JC Econs Essay Fiscal Stimulus & Consumer Expenditure Model Answers
Facing COVID-19, the Singapore government introduced a comprehensive support package (S$800 million) that includes enhanced wage subsidies under the Jobs Support Scheme (JSS) and rental relief will be rolled out to help businesses and workers cope with the impact of tightened Covid-19 restrictions.
This is expected to impact the expenditure by local consumers, on various good and services.
Question
In light of the recent COVID-induced global economic downturn, the Singapore government released a stimulus package that involves income tax rebates and wage subsidies.
Discuss how the above budget initiatives might affect expenditure by consumers on different types of goods. [25m]
Negative Externality & Demerit Goods
Suggested Answer: State that market equilibrium is the situation whereby there is no tendency for change in the market. This occurs when Qd = Qs i.e. there is no shortage or surplus in the market. Hence, changes in Demand and/or Supply conditions would cause changes in equilibrium price and quantity in the market.
Consumer expenditure = Price X Quantity
The personal income tax rebate will result in an increase in disposable income of consumers, hence an increase in demand for most goods & services. With the wage subsidies, there will be a reduction in cost of production for most producers, leading to an increase in supply of most goods & services. The impact of personal income tax rebate of 20% on market equilibrium depends on YED. Candidates are to consider the markets for inferior good, necessities, and luxury goods & services.
Do elaborate on the workings of the price mechanism. Moreover, the impact of the wage subsidies on market equilibrium depends on how the different producers of different markets are affected. The larger the extent of increase in supply, then the greater the downward pressure on equilibrium prices and vice versa. In addition, there is a need to consider the PED &/ PES of the various goods and services.
Normal Goods
Rise in real disposable income raises consumers purchasing power demand for normal goods will rise Demand curve will shift to the right
Luxury Goods YED (income elasticity of demand)> 1
Demand for the luxury goods will rise more than proportionately to the rise in income. E.g. recreation, branded handbags YED > 1. 4.5% increase in income will lead to more than 4.5% increase in demand
Necessities with YED <1
Demand for necessities rise less than proportionately to the rise in income, eg. food 0<YED<1. 4.5% increase in income will lead to less than 4.5% increase in demand
Inferior Goods
Rise in real disposable income will cause consumers to switch to better quality products Demand for inferior goods will fall. Demand curve will shift to the left E.g. switch to air-cons and reduce demand for fans YED negative.
PED> 1
Luxury goods, goods that have many close substitutes, and goods for which the proportion of total expenditure spent on the good is relatively large tends to have PED >1 E.g. consumer durables such as cars, laptops. A fall in price will lead to a more than proportionate rise in the qty given increase in supply due to wage subsidies (change in qty has a bigger impact on TE than the change in price),
PED< 1
Necessities, goods with few close substitutes, goods that are addictive in nature tends to have PED < 1 . E.g. cigarettes, insulin for diabetic – A fall in price lead to a less than proportionate rise in the qty given increase in supply due to wage subsidies (change in price has a bigger impact on the TE than the changes in qty).
Regardless of the PED of the product, the fall in demand caused by the rise in income will reinforce the increase in supply due to the wage subsidies overall price will fall (PO to P1 in diagram)→ quantity change will be indeterminate. Student may propose a scenario of 1 shift more than the other (Any logical reasoning based on example of a good) and do a market analysis based on that.
PES: With demand increase, price will increase and the quantity supplied will increase by a more/less than proportionate depending on the PES of the good. Eg. PES < 1 for goods such as food due to long gestation period (and Singapore imports) then quantity increase will be less than proportionate causing expenditure to increase not as much.
(Is PES concept necessary?)
Overall: Demand increases and supply increase reinforce rise in quantity but effects on price is indeterminate (justify which dominates.)
Regardless of the PED of the product, the fall in demand caused by the rise in income will reinforce the increase in supply due to the wage subsidies overall price will fall (PO to P1 in diagram)→ quantity change is unknown… Student may propose a scenario of 1 shift more than the other (Any logical reasoning based on example of a good.)
Thesis: Total expenditure will increase
These budget initiatives were taken in the midst of the global recession. Given the severity of the recession, world income was falling and given that a substantial proportion of food produced in Singapore is exported given the small domestic market (eg in the electronics sector), demand would have fallen significantly. It is thus unlikely that in the short run that the initiatives will increase demand overall if not for the use of other macro-economic policies by the government. The wage subsidies were given mainly to buffer the spike in cyclical unemployment therefore it is also unlikely that it would raise supply substantially.
