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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 eective economic policies to move the !!C
# &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
* , manuacturer wishes to sell more o his product" 2ow may he try
to achieve his aim(
0 Chapter 3: +esource ,llocation in Competitive -ar.ets // 11-13
1 Explain price elasticity o demand and income elasticity o demand" 1#
13 , 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"
11 ,ssess the relevance o elasticity concepts in explaining the eects
o the worldwide recession caused 'y the 111 terrorist attac.s
on the airline industry"
12 Chapter #: -icroeconomic !ro'lems: 4ailure 1*-10
13 !olicies on !ollution and Evaluation Summary 11-21
1# !olicies on !ollution and Congestion caused 'y Cars Summary 22-23
1% Chapter %: 5overnment /ntervention in the / 2#
1) Chapter ): 4irms and 2ow 6hey Operate / 2%-33
1* $iscuss whether rising costs limit the si7e o irms over time" 31
10 -erger in Singapore ,nalysis 31
11 Chapter *: 4irms and 2ow 6hey Operate // 32-30
23 $iscuss the view that the proit motive will always lead to a ew
large irms dominating the or each and every type o
21 Explain what is meant 'y productive and allocative eiciency" #3-#1
22 9, irm should 'e encouraged to maximi7e proits 'ecause this it eicient": $iscuss whether this argument is true or a irm
operating in an imperect"
23 $istinguish 'etween monopolistic competition and oligopoly" #3
2# Explain why oligopoly is a common structure in many
2% Explain why governments throughout the world have 'een involved
in the supply o services such as electricity"
2) Chapter 0: 5overnment /ntervention in the // #)-#0
J1 Topics
Chapter 1: Scarcity, Choice and Opportunity Cost
1" /ntroduction
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" 4actors o !roduction
>and: productive resources supplied 'y nature
>a'our: human eort directed to the production o goods and services
Supply: num'er o wor.ers ; average num'er o hours each is
prepared to oer
$exterity, greater use o machinery and more sophisticated
production techni?ues
-onotony, loss o cratsmanship, increased ris. o structural
Capital: man-made resource used in urther production
/nvolves postponing present consumption
Entrepreneurship: ris. o 'eing in 'usiness
/normation: data or the 'asis o .nowledge-'ased economy
3" Opportunity Cost
+eal cost in terms o the next 'est alternative oregone
Calculating opportunity cost re?uires time and inormation
Opportunity cost may vary with circumstance
Economic rent: dierence 'etween what is earned and what could have 'een
@sed in speciali7ation 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
eiciently, at a given state o technology
,ssumptions: ixed amount o resources, actors ully and eiciently
employed, technology ixed, time period give, 2-product model
4ully: using all resources availa'le
Eiciently: do as many things you can with the resources used
Scarcity: unattaina'le com'inations outside !!C ; society has to choose
among com'inations o 2 goods
Shit: ?uantity and ?uality o resources <thin. 4O!= ; technology A s.ewed(
Choice 'etween instant gratiication and improving economy in the uture
%" 6he -arginalist !rinciple
Consume till -!8 B -!C: cost o producing an additional unit o good B
'eneit o consuming an additional unit o good
4or 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
)" Eiciency
Static eiciency: how much output can 'e produced now rom a given stoc. o
resources at a given point in time
$ynamic eiciency: changes in the amount o consumer choice availa'le in
mar.ets together with the ?uality o goods and services availa'le
!roductive eiciency: a'sence o waste in the production process B
minimi7ing the opportunity costs or a given value o output
,llocative eiciency: society produces and consumes a com'ination o goods
and services that maximi7es its welare
$istri'utive eiciency: goods and services produced to those who want or
need them
Cloth 3
C$raw dotted line to show comparison
'etween 2 countries with a common
Explain two ways in which an econoy ight o!e "ro a point within its
PPC to a point on it. #1$%
$eine !!C
," /ncrease employment o resources
>ower wages to 'e more competitive A may 'e enticed to produce more
4iscal policy: increase government spending eg" circle line A multiplier
-onetary policy: lower interest rate A irms 'orrow more, increase
8" /ncrease eiciency in use o resources
!ay 'ased on productivity: 'ut only or Do's where output can 'e
measured <actory wor.ers=
+eallocate resources to more eicient uses
,: resources not ully utili7ed A
underemployment and
8: eicient use o resources A ull
&iscuss the ost e""ecti!e econoic policies to o!e the PPC outwards.
Outward shit: increase in productive capacity A sustain economic growth over
long run
," >a'our
/ncrease 'irth rate 'ut diicult to do so in developed countries A emale
la'our orce participation ; need lots o incentives
Education and training 'ut long time and does not necessarily yield
4oreign talent through tax incentives
8" Capital
-GCs A investment <machines= ; learn their technological .nowledge
/nvest in r;d
C" Entrepreneurship
/ncentives and su'sidies to start 'usinesses
$" >and
$epends on which country
Eg" 4or @S,: encourage capital goods, less consumption goods" 4or China:
(hat is eant )y the )asic econoic pro)le o" scarcity* #1+%
Scarcity A scare resources, unlimited wants
Scarcity A choice A opportunity cost
1= /ndividual: timeH consumerH how to maximi7e use o limited resources A more
la'our I more machines
2= 4irm: least-cost com'ination o resources in order to maximi7e proits
3= 5overnment: choice 'etween competing proDectsH cost-'eneit analysis
#= Economy: pro'lem o how to allocated scare resources eiciently 'est
illustrated 'y the !!C
<8rie= /mplications:
6rade as a solution to alleviate scarcity
6rade-o 'etween consumer goods and capital goods
&hat <how scarcity aects o an economy=, how much,
or whom and what to produce < system=
% )
&iscuss whether econoic growth sol!es the pro)le o" scarcity. #1,%
Economic growth A increase in national income A generally get to consume more
goods and services
1= /ncrease in ?uantity and ?uality o resources A increase in productive capacity
>a'our: due to reduction in unemployment and underemployment
S.ills and educational level
Capital stoc.: most eective way to alleviate pro'lem o scarcity A more
capital economy produces in one period, more output capital can produce
in the next to satisy wants in society
2= 6echnological improvement A increase in productive capacity: 'etter and new
methods o producing goods
+ ; d A technological 'rea.through A new products A create more wants
3= /ncrease in income A consumers a'le to satisy wants
8ut with greater aluence, people have more wants due to advertising and
promotions A luxury goods o the past may 'ecome necessities
#= Supply limited
$emand accelerating A China I /ndia economic growth
Crude oil important as it is a source o uel
Eg" land in Singapore
8ut technological improvements allow society to ma.e use o renewa'le
resources as sources o energy
8ut more wants created
%= E?uity in distri'ution
Economic growth does not guarantee a reduction in income gap
Corruption, ood shortages
Chapter +: -esource .llocation in Copetiti!e /ar0ets 1
C,ssumption: -any 'uyers and sellers such that no single 'uyer I seller can
exert control over price <price ta.ers=
1" $emand 6heory
$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
/ncome eect: eect o change in real income resulting rom change in
price o good
Su'stitution eect: eect o change in price on ?uantity demanded
arising rom consumer switching to, or rom, alternating products
6aste: education, culture, age group, health scares
/nterrelated goods: su'stitute vs" complement
!opulation: a'solute change, change in composition
Seasonal changes: climate, estival
Expectations o the uture: uture changes in price I income
+eal disposa'le income: changes in taxes I money income
+edistri'ution o income
Consumer surplus: dierence 'etween maximum amount consumers willing
to pay or a given ?uantity o good and what they actually pay
2" Supply 6heory
Supply: ?uantity o a good or service producers are willing and a'le to oer
or sale at each given price over a given period o time
CO!: change in price o actor inputs
Other prices: Doint I competitive supply
/nnovation: lower production costs
Gatural actors: climate, unexpected events
5overnment policies: indirect taxes, su'sidies
Gum'er o sellers
!roducer surplus: dierence 'etween amount received 'y producers and
minimum amount they are willing and a'le to accept or the supply o a
3" E?uili'rium
8uyers and sellers satisied with current com'ination o price and ?uantity
'ought or sold, and are under no incentive to change their present economic
,dDustment to e?uili'rium
8elow e?uili'rium
Shortage A consumers compete or goods, 'idding up prices A
price increases, ?uantity supplied increases A shortage
eliminated A settles at e?uili'rium
,'ove e?uili'rium
Surplus - producers reduce prices to get rid o stoc.s A
increase sales and decrease production A price alls, ?uantity
demanded increases, surplus eliminated A settles at
Shits in supply and demand: consider individual eects on price and ?uantity
then sum up
/nterrelated demand and surplus
Joint I competitive I derived demand
Joint I competitive supply
#" Case Study
&hen as.ed to explain how a group o people intend to aect a certain, 'ring in limitations
Elasticity o demand
+esponses o other irms I groups o people
,nalyse theoretically irst, then see how and why the data its I does not it the
$esira'ility: consider or whom: producer, consumer, society
Eectiveness: limitations, long run vs" short run
. anu"acturer wishes to sell ore o" his product. 2ow ay he try to
achie!e his ai* #1+%
Sell more A only considering e?uili'rium ?uantity A increase demand I supply
Eect: long run vs" short run
1= /ncrease demand: explain eect on ?uantity demanded
,dvertising and promotion: create product dierentiation and 'rand loyalty
Competitive other irms will do li.ewise as they ear losing share
2uge unds need to 'e devoted A increase CO! A reduce proits
/ irm passes cost increase to consumers in terms o higher
prices A all in ?uantity sold A assuming demand elastic A total
revenue alls
8ut una'le to increase price in competitive A irms may
engage in price wars
8ut in long run i campaign successul in altering people:s taste
and preerence A rise in ?uantity sold
Expanding num'er o mar.ets: go regional I glo'al
Easier to penetrate mar.ets where demand or product more price
/ncrease supply A all in price A more than proportionate rise in
?uantity demanded
/mprove ?uality o product I increase product dierentiation through 'etter
sales service I improved pac.aging
Eect o money spent or r;d on
Costs then price o product share in long run <increase=
$eli'erate attempt to reduce price o good through discounts
!rice elasticity o demand
2ow long discount can 'e sustained without eroding proits
2= /ncrease supply: explain eect on ?uantity demanded
/nvestment in r;d
>ower CO!, more eicient production methods, 'etter ?uality products
+aising productivity through greater speciali7ation and 'etter la'our-
capital com'ination
Sourcing cheaper sources o raw materials
+educes price A may conlict with proit maximi7ation
-ore eective strategy i selling product that is price demand elastic A
mass produce A reap EOS A lower prices A increase sales volume
more than proportionately
Chapter ,: -esource .llocation in Copetiti!e /ar0ets 11
1" !rice Elasticity o $emand
-easure o degree o responsiveness o ?uantity demanded o good to a
