Economics: Model Essays (Preview)

ECONOMICS Model Essays

CambridgeInternationalAS&ALevel LATESTSYLLABUS EXAM PREP

Wong Wai Leong with Ngew Shook Ying, Nedumaran Munusamy

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Cambridge International AS & A Level

ECONOMICS Model Essays

EXAM PREP

Wong Wai Leong with Ngew Shook Ying, Nedumaran Munusamy

No. 5, Jalan SunwayUniversitiCity 47500 Selangor Darul Ehsan press.sunway.edu.myMalaysiaFirstpublished2020Reprinted2021Secondedition2023

AS & A Level : ECONOMICS : Model Essays / Wong Wai Leong with Ngew Shook Ying, Nedumaran Munusamy.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, now known or hereafter

330.076

1. Economics--Examinations, questions, etc.

4. Macroeconomics--Examinations, questions, etc.

I. Ngew, Shook Ying. II. Nedumaran Munusamy.

Reproduced by permission of Cambridge Assessment International Education.

Edited by Hani Hazman

Published by Scola Books

Perpustakaan Negara Malaysia

3. Microeconomics--Examinations, questions, etc.

– SECOND EDITION . (EXAM PREP) ISBN 978-967-5492-78-5

Wong, Wai CambridgeLeongInternational

III. Title. IV. Series.

Designed by Rachel Goh

Typeset by Helen Wong Printed by Vinlin Press Sdn Bhd, Malaysia

Cataloguing-in-Publication Data

2. Pricing--Examinations, questions, etc.

Cambridge Assessment International Education bears no responsibility for the example answers to questions taken from its past question papers which are

An imprint of Sunway University Sdn Bhd

Cover image: LazarenkoD/Shutterstock.com Image used under licence from Shutterstock.com

5. Essays.

Chapter 8 Government Microeconomic Intervention 152

Chapter 5 Government Macroeconomic Intervention 82 Chapter 6 International Economic Issues 106

Chapter 10 236

Chapter 11 International Economic Issues 272

Chapter 7 The Price System and the Microeconomy 126

Contents

Introduction vi

AS Level

Chapter 1 2

Chapter 4 70

Foreword v

How to use this book viii

Chapter 3 Government Microeconomic Intervention 34

Acknowledgements iv

Chapter 9 The Macroeconomy 206

A2 Level

Chapter 2 The Price System and the Microeconomy 14

Carol Wong, Head of Scola Books, for encouraging and providing me thorough support for this book. I initially thought that writing this book was a simple task of putting my thoughts together on paper. How hard could it be? Only to realise that there were so many matters that I had no idea of. Without your guidance, this book would not have been possible.

iv

My sincere gratitude to all of you for this exciting journey.

Wong Wai Leong Sunway College, Malaysia

My colleagues, Shook Ying and Nedumaran, for your tireless effort in providing input and identifying key areas that examiners look for in essays. Thank you.

My wife, Sue, and my two beautiful daughters, Zi Qing and Zi Yin, for your support and understanding. Your suggestions, criticisms and ideas allow me to better understand the tastes and trends of the young generation today.

Hani Hazman, for playing a key role in polishing my English, being the ‘pilot reader’, and providing suggestions on areas that needed clarity and substantiation. Thank you very much.

Acknowledgements

Rachel Goh, Helen Wong and the publication team for your assistance, contribution and effort behind the scenes and for the beautiful work that results in an academic book that is neat, pleasant to read, and absolutely attractive to readers.

This book aims to help students organise and write coherent essays for the Cambridge International AS and A Level Economics (9708) examination. I am sure you will gain useful insights from the author Wong Wai Leong, who has had years of experience teaching the subject. This book will undoubtedly provide added knowledge and comprehensive coverage of the subject.

It is hoped that the wisdom provided in this book will not only aid you in preparing for the Cambridge International AS and A Level examination, but that it will help spark a greater interest in the fascinating subject of Economics.

Elizabeth Lee (Dr) Chief Executive Officer Sunway Education Group

Foreword

While people have studied Economics for almost two centuries, it is only recently that the subject is perceived as a “highly mathematical, value-free, abstract subject”.

v

Introduction

(ii) Make references to diagrams in the essay (iii) Be generous in using space when drawing diagrams

Elaboration of examples

While the prospect of writing an essay can be intimidating for some students, learning some crucial tips can help you go through the essay-writing process with ease.

