economics essay writing -...
TRANSCRIPT
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A Level H2 Economics Essay Writing E-Book
econoception.wordpress.com
By Zhu Hanfei
Table of Contents
1. Introduction
a. Who should read this book?
b. What I think about A Levels economics?
c. Why you should bother reading this book?
d. How to approach essay writing – an analogy
2. Writing an Introduction
a. Clear definitions
b. Scope
c. Context / Stand
3. Developing the Body
a. Basic concepts/ explanation
b. Dive into the question
i. Thesis / Anti-thesis
ii. Writing an argument
1. Main point
2. Explanation
3. Elaboration
4. Evaluation / Refinement
5. Linking statement
4. Crafting a Conclusion
5. Sample Questions
6. Conclusion
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Introduction
Who should read this book?
This book is for all students who are currently pursuing economics at the A levels and feel that they do
not have a good understanding of how exactly to approach an economics essay. Whether you are a new
student, or someone who is taking your A levels next week, I am certain that this book can provide you
with helpful insights on how to write an impressive economics essay.
What I think about A level Economics
At the A Levels, Economics is considered a humanities subject, even though there are many mathematics
references such as diagrams and equations. As such, for all you science students out there, this is
something different and you need both creativity and good essay writing skills to score well. It requires
extensive reading on your part to keep yourself up to date with the latest economic news and
macroeconomic happenings and the big picture in the world. At the end of the day, economics essay
writing is about asking the right questions – how would you know what questions to ask if you do not
have a firm grasp of the issues being discussed in the world right now?
Why you should bother reading this book
If you are frustrated with not being able to write a good economics essay, then this book is for you. If you
think you are the student who is confident of getting an A for every essay that you write, then by all
means you can choose not to read this book. Perhaps then, you can contact me and we can see how we
can create more free resources together J
How to approach Essay Writing – An analogy
Some of my students might have heard this from me before. Here is a quick tip on how to approach essay
writing. Suppose two of your friends are having an intellectual debate about an important issue. If Friend
A just went about listing all those reasons why he agreed and friend B decided to continue thereafter by
stating his justifications for his beliefs on the issue, how do you suppose such a conversation would sound?
That’s right, it will be pretty boring and pointless.
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Instead, picture friend A and B going about with defining the key terms and concepts regarding the issue
first, before they launch into a rigorous debate on the issue. Friend A starts off with a strong point that
supports his view. Friend B acknowledges that there is some validity to that argument, but proceeds to
rebut it by stating a couple of exceptions. He then continues with his own solid argument backed by up to
date examples. This goes on and they bounce off ideas from each others’ arguments and eventually, you
decide that you have heard enough of their debate and comes in with your stand that synthesizes both of
their arguments into a clear, coherent take on the issue. Now how does that sound?
In the first case, Friend A and B are committing the same mistake that most students will make when it
comes to Economics essay writing! They take on a mere listing approach to the question and do not put
any thought into how the different arguments might be related to each other. There is no evidence of
further analysis and evaluation in the writing. Typically these students fail to give a stand to the issue as
well.
Now I hope you are interested to find out more on how to write an extraordinary economics essay.
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Chapter 1: Writing an Introduction
We all want the halo effect to work in our favour. According to Wikipedia, halo effect is defined as a
cognitive bias in which our judgments of a person’s character can be influenced by our overall
impression of him or her.
Applied to education and essay writing, we can think of it as the teacher evaluating a student based on his
initial impression of the student’s ability and performance. With tens and hundreds of scripts to read,
teachers can hardly be blamed for judging a book by its cover. After all, it is far more likely that a well
written essay follows a good introduction and that a poor essay follows a bad one. This means that it is in
a student’s advantage to spend some time to write a good introduction. After all, who wouldn’t want to
start a journey with a step in the right direction?
Clear Definitions: Define the keywords in the question
It cannot be stressed how important definitions are. Not only do clear definitions demonstrate your
understanding of the content to the examiners, more importantly, they allow you to identify the scope
of the essay more clearly and ensure that you are sticking closely to the question. Definitions can range
from simple one-liner explanations of what national income is or what barriers to entry are, to full
paragraphs illustrating how the price mechanism functions or how the short-run profit maximising rule
works.
If the question focuses on a specific economy or a certain market structure, it is also a good idea to
describe the characteristics of the economy or market structure in focus. This is because you will most
likely need to keep using the characteristics in your later arguments and evaluation.
Scope: State the scope of the question clearly
Highlight the areas that will be discussed in your essay briefly in the introduction so that the reader can
anticipate what is about to come up in your answer. Also, it is better to define the boundaries of the essay
clearly from the start, so that you do not go off tangent as you write. It is a common mistake to define the
scope either too widely or too narrowly. Using the following question as an example,
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The relative importance of the components of the circular flow of income for a small and open economy,
such as Singapore, is likely to be different from a large and less open economy, such as the USA.
b. Assess whether a change in the external value of its currency is more likely to have a large impact on
Singapore or the USA. [15]
A scope that is too broad and poorly stated would be:
We will look at how fluctuations in Singapore and USA’s exchange rate impact both economies.
A scope that is too narrow would be:
We will examine how an appreciation in the value of SGD will affect the Singapore economy and
compare the effects with the impact of an appreciation of the USD on the US economy.