Wage cost could also contribute differently for different goods and services in the market. Eg. In labour intensive sectors like services sector (F & B) the effects of the wage subsidies would be greater. All in all, prices and quantities of most normal goods and services fell during this period. Producers were also generally receiving lower revenue as consumers reduced expenditure.
Anti-thesis: Total expenditure will decrease
(Repeat similar analysis)
To evaluate and synthesise students must consider the context of the recession which was the reason for the budget initiatives in the first place. This would have led to a fall in demand. for most goods and services affecting therefore the changes analysed above.
Conclusion
Hence, TE could rise or fall depending on the nature of the good. Impact of wage subsidies depend on producers willingness to pass cost savings to consumers and similarly the impact of the personal income tax rebate depends on whether consumers willingness and ability to spend on the various goods & services (which could have been affected by the recession). The impact on market equilibrium could also be affected by the extent of market power producers have in the various markets in reality because the larger the market power the more price inelastic the demand for their goods produced.
L3 (high): Answer shows excellent knowledge of demand and supply forces and how these affect equilibrium price and equilibrium quantity (therefore expenditure), and shows excellent knowledge of market equilibrium (inclusive of: market equilibrium condition), clear analysis of simultaneous shifts i.e. recognition that equilibrium price or quantity maybe reinforced and the other equilibrium will be indeterminate recognition that extent of shift of demand and supply affects the equilibrium which is indeterminate elaboration of price mechanism). Answer is balanced in consideration of demand and supply forces. Answer includes the different extent of shifts of supply given the wage subsidies.
Excellent consideration of elasticity concepts (including YED, PED, &/or PES) and its relevance in influencing market equilibrium. Excellent rigour in economic analysis and development. Excellent use of diagrams that is adequately explained. Excellent attempts at contextualisation with a variety of relevant examples.
*To be awarded higher L3 students must analyse at least 3 possible. markets (2 market diagrams with analysis) To be awarded higher L3 students must consider the recession context for evaluation.
L3 (low): Answer good knowledge of demand and supply forces and how these affect equilibrium price and equilibrium quantity and therefore expenditure, and shows knowledge of market equilibrium (i.e. includes market equilibrium condition). Answer is balanced in consideration of demand and supply forces.
Good consideration of elasticity concepts (i.e. YED and PED &/or PES) and its relevance in influencing market equilibrium. Good rigour in economic analysis and development. Good use of diagrams that is adequately explained (which includes diagrams with simultaneous shifts). Some attempts at contextualisation with some relevant examples.
L2 (high): Answer shows adequate knowledge of demand and supply forces how these affect equilibrium price and equilibrium quantity and therefore expenditure. Answer is balanced in consideration of demand and supply forces. Some consideration of elasticity concepts (i.e. at least one elasticity
concept) and its relevance in influencing market equilibrium. Some rigour in economic analysis and development. Relevant diagrams drawn but not well explained or clear explanation in absence of diagrammatical analysis. Minimal or no contextualisation. “To be awarded higher L2 students must analyse at least 2 markets (With at least 1 market diagram with analysis)
L2 (low): Answer shows adequate knowledge of demand and supply forces and how these affect equilibrium price and/or equilibrium quantity. Answer lacks balance in consideration of demand and supply forces. Minimal or no consideration of elasticity concepts and its relevance in influencing market equilibrium. Lack of economic analysis and development Minimal or no contextualisation. *Answers only discussing impact on price and quantity without reference to expenditure capped at low L2 .
L1 (high): Answer shows some knowledge of how equilibrium price and/or equilibrium quantity may be affected, without clear linkage to demand and/or supply forces. Errors and inconsistencies occur in the explanation, showing lack of understanding of the economic concepts. Minimal or no contextualisation.
L1 (low): Answer is mostly irrelevant. Only few valid points which do not clearly address the question.
E1: Mainly unexplained judgement.
E2: Judgement based on analysis.
A-Level Econs Teacher’s Comments:
1. There were a number of students who wrote macro essays to this question and were totally out of point. Students often chose to write about the income tax rebates ignoring wage subsidies (Lop-sided response).
2. Students were not able to give examples of different types of goods and services; Income tax rebates is not the same as income tax cut. Some students were writing about the recession affecting different types of goods and services (not answering question).
3. Elasticity applications were weak as of Q1. Eg. They will try to use PED to evaluate demand shifts and PES to evaluate supply shifts.