change in its price, ceteris pari'us
Coeicient: sensitivity o consumers to price changes
Gegative: inverse relationship 'etween price and ?uantity demanded
,vaila'ility o su'stitutes
Gecessities vs" luxuries
!roportion o income
6ime period: longer A switch to su'stitutes A more price elastic
5overnment taxation policies: raise revenue, discourage consumption
4irms: pricing policy
Eectiveness 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" /ncome Elasticity o $emand
-easure o degree o responsiveness o demand o good to change in
consumers: income, ceteris pari'us
Gegative: inerior good
!ositive: normal good
>ess than one: necessities
-ore than one: luxuries
!roduction plans: 'oom vs" recession
6argetting dierent income groups: segment
3" Cross Elasticity o $emand
-easure o degree o responsiveness o demand o good to change in price
o another good, ceteris pari'us
Gegative: complement
!ositive: su'stitute
Eects on products: demand when aced with change in price o rival:s
Strong complements A can sell Dointly
#" !rice Elasticity o Supply
-easure o degree o responsiveness o ?uantity supplied o good to a
change in its price, ceteris pari'us
!ositive: direct relationship 'etween price and ?uantity supplied
6ime period: longer A supply more price elastic 'ecause possi'le to
change anything
4actor mo'ility
Gum'er o irms: more A supply more price elastic
Stoc.s and spare capacity: more A can produce more A supply more
price elastic
>ength o production period: shorter A supply more price elastic
6axation: incidence
!rice sta'ility
%" 5overnment !olicies
6axation I su'sidies
$emand more price inelastic A higher incidence
/ncidence: distri'ution o 'urden 'etween consumers and
-inimum price
!rotect income o producers
Creates surplus or uture shortages
4inancing annual surpluses A 'urden on taxpayers A not good in long
Cushion ineiciency
Gew producers attracted A increase surpluses unless government has
measures to increase demand
-aximum price
>ower-income consumers to aord necessities
!rotect consumers
,llocation o goods may 'e 'iased
8lac., especially during war time
5overnment can encourage supply 'y drawing on past surpluses,
giving su'sidies and tax relie, reducing demand 'y controlling income
)" Case Study
Gote dierence 'etween elasticity o the product and the elasticity o the inal
product <which involves the use o the product=
Gote dierence 'etween less inelastic and more elastic
&hen as.ed how a strategy might aect a company, consider eect on total
revenue then proits
*" Essay
>imitations to using elasticity concepts to explain price changes
Elasticity concepts are static A need to relax ceteris pari'us
assumption in reality A simultaneous changes occur A need to consider
relative magnitudes o changes in demand and supply
Coeicients o elasticity mere estimates
Consumers not homogenous group
,mong high-income earners, there are the yuppies the
high lie and are li.ely to 'e more price and income sensitive
compared to oreign investors who would consider socio-
political actors
-ay not consider some goods as su'stitutes
Explain price elasticity o" deand and incoe elasticity o" deand. #1$%
Coeicients: range o values or elastic I 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'%
,ssume speciic tax or simplicity
@ses o petrol: irms: and commuters: transportation
Gormal good: income increase A demand or cars increase A demand or petrol
1= $emand or petrol price inelastic: explain why
/ncrease in indirect tax A supply alls at given price A supply curve shits
vertically upwards 'y amount o tax
$emand or petrol inelastic A all in ?uantity demanded less than
+elevance: need high tax i government wants to reduce consumption to
desired level
2= /ncome elasticity o demand less relevant 'ecause it is due to changes in
income A tax on petrol aects price directly, not income
5overnment li.ely to 'e less successul i they increase tax on petrol in
period o economic 'oom
8oom: incomes rise A demand or cars <luxury good= A increase 'y more
than proportionately A derived demand A increase demand or petrol
The terrorist attac0 on New 3or0 on 11 Septe)er +$$1 caused a worldwide
recession and an increased "ear o" "lying, )oth o" which se!erely a""ected
the deand "or tra!el )y air. This led to the closure o" soe o" the a4or
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'%
1= !rice elasticity o demand
&hen supply o airlines ell due to closure o maDor airlines A price
expected to increase A ?uantity demanded all 'y more than proportionate
A total revenue all
,irlines should expect that reducing supply causing a rise in price can
lead to a all in total revenue
8ut the demand or travel or 'usiness is li.ely to 'e inelastic" So price
increase A less than proportionate all in ?uantity demanded A total
revenue increase
Eect on total revenue depends on si7e o 'usiness vs" holiday
$ue to the ceteris pari'us assumption, the a'ove will only ta.e place i
other actors remain constant" /n this context, incomes have changed
causing demand curve to shit A total revenue all
2= /ncome elasticity o demand
,ir travel luxury good or most, necessity or 'usiness travelers
+ecession A all in income A all in demand A all in total revenue
/mplication: individual airlines need to reduce price I engage in non-
pricing strategies to increase share
3= Cross elasticity o demand
!otential su'stitutes: train I coach I ship
$egree o su'stituta'ility depends on the length o light
>ong haul lights: wea. su'stitutes especially or 'usiness
Short distance: stronger su'stitutes
/ another airline <eg" Kantas= reduces price to increase share A all
in demand or a particular airline <eg" S/,= A S/, reduces price A price war
A may not cover costs A erode proits
8udget airlines also pose as competition
,irlines close down routes I less schedules A all in supply A increase price
$emand inelastic: long haul lights A no close su'stitutes A total
revenue increase
$emand elastic: short distance lights A switch to trains I coaches A
total revenue alls
#= !rice elasticity o supply
4all in price A all in ?uantity supplied
8ut short run: supply price inelastic A less than proportionate all in
?uantity supplied
>a'our: need time to retrench I reallocate la'our to other departments
4light schedule I routes: need time to deli'erate which routes I
schedules to close A choose the unproita'le I lowest passenger
Cannot loo. at each value separately 'ecause in real world many varia'les
change at the same time
Chapter 5: /icroeconoic Pro)les: /ar0et 6ailure
1" 4ailure
Scarce resources A need to allocate resources eiciently A o'Dective:
maximi7e society:s welare <social optimality=
-S8 B -SC: 'eneit to society rom one additional unit o good B cost
to society o producing one extra unit o good
&ays to allocate resources
6otal government intervention
4ree <'ased on price mechanism=
-ixed economy <ree with some government intervention=
4ree economy
!rivate ownership o resources ; individual guided 'y
!rice serves as signal or resource allocation
,utomatic o supply and demand A spontaneity A allocative
E?uili'rium where demand B supply: maximi7ation o consumer and
producer surplus
,ssumes no externalities ; perect competition ailure occurs when
,llocative ineiciency: externalities I pu'lic goods, imperect
/na'ility o to achieve social o'Dective eg" income e?uity
2" Externalities
Cost I 'eneit on a third party not involved in the consumption I production o
6ypes: industrial pollution, pollution and congestion rom vehicles,
demerit goods eg" cigarettes
External cost: second-hand smo.e A health pro'lems, ire
ha7ard, environmental cost A littering, campaigns
A money comes rom taxpayers who largely do not smo.e
6o ta'acco company: proit-maximising private producer: -!8 B -!C
6o society: to attain social optimality: e?uili'rium level -S8 B -SC B
-!C ; -EC
Overproduction: deadweight loss
6ypes: merit goods eg" healthcare, education
External 'eneit: higher standard o living o everyone 'ecause
o highly-s.illed Do's
@nder-production 'y ree deadweight loss
8ecause o partial ailure, government intervention comes in
3" !u'lic 5oods
Gon-excluda'le: impossi'le I costly to exclude non-paying consumers rom
receiving the good
Gon-rivalrous: consumption 'y one person does not reduce amount availa'le
to others
Eg" Gational deense
4ree rider A conceal demand A private producer cannot gauge demand A will
not produce A non-production in ree A total ailure
5overnment provision necessary since pu'lic goods are socially desira'le
and largely indivisi'le
#" /ne?uality
+epresented 'y the >oren7 Curve I 5ini coeicient
Singapore: 3"#0% in 233*
European countries: 3"2% A 3"3
>atin ,merica and the Cari''ean: 3")
,verage worldwide: 3"#
%" Essay
&hen as.ed to suggest new policies, consider whether it is possi'le I
practical to enact them
!olicies may 'e diicult to administer, and policing expensive
Opportunity costs involved in attempted to control negative externalities
!olitical implications eg" pu'lic satisaction
Policies on Pollution and E!aluation Suary
1= /dentiy: 6axation
Explain: 6ax polluters per unit o -EC A CO! increases or private irms A
supply alls rom -!C to -SC 'y amount o -EC
Evaluate: C Gegative externality internali7ed 'y irm: incentive or irm to 'e
more -cost-eective to maximi7e proits I reduce pollution
C !rovides revenue or government to inance other social and
community development proDects
C ,'le to allow to continue operating according to
orces and reach state o e?uili'rium
x +e?uires accurate valuation o -EC I amount o pollution
- Over-valuation: output 'elow socially optimal level,
reducing society:s welare I deters production A aects
economic growth
- @nder-valuation: output still not 'rought to socially optimal
x $iicult to apportion 'lame
x Eectiveness dependent on price elasticity o demand: i highly
price inelastic, eect o tax on output ineective unless tax very
large I irm a'le to move 'urden to consumers and get away scot-
2= /dentiy: Kuotas
Explain: 8an production i pollution exceeds a certain limit A limits -EC 'y
restricting output at socially optimal level
Clearly deined amount o pollution each irm can have
Evaluate: C ,'le to control level o pollution in the country as a whole
E $oes not allow price to e?uili'rate ?uantity demanded to ?uantity
supplied: irms may decide to produce less so they do not exceed
the maximum amount o pollution they can have <compare this to
E $iicult and tedious to gauge how much pollution each irm
produces: waste o resources and time on inspection
E Geed vigilance and commitment o government
3= /dentiy: >egislation
Explain: 4orce producers to 'ear costs o more proper disposal o industrial
wastes eg" antipollution e?uipment
Evaluate: x $iicult and costly: spend resources on inspection
E / chances o 'eing caught and penalties are small, legislation
E Geed vigilance and commitment o government
E Got immediately eective 'ecause o 'ureaucracy involved in
esta'lishing laws
E >ose voters leading to loss in power
#= /dentiy: Gationalisation
Explain: 5overnment over the polluters: irms and ensures production
at socially optimal output
Evaluate: x &aste o resources: opportunity cost to other proDects 'ecause
less unds availa'le
E $iicult to accurately valuate ?uantity demanded
E Go competition: ineicient, no innovation
%= /dentiy: Campaign I 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 'eneits
E $uration needed 'eore eects can 'e elt and there is no
guarantee that the campaign will 'e eective
E -ay 'e eective 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 eect
)= /dentiy: Su'sidies
Explain: Su'sidise purchase o antipollution e?uipment so that irms: CO!
