Tut # 6 (Answers)

HWA CHONG INSTITUTION
C1 H1 and H2 Year One Economics 2010

Tutorials #4-6 Theories of Demand & Supply
Recap:
Demand
Supply
TUTORIAL #6 PRICE DETERMINATION (2.5h)

At
1.
2.
3.
4.
5.
6.
the end of the tutorial, students should be able to:

Explain the interaction of demand and supply in competitive markets
Explain the meaning of equilibrium price and equilibrium output
Explain the meaning of disequilibrium when there is
Excess demand (shortage)
Excess supply (surplus)
Analyse how changes in demand and supply affect the equilibrium price and
output.
Basic concepts:
Market Equilibrium
Qd= Qs
Market
clears
ie
shortages/surpluses
Market Disequilibrium
Qd =/= Qs
no Qd> Qs
Qs > Qd
Remarks
Shortage
Surplus
Hwa Chong Institution. All Rights Reserved. Teachers' Copy

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$)
Tonnes supplied per week
Tonnes demanded per week
100
220
770
140
260
680
180
320
610
220
400
550
260
500
500
300
640
460
340
880
400
380
1400
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?
Equilibrium price = S$260, Equilibrium quantity = 500 tonnes
(d) Now assume that the demand for organic wheat increases by 180 tonnes per week at
all prices. What is the size of the shortage or surplus at the original equilibrium price?

Shortage of 180 tonnes
(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
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.
Disequilibrium
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 equilibrium:
Quantity demanded = quantity supplied
There are no shortages or surpluses.
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
assume ceteris paribus.]

(i)
Magazines reporting that famous personalities such as Megan Fox and Jessica Alba
are reading the novel Twilight.
Analytical Tool:
Change in DD or non-P determinant => P
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).
Change in DD or non-P determinants => P T I D E
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
a poor substitute.

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

Change in SS or non-price determinants =>
C S
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:

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.
The graph above shows the population of Denmark from 1996 to 2007.
You can see that in 1996 the population was 5.25 million and that by the year 2007 it had
grown to 5.45 million.

(2) Look at the X and Y axes.
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?
The final statement to describe this graph is:

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)
Increased/
decreased
Pace ( rate of change)
Remarks
Incremental change
e.g. rose by 10%;
20% etc
Fast
At an increasing rate; dramatically, significantly,
considerably, rapidly, substantially, markedly, greatly,
exponentially, strongly, enormously; quickly
Exponential change
e.g. manifolds..
Double (100%)
Triple (200%)
Quadruple
Quintuple.
Rose/Fell
Slow
At a decreasing rate; steadily, slightly, gradually; gently
Data interpretation skills ( Reading line graphs)

Trends
( broad patterns)
(1) Direction
Possible
patterns
Aka
How to tell?
Up/down/flat
Rise/fall/ remain
constant
Plot trend-lines
+
Check major turning
points (sub-trends)
(2) Pace or rate of
Fast/slow
change
(3) Stable/Unstable
Steady/volatile
( volatility =>
sign of
uncertainty or
speculative
activity)
Sharp or steep/gradual Check

slope/gradient of
graph
fluctuating
Check for
smoothness/
irregular
movements

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-Eyes 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:
Prices tended to rise or pick up sharply from 2006 onwards.
NB:

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
*Billion vehicle kilometers refers to the distance travelled by vehicles)

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)
10

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
11

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 %
For questions with 10m or more allocated, MINI essays are expected.
12

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.
13

QUESTIONS
[Total: 20 marks]
14

(a)
(i)
Describe the main trends in the price of palladium during 1996 and 1997.
[2]
3 C method of working out the answers:

Command word Describe ( what is/are )
Concept - main trends in price
Context - 1966-1967
(ii) With the aid of a diagram, use the information in Table 1 to show how changes in [4]
supply and demand for the metal have influenced its price between 1996 and 1997.
Command word show ( using diagram)
Concept S and D
15

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 [4]
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
(c)
Analyse the relationship between palladium and platinum in their use in (i) car
exhaust systems and (ii) jewellery.
[4]
Command word Analyse ( explain analytically ie by breaking down key ideas

and showing the links clearly)
Concept Substitutes
Context Palladium/platinum/car exhaust/jewellery
(d)
Discuss how you would expect buyers and sellers to react to the higher price of
palladium
[6]
Command word Discuss { look at the issue from a balanced (TAT) perspective }
Concept LOD and LOS
Context - palladium
SUGGESTED ANSWERS:
(a) (i) Describe the main trends in the price of palladium during 1996 and 1997.
[2]
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?
Examiners Report:
Credit was also awarded for comment on relative volatility:
Marks were lost when detailed descriptions were given.
Remember KISS
(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.
Demand curve has shifted to the right.
16
[4]

Supply curve has shifted to the left.

