No Title Page

No.
1 Chapter 1: Scarcity, Choice and Opportunity Cost 2-3
2 Explain two ways in which an economy might move rom a
point within its !!C to a point on it"
#
3 $iscuss the most e%ective economic policies to move the
!!C outwards"
&
# 'hat is meant (y the (asic economic pro(lem o scarcity) *
& $iscuss whether economic growth solves the pro(lem o
scarcity"
+
* Chapter 2: ,esource -llocation in Competitive .ar/ets 0 1-2
+ - manuacturer wishes to sell more o his product" 3ow
may he try to achieve his aim)
14
1 Chapter 3: ,esource -llocation in Competitive .ar/ets 00 11-13
2 Explain price elasticity o demand and income elasticity o
demand"
1#
14 - government is proposing to increase the tax on petrol"
Examine the relevance o price elasticity o demand
and income elasticity o demand or this proposal"
1#
11 -ssess the relevance o elasticity concepts in explaining
the e%ects o the worldwide recession caused (y the
211 terrorist attac/s on the airline industry"
1&-1*
12 Chapter #: .icroeconomic !ro(lems: .ar/et 5ailure 1+-11
13 !olicies on !ollution and Evaluation Summary 12-21
1# !olicies on !ollution and Congestion caused (y Cars
Summary
22-23
1& Chapter &: 6overnment 0ntervention in the .ar/et 0 2#
1* Chapter *: 5irms and 3ow 7hey Operate 0 2&-34
1+ $iscuss whether rising costs limit the si8e o 9rms over
time"
31
11 :an/ing .erger in Singapore -nalysis 31
12 Chapter +: 5irms and 3ow 7hey Operate 00 32-31
24 $iscuss the view that the pro9t motive will always lead to
a ew large 9rms dominating the mar/et or each and
every type o product"
32
21 Explain what is meant (y productive and allocative
e;ciency"
#4-#1
22 <- 9rm should (e encouraged to maximi8e pro9ts (ecause
this ma/es it e;cient"= $iscuss whether this argument is
true or a 9rm operating in an imperect mar/et"
#2
23 $istinguish (etween monopolistic competition and
oligopoly"
#3
2# Explain why oligopoly is a common mar/et structure in
many economies"
##
2& Explain why governments throughout the world have (een #&
1
J1 Topics
involved in the supply o services such as electricity"
2* Chapter 1: 6overnment 0ntervention in the .ar/et 00 #*-#1
2
Chapter 1: Scarcity, Choice and Opportunity Cost
1" 0ntroduction
Study o the use o scarce resources to satisy unlimited human
wants
'ants: things people would consume i they had unlimited income
,esources: inputs to produce goods and services
Scarcity exists due to unlimited wants > worn out goods > newer
goals
!ositive ?can (e chec/ed (y acts@ vs" normative ?statement o
value@
2" 5actors o !roduction
Aand: productive resources supplied (y nature
Aa(our: human e%ort directed to the production o goods and
services
Supply: num(er o wor/ers > average num(er o hours each
wor/er is prepared to o%er
Specialisation
$exterity, greater use o machinery and more
sophisticated production techniBues
.onotony, loss o cratsmanship, increased ris/ o
structural unemployment
Capital: man-made resource used in urther production
0nvolves postponing present consumption
Entrepreneurship: ta/es ris/ o (eing in (usiness
0normation: data or the (asis o /nowledge-(ased economy
3" Opportunity Cost
,eal cost in terms o the next (est alternative oregone
Calculating opportunity cost reBuires time and inormation
Opportunity cost may vary with circumstance
Economic rent: di%erence (etween what is earned and what could
have (een earned
Csed in speciali8ation and trade
#" !roduction !ossi(ility Curve
.aximum attaina(le com(ination o two goods and services that
can (e produced in an economy, when all availa(le resources are
used ully and e;ciently, at a given state o technology
-ssumptions: 9xed amount o resources, actors ully and e;ciently
employed, technology 9xed, time period give, 2-product model
5ully: using all resources availa(le
E;ciently: do as many things you can with the resources used
3
Scarcity: unattaina(le com(inations outside !!C > society has to
choose among com(inations o 2 goods
Shit: Buantity and Buality o resources ?thin/ 5O!@ > technology D
s/ewed)
Choice (etween instant grati9cation and improving economy in the
uture
#
&" 7he .arginalist !rinciple
Consume till .!: E .!C: cost o producing an additional unit o
good E (ene9t o consuming an additional unit o good
5or the price mechanism to wor/, inormation need not (e /nown
with perect accuracy (y every individual acting in the mar/etplace:
dependent on marginal (uyers who /eep suppliers on their toes
*" E;ciency
Static e;ciency: how much output can (e produced now rom a
given stoc/ o resources at a given point in time
$ynamic e;ciency: changes in the amount o consumer choice
availa(le in mar/ets together with the Buality o goods and services
availa(le
!roductive e;ciency: a(sence o waste in the production process E
minimi8ing the opportunity costs or a given value o output
-llocative e;ciency: society produces and consumes a com(ination
o goods and services that maximi8es its welare
$istri(utive e;ciency: goods and services produced to those who
want or need them
&
'heat
Cloth 4
F$raw dotted line to show comparison
(etween 2 countries with a common
yardstic/
Explain two ways in which an econoy ight o!e "ro a
point within its PPC to a point on it. #1$%
0ntroduction
$e9ne !!C
:ody
-" 0ncrease employment o resources
Aower wages to (e more competitive D may (e enticed to
produce more goods
5iscal policy: increase government spending eg" circle line D
multiplier e%ect
.onetary policy: lower interest rate D 9rms (orrow more,
increase investment
:" 0ncrease e;ciency in use o resources
!ay (ased on productivity: (ut only or Go(s where output can (e
measured ?actory wor/ers@
,eallocate resources to more e;cient uses
,etraining
*
-
:
6ood
H
6ood
I
O
-: resources not ully utili8ed D
underemployment and
unemployment
:: e;cient use o resources D
ull employment
&iscuss the ost e'ecti!e econoic policies to o!e the PPC
outwards. #1(%
0ntroduction
Outward shit: increase in productive capacity D sustain economic
growth over long run
:ody
-" Aa(our
0ncrease (irth rate (ut di;cult to do so in developed countries D
emale la(our orce participation > need lots o incentives
Education and training (ut ta/es long time and does not
necessarily yield results
5oreign talent through tax incentives
:" Capital
.JCs D investment ?machines@ > learn their technological
/nowledge
0nvest in r>d
C" Entrepreneurship
0ncentives and su(sidies to start (usinesses
$" Aand
,eclamation
Conclusion
$epends on which country
Eg" 5or CS-: encourage capital goods, less consumption goods" 5or
China: entrepreneurship
+
)hat is eant *y the *asic econoic pro*le o" scarcity+
#1,%
0ntroduction
Scarcity D scare resources, unlimited wants
:ody
Scarcity D choice D opportunity cost
1@ 0ndividual: timeK consumerK how to maximi8e use o limited
resources D more la(our L more machines
2@ 5irm: least-cost com(ination o resources in order to maximi8e
pro9ts
3@ 6overnment: choice (etween competing proGectsK cost-(ene9t
analysis
#@ Economy: pro(lem o how to allocated scare resources e;ciently
(est illustrated (y the !!C
?:rie@ 0mplications:
7rade as a solution to alleviate scarcity
7rade-o% (etween consumer goods and capital goods
'hat ?how scarcity a%ects decision-ma/ing o an economy@, how
much, or whom and what to produce ?mar/et system@
1
E
6ood
H
6ood
I
O
*
#
& *
&iscuss whether econoic growth sol!es the pro*le o"
scarcity. #1-%
0ntroduction
Economic growth D increase in national income D generally get to
consume more goods and services
:ody
1@ 0ncrease in Buantity and Buality o resources D increase in productive
capacity
Aa(our: due to reduction in unemployment and
underemployment
S/ills and educational level
Aand
Capital stoc/: most e%ective way to alleviate pro(lem o scarcity
D more capital economy produces in one period, more output
capital can produce in the next to satisy wants in society
2@ 7echnological improvement D increase in productive capacity: (etter
and new methods o producing goods
, > d D technological (rea/through D new products D create more
wants
3@ 0ncrease in income D consumers a(le to satisy wants
:ut with greater aMuence, people have more wants due to
advertising and promotions D luxury goods o the past may
(ecome necessities
#@ Supply limited
$emand accelerating D China L 0ndia economic growth
Crude oil important as it is a source o uel
Eg" land in Singapore
:ut technological improvements allow society to ma/e use o
renewa(le resources as sources o energy
:ut more wants created
&@ EBuity in distri(ution
Economic growth does not guarantee a reduction in income gap
Corruption, ood shortages
2
Chapter ,: .esource /llocation in Copetiti!e 0ar1ets 2
F-ssumption: .any (uyers and sellers such that no single (uyer L seller
can exert control over mar/et price ?price ta/ers@
1" $emand 7heory
$emand: amount that consumers are willing and a(le to purchase
at each given price over a given period o time
$emand curve slopes downwards
0ncome e%ect: e%ect o change in real income resulting rom
change in price o good
Su(stitution e%ect: e%ect o change in price on Buantity
demanded arising rom consumer switching to, or rom,
alternating products
$eterminants
!rice
7aste: education, culture, age group, health scares
0nterrelated goods: su(stitute vs" complement
!opulation: a(solute change, change in composition
Seasonal changes: climate, estival
Expectations o the uture: uture changes in price L income
,eal disposa(le income: changes in taxes L money income
,edistri(ution o income
Consumer surplus: di%erence (etween maximum amount
consumers willing to pay or a given Buantity o good and what they
actually pay
2" Supply 7heory
Supply: Buantity o a good or service producers are willing and a(le
to o%er or sale at each given price over a given period o time
$eterminants
!rice
CO!: change in price o actor inputs
Other prices: Goint L competitive supply
0nnovation: lower production costs
Jatural actors: climate, unexpected events
6overnment policies: indirect taxes, su(sidies
Jum(er o sellers
!roducer surplus: di%erence (etween amount received (y producers
and minimum amount they are willing and a(le to accept or the
supply o a commodity
3" .ar/et EBuili(rium
14
:uyers and sellers satis9ed with current com(ination o price and
Buantity (ought or sold, and are under no incentive to change their
present economic actions
11
-dGustment to eBuili(rium
:elow eBuili(rium
Shortage D consumers compete or goods, (idding up
prices D price increases, Buantity supplied increases D
shortage eliminated D mar/et settles at eBuili(rium
-(ove eBuili(rium
Surplus - producers reduce prices to get rid o stoc/s D
increase sales and decrease production D price alls,
Buantity demanded increases, surplus eliminated D
mar/et settles at eBuili(rium
Shits in supply and demand: consider individual e%ects on price
and Buantity then sum up
0nterrelated demand and surplus
Noint L competitive L derived demand
Noint L competitive supply
#" Case Study
'hen as/ed to explain how a group o people intend to a%ect a
certain mar/et, (ring in limitations
Elasticity o demand
,esponses o other 9rms L groups o people
-nalyse theoretically 9rst, then see how and why the data 9ts L does
not 9t the theory
$esira(ility: consider or whom: producer, consumer, society
E%ectiveness: limitations, long run vs" short run
12
/ anu"acturer wishes to sell ore o" his product. 3ow ay he
try to achie!e his ai+ #1,%
0ntroduction
Sell more D only considering eBuili(rium Buantity D increase demand L
supply
E%ect: long run vs" short run
:ody
1@ 0ncrease demand: explain e%ect on Buantity demanded
-dvertising and promotion: create product di%erentiation and
(rand loyalty
Competitive mar/et: other 9rms will do li/ewise as they ear
losing mar/et share
3uge unds need to (e devoted D increase CO! D reduce
pro9ts
0 9rm passes cost increase to consumers in terms o
higher prices D all in Buantity sold D assuming demand
elastic D total revenue alls
:ut una(le to increase price in competitive mar/et D
9rms may engage in price wars
:ut in long run i campaign successul in altering
people=s taste and preerence D rise in Buantity sold
Expanding num(er o mar/ets: go regional L glo(al
Easier to penetrate mar/ets where demand or product more
price elastic
0ncrease supply D all in price D more than proportionate
rise in Buantity demanded
0mprove Buality o product L increase product di%erentiation
through (etter sales service L improved pac/aging
E%ect o money spent or r>d on
Costs then price o product
.ar/et share in long run ?increase@
$eli(erate attempt to reduce price o good through discounts
!rice elasticity o demand
3ow long discount can (e sustained without eroding pro9ts
2@ 0ncrease supply: explain e%ect on Buantity demanded
0nvestment in r>d
Aower CO!, more e;cient production methods, (etter Buality
products
,aising productivity through greater speciali8ation and (etter
la(our-capital com(ination
Sourcing cheaper sources o raw materials
13
Evaluation
,educes price D may conOict with pro9t maximi8ation
.ore e%ective strategy i selling product that is price demand
elastic D mass produce D reap EOS D lower prices D increase
sales volume more than proportionately
1#
Chapter -: .esource /llocation in Copetiti!e 0ar1ets 22
1" !rice Elasticity o $emand
.easure o degree o responsiveness o Buantity demanded o good
to a change in its price, ceteris pari(us
Coe;cient: sensitivity o consumers to price changes
Jegative: inverse relationship (etween price and Buantity
demanded
$eterminants
-vaila(ility o su(stitutes
Jecessities vs" luxuries
!roportion o income
7ime period: longer D switch to su(stitutes D more price elastic
Cseulness
6overnment taxation policies: raise revenue, discourage
consumption
5irms= pricing policy
E%ectiveness o trade unions: can as/ or higher wages i
demand or product is price inelastic
!rice sta(ility: prices more volatile i demand more price
inelastic when supply shoc/
2" 0ncome Elasticity o $emand
.easure o degree o responsiveness o demand o good to change
in consumers= income, ceteris pari(us
Coe;cient
Jegative: inerior good
!ositive: normal good
Aess than one: necessities
.ore than one: luxuries
Cseulness
!roduction plans: (oom vs" recession
7argetting di%erent income groups: segment mar/et
3" Cross Elasticity o $emand
.easure o degree o responsiveness o demand o good to change
in price o another good, ceteris pari(us
Coe;cient
Jegative: complement
!ositive: su(stitute
Cseulness
E%ects on products= demand when aced with change in price
o rival=s product
Strong complements D can sell Gointly
1&
1*
#" !rice Elasticity o Supply
.easure o degree o responsiveness o Buantity supplied o good to
a change in its price, ceteris pari(us
!ositive: direct relationship (etween price and Buantity supplied
$eterminants
7ime period: longer D supply more price elastic (ecause
possi(le to change anything
5actor mo(ility
Jum(er o 9rms: more D supply more price elastic
Stoc/s and spare capacity: more D can produce more D supply
more price elastic
Aength o production period: shorter D supply more price
elastic
Cseulness
7axation: incidence
!rice sta(ility
&" 6overnment !olicies
7axation L su(sidies
$emand more price inelastic D higher incidence
0ncidence: distri(ution o (urden (etween consumers
and sellers
.inimum price
!rotect income o producers
Creates surplus or uture shortages
5inancing annual surpluses D (urden on taxpayers D not good
in long run
Cushion ine;ciency
Jew producers attracted D increase surpluses unless
government has measures to increase demand
.aximum price
Aower-income consumers to a%ord necessities
!rotect consumers
-llocation o goods may (e (iased
:lac/ mar/et, especially during war time
6overnment can encourage supply (y drawing on past
surpluses, giving su(sidies and tax relie, reducing demand (y
controlling income
*" Case Study
Jote di%erence (etween elasticity o the product and the elasticity
o the 9nal product ?which involves the use o the product@
Jote di%erence (etween less inelastic and more elastic
1+
'hen as/ed how a strategy might a%ect a company, consider e%ect
on total revenue then pro9ts
11
+" Essay
Aimitations to using elasticity concepts to explain price changes
Elasticity concepts are static D need to relax ceteris pari(us
assumption in reality D simultaneous changes occur D need to
consider relative magnitudes o changes in demand and
supply
Coe;cients o elasticity mere estimates
Consumers not homogenous group
-mong high-income earners, there are the yuppies
see/ing the high lie and are li/ely to (e more price and
income sensitive compared to oreign investors who
would consider socio-political actors
.ay not consider some goods as su(stitutes
12
Explain price elasticity o" deand and incoe elasticity o"
deand. #1$%
$e9nition
5ormula
Sign
Coe;cients: range o values or elastic L inelastic
Examples with their estimated values
/ go!ernent is proposing to increase the tax on petrol.
