Tut # 6 ( Answers)

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TUTORIAL #6 PRICE DETERMINATION

(2.5h)

At the end of the tutorial, students should be able to:

1. Explain the interaction of demand and supply in competitive markets 2. Explain the meaning of equilibrium price and equilibrium output 3. Explain the meaning of disequilibrium when there is

4. Excess demand (shortage) 5. Excess supply (surplus)

6. Analyse how changes in demand and supply affect the equilibrium price and output.

Basic concepts:

Market Equilibrium Market Disequilibrium Remarks

Qd= Qs Qd =/= Qs Market clears ie no shortages/surpluses Qd> Qs Shortage Qs > Qd Surplus

Demand

Supply

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Section A: Tutorial Foundation

1. Fill in the blanks

(a) If the demand for a good exceeds the supply at a given price, there will be a shortage and the price of the good will rise.

(b) If the supply of a good exceeds the demand at a given price, there will be a surplus and the price of the good will fall.

(c) The equilibrium price is the price where quantity demanded is equal to the quantity

supplied.

2. The demand and supply schedules for wheat in a free market are shown in the table below.

Price per tonne (S$) 100 140 180 220 260 300 340 380

Tonnes supplied per week 220 260 320 400 500 640 880 1400 Tonnes demanded per week 770 680 610 550 500 460 400 320 (a) What would be the size of the shortage or surplus at a price of S$180 per tonne?

Shortage of 290 tonnes

(b) What would be the size of the shortage or surplus at a price of S$340 per tonne?

Surplus of 480 tonnes

(c) What is the equilibrium price and quantity?

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(e) What is the new equilibrium price and quantity?

New equilibrium price = S$300, New equilibrium quantity = 640 tonnes

3. Distinguish between market equilibrium and disequilibrium?

Equilibrium Disequilibrium

Equilibrium means a state of rest. In this context it means the market prices have reached a point where there is no tendency or

pressure on prices to rise or fall further. 2 indicators of equilibrium:

 Quantity demanded = quantity supplied  There are no shortages or surpluses.

Instead

of “rest”, prices are still in a state of flux. There is disequilibrium when there are either upward or downward pressures on prices to fall/rise respectively.

2 indicators of disequilibrium:

 Quantity demanded ≠ quantity supplied  There are shortages or surpluses.

Section B: Application Questions (15mins)

State whether demand or supply (or both) has/have changed and in which direction the curve(s) has/have shifted in each of the following cases.

Market For Novel: Twilight * Implicit/unstated assumption:

*The novel in the form of hardcopy/print or paperback Any analysis using demand and supply concepts must relate to a market. Let us consider the market for

Twilight.

What will happen to the equilibrium price and quantity of the book: Twilight by Stephanie Myers in Singapore? State your assumptions and analysis clearly. [In each case

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(i) Magazines reporting that famous personalities such as Megan Fox and Jessica Alba are reading the novel Twilight.

The public tastes and preferences are influenced by the reading tastes/preferences of celebrities e.g. Megan Fox and Jessica Alba.

This will increase the demand for the books as people want to read what their idols are reading, causing output and price to rise.

(i) Introduction of an e-Book service that allows readers to download books, either to their handheld or computers and read it at a nominal fee (less than cost of books).

Substitutes:

This will decrease the demand for books as most Singaporeans on the go and do not want to carry the books around. Thus price and quantity exchanged will decrease.

Evaluative Comments:

In applying econ concepts/principles it is important to learn evaluative skills One basic way is to consider theory versus reality.

Example:

In theory e-books could be considered as substitutes for hardcopies. However, in reality it depends on whether people are comfortable with switching to e-books.

The impact would be minimal if people generally prefer reading hardcopies ie e-books are Analytical Tool:

Change in DD or non-P determinant => P T I D E

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(ii) Improvement in technology – paper now costs 50% cheaper to produce.

Supply increases as the cost of production of the books fall. Thus, price of books fall and quantity exchanged ( actual quantity traded or bought and sold) increases.

(iii) Introduction of the movie, Twilight in Singapore

2 possible impact on the market:

(a)Change in DD or non-P determinants => P T I D E

Demand will increase as the movie screening will increase the awareness of the consumers to the books. Hence, equilibrium price and quantity exchanged/traded will rise.

Alternatively:

Movies and the book could be substitutes if people choose to watch the movies rather than buy/read the book…..

(b) Change in SS or non-P determinants = > C S S E

Supply will also increase as the producers anticipating a rise in demand for the book after they receive news regarding the production and screening of the movie. Qty exchanged [traded/brought and sold] increases and price indeterminate.

Evaluative comment:

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However, it is observed the price of books is usually high when the movie is released – ↑DD >↑SS and thus price increases is the most likely outcome.

TRAINING SET 1: DATA HANDLING FOR CASE STUDY TYPE 1

and 2

Read the Exam Skills Package before attempting the questions (45mins

)

LOS skills

The first question(s) of most Case Study or Data Response Questions (DRQ) require you to understand and interpret data. Most will require you to provide economic explanations following the interpretation of the data.

Some Pointers on Using Tables and Graph

Look at the following simple line graph:

(1)Look at Title

It is important to look first at the Chart Title.

This tells you what the data is about e.g. population.

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The vertical or Y-axis

2 common types of values represented on the Y-axis : (a) The absolute value ie millions of units

(b) % value ie growth rates

For example, on the Y-axis in this graph the units are millions.

The population of Denmark in 1996 was not 5.25, but 5.25 million people. Note: Sometimes the axes need not start from 0. BE CAREFUL !!!

Time series data

Look at the X-axis or horizontal axis :

If it measures TIME (e.g. years, months etc) it is intended to track CHANGE over time.

When reading these graphs you must answer the question "How the data changes ?”.

This is called a “trend”.

