2024 H2 Economics Paper 2 Essay 3: Suggested Answers
How to use these essay answers. The responses below, including the part (a) answer, are structured guides to the requirements of the question, the content, analysis and evaluation a strong answer must cover, rather than full essay prose with a written introduction and conclusion. Use them to see what to include and how to build the argument, then write it up in your own continuous prose, adding your own introduction and conclusion.
This essay explains why the effect of an income tax cut on expenditure depends on a good's income elasticity of demand, then asks whether firms can raise the price of all products by the full amount of a goods and services tax increase.
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Explain, with examples, why the impact on expenditure from a reduction in the rate of income tax depends on a good's income elasticity of demand.
Income elasticity of demand (YED) measures the responsiveness of demand for a good to a change in income, ceteris paribus. It is the percentage change in quantity demanded divided by the percentage change in income. A cut in the income tax rate raises disposable income, and the effect on expenditure depends on the YED of the good.
YED positive but less than 1 (necessities). Demand rises less than proportionately with income, so expenditure rises only modestly. For example, when income rises, demand for staples such as bread or rice grows only slightly, since there is a natural limit to how much more is consumed.
YED positive and greater than 1 (luxuries). Demand rises more than proportionately, so expenditure rises sharply. For example, a household receiving a sizeable tax cut may book a luxury cruise or buy designer goods, discretionary purchases that climb steeply with income.
YED negative (inferior goods). Demand falls as income rises, so expenditure declines. For example, as income rises consumers switch away from heavily discounted close to expiry food towards fresher or branded alternatives, so spending on the inferior good falls.
The overall impact of the income tax cut on expenditure therefore varies by good: a modest rise for necessities, a sharp rise for luxuries, and a fall for inferior goods.
Define YED and work through all three ranges with a clear good for each and the direction of the expenditure change.
Tests: YED and XED, Fiscal policy
Discuss whether firms can increase the price of all products by the full amount of the goods and services tax increase.
- Define price elasticity of demand and set up how a tax increase shifts supply.
- State the limiting case in which the full tax can be passed on, and explain why it is largely theoretical.
- Work through the relatively inelastic case and the share of the tax that can be passed on.
- Work through the relatively elastic case and how the incidence shifts towards the firm.
- Generalise across goods to answer whether all products behave the same way.
- Conclude with a judgment tied to the price elasticity of demand.
This part is gated. The full model answer with the worked tax incidence diagrams and the conclusion, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
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Where can I get the full worked answers to the 2024 H2 Economics paper 2 essay 3?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2024 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How should I use these suggested essay answers?
Treat them as a guide to the requirements of the question, the content, analysis and evaluation a strong answer must cover, not as full essay prose. Write the essay up in your own continuous prose, with your own introduction and conclusion.
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