does not increase that much 'y purchasing these e?uipment A
irms more li.ely to 'uy the e?uipment than 'eore
Evaluate: x Opportunity cost to other pu'lic proDects
E Go guarantee that irms will 'uy the e?uipment
E 4irms need time to incorporate use o new e?uipment: 'ut in the
long run pro'a'ly mitigates the pro'lem o pollution i irms use the
*= /dentiy: @r'an planning
Explain: >ocate actories away rom residential areas eg" Jurong /sland
5reenery <to reduce impact=
Evaluate: x -erely shiting the pollution to another area A does not solve the
root o the pro'lem 'ut reduces external cost since less people
aected 'y pollution
E Contentious as to whether greenery helps to reduce impact
Summation: ,ir pollution may not 'e due to the country itsel, so need
international I regional cooperation
Can integrate a ew policies or 'etter results
Policies on Pollution and Congestion caused )y Cars Suary
1= /dentiy: E+! per tax unit
Explain: +estricts car usage <nowadays rely more on this policy=
/ncreases cost o car Dourney A ?uantity demanded or car travel
Evaluate: x Congestion in other areas I small roads
E /ncrease 'usiness cost A pass to consumers
2= /dentiy: COE
Explain: +estricts car ownership
Evaluate: x /ncreasing aluence A income elasticity o demand or cars
E Cannot stem people:s aspirations
E Geeds vigilance and political will <in other countries, government
might not 'e a'le to have COE=
3= /dentiy: Eicient and aorda'le pu'lic transport
Explain: >ess pollution and congestion on roads
Evaluate: x Got all countries have resources to 'uild an eective pu'lic
transport system A >$Cs: no money, $Cs: complex commuting
E 4or it to 'e aorda'le, possi'ly need government to inance"
Otherwise i let to the private irm, they would want to charge more
to maximi7e proits"
#= /dentiy: +egistration tax, annual road license
Explain: +estricts car usage
Evaluate: C-ay wor. i there is vigilance and commitment 'y government
%= /dentiy: +e'ates or green vehicles eg" 23L o purchase price
Explain: >ower price A ?uantity demanded higher
Evaluate: x Still not widely advocated
E -ay still 'e too expensive to aord
)= /dentiy: &ee.end cars
Explain: +estricts car usage
Evaluate: x Still not widely advocated
E !eople associate cars with prestige <eg" ,mericans love or
Chapter ': 7o!ernent 1nter!ention in the /ar0et
1" Externalities
Gegative externalities Ndetails on page 21-23O
!ositive externalities
Su'sidies: external 'eneit internali7ed <wor.s li.e the tax=
Can 'e easily implemented to 'ring a'out increase in
production and consumption
$iicult to valuate external 'eneit generated
2igh government expenditure A high tax rates can su'se?uently
discourage investment in country
4irms lose incentive to 'e more productively eicient A
ineicient irms may survive
$irect provision o merit goods
Social Dustice: merit goods should 'e accessi'le to all and not
provided according to a'ility to pay
>arge 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 ?uality
/gnorance: consumers may not reali7e how much they will
'eneit and i they had to pay, they would rather go without it
2" 5overnment 4ailure
,llocative eiciency reduced ollowing government intervention to correct ailure
!ro'lem o incentives
/mposition o high taxes can distort incentives
2igh 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=
!roit motive o private sector largely removed
!ro'lem o inormation
$iicult to valuate external cost I 'eneit
$iicult to accurately estimate level o consumer demand or product
!ro'lem o distri'ution
/ncrease ine?uity
Eg" tax on use o domestic uel <.erosene in /ndonesia= A low income
households may eel greatest eect as tax on uel oil may ma.e lie o
poor worse since they use proportionately more domestic uel than
8ureaucracy and ineiciency: administrative costsH time lags
Shits in government policy: too re?uent changes A diicult or irms to plan
Chapter 8: 6irs and 2ow They Operate 1
1" !roduction in the Short +un
Short run: at least one ixed actor
>ong run: period o time long enough or all actors to vary, except level o
technology, which varies in the very long run
>$-+: as more units o a varia'le actor are applied to a given ?uantity o a
ixed actor, there comes a point 'eyond which the extra output rom
additional units o the varia'le actor will eventually diminish
Stage 1: 6! increases at an increasing rate, -! rises A due to
speciali7ation o la'our
Stage 2: 6! increases at a decreasing rate, -! alls, >$-+ sets in A
due ineicient use o ixed actor
Stage 3: 6! alls, -! alls
-! B change in 6! I change in >
2" 6heory o Costs in the Short +un
4actor 6otal 4ixed Cost 6otal Maria'le Cost -arginal Cost
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
Maries directly with
output level
,dditional cost incurred
in producing an extra
unit o output in the
short run while some
inputs remain ixed
-C B change in 6C I
change in K
+ent o actory 'uilding,
interest on capital
invested in e?uipment
+aw materials, la'our
,6C B
,MC ;
,4C: amount o ixed
costs per unit o output
,4C B 64C I K
,MC: total varia'le
costs per unit o output
Stage 1: ,MC alls, ,4C alls" Since ,4C and ,MC all, ,6C also alls
Stage 2: ,MC rises, ,4C alls" Since all in ,4C P rise in ,MC, ,6C still alls
Stage 3: ,MC rises, ,4C alls: Since all in ,4C Q rise in ,MC, ,6C rises
3" O'Dectives o 4irms
!roit-maximisation: e?uili'rium level o output since there is no tendency to
8eore e?uili'rium level, -+ P -C so irms want to produce more
,ter e?uili'rium level, -+ Q -C and rational irms will not produce at
this output level
4irm continues production as long as it can cover varia'le costs
-otivation o owners vs" motivation o managers: separation o control and
ownership A principal-agent pro'lem: managers tend to pursue their
alternative goals while maintaining minimum level o proits to appease
+evenue maximi7ation: managers aim to maximi7e irm:s short run total
>ong-run proit maximi7ation: managers aim to shit cost and revenue curves
so as to maximi7e proits over some longer time period
5rowth maximi7ation: managers may aim or expansion to maximi7e growth
in sales volume over time
#" 6heory o Costs in the >ong +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=
>+,C: lowest average cost or given level o output when all inputs are
-inimum eicient scale: smallest plant si7e 'eyond which no signiicant
additional /EOS can 'e achieved
/EOS: savings in costs that occur to a irm due to the irm:s expansion, and
have 'een created 'y irm:s own policies and actions
6echnical: concerned with production process
4actor indivisi'ility economies: larger plant si7e it
possi'le to eectively use indivisi'le actors <com'ine
harvesters, power transmission: large and costly= A raises
average output and reduces >+,C
Specialisation o la'our: simpler and repetitive Do's which
re?uire less training ; more eicient eg" car manuacturing
-anagerial: unctional speciali7ation 'y employing experts to increase
eiciency as a whole
5reater use o existing sta
$ecentralisation o increasing eiciency o
management 'ecause o aster low o inormation within irm A
distortions and delays o inormation avoided
8argaining advantage and accorded preerential treatment 'y
suppliers 'ecause they 'uy raw materials in 'ul.
8ul. sales rom 'ul. advertising and large-scale promotion
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
conidence in reputed irms
,dvantage in 'earing non-insura'le ris.s eg" conditions o
demand or inal products and supply o raw materials
$iversiication o products and mar.ets
$iversiication in sources o supply
8etter ?uality products A increased share and demand
8etter methods o production A more productively eicient A
lower average cost
&elare: wor.ers eel they 'elong to the company A more apt
to increase eiciency and productivity o company
Complexity o management
!rincipal-agent pro'lem
Strained relationships: impersonal A no loyalty to irm A apathy,
EEOS: savings in costs that occur to all irms 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 A
special educational institutions I irms can colla'orate to develop
training acilities
Go lac. o la'our to employ 'ecause experts want to
migrate there eg" Silicon Malley
&ell-developed inrastructure to cater to that industry
+eputation: 'uilds up name which consumers associate with
?uality A encourages 'rand loyalty and steady clientele
Economies o disintegration
Su'sidiary industries developed to cater to needs o maDor
Eg" car industry in Japan: range o irms speciali7e in
production o dierent inputs or car manuacturing A
provide output at lower prices to main industry 'ecause
speciali7ation allows su'sidiary irms to produce at large
scale A enDoy EOS
!rocess waste products into useul products and sell them to
cover CO!
Economies o inormation: pu'lications help improve productivity o
irms <research and expertise=
/ncreased strain on inrastructure: taxed to limits eg" congestion A loss
o time and increased uel consumption
+ising costs o 4O!: growing shortage o speciic raw materials I
s.illed la'our
%" 5rowth o 4irms
-ethods o growth
/nternal expansion: ma.e more o existing product or extending range
o product when it 'uilds a new 'igger plant
Mertical integration: irms engaged in dierent stages o
productive process
8ac.ward integration vs" orward integration
Eg" Star'uc.s merge with irm producing coee 'eans A
wants guaranteed access to raw materials
2ori7ontal integration: irm over similar irm at same stage
o production in the same industry
Eg" Coee 8ean and Star'uc.s merge
Eg" $8S and !OS8 domination
Eg" 'an. over developing irm to 'uild properties
$iversiy output
)" Survival o Small 4irms
$emand-side actors
Gature o product
8ul.y and perisha'le goods: small, locali7ed mar.ets eg" resh
Mariety preerred to standardi7ation eg" ashion
Specialised products: limited mar.ets eg" highly speciali7ed
!restige mar.ets: limited 'y price eg" sports cars, luxury yachts
$irect and personali7ed services eg" lawyers, doctors
5eographical limitations: high transport costs or 'ul.y products A local rather than national
Supply-side actors
$EOS set in early: optimum si7e o irm small
Mertical disintegration: entire production process 'ro.en into series o
separate processes and dierent small irms perorm each process
>ow 86E
>ac. o capital
@nwillingness to ta.e greater ris.s
>arger irm A higher expenditure A greater ris. o investment
4ear o uture all in price o inal product: expansion o output A
increase supply A excess supply A lower prices and
lower proits
8anding: small irms may 'and to gain advantages o 'ul. 'uying while
still retaining their independence
!roit cycles: early stage o product cycle A total demand or product
Gon-proit maximi7ation attitudes
Owner values independence or wants to maintain control
among amily mem'ers
Contented with reasona'le income rom domestic
@nwilling to ta.e increased ris.s associated with expanding into
*" Case Study
4actors: thin. long run vs" short run, demand-side vs" supply-side
EOS A lower >+,C A a'le to reduce price
!roits plough to r;d A 'etter ?uality products ; urther reduction in ,C
8loc. new entrants due to enormous 4C A less existing competitors A
increase share
,lways end EOS with ,C
/ a particular industry is stated in the extract, try to give egs o EOS speciic
to the industry
0" Essay
Survival o small irms: or conclusion, use 'anding I small irms may want to
merge in the ace o glo'alisation
&iscuss whether rising costs liit the si9e o" "irs o!er tie. #1'%
Si7e: sales revenue I turnover, level o output, share
Over time A long run A irm no longer constrained 'y ixed actor
1= Can limit
Short run cost
+eason: over-use o ixed actor, ineicient la'our-capital com'ination
A increase -C A eventual increase in ,C
/ncrease costs A all in proits i total revenue is constant A constrain
irm:s a'ility to expand
2= &ill not limit
>ong run
,ll inputs can vary A irm can expand A enDoy all in >+,C due to
internal EOS <list 2 egs=
4all in >+,C A all in price to ward o competitors <erecting 'arriers to
entry= A increase proits A plough into r;d A 'etter ?uality products ; i
yields results A urther all in ,C due to 'etter production methods
Si7e o irm determined 'y demand or irm:s product A i irm
supernormal proits A can still expand in si7e even i cost increases eg"
monopoly selling uni?ue products
Conclusion: 2owever, si7e o irm over time constrained 'y -ES <list 1 eg o
internal $OS=" -ES huge eg" electricity I water compared to -ES limited eg"
:an0ing /erger in Singapore .nalysis
&hy merge(
4ace competition rom oreign 'an.s A Singapore wants to expand 'eyond
our shores: 'ig A enDoy EOS A all in ,C A can compete with oreign 'an.s
Core part o Singapore economy A 111* ,sian inancial crisis A 'ig
&hy should not merge(
!ossi'le monopoly power
/ncrease price
Kuality o service
+eduction I removal o amiliar products and services A aects
consumer satisaction
Geglect lower-income group
Chapter ;: 6irs and 2ow They Operate 11
1" Comparison o the # -ar.ets
6ype !erect Competition -onopoly -onopolistic
Gum'er o
'uyers I
Go one 'uyer I seller
can inluence price
4irm price
Only one irm
4irm price setter
4O! relatively
&hen irm
decisions, does not
have to worry how
its rivals will react
4ew large irms
8arriers to
4O! perectly mo'ile
Go transaction I
transportation costs
-inimal sun. costs
Gatural: huge sun.
costs <,4C alls over
very large output A ,C
alls continuously A
enDoys huge /EOS=,
exclusive ownership
o essential raw
,rtiicial: non-price
competition, contrived
'arriers <cartel=, legal
protection: exclusive
rights <patents, taris
to 'loc. oreign irms=
Go I >ow
4irm lowers price A
proits spread thinly
over many rivals A
rivals suer
+etaliation unli.ely
Go collusion A .een
,rtiicial: legislation,
collusion I mergers,
Gature o
8uyers no preerence
Go close su'stitutes
CE$ and !E$ very
?uality, design,
2omogeneous I
or any irm low location, promotion
$emand price
Rnowledge !erect
Seller .nows rivals:
prices, costs
and availa'le
8uyers .now all
sellers: prices, ?uality
and availa'ility o
products A will not
purchase at a higher
price than e?uili'rium
Consumers not ully
aware o CO!
!roduction methods
and prices
Cost structures dier
as some irms enDoy
more avoura'le
locations I rentals
4irm:s curve
! B ,+ B -+
! P -+
Cannot increase 'oth
output and price at the
same time as curve is
downward sloping
! P -+
Some degree o
control over own
Go single e?uili'rium
price in A no demand curve
! P -+
4irm increases
price A other irms
will not
4irm decreases
price A other irms
ollow A may lead to
price war
!rice rigidity: menu
costs, ear o
harming irm:s
image <all in price
A all in ?uality=
Examples Stoc.