A proper scope would be something like:
Given the managed-float nature of the SGD, we will examine the effects of deliberate exchange rate
policies on the Singapore economy, as well as when there are minor fluctuations within the band. This
will be contrasted with the effects of an appreciation and depreciation of the USD, which is under a free
floating exchange rate system.
Context/Stand: Give a tentative stand to the question
Whenever possible, you should always include your stand in the introduction. However, this is not always
possible as most students only manage to formulate their stand in the conclusion, and that is also where
most teachers look to when awarding marks for evaluation. Stands and synthesis arguments in economics
are usually what stumps most students, as there are almost always at least two opposing points of view for
every issue. A good stand should be contextualised, specific and balanced.
Using the same example as above, a possible stand could be:
Given the small and open nature of the Singapore economy and its huge reliance on exports and imports
for growth and sustenance, it is likely that exchange rate changes will have a more significant impact on
its economy as compared to the US, which holds the world reserve currency and is largely dependent on
its domestic consumption and investment for growth. However, with the US aiming to restructure its
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economy and boost its export sectors in the medium to long term, the impact of foreign exchange rates on
the US economy is likely to increase over time.
Why is the stand so important? This is often neglected by students while writing an economics essay, but
you need a proper stand in order not to sound schizophrenic while writing. As much as possible, you
should be using your writing skills that you learn from General Paper to craft your economics essay. Use
the appropriate tone and language when addressing arguments that you disagree with. Distance yourself
from the originators of those viewpoints but do not poison the well.
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Chapter 2: Developing the Body
Perhaps at this point, it is best to keep in mind one thing – economics essay writing is seldom about
regurgitating points and explanations from the school notes. In the recent years after the revamp of the
syllabus in 2008, Cambridge has been shifting their focus substantially towards reality based economics.
Questions that demand creative applications of economic frameworks to real life situations and problems
are appearing in the A level examinations more frequently. In fact, one of the key skills that the H2
Economics course wants to equip students with is the ability to evaluate the applicability of theoretical
models to the real world. In the outside world of professional and higher level economics, the idea of real-
world economics is also gaining popularity, as the recent financial crisis in 2008 demonstrated the
fragility of markets and how blind faith in the invisible hand and the efficiency of markets can often be
disastrous.
The body of an economics essay is where the best students stand out from the rest. Two skills are
especially important here:
1. The ability to differentiate what is important from what is not important and what is more
important from what is less important.
2. Knowledge of examples, current affairs and applications of economic models in the real world.
There is only one way to develop both of the above – read widely and think about issues using
theoretical economic frameworks. Over time, you will be able to apply textbook economic concepts to
real world issues with greater ease.
Basic Concepts and Explanations: The starting point of all arguments.
This is usually more relevant for 25 mark questions, because they are usually less guided and you have to
explain certain economic concepts before you can start discussing the issues in depth. However, it is also
sometimes relevant for 13, 15 or 17 marks questions.
Again, this is somewhat similar to what you have been doing in the introduction – writing definitions.
Basically, you cannot really move on to answer the question unless you have defined the key ideas clearly
in the language of economics. The objective of the question is to test your ability to illustrate economic
ideas simply and coherently.
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Dive into the question: the thesis/ anti-thesis approach
“Where is your thesis and anti-thesis?” You would probably have heard this question a thousand times
from your nagging economics teacher. The idea of writing in a thesis and anti-thesis framework is simple
and it is also a very effective starting point to consider essay writing from for most H2 Economics
students. However, sometimes, the thesis and anti-thesis are not so clearly defined and a more effective
way to think about the structure would be to think of ways to deliver a balanced argument. Balanced does
not mean you support both points of view equally; neither does it mean that you sit on the fence on
issues. Writing a balanced essay or a balanced stand requires you to address both sides of the issue. In
other words, you are required to look at different perspectives to the issue and examine the merits and
demerits of each while comparing one to another. The cross-examination of arguments is an important
step to developing a strong stand/ response to the question.
First we should consider how an argument is written. I advocate the use of a simple 5 step approach to
craft arguments and write paragraphs.
Step 1: Delivering the Main point
Write the thesis or anti-thesis point in one sentence. It should be straightforward and not too confusing for
the reader. Examples:
- Question: Is a price discriminating monopolist always better than a perfectly competitive market?
Anti-thesis: A price discriminating monopolist could make consumers worse off than in a
perfectly competitive market when it practices first degree price discrimination.
- Question: Assess whether a change in the external value of its currency is more likely to have a
large impact on Singapore or the USA.
Thesis: Changes in their foreign exchange rates will have a larger impact on Singapore than the
US because Singapore relies heavily on its external sector for growth and sustenance.
The idea here is to phrase your main point such that it answers the question directly. Your arguments
should be centered on answering the question.
Step 2: Explaining your main point further
The economic framework used to illustrate your main point should be explained clearly. Take for
example the question on price discrimination. It is important for you to show exactly how a first degree
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price discriminating monopolist prices its product and explain in terms of consumer surplus why it could
have made consumers worse off.
This is the closest you can come to regurgitating off notes as what is required of you is the ability to
outline and explain events using an economics framework of analysis. If you are able to do this for
both sides of the issue, you can typically at least score a L2 for your answer.
Step 3: Elaborating on your ideas
This is a list of three things that you can consider including in your argument to make it more convincing.