Names of key economic figures

There is a command word in every question. It is important for you to understand the difference between the words ‘State’, ‘Explain’, ‘Analyse’, ‘Evaluate’ and ‘Discuss’.

(i) Fully label the diagrams (including the y and x axes, the zero value at the start of the axes, the line or curve names, and the arrows showing the direction of any line or curve shift)

Command words

The most popular command word in the examination paper is ‘Discuss’. When the word is used, you must provide a discussion that looks at an issue from both sides—the good and the bad.

Many students lose significant marks due to question misinterpretation. You must read the question clearly—and several times, if needed—to fully understand the question and avoid writing irrelevant content.

Use of paragraphs

When explaining a point or argument, you need to provide examples to support the answer. It is best that you elaborate on the example instead of just listing it out.

Use of diagrams

Question interpretation

Avoid writing an essay without breaks in paragraphs. It is ideal for you to present each idea or argument in its own single paragraph. In other words—one idea, one zparagraph. This makes the essay more systematic, and easier to read and understand.

Diagrams are crucial in illustrating and clarifying ideas in an essay. There are three things to keep in mind when using diagrams in an essay:

You can impress your examiner by including the names of prominent economists associated with any economic idea you are discussing in your essay. Among the key economic figures are:

vi

Karl MiltonMarxFriedman

Time management

vii

Ronald Coase

(i) The importance of a particular factor in making an economic impact (ii) The short-run versus the long-run impact of an economic decision (iii) The identification of ‘winners’ and ‘losers’—who benefits and who loses from a particular economic action?

Introduction

(iv) A review of economic model assumptions for any weaknesses

Economist Notable Economic Ideas or Works

Adam Smith Absolute advantage, canons of taxation, invisible hands, laissez faire, market equilibrium

Joseph Schumpeter Austrian school of economics, creative destruction, dynamic efficiency

John Keynes Animal spirits, circular flow, cross diagram, The General Theory of Employment, Interest and Money, the paradox of thrift John Nash Game theory

An evaluation is an important component in essays and it requires you to exercise higher-order thinking skills. To evaluate means to critically consider or assess a point of discussion. In writing an evaluation, you can consider these points:

Time management is one of the biggest challenges in answering Paper 4 (and Paper 2, to a lesser extent). The best preparation to manage time well is to practise writing a lot of essays under time constraint. Allocate 45 minutes for each question, and once the allocated time is up, move on to the next question. This is to avoid spending more time on lower-marked questions than higher-marked ones.

If you wish to be proficient at writing essays, all you need to do is practise. There is no short cut!

David Ricardo Comparative advantage, law of diminishing marginal returns

Writing of an evaluation

Chicago school of economics, neo-classical economics, the Monetarists

Richard Thaler

Conclusions are very important in long essays, particularly those that require you to discuss or evaluate a certain problem. The mark allocation is often one third of the total marks. Sadly, many students leave out the conclusion completely or write it too briefly.

George Akerlof Imperfect information, The Market for Lemons

Practice

Writing of a conclusion

Friedrich Hayek Neo-classical economics, The Road to Serfdom

EnterpriseShape Shift PRODUCTIONPOSSIBILITYCURVE EP Econs-Chap 1.indd 2 8/14/22 11:37 AM

4 Cambridge International AS & A Level Economics 9708 Paper 22 Q2 a & b, May/June 2016 MODEL

Basic Economic Ideas and

(a) Private goods are goods that are rival and excludable in nature, while public goods are goods that are non-rival and non-excludable. The inherent difference between the two types of goods can help explain why only private goods will be supplied in a free market economy. A free market economy is an economic system where goods are produced and consumed with little to no government intervention.

How to use this book ESSAY

consumption of a good by a person reduces the amount available for others. An example of this characteristic is the limited number of seats in a cinema hall. When a person occupies a seat in a 200-seat cinema hall, the number of available seats left for others will be 199.