,gricultural products:
many armers in >$Cs
Starhu':s E!>
S-+6 or GS and E&
8u''le tea @R 'rewery
6axi companies
-o'ile service
4irm:s S+
Supernormal, normal I su'normal proits
-C B -+ and -C must 'e rising
4irm:s >+
Gormal proits
Gew irms will enter
industry to erode
supernormal proits
Gormal I supernormal
4irm will shut down i
su'normal proits
Gormal proits Gormal I
4irm produces at -ES
/neicient unless 'y
&ill settle at >+,C
that is not necessarily
at -ES
/neicient unless 'y
4irm:s !OM: all points on >+,C
Society:s !OM: -ES
! B -C
! P -C
Could 'e seen as premium society pays or product dierentiation
2" ,nalysis o /mperect Structures
6ype -onopoly -onopolistic Competition Oligopoly
,llocative ineiciency: ! P -C,
output 'elow optimum
!roductive ineiciency
E-ineiciency 'ut increasingly
reduced due to glo'alisation,
reduced customs duties and
'arriers to trade
$ynamic eiciency: r;d
,llocative ineiciency: ! P -C
!roductive ineiciency: do not
utilise optimal plant capacity,
do not exhaust potential or
urther EOS 'ecause all small
$ynamic ineiciency: no r;d
,llocative ineiciency: ! P -C,
output 'elow optimum
!roductive ineiciency
$ynamic eiciency: r;d
Mariety o
!ossi'le innovation and new
products: 86E stimulus to the
creativity re?uired to destroy
'arriers A monopoly proits
stimulates new entrants
producing new and competing
>arge variety A increase in
consumer welare
+;d and
!roits lead to une?ual income
distri'ution: dollar votes ; shit
o consumer surplus to
Supernormal proits A plough
into r;d A 'etter ?uality
products ; 'etter methods o
production A lower ,C 'ut there
is no guarantee that
monopolies will do this
-ore e?uity: no redistri'ution o
income rom consumers to
Gormal proits: no additional
proits to plough into r;d
Supernormal proits ploughed
into r;d
6heory vs
-ES high A /EOS A lower -C
than !C industry A lower ! and
higher oIp 'ut monopolies
charge high prices 'y
restricting output
!ractise price discrimination
Nhas 'oth costs and 'eneitsO
Gatural monopolies
!erectly contesta'le mar.ets:
costs o entry and exit 'y
potential rivals are 7ero, and
when such entries can 'e
made very rapidly eg"
deregulation o airline industry
in 11*0
2it and run competition:
contesta'le or certain seasons
eg" parcels service during
+educes wasteul competition
<instead o extensive
&asteul competition
,dvertising provides 'etter
consumer inormation which
helps move structure
closer to !C model 'ut loss o
consumer sovereignty
2igh price rigidity: price sta'ility
&asteul competition: more
li.ely to engage in extensive
advertising A encourages price
competition, with increased
sales volume and reaping o
EOS, price reduce urther
8ut possi'le monopoly power
through collusion
8ut multiple 'randing gives
consumers misguided
inormation in products
are rom dierent irms
advertising, money can 'e
spent to produce more goods=
3" !rice $iscrimination
!roducer sells speciic commodity to dierent 'uyers at two or more dierent
Same consumer charged dierent prices or same product or reasons not
associated with cost dierences
Seller has control over supply segmentation and identiia'le groups ; no resale
!roita'le: each as dierent !E$
4irst degree
!ractice o charging each customer his reservation
Captures all consumer surplus as revenue
Eg" auction sites
/mpractical to charge each customer a dierent price
4irm 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 ind out
Second degree
Charge dierent prices or dierent 'loc.s o the same
product to the same 'uyer
Eg" photocopying shops
6hird degree
Sells same product at dierent prices to dierent
6wo or more mar.ets which can 'e separated
!E$ o each must 'e dierent
2igher price charged in with more price inelastic demand
Cost: loss o consumer surplus
4irm: higher proits and may use these proits rom one to
withstand possi'le price war in ' into another
Consumer may not have 'een a'le to aord good otherwise
2igher proits may 'e reinvested into r;d A 'etter ?uality
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 proits might exceed losses such that irm will
still continue producing the good
&iscuss the !iew that the pro"it oti!e will always lead to a "ew large "irs
doinating the ar0et "or each and e!ery type o" product. #1'%
1= 8arriers to entry
4ew large irms merge A greater share A reap EOS A all in >+,C
A all in price A ward o rivals I 'loc. new entrants <natural 86E= A a'le to
maintain supernormal proits
/ plough into r;d A 'etter methods o production A urther all in ,C -
ma.e more proits
8ut some industries have low 86E <technology easily replicated= A low
sun. cost eg" retail, grocery
2= si7e
Small: eg" Singapore television 'roadcasting -ediacorp vs" -ediawor.s
4irms will eat into each other:s share A erode proits A so to
.eep proits Dust let one irm dominate 'ig: eg" @S then can aord to have ew large irms
3= Gature o product
>arge irms: uni?ue products with no close su'stitutes
Small irms: availa'ility o su'stitutes, prestige I services, locali7ed
demand, perisha'les, limited -ES A ashion, speciali7ation, personali7ed
#= 5overnment /ntervention I pu'lic:s desire
4ew large irms will help to reduce price A increase in consumer surplus A
increase in consumer welare
Supernormal proits A plough into r;d to produce 'etter ?uality products
&ill still have competition unli.e monopoly A still have the incentive to 'e
more cost-eicient I innovative
Explain what is eant )y producti!e and allocati!e e""iciency. #1$%
1" ,llocative eiciency
$einition: 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
someone else worse o
,ssumption: no externalities I pu'lic goods A ! B -C A right amount ;
type o good produced to maximi7e societal welare
/ -8 Q -C, last unit o good less than opportunity cost o producing
that unit A society 'eneits rom not producing that last unit
/ -8 P -C, last unit o good more than opportunity cost o producing
that unit A society 'eneits rom producing that last unit
,ssumption aside, -S8 B -SC
!erect competition: irm price
-+ B -C B ! A allocatively eicient
Kuantity 3
S <-C=
K1 3
2" !roductive eiciency
>ong run concept
4irm:s !OM
,ny given level o irm:s output produced at lowest possi'le ,C A all
points on >+,C curve are productively eicient
Society:s !OM
>+,C minimum A irm is at optimum si7e I -ES A all /EOS exploited
K1 3
<. "ir should )e encouraged to axii9e pro"its )ecause this a0es it
e""icient.= &iscuss whether this arguent is true "or a "ir operating in an
iper"ect ar0et. #1'%
C&hen comparing eiciency, only tal. a'out long run
1= ,llocative eiciency: ! P -C true or all imperect mar.ets 'ecause they are
price setters A deadweight loss to society A allocatively ineicient
2= !roductive eiciency: Got operating at -ES <where >+,C cuts -C= A not ully
exploited all /EOS A productively ineicient
!C industry needs to 'e at -ES 'ecause it needs to 'e as cost-
eective as possi'le A price A cannot pass cost increase to
Ms" imperect need not 'e at -ES 'ecause price setter A can
pass cost increase to consumers
3= E-ineiciency
-onopoly: lax in cost control A no existing competition A can pass cost
increase as price increase
8ut monopoly can also 'e cost eicient due to ear o new entrants
5lo'alisation and international competition
/ is contesta'le
4orce monopoly to 'e cost eicient
Oligopoly more li.ely to 'e cost-eicient compared to monopoly 'ut
wastage o resources A large scale advertising I promotion A increase cost
or irm and opportunity cost to society as the money could have 'een
used to produce more goods
#= $ynamic eiciency
Supernormal proits in long run A a'le to invest in r;d A 'etter methods o
production A all in ,C in very long run
Ms" !C industry: no dynamic eiciency
,+ -+
Kc Km 3
6riangle B $&>
&istinguish )etween onopolistic copetition and oligopoly. #1$%
6ype -onopolistic competition Oligopoly
Gum'er o
-any A one irm:s
action less li.ely to
aect others
, ew large irms A interdependence
A one irm:s action li.ely to evo.e
responses rom rivals
Gature o
$ierentiated eg"
retail: restaurants A
aect demand curve
A demand price
2omogeneous I dierentiated eg"
mo'ile service provision, petrol
companies I taxi companies, O!EC A
.in.ed demand curve
4irm increase price: rivals will not
ollow A ?uantity demanded or irm:s
product alls more than
proportionately A demand price
4irm reduces price: rivals li.ely to
ollow A price war ; ?uantity
demanded or irm:s product
increases less than proportionately A
demand price inelastic
Smaller scale >arger scale
>ess -ore: large share
>ow I no A low sun.
cost ; technology
easily replicated A
long run normal
2igh A natural: high sun. cost eg"
utilities, telecomm A 64C very huge A
>+,C .eeps alling A enDoys huge
EOS A very low >+,CA new entrants
cannot produce at such low >+,C
,rtiicial: patents
Ensure supernormal proits in long
Kuantity 3
Kuantity 3
Explain why oligopoly is a coon ar0et structure in any econoies.
1= 4irms want to 'e 'ig to maximi7e proits
-erger o small irms A EOS A all in >+,C A all in price A ward o rivals ;
'loc. new entrants
-onopoly A attracted 'y supernormal proits A monopoly loses its power
2= Society may desire oligopolies
Oligopoly A competition A greater innovation through r;d which
monopolistic competition cannot aord since it only normal proits
Ms" monopoly A lax A E-ineiciency
3= 5overnment:s intervention
Singapore government A ace o international competition in a ree,
local irms have to 'e 'ig eg" ' A go regional A li'erali7ation and
deregulation o industries: mo'ile service industry, taxi companies
4irms 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 A oligopolistic I even natural monopoly
eg" utilities, telecommunications, transport, 6M 'roadcasting in Singapore since si7e is too small A one single player most eicient
Explain why go!ernents throughout the world ha!e )een in!ol!ed in the
supply o" ser!ices such as electricity. #1+%
5overnment A social 'eneits ; social costs which private irms unli.ely to
ta.e into account
Electricity A essential good or households and 'usinesses
1= Could 'e a natural monopoly si7e cannot operate with more than one player at -ES: huge sun.
cost A ,C .eeps alling A private irms li.ely to 'e monopolistic A charge
very high prices A need or regulation
2= !rivate A does not cater to lower income group vs" government more li.ely to
do so
3= 2uge initial investment A private irm li.ely to charge higher price to cover
costs vs" government can su'sidise rom revenue I taxes
#= / there is competition among a ew private irms A wastage ; duplication o
resources vs" government: save costs or advertising
%= Earns revenue or government since it is essential
-ain point is that government does not want to ris. anything 'ecause electricity
and similar services are so essential
Kuantity 3
,+ -+ -C
Km Kc
Chapter >: 7o!ernent 1nter!ention in the /ar0et 11
1" +egulation o Gatural -onopolies
-C pricing: monopoly charge a price that is e?ual to -C in order to
achieve allocative eiciency
8ut monopoly incurs a loss A shut down A pu'lic deprived o vital
Geed to 'e supplemented with government su'sidies: costly to
government, 'urden on taxpayers
2-tier pricing: consumers pay a ixed sum o money or access to
service and price per unit consumed to cover marginal cost
Eg" electricity, gas
!roducer meets all CO! and minimi7es loss o social welare
,C pricing: monopoly charge a price e?ual to ,C A lower price and greater
output A increase in society:s welare
Gormal proits A via'le in long run
Still not allocatively eicient
4irms no incentive to .eep costs low since price is at whatever ,C they
are at
$iicult to o'tain accurate inormation on demand and cost estimates:
irms tend to overstate cost, conditions change constantly,
costly to ac?uire new inormation
+egulatory lag: irms may have to operate at a loss during time lag
Costly to administer
2" 6axation
>ump-sum tax on monopolist:s excessive proits A shits ,C curve
upwards A proits reduced A normal proits
+edistri'ute income rom producer to consumer
@se tax revenue to su'sidise welare schemes I production o merit goods
-ay create disincentive or monopolist to 'e cost-eicient
-onopoly can pass 'urden to consumers due to price inelastic demand
$ynamic eiciency compromised
3" >egislation
,nti-trust laws: ,nti-trust ,ct <@S= I Competition >aw <Singapore=: 'rea.