Exaine the rele!ance o" price elasticity o" deand and
incoe elasticity o" deand "or this proposal. #1(%
0ntroduction
-ssume speci9c tax or simplicity
Cses o petrol: 9rms= and commuters= transportation
Jormal good: income increase D demand or cars increase D demand
or petrol increase
:ody
1@ $emand or petrol price inelastic: explain why
0ncrease in indirect tax D supply alls at given price D supply
curve shits vertically upwards (y amount o tax
$emand or petrol inelastic D all in Buantity demanded less than
proportionate
,elevance: need high tax i government wants to reduce
consumption to desired level
2@ 0ncome elasticity o demand less relevant (ecause it is due to
changes in income D tax on petrol a%ects price directly, not income
6overnment li/ely to (e less successul i they increase tax on
petrol in period o economic (oom
:oom: incomes rise D demand or cars ?luxury good@ D increase
(y more than proportionately D derived demand D increase
demand or petrol
24
The terrorist attac1 on New 4or1 on 11 Septe*er ,$$1 caused
a worldwide recession and an increased "ear o" 5ying, *oth o"
which se!erely a'ected the deand "or tra!el *y air. This led
to the closure o" soe o" the a6or airlines in the world.
/ssess the rele!ance o" elasticity concepts in explaining the
e'ects o" these e!ents on the airline industry. #1(%
:ody
1@ !rice elasticity o demand
$e9nition
'hen supply o airlines ell due to closure o maGor airlines D
price expected to increase D Buantity demanded all (y more
than proportionate D total revenue all
,elevance
-irlines should expect that reducing supply causing a rise in
price can lead to a all in total revenue
:ut the demand or travel or (usiness is li/ely to (e inelastic"
So price increase D less than proportionate all in Buantity
demanded D total revenue increase
E%ect on total revenue depends on si8e o (usiness mar/et vs"
holiday ma/ers
$ue to the ceteris pari(us assumption, the a(ove will only
ta/e place i other actors remain constant" 0n this context,
incomes have changed causing demand curve to shit D total
revenue all
2@ 0ncome elasticity o demand
$e9nition
-ir travel luxury good or most, necessity or (usiness travelers
,elevance
,ecession D all in income D all in demand D all in total
revenue
0mplication: individual airlines need to reduce price L engage
in non-pricing strategies to increase mar/et share
3@ Cross elasticity o demand
$e9nition
!otential su(stitutes: train L coach L ship
$egree o su(stituta(ility depends on the length o Oight
Aong haul Oights: wea/ su(stitutes especially or
(usiness travelers
Short distance: stronger su(stitutes
21
0 another airline ?eg" Pantas@ reduces price to increase mar/et
share D all in demand or a particular airline ?eg" S0-@ D S0-
reduces price D price war D may not cover costs D erode pro9ts
:udget airlines also pose as competition
22
-irlines close down routes L less schedules D all in supply D
increase price
$emand inelastic: long haul Oights D no close su(stitutes D
total revenue increase
$emand elastic: short distance Oights D switch to trains L
coaches D total revenue alls
#@ !rice elasticity o supply
$e9nition
5all in price D all in Buantity supplied
:ut short run: supply price inelastic D less than proportionate all
in Buantity supplied
,easons
Aa(our: need time to retrench L reallocate la(our to other
departments
5light schedule L routes: need time to deli(erate which
routes L schedules to close D choose the unpro9ta(le L lowest
passenger volume
Conclusion
Cannot loo/ at each value separately (ecause in real world many
varia(les change at the same time
23
Chapter 7: 0icroeconoic Pro*les: 0ar1et 8ailure
1" .ar/et 5ailure
Scarce resources D need to allocate resources e;ciently D o(Gective:
maximi8e society=s welare ?social optimality@
.S: E .SC: (ene9t to society rom one additional unit o
good E cost to society o producing one extra unit o good
'ays to allocate resources
7otal government intervention
5ree mar/et ?(ased on price mechanism@
.ixed economy ?ree mar/et with some government
intervention@
5ree mar/et economy
!rivate ownership o resources > individual decision-ma/ing
guided (y sel-interest
!rice serves as signal or resource allocation
-utomatic wor/ing o supply and demand D spontaneity D
allocative e;ciency
EBuili(rium where demand E supply: maximi8ation o
consumer and producer surplus
-ssumes no externalities > perect competition
.ar/et ailure occurs when
-llocative ine;ciency: externalities L pu(lic goods, imperect
competition
0na(ility o mar/et to achieve social o(Gective eg" income
eBuity
2" Externalities
Cost L (ene9t on a third party not involved in the consumption L
production o good
Jegative
7ypes: industrial pollution, pollution and congestion rom
vehicles, demerit goods eg" cigarettes
External cost: second-hand smo/e D health pro(lems,
9re ha8ard, environmental cost D littering, anti-smo/ing
campaigns D money comes rom taxpayers who largely
do not smo/e
7o ta(acco company: pro9t-maximising private producer: .!:
E .!C
7o society: to attain social optimality: eBuili(rium level .S: E
.SC E .!C > .EC
Overproduction: deadweight loss
!ositive
7ypes: merit goods eg" healthcare, education
2#
External (ene9t: higher standard o living o everyone
(ecause o highly-s/illed Go(s
Cnder-production (y ree mar/et: deadweight loss
:ecause o partial mar/et ailure, government intervention comes in
2&
3" !u(lic 6oods
Jon-excluda(le: impossi(le L costly to exclude non-paying
consumers rom receiving the good
Jon-rivalrous: consumption (y one person does not reduce amount
availa(le to others
Eg" Jational deense
5ree rider D conceal demand D private producer cannot gauge
demand D will not produce D non-production in ree mar/et D total
mar/et ailure
6overnment provision necessary since pu(lic goods are socially
desira(le and largely indivisi(le
#" 0neBuality
,epresented (y the Aoren8 Curve L 6ini coe;cient
Singapore: 4"#1& in 244+
European countries: 4"2& D 4"3
Aatin -merica and the Cari((ean: 4"*
-verage worldwide: 4"#
&" Essay
'hen as/ed to suggest new policies, consider whether it is
possi(le L practical to enact them
!olicies may (e di;cult to administer, and policing expensive
Opportunity costs involved in attempted to control negative
externalities
!olitical implications eg" pu(lic satisaction
2*
Policies on Pollution and E!aluation Suary
1@ 0dentiy: 7axation
Explain: 7ax polluters per unit o .EC D CO! increases or private
9rms D supply alls rom .!C to .SC (y amount o .EC
Evaluate: F Jegative externality internali8ed (y 9rm: incentive or
9rm to (e more -cost-e%ective to maximi8e pro9ts L reduce
pollution
F !rovides revenue or government to 9nance other social
and community development proGects
F -(le to allow mar/et to continue operating according to
mar/et orces and reach state o eBuili(rium
x ,eBuires accurate valuation o .EC L amount o pollution
- Over-valuation: output (elow socially optimal level,
reducing society=s welare L deters production D
a%ects economic growth
- Cnder-valuation: output still not (rought to socially
optimal level
x $i;cult to apportion (lame
x E%ectiveness dependent on price elasticity o demand: i
highly price inelastic, e%ect o tax on output ine%ective
unless tax very large L 9rm a(le to move (urden to
consumers and get away scot-ree
2@ 0dentiy: Puotas
Explain: :an production i pollution exceeds a certain limit D limits
.EC (y restricting output at socially optimal level
Clearly de9ned amount o pollution each 9rm can have
Evaluate: F -(le to control level o pollution in the country as a whole
H $oes not allow price to eBuili(rate Buantity demanded to
Buantity supplied: 9rms may decide to produce less so they
do not exceed the maximum amount o pollution they can
have ?compare this to taxation@
H $i;cult and tedious to gauge how much pollution each
9rm produces: waste o resources and time on inspection
H Jeed vigilance and commitment o government
3@ 0dentiy: Aegislation
Explain: 5orce producers to (ear costs o more proper disposal o
industrial wastes eg" antipollution eBuipment
2+
Evaluate: x $i;cult and costly: spend resources on inspection
H 0 chances o (eing caught and penalties are small,
legislation ine%ective
H Jeed vigilance and commitment o government
H Jot immediately e%ective (ecause o (ureaucracy
involved in esta(lishing laws
H Aose voters leading to loss in power
#@ 0dentiy: Jationalisation
Explain: 6overnment ta/es over the polluters= 9rms and ensures
production at socially optimal output
Evaluate: x 'aste o resources: opportunity cost to other proGects
(ecause less unds availa(le
H $i;cult to accurately valuate Buantity demanded
H Jo competition: ine;cient, no innovation
&@ 0dentiy: Campaign L advertisements to educate pu(lic
Explain: ,aise awareness o pollution situation to pu(lic in hope
they might do something to cur( pro(lem
Evaluate: x Costs o these measures might outweigh (ene9ts
H $uration needed (eore e%ects can (e elt and there is
no guarantee that the campaign will (e e%ective
H .ay (e e%ective or only a short period o time (ecause
the pu(lic is constantly (om(arded (y such campaigns
that it is starting to lose its intended e%ect
*@ 0dentiy: Su(sidies
Explain: Su(sidise purchase o antipollution eBuipment so that
9rms= CO! does not increase that much (y purchasing
these eBuipment D 9rms more li/ely to (uy the eBuipment
than (eore
Evaluate: x Opportunity cost to other pu(lic proGects
H Jo guarantee that 9rms will (uy the eBuipment
H 5irms need time to incorporate use o new eBuipment:
(ut in the long run pro(a(ly mitigates the pro(lem o
pollution i 9rms use the eBuipment
21
+@ 0dentiy: Cr(an planning
Explain: Aocate actories away rom residential areas eg" Nurong
0sland
6reenery ?to reduce impact@
Evaluate: x .erely shiting the pollution to another area D does not
solve the root o the pro(lem (ut reduces external cost
since less people a%ected (y pollution
H Contentious as to whether greenery helps to reduce
impact
Summation: -ir pollution may not (e due to the country itsel, so
need international L regional cooperation
Can integrate a ew policies or (etter results
22
Policies on Pollution and Congestion caused *y Cars Suary
1@ 0dentiy: E,! per tax unit
Explain: ,estricts car usage ?nowadays rely more on this policy@
0ncreases cost o car Gourney D Buantity demanded or car
travel alls
Evaluate: x Congestion in other areas L small roads
H 0ncrease (usiness cost D pass to consumers
2@ 0dentiy: COE
Explain: ,estricts car ownership
Evaluate: x 0ncreasing aMuence D income elasticity o demand or
cars
H Cannot stem people=s aspirations
H Jeeds vigilance and political will ?in other countries,
government might not (e a(le to have COE@
3@ 0dentiy: E;cient and a%orda(le pu(lic transport
Explain: Aess pollution and congestion on roads
Evaluate: x Jot all countries have resources to (uild an e%ective
pu(lic transport system D A$Cs: no money, $Cs: complex
commuting patterns
H 5or it to (e a%orda(le, possi(ly need government to
9nance" Otherwise i let to the private 9rm, they would
want to charge more to maximi8e pro9ts"
#@ 0dentiy: ,egistration tax, annual road license
Explain: ,estricts car usage
Evaluate: F.ay wor/ i there is vigilance and commitment (y
government
&@ 0dentiy: ,e(ates or green vehicles eg" 24Q o% purchase price
Explain: Aower price D Buantity demanded higher
Evaluate: x Still not widely advocated
H .ay still (e too expensive to a%ord
34
*@ 0dentiy: 'ee/end cars
Explain: ,estricts car usage
Evaluate: x Still not widely advocated
H !eople associate cars with prestige ?eg" -mericans love
or SCRs@
31
Chapter (: 9o!ernent 2nter!ention in the 0ar1et
1" 7ac/ing Externalities
Jegative externalities Sdetails on page 21-23T
!ositive externalities
Su(sidies: external (ene9t internali8ed ?wor/s li/e the tax@
Can (e easily implemented to (ring a(out increase in
production and consumption
$i;cult to valuate external (ene9t generated
3igh government expenditure D high tax rates can
su(seBuently discourage investment in country
5irms lose incentive to (e more productively e;cient D
ine;cient 9rms may survive
$irect provision o merit goods
Social Gustice: merit goods should (e accessi(le to all
and not provided according to a(ility to pay
Aarge positive externalities: eg" ree healthcare com(ats
spread o disease
$ependants: eg" ree education to protect children rom
irresponsi(le parents who ail to provide children Buality
education