In this case the trend shows 2 distinct characteristics:

(a) The population of Denmark increased from 1996 to 2007 by 3.8% or 200,000 people (Note the line rising over time)

(b) The population increased steadily ( Note the smooth line graph)

Summarized question to ask to describe graph:

1. What exactly does the graph show? (Use the chart title to help you answer this question)

2. What are the axes and what are the units? 3. What changed?

4. How much did it change? 5. How fast did it change?

6. How smooth was the change?

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This graph shows population change in Denmark from 1996 to 2007. Denmark's population grew steadily at 3.8% or with an increase of 200,000 people from 1996 to 2007.

Vocabulary that you can use while describing graphs (list is not exhaustive):

Synonymous terms

( direction)

Pace ( rate of change) Remarks

Increased/ decreased

Rose/Fell

Fast

At an increasing rate; dramatically, significantly, considerably, rapidly, substantially, markedly, greatly, exponentially, strongly, enormously; quickly

Slow

At a decreasing rate; steadily, slightly, gradually; gently

Incremental change e.g. rose by 10%; 20% etc Exponential change e.g. manifolds.. Double (100%) Triple (200%) Quadruple Quintuple….

Data interpretation skills ( Reading line graphs)

Trends

( broad patterns)

Possible patterns

Aka How to tell?

(1) Direction Up/down/flat Rise/fall/ remain constant

Plot trend-lines +

Check major turning points (sub-trends) (2) Pace or rate of

change

Fast/slow Sharp or steep/gradual Check

slope/gradient of graph (3) Stable/Unstable Steady/volatile ( volatility => sign of uncertainty or speculative activity)

fluctuating Check for smoothness/ irregular movements

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Time Series Data

This is data which shows the value if some variable over a period of time. This can also be shown using a simple bar chart or line graph.

QUESTION 1

Adapted from Dunman High Prelim 2009 Summarise the trend in HDB resale prices from the period 2005 to 2007. (2m)

Bird-Eye’s view:

 Look at end points….to identify or draw a trend-line.

 Check if there are breaks (ie major turning points) in the trend-line….. Resale price of HDB showed a generally increasing trend between 2005 and 2007 Or

Overall prices of resale HDB flats were rising between 2005 and 2007 Closer Look:

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100 = 1998 prices or base year prices. 120 => prices rose by 20% compared to 1998.

QUESTION 2

Figure 2: Car Traffic volume and year-on-year growth rate, UK: 1950 to 2008

Source: www.dft.gov.uk/pgr/statistics Describe the trend in car traffic volume in UK from 1950 to 2008. (2m)

________________________________________________________________________________ Technical Issues:

Distinguish between change in absolute terms vs rate of change or growth rates

Absolute measure of traffic volume = billion vehicles kilometers ie no of vehicles x mileage travelled

YOY growth = rate of growth over a 12 month period ( e.g. March 2004- March 2005) Answer:

From Figure 2, car traffic volume increases (1m) at a decreasing rate (1m). OR

From Figure 2, although volume of car traffic has grown since 1950 (1m), the actual rate of growth has been slowing over time (1m).

QUESTION 3

EU and World white sugar prices 1990-2002 (current prices)

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‘A’ Levels N2004

a) Describe the trend for the EU price of sugar. (1m)

_________________________________________________________________________ b) Compare the EU prices of sugar with the World price of sugar over the period shown.

(2m)

_________________________________________________________________________ c) Use economic analysis to explain the difference (2m)

_________________________________________________________________________

Answers:

a) The price of sugar have been falling gradually NB: The decline is very shallow.

b)Although a falling trend is observed for both prices, the EU price is 2 - 3 times higher and is much more stable compared to the world price which is much more volatility and fluctuations.

Compared the 2 graphs:

Stability => Still, pretty straight; unwavering, steady Volatility => turmoil; turbulence; zig-zag or wavy lines

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c) EU price was guaranteed (price floor) implemented by the government and as a result more stable than the fluctuating world price, which was determined by the free market forces of supply and demand.

Section C: Date Response Question (1h)

Case study Paper:

Data FORMS 3 forms:

(a) Text or extract ( ie article) (b) Graphs – common forms Line graph Bar graphs Pie charts (c ) Tables SKILL-LEVELS 2 broad types:

(a) LOS or Lower order skills :

Focus is on data reading/interpretation, example:  Describe trends

 Explain trends

Weightage [12m] or 40% Reference: (a) (b) questions related to Palladium (b) HOS or higher order skills

Focus is on ISSUES related to the data, example:  Analyse…..

 Discuss….

 Evaluate …. Reference: ( c) (d) questions related to Palladium

Weightage [18m] or 60 %

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TYS J2000 Q1: The Price of Palladium

Palladium is an essential metal in the production of mobile telephones and computers. It is also used in anti-pollution systems for car exhausts and the chemical industry. In April 1998 it reached a then record price of $417 an ounce. This made it more expensive than platinum, to which it is closely related, and gold. While either palladium or platinum car be used in car exhaust systems, platinum is important in jewellery production, which palladium is not. The following information highlights some aspects of the market for palladium in 1996 and 1997.

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QUESTIONS

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(a) (i) Describe the main trends in the price of palladium during 1996 and 1997. 3 C method of working out the answers:

 Command word – Describe ( “what is/are …”)  Concept - main trends in price

 Context - 1966-1967

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(ii) With the aid of a diagram, use the information in Table 1 to show how changes in supply and demand for the metal have influenced its price between 1996 and 1997.

 Command word – show ( using diagram)

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 Context – market for palladium 1996-1997 ( Table 1)

(b) Using Tables 2 and 3, identify the main cause of change on the demand side and on the supply side and give a possible explanation in each case.

 Command word - identify ( find out from the data one main cause)  Concept – D + S determinants

 Context - Information provided in Tables 2 and 3

[4]

(c) Analyse the relationship between palladium and platinum in their use in (i) car exhaust systems and (ii) jewellery.