up monopoly
Eg" -icrosot Corporation: one irm own &indows operating system,
the other will own applications
-ay not 'e applica'le to natural monopoly I monopolies with great
incentives to underta.e r;d
4or'idding certain practices: eg" predatory pricing: setting price 'elow
CO! to eliminate competition
/mposing standards o provision eg" !u'lic 6ransport ,uthority in
Singapore governs standards o pu'lic transportation to ensure
guaranteed ?uality o product
/nsisting on certain levels o competition in industry: Singapore
government increasingly deregulates monopoly
#" Gationalisation
/ndustries with maDor investment eg" steel and coal industry, large
spending on r;d re?uired
@nair competition o state-owned enterprises with private sector
Gatural monopoly, presence o positive externalities, eliminate wasteul
>ac. o competition pressure A lac. o incentive A E-ineiciency
8ureaucracy A heavier 'urden on tax payers
Sunset industry
$ecision may 'e made or political rather than economic reasons eg"
Dust to .eep employment igures high
Special pricing policies eg" ree 'us rides or pensioners
Service which would otherwise not 'e provided eg" 'us route to remote
State monopoly no less disadvantageous to consumer than private one
A no higher authority to maintain chec.s and 'alances
4or strategic reasons eg" national deence
Seen as a move towards communism
%" !rivatisation
/ncreased competition A cost eiciency ; 'eneits or consumers eg"
lower prices, wider choice, improved ?uality
@nair competition o state-owned enterprises with private sector
Could 'e worse outcome
/ state monopoly replaced with private monopoly, possi'ly
lower output and higher price
/ high 86E
5reater eiciency
Commercially sounder decision eg" higher returns on
5reater accounta'ility to pu'lic A constantly need to perorm
well or ris. ta.eover 'y another irm
Gatural monopolies, externalities, e?uity issues
+evenue rom selling state assets
2igher corporate tax receipts i privati7ed company is proita'le
>ong term loss o revenue had the privati7ed irm 'een proita'le
No. Title Page No.
21 Chapter 1: Rey Economic /ndicators %3-%1
33 2ow ar can this inormation lead you to conclude that there is a
rising standard o living in Singapore(
31 $iscuss the actors that contri'ute to economic growth in a country" %#
32 Chapter 13: /ncome and Employment $etermination %%-%0
33 Explain what inormation an economist would re?uire to decide
whether the @S needed 9an economic stimulus:"
3# Explain what is meant 'y the e?uili'rium level o national income" %1
3% ,nalyse the eect on the e?uili'rium level o income o an increase
in the level o savings and an increase in the level o exports"
3) $iscuss the extent to which the @S iscal stimulus might lead to a
sustained increase in national income"
3* &hat are the main causes o Singapore:s recessions( )2
30 Chapter 11: /nternational Economics )3-))
31 Explain the theory o comparative advantage" )*
#3 6o what extent does the theory o comparative advantage explain
the pattern o trade 'etween Singapore and the rest o the
#1 $iscuss whether protection oers any advantages over
#2 Explain the rationale or ree trade and discuss the extent to which
46,s are 'eneicial"
#3 6o what extent can economies 'eneit rom glo'alisation( *%-*)
## $iscuss the opportunities and threats o glo'alisation or Singapore
and other ,sian economies"
#% Consider the eects, other than on the general price level, o
Singapore:s changing tax structure"
#) !olicies to remedy Singapore:s recession *1
#* Evaluate methods the -alaysian government might use to slow
down import growth and increase new export 'usiness"
#0 S6o 'e considered successul, an economy needs to achieve low
unemployment, low inlation and sta'le economic growth"T 2ow ar
do you agree with the statement(
#1 S6o 'e considered successul, an economy needs to achieve low
unemployment, low inlation and sta'le economic growth"T Explain
this statement"
%3 $iscuss whether iscal policy is the most eective way or
Singapore to sustain a successul economy"
%1 /n the ourth ?uarter o 233#, Singapore:s unemployment rate rose
to 3"*L" $iscuss whether supply-side policies are the 'est way
o achieving ull employment in Singapore"
%2 &hy Singapore does not use interest rate policy 0#
%3 !ro'lems with exchange rate insta'ility 0#
J+ Topics
Chapter ?: @ey Econoic 1ndicators
1" Rey -acroeconomic ,ims
Strong sustained economic growth
>ow inlation
>ow unemployment rate
2ealthy 8O!
2" Gational /ncome Statistics
5ross domestic product: value o all inal goods and services produced within
a given country during a given period o time
-easure economic growth
@nderstate nation:s output: omission o activities
<voluntary welare services= and underground economy
$iiculties in measuring SO>
>eisure time
!roduction does not e?ual consumption: expenditure
could 'e or potential growth
/ncome distri'ution
Other social actors: eg" crime rates, reedom
/nternational comparisons
$ierence in account procedures and items included
Exchange rates: need to use !!!
!opulation: need 5$! per capita
$ierence in climate and culture: dierent needs A
dierent costs
$ierence in underground economy: Sweden:s
underground economy 13L o 5$!
,lternative measures o SO>
2$/: lie expectancy, education, 5$! per capita at !!! rates
-E&: leisure, 5$! per man hour
5ross national product: value o all inal goods and services produced 'y
residents o a country, regardless o the location o production, during a given
Get national product: 5G! A depreciation
Gominal: at current prices vs" real: at constant prices
3" /nlation +ate
C!/: measures change in price o ixed ' o goods and services
commonly purchased 'y households in a speciied time period
Got an accurate measure o CO>
Su'stitution 'ias: consumers su'stitute toward goods that have
'ecome relatively cheaper A overstates CO>
Kuality adDustment: C!/ increase might 'e due to ?uality adDustments A
overstate inlation
Gew products: price declines sharply a ew years ater introduction A
not added to ' until years ater introduction A price
declines not recorded
#" @nemployment +ate
@nemployed: people aged 1% and over who are without wor. 'ut were
availa'le or wor. and were actively or a Do'
4rictional unemployment: unemployment 'ecause time ta.en or wor.ers to
search Do's and or irms 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
%" 8alance o !ayments
+ecord o country:s international transactions
Current account
Misi'le: imports and exports o goods and services A 8O6
/nvisi'le: proit repatriation, interest, dividends, unilateral transers
Capital account
!ortolio: 'onds, shares, money in 'an.s
$irect: 4$/
4inancial account: something li.e 'an. reserves
Singapore has en4oyed another year o" ro)ust growth in +$$;, and the real
7&P growth was ;.'A "or the year. . record 1;+$$$ 4o)s were created
in the "irst , Buarters. 2owe!er, in recent onths, in"lation has pic0ed
up and the in"lation rate "or the onth o" No!e)er alone was 5.+A.
2ow "ar can this in"oration lead you to conclude that there is a rising
standard o" li!ing in Singapore* #+'%
SO> A material and non-material well 'eing o each citi7en
,= -aterial well 'eing
+eal 5$! per head: on average how much goods I services each citi7en gets
to consumer
+eal: adDusted or inlation as converted to constant prices
2igh or a developed country
>imitation: does not show eect o changes in population si7e
!er head: eect o population si7e eg" i 5$! increases 'y *"%L 'ut
population increases 'y 1L, 5$! per head alls
Singapore: over 1 year: changes in population si7e little 'ut could have
'een some increase due to open-door policy
/ncome gap A 5ini coeicient
5ini coeicient glo'ally used as a measure o income disparity, with 3
indicating perect e?uality and 1 perect ine?uality
Singapore: 3"%2 in 233)
/ncreasing gap in Singapore due to glo'alisation: displaced 'y
machines, structural changes, inlux o oreign wor.ers, outsourcing
6ype o spending
Capital vs" consumption goods
5overnment spending
$eence vs" spending that directly increases SO>
1*2333 Do's
2igh incomes A increase consumer spending which increases demand
or goods and services, generating more Do's and employment
$ue to investments 'y oreign companies eg" in 233* plant speciali7ing
in harnessing solar energy set up in Singapore A indicates investor
>imitations: )3L Do's went to oreigners, num'er o Do's destroyed vs"
num'er o Do's created, si7e o la'our orce may have changed so it is
not that unemployment rates ell, composition o Do's <or lower-s.illed
wor.ers(=, ratio o dependants to population
/nlation rate
+eal: adDusted or inlation
Cause: mainly cost actors li.e high imported oil price, imported ood
shortages, partly 5S6
>ower-income group suers more in the ace o urther increase in
prices I income gap
8= Gon-material well 'eing
Education A literacy rate
Singapore: high literacy rate due to compulsory primary education,
heavily su'sidi7ed
5overnment emphasis on upgrading o s.ills and training su'sidies to
irms or such purposes
2ealthcare A inant mortality rate I lie expectancy
Singapore: individual responsi'ility ; government spending A 3-
ramewor. A -edisave, -edishield, -ediund
,void excessive 'urden on state and tax payers
&ith increasing medical costs ; ageing population, KO> o some
<lower-income group(= may 'e aected
>eisure: 5$! per man hour
Others: negative externalities eg" pollution
Other indicators: 2$/, -E&, 5G!
&iscuss the "actors that contri)ute to econoic growth in a country. #1+%
Economic growth measured 'y 5$! growth rate and is the means to improve
living standards
1= Kuantity and ?uality o resources
Kuantity and availa'ility enhance growth potential
>and: includes natural resources li.e mineral deposits and oil eg" oil-
rich Saudi ,ra'ia
>a'our A la'our-a'undant countries li.e China and /ndia
Entrepreneurship A availa'ility o talents and individuals eg"
sel-made entrepreneurs in 2ong Rong
Kuality can 'e enhanced through government eort and policies
/ncrease la'our productivity through training and education
Capital A government eorts to ma.e it more conducive or ixed
capital ormation
2= +ole o government
,ugment ?uality 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: relection o good macroeconomic management 'y
government, competitive price and lowered CO! A a'ility to attract 4$/
due to lower wages
Eicient inrastructure
,ttractive corporate taxes
>ess 'ureaucracy and red tape
,'ility to explore new mar.ets I help 'usinesses go glo'al
3= >evel o consumption, investment and government spending in economy
2igh consumption conducive when economy has unutili7ed resources while
high savings conducive when economy near or at ull employment
Savings provide investment unds necessary or growth
5overnment iscal and interest rate policies
2igh export revenue due to competitiveness
Chapter 1$: 1ncoe and Eployent &eterination
1" ,ggregate $emand
6otal level o spending in an economy
,$ curve slopes downwards 'ecause
&ealth I real 'alance eect: 5!> higher A purchasing power o
inancial assets alls A discourages domestic consumption A lower level
o output
/nterest rate eect: higher 5!> A increase demand or money rom
households and irms ; might shit wealth out o inancial assets A
decreasing supply o loana'le unds A increase in interest rates A more
expensive to purchase goods and services on credit A households
purchase less goods ; 'usinesses invest less A lower national output
/nternational su'stitution eect: higher 5!> A locals 'uy more oreign
goods ; oreigners 'uy less domestic goods A net exports all A lower
national output
4actors that cause a shit
Changes in expectations: income and proits, real wealth, inlation
Changes in government policies
Changes in world economy: income a'road, oreign price level,
exchange rates
2" ,ggregate Supply
6otal output o goods and services that irms as a whole would li.e to produce
and sell at each possi'le price level
2ori7ontal: producers can produce all they want due to a'undant
@pward sloping: output rises 'ut pressure on prices
Mertical: need time to adDust to new cost structures
4actors that cause a shit
Change in input prices
Change in ?uality o la'our input
Change in expected rate o inlation
Change in technology
5overnment policies <local and oreign=
3" Consumption 4unction
,ct o using income or the purchase o goods and services to satisy current
C B a;'F
a represents autonomous consumption: level o consumption that does
not vary with income A still need to consume even though no income
'F represents induced consumption: household expenditures that vary
directly with income
': -!C B change in C I change in F
Gon-income determinants
&ealth: amount o money, ixed assets and inancial assets
households have
Expectations o uture prices and income
$istri'ution o income
/nterest rate and availa'ility on credit
6astes and attitudes
#" /nvestment
,ct o ac?uiring new ixed capital assets and accumulating stoc.s and
,utonomous: not inluenced 'y national income vs" induced
Expected rate o return P rate o interest A will invest
4actors that cause shit
8usiness conidence and expectations
Cost and availa'ility o capital goods
+ate o change o income: accelerator eect
5overnment policies
Change in technology
Y = C
C = a + bY
W = dissavings, X = breakeven point, Z = savings
%" E?uili'rium >evel o /ncome
,t OF1
,E B aF, F B 'y ,E Q F
unplanned inventory investment a'
next period irms reduce output
F1 alls to e?uili'rium F3
,t OF2
,E B dF2, F B cF2 ,E P F
excess demand, irms draw on stoc.s
unplanned disinvestments cd
next period irms increase output
F2 rises to e?uili'rium F3
)" 6he -ultiplier Eect
, change in any component o aggregate expenditure <ie" C, /, 5 or E= will wor.
