J1 Topics

No Title . 1 Chapter 1: Scarcity, Choice and Opportunity Cost 2 Explain two ways in which an economy might move from a point within its PPC to a point on it. 3 Discuss the most effective economic policies to move the PPC outwards. 4 What is meant by the basic economic problem of scarcity? 5 Discuss whether economic growth solves the problem of scarcity. 6 Chapter 2: Resource Allocation in Competitive Markets I 7 A manufacturer wishes to sell more of his product. How may he try to achieve his aim? 8 Chapter 3: Resource Allocation in Competitive Markets II 9 Explain price elasticity of demand and income elasticity of demand. 10 A government is proposing to increase the tax on petrol. Examine the relevance of price elasticity of demand and income elasticity of demand for this proposal. 11 Assess the relevance of elasticity concepts in explaining the effects of the worldwide recession caused by the 911 terrorist attacks on the airline industry. 12 Chapter 4: Microeconomic Problems: Market Failure 13 Policies on Pollution and Evaluation Summary 14 Policies on Pollution and Congestion caused by Cars Summary 15 Chapter 5: Government Intervention in the Market I

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Chapter 6: Firms and How They Operate I Discuss whether rising costs limit the size of firms over time. Banking Merger in Singapore Analysis Chapter 7: Firms and How They Operate II Discuss the view that the profit motive will always lead to a few large firms dominating the market for each and every type of product. Explain what is meant by productive and allocative efficiency. ‘A firm should be encouraged to maximize profits because this makes it efficient.’ Discuss whether this argument is true for a firm operating in an imperfect market. Distinguish between monopolistic competition and oligopoly. Explain why oligopoly is a common market structure in many economies. Explain why governments throughout the world have been involved in the supply of services such as electricity. Chapter 8: Government Intervention in the Market II

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Chapter 1: Scarcity, Choice and Opportunity Cost 1. Introduction  Study of the use of scarce resources to satisfy unlimited human wants  Wants: things people would consume if they had unlimited income  Resources: inputs to produce goods and services  Scarcity exists due to unlimited wants + worn out goods + newer goals  Positive (can be checked by facts) vs. normative (statement of value) 2. Factors of Production  Land: productive resources supplied by nature  Labour: human effort directed to the production of goods and services  Supply: number of workers + average number of hours each worker is prepared to offer  Specialisation  Dexterity, greater use of machinery and more sophisticated production techniques  Monotony, loss of craftsmanship, increased risk of structural unemployment  Capital: man-made resource used in further production  Involves postponing present consumption  Entrepreneurship: takes risk of being in business  Information: data for the basis of knowledge-based economy 3. Opportunity Cost  Real cost in terms of the next best alternative foregone  Calculating opportunity cost requires time and information  Opportunity cost may vary with circumstance

time period give. 2product model  Fully: using all resources available  Efficiently: do as many things you can with the resources used  Scarcity: unattainable combinations outside PPC + society has to choose among combinations of 2 goods  Shift: quantity and quality of resources (think FOP) + technology – skewed?  Choice between instant gratification and improving economy in the future 4 . factors fully and efficiently employed. technology fixed. at a given state of technology  Assumptions: fixed amount of resources. Economic rent: difference between what is earned and what could have been earned  Used in specialization and trade 4. when all available resources are used fully and efficiently. Production Possibility Curve  Maximum attainable combination of two goods and services that can be produced in an economy.

Efficiency  Static efficiency: how much output can be produced now from a given stock of resources at a given point in time  Dynamic efficiency: changes in the amount of consumer choice available in markets together with the quality of goods and services available  Productive efficiency: absence of waste in the production process = minimizing the opportunity costs for a given value of output  Allocative efficiency: society produces and consumes a combination of goods and services that maximizes its welfare 5 . The Marginalist Principle  Consume till MPB = MPC: cost of producing an additional unit of good = benefit of consuming an additional unit of good  For the price mechanism to work. information need not be known with perfect accuracy by every individual acting in the marketplace: dependent on marginal buyers who keep suppliers on their toes 6.Wheat *Draw dotted line to show comparison between 2 countries with a common yardstick 0 Cloth 5.

 Distributive efficiency: goods and services produced to those who want or need them 6 .

Explain two ways in which an economy might move from a point within its PPC to a point on it. Increase efficiency in use of resources  Pay based on productivity: but only for jobs where output can be measured (factory workers)  Reallocate resources to more efficient uses  Retraining 7 . circle line – multiplier effect  Monetary policy: lower interest rate – firms borrow more. [10m] Introduction Define PPC Good X A: resources not fully utilized – underemployment and unemployment B: efficient use of resources – full employment Good Y B A O Body A. Increase employment of resources  Lower wages to be more competitive – may be enticed to produce more goods  Fiscal policy: increase government spending eg. increase investment B.

Discuss the most effective economic policies to move the PPC outwards. [15m] Introduction Outward shift: increase in productive capacity – sustain economic growth over long run Body A. Labour  Increase birth rate but difficult to do so in developed countries – female labour force participation + need lots of incentives  Education and training but takes long time and does not necessarily yield results  Foreign talent through tax incentives B. Capital  MNCs – investment (machines) + learn their technological knowledge  Invest in r+d C. Entrepreneurship  Incentives and subsidies to start businesses D. Land  Reclamation Conclusion Depends on which country Eg. For USA: encourage capital goods, less consumption goods. For China: entrepreneurship


What is meant by the basic economic problem of scarcity? [12m] Introduction Scarcity – scare resources, unlimited wants Body Scarcity – choice – opportunity cost 1) Individual: time; consumer; how to maximize use of limited resources – more labour / more machines 2) Firm: least-cost combination of resources in order to maximize profits 3) Government: choice between competing projects; cost-benefit analysis 4) Economy: problem of how to allocated scare resources efficiently best illustrated by the PPC
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(Brief) Implications:  Trade as a solution to alleviate scarcity