0gnorance: consumers may not reali8e how much they
will (ene9t and i they had to pay, they would rather go
without it
2" 6overnment 5ailure
-llocative e;ciency reduced ollowing government intervention to
correct mar/et ailure
!ro(lem o incentives
0mposition o high taxes can distort incentives
3igh marginal tax removes incentive or people to wor/
harder to earn more
$isincentive to produce and consume
$esire (y politicians to get elected: popular policies
introduced ?eg" minimum wage law@
!ro9t motive o private sector largely removed
!ro(lem o inormation
$i;cult to valuate external cost L (ene9t
$i;cult to accurately estimate level o consumer demand or
product
!ro(lem o distri(ution
0ncrease ineBuity
Eg" tax on use o domestic uel ?/erosene in 0ndonesia@ D low
income households may eel greatest e%ect as tax on uel oil
32
may ma/e lie o poor worse since they use proportionately
more domestic uel than others
:ureaucracy and ine;ciency: administrative costsK time lags
Shits in government policy: too reBuent changes D di;cult or 9rms
to plan ahead
33
Chapter :: 8irs and 3ow They Operate 2
1" !roduction in the Short ,un
Short run: at least one 9xed actor
Aong run: period o time long enough or all actors to vary, except
level o technology, which varies in the very long run
A$.,: as more units o a varia(le actor are applied to a given
Buantity o a 9xed actor, there comes a point (eyond which the
extra output rom additional units o the varia(le actor will
eventually diminish
Stage 1: 7! increases at an increasing rate, .! rises D due to
speciali8ation o la(our
Stage 2: 7! increases at a decreasing rate, .! alls, A$.,
sets in D due ine;cient use o 9xed actor
Stage 3: 7! alls, .! alls
.! E change in 7! L change in A
2" 7heory o Costs in the Short ,un
5actor 7otal 5ixed Cost 7otal Raria(le Cost .arginal Cost
$e9niti
on
Sum o all costs o
production do not
vary with the level o
output a/a overhead
costs
.ust (e paid even
without production
Costs incurred or
use o varia(le
actors li/e la(our
Raries directly with
output level
-dditional cost
incurred in producing
an extra unit o
output in the short
run while some
inputs remain 9xed
.C E change in 7C L
change in P
Exampl
es
,ent o actory
(uilding, interest on
capital invested in
,aw materials,
la(our
3#
eBuipment
6raph
-verag
e
curves
-7C E
-RC >
-5C
-5C: amount o 9xed
costs per unit o
output
-5C E 75C L P
-RC: total varia(le
costs per unit o
output
-RC E 7RC L P
Stage 1: -RC alls, -5C alls" Since -5C and -RC all, -7C also alls
Stage 2: -RC rises, -5C alls" Since all in -5C U rise in -RC, -7C still
alls
Stage 3: -RC rises, -5C alls: Since all in -5C V rise in -RC, -7C
rises
3&
3" O(Gectives o 5irms
!ro9t-maximisation: eBuili(rium level o output since there is no
tendency to change
:eore eBuili(rium level, ., U .C so 9rms want to produce
more
-ter eBuili(rium level, ., V .C and rational 9rms will not
produce at this output level
5irm continues production as long as it can cover varia(le
costs
.otivation o owners vs" motivation o managers: separation o
control and ownership D principal-agent pro(lem: managers tend to
pursue their alternative goals while maintaining minimum level o
pro9ts to appease shareholders
,evenue maximi8ation: managers aim to maximi8e 9rm=s short run
total revenue
Aong-run pro9t maximi8ation: managers aim to shit cost and
revenue curves so as to maximi8e pro9ts over some longer time
period
6rowth maximi8ation: managers may aim or expansion to
maximi8e growth in sales volume over time
#" 7heory o Costs in the Aong ,un
,eturns to scale: measure o resulting change in output when all
inputs are changed in the same proportion ?can (e increasing,
decreasing or constant@
A,-C: lowest average cost or given level o output when all inputs
are varia(le
.inimum e;cient scale: smallest plant si8e (eyond which no
signi9cant additional 0EOS can (e achieved
0EOS: savings in costs that occur to a 9rm due to the 9rm=s
expansion, and have (een created (y 9rm=s own policies and
actions
7echnical: concerned with production process
5actor indivisi(ility economies: larger plant si8e ma/es it
possi(le to e%ectively use indivisi(le actors ?com(ine
harvesters, power transmission: large and costly@ D
raises average output and reduces A,-C
Specialisation o la(our: simpler and repetitive Go(s
which reBuire less training > more e;cient eg" car
manuacturing
.anagerial: unctional speciali8ation (y employing experts to
increase e;ciency as a whole
6reater use o existing sta%
$ecentralisation o decision-ma/ing: increasing
e;ciency o management (ecause o aster Oow o
3*
inormation within 9rm D distortions and delays o
inormation avoided
Commercial
:argaining advantage and accorded preerential
treatment (y suppliers (ecause they (uy raw materials
in (ul/
:ul/ sales rom (ul/ advertising and large-scale
promotion
3+
5inancial
Easier and cheaper to raise unds: given lower interest
rate and larger loans (ecause (etter credit ratings and
more collateral
,aise capital through issue o shares to pu(lic who has
more con9dence in reputed 9rms
,is/-(earing
-dvantage in (earing non-insura(le ris/s eg" conditions
o demand or 9nal products and supply o raw
materials
$iversi9cation o products and mar/ets
$iversi9cation in sources o supply
,>d
:etter Buality products D increased mar/et share and
demand
:etter methods o production D more productively
e;cient D lower average cost
'elare: ma/ing wor/ers eel they (elong to the company D
more apt to increase e;ciency and productivity o company
0$OS
Complexity o management
!rincipal-agent pro(lem
:ureaucracy
Strained relationships: impersonal D no loyalty to 9rm D
apathy, stri/es
EEOS: savings in costs that occur to all 9rms in an industry due to
the expansion o the industry
Economies o concentration
-vaila(ility o s/illed la(our: demand or la(our large
enough D special educational institutions L 9rms can
colla(orate to develop training acilities
Jo lac/ o la(our to employ (ecause experts want
to migrate there eg" Silicon Ralley
'ell-developed inrastructure to cater to that industry
,eputation: (uilds up name which consumers associate
with Buality D encourages (rand loyalty and steady
clientele
Economies o disintegration
Su(sidiary industries developed to cater to needs o
maGor industry
Eg" car industry in Napan: range o 9rms speciali8e
in production o di%erent inputs or car
manuacturing D provide output at lower prices to
main industry (ecause speciali8ation allows
31
su(sidiary 9rms to produce at large scale D enGoy
EOS
!rocess waste products into useul products and sell
them to cover CO!
Economies o inormation: pu(lications help improve
productivity o 9rms ?research and expertise@
32
E$OS
0ncreased strain on inrastructure: taxed to limits eg"
congestion D loss o time and increased uel consumption
,ising costs o 5O!: growing shortage o speci9c raw materials
L s/illed la(our
&" 6rowth o 5irms
.ethods o growth
0nternal expansion: ma/e more o existing product or
extending range o product when it (uilds a new (igger plant
.erger
Rertical integration: 9rms engaged in di%erent stages o
productive process
:ac/ward integration vs" orward integration
Eg" Star(uc/s merge with 9rm producing co%ee
(eans D wants guaranteed access to raw materials
3ori8ontal integration: 9rm ta/es over similar 9rm at
same stage o production in the same industry
Eg" Co%ee :ean and Star(uc/s merge
Eg" $:S and !OS:
.ar/et domination
Conglomeration
Eg" (an/ ta/ing over developing 9rm to (uild properties
$iversiy output
*" Survival o Small 5irms
$emand-side actors
Jature o product
:ul/y and perisha(le goods: small, locali8ed mar/ets eg"
resh 9sh
Rariety preerred to standardi8ation eg" ashion
Specialised products: limited mar/ets eg" highly
speciali8ed machines
!restige mar/ets: limited (y price eg" sports cars, luxury
yachts
$irect and personali8ed services eg" lawyers, doctors
6eographical limitations: high transport costs or (ul/y
products D local mar/et rather than national mar/et
Supply-side actors
$EOS set in early: optimum si8e o 9rm small
Rertical disintegration: entire production process (ro/en into
series o separate processes and di%erent small 9rms perorm
each process
Aow :7E
#4
Aac/ o capital
#1
Cnwillingness to ta/e greater ris/s
Aarger 9rm D higher expenditure D greater ris/ o
investment
5ear o uture all in price o 9nal product: expansion o
output D increase mar/et supply D excess supply D lower
prices and lower pro9ts
:anding: small 9rms may (and to gain advantages o (ul/
(uying while still retaining their independence
!ro9t cycles: early stage o product cycle D total demand or
product low
Jon-pro9t maximi8ation attitudes
Owner values independence or wants to maintain
control among amily mem(ers
Contented with reasona(le income rom domestic
mar/et
Cnwilling to ta/e increased ris/s associated with
expanding into oreign mar/et
+" Case Study
5actors: thin/ long run vs" short run, demand-side vs" supply-side
EOS D lower A,-C D a(le to reduce price
!ro9ts plough to r>d D (etter Buality products > urther
reduction in -C
:loc/ new entrants due to enormous 5C D less existing
competitors D increase mar/et share
-lways end EOS with -C
0 a particular industry is stated in the extract, try to give egs o EOS
speci9c to the industry
1" Essay
Survival o small 9rms: or conclusion, use (anding L small 9rms
may want to merge in the ace o glo(alisation
#2
&iscuss whether rising costs liit the si;e o" <rs o!er tie.
#1(%
0ntroduction
Si8e: sales revenue L turnover, level o output, mar/et share
Over time D long run D 9rm no longer constrained (y 9xed actor
:ody
1@ Can limit
Short run cost
,eason: over-use o 9xed actor, ine;cient la(our-capital
com(ination D increase .C D eventual increase in -C
0ncrease costs D all in pro9ts i total revenue is constant D
constrain 9rm=s a(ility to expand
2@ 'ill not limit
Aong run
-ll inputs can vary D 9rm can expand D enGoy all in A,-C due
to internal EOS ?list 2 egs@
5all in A,-C D all in price to ward o% competitors ?erecting
(arriers to entry@ D increase pro9ts D plough into r>d D (etter
Buality products > i yields results D urther all in -C due to
(etter production methods
Si8e o 9rm determined (y demand or 9rm=s product D i 9rm
ma/ing supernormal pro9ts D can still expand in si8e even i
cost increases eg" monopoly selling uniBue products
Conclusion: 3owever, si8e o 9rm over time constrained (y .ES ?list 1
eg o internal $OS@" .ES huge eg" electricity L water compared to .ES
limited eg" ashion"
=an1ing 0erger in Singapore /nalysis
'hy merge)
5ace competition rom oreign (an/s D Singapore wants to
expand (eyond our shores: (ig D enGoy EOS D all in -C D can
compete with oreign (an/s
Core part o Singapore economy D 122+ -sian 9nancial crisis D
(ig sta(le
'hy should not merge)
!ossi(le monopoly power
0ncrease price
Puality o service
#3
,eduction L removal o amiliar products and services D
a%ects consumer satisaction
Jeglect lower-income group
,etrenchment
##
Chapter >: 8irs and 3ow They Operate 22
1" Comparison o the # .ar/ets
7ype !erect Competition .onopoly .onopolistic
Competition
Oligopoly
Jum(er o
(uyers L
sellers
Aarge
Jo one (uyer L
seller can inOuence
price
5irm price ta/er
Only one 9rm
5irm price setter
Aarge
5O! relatively
mo(ile
'hen 9rm ma/es
decisions, does
not have to worry
how its rivals will
react
5ew large 9rms
0nterdependent
:arriers to
entry
Jone
5O! perectly
mo(ile
Jo transaction L
transportation
costs
.inimal sun/ costs
3igh
Jatural: huge sun/
costs ?-5C alls
over very large
output D -C alls
continuously D
enGoys huge 0EOS@,
exclusive
ownership o
essential raw
materials
-rti9cial: non-price
competition,
contrived (arriers
?cartel@, legal
protection:
Jo L Aow
5irm lowers price
D pro9ts spread
thinly over many
rivals D rivals
su%er negligi(ly
,etaliation
unli/ely
Jo collusion D
/een competition
Su(stantial
Jatural
-rti9cial:
legislation,
collusion L
mergers, non-
price
competition,
advertising
#&
exclusive rights
?patents, tari%s to
(loc/ oreign 9rms@
Jature o
products
3omogeneous
:uyers no
preerence or any
9rm
Jo close
su(stitutes
CE$ and !E$ very
low
$i%erentiated:
Buality, design,
location,
promotion
$emand price
elastic
3omogeneous L
di%erentiated
#*
Wnowledg
e
!erect
Seller /nows rivals=
prices, mar/et
costs and availa(le
technology
:uyers /now all
sellers= prices,
Buality and
availa(ility o
products D will not
purchase at a
higher price than
eBuili(rium price
0mperect
Consumers not
ully aware o CO!