 Command word – Analyse ( explain analytically ie by breaking down key ideas and showing the links clearly)

 Concept – Substitutes

 Context – Palladium/platinum/car exhaust/jewellery

[4]

(d) Discuss how you would expect buyers and sellers to react to the higher price of palladium

Command word – Discuss { look at the issue from a balanced (TAT) perspective } Concept – LOD and LOS

Context - palladium

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SUGGESTED ANSWERS:

(a) (i) Describe the main trends in the price of palladium during 1996 and 1997. 1996

Prices declined slightly and were relatively stable on a monthly basis. 1997

Sharp rise in prices (ie prices doubled from $120 per ounce to $240) Greater price volatility on a monthly basis.

How much information to “pack into” the answers? Examiner’s Report:

 Credit was also awarded for comment on relative volatility:  Marks were lost when detailed descriptions were given.

Remember “KISS”

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 Market price and quantity traded have risen.

Candidates were given full marks for a clear statement of the changes in supply & demand with an accurate diagram. Remember draw “AWEsome” Diagram (b) Using Tables 2 and 3, identify the main cause of change on the demand side and on

the supply side and give a possible explanation in each case. Why the sharp rise in price over 1997?

Demand side: Analysis

P –T I D E T factor linked to the concept of derived demand. Palladium here is seen not as a good but an fop I factor linked to increase in demand for cars Explanation

Reference to Table 2 “palladium demand by application”

Increased demand for palladium used in making car exhaust system (33%). Palladium is a material used as a input (fop) in manufacturing various items. As such its demand is basically a derived demand.

Supply-side Analysis:

C S S E S1 – supply capacity ie closure of mines

S2 – supply shocks ie political problems, depletion of reserves Explanation:

Reference to Table 3”Palladium Supply”

Data indicate of all palladium producing countries, the supply fell only for Russia. The possible reasons could be closure of mines due to political problems as well as depletion of reserves etc.

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(c) Analyse the relationship between palladium and platinum in their use in (i) car exhaust systems and (ii) jewellery.

(i) Palladium and Platinum are substitute materials used in making car exhaust systems. An increase (decrease) in the price of palladium would lead to an increase (decrease) in the demand for platinum.

(ii) Platinum is used in making jewellery but palladium isn't. A decrease in the price of palladium would not lead to a change in the demand for platinum in jewellery making.

[4]

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Buyers' reaction:

Reduce quantity demanded due to the law of demand(LOD) (1m) However ( flip-side/limitations):

In this case, the extent of fall in quantity demanded will then depend on Ep, which depends on factors affecting Ep. (1m)

Demand tends to be price inelastic as there are not many close substitutes except platinum. (1m)

Buying on expectations of further price increases

if majority of the buyers treat palladium as a commodity for investment, they may start buying more of it if they expect the prices to increase.

Sellers' reactions:

Increase quantity supplied due to the law of supply (LOS) (1m) However ( flip-sides/limitations)

In this case, the extent of increase in quantity supplied will then depend on Es, which depends on factors affecting Es. (1m)

Supply tends to be price inelastic if there is:

 Little existing capacity e.g. difficult to hire more miners or making the existing labour to work the mines harder.

 Difficulty in finding new mines

( useful to illustrate with a diagram of say a vertical SS curve versus a gentle upward sloping supply curve)

Section E: Essay (1h 15mins)

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S h a rin g B e s t P ra c tice s in E c on o m ic s T eac h in g 2 00 8 @ H C I

Practice Essay Question (HCI Promos 2005 Qt 2a)

“After the recession caused by the Sept 11 terrorist attacks in 2001, most major airline carriers in the United States are now faced with rising fuel costs, expensive labour and tough competition from low-cost carriers. All these led to some major airline carriers suffering huge losses.”

Adapted from the Straits Times, 15 September 2004 Using demand and supply analysis, explain how the factors mentioned above affected the market for major airline carriers. [10]

Step 1:

Getting on the RIGHT track.

[ Basic principle - To get to the right destination, at the end of the day, you must always stay on the right track right?].

How?

Learn to “dissect” or “unpack” the question efficiently using the 3 C technique. Dissect/unpack => Find out the Requirements of the Question.

Use 3 C technique:

(1) Command word (s) - Explain

(2) Concept (s) - Demand and Supply

(3) Context (s) - Airline industry and scenario as given in the stem NB:

This step is very important to do it right. It is strategic!

If done incorrectly your entire effort in writing the essay would be futile/wasted because at the end of the day your ESSAY must ANSWER the right question. An irrelevant answer ( wrong track) earns ZERO marks !!

Essay Plan ( Framework) - Do not use more than 10 mins to draw up a simple plan in the exams.

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Introduction

Since the question is focus on the possible impact on the market for major airlines Link market to D +S :

On the demand side the market is made up of passengers who prefer to travel on full service airlines whilst on the supply side it is made up of major airlines operators. Any change in the conditions of demand and supply for travel on major airlines is likely to impact on the market price as well as quantity exchanged/traded ( ie size of the market). I shall proceed to analyse the impact given the above scenario.

Body

Impact on market for major airlines ( ie non budget airlines)

Demand side

Shift left ( falls) PT I D E (1) Income – recession

P

T I D E (2) Taste - Availability of close substitute ie cheaper budget airlines.

Supply side

Shift left ( falls) C S S E (1) Cost – higher fuel, labour, marketing costs

(2) Supply capacity – closure of major airlines Conclusion

Combined effect Both

D+S falls

Quantity exchanged/brought and sold must therefore fall

Price indeterminate.

However, prices likely to fall because recession makes it difficult to jack up air fares.

(ieusing the context to provide a sound conclusion/stand)

Remarks

 Support with diagrams where appropriate and useful

 No need to consider flip-sides and limitations. This is not a “discuss-type” question.

