JC Economics Essay Series #23 – Microeconomic Policies & Price Controls

JC Economics Microeconomic Policies & Price Controls Essay Model Answers 

Are you worried about the essay question on elasticity applications in the Market Mechanism topic question in your ‘A’ Levels H2 Econs? How many of you in JC1 can afford to skip this essay question? Not many actually, as most JC Promos exams do set one question, or it can be easily set in the CSQ paper as well. Worse, if it is set as a compulsory section on its own!

Furthermore, application of PED, PES, YED and XED (or CED) is not that difficult, as one needs to figure how a firms uses these concepts to achieve their business objectives. Here is a full essay example; 


Prices of petrol fuel have increased in the USA. Some motorists however were paying in excess of three dollars per gallon, as petrol prices shot up to record highs.

(a) Explain for the rise in the price of oil. (10)
(b) Explain how the goverment can help those affected the high petrol prices and discuss the impacts of such government intervention. (15)


JC Economics Essay – Market Forces on Prices

Suggested Answer:

Students should recognize that price of oil is determined by demand and supply conditions and changes in demand and supply conditions will cause changes in the price of oil. For price to rise, there must be a shortage (use diagram to illustrate)

Explain possible demand factors:

-Global expansion: Global economic growth has led to power production in most countries., leading to an increase in demand for fuel. Moreover, rising income in emerging countries would have resulted in rising demand for private transport (Ey>0) and this would have led to rising demand for petrol, which in turn drives up demand
– Expectations of future increase in prices (eg. speculation)


Explain possible supply factors: Depletion of oil sources

– Political tension and violence especially in the middle east have limited oil production in the area OPEC reluctance to increase production level in order to maintain high prices for oil

– Bad weather conditions destroyed oil refinery facilities

Students should recognize that the increase in price of oil in recent years is largely demand driven. However, supply factors also exacerbated the increase. With inelastic PED and PES, the increase in price is more significant. (use diagram to illustrate)


Other possible variations of Part A essays:

(a) Explain for the record rise in the price of oil. (10)
(a) Explain for the slight fall in the quantity of oil. (10)
(a) Explain for the rise in the price of petrol is larger than that of the price in crdue oil. (10)



JC Economics Essay – Price Controls & Micro Objectives

b) Price control: Price celling (max.p) use diagram

Consumers: lower price, however shortage and might lead to black mkt Producers: worst off in term of revenue

Efficiency: inefficient, lost of CS and PS- DWL


Max P must be done with guaranteed supply, goverment can set a min price to guarantee purchase from producers or import to resell to consumers; however, these incur goverment budget.

Subsidies to producers to lower COP (with diagram)

Consumers will pay lower P and have higher Q; Producers will benefit from lower COP and revenue depends on PED; However, consumers may not get the full benefits from the subsidies as producers might not pass on the cost saving to consumers, especially if the demand is price inelastic like petrol; over consumption might also lead to pollution etc;


R&D on alternative energy
In the LR, government should encourage or fund the development of alternative energy source to reduce reliance on petrol. However, these incur high cost and may not be successful;


Final evaluation: SR vs LR. Overall ineffectiveness, etc


Econs teacher’s comments: This is a simple question, and likely to appear in JC1 Promos exams, rather than JC2. Equally likely for CSQ question for H1 students. Practice to fiish the answer within 45 minutes or less.


More full length answers here: Econs Essay #22 | Econs Essay #24