Key features of the book:

BODY Explain the characteristics of private goods and cite an example for each: • Rival—limited number of seats in a cinema hall • Excludable—public bus l Avoid making the mistake of listing public buses, telephones and toilets as examples of public goods in your answer. These are not public goods. COMMON ERRORS INTRODUCTION Define ‘private goods’, ‘public goods’ and ‘free market economy’ l EP Econs-Chap 1.indd 4 8/14/22 11:37 AM Charts These are placed at the start of every chapter for an overview of fundamental concepts of each topic area Hint! This is a tip found throughout the book on understanding essay questions and basic Economic concepts Past-Year Questions Each model essay is a sample answer to carefully curated questions from actual examination papers Common Errors This is an alert on common errors committed when writing essays Essay Outlines Structured into ‘Introduction’, ‘Body’ and ‘Conclusion’, the outlines are a guide to plan and organise essays

For private goods, the rival characteristic means the

The excludable characteristic of means the unwilling to pay from boarding the bus. While public amenities are available to the general public, some are excludable since they can only be enjoyed after payment. Public buses, telephones and toilets are therefore private goods, and not public goods in the economic sense.

viii

private goods

seller can exclude a person from consuming a good if the person does not pay for it. For example, a public bus driver can refuse passengers who are unable or

This book is tailored for students undertaking the Cambridge International AS and A Level Economics (9708) examination. Best used as a complement to textbooks, this book is a revision guide covering the 2023–2025 syllabus and is filled with tips that will enhance your essay-writing skills.

AS Level

2 1 Basic Economic Ideas and Resource Allocation Basicquestionseconomic What How FACTORS PRODUCTIONOF Land Labour Capital Enterprise Shift PRODUCTIONPOSSIBILITYCURVESCARCITY, CHOICE AND OPPORTUNITYCOST

CHAPTER 1 Basic Economic Ideas and Resource Allocation3economyMarket mechanismPrice paribusCeterismechanismPriceandcentralplanning Normativestatement economyMixed Approaches Assumption OFCLASSIFICATIONGOODSANDSERVICES goodsPublicgoodsFree Meritdemeritandgoods Privategoods METHODOLOGYECONOMICALLOCATIONRESOURCE IN ECONOMICDIFFERENTSYSTEMS

Cambridge International AS & A Level Economics 9708 Paper 22 Q2 a & b, May/June 2016

Private goods are goods that are rival and excludable in nature, while public goods are goods that are non-rival and non-excludable. The inherent difference between the two types of goods can help explain why only private goods will be supplied in a free market economy. A free market economy is an economic system where goods are produced and consumed with little to no government intervention.

HINT!

CHAPTER 1 Basic Economic Ideas and Resource Allocation 4

The free-rider problem is the main discussion point for the second part of Question 1(a).

When a person occupies a seat in a 200-seat cinema hall, the number of available seats left for others will be 199.

Basic Economic Ideas and Resource Allocation

BODY

• Excludable—public bus

The excludable characteristic of private goods means the seller can exclude a person from consuming a good if the person does not pay for it. For example, a public bus driver can refuse passengers who are unable or unwilling to pay from boarding the bus. While public amenities are available to the general public, some are excludable since they can only be enjoyed after payment. Public buses, telephones and toilets are therefore private goods, and not public goods in the economic sense.

Avoid making the mistake of listing public buses, telephones and toilets as examples of public goods in your answer. These are not public goods.

COMMON ERRORS

INTRODUCTION

QUESTION 1

(b) The factor enterprise and the free working of the price mechanism always ensure a satisfactory outcome for consumers even when[12]

Define ‘private goods’, ‘public goods’ and ‘free market economy’

• Rival—limited number of seats in a cinema hall

Explain the characteristics of private goods and cite an example for each:

For private goods, the rival characteristic means the consumption of a good by a person reduces the amount available for others. An example of this characteristic is the limited number of seats in a cinema hall.

(a) Use examples to illustrate the difference between private goods and public goods, and explain why only private goods will be supplied in a free market economy. [8]

1

Public goods are also non-excludable, which means the benefits derived from consuming a good cannot be limited to only those who have paid for it. An example of a good that possesses this characteristic is a streetlight. Once a streetlight is installed on a public street, everybody using the street at night can benefit from the light. This means a person cannot be excluded from enjoying the good despite not bearing any financial cost for its provision.

