand and supply, how would you link those to the concepts? What revision do you need to make this essay excellent, or better? Special thanks to student contributors for this sample essay. 

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. 

How is price determination related to the different roles of prices in a competitive free market? [10]

In a competitive free market, the equilibrium market price is determined by the intersection of the market demand and supply curves. Prices play four different and important roles in the market, namely signaling, allocating, rationing and providing incentives. After establishing how price is determined and identifying the different roles of prices, this essay seeks to first explain a perfectly competitive market before explaining in detail how the equilibrium price is determined with the aid of a diagram. Thereafter, the different roles of prices will be further elaborated before analyzing the relationship between that and price determination.

How are prices determined? To begin with, a perfectly competitive market is one where there are low barriers to entry, a homogeneous product being transacted between many buyers and sellers and perfect information regarding product prices. The key outcome of such a market is that neither individual buyers or sellers have the ability to influence prices, thus both parties are price takers. The equilibrium market price (PE), which buyers and sellers are equally satisfied with, is thus determined by the intersection of the market demand and supply curves.

[Insert diagram on equilibrium market price and quantity]

As depicted in the diagram, if the price is above PE at $10, the quantity supplied is 100 units while the quantity demanded is 50 units. There is a surplus of 50 units and to clear the excess supply, producers will lower their prices. As the price falls, the quantity demanded rises while the quantity supplied falls, reducing the surplus. The surplus is totally eliminated when the price falls to PE. Likewise, if the price is below PE at $5, the quantity supplied is 50 units while the quantity demanded is 100 units. There is a shortage of 50 units and producers will raise their prices. As the price rises, the quantity demanded falls while the quantity supplied increases. The shortage is totally removed when the price rises to PE.

Moving to the different roles of prices, the first is a signaling function. With a change in consumers’ tastes and preferences, an increase in demand for a good would increase the price of it. Producers would follow these price signals to produce accordingly, with more when the demand of the good is rising and with less when the demand of the good is falling. 

The second is the allocative function of prices. Following an increase in demand and subsequent increase in price for a good is an increase in profit. Hence, producers would channel scarce resources from less profitable to more profitable industries. 

The third is a rationing function of prices. When there are shortages, consumers would bid up the price of the good. Consumers with higher effective demand would get to purchase the good, in turn allowing goods in shortage to be rationed. 

Finally, prices function as incentives for consumers and producers to maximize welfare. For the consumers, when prices fall, they have the incentive to buy more to increase welfare. For the producers, when prices rise, they would have the incentive to sell more to increase profits and welfare. 

Looking at the relationship between price determination and different roles of prices, the signaling role is a movement along the supply curve whereas the rationing role is a movement along the demand curve. The incentivizing role is a movement along both the supply and demand curves while the allocative role needs diagrams of two different markets in order to be illustrated.

JC Economics Essays - H1 H2 H3 A Levels Economics, adapted question (part (a)): economics tutor's comments: Students sometimes do not do enough revision for the role of prices in a free market because they take it for granted, but a moment's reflection should inform students about the complexities of studying economics. What are the roles of prices? How are these related to the supply and demand diagram? (Remember that diagrams are very important in Economics.) Supply and demand economics questions are not limited to just factors affecting demand and supply, and elasticities. In this particular economics essay, there does not seem to be an essay conclusion, but having said that the essay's introduction was fairly well written - what makes for a good conclusion, and what makes for a good essay introduction? Special thanks to contributions by some motivated, hardworking, and generous students who share their skills, services, and materials. Just for interest: Milton Friedman's "pencil" concept on the free market can be found on YouTube. Do watch it just for interest about understanding the intuition behind the economics concept of the free, competitive, unfettered market.

H2 Explain the likely demand and supply factors affecting the oil (petroleum) market. [10]

Note: An "A" level Economics standard type of examination question.

This paper explains the likely demand and supply factors affecting the oil market. Demand refers to the willingness and ability to purchase a good, while supply refers to the willingness and ability to provide the good. The market price of a good is determined by the intersection of the demand and supply curves. The equilibrium output occurs when the quantity demanded is equal to the quantity supplied. 

There are various factors affecting the demand and supply of the oil market. 

First, let me deal with the demand side. For the demand aspect, the factors affecting it include derived demand, availability of substitutes and complements, population changes, expectations and increasing incomes. 

Derived demand refers to demand for goods which are not demanded for its own sake but it is used to facilitate the consumption/production of another. In the oil market, oil is demanded to facilitate the production processes in factories and for transportation. That is, the demand for oil is derived from the demand for transport as well as for production and manufacturing processes to spur the economy of a country. 