0mperect
!roduction methods
and prices
Cost structures
di%er as some 9rms
enGoy more
avoura(le
locations L rentals
0mperect
5irm=s
curve
! E -, E .,
! U .,
Cannot increase
(oth output and
price at the same
time as curve is
downward sloping
! U .,
Some degree o
control over own
prices
Jo single
eBuili(rium price in
mar/et D no mar/et
! U .,
5irm increases
price D other
9rms will not
5irm decreases
price D other
9rms ollow D
#+
demand curve may lead to price
war
!rice rigidity:
menu costs, ear
o harming 9rm=s
image ?all in
price D all in
Buality@
Examples Stoc/ mar/et
5orex mar/et
-gricultural
products: many
armers in A$Cs
Ctilities
Starhu(=s E!A
coverage
S.,7 or JS and
E' lines
:u((le tea CW (rewery
industry
7axi companies
O!EC
.o(ile service
provision
5irm=s S,
eBuili(riu
m
Supernormal, normal L su(normal pro9ts
.C E ., and .C must (e rising
5irm=s A,
eBuili(riu
m
Jormal pro9ts
Jew 9rms will enter
industry to erode
supernormal pro9ts
Jormal L
supernormal pro9ts
5irm will shut down
i su(normal pro9ts
Jormal pro9ts Jormal L
supernormal
A,
eBuili(riu
m curve
#1
!roductive
e;ciency
E;cient
5irm produces at
.ES
0ne;cient unless
(y coincidence
0ne;cient
'ill settle at A,-C
that is not
necessarily at .ES
0ne;cient unless
(y coincidence
5irm=s !OR: all points on A,-C
Society=s !OR: .ES
-llocative
e;ciency
E;cient
! E .C
0ne;cient
! U .C
Could (e seen as premium society pays or product di%erentiation
#2
2" -nalysis o 0mperect .ar/et Structures
7ype .onopoly .onopolistic Competition Oligopoly
Economi
c
e;cienc
y
-llocative ine;ciency: ! U
.C, output (elow optimum
!roductive ine;ciency
H-ine;ciency (ut
increasingly reduced due to
glo(alisation, reduced
customs duties and (arriers
to trade
$ynamic e;ciency: r>d
-llocative ine;ciency: ! U
.C
!roductive ine;ciency: do
not utilise optimal plant
capacity, do not exhaust
potential or urther EOS
(ecause all small 9rms
$ynamic ine;ciency: no
r>d
-llocative ine;ciency: ! U
.C, output (elow optimum
!roductive ine;ciency
$ynamic e;ciency: r>d
Rariety o
products
CniBue
!ossi(le innovation and
new products: :7E
stimulus to the creativity
reBuired to destroy (arriers
D monopoly pro9ts
stimulates new entrants
producing new and
competing products
Aarge variety D increase in
consumer welare
$i%erentiated
,>d and
new
pro9ts
!ro9ts lead to uneBual
income distri(ution: dollar
votes > shit o consumer
surplus to producer
Supernormal pro9ts D
plough into r>d D (etter
Buality products > (etter
methods o production D
lower -C (ut there is no
.ore eBuity: no
redistri(ution o income
rom consumers to
shareholders
Jormal pro9ts: no
additional pro9ts to plough
into r>d
Supernormal pro9ts
ploughed into r>d
&4
guarantee that monopolies
will do this
&1
7heory
vs
empirical
evidence
.ES high D 0EOS D lower .C
than !C industry D lower !
and higher oLp (ut
monopolies charge high
prices (y restricting output
!ractise price
discrimination Shas (oth
costs and (ene9tsT
Jatural monopolies
!erectly contesta(le
mar/ets: costs o entry and
exit (y potential rivals are
8ero, and when such
entries can (e made very
rapidly eg" deregulation o
airline industry in 12+1
3it and run competition:
mar/et contesta(le or
certain seasons eg" parcels
service during estivals
,educes wasteul
'asteul competition
-dvertising provides (etter
consumer inormation
which helps move mar/et
structure closer to !C
model (ut loss o consumer
sovereignty
3igh price rigidity: price
sta(ility
'asteul competition: more
li/ely to engage in
extensive advertising D
encourages price
competition, with increased
sales volume and reaping
o EOS, price reduce urther
:ut possi(le monopoly
power through collusion
:ut multiple (randing gives
consumers misguided
inormation in thin/ing
products are rom di%erent
9rms
!L,LC
P
-,
.C
m
.,
.Cp
c
!c
!m
4
P
c
P
m
&2
competition ?instead o
extensive advertising,
money can (e spent to
produce more goods@
&3
3" !rice $iscrimination
!roducer sells speci9c commodity to di%erent (uyers at two or more
di%erent prices
Same consumer charged di%erent prices or same product or
reasons not associated with cost di%erences
Conditions
!ossi(le
Seller has control over mar/et supply
.ar/et segmentation and identi9a(le groups > no
resale
!ro9ta(le: each mar/et as di%erent !E$
5irst degree
!ractice o charging each customer his
reservation price
Captures all consumer surplus as revenue
Eg" auction sites
0mpractical to charge each customer a di%erent
price
5irm usually does not /now the reservation price o each
customer: consumers do not tell and producers may not want
to spend time and resources to 9nd out
Second degree
Charge di%erent prices or di%erent (loc/s o
the same product to the same (uyer
Eg" photocopying shops
7hird degree
Sells same product at di%erent prices to
di%erent customers
Conditions
7wo or more mar/ets which can (e separated
!E$ o each mar/et must (e di%erent
3igher price charged in mar/et with more price inelastic
demand
&#
Cost: loss o consumer surplus
:ene9ts
5irm: higher pro9ts and may use these pro9ts rom one
mar/et to withstand possi(le price war in (rea/ing into
another mar/et
Consumer
Consumer may not have (een a(le to a%ord good
otherwise
3igher pro9ts may (e reinvested into r>d D (etter
Buality products > (etter methods o production
!rovision o goods that would otherwise not (e
produced due to high costs i production and
consumption o good is one that coners positive
externalities on society
-dditional pro9ts might exceed losses such that
9rm will still continue producing the good
&&
&iscuss the !iew that the pro<t oti!e will always lead to a
"ew large <rs doinating the ar1et "or each and e!ery type
o" product. #1(%
1@ :arriers to entry
5ew large 9rms merge D greater mar/et share D reap EOS D all in
A,-C D all in price D ward o% rivals L (loc/ new entrants ?natural
:7E@ D a(le to maintain supernormal pro9ts
0 plough into r>d D (etter methods o production D urther all in
-C - ma/e more pro9ts
:ut some industries have low :7E ?technology easily replicated@
D low sun/ cost eg" retail, grocery
2@ .ar/et si8e
Small: eg" Singapore television (roadcasting .ediacorp vs"
.ediawor/s
5irms will eat into each other=s mar/et share D erode pro9ts D
so to /eep pro9ts Gust let one 9rm dominate
.ar/et (ig: eg" CS then can a%ord to have ew large 9rms
3@ Jature o product
Aarge 9rms: uniBue products with no close su(stitutes
Small 9rms: availa(ility o su(stitutes, prestige mar/et L services,
locali8ed demand, perisha(les, limited .ES D ashion,
speciali8ation, personali8ed services
#@ 6overnment 0ntervention L pu(lic=s desire
5ew large 9rms will help to reduce price D increase in consumer
surplus D increase in consumer welare
Supernormal pro9ts D plough into r>d to produce (etter Buality
products
'ill still have competition unli/e monopoly D still have the
incentive to (e more cost-e;cient L innovative
&*
Explain what is eant *y producti!e and allocati!e e?ciency.
#1$%
1" -llocative e;ciency
$e9nition: situation in which it is impossi(le to change the
allocation o resources in such a way as to ma/e someone (etter
o% without ma/ing someone else worse o%
-ssumption: no externalities L pu(lic goods D ! E .C D right
amount > type o good produced to maximi8e societal welare
0 .: V .C, last unit o good less than opportunity cost o
producing that unit D society (ene9ts rom not producing that
last unit
0 .: U .C, last unit o good more than opportunity cost o
producing that unit D society (ene9ts rom producing that last
unit
-ssumption aside, .S: E .SC
!erect competition: 9rm price ta/er
., E .C E ! D allocatively e;cient
!ric
e
Puantit
y
4
S ?.C@
$
?.:@
!L,L
C
Puanti
ty
.,
.C
P1 4
!1
&+
2" !roductive e;ciency
Aong run concept
5irm=s !OR
-ny given level o 9rm=s output produced at lowest possi(le
-C D all points on A,-C curve are productively e;cient
Society=s !OR
A,-C minimum D 9rm is at optimum si8e L .ES D all 0EOS
exploited
!L,L
C
Puanti
ty
.,
A,-
C
P1 4
!1
&1
@/ <r should *e encouraged to axii;e pro<ts *ecause this
a1es it e?cient.A &iscuss whether this arguent is true "or a
<r operating in an iper"ect ar1et. #1(%
F'hen comparing e;ciency, only tal/ a(out long run
1@ -llocative e;ciency: ! U .C true or all imperect mar/ets (ecause
they are price setters D deadweight loss to society D allocatively
ine;cient
2@ !roductive e;ciency: Jot operating at .ES ?where A,-C cuts .C@ D
not ully exploited all 0EOS D productively ine;cient
!C industry needs to (e at .ES (ecause it needs to (e as
cost-e%ective as possi(le D price ta/er D cannot pass cost
increase to consumers
Rs" imperect mar/et need not (e at .ES (ecause price setter
D can pass cost increase to consumers
3@ H-ine;ciency
.onopoly: lax in cost control D no existing competition D can pass
cost increase as price increase
:ut monopoly can also (e cost e;cient due to ear o new
entrants
6lo(alisation and international competition
0 mar/et is contesta(le
5orce monopoly to (e cost e;cient
Oligopoly more li/ely to (e cost-e;cient compared to monopoly
(ut wastage o resources D large scale advertising L promotion D
increase cost or 9rm and opportunity cost to society as the
money could have (een used to produce more goods
#@ $ynamic e;ciency
!L,LC
Puantity
-, .,
.C
A,-C
!m
!c
Pc Pm 4
7riangle E
$'A
&2
Supernormal pro9ts in long run D a(le to invest in r>d D (etter
methods o production D all in -C in very long run
Rs" !C industry: no dynamic e;ciency
*4
&istinguish *etween onopolistic copetition and oligopoly.