Learn to be a

Master Chef at

Beefing up your

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“After the recession caused by the Sept 11 terrorist attacks in 2001, most major airline carriers in the United States are now faced with rising fuel costs, expensive labour and tough competition from low-cost carriers. All these led to some major airline carriers suffering huge losses.”

Adapted from The Straits Times, 15 September 2004 Using demand and supply analysis, explain how the factors mentioned above affected the market for major airline carriers. 10]

Examiners’ Comments

 Effects of changes in demand and supply conditions was considered separately - Did not consider the effect on the market given that both demand and supply factors have simultaneously changed. [ i.e. flaw= Incomplete analysis]

 Quite a number explained in detail how each factor (esp. supply factors) came about, often forgetting to answer the question itself. [i.e. Flaw= Incomplete analysis]

 When explaining for the effects of various demand and supply factors, a number of students based their analysis on one individual firm. [ i.e. flaw conceptual error]

Essay Writing Skills Nuggets (Tips) for Students #1

Turning/ Training the Spotlight….

Before a show begins, the normal practice is to train/turn the spotlight on whatever or whosoever is the FOCUS to get the attention of the audience.

In the same way, in the introduction the intention is to put the spotlight on the major conceptual issues which is the centre of focus before proceeding to do the detail analysis in the BODY.

Content words…get a bird’s eye view before proceeding to flesh out the details.

A careful reading of the content words in the question requires the answer to link the impact on Market (central issue) to demand and supply concepts with special application or reference to the context of airline industry.

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Natural Flow and KISS effect

For this question unless students know the link between market and Demand & Supply they might not be able to give a good analysis. Once this it accomplish successfully there is a natural flow or progression into the BODY. It is this natural flow that is sometimes “tricky” to catch. At the same time be mindful that time is precious so in writing the introduction give it a KISS effect (i.e. keep it short and sweet). Time is precious and you ought to use it wisely for the main part of the analysis which is the BODY.

Introduction

In any market sellers exert an influence over supply whilst buyers exert influence over demand for the product.

In the US, the decisions of both buyers and sellers in the market for travel on major airlines affect demand and supply thus impacting on price and quantity. It is this impact on price and quantity that I shall attempt to explain using demand and supply analysis.

Body

Essay Writing Skills Tips/Nuggets for Students #2

Good analysis is done systematically. To do a systematic analysis the BODY is “divided” (i.e. there is no necessity to number or do an explicit division) into 3 segments:

(1) Impact on demand (2) Impact on Supply (3) Combined impact

The headings/sub-headings are there to guide the flow. You can actually dispense with them once you have written the essay.

Impact on Demand (ceteris paribus)

First I shall focus my analysis on the demand side of the market for air travel.

Ceteris paribus,* the context suggests that demand for air travel on major airlines has been severely hit by changes in tastes and preferences and incomes related to 3 major events that happened in the US around 2001. These 3 major events have resulted in a severe fall in demand for air travel

.

As a social science clarity and precision is expected in economic analysis.

The *ceteris paribus assumption is important and useful in analysis to ensure clarity and precision. Students of economics should learn to use this technique in economic analysis to provide clear/precise explanation. But, of course don’t use it indiscriminately. Placing a

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Figure 1: US Market for Air Travel on Major Airlines

Tastes and Preferences (likes and dislikes)

One of the major determinants of demand is likes and dislikes or tastes and preferences related to air travel. In the context, demand for air travel at that time was badly affected because of fear of travelling on long haul flights following the 9/11 terrorist attack in the US. Many Americans avoided long haul travelling by air. The impact can be illustrated with a leftward/inward shift of the demand curve from D to D1 as shown in figure 1.

Essay Writing Skills tips/nuggets for Students # 4

Using Diagrams as Tools for Analysis

Diagrams are part and parcel of economic analysis especially for a question that called for demand and supply analysis.

Diagrams offer clarity and precision in analysis. A picture or good diagram is worth a 1000 words of descriptive analysis. Of course, poorly drawn or inaccurate diagrams are not just a waste of time they are equally damaging to your credibility. The advice is learn and train yourself to draw well. Make it a habit. In the long run you will reap good returns.

By the way, good diagrams are AWE-some. Whilst bad diagrams are

Awful!

AWE-some stands for…

 A – Accurate (Absolutely essential to draw theoretically correct diagrams)

D D1 S S1 Qty Price Q1 Q P P1 A

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HWA CHONG INSTITUTION

C1 H1 and H2 Year One Economics 2010 Tutorials #4-6 Theories of Demand & Supply

 W – Well-Labelled + Titled + Numbered especially if there are more than 1 diagram

drawn (spell out clearly what every axis; curves; points represent in the diagram )  E – Easy on the eye (Big enough, Neat ,Well-positioned)

Awful diagrams are extremely irritating to the examiner. Don’t waste time drawing them!

Cheaper Substitutes

Taste and preferences is also affected by cheaper and better substitutes available in the market. In the context, the rise of budget airlines around that time provided cheaper substitutes to travel on major airlines for Americans. These low-cost no frills carriers posed a serious threat to major airlines for they offered cheap fares at a fraction of the cost of major airlines. Moreover, the recession that hit US after the 9/11 incident makes budget carriers attractive thus adding to the woes of the major airlines. As an inferior good or substitute the demand for budget carriers tend to rise whilst the demand for travel on major airlines tend to fall as a consequent of the recession.

Income or Purchasing Power

The third factor that affects demand is income or purchasing power. In the context, US went into recession and many Americans have to cut back on spending because of job loss, pay-cuts and a general mood of pessimism. In times of recession demand for air travel on major airlines will be hit harder as consumers tightened their belts and cut back on spending on non-inferior or luxury goods.

In summary

Hence from the above analysis it is clear that demand for travel on major airlines in the US will fall substantially causing the demand cure to shift leftwards/inwards. Ceteris paribus, price or airfares will go down and quantity should fall.