1. Include diagrams in your essay.
Diagrams can greatly simplify the elaboration process when used properly. My advice to students
would be to always use a pencil and ruler when drawing a diagram. Try to centralize your
diagram on the page and make sure it takes up about one third of the page.
A common mistake many students make would be leaving the diagram out of the worded
explanation altogether. A properly labeled and drawn diagram should have the following
elements:
a. Labeled axes – as much as possible these should be specific to the example you are
using or to a particular context given in the question. For instance, if you are
discussing the healthcare industry, then the y-axis for a demand and supply diagram
can be labeled as “Price of healthcare services” and x-axis as “Quantity of healthcare
services”. In other words, aim for specificity in your diagrams.
b. The origin – this one is too often forgotten by students.
c. Labeled curves – all your curves should be labeled, either in immediately
recognizable short forms or in their respective expanded versions. (i.e. Demand
curve is often labeled as DD)
d. Arrows depicting movement – arrows that show shifts in the curves should be clearly
drawn on the diagram. This should also be incorporated in your explanation.
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e. Y and X axis values for important intersection points – ensure that these are marked
out with dotted lines originating from the respective intersection points. Always use
a ruler here.
f. Labeled intersection points / key points – when trying to show deadweight loss or
change in consumer and producer surplus, avoid shading your diagrams. Instead,
label the key points on the diagram clearly using “a,b,c” and refer to “Area abc” in
your explanations. This is similar to how you would label figures in mathematics.
Example of a diagram showing the effects of a government tax.
Triangle abc shows the deadweight loss to society from imposing the tax on the good
or service.
2. Include examples in your elaboration.
a. Use a wide range of examples in your answers. These examples can come from your
experience with firms, consumers and governments in your life, the local newspapers, or
magazines and journals like The Economist and The Wall Street Journal. Try to refrain
from using hypothetical examples with no realism in them.
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b. The point here is to demonstrate your ability to apply economic theories and ideas to
understand and analyse real world events. In microeconomics, this usually means that
you have to think about how firms in the real world operate and some of the challenges
they might face, as well as issues such as market failure and government intervention. For
macroeconomics, you need to show an appreciation of the different policy options
available to governments and the importance of the macroeconomic goals in the real
world context.
3. Use the context given in the preamble.
a. This can be a great starting point for your elaboration, as the preamble given is almost
always relevant to the question and topic you are required to write about.
b. A common pitfall here is for students to focus the whole essay entirely on the context
given in the preamble and neglect other important areas for discussion. In other words,
the scope of the essay is insufficient. Always refer back to the question to determine
the scope of the essay.
At the end of all your examples, diagrams and elaboration, always remember to link your response back
to the question. Answer the question.
Step 4: Evaluating and refining your ideas
This is the part where most students have questions about. I will attempt, to the best of my knowledge, to
answer some of the questions that are frequently asked about evaluation.
Qn: I thought the evaluation is supposed to be in the last paragraph! That’s what my teacher told me.
Ans: Yes and no. Many markers do look for your evaluation in your conclusion, but it is equally
important for you to include evaluative comments in your essay. Think of it as further analysis of the
question. You need depth in your thinking and the only way this can be reflected is through writing
good evaluation and balanced refinements to your thesis and anti-thesis. Without evidence of deeper
analysis, it is difficult for you to attain a L3 grade. Most importantly, good evaluative comments and well
thought out synthesis are often pleasant to read for teachers – so go ahead and provide a refreshing
perspective on the issues discussed.
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Qn: Why is it so difficult to write an evaluation? I can barely come up with simple arguments, how am I
ever going to learn to evaluate them?
Ans: It is not difficult at all! Anyone can write an evaluation. Just like writing an introduction, or a
thesis or a conclusion, writing evaluations is a skill that anyone can master if they work at it. Of course,
you will need good content knowledge and some awareness of examples and real life economic issues.
You definitely need to develop the willingness to think deeply about the question.
Qn: My teacher tells me that for evaluation you just need to write something intelligent. How exactly do I
do that?
Ans: I think your teacher could have been a bit more specific in his or her advice. While it is true
evaluations are generally made up of ‘intelligent’ comments, this is hardly the full picture. There are
usually proper frameworks that you can use to guide your thinking. One of the frameworks that I have
come across goes by the acronym FRESH, which stands for feasibility, root cause, effectiveness, side
effects and time horizon. It is only applicable to policy questions for macroeconomics though. I have
come up with a different one that I think is applicable to most if not all questions.
You can evaluate and refine your ideas based on:
1. Limitations – examine the limitations to your ideas and arguments.
a. Ask yourself this question: What factors will make your argument less feasible? If
you are looking at a policy question, this usually involves looking at some of the factors
that affect the effectiveness of the policy. If you are answering a question on the impact
on consumers and producers, perhaps you will need to examine the factors that might
undermine the positive impact highlighted in your thesis.
b. Reverse the above question – what will add weight to your argument? By turning the
question around, you can look at some of the factors that might make your policy
particularly effective. Usually, limitations work both ways. You can use them to justify
why something might not work as well as intended, but when these limitations are not
present or when the circumstances are particularly favourable, the economic effects might
be amplified in a positive manner. This idea of differing circumstances will be revisited.