The free-rider problem therefore results in public goods not having a market at all, an instance of economic inefficiency known as a ‘missing market’. While there is demand for public goods, the market for them does not exist because firms do not have any incentive to supply goods that they will not profit from. As a result, only private goods—which have to be bought and sold for consumption—are supplied in a free market economy.

Explain why only private goods are supplied in a free market economy

(b) Factor enterprise is one of the four factors of production and refers to a risk-taking endeavour by entrepreneurs. It is the role of the factor enterprise to manage the other three passive factors of production— land, labour and capital. The free working of the price mechanism

Introduce the concept of the free-rider problem

INTRODUCTION

CONCLUSION

The free-rider problem occurs when consumers enjoy a good they do not pay for. It is a problem that is inherent in public goods since public goods are non-rival and non-excludable in nature. No one will be willing to pay for public goods since everybody will wait for somebody else to pay in order for them to use the goods for free.

CHAPTER 1 Basic Economic Ideas and Resource Allocation5

In a free market economy, only private goods will be supplied due to the free-rider problem that is inherent in public goods.

• Non-rival—television broadcast • Non-excludable—streetlights l

In conclusion, private goods are goods that are rival and excludable, while public goods are goods that are non-rival and non-excludable. Only private goods are supplied in a free market economy due to the free-rider problem that is inherent in public goods.

BODY

Summarise discussion on the difference between private and public goods, and the freerider problem l

BODY

Explain the characteristics of public goods and cite an example for each:

BODY

For public goods, the non-rival characteristic means the consumption of a good by a person does not reduce the amount available for others. Television broadcast is an example of a good that possesses the nonrival aspect of a public good. When a person watches a television programme, the broadcast signal received does not reduce or interfere with the reception of other viewers.

Define ‘factor enterprise’ and ‘free working of the price mechanism’ l

means the free forces of demand and supply determine the price of goods and services in the market. The response of price to changes in demand and supply will then determine how resources are allocated.

Shortage D e

Quantity pp13 q1

BODY

A satisfactory outcome for consumers through the workings of the factor enterprise and price mechanism is evident during periods of shortages

The elimination of shortages and surpluses through the price mechanism will lead to an efficient allocation of resources. As conceptualised by economist Adam Smith, the ‘invisible hands’ of

When there is a shortage of goods, price will rise because the quantity demanded is greater than the quantity supplied. The increase in price is a signal to the factor enterprise that more resources should be allocated towards production to meet consumer demand. When there is a surplus of goods, or when consumers do not want the goods anymore, the factor enterprise will be left with many unsold stocks. This is because the quantity supplied is greater than the quantity demanded. To dispose of unsold stocks, the factor enterprise will reduce price and stop producing the goods altogether. The following diagram shows the gaps between the demand and supply curves, indicating a shortage and a surplus.

0

Describe the satisfactory outcomes that the factor enterprise and price mechanism can ensure during:

• Surpluses

The factor enterprise and the free working of the price mechanism ensure a satisfactory outcome for consumers by allocating resources based on consumer demand. This is because the factor enterprise is driven by profit and will quickly respond to changes in the price mechanism to maximise its gains.

• Shortages

CHAPTER 1 Basic Economic Ideas and Resource Allocation 6

the market forces will bring the demand and supply of goods to an equilibrium at the right price and quantity. As a result, a satisfactory outcome for consumers is ensured.

The existence of imperfect information, however, can undermine a satisfactory outcome and lead to a misallocation of resources. Imperfect information is a situation where parties to a transaction do not have the same amount of information about a particular good. For example, the seller may know more about the benefits of a good than the buyer, or vice versa

refer to socially undesirable goods which costs to well-being, or negative externalities, are underestimated by consumers. Some examples of demerit goods include tobacco, alcohol and illegal drugs. When there is imperfect information, buyers will not be fully aware of the harm that these goods can cause to society. Consumers will therefore continue consuming demerit goods. As a result, demerit goods will be produced and consumed beyond their optimal level.

Moral hazard occurs when a party increases its exposure to risks after entering into a business transaction. For example, a car owner may have less incentive to take any precaution against car theft after getting a complete car insurance covering any loss. Without perfect information, the insurer would not know whether the insured would engage in riskier behaviour that should have warranted a higher premium.

