(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!