2. Importance – how important is this point compared to the rest of your arguments?
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a. Find a way to compare the current point to the rest. Sometimes the question explicitly
demands it, in which case you should come up with a list of factors that can justify why
one idea is more relevant or important than the other. When it is not explicitly demanded
by the question, such analysis will usually add depth to your answer and be considered as
evaluation. Perhaps it will then be a good idea to include this in your conclusion
paragraph. However, nothing is stopping you from writing it in the middle of your essay
but remember to focus on the question at all times.
3. Context – Think about the economic context.
a. What is unique about this particular firm’s product? What is the market structure present?
Does this country have any unique features that need to be taken into consideration?
What is the larger economic context that is portrayed in the question – is it a recession or
a boom; could it be a period of jobless recovery, or is it during a period of stagflation?
These are some generic and relatively common questions that you can ask yourself. The
objective of asking these questions is to see if any of your points could be particularly
important or if some of the impact might be different because of certain economic
circumstances and/or context.
b. Usually, if you can attach some real world significance to your arguments it will make
your essay better. Try to include real-life economic examples in your elaboration as much
as is allowed by the question.
4. Time frame – Consider the time frame you are looking at.
a. When it comes to time frame, the terms short-run and long-run has special significance in
economics. Short-run generally refers to the time period where there is at least one
fixed factor input and is where the law of diminishing marginal returns is present.
In the macroeconomic context, it refers to the time period where technology is assumed
to be fixed and prices of factor inputs are also fixed, and where there is at least one other
fixed factor of production. Long-run is in general the planning horizon for firms and
for the economy. It refers to the time period where all factors of production are variable.
In the microeconomic context, it means that firms are free to enter and exit industries,
and assuming factors are perfectly mobile, they can also move these factors of production
across industries. In the macroeconomic context, this refers to the time frame where it is
possible for improvements to the quantity and quality of resources to be improved, and
where technological improvements can take place. A common mistake students make is
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the profligate usage of the terms short-run and long-run when they actually mean short-
term, medium term and long-term. This mistake is most common in macroeconomics.
b. Different policies might have different impact on the economy in the short run and short
term as compared to the long run or medium term. Certain economic events might also
play out differently and have different impact on the economy, consumers and producers
depending on the time frame that you are looking at.
5. Answering the question – Always focus on the question.
a. While it may be exciting and fun to think of many evaluative comments to add spice to
your essay, always remember you need to refer back to the question and make sure
your points answer it.
b. The four angles to think about evaluation that I have just highlighted should not be
looked at in isolation. When thinking of evaluative comments, run through all the
different ideas in your brain. Usually, the best evaluation involves combining looking at
the context of issues and examining whether certain limitations will be more pronounced
or not, and whether the time frame will affect the result of the analysis. Finally, if
possible, a comparison with other arguments is then made to determine the merits of the
different arguments. These steps will be very helpful in aiding you to develop a stand for
the question, the process of which we will examine in the next part of this book.
As an example, I will use the following typical question on market structure to illustrate some of the ideas:
Discuss how barriers to entry can influence the behaviour of firms. [15 marks]
Main point 1: Barriers to entry can affect the pricing and output decisions of firms in the long run.
Brief explanation: Barriers to entry give rise to the ability for firms to earn super normal profits in the
long run. It thus allows firms to grow large and gain market share and greater market power to charge
higher prices to consumers than the marginal cost of producing the good. The degree of barriers to entry
and the level of market power a firm possess tend to be positively correlated.
a. Evaluation (Limitation): However, this is less relevant for oligopolistic firms as their pricing and
output decisions tend to depend more on their rivals' actions due to the high degree of
interdependence. For MPC firms, their monopoly power does not originate from barriers to entry,
but rather from slight product differentiation.
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b. Evaluation (Time frame): While barriers to entry can only affect firms’ pricing decisions and
output decisions in the long run, it plays an important role in shaping the type of market structure
a specific industry eventually develops into. The market structure and its characteristics will then
determine most of the firm’s behavior in the short-run. For example, when both natural and
artificial barriers to entry are low, firms tend to stay small due to limited availability of
economies of scale. As a result, the market tends to be monopolistically competitive in nature,
and this observation then allows us to predict their behavior in the short-run (i.e. firms will tend
to have a certain degree of market power over their pricing decisions, as they will compete with
some form of product differentiation, and in general they will not be affected by rivals’ pricing
and output decisions.)
Main point 2: Barriers to entry can affect the level of innovation and product differentiation in industries.
Brief explanation: The willingness of firms to innovate depends on if there are threats of new entrants.
Short-term BTE such as patents and copyrights or low levels of BTE can significantly improve the desire
of firms to innovate. The ability to innovate and invest on R&D is hinged on the level of profits firms
make, which is partially affected by the level of barriers of entry in the long run. Industries with high
barriers to entry tend to be able to maintain higher levels of profits.
a. Evaluation (Limitation): This is assuming that these industries are efficient and firms are not
complacent and they actively seek to reduce costs of production in order to maximize profits.