• Adverse selection

An unsatisfactory outcome for consumers due to imperfect information is evident in the under-consumption of merit goods, over-consumption of demerit goods, as well as the incidence of moral hazard and adverse selection.

Students often confuse merit goods with public goods

• Over-consumption of demerit goods

BODY

• Under-consumption of merit goods

Merit goods are socially desirable goods which benefits, or positive externalities, are underestimated by consumers. Some examples of merit goods include education, healthcare, insurance and retirement savings. If buyers do not have full knowledge of the benefits of these particular goods, they will not be willing to spend money for their optimal consumption. As a result, merits goods will be under-produced and

Demeritunder-consumed.goodsmeanwhile

Allocation7

CHAPTER 1 Basic Economic Ideas and Resource

Introduce the concept of imperfect information l BODY

Describe the unsatisfactory outcomes caused by imperfect information:

• Moral hazard

COMMON ERRORS

It is important to remember that merit goods are a type of private goods that are defined by under-consumption.under-productiontheirand

BODY

• An outward shift of a PPC —economic growth

A movement along a PPC means the economy reallocates its resources by producing less of one good in order to produce more of the other. The trade-off between goods illustrates the concept of scarcity, whereby one good will have to be ‘sacrificed’ in order to produce more of the other.

Explain the causes for:

CONCLUSION

Adverse selection occurs when one party has an information advantage over the other before entering into a business transaction. For example, in the health insurance market, an insurance applicant may withhold information about being a high-risk person from the insurer to obtain a lower premium than what would have been charged to high-risk people.

Show the difference between a movement along, and a shift in, a production possibility curve. Explain what might cause each to occur.[8]

Cambridge International AS & A Level Economics 9708 Paper 22 Q3 a & b, October/November 2017

INTRODUCTIONHINT!

Briefly consider how a satisfactory outcome can be ensured l

Define ‘production possibility curve’ (PPC) l

Discuss the way in which resources are allocated in planned economies and free market economies. Consider which type of economic system[12]is

• A movement along a PPC —scarcity

(a) Production possibility curve (PPC) is a curve that shows the maximum potential output that an economy can produce with existing resources. This economic model is constructed based on a few assumptions—the economy is a closed economy, only two types of goods are produced, factors of production are not equally productive, resources are limited, and the state of technology is constant.

• An inward shift of a PPC—reduction in economic resources l

Production possibility curve (PPC) is a popular examination question. Be sure you understand and master the basic concepts of PPC, and remember to include key assumptions underlying PPC.

CHAPTER 1 Basic Economic Ideas and Resource Allocation 8

In conclusion, the factor enterprise and the free working of the price mechanism cannot always ensure a satisfactory outcome for consumers due to imperfect information. Government intervention in the form of regulatory controls, tax imposition or direct provision may therefore be necessary to correct a misallocation of resources and overcome issues related to merit and demerit goods, moral hazard and

Since limited resources cannot satisfy unlimited wants, consumers

Allocation9

CHAPTER 1 Basic Economic Ideas and Resource

cannot have more of both goods at the same time. A movement along the PPC is shown in the following diagram, moving from point A to point B.

Capitalgoods0

Consumptiongoods

PPC2 PPC1

An inward shift of a PPC, though rare, is also possible and signifies a fall in an economy’s productive capacity. The inward shift can be caused by a reduction in the quality and quantity of factors of production.

alongMovementthePPCB A

Capitalgoods0

A shift in a PPC can be either outward or inward. An outward shift of a PPC means the economy is experiencing economic growth. In other words, the productive capacity of the economy has expanded due to, for example, an increase in capital goods, labour force and new technology.

There are two types of shifts in a PPC—outward and inward. To gain full marks, be sure to explain both types.

This growth is shown in the following diagram, shifting from PPC PPC2. In the new PPC the same time.

HINT!

BODY

Define ‘planned economy’ and ‘free market economy’

For example, war and natural disasters can destroy infrastructures and capital goods, while pandemics and epidemics can reduce the number of workforce. The economy will not be able to quickly recover and produce as much goods and services after such catastrophes. The fall in an economy’s productive capacity is shown in the following diagram, shifting from PPC1 to PPC2.