Impact on Supply (ceteris paribus)

Having explained the impact on demand, I shall now look at the impact on the supply side of the market.

Cost of Production Fuel Cost

In any industry, cost is an important determinant of supply. In the context it is mentioned that the price of oil was rising. Oil price forms a major part of airlines’ fuel cost. Hence, the “rising price of oil” pushed up the cost of production for major airlines prompting airlines to raise their prices to cover costs for every possible quantity supplied. This is shown by the leftward shift of the SS curve from SS to SS1 in Figure 1.

Labour Cost

At the same time, labour cost for airlines has also risen. This further pushed up the cost and hence the price or airfares. Again, the impact is to shift the supply curve leftwards.

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airlines have to spend more on marketing. Hence another possible increase in cost could come from increase or aggressive spending on advertising and marketing.

In summary

From the above analysis it is clear that the airlines’ cost has gone up substantially shifting supply curve leftwards. Ceteris paribus, price of air travel or airfares will go up and quantity should fall.

Combined Impact

So far the analysis on the impact on price and quantity suggests that

quantity will

certainly fall but price might go up or down. In theory the impact on

price is indeterminate. The final outcome on the market is dependent on the

combined impact on both demand and supply on the market for air travel. Conclusion:

Although in theory price is indeterminate, however in the given context, it is very likely that the price or airfares has indeed fallen. The reference to airlines “suffering losses” because their profits have been squeezed suggests that at a time of weak demand they are unlikely to have the power to raise fares to cover rising costs.

Essay Writing Skills tips/nuggets for students #5

In writing a good conclusion keeps it again short and sweet perhaps even snappy.

Conclusion is the place where you are expected to state your findings clearly and to deliver a sound verdict/stand.

Notice the above conclusion conforms to theory (price indeterminacy is explicitly acknowledged) however where possible we should be confident enough to apply theory to the context to show good application skills. In the context of the above question it is quite obvious that major airlines could not and did not historically speaking raise their fares despite experiencing a massive collapse of demand and rising cost pressures. If you check the history of the period, you would realize that many airlines went belly up such as the United Airlines, American Airlines and several have to merged just to survive the crunch!

Essay Writing Skills Tips/Nuggets for Students # 6

Time Management

You have actually around 15-20 mins (roughly 40% of your total time allocation) to complete this essay in the exams. This is only part (a) of a two part question. Overall you have 45 mins to complete both parts. Part (b) carries more marks (15) and you should allocate more time to part (b). This means you have to train yourself to be able to think fast (work out a framework quickly) and write fast. This is a process and so be steadfast; patient and resolute. You should get there in good time before your real Exams!

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Using the LORM as a Guide

Skill level Marking Scheme is based on how well your answer has demonstrated the different level of skills expected by the examiners.

Level 1 Identify some factors but explanation is weak and may consist

of some conceptual errors. 1-4 marks

Level 2 Explain factors that cause a fall in both demand and supply with some references to the scenario.

5-6 marks Level 3 Explain factors that cause a fall in both demand and supply

well with good references to the scenario and illustrate with the help of diagrams.

Explain the factors that cause the fall in demand and supply well with excellent references to the scenario and illustrate with the help of diagrams. Able to reach correct conclusion for the output and price level for major airline carriers.

7-8 marks

9-10 marks

MORE RESOURCES FOR TEACHERS: ESSAY WRITING SKILLS + ESSAY

A. INTRODUCTION

Comments made repeatedly by the examiners on students' performance in the essay paper reflect the following deficiencies:

1. Failure to read the questions carefully.

2. Failure to understand the requirements of the questions.

3. Failure to recognise the cue words such as 'distinguish', 'evaluate', 'comment', 'describe', etc.

4. Failure to spend an appropriate amount of time in relation to the marks allocated [ available]

5. Failure to write a coherent ( well-structured and organised – everything falls into their proper places – nothing is out of place) essay and a reasoned conclusion.

6. Poor application ( learn to contextualize answers) of economic analysis for questions which contain real world economic problems

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 underline cue words

 spell out the cognitive requirement I

STEP 2: ANALYSE THE REQUIREMENTS

I

STEP 3: ORGANISE THE ANSWERS ( goal = coherence)

I

STEP 4: WRITE THE ESSAY

STEP 1: INTERPRET THE QUESTION ( unpacked/dissect/deconstruct/unscramble) Before you can answer a question, you must first understand what is required. The requirements of a question are two-fold:

 in terms of the cognitive (thinking and processing) skills required  in terms of the content required

To ensure that you read the question carefully and thoroughly and understand the requirements of the question, it is advisable that you

i) Underline direction1_{words and spell out the cognitive requirements.}

ii) Identify the key concepts and specify the required content.

iii) Restate the question { reconstruct to put the issues “right side up” instead of “upside down”!}

STEP 2: ANALYSE THE REQUIREMENTS

After you have understood the requirements of the question, you now need to break them down to determine what exactly you must write/discuss in your answer to meet the requirements of the questions. In breaking down the question, you must identify all the relevant issues, economic concepts and diagrams that you want to address in your answers.

STEP 3: ORGANISE THE ANSWERS

This step helps you to be coherent; to relate one point to another ( link up or connect the dots logically and systematically) and to plan effectively. Having understood what the question is directing you to do and having identified the particular information pertinent to your answer, you must rearrange this information into a structure that is compatible with what is required as spelt out by the direction words.

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Use your plan as a guide when you write the answer. The basic components of your essay should include:

Introduction _ where you clearly spell out the requirements of the question

and hence the central idea or the main point of the essay [ Soccer Analogy: Learn to centre the “ball” before you start the game]

Developmental

paragraphs  their function is to develop the various aspects of the centralidea  each paragraph should have a key or controlling idea

 use of transitions2_{between paragraphs is crucial to give the}

essay coherence and unity

Conclusion  summing up

 Provide a judgement/stand if required.