Also, all firms may make supernormal profits in the short run, which might largely fund their
ability to innovate.
b. Evaluation (Context): While level of innovation largely depends on the level of profits made by
firms and the level of barriers to entry, in the real world we see plenty of examples where
creative destruction takes place as new entrants innovate and develop new technology and
creative business models to steal the existing market share of oligopolies and monopolies even in
industries where barriers to entry are supposedly quite significant. For example, Starbucks’
entrance into the retail coffee market by coming up with its innovative model dealt a huge blow
to traditional coffee retailers and their monopoly power; Xerox in copiers and Polaroid in instant
photography have seen their profits fall and their dominance vanish as rivals launched improved
designs or cut manufacturing costs. In these cases, these new firms are often able to use their new
technology or discovery as a form of leverage to lower costs and amass significant demand to
compete with the existing firms and circumvent barriers to entry.
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c. Evaluation (Importance): The level of barriers to entry might have a larger influence on the
behavior of firms in the extreme cases of perfect competition and monopoly, and have slightly
less influence on MPC and oligopoly firms. For MPC firms, in the short run, their pricing and
non price strategies largely depends on how differentiated their products are from the rest and the
demand for their products; for oligopolies, their decisions are largely based on the degree of
interdependence with other firms, because they often have to follow their rivals’ actions closely.
Even then, there are still some universal factors that affect all market structures such as the degree
of complacency of the firms, government policies and alternative objectives of the firms that will
have significant effects on the behavior of firms as well.
Step 5: Linking to the next idea
The structure and flow of an essay are very important concepts that students should always keep in mind
when writing. The following are some quick tips on how you can make that smooth transition between
ideas and improve the organization of your essay.
1. Ask a question and proceed to answer it. E.g. What would be a better solution to the recession?
What are some of the benefits of the proposed merger?
2. Expand on one of your ideas in your evaluation of the previous main point. For example, one of
the limitations can be developed into an antithesis.
3. Use language to your advantage. Use linking words and phrases such as, ‘however’, ‘while it may
seem that’, ‘although’ to help you smooth the transition of ideas.
4. Introduce ideas that are linked to one another in succession. By highlighting similarities or
differences in your argument to your previous one, you can transit smoothly between ideas.
If there is one thing that you should remind yourself at this point, it is to answer the question at all
times.
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Chapter 3: Crafting a conclusion
Now that we have reached the end of the essay, we are left with what I think is one of the hardest parts of
essay writing for students – the conclusion. While the conclusion is crucial to wrapping up the essay, I
think the importance of it is often overrated and blown out of proportion in economics essay writing.
I would explain why later, but first let us look at what objectives a well written conclusion should
accomplish:
1. Reiterate the writer’s stand
a. A common mistake many students make for their economics essay is that they do not
even have a stand to begin with. As stated previously, you should come up with a brief
stand in your introduction if possible.
2. A well evaluated synthesis
a. Writing a well evaluated synthesis is important in order to qualify your stand. In fact, you
can think of the synthesis as being part of the stand, as it makes your stand balanced and
specific. The evaluation on the other hand, makes your stand contextualized and well
considered.
3. What questions can we ask / should be answered at this point?
a. This involves thinking beyond the question. After looking at the different issues
involved, what do you think are appropriate questions that should be asked at this point of
time? Who should be the one to answer them? Is it the government or is it a certain firm
or consumers in general?
What is meant by a well evaluated synthesis?
There is a common misconception that the evaluation should be left to the conclusion, and that the rest of
the essay just requires basic explanation of thesis and anti-thesis. It cannot be further away from the truth.
It is a myth that teachers only want to see evidence of evaluation in the conclusion. Evaluation within
arguments provides the depth of analysis required for L3 marks. The so-called evaluation that gives
4 marks in the conclusion is merely an add-on to all that you have already considered in your main
arguments. At this point, what is required is simply a well articulated stand supported by a well evaluated
synthesis – there is no need for any new arguments to be brought in.
However, at this point you might be tempted to conclude that a conclusion is a mere summary for the
essay. It is not true. What you are doing is looking at the different perspectives as a whole and evaluating
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them together. A whole is not simply the sum of its parts. Here is how you can score the 4 evaluation
marks in the conclusion:
1. Be specific when writing the stand and the arguments that support it.
a. This is the closest you can get to a summary of the essay. You must be as specific as
possible with your stand by referring to the arguments that you have discussed in your
essay.
b. Being specific also means that you use the acronym LICTA as previously discussed to
evaluate your arguments as a whole.
2. Make sure it is balanced
a. Balanced does not mean you sit on the fence or you agree with both sides equally.
Instead, it means that you qualify your stand based on certain factors. For example, you
can agree that an apple is better than an orange because of its distinctive crunchiness and
taste, but in some ways oranges are better because they have more Vitamin C. The central
idea here is that you must show appreciation of different perspectives..
3. The evaluation should be contextualized.
a. Context is probably the most important from the acronym LICTA when dealing with
the conclusion. It is best if you can link your points with the context given in the
question’s preamble. If not, bring in your own context, such as economic conditions or
type of market structure. The context should add weight to your stand.
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Chapter 4: Sample essays
This section of the book will illustrate exactly how to put into practice some of the key ideas that I have
covered throughout this book. Hopefully, at the end of it you can see that essay writing is really not that
difficult. To help you better understand the thought process that I go through, I have included a list of
guiding questions at various junctures in the essay that will hopefully point you in the right direction in
terms of question interpretation.
1. Discuss whether low unemployment should be the macroeconomic priority of a government? [17]
Asking the right
questions
A possible response
Introduction
What is meant by
unemployment?
[Definition]
What are the
other
macroeconomic
aims of a
government?