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.
[4]
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:
CSS E
S1 supply capacity ie closure of mines

S2 supply shocks ie political problems, depletion of reserves
Explanation:
Reference to Table 3Palladium 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.
(c)
Analyse the relationship between palladium and platinum in their use in (i) car exhaust
systems and (ii) jewellery.
(i)
(ii)
(d)
[4]
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.
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.
Discuss how you would expect buyers and sellers to react to the higher price of
palladium.
17
[6]

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)
Learn to be a Good Essay

Warrior. Use your warrior
skills! Think well + Write
WellAll Rights Reserved. Teachers' Copy
Hwa Chong Institution.
18

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.
STEP 2 : Simple Skeletal Essay Plan
19

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)
Supply side
Shift left ( falls)
Conclusion
Combined effect
PTI D E
PT I D E
(1) Income recession

(2) Taste - Availability of close substitute ie
cheaper budget airlines.
CSSE
(1) Cost higher fuel, labour, marketing costs

(2) Supply capacity closure of major airlines
Both
Quantity exchanged/brought and sold must
D+S falls 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.
STEP 3:
BEEF UP your essay plan
Learn to be a
Master Chef at
Beefing up your
essay
20

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
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 wordsget a birds 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.
21

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 dont 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.
22

Figure 1: US Market for Air Travel on Major Airlines
Price
S1
S
P
P1
D
L
D1
e
Qty
a
Q1
Q
r
n
t
Tastes and Preferences (likes and dislikes)
o
One of the major determinants of demand is likes and dislikes or tastes and preferences
related to air travel. In the context,
b 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
e 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.
a
Essay Writing Skills tips/nuggets for Students # 4
M
Using Diagrams as Tools for Analysis
Diagrams are part and parcel ofaeconomic analysis especially for a question that called for
demand and supply analysis.
s
Diagrams offer clarity and precision in analysis. A picture or good diagram is worth a 1000
words of descriptive analysis. Of
t 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 e
habit. In the long run you will reap good returns.
r are AWE-some. Whilst bad diagrams are
By the way, good diagrams
Awful!
C
h
Hwa Chonge
Institution. All Rights Reserved. Teachers' Copy
f
AWE-some stands for

A Accurate (Absolutely essential to draw theoretically correct diagrams)
23
t
B
C1e H1 and H2 Year One Economics 2010
e
f + Numbered especially if there are more than 1 diagram
W Well-Labelled + Titled
drawn (spell out clearly what every axis; curves; points represent in the diagram )
E Easy on the eye (Bigienough, Neat ,Well-positioned)
n
Awful diagrams are extremely irritating to the examiner. Dont waste time drawing them!
g
Cheaper Substitutes
Taste and preferences is also u
affected by cheaper and better substitutes available in the
market. In the context, the rise of budget airlines around that time provided cheaper
p for Americans. These low-cost no frills carriers posed
substitutes to travel on major airlines
a serious threat to major airlines
y 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 o
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
u of the recession.
Income or Purchasing Powerr
The third factor that affects demand is income or purchasing power. In the context, US
went into recession and manyeAmericans 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 s
hit harder as consumers tightened their belts and cut back
on spending on non-inferior or luxury
s goods.
a
In summary
Hence from the above analysisy
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
24

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
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!
25

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
Level 2
Level 3
Identify some factors but explanation is weak and may consist 1-4 marks
of some conceptual errors.
Explain factors that cause a fall in both demand and supply 5-6 marks
with some references to the scenario.
Explain factors that cause a fall in both demand and supply 7-8 marks
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 9-10 marks
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.
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
[NB: The annotation coded in blue is to lend emphasis to the meaning and intent]
B.
FRAMEWORK FOR ANSWERING ESSAY QUESTIONS
26

STEP 1: INTERPRET THE QUESTION
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)
ii)
iii)
Underline direction1 words and spell out the cognitive requirements.

Identify the key concepts and specify the required content.
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.
STEP 4: WRITE THE ESSAY
1
Refer to Appendix A for list of direction words and what they require.
27

Use your plan as a guide when you write the answer. The basic components of your
essay should include:
Introduction
Developmental
paragraphs
Conclusion
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]
their function is to develop the various aspects of the central
idea
each paragraph should have a key or controlling idea
use of transitions2 between paragraphs is crucial to give the
essay coherence and unity
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
good grammar, spelling and punctuation.
Refer to Appendix B for list of helpful transition words and their functions.
28

APPENDIX A
Your wish is my
COMMAND Sir
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
Account for
What is required
Analyse
Give reasons for , provide evidence to support