#1$%
7ype .onopolistic
competition
Oligopoly
Jum(er
o sellers
.any D one 9rm=s
action less li/ely to
a%ect others
- ew large 9rms D
interdependence D one 9rm=s
action li/ely to evo/e responses
rom rivals
Jature o
product
$i%erentiated eg"
retail: restaurants
D a%ect demand
curve D demand
price elastic
3omogeneous L di%erentiated
eg" mo(ile service provision,
petrol companies L taxi
companies, O!EC D /in/ed
demand curve
5irm increase price: rivals will
not ollow D Buantity demanded
or 9rm=s product alls more than
proportionately D demand price
elastic
5irm reduces price: rivals li/ely
to ollow D price war > Buantity
demanded or 9rm=s product
increases less than
proportionately D demand price
inelastic
Jon-
pricing
competiti
on
Smaller scale Aarger scale
Ai/elihoo
d o
colluding
Aess .ore: large mar/et share
:7E Aow L no D low
sun/ cost >
technology easily
3igh D natural: high sun/ cost
eg" utilities, telecomm D 75C
very huge D A,-C /eeps alling D
!L,L
C
Puantit
y
4
-,
!L,LC
Puantit
y
4
-,
!e
*1
replicated D long
run normal pro9ts
enGoys huge EOS D very low
A,-CD new entrants cannot
produce at such low A,-C
-rti9cial: patents
Ensure supernormal pro9ts in
long run
*2
Explain why oligopoly is a coon ar1et structure in any
econoies. #1(%
1@ 5irms want to (e (ig to maximi8e pro9ts
.erger o small 9rms D EOS D all in A,-C D all in price D ward o%
rivals > (loc/ new entrants
.onopoly D attracted (y supernormal pro9ts D monopoly loses its
power
2@ Society may desire oligopolies
Oligopoly D competition D greater innovation through r>d which
monopolistic competition cannot a%ord since it only ma/es
normal pro9ts
Rs" monopoly D lax D H-ine;ciency
3@ 6overnment=s intervention
Singapore government D ace o international competition in a
ree mar/et, local 9rms have to (e (ig eg" (an/ing D go regional D
li(erali8ation and deregulation o industries: mo(ile service
industry, taxi companies
5irms preer operate in oligopolistic structure rather than
monopolistic: monopolies more closely watched (y government
vs" oligopolies harder to o(serve whether they are colluding
#@ Some industries due to huge sun/ cost D oligopolistic L even natural
monopoly eg" utilities, telecommunications, transport, 7R (roadcasting
in Singapore since mar/et si8e is too small D one single player most
e;cient
*3
Explain why go!ernents throughout the world ha!e *een
in!ol!ed in the supply o" ser!ices such as electricity. #1,%
0ntroduction
6overnment D social (ene9ts > social costs which private 9rms
unli/ely to ta/e into account
Electricity D essential good or households and (usinesses
:ody
1@ Could (e a natural monopoly
.ar/et si8e cannot operate with more than one player at .ES:
huge sun/ cost D -C /eeps alling D private 9rms li/ely to (e
monopolistic D charge very high prices D need or regulation
2@ !rivate D does not cater to lower income group vs" government more
li/ely to do so
3@ 3uge initial investment D private 9rm li/ely to charge higher price to
cover costs vs" government can su(sidise rom revenue L taxes
#@ 0 there is competition among a ew private 9rms D wastage >
duplication o resources vs" government: save costs or advertising
&@ Earns revenue or government since it is essential
Conclusion
.ain point is that government does not want to ris/ anything (ecause
electricity and similar services are so essential
!L,LC
Puantity 4
-, ., .C
!m
!c
Pm Pc
-C
*#
Chapter B: 9o!ernent 2nter!ention in the 0ar1et 22
1" ,egulation o Jatural .onopolies
.C pricing: monopoly charge a price that is eBual to .C in order
to achieve allocative e;ciency
:ut monopoly incurs a loss D shut down D pu(lic deprived o
vital service
Jeed to (e supplemented with government su(sidies: costly
to government, (urden on taxpayers
2-tier pricing: consumers pay a 9xed sum o money or access
to service and price per unit consumed to cover marginal cost
Eg" electricity, gas
!roducer meets all CO! and minimi8es loss o social
welare
-C pricing: monopoly charge a price eBual to -C D lower price
and greater output D increase in society=s welare
Jormal pro9ts D via(le in long run
Still not allocatively e;cient
5irms no incentive to /eep costs low since price is at whatever
-C they are at
!ro(lems
$i;cult to o(tain accurate inormation on demand and cost
estimates: 9rms tend to overstate cost, mar/et conditions
change constantly, costly to acBuire new inormation
,egulatory lag: 9rms may have to operate at a loss during
time lag
Costly to administer
2" 7axation
Aump-sum tax on monopolist=s excessive pro9ts D shits -C curve
upwards D pro9ts reduced D normal pro9ts
,edistri(ute income rom producer to consumer
Cse tax revenue to su(sidise welare schemes L production o
merit goods
.ay create disincentive or monopolist to (e cost-e;cient
.onopoly can pass (urden to consumers due to price inelastic
demand
$ynamic e;ciency compromised
3" Aegislation
-nti-trust laws: -nti-trust -ct ?CS@ L Competition Aaw ?Singapore@:
(rea/ up monopoly
Eg" .icrosot Corporation: one 9rm own 'indows operating
system, the other will own applications
*&
.ay not (e applica(le to natural monopoly L monopolies with
great incentives to underta/e r>d
5or(idding certain practices: eg" predatory pricing: setting price
(elow CO! to eliminate competition
0mposing standards o provision eg" !u(lic 7ransport -uthority in
Singapore governs standards o pu(lic transportation to ensure
guaranteed Buality o product
0nsisting on certain levels o competition in industry: Singapore
government increasingly deregulates monopoly
#" Jationalisation
6rowth
0ndustries with maGor investment eg" steel and coal industry,
large spending on r>d reBuired
Cnair competition o state-owned enterprises with private
sector
E;ciency
Jatural monopoly, presence o positive externalities,
eliminate wasteul duplication
Aac/ o competition pressure D lac/ o incentive D H-
ine;ciency
:ureaucracy D heavier (urden on tax payers
Sunset industry
$ecision may (e made or political rather than economic
reasons eg" Gust to /eep employment 9gures high
EBuity
Special pricing policies eg" ree (us rides or pensioners
Service which would otherwise not (e provided eg" (us route
to remote areas
State monopoly no less disadvantageous to consumer than
private one D no higher authority to maintain chec/s and
(alances
Sta(ility
5or strategic reasons eg" national deence
Seen as a move towards communism
&" !rivatisation
Competition
0ncreased competition D cost e;ciency > (ene9ts or
consumers eg" lower prices, wider choice, improved Buality
Cnair competition o state-owned enterprises with private
sector
Could (e worse outcome
**
0 state monopoly replaced with private monopoly,
possi(ly lower output and higher price
0 high :7E
*+
E;ciency
6reater e;ciency
Commercially sounder decision ma/ing eg" higher
returns on investments
6reater accounta(ility to pu(lic D constantly need to
perorm well or ris/ ta/eover (y another 9rm
Jatural monopolies, externalities, eBuity issues
,evenue
,evenue rom selling state assets
3igher corporate tax receipts i privati8ed company is
pro9ta(le
Aong term loss o revenue had the privati8ed 9rm (een
pro9ta(le
*1
No Title Page
No.
22 Chapter 2: Wey Economic 0ndicators &4-&1
34 3ow ar can this inormation lead you to conclude that
there is a rising standard o living in Singapore)
&2-&3
31 $iscuss the actors that contri(ute to economic growth in a
country"
&#
32 Chapter 14: 0ncome and Employment $etermination &&-&1
33 Explain what inormation an economist would reBuire to
decide whether the CS needed <an economic stimulus="
&2
3# Explain what is meant (y the eBuili(rium level o national
income"
&2
3& -nalyse the e%ect on the eBuili(rium level o income o an
increase in the level o savings and an increase in the
level o exports"
*4
3* $iscuss the extent to which the CS 9scal stimulus might
lead to a sustained increase in national income"
*1
3+ 'hat are the main causes o Singapore=s recessions) *2
31 Chapter 11: 0nternational Economics *3-**
32 Explain the theory o comparative advantage" *+
#4 7o what extent does the theory o comparative advantage
explain the pattern o trade (etween Singapore and the
rest o the world)
*1-*2
#1 $iscuss whether protection o%ers any advantages over
speciali8ation"
+4-+1
#2 Explain the rationale or ree trade and discuss the extent
to which 57-s are (ene9cial"
+2-+#
#3 7o what extent can economies (ene9t rom glo(alisation) +&-+*
## $iscuss the opportunities and threats o glo(alisation or
Singapore and other -sian economies"
++
#& Consider the e%ects, other than on the general price level,
o Singapore=s changing tax structure"
+1
#* !olicies to remedy Singapore=s recession +2
#+ Evaluate methods the .alaysian government might use to
slow down import growth and increase new export
(usiness"
14
#1 X7o (e considered successul, an economy needs to
achieve low unemployment, low inOation and sta(le
economic growth"Y 3ow ar do you agree with the
statement)
11
#2 X7o (e considered successul, an economy needs to
achieve low unemployment, low inOation and sta(le
economic growth"Y Explain this statement"
11
&4 $iscuss whether 9scal policy is the most e%ective way or
Singapore to sustain a successul economy"
12
J, Topics
*2
&1 0n the ourth Buarter o 244#, Singapore=s unemployment
rate rose to 3"+Q" $iscuss whether supply-side policies
are the (est way o achieving ull employment in
Singapore"
13
&2 'hy Singapore does not use interest rate policy 1#
&3 !ro(lems with exchange rate insta(ility 1#
+4
Chapter C: Dey Econoic 2ndicators
1" Wey .acroeconomic -ims
Strong sustained economic growth
Aow inOation
Aow unemployment rate
3ealthy :O!
2" Jational 0ncome Statistics
6ross domestic product: value o all 9nal goods and services
produced within a given country during a given period o time
.easure economic growth
Aimitations
Cnderstate nation=s output: omission o non-mar/et
activities ?voluntary welare services@ and underground
economy
$i;culties in measuring SOA
Aeisure time
Externalities
!roduction does not eBual consumption:
expenditure could (e or potential growth
0ncome distri(ution
Other social actors: eg" crime rates, reedom
0nternational comparisons
$i%erence in account procedures and items
included
Exchange rates: need to use !!!
!opulation: need 6$! per capita
$i%erence in climate and culture: di%erent needs D
di%erent costs
$i%erence in underground economy: Sweden=s
underground economy 13Q o 6$!
-lternative measures o SOA
3$0: lie expectancy, education, 6$! per capita at !!!
rates
.E': leisure, 6$! per man hour
6ross national product: value o all 9nal goods and services
produced (y residents o a country, regardless o the location o
production, during a given period
Jet national product: 6J! D depreciation
Jominal: at current prices vs" real: at constant prices
+1
3" 0nOation ,ate
C!0: measures change in price o 9xed (as/et o goods and services
commonly purchased (y households in a speci9ed time period
Aimitations
Jot an accurate measure o COA
Su(stitution (ias: consumers su(stitute toward goods that
have (ecome relatively cheaper D overstates COA
Puality adGustment: C!0 increase might (e due to Buality
adGustments D overstate inOation
Jew products: price declines sharply a ew years ater
introduction D not added to mar/et (as/et until years ater
introduction D price declines not recorded
#" Cnemployment ,ate
Cnemployed: people aged 1& and over who are without wor/ (ut
were availa(le or wor/ and were actively loo/ing or a Go(
5rictional unemployment: unemployment (ecause time ta/en or
wor/ers to search Go(s and or 9rms to search or suita(le wor/ers
Structural unemployment: wor/ers do not have the s/ills needed to
o(tain long-term employment
Cyclical unemployment: unemployment during recession
&" :alance o !ayments
,ecord o country=s international transactions
Current account
Risi(le: imports and exports o goods and services D :O7
0nvisi(le: pro9t repatriation, interest, dividends, unilateral
transers
Capital account
!ortolio: (onds, shares, money in (an/s
$irect: 5$0
5inancial account: something li/e (an/ reserves
+2
Singapore has en6oyed another year o" ro*ust growth in ,$$>,
and the real 9&P growth was >.(E "or the year. / record
1>,$$$ 6o*s were created in the <rst - Fuarters. 3owe!er,
in recent onths, in5ation has pic1ed up and the in5ation
rate "or the onth o" No!e*er alone was 7.,E.
3ow "ar can this in"oration lead you to conclude that there is
a rising standard o" li!ing in Singapore+ #,(%
0ntroduction
SOA D material and non-material well (eing o each citi8en
:ody
-@ .aterial well (eing
,eal 6$! per head: on average how much goods L services each
citi8en gets to consumer
,eal: adGusted or inOation as converted to constant prices
3igh or a developed country
Aimitation: does not show e%ect o changes in population si8e
!er head: e%ect o population si8e eg" i 6$! increases (y
+"&Q (ut population increases (y 2Q, 6$! per head alls
Singapore: over 1 year: changes in population si8e little (ut
could have (een some increase due to open-door policy
0ncome gap D 6ini coe;cient
6ini coe;cient glo(ally used as a measure o income
disparity, with 4 indicating perect eBuality and 1 perect
ineBuality
Singapore: 4"&2 in 244*
0ncreasing gap in Singapore due to glo(alisation: displaced (y
machines, structural changes, inOux o oreign wor/ers,
outsourcing
7ype o spending
Capital vs" consumption goods
6overnment spending
$eence vs" spending that directly increases SOA
1+2444 Go(s
3igh incomes D increase consumer spending which increases
demand or goods and services, generating more Go(s and
employment
$ue to investments (y oreign companies eg" in 244+ plant
speciali8ing in harnessing solar energy set up in Singapore D
indicates investor con9dence
Aimitations: *4Q Go(s went to oreigners, num(er o Go(s
destroyed vs" num(er o Go(s created, si8e o la(our orce may
have changed so it is not that unemployment rates ell,
+3
composition o Go(s ?or lower-s/illed wor/ers)@, ratio o
dependants to wor/ing population
+#
0nOation rate
,eal: adGusted or inOation
Cause: mainly cost actors li/e high imported oil price,
imported ood shortages, partly 6S7
Aower-income group su%ers more in the ace o urther
increase in prices L income gap
:@ Jon-material well (eing
Education D literacy rate
Singapore: high literacy rate due to compulsory primary
education, heavily su(sidi8ed
6overnment emphasis on upgrading o s/ills and training
su(sidies to 9rms or such purposes
3ealthcare D inant mortality rate L lie expectancy
Singapore: individual responsi(ility > government spending D
3. ramewor/ D .edisave, .edishield, .ediund
-void excessive (urden on state and tax payers
'ith increasing medical costs > ageing population, POA o
some ?lower-income group)@ may (e a%ected
.eans-testing
Aeisure: 6$! per man hour
Others: negative externalities eg" pollution
Conclusion
Other indicators: 3$0, .E', 6J!