Substitutes are goods which are considered to be alternatives to each other while complements are goods that when consumed together, gives rise to a higher combined utility than if goods were consumed individually. There are no substitutes for oil as it is a necessity for the operations of machinery in production processes and for transportation. As a result, the demand for oil is very price inelastic due to lack of availability of other related goods to substitute oil. 

The rising incomes among the population affect the demand for oil too. With increasing household income, the purchasing power among consumers increases. They have the financial capability to buy private cars which offer more comfort than taking public transport. Rising income will see a rise in private car ownership as well. This will drive up the demand for oil in the private car market.

Expectations will affect the demand for oil. If the price of oil is expected to rise, buyers may want to purchase more of the oil now before the price rises, thus raising current demand. In this case, producers may intensify their production processes to take advantage of the cheaper oil price now. Conversely, if the price of oil is expected to fall, buyers may want to hold back their purchases thus reducing current demand. For instance, private car owners may switch to take public transport temporarily to save on costs. 

On the other hand, there are also various factors affecting the supply aspect in the oil market. 

This paper now deals with the supply side factors. These factors include costs of production, expectations on the part of producers, number of firms and government policies on the part of the OPEC producers. 

The entry of new firms into the oil market will shift the market supply curve rightwards. An increase in the size of existing firms raises the total capacity of the industry, thus shifting the market supply curve rightwards. In the oil market, the discoveries of new oil reserves will increase the number of producers, leading to the expansion of firms, thus, shifting the supply curve rightwards. On the other hand, when the oil reserves are used up and oil wells run dry, supply could shift to the left, reducing supply. 

Government policies on the part of OPEC influence the supply of oil too. Indirect subsidies will shift the supply curve downwards while indirect taxes shift the supply curve upwards. Increased taxes on oil will raise the cost of production of the oil barrels which reduces the supply. Alternatively, decreases in OPEC’s production will also shift supply to the left. 

Economics Diagram: Supply & Demand Interaction

[Tutor's note: This section here describes the diagram and explains the movements of the curves.] The initial equilibrium price and output is at P1 and Q1 respectively, as determined by the intersection of the S1 and D1 curves. Supply curve shifts from S1 to S2 while demand curve shift simultaneously from D1 to D2. The new equilibrium price and output is P2 and Q2, as determined by the intersection of the S2 and Q2 curves. 

In conclusion, the factors affecting demand and supply of oil will shift the curves respectively. When considering which factor is more responsible for the shifting of the curve, it is important to consider it on a case-by-case basis. 

JC Economics Essays: Economics Tutor's Comments - Demand and supply analysis is totally fundamental to "A" level Economics (for practically all the A level Economics papers, and is also important for first year introductory undergraduate Economics), and can be applied to many markets, ranging from the oil market to the car market, or from commodities to even the market for labour and other factors of production. Hence, knowing the Economics of demand and supply is crucial to scoring well at the examinations. This Economics paper is rather well written, simple, clear, and to the point. Once again, special thanks to S YQ who contributed this well written economics essay. The usual question applies: how can you make the essay better? It goes without saying that the diagram should be drawn accurately and well labelled. Other than that, what else could you do or would you have done? Note that for advanced A level students or even H2, H3 students taking the examinations, this paper could possibly have included oligopoly and perhaps even discussed elasticities, adding on to the analysis. Thanks for reading, and cheers. 

Hints and Approaches to H1 and H2 A Level Economics Essay Questions for Practice

H1 and H2 A Level Economics Essay Questions for Practice (Hints and Approaches)

Essay Questions: Quick Recap and Introduction

These are the promised Economics hints (covering Economics concepts, definitions, ideas, arguments, and logical approaches) for the Economics essay questions for practice posted in my earlier post. 

(Do please see the bottom of this page for the relevant links if you want to refer to that post.)

Suggested Economics Tutor's Hints

Q: "Protectionism is better than free trade.” Discuss. [15]

HINT: Define protectionism, and international trade. List and explain various methods of protectionism (tariffs, quotas, subsidies). Talk about gains from trade, and maybe terms of trade. Thesis argument: protectionism is better than free trade. Why? Think about the infant industry argument and other arguments you could use. Anti-thesis argument: on the other hand, free trade is beneficial. Why? Define comparative advantage, opportunity cost. Show the diagram for the small country case, demonstrating deadweight loss from tariffs. You may discuss quotas too. Discuss other reasons why trade is beneficial. Be sure to give examples from Singapore/China/USA/UK. Conclude with a justified argument – which is better, why, or are both equally important?  