[Definition]
In one sentence,
how do you think
we should decide
if low
unemployment
should be the
macroeconomic
priority of a
government?
[Scope]
Do you think low
unemployment
should be the
The percentage of unemployed is a measure of the number of people who are
willing and able to work and actively seeking work but without jobs divided by
the total number of people in the labour force (willing and able to work and
actively seeking a job). Unemployment will often result in economic suffering
for most people, as their jobs are usually their only source of income. Also, the
level of happiness and the standard of living of a citizen strongly depends on if
he is employed or not. The four macroeconomic objectives that governments
can pursue are economic growth, low inflation, low unemployment and a
balance of payments and exchange rate equilibrium. Given that the
government's role is to pursue improvements in SOL for their citizens and to
achieve the macro and micro objectives, it is easy to see how low
unemployment should be a macroeconomic priority for a government.
20
macroeconomic
priority of the
government?
[Stand]
Body
1. Why should
low
unemployment be
a priority of the
government?
What are the
benefits of low
unemployment?
2. How could low
unemployment
benefit the other
three macro-
objectives?
3. What could be
some downsides
of pursuing low
unemployment?
4. What should
the government
consider when
deciding whether
pursuing low
unemployment
should be the
main
macroeconomic
priority?
5. Are there any
Pursuing low unemployment involves offering solutions to the different types
of unemployment present - cyclical, structural, frictional, geographical and
seasonal. By having policies that pursue low unemployment such as by
reducing the level of cyclical unemployment through demand management
policies, governments can achieve their other aims as well. For example, by
increasing G or lowering T (leading to an increase in C and I) to boost AD, the
increase in AD will lead to a multiplied increase in national income, as seen in
the diagram drawn. This is because as firms step up their level of production, to
produce greater output to meet the additional demand, they have to pay out
additional factor income such as wages, profits, interest and rents. Since labour
is a derived demand for the production of most goods and services, we thus see
a rise in demand for labour and a fall in cyclical unemployment. Assuming that
the policy is well-timed, this will lead to economic growth and a low level of
inflation that is healthy for the economy. With low inflation relative to other
countries, it is likely to benefit the external sector as well, because price
stability will fuel the competitiveness of exports, and cause a rise in demand for
the country's exports. On the other hand, imports consumption will fall because
domestic goods are cheaper than imports and hence the substitution effect
occurs to result in a lower demand for imports. The net effect of this is an
improvement to the country's balance of payment, and exchange rate.
However, blindly adhering to low unemployment as a macroeconomic priority
can be disastrous. In the above-mentioned example, suppose the government
mistimed its fiscal or monetary policy and caused AD to increase when the
economy was already over-heating or near full employment. This can severely
worsen inflation (from P1 to P2) in the economy as seen in the diagram below
and also have little to no effect on the level of economic growth (NY1 to NY2).
21
cases where there
will not be any
conflict of
objectives?
Moreover, the high level of inflation is likely to worsen the balance of
payments by virtue of the fact that our domestic goods and services and our
exports are less competitive and thus demand for them will fall, and demand for
imports will increase. A similar scenario can also arise when the government
misdiagnoses the nature of the unemployment and uses demand side policies
when in fact the unemployment is largely due to structural or frictional reasons.
To this extent, unemployment should only be made the priority during periods
of low AD, such as during a recession or depression. Else, the government is
better off managing inflation and the level of economic growth, or simply its
balance of payments.
An illustration of how managing inflation might be a better priority - we can
consider the case where the economy is experiencing high levels of aggregate
demand, and speculative bubbles in certain sectors are starting to appear (i.e.
housing, financial sectors). In this case, the government ought to put aside the
objective of achieving a low level of unemployment and focus on targeting
inflation instead. A simple cost-benefit analysis will reveal that this strategy is
far superior, because by targeting inflation in the short-term or medium-term,
unemployment may rise slightly, but the benefits from preventing speculative
asset bubbles from forming and bursting, or from overheating resulting in a
complete economic collapse and hyper inflation are clear if we look at the
recent run-up to the financial crisis and how poor monetary policies such as
22
loose interest rate policy led to a devastating recession for the economy. By
lowering the level of inflation through demand management policies (such as
contractionary fiscal and monetary policies), the level of inflation can be
brought down and the external sector will also benefit. Moreover, it will help to
achieve a low level of unemployment and sustained economic growth on
average in the long term.
On the other hand, there are supply side policies that can target specific
unemployment such as structural and frictional unemployment. For example,
Singapore offers retraining programs for low-skilled workers who are more
prone to structural unemployment as the economy shifts as a whole to a focus
on skilled manufacturing and knowledge intensive industries. Many
governments in the world subsidises online employment programs that help
employees seek jobs and reduce the time spent on job search and thus lowering
the level of frictional unemployment.
Conclusion
How can I make
my stand clearer?