+&
&iscuss the "actors that contri*ute to econoic growth in a
country. #1,%
0ntroduction
Economic growth measured (y 6$! growth rate and is the means to
improve living standards
:ody
1@ Puantity and Buality o resources
Puantity and availa(ility enhance growth potential
Aand: includes natural resources li/e mineral deposits and oil
eg" oil-rich Saudi -ra(ia
Aa(our D la(our-a(undant countries li/e China and 0ndia
Entrepreneurship D availa(ility o talents and ris/-ta/ing
individuals eg" sel-made entrepreneurs in 3ong Wong
Puality can (e enhanced through government e%ort and policies
0ncrease la(our productivity through training and education
Entrepreneurship
Capital D government e%orts to ma/e it more conducive or
9xed capital ormation
2@ ,ole o government
-ugment Buality o la(our through education and training
Strategise economic direction eg" change structure o economy in
ace o loss o comparative advantage and nurture comparative
advantage in new areas
Conducive environment or (usiness
!olitical sta(ility
!rice sta(ility: reOection o good macroeconomic management
(y government, competitive price and lowered CO! D a(ility to
attract 5$0 due to lower wages
E;cient inrastructure
-ttractive corporate taxes
Aess (ureaucracy and red tape
-(ility to explore new mar/ets L help (usinesses go glo(al
3@ Aevel o consumption, investment and government spending in
economy
3igh consumption conducive when economy has unutili8ed
resources while high savings conducive when economy near or at
ull employment
Savings provide investment unds necessary or growth
6overnment 9scal and interest rate policies
3igh export revenue due to competitiveness
+*
++
Chapter 1$: 2ncoe and Eployent &eterination
1" -ggregate $emand
7otal level o spending in an economy
-$ curve slopes downwards (ecause
'ealth L real (alance e%ect: 6!A higher D purchasing power o
9nancial assets alls D discourages domestic consumption D
lower level o output
0nterest rate e%ect: higher 6!A D increase demand or money
rom households and 9rms > might shit wealth out o
9nancial assets D decreasing supply o loana(le unds D
increase in interest rates D more expensive to purchase goods
and services on credit D households purchase less goods >
(usinesses invest less D lower national output
0nternational su(stitution e%ect: higher 6!A D locals (uy more
oreign goods > oreigners (uy less domestic goods D net
exports all D lower national output
5actors that cause a shit
Changes in expectations: income and pro9ts, real wealth,
inOation
Changes in government policies
Changes in world economy: income a(road, oreign price
level, exchange rates
2" -ggregate Supply
7otal output o goods and services that 9rms as a whole would li/e
to produce and sell at each possi(le price level
Shape
3ori8ontal: producers can produce all they want due to
a(undant resources
Cpward sloping: output rises (ut pressure on prices
Rertical: need time to adGust to new cost structures
5actors that cause a shit
Change in input prices
Change in Buality o la(our input
Change in expected rate o inOation
Change in technology
6overnment policies ?local and oreign@
+1
3" Consumption 5unction
-ct o using income or the purchase o goods and services to
satisy current wants
C E a>(I
a represents autonomous consumption: level o consumption
that does not vary with income D still need to consume even
though no income
(I represents induced consumption: household expenditures
that vary directly with income
(: .!C E change in C L change in I
Jon-income determinants
'ealth: amount o money, 9xed assets and 9nancial assets
households have
Expectations o uture prices and income
$istri(ution o income
0nterest rate and availa(ility on credit
7astes and attitudes
#" 0nvestment
-ct o acBuiring new 9xed capital assets and accumulating stoc/s
and inventories
-utonomous: not inOuenced (y national income vs" induced
Expected rate o return U rate o interest D will invest
5actors that cause shit
:usiness con9dence and expectations
Cost and availa(ility o capital goods
,ate o change o income: accelerator e%ect
6overnment policies
Consumption
Income
Y = C
C = a + bY
W
X
Z
W = dissavings, X = breakeven point, Z = savings
+2
Change in technology
14
&" EBuili(rium Aevel o 0ncome
-t OI1
-E E aI, I E (y -E V I
unplanned inventory investment
a(
next period 9rms reduce output
I1 alls to eBuili(rium I4
-t OI2
-E E dI2, I E cI2 -E U I
excess demand, 9rms draw on
stoc/s
unplanned disinvestments cd
next period 9rms increase output
I2 rises to eBuili(rium I4
*" 7he .ultiplier E%ect
Interest rate
Investment
AE
National output
Y = AE
Y
c
d
b
a
Autonomous
consumption
Y!
-
:
11
- change in any component o aggregate expenditure ?ie" C, 0, 6 or H@
will wor/ through the multiplier to change the national income more
than proportionately" -s shown in the diagram (elow Sreer to diagram
a(oveT, an increase in -E will cause the -E curve to shit rom -E4 to
-E1" -t the original level o national income I4, since -E is now greater
than actual national output, there is an unplanned all in stoc/s o -:"
0n the next period, 9rms would increase output, causing the level o
national income to rise eventually to I1, where the new -E eBuates the
national output"
7he initial rise in income due to ?any rise in component: depends on
Buestion context@ will induce consumption (y recipients o the income"
-s one man=s spending generates income or the next person, the
national income will eventually rise (y a multiple o the initial rise in
the -E" -ssuming an initial inGection o Z144m and a constant .!C o
4"&, the national income will eventually rise (y 2 times the initial
inGection"
0n short, the multiplier measures the change in national income as a
result o the change in -E" 0t has a direct relationship with the .!C,
expressed as /E1L?1-.!C@"
Evaluation
.agnitude o increase in JI depends on si8e o multiplier
Aarger the .!', smaller the multiplier
.ay lead to demand-pull inOation i near or at ull employment
:O! D inOation a%ects price o exports and may have adverse e%ect
on :O7
+" 0nOationary L $eOationary 6ap
-mount o -E that alls short o ?cd@L exceeds ?a(@ the level
necessary to achieve 5E
12
Explain what in"oration an econoist would reFuire to decide
whether the GS needed @an econoic stiulusA. #1$%
0ntroduction
'ea/ economy D assume pending recession D all in 6$! or 2
consecutive Buarters ?negative 6$! growth@
$evelopment
5all in real 6$!
Components o -$: all in -$ D all in 6$!
Consumption level o households: due to all in income L
saving in ear o retrenchment
5all in investment: (usiness pessimism, induced: all in 6$! D
all in investment
0nOation: all in 6$! D all in -$ D all in 6!A L all in inOation rate
Jeed inOation rate to arrive at real 6$!
5irms and (an/ruptcy, 9rms and decreasing pro9ts
Stoc/ mar/ets: indices all D con9dence all
O,
5all in real 6$!
'hat causes all: CL0L6LH-.: :O7: more relevant or Singapore since
Singapore=s recession mainly due to :O7
6$! D income, wages and pro9ts, (an/ruptcy
0nOation: all in 6!A (ut stagOation ?economy wea/ening (ut price
increasing@ D price increase in CS not due to recession: not -$
actors (ut -S actors
Cnemployment rate D rough guide: #Q - cyclical D no Go( D demand
de9cient unemployment
Explain what is eant *y the eFuili*riu le!el o" national
incoe. #1$%
JI: as measured (y 6$! ?de9nition@
EBuili(rium: no tendency to move rom that eBuili(rium
$escri(e (rieOy components o -E
C ?households@: shape o -E ollows shape o consumption
unction CEa>(y
Simple explanation o components
Sign o #& degree line: every point is an eBuili(rium point where
-EEI
EBuili(rium level o JI: planned -E E I" -E curve cuts #& degree line
-dGustment to eBuili(rium
13
Conclusion: when economy is in eBuili(rium, may not (e at ull
employment L recession
1#
/nalyse the e'ect on the eFuili*riu le!el o" incoe o" an
increase in the le!el o" sa!ings and an increase in the le!el o"
exports. #1(%
-" Savings
I E C > S
0ncrease in S D all in C D -E alls D -E curve shits rom -E1 to -E2
Show adGustment to eBuili(rium
Summation: increase savings D all in C D wor/s through multiplier D
all in JI (y a ew multiples
Evaluation
Savings can (e good or economic growth D increase supply o
loana(le unds D interest rate alls D cost o (orrowing alls D
increase 0 D increase productive capacity D increase -S D
increase JI
Summation: S decreases actual growth (ut increases potential
growth
:" Exports
0ncrease H D increase -E D -E curve shits rom -E2 to -E1
Show adGustment to eBuili(rium
Evaluation
0ncrease H D i have unemployed resources D increase JI
0ncrease H D i near L at 5E D JI may not increase as ast L
demand-pull inOation
$iscuss multiplier process in detail
Conclusion
.agnitude o change in national income depends on si8e o
multiplier
Aarger .!', smaller W
Eg" Singapore
1&
&iscuss the extent to which the GS <scal stiulus ight lead
to a sustained increase in national incoe. #1(%
0ntroduction
5iscal: increase 6, decrease 7
Sustained: actual > potential growth
$evelopment
3ow 9scal stimulus wor/s: lower taxes ?increase CL increase 0@ >
increase 6 D increase -$ D increase JI: actual growth, cannot
sustain
.ultiplier in detail
Evaluation: depends on si8e o multiplier
CS- D .!. could (e high (ecause hug e trade de9cit D may
reduce si8e o /
Crowding out e%ect: increase in 6 i (orrowed rom pu(lic D
decrease in supply o loana(le unds D increase in interest rate
D crowd out CL0 D cannot sustain
E%ects o taxes on C and 0 unpredicta(le due to pessimism
,eaches 5E: cannot sustain
7hereore need supply-side measures to increase -S or sustained
growth D potential growth L increase in productive capacity
0ncrease in 6 on inrastructure D acilitates (usiness D increase -S
7ax D increase JI ?potential@
$ecrease personal taxes D increase incentive to wor/ D
increase -S
$ecrease corporate taxes D increase 0 D increase A,-S
Condition: i re(ates are permanent (ut according to
pream(le, re(ates seem to (e one-o%
Conclusion
.ore policies to (oost -S D education and training D increase
productivity D increase A,-S
1*
)hat are the ain causes o" SingaporeAs recessions+ #1$%
1@ 5actors leading to all in -$
External actors D pessimism eg" 211, S-,S ?only caused a
slowdown in Singapore=s economy@, 122+ -sian crisis D CL0 all
7rade de9cit: value o H ell due to 211
Aose C- D goods more expensive
5all in income o trading partner
2@ External recessions
CS recession D CS 6$! all D (uy less Singapore goods D Singapore=s
H alls D -$ alls D 6$! alls ?multiplier e%ect@
Singapore may not (e that a%ected D can ride on growth o China L
0ndia
:ut China huge trade partner o CS-
Singapore: international momentum
Extension o .,7 D increase 6 D / D increase JI
0,: increase 0 D increase JI > tourist revenue
IO6: tourist revenue
Cannot sustain since / is small
3@ Supply-side actors
Supply shoc/s: 12+3 oil crisis D increase CO! D all in -S
:ut overwhelming cause is due to -$, (ut recogni8e that all in -S can
also create a recession
1+
Chapter 11: 2nternational Econoics
1" 7heory o 0nternational 7rade
Exchange o goods and services (etween countries, involving the
use o di%erent currencies and crossing international (orders
7heory o comparative advantage: produce good at lower
opportunity cost than another country
Sources
$i%erences in actor endowments that can change over
time
$i%erences in technology
$ynamic comparative advantage
-dvantages o trade
6reater world output and higher consumption o goods and
services ?possi(le at previously unattaina(le levels@
,eduction in unit cost o production: EOS, countries gain
experience over time
Stimulate economic development and growth: enlarge mar/et,
increase competition in home mar/et
5acilitate transer o technology and ideas: increase e;ciency
o production D economic growth, help developing countries
leap rog stages
!romotes (ene9cial political lin/s
:ene9ts consumers: more choice and higher satisaction
levels, lower prices compared with local products, (etter
Buality products
$ynamic gains rom trade: gains grow larger over time
$isadvantages o trade
Cnair competition and dumping L unnecessary government
su(sidies
Over dependence on other countries
0mport harmul goods
7erms o trade: rate at which country exchanges its exports or
imports
5actors
Change in demand conditions: population, income,
availa(ility o su(stitutes
Change in supply conditions: technology, depletion o
natural non-renewa(le resources
ConseBuences o change in 7O7
Change in :O7 and SOA: dependent on !E$ o exports
and imports, cause o change, responses that ollow
,eallocation o resources
Change in consumption patterns
11
12
2" :arriers to 7rade
Jatural
3igh transport costs D raises CO! and lowers relative
e;ciency
Aac/ o mo(ility o actors
0ncreasing CO! due to A$., (eyond certain level o output
Other mar/et imperections: imperect inormation and
mar/et conditions D may not speciali8e to extent that theory
suggests
-rti9cial: protectionism
7ari%: custom duties imposed on imports o goods and
services (y government
$epends on !E$ o imports and how much oreign
suppliers are willing to a(sor( D may not protect
domestic producers, Gust a source o government
revenue
Cuts volume o imports D improve :O7 D exchange rate
appreciates D exports more expensive a(road D reduce
exports in the long run
Jon-tari%: import Buotas
6reater certainty o protection since revenue earned (y
oreign suppliers may not (e as (adly a%ected as tari%
Export su(sidies: cash grants (y government to local
producers
,educes CO! D sell more o good at prevailing price
.ay induce complacency
$rain on government unds
5oreign exchange control: government control over sale and
purchase o oreign exchange
5inancial Buotas, charges made on people purchasing
oreign currencies
.alaysia used this method to recover rom 122+ -sian
9nancial crisis
$i;cult to enorce and might result in (lac/ mar/et or
oreign exchange
'or/s (est in communist countries (ecause
government monopolises money conversion