Q: Explain how imperfect information can lead to market failure, using examples from Singapore. [10]

HINT: Define market failure, and imperfect information. Define merit and demerit goods also. Explain how this leads to market failure – overconsumption (in what case?) and underconsumption (in what case?). Draw and explain diagrams. Use examples from Singapore, such as healthcare (Medisave, Medishield), etc. You may bring in other areas if you wish. List other forms of market failures. Other forms of market failures are important too, such as externalities. How would you conclude?  

Q: Explain comparative advantage and why international trade is beneficial for countries. [10]

HINT: Define comparative advantage and international trade. Talk about gains from trade, and terms of trade. Free trade is beneficial. Why? Demonstrate that countries can consume outside their PPC (on the PPC is for the autarky case) when their consumption possibilities increase (the trade case has CPC); draw diagrams. Explain the diagrams. Can also show the diagram for the small country case, demonstrating deadweight loss from tariffs; argue that protectionism is bad. Define and explain protectionism briefly. Discuss other reasons why trade is beneficial. Be sure to give examples from Singapore or China/USA/UK. 

Q: Explain the likely demand and supply factors affecting the oil (petroleum) market. [10]

HINT: Define demand and supply; talk about market prices and equilibrium output and how these are determined. Factors affecting the demand for oil are: derived demand (define), substitutes and complements (define), population changes, expectations, and rising incomes. Which of these is most likely? Factors affecting the supply of oil are: cost of production, expectations on the part of producers, number of firms, and government policies on the part of OPEC producers.  Which of these is most likely? Draw the demand and supply diagram with simultaneous shifts, explain it, and conclude your essay.

Q: Explain the difference between public goods and merit goods, using examples from the United Kingdom. [10]

HINT: Define public goods and merit goods. Define market failure, and say that these are instances of market failure. Why? Public goods are non rival and non excludable – leading to P = MC = 0 and also to the free rider problem, respectively. Give UK examples. Merit goods are goods that have positive externalities or due to imperfect information are underconsumed. Give UK examples (see next question for further hints). What is the difference, based on the explanations that you have written? Which is the most important difference?

Q: Explain using economic theory why in the United Kingdom, entry to national museums and art galleries is free and tickets to the opera are subsidised. [10]

HINT: Define public good and merit goods, and define market failure. The central problem here is underconsumption. National museums and art galleries can be considered quasi-public goods or merit goods. Why (for each of the possibilities), justification? Opera can be considered a merit good. Why, justification? Talk about imperfect information and positive externalities. Talk about a paternalistic state; talk about government intervention. Conclude.

Q: Discuss how the Singapore government deals with negative externalities in Singapore. [10]

HINT: Define market failure, externalities in general, and talk about negative externalities in particular. Focus on car congestion, cigarette smoking for this paper to make it easier. Draw the negative externality diagram and explain why it is a problem. What should the government do? Either impose taxes or quotas. Define those, explain, show. For congestion in particular, talk about ERP and COE. Conclude with the limitations of government policies.

Q: Explain how fiscal policy in the USA can be used to increase the circular flow of income in the USA. [10]

HINT: Define fiscal policy, and circular flow. Draw the circular flow diagram. Explain it. When G is increased, what happens to the circular flow? When corporate taxes are lowered, what happens to I, and in turn what happens to circular flow?  I, G, X are injections, and S, T, M are withdrawals. Talk about net injections and net withdrawals, but focus on injections. Give examples from the USA. (You may also in the course of the essay, define and discuss GDP, national income, standard of living.)

JC Economics Essays - Economics Tutor's Comments: These are some suggested hints (possible approaches, possible ideas/ concepts/ logic/ economics materials) to the Economics essay questions posted earlier (with a few general instructions, ideas, and pointers/tips for students). Do remember to think through them, and see if there are other Economics ideas, concepts, and approaches that you could use in addition to those provided by Economics tutors. 

For the earlier post on JC Economics Essays' questions for practice: H1 and H2 A Level Economics Essay Questions for Practice. 

For ease of reference, here is my List of Economics Exam Questions for Practice. Note that these questions are practical, heuristic, and training questions that test fundamental Economics understanding and fundamental, basic application. Some students have kindly, and rightly, pointed out that these questions in the "List" are for training purposes, and not all are reflective of the rigour of A levels or introductory undergraduate Economics - true!