(do not confuse with give an account of which is asking for a
description)
Break down into the component parts & explain how they relate
to each other
Make a detailed examination or investigation into something
Assess
Compare
Comment
Consider something in a balanced way: the points for & against

something
Examine the similarities & differences perhaps reach a
conclusion about which is preferable
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
29

Criticise
{ seldom used}
Define
Describe
Discuss
Distinguish
Evaluate
Extent
Illustrate
Examine
Explain
Interpret
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
Give the precise meaning of a word or phrase
Show how the distinctions you make are necessary
Give a detailed account
Provide the main characteristics
Investigate and/or examine in detail
Sift the arguments & debate
Give reasons for & against
Examine the implications
Describe the important aspects, pointing out the pros & cons
Appraise the merit or worth of something
Judge the impact, importance of success of
Include your personal opinion & evidence to support your
evaluation
Investigate, scrutinise & question all the evidence
Provide details about how something happens/ed
Give clear reasons for
Account for
To what extent asks you to weigh the evidence for & against
something
to state how far something is valid
Make clear by the use of concrete examples from a range of
source
Use a figure or diagram to explain or clarify
Expound the meaning of
Make clear & explicit, usually giving your own judgement
Outline
Refute
Relate
Review
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
Describe the main features, or general principles of a subject,
omitting minor details & emphasising the structure &
arrangement
Disprove a statement or argument
Show how things are connected to each other & to what extent
they are alike or affect each other
Make a survey of, examining the subject carefully
State
Set down the main points

Present in a brief, clear form
Justify
30

Summarise
Trace
Give a concise account of the main points of a matter/topic

Avoid unnecessary details & examples
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 For example, for instance, in other words, in illustration, in this case, in
special features
particular, 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.
31

Level
Descriptors
Lower
answer is mostly irrelevant

only few valid points made incidentally in an irrelevant context
Wrong track !
Upper
1
Right
track but
very skimpy +
marred
by
conceptual flaws
Lower
Incomplete
analysis :
Breadth
(too
narrow)
Depth
(
too
shallow/superficial)
Plus:
Incoherent
presentation
badly organised)
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
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
Lower
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
clear reasoned structure to the whole answer
lack of critical comment
Got both breadth

and depth but
Lacking
in
evaluative
comments
32

Upper
Ideal answer
good analysis
evaluation
application
+ well written
+
+
thorough knowledge of facts and theory with an excellent ability to

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
Analyse
Apply
(Extend to include analysis)

use relevant theory to aid explanation
place explanation in context
Evaluation marks:
Level
E2
E1
Descriptors
Judgement based on analysis
Mainly unexplained judgement
Marks
34
12
33

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) Wheres 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
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]
34

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 wordsget a birds 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.
35