It is important to remember that when writing the essay, you should strive for focus, simplicity and clarity. Therefore, you should use:

 one paragraph to discuss one idea

 simple language

 short sentences

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Skill Level Assessment

The examiners use a LORM mark scheme which focuses on skill levels as indicated by command words.

 Command word – “OBEY”

 Cue word - “ HINT ….follow ”  Direction word - “FOLLOW”  Process Word - “ Cook it right “

Command Words

What is required

Account for _ Give reasons for , provide evidence to support

 (do not confuse with “give an account of” which is asking for a description)

Analyse  Break down into the component parts & explain how they relate to each other

 Make a detailed examination or investigation into something Assess _ Consider something in a balanced way: the points for & against

something

Compare _ Examine the similarities & differences – perhaps reach a conclusion about which is preferable

Comment  State clearly your opinions on the topic in the question  Support your views with evidence

Consider _ Take into account; weigh up the advantages/disadvantages Contrast _ Examine the difference between and provide explanations

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Criticise

{ seldom used}

 Give your judgement about the merit or demerit of the theories or opinions about the truth or falsehood of facts

 Support your judgement by a discussion of evidence or reasoning involved

Define _ Give the precise meaning of a word or phrase  Show how the distinctions you make are necessary Describe  Give a detailed account

 Provide the main characteristics Discuss  Investigate and/or examine in detail

 Sift the arguments & debate  Give reasons for & against  Examine the implications

Distinguish _ Describe the important aspects, pointing out the pros & cons Evaluate _ Appraise the merit or worth of something

 Judge the impact, importance of success of

 Include your personal opinion & evidence to support your evaluation

Examine _ Investigate, scrutinise & question all the evidence Explain  Provide details about how something happens/ed

 Give clear reasons for  Account for

Extent  “To what extent” – asks you to weigh the evidence for & against something

 to state “how far” something is valid

Illustrate _ Make clear by the use of concrete examples from a range of source

 Use a figure or diagram to explain or clarify Interpret  Expound the meaning of

 Make clear & explicit, usually giving your own judgement Justify  Show adequate grounds for decisions or conclusions

 Answer the main objectives likely to be made to them  Make a case for a particular perspective

 Provide evidence

Outline  Describe the main features, or general principles of a subject, omitting minor details & emphasising the structure & arrangement

Refute _ Disprove a statement or argument

Relate  Show how things are connected to each other & to what extent they are alike or affect each other

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 Avoid unnecessary details & examples

Trace  Indicate the development of events or progress of a subject in clear stages

[NB: coded in red are those command words that are hardly used by the UCLES examiners]

APPENDIX B: TRANSITIONS

Transitions are words and phrases that are used to signal the relationship between ideas in an essay and to join the various parts of an essay together. The following is a list of traditional expressions categorised according to their functions.

Functions Transition words

Addition Again, too, also, in addition, further, furthermore, moreover, besides Cause and effect Therefore, consequently, thus, accordingly, as a result, hence, then,

so , otherwise

Comparison Similarly, likewise, by comparison

Concession To be sure, granted, of course, it is true, to tell the truth, certainly, with the exception of, although this may be true, even though, naturally Contrast But, however, in contrast, on the contrary, on the other hand, yet,

nevertheless, after all, in spite of Examples or

special features For example, for instance, in other words, in illustration, in this case, inparticular, specifically Restatement That is, as I have said, in other words, in simpler terms, to put it

differently, simply stated

Sequence First, second, third, next, finally

{ UCLES examiners are NOT fond of this method of structuring or itemizing your arguments}. It makes your answer look like a “shopping” or “laundry” list.

Summary In conclusion, to conclude, to summarise, in brief, in short

General Essay Mark Scheme (9732) General comment:

Differences in grades should be determined by the ability of the candidate to demonstrate the various objectives of the examination listed in the syllabus & not purely by the ability to itemise further facts from the content of the syllabus.

An overall guide to the marks for individual questions is given below; these are from a total of 21 marks as the other 4 marks are reserved for evaluation.

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Level Descriptors

1

Lower

Wrong track !

 answer is mostly irrelevant

 only few valid points made incidentally in an irrelevant context Upper

Right track but very skimpy +

marred by

conceptual flaws

 answer shows some knowledge but does not indicate that the meaning of the question has been properly grasped

 basic errors of theory or an inadequate development of analysis may be evident 2 Lower Incomplete analysis : Breadth (too narrow) Depth ( too shallow/superficial) Plus: Incoherent presentation badly organised)

 answer shows an ability to identify facts, some ability at graphs, fair ability to apply known laws to new situation

 accurate though undeveloped explanation of the facts relating to the question together with an explanation of the theory & evidence of some ability to discriminate & form elementary judgements,

BUT a clear, logical presentation not present

Upper

Lacking in scope and depth but better organised – more coherent.

 where the answer has a more thorough relevance to the question but the theory is incompletely explained

3 Lower

Got both breadth and depth but

Lacking in

evaluative comments

 answer shows a good knowledge of the facts and theory of the question, clear evidence of the ability to use facts and theory with accurate reference to the question

 evidence of the ability to examine the implications of the question & an attempt to distinguish between facts & value judgements  clear statements, supported by reasoned arguments should be

given & there should be some attempt at a conclusion to the question

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Ideal answer good analysis + evaluation + application

+ well written

describe & explain this in a precise, logical, reasoned manner

 ability to query some of the assumptions

 new illustrations & examples appropriate to the material discussed should be introduced as further evidence of the ability to recognise the principles of the question & their application to relevant current situations

Levels explained:

L1 Knowledge/Recognise (Description)

Identify the key theory without explanation Outline give a list of relevant factors

L2 Consolidate (Add some detail – application)

Explain what happens – descriptive

Clarify give examples without explanation

L3 Elaborate (Extend to include analysis)

Analyse use relevant theory to aid explanation Apply place explanation in context

Evaluation marks:

Level Descriptors Marks

E2 Judgement based on analysis 3 – 4

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How to use this ‘full-length’ essay to teach skills

Objective of preparing a fully fleshed up essay for our First tutorial to Teach Essay Skills:

(1) Benchmark and Inspiration

As part of our concerted effort to “teach” essay skills a fully fleshed out answer is useful to complement an outline or framework. The purpose is to help students see and understand how to transform a skeletal outline into the final product. How to put the flesh to the bones. Hopefully it is useful as a benchmark to inspire them to work towards this goal.