For policies that target these types of unemployment, there is no short-run
macroeconomic priority and policy conflict. As such, it is possible for the
government to, for instance, make both structural unemployment and cost-push
inflation a priority, such as if we look at the case of Singapore, where our
exchange rate policies and supply side policies are aimed to target imported
cost-push inflation as well as structural unemployment. However, the only
constraint here is the amount of budget and funds available - governments can
only implement as much as they can pay for. Hence, governments around the
world should assess what their economies are most vulnerable to and prepare
for these threats, while at the same time, ensuring that their citizens are
prepared for taking on challenges in the global economic landscape. Using the
example of Singapore, the government understands our vulnerability to cost-
push imported inflation and thus uses a gradual and modest exchange rate
policy to target it and it is one of our main policy objectives to prevent such
inflation. At the same time, the government also understands the need to
address structural unemployment as our workforce becomes increasingly
skilled, and as globalisation brings about structural changes to the economy.
The government also understands the need to focus on different policies
23
depending on the need and urgency of each problem. For example, in the recent
economic recession in 2008, the government discarded our existing monetary
stance for a zero-appreciation stance as a bid to cushion the export related AD
shocks that will deal a huge blow to our industries. Clearly, the objective here
is to prevent short-term cyclical unemployment, which will surely worsen the
impact of the crisis on our economy and for individuals and households. Hence,
the scope of policy and priority of governments largely depends on the
economic context (recession/boom), the time frames involved and also the
individual characteristics of the economies. Low unemployment can be a
priority at times, but definitely not all the time.
2. “When prices are volatile it is in the best interests of both consumers and producers for
governments to control and moderate that volatility.”
a) Examine and illustrate why the prices of some goods are more volatile than the prices of others.
[10]
b) Given their role in resource allocation, is it best for a government to accept whatever volatility
of prices may occur in a free market? [15]
a. Examine and illustrate why the prices of some goods are more volatile than the prices of others.
[10]
Introduction
Definition Volatility measures to the extent of deviation of price changes relative to
the mean.
Explanation Typically, in a free market, the prices of goods and services are
determined by the interaction of consumers and producers, who demand
and supply the good or service respectively. In a mixed market or a
central planned economy, the government could set the prices of some
goods and services, and that might either induce or remove volatility.
Scope This essay will examine the causes of volatility from both the supply and
24
demand side of the equation.
Body
Main Point 1 The prices of some goods and services are more volatile than others due
to unstable supply conditions that can cause quantity supplied to
fluctuate wildly.
Explanation Frequent supply shocks can cause large changes to the price level.
Elaboration An example would be wheat, corn and other farmer crops. The supply of
these goods can be severely affected by random weather conditions such
as droughts and floods. As illustrated in the diagram below, a fall in
supply from S1 to S2 will lead to a huge increase in price levels from P1
to P2.
When the weather conditions return to normal, the supply will thus
return to previous levels and result in a huge change in price back to P1.
Answering the Question This accounts for the wide fluctuations in price levels in the SR and
hence adds to volatility.
Linking Statement In this case, the price changes are exacerbated by the price elasticity of
demand for these food products.
Main Point 2 The prices of goods and services are more volatile in industries where
the demand or supply for the good is price inelastic in nature.
Explanation A more price inelastic demand in the SR would mean that there are few
substitutes for the good, and consumers need to consume it, so they are
very insensitive to price changes. Most crops produced fit this criterion.
On the other hand, when the supply of a good is price inelastic, usually
when the production process is long and there are relatively limited
space capacity and stock available, a change in demand will also lead to
25
a large change in price.
Elaboration Using the market of electricity from coal and natural gas, the demand for
such goods and services are usually price inelastic in the SR as
consumers are unable to find energy substitutes in a short time frame.
The supply also tends to be price inelastic because of limited space
capacity and hence producers cannot respond to price changes by
increasing quantity supplied in the SR. The cumulative impact of this is
that any supply and demand changes are likely to lead to significant
price volatility in these markets.
Linking statement However, in the real world, we see that food and electricity are not as
volatile.
Conclusion
Main Idea Prices of some goods and services are especially stable - if there's price
fixing by the government, or if the industry is operating in some sort of
oligopoly where producers either collude to fix prices or compete and
end up with price rigidity, or in the case where producers have alternate
objectives. These effects can smoothen out the effect of supply changes
on the prices of goods and services.
Elaboration Supply shocks are relatively rare and the government could thus provide
subsidies to these markets when there are huge price increases due to
poor weather conditions. Price fluctuations in these markets are also
reduced by the presence of futures markets that allow commercial
traders to hedge their positions. For example, Starbucks in Singapore can
choose to buy coffee future contracts, which promises to deliver coffee
beans for a certain price at a fixed date in a future at a premium to
current prices - effectively hedging the risks and uncertainty in these
markets and hence keeping their cost of production stable and
predictable. This results in less price volatility.
b) Given their role in resource allocation, is it best for a government to accept whatever volatility
of prices may occur in a free market? [15]
Introduction
Definition The government's role in resource allocation is to achieve the
26
microeconomic goals of equity, efficiency and stability in markets.
Stand To the extent that volatility may affect the prospect of achieving any of
the three goals, the government should intervene in the markets involved
to strive for a better outcome. However, there is no guarantee that
government intervention will improve the outcomes in these markets and
there might also be undesired consequences that we will examine.
Body
Main Point 1 Volatility is part of price changes that are crucial to the functioning of
the price mechanism that can result in efficient outcomes in markets.