through the multiplier to change the national income more than proportionately"
Interest rate
National output
Y = AE
,s shown in the diagram 'elow Nreer to diagram a'oveO, an increase in ,E will
cause the ,E curve to shit rom ,E3 to ,E1" ,t the original level o national
income F3, since ,E is now greater than actual national output, there is an
unplanned all in stoc.s o ,8" /n the next period, irms would increase output,
causing the level o national income to rise eventually to F1, where the new ,E
e?uates the national output"
6he initial rise in income due to <any rise in component: depends on ?uestion
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
inDection o U133m and a constant -!C o 3"%, the national income will eventually
rise 'y 2 times the initial inDection"
/n short, the multiplier measures the change in national income as a result o the
change in ,E" /t has a direct relationship with the -!C, expressed as .B1I<1-
-agnitude o increase in GF depends on si7e o multiplier
>arger the -!&, smaller the multiplier
-ay lead to demand-pull inlation i near or at ull employment
8O! A inlation aects price o exports and may have adverse eect on 8O6
*" /nlationary I $elationary 5ap
,mount o ,E that alls short o <cd=I exceeds <a'= the level necessary to
achieve 4E
Explain what in"oration an econoist would reBuire to decide whether
the CS needed <an econoic stiulus=. #1$%
&ea. economy A assume pending recession A all in 5$! or 2 consecutive
?uarters <negative 5$! growth=
4all in real 5$!
Components o ,$: all in ,$ A all in 5$!
Consumption level o households: due to all in income I saving in ear
o retrenchment
4all in investment: 'usiness pessimism, induced: all in 5$! A all in
/nlation: all in 5$! A all in ,$ A all in 5!> I all in inlation rate
Geed inlation rate to arrive at real 5$!
4irms and 'an.ruptcy, irms and decreasing proits
Stoc. mar.ets: indices all A conidence all
4all in real 5$!
&hat causes all: CI/I5IE--: 8O6: more relevant or Singapore since
Singapore:s recession mainly due to 8O6
5$! A income, wages and proits, 'an.ruptcy
/nlation: all in 5!> 'ut staglation <economy wea.ening 'ut price increasing=
A price increase in @S not due to recession: not ,$ actors 'ut ,S actors
@nemployment rate A rough guide: #L - cyclical A no Do' A demand deicient
Explain what is eant )y the eBuili)riu le!el o" national incoe. #1$%
GF: as measured 'y 5$! <deinition=
E?uili'rium: no tendency to move rom that e?uili'rium
$escri'e 'riely components o ,E
C <households=: shape o ,E ollows shape o consumption unction
Simple explanation o components
Sign o #% degree line: every point is an e?uili'rium point where ,EBF
E?uili'rium level o GF: planned ,E B F" ,E curve cuts #% degree line
,dDustment to e?uili'rium
Conclusion: when economy is in e?uili'rium, may not 'e at ull employment I
.nalyse the e""ect on the eBuili)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
F B C ; S
/ncrease in S A all in C A ,E alls A ,E curve shits rom ,E1 to ,E2
Show adDustment to e?uili'rium
Summation: increase savings A all in C A wor.s through multiplier A all in GF
'y a ew multiples
Savings can 'e good or economic growth A increase supply o
loana'le unds A interest rate alls A cost o 'orrowing alls A increase /
A increase productive capacity A increase ,S A increase GF
Summation: S decreases actual growth 'ut increases potential growth
8" Exports
/ncrease E A increase ,E A ,E curve shits rom ,E2 to ,E1
Show adDustment to e?uili'rium
/ncrease E A i have unemployed resources A increase GF
/ncrease E A i near I at 4E A GF may not increase as ast I demand-
pull inlation
$iscuss multiplier process in detail
-agnitude o change in national income depends on si7e o multiplier
>arger -!&, smaller R
Eg" Singapore
&iscuss the extent to which the CS "iscal stiulus ight lead to a
sustained increase in national incoe. #1'%
4iscal: increase 5, decrease 6
Sustained: actual ; potential growth
2ow iscal stimulus wor.s: lower taxes <increase CI increase /= ; increase 5 A
increase ,$ A increase GF: actual growth, cannot sustain
-ultiplier in detail
Evaluation: depends on si7e o multiplier
@S, A -!- could 'e high 'ecause hug e trade deicit A may reduce
si7e o .
Crowding out eect: increase in 5 i 'orrowed rom pu'lic A decrease
in supply o loana'le unds A increase in interest rate A crowd out CI/ A
cannot sustain
Eects o taxes on C and / unpredicta'le due to pessimism
+eaches 4E: cannot sustain
6hereore need supply-side measures to increase ,S or sustained growth A
potential growth I increase in productive capacity
/ncrease in 5 on inrastructure A acilitates 'usiness A increase ,S
6ax A increase GF <potential=
$ecrease personal taxes A increase incentive to wor. A increase ,S
$ecrease corporate taxes A increase / A increase >+,S
Condition: i re'ates are permanent 'ut according to pream'le, re'ates
seem to 'e one-o
-ore policies to 'oost ,S A education and training A increase productivity A
increase >+,S
(hat are the ain causes o" Singapore=s recessions* #1$%
1= 4actors leading to all in ,$
External actors A pessimism eg" 111, S,+S <only caused a slowdown in
Singapore:s economy=, 111* ,sian crisis A CI/ all
6rade deicit: value o E ell due to 111
>ose C, A goods more expensive
4all in income o trading partner
2= External recessions
@S recession A @S 5$! all A 'uy less Singapore goods A Singapore:s E alls
A ,$ alls A 5$! alls <multiplier eect=
Singapore may not 'e that aected A can ride on growth o China I /ndia
8ut China huge trade partner o @S,
Singapore: international momentum
Extension o -+6 A increase 5 A . A increase GF
/+: increase / A increase GF ; tourist revenue
FO5: tourist revenue
Cannot sustain since . is small
3= Supply-side actors
Supply shoc.s: 11*3 oil crisis A increase CO! A all in ,S
8ut overwhelming cause is due to ,$, 'ut recogni7e that all in ,S can also
create a recession
Chapter 11: 1nternational Econoics
1" 6heory o /nternational 6rade
Exchange o goods and services 'etween countries, involving the use o
dierent currencies and crossing international 'orders
6heory o comparative advantage: produce good at lower opportunity cost
than another country
$ierences in actor endowments that can change over time
$ierences in technology
$ynamic comparative advantage
,dvantages o trade
5reater 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,
increase competition in home
4acilitate transer o technology and ideas: increase eiciency o
production A economic growth, help developing countries leap rog
!romotes 'eneicial political lin.s
8eneits consumers: more choice and higher satisaction levels, lower
prices compared with local products, 'etter ?uality products
$ynamic gains rom trade: gains grow larger over time
$isadvantages o trade
@nair competition and dumping I unnecessary government su'sidies
Over dependence on other countries
/mport harmul goods
6erms o trade: rate at which country exchanges its exports or imports
Change in demand conditions: population, income, availa'ility o
Change in supply conditions: technology, depletion o natural
non-renewa'le resources
Conse?uences o change in 6O6
Change in 8O6 and SO>: dependent on !E$ o exports and
imports, cause o change, responses that ollow
+eallocation o resources
Change in consumption patterns
2" 8arriers to 6rade
2igh transport costs A raises CO! and lowers relative eiciency
>ac. o mo'ility o actors
/ncreasing CO! due to >$-+ 'eyond certain level o output
Other imperections: imperect inormation and
conditions A may not speciali7e to extent that theory suggests
,rtiicial: protectionism
6ari: custom duties imposed on imports o goods and services 'y
$epends on !E$ o imports and how much oreign suppliers
are willing to a'sor' A may not protect domestic producers, Dust
a source o government revenue
Cuts volume o imports A improve 8O6 A exchange rate
appreciates A exports more expensive a'road A reduce exports
in the long run
Gon-tari: import ?uotas
5reater certainty o protection since revenue earned 'y oreign
suppliers may not 'e as 'adly aected as tari
Export su'sidies: cash grants 'y government to local producers
+educes CO! A sell more o good at prevailing price
-ay induce complacency
$rain on government unds
4oreign exchange control: government control over sale and purchase
o oreign exchange
4inancial ?uotas, charges made on people purchasing oreign
-alaysia used this method to recover rom 111* ,sian inancial
$iicult to enorce and might result in 'lac. or oreign
&or.s 'est in communist countries 'ecause government
monopolises money conversion
Others: em'argo, trade agreements, international cartels
Gew protectionist measure: technical speciications and
standards which discriminate in avour o domestic producers
,dministrative regulations regarding import procedures to delay
and reduce volume o imports
Moluntary export restraints <ME+=: exporting country voluntarily
reduces its exports under threats o all-round trade restrictions
eg" @S automo'ile industry vs" Japan:s
3" ,rguments or !rotectionism
!rotect inant industry eg" Singapore had protective duties covering
V333 items in 11)3s
$iicult to identiy currently unproita'le industries that might
ac?uire comparative advantage in the long run
$iicult to decide when industry can 'e independent o
Encourage ineiciency
+educe 8O! deicits
$ependent on !E$ o imports and exports
Geed to loo. at root causes
/nvite retaliation A reduced exports A reduced total volume o
world trade
!revent unair trade practices
$umping A distorts A Dustiia'le
/ consumers 'eneit in the long run rom lower import prices A
not Dustiied
$iversiy economic structure
-ay not support theory o comparative advantage
!attern o comparative advantage can change over time
naturally <discovery o new raw materials= I through deli'erate
!rotect mature industries
6rade unions
-isuse o resources since protectionism will not increase total
!rotect against low-wage oreign la'our
+eDection o theory o comparative advantage
Could shut down industries and divert resources to more
productive ones
Consumers denied opportunity to 'uy rom cheaper source A
'eneits o trade lost
/ncrease domestic production: counter-cyclical measure
/ncrease government revenue
6o 'e eective, should 'e imposed on goods which are price
@nhealthy or word trade and ineective
$istort and reduce dierences in comparative advantage
&elare loss
-isallocation o resources: irms unnecessarily retained
$iicult to remove protectionist measures once in place
Other industries may demand or protectionism
8etter alternative: stimulate export competitiveness 'y
increasing ,S
Essential to produce on military weapons in case o crisis A su'sidies
industry to ensure continuous supply eg" @S 1103s semiconductor
industry or high-tech weaponry vs" Japan:s
Gation poorer 'ut value o national security higher
6rade as weapon o oreign policy eg 5ul war: @S imposed trade
sanctions against /ra?