 Trade-off between consumer goods and capital goods  What (how scarcity affects decision-making of an economy), how much, for whom and what to produce (market system)


people have more wants due to advertising and promotions – luxury goods of the past may become necessities 4) Supply limited  Demand accelerating – China / India economic growth  Crude oil important as it is a source of fuel  Eg. [13m] Introduction Economic growth – increase in national income – generally get to consume more goods and services Body 1) Increase in quantity and quality of resources – increase in productive capacity  Labour: due to reduction in unemployment and underemployment  Skills and educational level  Land  Capital stock: most effective way to alleviate problem of scarcity – more capital economy produces in one period. land in Singapore 11 . more output capital can produce in the next to satisfy wants in society 2) Technological improvement – increase in productive capacity: better and new methods of producing goods  R + d – technological breakthrough – new products – create more wants 3) Increase in income – consumers able to satisfy wants  But with greater affluence.Discuss whether economic growth solves the problem of scarcity.

 But technological improvements allow society to make use of renewable resources as sources of energy  But more wants created 5) Equity in distribution  Economic growth does not guarantee a reduction in income gap  Corruption. food shortages 12 .

Demand Theory  Demand: amount that consumers are willing and able to purchase at each given price over a given period of time  Demand curve slopes downwards  Income effect: effect of change in real income resulting from change in price of good  Substitution effect: effect of change in price on quantity demanded arising from consumer switching to. alternating products  Determinants  Price  Taste: education. Supply Theory  Supply: quantity of a good or service producers are willing and able to offer for sale at each given price over a given period of time  Determinants  Price 13 . complement  Population: absolute change. change in composition  Seasonal changes: climate.Chapter 2: Resource Allocation in Competitive Markets I *Assumption: Many buyers and sellers such that no single buyer / seller can exert control over market price (price takers) 1. festival  Expectations of the future: future changes in price / income  Real disposable income: changes in taxes / money income  Redistribution of income  Consumer surplus: difference between maximum amount consumers willing to pay for a given quantity of good and what they actually pay 2. culture. age group. or from. health scares  Interrelated goods: substitute vs.

and are under no incentive to change their present economic actions 14 . subsidies  Number of sellers  Producer surplus: difference between amount received by producers and minimum amount they are willing and able to accept for the supply of a commodity 3. Market Equilibrium  Buyers and sellers satisfied with current combination of price and quantity bought or sold. unexpected events  Government policies: indirect taxes. COP: change in price of factor inputs  Other prices: joint / competitive supply  Innovation: lower production costs  Natural factors: climate.

quantity supplied increases – shortage eliminated – market settles at equilibrium  Above equilibrium  Surplus . bidding up prices – price increases. surplus eliminated – market settles at equilibrium  Shifts in supply and demand: consider individual effects on price and quantity then sum up  Interrelated demand and surplus  Joint / competitive / derived demand  Joint / competitive supply 4. long run vs. short run 15 . then see how and why the data fits / does not fit the theory  Desirability: consider for whom: producer. society  Effectiveness: limitations. Case Study  When asked to explain how a group of people intend to affect a certain market.producers reduce prices to get rid of stocks – increase sales and decrease production – price falls. quantity demanded increases. bring in limitations  Elasticity of demand  Responses of other firms / groups of people  Analyse theoretically first. Adjustment to equilibrium  Below equilibrium  Shortage – consumers compete for goods. consumer.

How may he try to achieve his aim? [12m] Introduction Sell more – only considering equilibrium quantity – increase demand / supply Effect: long run vs.A manufacturer wishes to sell more of his product. short run Body 1) Increase demand: explain effect on quantity demanded  Advertising and promotion: create product differentiation and brand loyalty  Competitive market: other firms will do likewise as they fear losing market share  Huge funds need to be devoted – increase COP – reduce profits  If firm passes cost increase to consumers in terms of higher prices – fall in quantity sold – assuming demand elastic – total revenue falls  But unable to increase price in competitive market – firms may engage in price wars  But in long run if campaign successful in altering people’s taste and preference – rise in quantity sold  Expanding number of markets: go regional / global  Easier to penetrate markets where demand for product more price elastic  Increase supply – fall in price – more than proportionate rise in quantity demanded  Improve quality of product / increase product differentiation through better sales service / improved packaging  Effect of money spent for r+d on  Costs then price of product  Market share in long run (increase) 16 .

more efficient production methods. better quality products  Raising productivity through greater specialization and better labour-capital combination  Sourcing cheaper sources of raw materials  Evaluation  Reduces price – may conflict with profit maximization  More effective strategy if selling product that is price demand elastic – mass produce – reap EOS – lower prices – increase sales volume more than proportionately 17 . Deliberate attempt to reduce price of good through discounts  Price elasticity of demand  How long discount can be sustained without eroding profits 2) Increase supply: explain effect on quantity demanded  Investment in r+d  Lower COP.

discourage consumption  Firms’ pricing policy  Effectiveness of trade unions: can ask for higher wages if demand for product is price inelastic  Price stability: prices more volatile if demand more price inelastic when supply shock 2. ceteris paribus  Coefficient  Negative: inferior good  Positive: normal good  Less than one: necessities  More than one: luxuries  Usefulness  Production plans: boom vs.Chapter 3: Resource Allocation in Competitive Markets II 1. luxuries  Proportion of income  Time period: longer – switch to substitutes – more price elastic  Usefulness  Government taxation policies: raise revenue. Price Elasticity of Demand  Measure of degree of responsiveness of quantity demanded of good to a change in its price. ceteris paribus  Coefficient: sensitivity of consumers to price changes  Negative: inverse relationship between price and quantity demanded  Determinants  Availability of substitutes  Necessities vs. recession 18 . Income Elasticity of Demand  Measure of degree of responsiveness of demand of good to change in consumers’ income.