Explanation In a free market, where there exists perfect competition, it is assumed
that both sellers and buyers have no control over the market price. It is
the interaction of both groups that result in the market price, which
equates quantity demanded, and quantity supplied. At the given price
level, consumers will maximise their welfare by consuming to the point
where marginal utility equals to the price (which reflects the opportunity
cost - that sacrifice of marginal utility given by other goods and services
not consumed). Producers on the other hand will maximise their welfare
by responding to the price and producing to the point where marginal
cost of the last unit equals to the price (such that any additional units
produced will result in a loss of profits). When both conditions are
fulfilled in all markets, allocative efficiency is achieved because
resources are allocated to produce a combination of goods and services
that maximises society's welfare (at the current distribution of income).
As a result, the price serves as a useful guide to consumers and
producers on how much to consume and produce.
Elaboration When the determinants of either supply or demand change, there will be
shifts in supply and demand that will necessary result in price changes.
These price changes contribute to volatility, but they transmit necessary
information about the underlying goods and allow both consumers and
producers to make better decisions in the short run and long run. For
example, a increase in demand for flats due to increased income levels
will lead to prices rising in the short run. This increased price levels will
lead to supernormal profits for existing producers and attract more
27
producers to enter the industry in the long run. This process is a
necessary adjustment that restores markets to allocative efficiency as
resources are being diverted from sunset industries to sunrise ones. For
consumers, the higher prices will reduce some of the quantity demanded
by deterring some consumers in the SR. In the LR, consumers will be
more motivated to search for alternatives and this might reduce demand
for the good in the long run. The application of this last point can be
especially helpful if we look at rising gas and oil prices due to supply
bottlenecks and rising demand - consumers will be more motivated to
seek alternatives and the higher demand for alternative energy will drive
prices and growth of those sectors, thus offering a market solution to
energy sustainability.
Answering the question When these price changes reflect accurate information in a perfectly
competitive free market, the government ought to let volatility in these
markets remain on efficiency grounds because they transmit accurate
signals to consumers and producers who will respond correctly.
Evaluation Volatility can cause economic suffering/ cause severe welfare losses to
producers and consumers in the short run before adjustment takes place
in the long run. Use a diagram of inelastic demand and show how a
supply shock can severely affect consumer welfare. Similarly, a huge
rise in supply due to a good harvest can damage producers' welfare.
These losses in welfare represent economic suffering for firms and
households. The government can consider intervening with price fixing
methods to solve some of these problems.
Main Point 2 In the absence of perfect information and unlimited analytical ability in
the real world, the quality of decisions made by consumers and
producers will deteriorate in the presence of volatility. In some cases,
consumers and producers might stay away from making decisions
altogether in the face of uncertainty. These will result in undesirable
economic consequences.
Explanation/Elaboration This problem is best illustrated with examples. In the financial market,
rising and volatile asset prices will often lead to even greater demand
because buyers speculate that prices will rise even further and increase
28
their demand now and hope to become a seller at a future date at a higher
price. Sellers on the other hand will hold off selling anticipating future
price increases and as a result supply falls. The cumulative effect of both
is even greater price increases that are not reflective of the actual value
of the good or asset transacted. These speculative activities can lead to
market bubbles and episodes of panic buying and panic selling - the
impact of which is evident in the recent 2008 financial crisis. Volatility
can also lead to consumers and producers postponing their decisions. For
example, volatility of prices tends to deter producers from investing
because they are uncertain of the returns on their investment. For that
particular market, this can mean less supply in the future and higher
prices for consumers to bear. Dynamic efficiency and innovation are also
hampered. For the economy as a whole, this can mean a deficiency in
aggregate demand and a drag on national income growth, adversely
affecting the future material standard of living of citizens. Hence,
governments might consider intervening in these key markets to reduce
some of the volatility present.
Main Point 3 The markets are not perfect, price changes could be due to self-
maximising behaviour of powerful producers or consumers exercising
their market power.
Explanation In the presence of imperfect markets, price fluctuations upwards could
be due to producers restricting supply and adjusting prices to maximise
(e.g. OPEC changing prices of crude oil) their profits. Downward
volatility can reflect strong buyers in the markets exerting their market
power on producers.
Elaboration With the aid of a diagram, explain the deadweight loss and equity
downsides of imperfect competition. This might provide the basis for
government intervention to achieve the microeconomic aims of efficient
and equity.
Conclusion
Synthesis For reasons associated with market failure, especially imperfect
information, imperfect competition and immobility of factor of
production in the short-run, we find that it is often necessary for
29
governments to intervene in markets to achieve a more efficient,
equitable and stable outcome. Certain markets are more prone to such
problems, such as financial markets and product markets where supply
and demand are relatively price inelastic in nature. (i.e. agriculture,
housing). The level and degree of government intervention warranted in
each scenario hinges largely on the severity of the problems caused by
volatility and the tools available to the government to intervene.
Microeconomic policies to reduce volatility can often lead to shortages
or surpluses in the short-run because the market is unable to equate
quantity demanded and supplied at the prices set by the government. In
the case of imperfect competition, forcing producers to set lower prices
can hinder innovation and growth in the sectors. In financial markets,
reducing speculation can come at a cost of reduced liquidity and higher
transaction costs that might weigh on firms' cost curves. In general, the
government should aim for market based solutions wherever possible,
and minimise their intervention in the pricing mechanism. However, in
some cases where severe market failure can be present (e.g. financial
sectors), more drastic measures might be required. Ultimately, a cost
benefit analysis should be carried out for all policies.
30
Conclusion
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