Su'sidise agricultural sector to avoid urther depletion o population in
rural areas I prevent urther rural-ur'an migration to overpopulated
+estrict import o harmul goods
#" 6ari $iagram
>oss in consumer surplus B a ; ' ; c
; d
a 'ecomes producer surplus, c 'ecome tax revenue, ' ; d 'ecomes deadweight
Consumption eect:
" +educe consumption rom OK# to OK3
" +educe consumption o imports and switch to domestically produced
" !ay extra amount <!2 A !1=
" Consumer surplus alls
!roduction eect:
" Expand production rom OK1 to OK2
" /ncrease revenue
" !roducer surplus increases
5overnment revenue eect:
- +eceives as tax revenue extra amount paid 'y consumers or the imported
Explain the theory o" coparati!e ad!antage. #1$%
Comparative advantage: speciali7e 'ased on lower opportunity cost A less o
the other good oregone
,ssumptions: 2 countries 2 goods, no transport costs, constant returns to
scale: >+,C remains constant
,ssume @S, and China each has 23 units o resources, initially use 13 units to
produce each good
6a'le 1: 8eore speciali7ation
Cars 6extiles Opportunity Cost
@S, 133 )3 1C: 3")6
China % 13 1C: 26
6otal 13% *3
@S,: C, in production o cars A give up less textile
China: C, in textile A give up less cars
@S, devotes 1I13 more to car, China complete speciali7ation"
6a'le 2: ,ter speciali7ation
Cars 6extiles
@S, 113 %#
China 3 23
6otal 113 *#
&orld output increases
6erms o trade: mutually 'eneicial 3")6 Q 1C Q26 A 1C traded or 16
@S, exports 13 cars, gets 13 textiles
6a'le 3: ,ter trade
Cars 6extiles
@S, 133 )#
China 13 13
6otal 113 *%
5ains rom trade: higher level o consumption
Comparative advantage A gains rom trade, more choices, increase growth
>imitations o C,: relax assumptions
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'%
Singapore:s constraints A lac. o natural resourcesH small geographical si7e
and population A human capital our only resource
Singapore:s relative strengths A good geographical location
Our constraints and strengths determine where our C, lies
!attern o trade: type o exports and imports o goods and services
,= Fes
6ype o exports
11*3s 6extiles and simple manuactured
>a'our-intensive industries:
Cheap, uns.illed and surplus
1103s -ove towards higher-end products
and electronic productsH moving
towards services li.e ' and
inance, tourism
Capital-intensive industries:
-ore educated wor.orce and
improved technology
>oss o C, in la'our-intensive
industries to countries li.e
-alaysia and /ndonesia which
have huge la'our orce
Electronics, pharmaceuticals,
telecommunication e?uipment,
dis. drives, integrated circuits
Services: ' and inance,
tourism, educational hu', medical
2igh value-added, .nowledge-
intensive, technology-intensive
2ighly ?ualiied la'our orce, r;d
Continue to lose C, in
manuacturing industries to
countries li.e China and /ndia
6ype o imports
>ac. o C,
/mports: consumer items, ood,
raw materials, capital goods or
development and inrastructure
>ac. o natural resources
especially lac. o land or
agriculture and to support huge
export 'ase
8= Go, there are other actors
6rade 'ased on world demand
C, only gives rationale or trade 'ut countries try to augment and
develop C, in industries with world demand
4or country to develop and provide opportunities or its population o diverse
talents, needs to have spectrum o industries
$iversiication to reduce negative conse?uences o over-dependence
$esire not to rely on oreign supplier or essential goods
Gational pride I security eg" Gewater
&iscuss whether protection o""ers any ad!antages o!er speciali9ation.
!rotectionist measures
,dvantages o speciali7ation 'ased on C,: gains rom trade, increase E A
economic growth, wider choice, EOS A all in >+,C A competitive prices,
eiciency in resource allocation in the world, welare gain i world price
cheaper than domestic price
/nant industries
+ationale: G/E, reasons o economic diversiication A impose ?uotas I
taris A allow new industries to grow and develop EOS
S+ implications: applies or all reasons to protect as long as use
?uotas I taris
Society: $&>
Consumers: increase price
Other irms <some extent=: increase CO! i good protected is
important input eg" steel
>+ implications
5row A enDoy EOS A lower >+,C A lower price o exports A a'le
to compete internationally A 8O6 improves i demand is price
elastic A increase in total revenue rom exports A increase
exports A increase GFIG
/ do not grow
/ government su'sidi7ing A waste o resources A could have
'een used elsewhere A education I healthcare I develop
Consumers and society continue to suer rom ineiciency A
higher prices
Shut down A massive retrenchment
Summation: 6o the extent that inant industries grow" 2owever, the
inant industries normally do not grow and may 'ecome ineicient due
to government su'sidies" !rotectionism cannot 'e long term"
/neicient industries
Eg" @S steel industry, textile: 9slap: taris I ?uotas on Chinese textiles I
imported steel A allow ineicient irms to eventually 'e a'le to 'e more
eicient A develop new technology I adDust cost structures
Eg" steel A aects CO! in many other industries eg" housing, cars A
cost-push inlation A aects domestic and erodes export
Summation: protect Do's in ineicient industries 'ut more Do's lost
elsewhere eg" car industry
,lternative solution: develop C, in new industries: capital-intensive,
technology-intensive, services, training
4oreign country selling goods 'elow its actual CO! A local irms driven
out A eventually oreign country gains monopoly power
$iicult to ascertain i it is dumping I country really has C, in
production o these goods A Chinese textile ; a'undance o cheap
Could 'e 'aseless accusation
Solution: orce irms to 'e more cost-eicient <don:t protect=, training
<su'sidise irms or training=, su'sidise r;d
Economic diversiication
+educe over-dependence on a ew .ey products I industries
Eg" Wam'ia: copper exports A what i world demand alls
8alance o trade deicit A value o imports P value o exports
Eg" @S huge trade deicit A @S, consumes a lot, including on imports
A 'reed urther ineiciency
,lternative solution: increase interest rates A encourage people to save
; discourage consumption
>+: high C A low S A low investment A aects productive capacity A
low >+,S <ineiciency=
Gational security
Eg" steel A war weapons
/ country protects, other countries retaliate A world ineiciency
Explain the rationale "or "ree trade and discuss the extent to which 6T.s
are )ene"icial. #+'%
4ree trade A 'ased on C, A lower opportunity cost ratio A gains rom trade
46, A remove tari and non-tari 'arriers A in theory A in practice eg
Singapore:s 46,s A also include investment
,= Expounding theory o C, A dierence in actor endowments
3 ta'les
Summation: gains rom trade, increase choice I increase society:s welare,
increase economic growth and SO>
8= ,re 46,s 'eneicial
On trade
/ncrease E A . A increase GF I G A associated 'eneit o large-scale
production A EOS A all in >+,C A a'le to price goods more
competitively A may improve 8O6
Singapore: small domestic
China: may not 'e as dependent on E revenue 'ecause people are
getting more aluent" C increase can sustain itsel 'ased on internal
Cam'odia I Mietnam: G/Es 'ecause people are poor
8ut increase E A demand-pull inlation when near I at 4E A price o
exports increase A volume o exports A may aect 8O6 A GF alls
aects economic growth
,ccess to cheaper consumer goods ; raw materials I inputs A all in
CO! A all in price o exports A E increase A may increase 8O6
4all in CO> A extra savings can 'e used to 'uy domestic goods A
increase C I GF
!rice o consumer goods
Kuantity o consumer goods
13 3 33 %3
a '
a;' B welare gain
a: production eect, ineicient domestic irms orced to reduce output
rom 33 to 13
': consumption eect: increase C rom 33 to %3
4rom diagram, irms orced to 'e more cost-eicient A cut costs in
order or proits not to 'e eroded since ! is at !w
6rade creation I diversion
Creation: increase volume o trade A rom high-cost producer to low-
cost producer A increase welare o people
$iversion: rom low-cost non-mem'er to high-cost mem'er A away
rom optimum allocation o resources
$raw diagram to illustrate eects
Jo's: increase in E A increase G
8ut loss o C, A orced to restructure A move towards C, A structural
Outsourcing A irms 'eneit 'y relocating A increase 8O6 A increase
8ut cost Do's in previous country
On 4$/
Outward investment to China rom Singapore
/ncrease investment A increase productive capacity A increase ,S
/ncrease investment A increase ,$ A increase G I GF
6ranser o technology
@seul or G/Es A lac. wealth I local entrepreneurs eg" Singapore
depends on -GCs
8ut ootloose
8ut local irms cannot compete
Mulnera'ility to external shoc.s due to over-dependence A recession I
imported inlation
/nterdependence: economies 'ecome intertwined eg" @S, recession A
Singapore recession, worldwide ood prices increase
!ossi'ility o une?ual gains
-ore S6 capital outlow to China 'ut >6 proits A increase 5G!
>oss o Do's as companies go to China
Shited ocus to capital-intensive I technology-intensive A ocus
on services
5ain A education: Chinese students come here to study
@S, spend a lot 'ecause lost C, in lots o goods A need to 'uy
more imports A worsen trade deicit A less savings A less
investment A reduced productive capacity
$emand or capital goods
46,: macroo'Dective A increase GF A increase SO>, all in price A
increase 8O6
6rade creation P trade diversion
C46, means reer trade A no restrictions among countries vs" ree trade, so
arguments similar, only dierence is trade creation I diversion
To what extent can econoies )ene"it "ro glo)alisation* #+'%
5lo'alisation A ree movement o goods and services, capital, la'our
Economic integration: 46,, customs union
,= 5oods and services
6rade 'ased on C, A gains ; EOS
!oor A G/Es ; Singapore <small domestic A increase E A increase GF
I G A increase SO>
,ccess to cheaper goods
Consumer goods A lower CO>
+aw materials A Singapore I 2ong Rong
Capital goods or inrastructure A Cam'odia I Mietnam A increase
societal welare ; potential growth
$raw in ree trade diagram and illustrate gains
6rade diversion vs" trade creation: diagram
>oss o C, eg" @S, steel and textile industry, Europe car industry A 'ut
restructure and move towards new C,
/nter-dependency eg" @S, aect China I /ndia
Over-dependency due to C, and complete speciali7ation A that:s why
countries tend to partially speciali7e I diversiy their economies
Eect on prices A imported inlation
6aris due to protectionism: draw in diagram
8= Capital <associated technology= A 4$/ <inward and outward=
+eceiving country
/ncrease inward investment A increase ,S I ,$ A increase GF I G
5rowth o local supporting industries
6ranser o technology
4ootloose A may cause massive retrenchment i suddenly leaves
>ocal industries cannot compete A lac. o S-Es
Source country
S+: loss o Do's
S+: outlow o capital
>+: restructuring
>+: -ore companies internationally A increase 5G!
>+: Create Do's
C= >a'our
4or >$Cs, provide Do's or la'our A cheap
-ay 'e S+ exploitation A 'ut vs" no Do's
Eg" Mietnam A inlation V11L - lower income wage rise Q price rise
4ree low o la'our A inlux o oreign wor.ers A depress wages in Do's where
supply elastic <a'undant supply o manual wor.ers= A no s.ills
Eg" Singapore I E@ A inlux o wor.ers into @R
Solution: provide training
8rain drain
/ne?uity issue
-anual wor.ers wages all
S.ills demanded glo'ally A increase demand or wor. A increase
wages or s.illed Do's
$ual economy
Caters to international A people grow richer
Caters to domestic A people do not really get richer
&iscuss the opportunities and threats o" glo)alisation "or Singapore and
other .sian econoies. #1+%
5lo'alisation: high degree o reedom o movement o goods and services
<trade=, capital, technology <-GCs= and talent <la'our=
1= 5lo'alisation and ree trade
Export revenue and higher rate o economic growth
/ncrease in E A . A increase G I GF
/ncrease - o capital goods I raw materials eg" Mietnam I Cam'odia I
Competition causes countries to lose C,
Singapore lost C, in la'our-intensive industries in mid-03s to
G/Es li.e China and /ndonesia
S+: structural unemployment
>+: eorts may pay o i country reali7es C, in new industries
Singapore shited to capital-intensive then .nowledge-intensive
Specialisation and over-dependency on ew maDor products
/ some countries adopt protectionist measures, trading partners
could 'e adversely aected
/nterdependency o countries
Economies o maDor trading partners ta.e a slide, countries will
'e aected eg" 111, @S recession
2= !resence o -GCs and out-sourcing
/nlux o -GCs in ,sian countries helped their economies grow
Creation o Do's and contri'ution to 5$!