Cross Elasticity of Demand  Measure of degree of responsiveness of demand of good to change in price of another good. Targetting different income groups: segment market 3. ceteris paribus  Coefficient  Negative: complement  Positive: substitute  Usefulness  Effects on products’ demand when faced with change in price of rival’s product  Strong complements – can sell jointly 19 .

4. ceteris paribus  Positive: direct relationship between price and quantity supplied  Determinants  Time period: longer – supply more price elastic because possible to change anything  Factor mobility  Number of firms: more – supply more price elastic  Stocks and spare capacity: more – can produce more – supply more price elastic  Length of production period: shorter – supply more price elastic  Usefulness  Taxation: incidence  Price stability 5. Government Policies  Taxation / subsidies  Demand more price inelastic – higher incidence  Incidence: distribution of burden between consumers and sellers  Minimum price  Protect income of producers  Creates surplus for future shortages  Financing annual surpluses – burden on taxpayers – not good in long run  Cushion inefficiency  New producers attracted – increase surpluses unless government has measures to increase demand  Maximum price  Lower-income consumers to afford necessities 20 . Price Elasticity of Supply  Measure of degree of responsiveness of quantity supplied of good to a change in its price.

    Protect consumers Allocation of goods may be biased Black market. giving subsidies and tax relief. reducing demand by controlling income 6. Case Study  Note difference between elasticity of the product and the elasticity of the final product (which involves the use of the product)  Note difference between less inelastic and more elastic  When asked how a strategy might affect a company. especially during war time Government can encourage supply by drawing on past surpluses. consider effect on total revenue then profits 21 .

7. Essay  Limitations to using elasticity concepts to explain price changes  Elasticity concepts are static – need to relax ceteris paribus assumption in reality – simultaneous changes occur – need to consider relative magnitudes of changes in demand and supply  Coefficients of elasticity mere estimates  Consumers not homogenous group  Among high-income earners. there are the yuppies seeking the high life and are likely to be more price and income sensitive compared to foreign investors who would consider socio-political factors  May not consider some goods as substitutes 22 .

Examine the relevance of price elasticity of demand and income elasticity of demand for this proposal. [15m] Introduction Assume specific tax for simplicity Uses of petrol: firms’ and commuters’ transportation Normal good: income increase – demand for cars increase – demand for petrol increase Body 1) Demand for petrol price inelastic: explain why  Increase in indirect tax – supply falls at given price – supply curve shifts vertically upwards by amount of tax  Demand for petrol inelastic – fall in quantity demanded less than proportionate  Relevance: need high tax if government wants to reduce consumption to desired level 2) Income elasticity of demand less relevant because it is due to changes in income – tax on petrol affects price directly. [10m]      Definition Formula Sign Coefficients: range of values for elastic / inelastic Examples with their estimated values A government is proposing to increase the tax on petrol. not income  Government likely to be less successful if they increase tax on petrol in period of economic boom 23 .Explain price elasticity of demand and income elasticity of demand.

 Boom: incomes rise – demand for cars (luxury good) – increase by more than proportionately – derived demand – increase demand for petrol 24 .

holiday makers  Due to the ceteris paribus assumption. necessity for business travelers  Relevance 25 . This led to the closure of some of the major airlines in the world. incomes have changed causing demand curve to shift – total revenue fall 2) Income elasticity of demand  Definition  Air travel luxury good for most. [15m] Body 1) Price elasticity of demand  Definition  When supply of airlines fell due to closure of major airlines – price expected to increase – quantity demanded fall by more than proportionate – total revenue fall  Relevance  Airlines should expect that reducing supply causing a rise in price can lead to a fall in total revenue  But the demand for travel for business is likely to be inelastic. the above will only take place if other factors remain constant.The terrorist attack on New York on 11 September 2001 caused a worldwide recession and an increased fear of flying. Assess the relevance of elasticity concepts in explaining the effects of these events on the airline industry. both of which severely affected the demand for travel by air. So price increase – less than proportionate fall in quantity demanded – total revenue increase  Effect on total revenue depends on size of business market vs. In this context.

 Recession – fall in income – fall in demand – fall in total revenue  Implication: individual airlines need to reduce price / engage in non-pricing strategies to increase market share 3) Cross elasticity of demand  Definition  Potential substitutes: train / coach / ship  Degree of substitutability depends on the length of flight  Long haul flights: weak substitutes especially for business travelers  Short distance: stronger substitutes  If another airline (eg. SIA) – SIA reduces price – price war – may not cover costs – erode profits  Budget airlines also pose as competition 26 . Qantas) reduces price to increase market share – fall in demand for a particular airline (eg.

 Airlines close down routes / less schedules – fall in supply – increase price  Demand inelastic: long haul flights – no close substitutes – total revenue increase  Demand elastic: short distance flights – switch to trains / coaches – total revenue falls 4) Price elasticity of supply  Definition  Fall in price – fall in quantity supplied  But short run: supply price inelastic – less than proportionate fall in quantity supplied  Reasons  Labour: need time to retrench / reallocate labour to other departments  Flight schedule / routes: need time to deliberate which routes / schedules to close – choose the unprofitable / lowest passenger volume Conclusion Cannot look at each value separately because in real world many variables change at the same time 27 .