Of course they are not expected to able to produce this answer at this point. Building good writing skills is a process that takes time to bear fruit.

(2) Where’s the Beef?

I have consciously highlighted in red all the parts of the answer that is content or concept based. Good analysis must be based on solid use of ECONOMIC concepts to beef up analysis. In short the red parts represent the “meat” or beef” in the answer. Students should be taught to dispel the notion that good style and command of the language is sufficient to “smoke” their way through in writing an economics essay. Lots of words but no real economic content is to be strongly discouraged at an early stage.

(3) Tips

I have incorporated tips/nuggets in the boxes to help our students polish up essay-writing skills. As I think about essay writing skills I realized that students also learn not just from a set of ready made rules neatly laid down in a handbook but also from picking up “tips” as they do their hands-on practice. Hence, I have inserted these boxes to inculcate skills as we go along.

STEP 3 : Beef Up your Essay Plan

“After the recession caused by the Sept 11 terrorist attacks in 2001, most major airline carriers in the United States are now faced with rising fuel costs, expensive labour and tough competition from low-cost carriers. All these led to some major airline carriers

suffering huge losses.”

Adapted from The Straits Times, 15 September 2004 Using demand and supply analysis, explain how the factors mentioned above affected the market for major airline carriers. 10]

Examiners’ Comments

 Effects of changes in demand and supply conditions was considered separately - Did not consider the effect on the market given that both demand and supply factors have simultaneously changed. [ i.e. flaw= Incomplete analysis]

 Quite a number explained in detail how each factor (esp. supply factors) came about, often forgetting to answer the question itself. [i.e. Flaw= Incomplete analysis]

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Fully Written Out Essay

Essay Writing Skills Nuggets (Tips) for Students #1

Turning/ Training the Spotlight….

Before a show begins, the normal practice is to train/turn the spotlight on whatever or whosoever is the FOCUS to get the attention of the audience.

In the same way, in the introduction the intention is to put the spotlight on the major conceptual issues which is the centre of focus before proceeding to do the detail analysis in the BODY.

Content words…get a bird’s eye view before proceeding to flesh out the details.

A careful reading of the content words in the question requires the answer to link the impact on Market (central issue) to demand and supply concepts with special application or reference to the context of airline industry.

Natural Flow and KISS effect

For this question unless students know the link between market and Demand & Supply they might not be able to give a good analysis. Once this it accomplish successfully there is a natural flow or progression into the BODY. It is this natural flow that is sometimes “tricky” to catch. At the same time be mindful that time is precious so in writing the introduction give it a KISS effect (i.e. keep it short and sweet). Time is precious and you ought to use it wisely for the main part of the analysis which is the BODY.

Introduction

In any market sellers exert an influence over supply whilst buyers exert influence over demand for the product.

In the US, the decisions of both buyers and sellers in the market for travel on major airlines affect demand and supply thus impacting on price and quantity. It is this impact on price and quantity that I shall attempt to explain using demand and supply analysis.

Body

Good analysis is done systematically. To do a systematic analysis the BODY is “divided” (i.e. there is no necessity to number or do an explicit division) into 3 segments:

(4) Impact on demand (5) Impact on Supply (6) Combined impact

The headings/sub-headings are there to guide the flow. You can actually dispense with them once you have written the essay.

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Impact on Demand (ceteris paribus)

First I shall focus my analysis on the demand side of the market for air travel.

Ceteris paribus,* the context suggests that demand for air travel on major airlines has been severely hit by changes in tastes and preferences and incomes related to 3 major events that happened in the US around 2001. These 3 major events have resulted in a severe fall in demand for air travel

.

As a social science clarity and precision is expected in economic analysis.

The *ceteris paribus assumption is important and useful in analysis to ensure clarity and precision. Students of economics should learn to use this technique in economic analysis to provide clear/precise explanation. But, of course don’t use it indiscriminately. Placing a “ceteris paribus assumption” at appropriate points in your analysis lends a lot of weight to your analysis. It basically means you are being careful, methodical, objective and scientific in your analysis.

Figure 1: US Market for Air Travel on Major Airlines

Tastes and Preferences (likes and dislikes)

One of the major determinants of demand is likes and dislikes or tastes and preferences related to air travel. In the context, demand for air travel at that time was badly affected because of fear of travelling on long haul flights following the 9/11 terrorist attack in the

D D1 S S1 Qty Price Q1 Q P Ess ay Wri tin g Skil ls tips /nu gge ts for Stu den ts # 4 Usi ng Dia gra ms as Too ls for An aly sis Dia gra ms are part and par cel of eco no mic ana lysi s esp eci ally for a que stio n that call ed for de ma nd and sup ply ana lysi s. Dia gra ms offe r clar ity and pre cisi on in ana lysi s. A pict ure or goo d dia gra m is wor th a 100 0 wor ds of des crip tive ana lysi s. Of cou rse, poo rly dra wn or ina ccu rate dia gra ms are not just a was te of tim e the y are equ ally da ma gin g to you r cre dibil ity. The adv ice is lear n and trai n you rsel f to dra w well . Ma ke it a hab it. In the lon g run you will rea p goo d retu rns.