6ranser o technical .now-how
Outsourcing eg" @R /6 companies phone service operations to /ndia
4ear o over-dependency: -GCs ootloose A i pull out, adverse eect
on Do's and economic growth
$earth o local irms
3= /nlux o talent
/ncrease ?uantity o resources A shit !!C outwards
8ut cheap oreign la'our A wages in city all A lower income
Consider the e""ects, other than on the general price le!el, o" Singapore=s
changing tax structure.
,= /nlation
Eect o increased reliance on indirect taxes A deinite inlation A shit in
/ncrease indirect taxes A increase CO! or all irms A all in ,S A all in
GF <contractionary= ; rise in 5!> A cost-push inlation A 8O6 may
worsen <depending on !E$=
Eect o decreased reliance on direct taxes A may or may not have inlation A
shit in >+,S and ,$
4all in direct taxes A CI/ increase A ,$ increase A GF increase
<growth= I G increase A i near I at 4E: demand-pull inlation <a little
may 'e desira'le 'ecause increase output= A 8O6 worsen <depending
on !E$=
>ower income taxes A income I su'stitution eect A may increase
incentive to wor. A increase ,S A increase GF A all in 5!> A 8O6
>ower corporate taxes A increase / A increase GF A all in 5!> A 8O6
Singapore: .eep I attract talent A increase eiciency
,ttract -GCS A increase 4$/ A increase ,$ <increase G= and increase ,S
<increase productive capacity=
8= E?uity
/ncome taxes <direct= A progressive A higher the income, the higher the
percentage to tax A reduce income gap
/ndirect taxes A regressive A lower the income, the higher percentage to tax A
increase income gap A aects poor more
Cost-push inlation A increase CO> A aects poor more
>ower direct taxes A increase income gap 'ecause rich pay proportionately
less <usually reduce the percentage tax o rich more=
Corporate taxes ixed at 10L: neither progressive or regressive
C= 6ax 'ase
/ncrease indirect taxes A widens tax 'ase A 'etter to rely on due to ageing
population A increase num'er o dependants I decrease in si7e o la'our
$ecrease direct taxes: on population and irms
$= ,'ility to evade
/ndirect taxes: diicult to evade
$irect taxes: can evade 'ut not in Singapore <Dailed= A can under-declare
Policies to reedy Singapore=s recession
+ecession in Singapore: externally induced: all in E
1" 4iscal !olicy
/ncrease 5 to reduce 'usiness costs ; training A need to su'sidise irms and
training grants
4all in CO! ; increase productivity A increase >+,S A all in 5!> A
price o exports all A volume o exports increase
Evaluation: 'uy only i they recover rom recession
8ut increase 5 to 'oost increase in GF limited eect in Singapore
Small . A need huge increase in 5
&hy not increase 5 on pu'lic wor.s
>imited land
2" -onetary !olicy
&hy not policies to directly increase E with exchange rate management
Short run solution: depreciation o SU - price o exports all in oreign
dollars A volume o E increase
5overnment preers sot option
!rice o imports increase in SU - import all raw materials A CO!
increase A goods more expensive
>ong term policy stance: gradual and modest appreciation o SU - price o
imports lower or SU - import raw materials more cheaply A CO! alls A prices
more competitive
-odest: small increments A export competitiveness not drastically
eroded in the immediate period
5radual: irms can have time to adDust their cost structures A ind ways
to 'e more cost-eicient
$eals with cost-push inlation
3" Other &ays
Explore new mar.ets through trade missions and signing o 46,s A reduce
over dependence on a ew trading partner
>ong term measure
4all in E is 'eyond our control
-easures can only 'e long run or interim ones
E!aluate ethods the /alaysian go!ernent ight use to slow down
iport growth and increase new export )usiness.
," Slow down import growth
$evaluation A wea.en ringgit
!rice o exports all in oreign currency A volume o exports increase A
total revenue rom exports increase
!rice o imports in ringgit increase A volume o imports all A total
expenditure on imports all
8O6 improves
$epends on price elasticity o demand or E and - A -alaysia demand
or imports o capital goods could 'e price inelastic A CO! rises
Can only 'e short term i -alaysia needs to import capital goods and
raw materials
!ersistent devaluation can lead to loss o conidence in economy
6ari A tax on imports A price o imports rise A volume o imports all A total
expenditure on imports all
/ncrease in CO>
$eadweight loss to society
Contractionary policies: interest rate rise A investment and consumption alls
A ,$ alls A . A all in GF A all in demand or imports
-alaysia may have small multiplier
-alaysian irms may want to 'uy capital goods
-alaysia still developing, cannot aord to have all in rate o growth
@se only i overheating
8" /ncrease new export 'usiness
Su'sidies to export irms
CO! alls A increase ,S A 5!> alls A price o exports all
/neiciency, 'urden on government and taxpayers
46, I 6rade missions to new countries A increase E A . A increase GF
+educe over dependence on Dust a ew maDor trading partners time A long term
4irms may not want to ta.e the ris. A uncharted territory A
'usinessmen may 'e ris. averse
Education and training A increase productivity A increase >+,S A all in
5!> A price o exports all
8est measure, yield results in the long run
DTo )e considered success"ul, an econoy needs to achie!e low
uneployent, low in"lation and sta)le econoic growth.E 2ow "ar &3.
with the stateent* #1+%
2ealthy 8O!s A especially open economy A macro o'Dective
E?uity in distri'ution A micro o'Dective
Eiciency in resource allocation A micro o'Dective
DTo )e considered success"ul, an econoy needs to achie!e low
uneployent, low in"lation and sta)le econoic growth.E Explain this
stateent. #1+%
,= >ow unemployment A success Nany 2 well-discussedO
-aximise use o resources A reduces loss o potential output due to
8urden on government
>ess tax revenue collected
-ore unemployment 'eneits
/ncrease 'udget deicit, opportunity cost A less or other areas A
healthcare, education
Singapore: 5S6 oset pac.age, growth dividends, Singapore shares,
one-o re'ates
>ow unemployment A people have Do's A higher C A uels growth
Social pro'lems A crime rates A social unrest A loss o man hours ; deters
investment <conidence=
8= >ow inlation A success Ninternal and externalO
/nternal: stimulates output, induces conidence, increase investment due to
certainty, increase 4$/, encourages savings A increase investment in the long
External: 8O6 improves N!E$O
C= Sta'le economic growth A success Nany 2 well-discussedO
Sustained growth: actual and potential growth: increase ,$ and ,s A
continual increase in SO>
Conidence A increase investment ; 4$/ A good macroeconomic
management o government
&hy unsta'le growth undesira'le
,$ .eeps increase may cause overheating A demand Apull inlation A
increase CO> ; aects 8O6 A insta'ility
/ economy lapses into recession: negative growth A hardship A all in
8rie mention o other criteria or success
Conlict 'etween growth and inlation: relentlessly pursues growth A demand-
pull inlation: sta'le growth vs low inlation
&hich criteria most important: low inlation A price sta'ility A Singapore
&iscuss whether "iscal policy is the ost e""ecti!e way "or Singapore to
sustain a success"ul econoy. #1,%
Sustaina'le ; sta'le growth ; low inlation A one o the .eys to sustaina'le
,= 2ow 4! wor.s to attain growth
/ncrease 5 ; decrease 6 A increase ,$ A . A increase GF
R 'rie ; diagram
Si7e o . A small . A huge lea.ages A high savings I - A need huge
increase in 5 A prudent: 'udget surplus
Small C I / 'y domestic irms A need export revenue A policies should
target E
Crowding out: increase 5 inanced 'y 'orrowing rom pu'lic A increase
interest rate A crowd out CI/IE
-ay not need to 'orrow A huge reserves A reserves can 'e
-ore concerned a'out all in E
6ime lag: recognition, implementation, response
Small A shorter time lag
6axes A unpredicta'le eect on CI/ A . wor.s only on the extra
disposa'le income that is spent
Expectations: pessimism I optimism
4all in direct taxes A rely more on indirect taxes <5S6= <increase
CO>= A regressive A increase income gap
8= Summation: 4! in Singapore A limited role
/ economy wea.ens <all in 5$!= A usually due to external actors li.e all in
E eg" 111 @S recession A policies should target E
!olicy exchange rate management A sustaina'le growth
5radual and modest appreciation o SU
!rice o imports all in SU - chec. imported inlation <low inlation= ;
Singapore depends a lot on imported raw materials A lower CO! A >6
a'le to price competitively A sta'le growth A 8O6 increase <!E$=
!rice o E increases in immediate period
5radual: Singapore irms to ind other ways to reduce cost
-odest: not to totally erode export competitiveness
Supply-side policy: education and training, welare 'eneits, taxation
4! in Singapore limited eect on ,d, serves as supply-side measure to
increase GF over long term ; exchange rate management A to 'oost long
term export competitiveness
1n the "ourth Buarter o" +$$5, Singapore=s uneployent rate rose to ,.;A.
&iscuss whether supplyFside policies are the )est way o" achie!ing "ull
eployent in Singapore. #+'%
4ull employment: natural <rictional= rate o unemployment <some structural=
Cause or concern <very 'riely=: i structural severe, i cyclical
,= Supply-side
Education and training A 8udget 30
Schools and vocational institutes gear Singapore wor.ers or the
challenges o new economy A grants, scholarships, places in university
A ocus: 'iomedical A increase employa'ility
Su'sidise irms or wor.ers training A S.ills $evelopment 4und A
upgrade s.ills A reduce structural unemployment
>ie-long learning A .nowledge can 'ecome o'selete A constant
upgrading o s.ills A reduces prospect o 'eing structurally unemployed
>ong term and may not yield results
/ncrease employa'ility and attracts -GCs
&elare 'eneits
Singapore no unemployment 'eneits A reduce rictional
4orced to upgrade s.ills A reduce structural unemployment
+educe power o trade unions
G6@C: government 'ody A harmonious relations A no la'our unrest:
attracts investment <4$/=
G&C: wage recommendations A wage increase Q productivity increase
A .eep CO! low
/ncrease employa'ility o wor.ers
8= !olicies to deal with cyclical unemployment: all in ,$
Supply-side A structural, cannot solve cyclical
4!: increase 5, decrease 6 'ut small ., external actors
Exchange rate management
+ecession due to all in E: depreciation I appreciation
$epreciation: price o exports all A immediate solution 'ut Singapore
cannot aord to A price o imports increase A CO! increase A later
price o exports increase <growth cannot sustain=
Singapore:s choice: gradual and modest appreciation <long term
/ncrease 5 on education and training ; taxation incentives A supply-side
policies A eect on ,$ and some eect on cyclical unemployment A limited
role in Singapore due to small .
(hy Singapore does not use interest rate policy
Mery dependent on overseas unds A small
Eg" i Singapore:s interest rate alls to cur' recession A 9hot: money outlow - U
in Singapore 'an.s all A -S alls A interest rate increase A no control
$iscuss interest rate only i not Singapore
Pro)les with exchange rate insta)ility
Exchange rates determined 'y
6rade and investment 'etween trading partners
5overnment management I manipulation o exchange rate eg" 'uy @S 'onds
to .eep @S$ up
1= 6rade
,ects 'usiness planning: need or certainty to orecast proits
Eg" / SU depreciates
!rice o Singapore exports all in oreign currency A volume o exports
!rice o imports increase in SU: dependent on raw materials <same or
developing countries which need capital goods=
Eg" / SU appreciates A price o exports increase in oreign currency A aects
export earnings
2= /nvestment
!ersistent depreciation A loss o conidence in economy A all in investment
3= $eveloping countries
4oreign loans in @SU denomination A i your currency depreciates A pay 'ac.
more in your country:s U