Others: em(argo, trade agreements, international cartels
Jew protectionist measure: technical speci9cations and
standards which discriminate in avour o domestic
producers
-dministrative regulations regarding import procedures
to delay and reduce volume o imports
24
Roluntary export restraints ?RE,@: exporting country
voluntarily reduces its exports under threats o all-round
trade restrictions eg" CS automo(ile industry vs" Napan=s
21
3" -rguments or !rotectionism
Economic
!rotect inant industry eg" Singapore had protective duties
covering [344 items in 12*4s
$i;cult to identiy currently unpro9ta(le industries that
might acBuire comparative advantage in the long run
$i;cult to decide when industry can (e independent o
protection
Encourage ine;ciency
,educe :O! de9cits
$ependent on !E$ o imports and exports
Jeed to loo/ at root causes
0nvite retaliation D reduced exports D reduced total
volume o world trade
!revent unair trade practices
$umping D distorts mar/et D Gusti9a(le
0 consumers (ene9t in the long run rom lower import
prices D not Gusti9ed
$iversiy economic structure
.ay not support theory o comparative advantage
!attern o comparative advantage can change over time
naturally ?discovery o new raw materials@ L through
deli(erate policies
!rotect mature industries
7rade unions
.isuse o resources since protectionism will not increase
total employment
,etaliation
!rotect against low-wage oreign la(our
,eGection o theory o comparative advantage
Could shut down industries and divert resources to more
productive ones
Consumers denied opportunity to (uy rom cheaper
source D (ene9ts o trade lost
0ncrease domestic production: counter-cyclical measure
0ncrease government revenue
7o (e e%ective, should (e imposed on goods which are
price inelastic
,etaliation
,etaliation
Cnhealthy or word trade and ine%ective
$istort and reduce di%erences in comparative
advantage
'elare loss
22
.isallocation o resources: 9rms unnecessarily retained
$i;cult to remove protectionist measures once in place
Other industries may demand or protectionism
:etter alternative: stimulate export competitiveness (y
increasing -S
!olitical
Essential to produce on military weapons in case o crisis D
su(sidies industry to ensure continuous supply eg" CS 1214s
semiconductor industry or high-tech weaponry vs" Napan=s
Jation poorer (ut value o national security higher
7rade as weapon o oreign policy eg 6ul war: CS imposed
trade sanctions against 0raB
Social
Su(sidise agricultural sector to avoid urther depletion o
population in rural areas L prevent urther rural-ur(an
migration to overpopulated cities
,estrict import o harmul goods
#" 7ari% $iagram
Aoss in consumer surplus
E a > ( > c > d
a (ecomes producer surplus, c (ecome tax revenue, ( > d (ecomes
deadweight loss
Consumption e%ect:
" ,educe consumption rom OP# to OP3
" ,educe consumption o imports and switch to domestically
produced su(stitutes
" !ay extra amount ?!2 D !1@
" Consumer surplus alls
23
!roduction e%ect:
" Expand production rom OP1 to OP2
" 0ncrease revenue
" !roducer surplus increases
6overnment revenue e%ect:
- ,eceives as tax revenue extra amount paid (y consumers or the
imported Buantity
2#
Explain the theory o" coparati!e ad!antage. #1$%
0ntroduction
Comparative advantage: speciali8e (ased on lower opportunity cost
D less o the other good oregone
:ody
-ssumptions: 2 countries 2 goods, no transport costs, constant
returns to scale: A,-C remains constant
-ssume CS- and China each has 24 units o resources, initially use 14
units to produce each good
7a(le 1: :eore speciali8ation
Cars 7extiles Opportunity
Cost
CS- 144 *4 1C: 4"*7
China & 14 1C: 27
7otal 14& +4
CS-: C- in production o cars D give up less textile
China: C- in textile D give up less cars
CS- devotes 1L14 more to car, China complete speciali8ation"
7a(le 2: -ter speciali8ation
Cars 7extiles
CS- 114 &#
China 4 24
7otal 114 +#
'orld output increases
7erms o trade: mutually (ene9cial 4"*7 V 1C V27 D 1C traded or 17
CS- exports 14 cars, gets 14 textiles
7a(le 3: -ter trade
Cars 7extiles
CS- 144 *#
China 14 14
7otal 114 +&
6ains rom trade: higher level o consumption
Conclusion
Comparative advantage D gains rom trade, more choices, increase
growth
Aimitations o C-: relax assumptions
2&
To what extent does the theory o" coparati!e ad!antage
explain the pattern o" trade *etween Singapore and the rest o"
the world+ #1(%
0ntroduction
Singapore=s constraints D lac/ o natural resourcesK small
geographical si8e and population D human capital our only resource
Singapore=s relative strengths D good geographical location
Our constraints and strengths determine where our C- lies
!attern o trade: type o exports and imports o goods and services
:ody
-@ Ies
7ype o exports
C-
12+4s 7extiles and simple
manuactured products
Aa(our-intensive industries:
Cheap, uns/illed and surplus
la(our
1214s .ove towards higher-end
products and electronic
productsK moving towards
services li/e (an/ing and
9nance, tourism
Capital-intensive industries:
.ore educated wor/orce and
improved technology
Aoss o C- in la(our-intensive
industries to countries li/e
.alaysia and 0ndonesia which
have huge la(our orce
1224s
and
(eyon
d
Electronics, pharmaceuticals,
telecommunication
eBuipment, dis/ drives,
integrated circuits
Services: (an/ing and 9nance,
tourism, educational hu(,
medical hu(
3igh value-added, /nowledge-
intensive, technology-
intensive industries:
3ighly Buali9ed la(our orce,
r>d inrastructure
Continue to lose C- in
manuacturing industries to
countries li/e China and 0ndia
7ype o imports
Aac/ o C-
0mports: consumer items,
ood, raw materials, capital
goods or development and
inrastructure (uilding
Aac/ o natural resources
especially lac/ o land or
agriculture and to support
huge export (ase
2*
:@ Jo, there are other actors
7rade (ased on world demand
C- only gives rationale or trade (ut countries try to augment
and develop C- in industries with world demand
5or country to develop and provide opportunities or its population
o diverse talents, needs to have spectrum o industries
$iversi9cation to reduce negative conseBuences o over-
dependence
$esire not to rely on oreign supplier or essential goods
Jational pride L security eg" Jewater
,e-exports
2+
&iscuss whether protection o'ers any ad!antages o!er
speciali;ation. #1-%
0ntroduction
!rotectionist measures
-dvantages o speciali8ation (ased on C-: gains rom trade,
increase H D economic growth, wider choice, EOS D all in A,-C D
competitive prices, e;ciency in resource allocation in the world,
welare gain i world price cheaper than domestic price
:ody
0nant industries
,ationale: J0E, reasons o economic diversi9cation D impose
Buotas L tari%s D allow new industries to grow and develop
EOS
S, implications: applies or all reasons to protect as long as
use Buotas L tari%s
Society: $'A
Consumers: increase price
Other 9rms ?some extent@: increase CO! i good
protected is important input eg" steel
A, implications
6row D enGoy EOS D lower A,-C D lower price o exports D
a(le to compete internationally D :O7 improves i
demand is price elastic D increase in total revenue rom
exports D increase exports D increase JILJ
0 do not grow
0 government su(sidi8ing D waste o resources D could
have (een used elsewhere D education L healthcare L
develop inrastructure
Consumers and society continue to su%er rom
ine;ciency D higher prices
Shut down D massive retrenchment
Summation: 7o the extent that inant industries grow"
3owever, the inant industries normally do not grow and may
(ecome ine;cient due to government su(sidies"
!rotectionism cannot (e long term"
0ne;cient industries
Eg" CS steel industry, textile: <slap= tari%s L Buotas on Chinese
textiles L imported steel D allow ine;cient 9rms to eventually
(e a(le to (e more e;cient D develop new technology L adGust
cost structures
Eg" steel D a%ects CO! in many other industries eg" housing,
cars D cost-push inOation D a%ects domestic mar/et and
erodes export competitiveness
21
Summation: protect Go(s in ine;cient industries (ut more Go(s
lost elsewhere eg" car industry
-lternative solution: develop C- in new industries: capital-
intensive, technology-intensive, services, training
22
$umping
5oreign country selling goods (elow its actual CO! D local
9rms driven out D eventually oreign country gains monopoly
power
$i;cult to ascertain i it is dumping L country really has C- in
production o these goods D Chinese textile > a(undance o
cheap la(our
Could (e (aseless accusation
Solution: orce 9rms to (e more cost-e;cient ?don=t protect@,
training ?su(sidise 9rms or training@, su(sidise r>d
Economic diversi9cation
,educe over-dependence on a ew /ey products L industries
Eg" \am(ia: copper exports D what i world demand alls
:alance o trade de9cit D value o imports U value o exports
Eg" CS huge trade de9cit D CS- consumes a lot, including on
imports D (reed urther ine;ciency
-lternative solution: increase interest rates D encourage
people to save > discourage consumption
A,: high C D low S D low investment D a%ects productive
capacity D low A,-S ?ine;ciency@
Jational security
Eg" steel D war weapons
Conclusion
0 country protects, other countries retaliate D world ine;ciency
144
Explain the rationale "or "ree trade and discuss the extent to
which 8T/s are *ene<cial. #,(%
0ntroduction
5ree trade D (ased on C- D lower opportunity cost ratio D gains rom
trade
57- D remove tari% and non-tari% (arriers D in theory D in practice eg
Singapore=s 57-s D also include investment
$evelopment
-@ Expounding theory o C- D di%erence in actor endowments
-ssumptions
3 ta(les
Summation: gains rom trade, increase choice L increase society=s
welare, increase economic growth and SOA
:@ -re 57-s (ene9cial
On trade
0ncrease H D / D increase JI L J D associated (ene9t o large-
scale production D EOS D all in A,-C D a(le to price goods
more competitively D may improve :O7
Singapore: small domestic mar/et
China: may not (e as dependent on H revenue (ecause
people are getting more aMuent" C increase can sustain itsel
(ased on internal economy
Cam(odia L Rietnam: J0Es (ecause people are poor
:ut increase H D demand-pull inOation when near L at 5E D
price o exports increase D volume o exports D may a%ect :O7
D JI alls a%ects economic growth
0nOation
-ccess to cheaper consumer goods > raw materials L inputs D
all in CO! D all in price o exports D H increase D may increase
:O7
5all in COA D extra savings can (e used to (uy domestic goods
D increase C L JI
!rice o consumer goods
Puantity o consumer
goods
Sdom
$dom
!w
!
c
14 4 34 &4
a (
141
142
a>( E welare gain
a: production e%ect, ine;cient domestic 9rms orced to
reduce output rom 34 to 14
(: consumption e%ect: increase C rom 34 to &4
5rom diagram, 9rms orced to (e more cost-e;cient D cut
costs in order or pro9ts not to (e eroded since ! is at !w
7rade creation L diversion
Creation: increase volume o trade D rom high-cost producer
to low-cost producer D increase welare o people
$iversion: rom low-cost non-mem(er to high-cost mem(er D
away rom optimum allocation o resources
$raw diagram to illustrate e%ects
No(s: increase in H D increase J
:ut loss o C- D orced to restructure D move towards C- D
structural unemployment
Outsourcing D 9rms (ene9t (y relocating D increase :O7 D
increase 6J!
:ut cost Go(s in previous country
On 5$0
Outward investment to China rom Singapore
0ncrease investment D increase productive capacity D increase
-S
0ncrease investment D increase -$ D increase J L JI
7ranser o technology
Cseul or J0Es D lac/ wealth L local entrepreneurs eg"
Singapore depends on .JCs
:ut ootloose
:ut local 9rms cannot compete
Others
Rulnera(ility to external shoc/s due to over-dependence D
recession L imported inOation
0nterdependence: economies (ecome intertwined eg" CS-
recession D Singapore recession, worldwide ood prices
increase
Conclusion
!ossi(ility o uneBual gains
Singapore
.ore S7 capital outOow to China (ut A7 pro9ts D increase
6J!
Aoss o Go(s as companies go to China
Shited ocus to capital-intensive L technology-intensive
D ocus on services
143
6ain D education: Chinese students come here to study
14#
CS-
CS- spend a lot (ecause lost C- in lots o goods D need
to (uy more imports D worsen trade de9cit D less
savings D less investment D reduced productive capacity
0ndia
$emand or capital goods
Summation
57-: macroo(Gective D increase JI D increase SOA, all in price
D increase :O7
7rade creation U trade diversion
F57- means reer trade D no restrictions among countries vs" ree
trade, so arguments similar, only di%erence is trade creation L diversion
14&
To what extent can econoies *ene<t "ro glo*alisation+
#,(%
0ntroduction
6lo(alisation D ree movement o goods and services, capital, la(our
Economic integration: 57-, customs union
$evelopment
-@ 6oods and services
7rade (ased on C- D gains > EOS
!oor D J0Es > Singapore ?small domestic mar/et@ D increase H D
increase JI L J D increase SOA
-ccess to cheaper goods
Consumer goods D lower COA
,aw materials D Singapore L 3ong Wong
Capital goods or inrastructure D Cam(odia L Rietnam D
increase societal welare > potential growth
$raw in ree trade diagram and illustrate gains
7rade diversion vs" trade creation: diagram
Aoss o C- eg" CS- steel and textile industry, Europe car industry D
(ut restructure and move towards new C-
0nter-dependency eg" CS- a%ect China L 0ndia
Over-dependency due to C- and complete speciali8ation D that=s
why countries tend to partially speciali8e L diversiy their economies
E%ect on prices D imported inOation
7ari%s due to protectionism: draw in diagram
:@ Capital ?associated technology@ D 5$0 ?inward and outward@
,eceiving country
0ncrease inward investment D increase -S L -$ D increase JI L
J
6rowth o local supporting industries
7ranser o technology
5ootloose D may cause massive retrenchment i suddenly
leaves
Aocal industries cannot compete D lac/ o S.Es
Source country
S,: loss o Go(s
S,: outOow o capital
A,: restructuring
A,: .ore companies internationally D increase 6J!