pollution and congestion from vehicles. cigarettes 28 . income equity 2. Market Failure  Scarce resources – need to allocate resources efficiently – objective: maximize society’s welfare (social optimality)  MSB = MSC: benefit to society from one additional unit of good = cost to society of producing one extra unit of good  Ways to allocate resources  Total government intervention  Free market (based on price mechanism)  Mixed economy (free market with some government intervention)  Free market economy  Private ownership of resources + individual decisionmaking guided by self-interest  Price serves as signal for resource allocation  Automatic working of supply and demand – spontaneity – allocative efficiency  Equilibrium where demand = supply: maximization of consumer and producer surplus  Assumes no externalities + perfect competition  Market failure occurs when  Allocative inefficiency: externalities / public goods. imperfect competition  Inability of market to achieve social objective eg. Externalities  Cost / benefit on a third party not involved in the consumption / production of good  Negative  Types: industrial pollution. demerit goods eg.Chapter 4: Microeconomic Problems: Market Failure 1.

anti-smoking campaigns – money comes from taxpayers who largely do not smoke  To tabacco company: profit-maximising private producer: MPB = MPC  To society: to attain social optimality: equilibrium level MSB = MSC = MPC + MEC  Overproduction: deadweight loss  Positive  Types: merit goods eg. government intervention comes in 29 . education  External benefit: higher standard of living of everyone because of highly-skilled jobs  Under-production by free market: deadweight loss  Because of partial market failure. environmental cost – littering. External cost: second-hand smoke – health problems. fire hazard. healthcare.

6  Average worldwide: 0.3.485 in 2007  European countries: 0. National defense  Free rider – conceal demand – private producer cannot gauge demand – will not produce – non-production in free market – total market failure  Government provision necessary since public goods are socially desirable and largely indivisible 4.3  Latin America and the Caribbean: 0. Essay  When asked to suggest new policies. public satisfaction 30 .4 5. and policing expensive  Opportunity costs involved in attempted to control negative externalities  Political implications eg.25 – 0. consider whether it is possible / practical to enact them  Policies may be difficult to administer. Public Goods  Non-excludable: impossible / costly to exclude non-paying consumers from receiving the good  Non-rivalrous: consumption by one person does not reduce amount available to others  Eg. Inequality  Represented by the Lorenz Curve / Gini coefficient  Singapore: 0.

Over-valuation: output below socially optimal level.Policies on Pollution and Evaluation Summary 1) Identify: Explain: Taxation Tax polluters per unit of MEC – COP increases for private firms – supply falls from MPC to MSC by amount of MEC Evaluate: * Negative externality internalized by firm: incentive for firm to be more -cost-effective to maximize profits / reduce pollution * Provides revenue for government to finance other social and community development projects * Able to allow market to continue operating according to market forces and reach state of equilibrium x Requires accurate valuation of MEC / amount of pollution . effect of tax on output ineffective unless tax very large / firm able to move burden to consumers and get away scot-free 2) Identify: Quotas Explain: Ban production if pollution exceeds a certain limit – limits MEC by restricting output at socially optimal level 31 . reducing society’s welfare / deters production – affects economic growth .Under-valuation: output still not brought to socially optimal level x Difficult to apportion blame x Effectiveness dependent on price elasticity of demand: if highly price inelastic.

antipollution equipment 32 .Clearly defined amount of pollution each firm can have Evaluate: * Able to control level of pollution in the country as a whole X Does not allow price to equilibrate quantity demanded to quantity supplied: firms may decide to produce less so they do not exceed the maximum amount of pollution they can have (compare this to taxation) X Difficult and tedious to gauge how much pollution each firm produces: waste of resources and time on inspection X Need vigilance and commitment of government 3) Identify: Legislation Explain: Force producers to bear costs of more proper disposal of industrial wastes eg.

no innovation 5) Identify: Campaign / advertisements to educate public Explain: Raise awareness of pollution situation to public in hope they might do something to curb problem Evaluate: x Costs of these measures might outweigh benefits X Duration needed before effects can be felt and there is no guarantee that the campaign will be effective X May be effective for only a short period of time because the public is constantly bombarded by such campaigns that it is starting to lose its intended effect 6) Identify: Subsidies 33 .Evaluate: x Difficult and costly: spend resources on inspection X If chances of being caught and penalties are small. legislation ineffective X Need vigilance and commitment of government X Not immediately effective because of bureaucracy involved in establishing laws X Lose voters leading to loss in power 4) Identify: Nationalisation Explain: Government takes over the polluters’ firms and ensures production at socially optimal output Evaluate: x Waste of resources: opportunity cost to other projects because less funds available X Difficult to accurately valuate quantity demanded X No competition: inefficient.

Explain: Subsidise purchase of antipollution equipment so that firms’ COP does not increase that much by purchasing these equipment – firms more likely to buy the equipment than before Evaluate: x Opportunity cost to other public projects X No guarantee that firms will buy the equipment X Firms need time to incorporate use of new equipment: but in the long run probably mitigates the problem of pollution if firms use the equipment 34 .

so need international / regional cooperation Can integrate a few policies for better results 35 . Jurong Island Greenery (to reduce impact) Evaluate: x Merely shifting the pollution to another area – does not solve the root of the problem but reduces external cost since less people affected by pollution X Contentious as to whether greenery helps to reduce impact Summation: Air pollution may not be due to the country itself.7) Identify: Urban planning Explain: Locate factories away from residential areas eg.

possibly need government to finance. DCs: complex commuting patterns X For it to be affordable. 4) Identify: Registration tax. they would want to charge more to maximize profits. government might not be able to have COE) 3) Identify: Efficient and affordable public transport Explain: Less pollution and congestion on roads Evaluate: x Not all countries have resources to build an effective public transport system – LDCs: no money.Policies on Pollution and Congestion caused by Cars Summary 1) Identify: ERP per tax unit Explain: Restricts car usage (nowadays rely more on this policy) Increases cost of car journey – quantity demanded for car travel falls Evaluate: x Congestion in other areas / small roads X Increase business cost – pass to consumers 2) Identify: COE Explain: Restricts car ownership Evaluate: x Increasing affluence – income elasticity of demand for cars X Cannot stem people’s aspirations X Needs vigilance and political will (in other countries. Otherwise if left to the private firm. annual road license 36 .