• A free market economy

Summarise the causes for each change in a PPC

Explain how resources are allocated in:

Capitalgoods

INTRODUCTION

• A planned economy

Consumptiongoods

In contrast, resources in a free market economy are allocated based on decisions made by economic agents such as producers and consumers who are driven by self-interest and benefit maximisation. The process of resource allocation is dictated by the ‘invisible hands’ of demand and

CHAPTER 1 Basic Economic Ideas and Resource Allocation 10

In summary, a movement along a PPC occurs when there is a change in the allocation of resources, an outward shift of a PPC occurs when there is economic growth, while an inward shift occurs when there is a

Inward shift of the PPC PPC1

l

CONCLUSION

A planned economy is one in which resources are allocated through central planning by the public sector, while a free market economy is one in which resources are allocated through the market mechanism by

In a planned economy, the central government owns all productive resources and decides on all the basic economic questions of what to produce, how, how much and for whom through a planning committee. This approach means there are no private property rights, no strong motivation for producers to work harder, and no market competition in the economy.

• Innovation

• Efficiency

• Income distribution l

Allocation11

Based on the comparison, the question of which economic system is likely to have the more beneficial outcome depends on various aspects.

BODY

Compare both economic systems in terms of:

• Incentive for production l

• Efficiency gains

Evaluate the likeliness of an economic system to have the more beneficial outcome in terms of:

Make sure you discuss the merits and demerits of both planned and free market economic systems.

supply forces without any government intervention. The market will eventually arrive at an equilibrium through these forces, and eliminate shortages and surpluses. This approach means there are private property rights and aggressive competition in the economy. As a result, the economic system is robust and dynamic.

HINT!

It can also be argued that the level of economic efficiency in a free market economy trumps that of a planned economy. This is because any surplus or shortage in a free market economy will ultimately be eliminated through price signals, as profit-driven producers will respond to changes in market demand quickly. On the contrary, a planned economy does not take market demand into account. This is because the central government only produces goods that it deems to be beneficial to its people. The inefficiency of such a system can lead to over- and even under-production of planned output.

In terms of incentive for production, a free market economy only produces goods that are demanded by consumers with purchasing power. In other words, producers will seek to maximise profit and only respond to effective demand, or demand that is supported by consumers’ ability to pay. A planned economy, on the other hand, does not use profit as an incentive for production. Instead, the production of the common good that will be of benefit to the whole society is seen as the primary drive for production.

It can be argued that goods produced in a free market economy are more innovative and of better quality. This is the result of intense competition that arises from free enterprise and private property rights. In contrast, there is no competition in a planned economy as all economic activities are determined by the central government. Producers lack motivation to produce and innovate as there are no private property rights.

Both economic systems can be further compared in terms of innovation, efficiency and incentive for production.

BODY

CHAPTER 1 Basic Economic Ideas and Resource

One aspect that can be considered is efficiency gains. While a free market economy can be more efficient in allocating resources through the price mechanism, it has a tendency to overproduce socially undesirable goods or demerit goods due to imperfect information. A planned economy, meanwhile, is able to reap the benefits of substantial economies of scale from the presence of only very few firms in the economy. This means when the volume of output increases, the cost per unit of production will decrease. As a result, a planned economy will achieve efficiency gains.

Another aspect that can be considered is income distribution. A free market economy’s pursuit of profit can result in both great wealth and great income inequality. As income inequality widens, the lower-income group—particularly the working class—will be increasingly exploited by the economy’s capitalistic appetite for profit and growth. In contrast, a planned economy prioritises socioeconomic equality through a fair distribution of resources and wealth. It can be argued, therefore, that a planned economy can eliminate the economic gap between the rich

CHAPTER 1 Basic Economic Ideas and Resource Allocation 12

In conclusion, both economic systems have their own advantages and disadvantages. Perhaps a mixed economy, which combines the elements of both planned and free market economies, can produce the most beneficial outcome as it encourages the balance between free

Suggest an economic system that can produce the most beneficial outcome

CONCLUSION

Buchholz, T. G. (1990). New ideas from dead economists: An introduction to modern economic thought. Plume Books.

Bootle, R. (2019). The AI economy: Work, wealth and welfare in the age of the robot. Nicholas Brealey.

CHAPTER 1 Basic Economic Ideas and Resource