A,: Create Go(s
14*
C@ Aa(our
5or A$Cs, provide Go(s or la(our D cheap
.ay (e S, exploitation D (ut vs" no Go(s
Eg" Rietnam D inOation [12Q - lower income wage rise V price
rise
5ree Oow o la(our D inOux o oreign wor/ers D depress wages in
Go(s where supply elastic ?a(undant supply o manual wor/ers@ D no
s/ills
Eg" Singapore L EC D inOux o wor/ers into CW
Solution: provide training
:rain drain
0neBuity issue
.anual wor/ers wages all
S/ills demanded glo(ally D increase demand or wor/ D
increase wages or s/illed Go(s
$ual economy
Caters to international mar/et D people grow richer
Caters to domestic mar/et D people do not really get
richer
14+
&iscuss the opportunities and threats o" glo*alisation "or
Singapore and other /sian econoies. #1,%
6lo(alisation: high degree o reedom o movement o goods and
services ?trade@, capital, technology ?.JCs@ and talent ?la(our@
1@ 6lo(alisation and ree trade
Opportunities
Export revenue and higher rate o economic growth
0ncrease in H D / D increase J L JI
0ncrease . o capital goods L raw materials eg" Rietnam L
Cam(odia L Singapore
7hreats
Competition causes countries to lose C-
Singapore lost C- in la(our-intensive industries in mid-
14s to J0Es li/e China and 0ndonesia
S,: structural unemployment
A,: e%orts may pay o% i country reali8es C- in new
industries
Singapore shited to capital-intensive then /nowledge-
intensive
Specialisation and over-dependency on ew maGor products
0 some countries adopt protectionist measures, trading
partners could (e adversely a%ected
0nterdependency o countries
Economies o maGor trading partners ta/e a slide,
countries will (e a%ected eg" 211, CS recession
2@ !resence o .JCs and out-sourcing
Opportunities
0nOux o .JCs in -sian countries helped their economies grow
Creation o Go(s and contri(ution to 6$!
7ranser o technical /now-how
Outsourcing eg" CW 07 companies phone service operations to
0ndia
7hreats
5ear o over-dependency: .JCs ootloose D i pull out, adverse
e%ect on Go(s and economic growth
$earth o local 9rms
3@ 0nOux o talent
0ncrease Buantity o resources D shit !!C outwards
:ut cheap oreign la(our D wages in city all D lower income
141
Consider the e'ects, other than on the general price le!el, o"
SingaporeAs changing tax structure.
-@ 0nOation
E%ect o increased reliance on indirect taxes D de9nite inOation D
shit in S,-S
0ncrease indirect taxes D increase CO! or all 9rms D all in -S D
all in JI ?contractionary@ > rise in 6!A D cost-push inOation D
:O7 may worsen ?depending on !E$@
E%ect o decreased reliance on direct taxes D may or may not have
inOation D shit in A,-S and -$
5all in direct taxes D CL0 increase D -$ increase D JI increase
?growth@ L J increase D i near L at 5E: demand-pull inOation ?a
little may (e desira(le (ecause increase output@ D :O7 worsen
?depending on !E$@
Aower income taxes D income L su(stitution e%ect D may
increase incentive to wor/ D increase -S D increase JI D all in
6!A D :O7 improves
Aower corporate taxes D increase 0 D increase JI D all in 6!A D
:O7 improves
Singapore: /eep L attract talent D increase e;ciency
-ttract .JCS D increase 5$0 D increase -$ ?increase J@ and increase
-S ?increase productive capacity@
:@ EBuity
0ncome taxes ?direct@ D progressive D higher the income, the higher
the percentage to tax D reduce income gap
0ndirect taxes D regressive D lower the income, the higher
percentage to tax D increase income gap D a%ects poor more
Cost-push inOation D increase COA D a%ects poor more
Aower direct taxes D increase income gap (ecause rich pay
proportionately less ?usually reduce the percentage tax o rich
more@
Corporate taxes 9xed at 11Q: neither progressive or regressive
C@ 7ax (ase
0ncrease indirect taxes D widens tax (ase D (etter to rely on due to
ageing population D increase num(er o dependants L decrease in
si8e o la(our orce
$ecrease direct taxes: on wor/ing population and 9rms
$@ -(ility to evade
0ndirect taxes: di;cult to evade
$irect taxes: can evade (ut not in Singapore ?Gailed@ D can under-
declare
142
114
Policies to reedy SingaporeAs recession
,ecession in Singapore: externally induced: all in H
1" 5iscal !olicy
0ncrease 6 to reduce (usiness costs > training D need to su(sidise
9rms and training grants
5all in CO! > increase productivity D increase A,-S D all in
6!A D price o exports all D volume o exports increase
Evaluation: (uy only i they recover rom recession
:ut increase 6 to (oost increase in JI limited e%ect in Singapore
Small / D need huge increase in 6
!rudent
'hy not increase 6 on pu(lic wor/s
Aimited land
2" .onetary !olicy
'hy not policies to directly increase H with exchange rate
management
Short run solution: depreciation o SZ - price o exports all in
oreign dollars D volume o H increase
6overnment preers sot option
!rice o imports increase in SZ - import all raw materials D CO!
increase D goods more expensive
Aong term policy stance: gradual and modest appreciation o SZ -
price o imports lower or SZ - import raw materials more cheaply D
CO! alls D prices more competitive
.odest: small increments D export competitiveness not
drastically eroded in the immediate period
6radual: 9rms can have time to adGust their cost structures D
9nd ways to (e more cost-e;cient
$eals with cost-push inOation
3" Other 'ays
Explore new mar/ets through trade missions and signing o 57-s D
reduce over dependence on a ew trading partner
Aong term measure
Conclusion
5all in H is (eyond our control
.easures can only (e long run or interim ones
111
E!aluate ethods the 0alaysian go!ernent ight use to slow
down iport growth and increase new export *usiness.
-" Slow down import growth
$evaluation D wea/en ringgit
!rice o exports all in oreign currency D volume o exports
increase D total revenue rom exports increase
!rice o imports in ringgit increase D volume o imports all D
total expenditure on imports all
:O7 improves
$epends on price elasticity o demand or H and . D .alaysia
demand or imports o capital goods could (e price inelastic D
CO! rises
Can only (e short term i .alaysia needs to import capital
goods and raw materials
!ersistent devaluation can lead to loss o con9dence in
economy
7ari% D tax on imports D price o imports rise D volume o imports all
D total expenditure on imports all
0ncrease in COA
$eadweight loss to society
,etaliation
Contractionary policies: interest rate rise D investment and
consumption alls D -$ alls D / D all in JI D all in demand or
imports
.alaysia may have small multiplier
.alaysian 9rms may want to (uy capital goods
.alaysia still developing, cannot a%ord to have all in rate o
growth
Cse only i overheating
:" 0ncrease new export (usiness
Su(sidies to export 9rms
CO! alls D increase -S D 6!A alls D price o exports all
0ne;ciency, (urden on government and taxpayers
57- L 7rade missions to new countries D increase H D / D increase JI
,educe over dependence on Gust a ew maGor trading partners
7a/es time D long term
5irms may not want to ta/e the ris/ D uncharted territory D
(usinessmen may (e ris/ averse
Supply-side
Education and training D increase productivity D increase A,-S
D all in 6!A D price o exports all
:est measure, yield results in the long run
112
HTo *e considered success"ul, an econoy needs to achie!e
low uneployent, low in5ation and sta*le econoic growth.I
3ow "ar &4/ with the stateent+ #1,%
-nti-thesis
3ealthy :O!s D especially open economy D macro o(Gective
EBuity in distri(ution D micro o(Gective
E;ciency in resource allocation D micro o(Gective
HTo *e considered success"ul, an econoy needs to achie!e
low uneployent, low in5ation and sta*le econoic growth.I
Explain this stateent. #1,%
-@ Aow unemployment D success Sany 2 well-discussedT
.aximise use o resources D reduces loss o potential output due to
unemployment
:urden on government
Aess tax revenue collected
.ore unemployment (ene9ts
0ncrease (udget de9cit, opportunity cost D less or other areas
D healthcare, education
Singapore: 6S7 o%set pac/age, growth dividends, Singapore
shares, one-o% re(ates
Aow unemployment D people have Go(s D higher C D uels growth
Social pro(lems D crime rates D social unrest D loss o man hours >
deters investment ?con9dence@
:@ Aow inOation D success Sinternal and externalT
0nternal: stimulates output, induces con9dence, increase investment
due to certainty, increase 5$0, encourages savings D increase
investment in the long run
External: :O7 improves S!E$T
C@ Sta(le economic growth D success Sany 2 well-discussedT
Sustained growth: actual and potential growth: increase -$ and -s D
continual increase in SOA
Con9dence D increase investment > 5$0 D good macroeconomic
management o government
'hy unsta(le growth undesira(le
-$ /eeps increase may cause overheating D demand Dpull
inOation D increase COA > a%ects :O7 D insta(ility
0 economy lapses into recession: negative growth D hardship D
all in SOA
113
Conclusion
:rie mention o other criteria or success
ConOict (etween growth and inOation: relentlessly pursues growth D
demand-pull inOation: sta(le growth vs low inOation
'hich criteria most important: low inOation D price sta(ility D
Singapore
11#
&iscuss whether <scal policy is the ost e'ecti!e way "or
Singapore to sustain a success"ul econoy. #1-%
0ntroduction
Sustaina(le > sta(le growth > low inOation D one o the /eys to
sustaina(le growth
$evelopment
-@ 3ow 5! wor/s to attain growth
0ncrease 6 > decrease 7 D increase -$ D / D increase JI
W (rie > diagram
Evaluation
Si8e o / D small / D huge lea/ages D high savings L . D need
huge increase in 6 D prudent: (udget surplus
Small C L 0 (y domestic 9rms D need export revenue D policies
should target H
Crowding out: increase 6 9nanced (y (orrowing rom pu(lic D
increase interest rate D crowd out CL0LH
.ay not need to (orrow D huge reserves D reserves can
(e depleted
.ore concerned a(out all in H
7ime lag: recognition, implementation, response
Small D shorter time lag
7axes D unpredicta(le e%ect on CL0 D / wor/s only on the extra
disposa(le income that is spent
Expectations: pessimism L optimism
5all in direct taxes D rely more on indirect taxes ?6S7@
?increase COA@ D regressive D increase income gap
:@ Summation: 5! in Singapore D limited role
0 economy wea/ens ?all in 6$!@ D usually due to external actors
li/e all in H eg" 211 CS recession D policies should target H
!olicy exchange rate management D sustaina(le growth
6radual and modest appreciation o SZ
!rice o imports all in SZ - chec/ imported inOation ?low
inOation@ > Singapore depends a lot on imported raw
materials D lower CO! D A7 a(le to price competitively D sta(le
growth D :O7 increase ?!E$@
!rice o H increases in immediate period
6radual: Singapore 9rms to 9nd other ways to reduce cost
.odest: not to totally erode export competitiveness
Supply-side policy: education and training, welare (ene9ts, taxation
incentives
11&
Conclusion
5! in Singapore limited e%ect on -d, serves as supply-side measure
to increase JI over long term > exchange rate management D to
(oost long term export competitiveness
11*
2n the "ourth Fuarter o" ,$$7, SingaporeAs uneployent rate
rose to -.>E. &iscuss whether supplyJside policies are the *est
way o" achie!ing "ull eployent in Singapore. #,(%
0ntroduction
5ull employment: natural ?rictional@ rate o unemployment ?some
structural@
Cause or concern ?very (rieOy@: i structural severe, i cyclical
$evelopment
-@ Supply-side
Education and training D :udget 41
Schools and vocational institutes gear Singapore wor/ers or
the challenges o new economy D grants, scholarships, places
in university D ocus: (iomedical D increase employa(ility
Su(sidise 9rms or wor/ers training D S/ills $evelopment 5und
D upgrade s/ills D reduce structural unemployment
Aie-long learning D /nowledge can (ecome o(selete D
constant upgrading o s/ills D reduces prospect o (eing
structurally unemployed
Aong term and may not yield results
0ncrease employa(ility and attracts .JCs
'elare (ene9ts
Singapore no unemployment (ene9ts D reduce rictional
unemployment
5orced to upgrade s/ills D reduce structural unemployment
,educe power o trade unions
J7CC: government (ody D harmonious relations D no la(our
unrest: attracts investment ?5$0@
J'C: wage recommendations D wage increase V productivity
increase D /eep CO! low
0ncrease employa(ility o wor/ers
:@ !olicies to deal with cyclical unemployment: all in -$
Supply-side D structural, cannot solve cyclical
5!: increase 6, decrease 7 (ut small /, external actors
Exchange rate management
,ecession due to all in H: depreciation L appreciation
$epreciation: price o exports all D immediate solution (ut
Singapore cannot a%ord to D price o imports increase D CO!
increase D later price o exports increase ?growth cannot
sustain@
Singapore=s choice: gradual and modest appreciation ?long
term solution@
11+
Conclusion
0ncrease 6 on education and training > taxation incentives D supply-
side policies D e%ect on -$ and some e%ect on cyclical
unemployment D limited role in Singapore due to small /
111
)hy Singapore does not use interest rate policy
Rery dependent on overseas unds D small
Eg" i Singapore=s interest rate alls to cur( recession D <hot= money
outOow - Z in Singapore (an/s all D .S alls D interest rate increase
D no control
$iscuss interest rate only i not Singapore
Pro*les with exchange rate insta*ility
Exchange rates determined (y
7rade and investment (etween trading partners
Speculation
6overnment management L manipulation o exchange rate eg" (uy
CS (onds to /eep CS$ up
1@ 7rade
-%ects (usiness planning: need or certainty to orecast pro9ts
Eg" 0 SZ depreciates
!rice o Singapore exports all in oreign currency D volume o
exports increase
!rice o imports increase in SZ: dependent on raw materials
?same or developing countries which need capital goods@
Eg" 0 SZ appreciates D price o exports increase in oreign currency D
a%ects export earnings
2@ 0nvestment
!ersistent depreciation D loss o con9dence in economy D all in
investment
3@ $eveloping countries
5oreign loans in CSZ denomination D i your currency depreciates D
pay (ac/ more in your country=s Z
112