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US. Many Americans avoided long haul travelling by air. The impact can be illustrated with a leftward/inward shift of the demand curve from D to D1 as shown in figure 1.

Cheaper Substitutes

Taste and preferences is also affected by cheaper and better substitutes available in the market. In the context, the rise of budget airlines around that time provided cheaper substitutes to travel on major airlines for Americans. These low-cost no frills carriers posed a serious threat to major airlines for they offered cheap fares at a fraction of the cost of major airlines. Moreover, the recession that hit US after the 9/11 incident makes budget carriers attractive thus adding to the woes of the major airlines. As an inferior good or substitute the demand for budget carriers tend to rise whilst the demand for travel on major airlines tend to fall as a consequent of the recession.

Income or Purchasing Power

The third factor that affects demand is income or purchasing power. In the context, US went into recession and many Americans have to cut back on spending because of job loss, pay-cuts and a general mood of pessimism. In times of recession demand for air travel on major airlines will be hit harder as consumers tightened their belts and cut back on spending on non-inferior or luxury goods.

In summary

Hence from the above analysis it is clear that demand for travel on major airlines in the US will fall substantially causing the demand cure to shift leftwards/inwards. Ceteris paribus, price or airfares will go down and quantity should fall.

Impact on Supply (ceteris paribus)

Having explained the impact on demand, I shall now look at the impact on the supply side of the market.

Cost of Production Fuel Cost

In any industry, cost is an important determinant of supply. In the context it is mentioned that the price of oil was rising. Oil price forms a major part of airlines’ fuel cost. Hence, the “rising price of oil” pushed up the cost of production for major airlines prompting airlines to raise their prices to cover costs for every possible quantity supplied. This is shown by the leftward shift of the SS curve from SS to SS1 in Figure 1.

Labour Cost

At the same time, labour cost for airlines has also risen. This further pushed up the cost and hence the price or airfares. Again, the impact is to shift the supply curve leftwards.

Marketing Cost

Moreover, given the stiff competition from budget carriers, it is also possible that major airlines have to spend more on marketing. Hence another possible increase in cost could come from increase or aggressive spending on advertising and marketing.

In summary

Ess ay Wri tin g Skil ls tips /nu gge ts for Stu den ts # 4 Usi ng Dia gra ms as Too ls for An aly sis Dia gra ms are part and par cel of eco no mic ana lysi s esp eci ally for a que stio n that call ed for de ma nd and sup ply ana lysi s. Dia gra ms offe r clar ity and pre cisi on in ana lysi s. A pict ure or goo d dia gra m is wor th a 100 0 wor ds of des crip tive ana lysi s. Of cou rse, poo rly dra wn or ina ccu rate dia gra ms are not just a was te of tim e the y are equ ally da ma gin g to you r cre dibil ity. The adv ice is lear n and trai n you rsel f to dra w well . Ma ke it a hab it. In the lon g run you will rea p goo d retu rns.

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From the above analysis it is clear that the airlines’ cost has gone up substantially shifting supply curve leftwards. Ceteris paribus, price of air travel or airfares will go up and quantity should fall.

Combined Impact

So far the analysis on the impact on price and quantity suggests that

quantity will

certainly fall but price might go up or down. In theory the impact on

price is indeterminate. The final outcome on the market is dependent on the

combined impact on both demand and supply on the market for air travel. Conclusion:

Although in theory price is indeterminate, however in the given context, it is very likely that the price or airfares has indeed fallen. The reference to airlines “suffering losses” because their profits have been squeezed suggests that at a time of weak demand they are unlikely to have the power to raise fares to cover rising costs.

Essay Writing Skills tips/nuggets for students #5

In writing a good conclusion keep it again short and sweet perhaps even snappy.

Conclusion is the place where you are expected to state your findings clearly and to deliver a sound verdict/stand.

Notice the above conclusion conforms to theory (price indeterminacy is explicitly acknowledged) however where possible we should be confident enough to apply theory to the context to show good application skills. In the context of the above question it is quite obvious that major airlines could not and did not historically speaking raise their fares despite experiencing a massive collapse of demand and rising cost pressures. If you check the history of the period, you would realize that many airlines went belly up such as the United Airlines, American Airlines and several have to merge just to survive the crunch!

Essay Writing Skills Tips/Nuggets for Students # 6

Time Management

You have actually around 15-20 mins (roughly 40% of your total time allocation) to complete this essay in the exams. This is only part (a) of a two part question. Overall you have 45 mins to complete both parts. Part (b) carries more marks (15) and you should allocate more time to part (b). This means you have to train yourself to be able to think fast (work out a framework quickly) and write fast. This is a process and so be steadfast; patient and resolute. You should get there in good time before your real Exams!

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A simplified Rule of Thumb Version of the LORMs

Skills Lower Upper

L1 Wrong track ( irrelevance).

Hit and miss answer

Basic conceptual flaws/errors

L2 On track (relevant/focus)

But Skimpy ( Inadequate B + D ) + Incoherent

L3 On track and Beefy ( adequate B + D ) + Good evaluation

+ Illustration + application Examiners’ Wish-List  Relevance  Coherence  Breadth + Depth  Conceptual mastery  Evaluative comments  Good illustration  Good Application

NB: Each by itself is a skill worthy of mastery. So Jia You.

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AW E-so me sta nds for … A – Acc urat e (Ab sol utel y ess enti al to dra w the oret icall y corr ect dia gra ms) W – Wel l-Lab elle d + Titl ed + Nu mb ere d esp eci ally if ther e are mor e tha n 1 dia gra m dra wn (sp ell out cle arly wh at eve ry axis ; cur ves ; poi nts repr ese nt in the dia gra m ) E – Eas y on the eye (Big eno ugh , Ne at , Wel l-pos itio ned ) Awf ul dia gra ms are extr em ely irrit atin g to the exa min er. Do n’t was te tim e dra win g 39