Explain: Restricts car usage Evaluate: *May work if there is vigilance and commitment by government 5) Identify: Rebates for green vehicles eg. 20% off purchase price Explain: Lower price – quantity demanded higher Evaluate: x Still not widely advocated X May still be too expensive to afford 37 .

Americans love for SUVs) 38 .6) Identify: Weekend cars Explain: Restricts car usage Evaluate: x Still not widely advocated X People associate cars with prestige (eg.

Government Failure  Allocative efficiency reduced following government intervention to correct market failure  Problem of incentives  Imposition of high taxes can distort incentives  High marginal tax removes incentive for people to work harder to earn more 39 . Tacking Externalities  Negative externalities [details on page 21-23]  Positive externalities  Subsidies: external benefit internalized (works like the tax)  Can be easily implemented to bring about increase in production and consumption  Difficult to valuate external benefit generated  High government expenditure – high tax rates can subsequently discourage investment in country  Firms lose incentive to be more productively efficient – inefficient firms may survive  Direct provision of merit goods  Social justice: merit goods should be accessible to all and not provided according to ability to pay  Large positive externalities: eg. free healthcare combats spread of disease  Dependants: eg.Chapter 5: Government Intervention in the Market 1. free education to protect children from irresponsible parents who fail to provide children quality education  Ignorance: consumers may not realize how much they will benefit and if they had to pay. they would rather go without it 2.

time lags Shifts in government policy: too frequent changes – difficult for firms to plan ahead 40 . tax on use of domestic fuel (kerosene in Indonesia) – low income households may feel greatest effect as tax on fuel oil may make life of poor worse since they use proportionately more domestic fuel than others Bureaucracy and inefficiency: administrative costs.     Disincentive to produce and consume  Desire by politicians to get elected: popular policies introduced (eg. minimum wage law)  Profit motive of private sector largely removed Problem of information  Difficult to valuate external cost / benefit  Difficult to accurately estimate level of consumer demand for product Problem of distribution  Increase inequity  Eg.

Theory of Costs in the Short Run 41 .Chapter 6: Firms and How They Operate I 1. which varies in the very long run  LDMR: as more units of a variable factor are applied to a given quantity of a fixed factor. LDMR sets in – due inefficient use of fixed factor  Stage 3: TP falls. there comes a point beyond which the extra output from additional units of the variable factor will eventually diminish  Stage 1: TP increases at an increasing rate. except level of technology. MP falls. MP falls  MP = change in TP / change in L 2. MP rises – due to specialization of labour  Stage 2: TP increases at a decreasing rate. Production in the Short Run  Short run: at least one fixed factor  Long run: period of time long enough for all factors to vary.

Factor Total Fixed Cost Definition Sum of all costs of production do not vary with the level of output aka overhead costs Must be paid even without production Total Variable Cost Costs incurred for use of variable factors like labour Varies directly with output level Marginal Cost Additional cost incurred in producing an extra unit of output in the short run while some inputs remain fixed MC = change in TC / change in Q Examples Rent of factory Raw building. interest labour on capital invested in equipment Graph materials. Average curves ATC = AVC + AFC AFC: amount of fixed costs per unit of output AFC = TFC / Q AVC: total variable costs per unit of output AVC = TVC / Q 42 .

AFC falls. Stage 1: AVC falls. ATC also falls  Stage 2: AVC rises. Since AFC and AVC fall. ATC still falls  Stage 3: AVC rises. Since fall in AFC > rise in AVC. AFC falls. AFC falls: Since fall in AFC < rise in AVC. ATC rises 43 .

Objectives of Firms  Profit-maximisation: equilibrium level of output since there is no tendency to change  Before equilibrium level. decreasing or constant)  LRAC: lowest average cost for given level of output when all inputs are variable  Minimum efficient scale: smallest plant size beyond which no significant additional IEOS can be achieved  IEOS: savings in costs that occur to a firm due to the firm’s expansion. and have been created by firm’s own policies and actions  Technical: concerned with production process 44 . MR < MC and rational firms will not produce at this output level  Firm continues production as long as it can cover variable costs  Motivation of owners vs.3. MR > MC so firms want to produce more  After equilibrium level. motivation of managers: separation of control and ownership – principal-agent problem: managers tend to pursue their alternative goals while maintaining minimum level of profits to appease shareholders  Revenue maximization: managers aim to maximize firm’s short run total revenue  Long-run profit maximization: managers aim to shift cost and revenue curves so as to maximize profits over some longer time period  Growth maximization: managers may aim for expansion to maximize growth in sales volume over time 4. Theory of Costs in the Long Run  Returns to scale: measure of resulting change in output when all inputs are changed in the same proportion (can be increasing.

power transmission: large and costly) – raises average output and reduces LRAC  Specialisation of labour: simpler and repetitive jobs which require less training + more efficient eg. Factor indivisibility economies: larger plant size makes it possible to effectively use indivisible factors (combine harvesters. car manufacturing  Managerial: functional specialization by employing experts to increase efficiency as a whole  Greater use of existing staff  Decentralisation of decision-making: increasing efficiency of management because of faster flow of information within firm – distortions and delays of information avoided  Commercial  Bargaining advantage and accorded preferential treatment by suppliers because they buy raw materials in bulk  Bulk sales from bulk advertising and large-scale promotion 45 .

conditions of demand for final products and supply of raw materials  Diversification of products and markets  Diversification in sources of supply  R+d  Better quality products – increased market share and demand  Better methods of production – more productively efficient – lower average cost  Welfare: making workers feel they belong to the company – more apt to increase efficiency and productivity of company  IDOS  Complexity of management  Principal-agent problem  Bureaucracy  Strained relationships: impersonal – no loyalty to firm – apathy. strikes  EEOS: savings in costs that occur to all firms in an industry due to the expansion of the industry  Economies of concentration  Availability of skilled labour: demand for labour large enough – special educational institutions / firms can collaborate to develop training facilities 46 . Financial  Easier and cheaper to raise funds: given lower interest rate and larger loans because better credit ratings and more collateral  Raise capital through issue of shares to public who has more confidence in reputed firms  Risk-bearing  Advantage in bearing non-insurable risks eg.