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 dont 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
Price
S1
S
P
A
B
D
D1
Qty
Ess
Q1
Q
ay
Wri
tin
g
Skil Preferences (likes and dislikes)
Tastes and
ls major determinants of demand is likes and dislikes or tastes and preferences
One of the
tips
related to
air travel. In the context, demand for air travel at that time was badly affected
because/nu
of fear of travelling on long haul flights following the 9/11 terrorist attack in the
gge
ts
36
for
Stu
den
4
Usi
ng
Dia
gra
C1
H1
and H2 Year One Economics 2010
ms
as
Too
US. Many
ls 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.
for
An
aly
Cheapersis
Substitutes
Taste and
Diapreferences is also affected by cheaper and better substitutes available in the
market. gra
In the context, the rise of budget airlines around that time provided cheaper
substitutes
ms to travel on major airlines for Americans. These low-cost no frills carriers posed
a serious
arethreat to major airlines for they offered cheap fares at a fraction of the cost of
major airlines.
part Moreover, the recession that hit US after the 9/11 incident makes budget
carriers and
attractive thus adding to the woes of the major airlines. As an inferior good or
substitute
parthe demand for budget carriers tend to rise whilst the demand for travel on major
airlines tend
cel to fall as a consequent of the recession.
of
Income eco
or Purchasing Power
The thirdnofactor 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
mic
loss, pay-cuts
ana and a general mood of pessimism. In times of recession demand for air
travel onlysi
major airlines will be hit harder as consumers tightened their belts and cut back
on spending
on non-inferior or luxury goods.
s
esp
eci
In summary
ally
Hence from
for 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,
a
price or que
airfares will go down and quantity should fall.
stio
Impact on
n Supply (ceteris paribus)
Having explained
the impact on demand, I shall now look at the impact on the supply side
that
of the market.
call
ed
Cost of for
Production
Fuel Cost
de
In any industry,
cost is an important determinant of supply. In the context it is mentioned
ma
that the nd
price of oil was rising. Oil price forms a major part of airlines fuel cost. Hence, the
rising price
and of oil pushed up the cost of production for major airlines prompting airlines to
raise their
supprices to cover costs for every possible quantity supplied. This is shown by the
leftward ply
shift of the SS curve from SS to SS1 in Figure 1.
ana
Labour lysi
Cost
At the same
time, labour cost for airlines has also risen. This further pushed up the cost
s.
and hence the price or airfares. Again, the impact is to shift the supply curve leftwards.
Dia
Marketing
graCost
Moreover,
msgiven the stiff competition from budget carriers, it is also possible that major
airlines have
offe to spend more on marketing. Hence another possible increase in cost could
come from
r increase or aggressive spending on advertising and marketing.
clar
In summary
ity
and
37
pre
cisi
on
ana
lysi
s. A
pict
ure
C1
H1
or
goo
d
From thedia
above analysis it is clear that the airlines cost has gone up substantially shifting
supply curve
gra leftwards. Ceteris paribus, price of air travel or airfares will go up and quantity
should fall.
m
is
Combined
worImpact
th aanalysis on the impact on price and quantity suggests that quantity will
So far the
100 fall but price might go up or down. In theory the impact on
certainly
0
price is
indeterminate. The final outcome on the market is dependent on the
wor
combined impact on both demand and supply on the market for air travel.
ds
of
Conclusion:
des
Although in theory price is indeterminate, however in the given context, it is very likely that
crip
the price or airfares has indeed fallen. The reference to airlines suffering losses because
tive
their profits have been squeezed suggests that at a time of weak demand they are unlikely
ana
to have the power to raise fares to cover rising costs.
lysi
s.
Of
cou
Essay Writing
rse, Skills tips/nuggets for students #5
In writingpoo
a good conclusion keep it again short and sweet perhaps even snappy.
rly
Conclusion
dra is the place where you are expected to state your findings clearly and to deliver
a sound wn
verdict/stand.
Notice the
or above conclusion conforms to theory (price indeterminacy is explicitly
acknowledged)
however where possible we should be confident enough to apply theory to
ina
the context
to
show
good application skills. In the context of the above question it is quite
ccu
obvious rate
that major airlines could not and did not historically speaking raise their fares
despite dia
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
gra
the United
msAirlines, American Airlines and several have to merge just to survive the crunch!
are
not
just
Essay Writing Skills Tips/Nuggets for Students # 6
a
Time Management
was
You have actually around 15-20 mins (roughly 40% of your total time allocation)
to
te
complete this essay in the exams. This is only part (a) of a two part question. Overall you
of
have 45 mins to complete both parts. Part (b) carries more marks (15) and you should
tim
allocate more time to part (b). This means you have to train yourself to be able to think fast
e
(work out a framework quickly) and write fast. This is a process and so be steadfast; patient
the
and resolute. You should get there in good time before your real Exams!
y
are
equ
ally
da
ma
gin
g to
you
38
r
cre
dibil
The
adv
ice
is
lear
C1
H1
n
and
trai
n
you
rsel
f to Rule of Thumb Version of the LORMs
A simplified
dra
Skills w
Lower
Upper
well
L1
Wrong track ( irrelevance).
.
Hit and miss answer
Ma
Basic conceptual flaws/errors
ke
it a
hab
it.
In
the
lon
g
run
L2
On track (relevant/focus)
you
But Skimpy ( Inadequate B + D ) + Incoherent
will
rea
p
goo
d
retu
rns.
L3
On track and Beefy ( adequate B + D ) + Good evaluation
By
+ Illustration + application
the
wa
y,
go
od
dia
gr
Examiners
am
Wish-List
s
are
A
W
Eso
me
.
W
hil
st
ba
d
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.
39

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HWA CHONG INSTITUTION

C1 H1 and H2 Year One Economics 2010

TUTORIAL #6 PRICE DETERMINATION (2.5h)

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

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Section A: Tutorial Foundation

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

Section B: Application Questions (15mins)

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Introduction of an e-Book service that allows readers to download books, either to

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

2 possible impact on the market:

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TRAINING SET 1: DATA HANDLING FOR CASE STUDY TYPE 1

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The final statement to describe this graph is:

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Pace ( rate of change)

Data interpretation skills ( Reading line graphs)

(2) Pace or rate of

Sharp or steep/gradual Check

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Time Series Data

Adapted from Dunman High Prelim 2009

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120 => prices rose by 20% compared to 1998.

*Billion vehicle kilometers refers to the distance travelled by vehicles)

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

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

Compared the 2 graphs:

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Section C: Date Response Question (1h)

Reference: (a) (b) questions related to Palladium

(b) HOS or higher order skills

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TYS J2000 Q1: The Price of Palladium

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3 C method of working out the answers:

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Command word Analyse ( explain analytically ie by breaking down key ideas

Demand curve has shifted to the right.

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Supply curve has shifted to the left.