 No lack of labour to employ because experts want to migrate there eg. car industry in Japan: range of firms specialize in production of different inputs for car manufacturing – provide output at lower prices to main industry because specialization allows subsidiary firms to produce at large scale – enjoy EOS  Process waste products into useful products and sell them to cover COP  Economies of information: publications help improve productivity of firms (research and expertise) 47 . Silicon Valley  Well-developed infrastructure to cater to that industry  Reputation: builds up name which consumers associate with quality – encourages brand loyalty and steady clientele  Economies of disintegration  Subsidiary industries developed to cater to needs of major industry  Eg.

Growth of Firms  Methods of growth  Internal expansion: make more of existing product or extending range of product when it builds a new bigger plant  Merger  Vertical integration: firms engaged in different stages of productive process  Backward integration vs. DBS and POSB  Market domination  Conglomeration  Eg. bank taking over developing firm to build properties  Diversify output 6. Survival of Small Firms  Demand-side factors  Nature of product 48 . Coffee Bean and Starbucks merge  Eg. forward integration  Eg. Starbucks merge with firm producing coffee beans – wants guaranteed access to raw materials  Horizontal integration: firm takes over similar firm at same stage of production in the same industry  Eg. congestion – loss of time and increased fuel consumption  Rising costs of FOP: growing shortage of specific raw materials / skilled labour 5. EDOS  Increased strain on infrastructure: taxed to limits eg.

fashion  Specialised products: limited markets eg. fresh fish  Variety preferred to standardization eg. localized markets eg. luxury yachts  Direct and personalized services eg. Bulky and perishable goods: small. doctors  Geographical limitations: high transport costs for bulky products – local market rather than national market  Supply-side factors  DEOS set in early: optimum size of firm small  Vertical disintegration: entire production process broken into series of separate processes and different small firms perform each process  Low BTE  Lack of capital 49 . lawyers. highly specialized machines  Prestige markets: limited by price eg. sports cars.

Case Study  Factors: think long run vs. use banding / small firms may want to merge in the face of globalisation 50 . Essay  Survival of small firms: for conclusion. Unwillingness to take greater risks  Larger firm – higher expenditure – greater risk of investment  Fear of future fall in price of final product: expansion of output – increase market supply – excess supply – lower prices and lower profits  Banding: small firms may band to gain advantages of bulk buying while still retaining their independence  Profit cycles: early stage of product cycle – total demand for product low  Non-profit maximization attitudes  Owner values independence or wants to maintain control among family members  Contented with reasonable income from domestic market  Unwilling to take increased risks associated with expanding into foreign market 7. short run. try to give egs of EOS specific to the industry 8. demand-side vs. supplyside  EOS – lower LRAC – able to reduce price  Profits plough to r+d – better quality products + further reduction in AC  Block new entrants due to enormous FC – less existing competitors – increase market share  Always end EOS with AC  If a particular industry is stated in the extract.

[15m] Introduction  Size: sales revenue / turnover.Discuss whether rising costs limit the size of firms over time. size of firm over time constrained by MES (list 1 eg of internal DOS). MES huge eg. fashion. monopoly selling unique products Conclusion: However. 51 . market share  Over time – long run – firm no longer constrained by fixed factor Body 1) Can limit  Short run cost  Reason: over-use of fixed factor. electricity / water compared to MES limited eg. inefficient labour-capital combination – increase MC – eventual increase in AC  Increase costs – fall in profits if total revenue is constant – constrain firm’s ability to expand 2) Will not limit  Long run  All inputs can vary – firm can expand – enjoy fall in LRAC due to internal EOS (list 2 egs)  Fall in LRAC – fall in price to ward off competitors (erecting barriers to entry) – increase profits – plough into r+d – better quality products + if yields results – further fall in AC due to better production methods  Size of firm determined by demand for firm’s product – if firm making supernormal profits – can still expand in size even if cost increases eg. level of output.

Banking Merger in Singapore Analysis Why merge?  Face competition from foreign banks – Singapore wants to expand beyond our shores: big – enjoy EOS – fall in AC – can compete with foreign banks  Core part of Singapore economy – 1997 Asian financial crisis – big  stable Why should not merge?  Possible monopoly power  Increase price  Quality of service  Reduction / removal of familiar products and services – affects consumer satisfaction  Neglect lower-income group  Retrenchment 52 .

nonprice competition. Comparison of the 4 Markets Type Perfect Competition Monopoly  Only one firm  Firm price setter Monopolistic Competition  Large  FOP relatively mobile  When firm makes decisions.Chapter 7: Firms and How They Operate II 1. collusion / mergers. 53 . exclusive  Substantial  Natural  Artificial: legislation. does not have to worry how its rivals will react  No / Low  Firm lowers price – profits spread thinly over many rivals – rivals suffer negligibly  Retaliation Oligopoly  Few large firms  Interdependent Number of  Large buyers /  No one buyer / sellers seller can influence price  Firm price taker Barriers to entry  None  FOP perfectly mobile  No transaction / transportation costs  Minimal sunk costs  High  Natural: huge sunk costs (AFC falls over very large output – AC falls continuously – enjoys huge IEOS).

 CED and PED very location. legal protection: exclusive rights (patents. contrived barriers (cartel). tariffs to block foreign firms)  No close  Differentiated: substitutes quality. design. low promotion  Demand price elastic advertising  Homogeneous / differentiated 54 .Nature of products  Homogeneous  Buyers no preference for any firm ownership of unlikely essential raw  No collusion – materials keen  Artificial: noncompetition price competition.

Knowledge  Perfect  Seller knows rivals’ prices. market costs and available technology  Buyers know all sellers’ prices. quality and availability of products – will not purchase at a higher price than equilibrium price Firm’s curve  Imperfect  Imperfect  Imperfect  Consumers not  Production fully aware of COP methods and prices  Cost structures differ as some firms enjoy more favourable locations / rentals  P > MR 55 .

fear of harming firm’s image (fall in price – fall in quality)  UK brewery industry  Taxi companies  OPEC  Mobile service provision 56 . P = AR = MR  P > MR  Some degree of  Cannot increase control over own both output and prices price at the same  No single time as curve is equilibrium price downward sloping in market – no market demand curve Examples  Stock market  Forex market  Agricultural products: many farmers in LDCs  Utilities  Starhub’s EPL coverage  SMRT for NS and EW lines  Bubble tea  P > MR  Firm increases price – other firms will not  Firm decreases price – other firms follow – may lead to price war  Price rigidity: menu costs.

Firm’s SR  Supernormal. normal / subnormal profits equilibrium  MC = MR and MC must be rising Firm’s LR  Normal profits  Normal /  Normal profits equilibrium  New firms will supernormal enter industry to profits erode  Firm will shut supernormal down if profits subnormal profits LR equilibrium curve  Normal / supernormal Productive  Efficient efficiency  Firm produces at MES  Inefficient unless  Inefficient by coincidence  Will settle at LRAC that is not necessarily at MES  Firm’s POV: all points on LRAC  Society’s POV: MES  Inefficient unless by coincidence 57 .

Allocative efficiency  Efficient  P = MC  Inefficient  P > MC  Could be seen as premium society pays for product differentiation 58 .

2. do not exhaust potential for further EOS because all small firms  Dynamic inefficiency: no r+d  Large variety – increase in consumer welfare Oligopoly  Allocative inefficiency: P > MC. Analysis of Imperfect Market Structures Type Monopoly Economic  Allocative inefficiency: P efficiency > MC. output below optimum  Productive inefficiency  Dynamic efficiency: r+d  Differentiated 59 . output below optimum  Productive inefficiency  X-inefficiency but increasingly reduced due to globalisation. reduced customs duties and barriers to trade  Dynamic efficiency: r+d Variety  Unique of  Possible innovation and products new products: BTE stimulus to the creativity required to destroy barriers – monopoly profits stimulates new entrants producing new and competing products Monopolistic Competition  Allocative inefficiency: P > MC  Productive inefficiency: do not utilise optimal plant capacity.

R+d and new profits  Profits lead to unequal income distribution: dollar votes + shift of consumer surplus to producer  Supernormal profits – plough into r+d – better quality products + better methods of production – lower AC but there is no guarantee that monopolies will do this  More equity: no redistribution of income from consumers to shareholders  Normal profits: no additional profits to plough into r+d  Supernormal profits ploughed into r+d 60 .

with increased sales volume and reaping of EOS. price reduce further  But possible monopoly power through collusion  But multiple branding gives consumers misguided information in thinking products are from different firms 61 .Theory  MES high – IEOS – lower vs MC than PC industry – empirical lower P and higher o/p evidence but monopolies charge high prices by restricting output P/R/C Pc Pm MR 0 Q Q c m AR Q MCpc MCm  Wasteful competition  Advertising provides better consumer information which helps move market structure closer to PC model but loss of consumer sovereignty  Practise price discrimination [has both costs and benefits]  Natural monopolies  Perfectly contestable markets: costs of entry and exit by potential  High price rigidity: price stability  Wasteful competition: more likely to engage in extensive advertising – encourages price competition.

parcels service during festivals  Reduces wasteful competition (instead of extensive advertising.rivals are zero. money can be spent to produce more goods) 62 . and when such entries can be made very rapidly eg. deregulation of airline industry in 1978  Hit and run competition: market contestable for certain seasons eg.

3. Price Discrimination  Producer sells specific commodity to different buyers at two or more different prices  Same consumer charged different prices for same product for reasons not associated with cost differences  Conditions  Possible  Seller has control over market supply  Market segmentation and identifiable groups + no resale  Profitable: each market as different PED  First degree  Practice of charging each customer his reservation price  Captures all consumer surplus as revenue  Eg. auction sites  Impractical to charge each customer a different price  Firm usually does not know the reservation price of each customer: consumers do not tell and producers may not want to spend time and resources to find out  Second degree  Charge different prices for different blocks of the same product to the same buyer  Eg. photocopying shops  Third degree  Sells same product at different prices to different customers  Conditions  Two or more markets which can be separated  PED of each market must be different 63 .

 Higher price charged in market with more price inelastic demand  Cost: loss of consumer surplus  Benefits  Firm: higher profits and may use these profits from one market to withstand possible price war in breaking into another market  Consumer  Consumer may not have been able to afford good otherwise  Higher profits may be reinvested into r+d – better quality products + better methods of production  Provision of goods that would otherwise not be produced due to high costs if production and consumption of good is one that confers positive externalities on society  Additional profits might exceed losses such that firm will still continue producing the good 64 .

specialization. US then can afford to have few large firms 3) Nature of product  Large firms: unique products with no close substitutes  Small firms: availability of substitutes. personalized services 4) Government Intervention / public’s desire  Few large firms will help to reduce price – increase in consumer surplus – increase in consumer welfare  Supernormal profits – plough into r+d to produce better quality products 65 . Singapore television broadcasting Mediacorp vs. limited MES – fashion. [15m] 1) Barriers to entry  Few large firms merge – greater market share – reap EOS – fall in LRAC – fall in price – ward off rivals / block new entrants (natural BTE) – able to maintain supernormal profits  If plough into r+d – better methods of production – further fall in AC . prestige market / services. Mediaworks  Firms will eat into each other’s market share – erode profits – so to keep profits just let one firm dominate  Market big: eg. grocery 2) Market size  Small: eg. retail. localized demand. perishables.make more profits  But some industries have low BTE (technology easily replicated) – low sunk cost eg.Discuss the view that the profit motive will always lead to a few large firms dominating the market for each and every type of product.

 Will still have competition unlike monopoly – still have the incentive to be more cost-efficient / innovative 66 .

MSB = MSC  Perfect competition: firm price taker  MR = MC = P – allocatively efficient 67 . last unit of good more than opportunity cost of producing that unit – society benefits from producing that last unit  Assumption aside. Allocative efficiency  Definition: situation in which it is impossible to change the allocation of resources in such a way as to make someone better off without making someone else worse off  Assumption: no externalities / public goods – P = MC – right amount + type of good produced to maximize societal welfare Price S (MC) D (MB) 0 Quantity  If MB < MC. last unit of good less than opportunity cost of producing that unit – society benefits from not producing that last unit  If MB > MC.Explain what is meant by productive and allocative efficiency. [10m] 1.

P/R/C MC P1 MR 0 Q1 Quantity 2. Productive efficiency  Long run concept  Firm’s POV  Any given level of firm’s output produced at lowest possible AC – all points on LRAC curve are productively efficient  Society’s POV  LRAC minimum – firm is at optimum size / MES – all IEOS exploited P/R/C LRAC P1 MR 0 Q1 Quantity 68 .

’ Discuss whether this argument is true for a firm operating in an imperfect market. only talk about long run 1) Allocative efficiency: P > MC true for all imperfect markets because they are price setters – deadweight loss to society – allocatively inefficient 2) Productive efficiency: Not operating at MES (where LRAC cuts MC) – not fully exploited all IEOS – productively inefficient P/R/C Triangle = DWL MC LRAC Pm Pc MR 0 Qm Qc AR Quantity  PC industry needs to be at MES because it needs to be as cost-effective as possible – price taker – cannot pass cost increase to consumers  Vs.‘A firm should be encouraged to maximize profits because this makes it efficient. [15m] *When comparing efficiency. imperfect market need not be at MES because price setter – can pass cost increase to consumers 3) X-inefficiency  Monopoly: lax in cost control – no existing competition – can pass cost increase as price increase 69 .

 But monopoly can also be cost efficient due to fear of new entrants  Globalisation and international competition  If market is contestable  Force monopoly to be cost efficient  Oligopoly more likely to be cost-efficient compared to monopoly but wastage of resources – large scale advertising / promotion – increase cost for firm and opportunity cost to society as the money could have been used to produce more goods 4) Dynamic efficiency  Supernormal profits in long run – able to invest in r+d – better methods of production – fall in AC in very long run  Vs. PC industry: no dynamic efficiency 70 .

retail: differentiated eg. mobile restaurants – service provision. petrol affect demand companies / taxi curve – demand companies. [10m] Type Number of sellers Monopolistic Oligopoly competition  Many – one  A few large firms – firm’s action less interdependence – one likely to affect firm’s action likely to evoke others responses from rivals  Differentiated  Homogeneous / eg. OPEC – kinked price elastic demand curve P/R/C P/R/C Nature of product AR 0 Quantity Pe AR 0 Quantity  Firm increase price: rivals will not follow – quantity demanded for firm’s product falls more than proportionately – demand price elastic  Firm reduces price: rivals likely to follow – price war + 71 .Distinguish between monopolistic competition and oligopoly.

utilities.Non-pricing  Smaller scale competition Likelihood  Less of colluding BTE  Low / no – low sunk cost + technology easily replicated – long run normal profits quantity demanded for firm’s product increases less than proportionately – demand price inelastic  Larger scale  More: large market share  High – natural: high sunk cost eg. telecomm – TFC very huge – LRAC keeps falling – enjoys huge EOS – very low LRAC– new entrants cannot produce at such low LRAC  Artificial: patents  Ensure supernormal profits in long run 72 .

telecommunications. monopoly – lax – X-inefficiency 3) Government’s intervention  Singapore government – face of international competition in a free market. TV broadcasting in Singapore since market size is too small – one single player most efficient 73 . oligopolies harder to observe whether they are colluding 4) Some industries due to huge sunk cost – oligopolistic / even natural monopoly eg.Explain why oligopoly is a common market structure in many economies. transport. local firms have to be big eg. [15m] 1) Firms want to be big to maximize profits  Merger of small firms – EOS – fall in LRAC – fall in price – ward off rivals + block new entrants  Monopoly – attracted by supernormal profits – monopoly loses its power 2) Society may desire oligopolies  Oligopoly – competition – greater innovation through r+d which monopolistic competition cannot afford since it only makes normal profits  Vs. taxi companies  Firms prefer operate in oligopolistic structure rather than monopolistic: monopolies more closely watched by government vs. banking – go regional – liberalization and deregulation of industries: mobile service industry. utilities.

government more likely to do so 74 .Explain why governments throughout the world have been involved in the supply of services such as electricity. [12m] Introduction  Government – social benefits + social costs which private firms unlikely to take into account  Electricity – essential good for households and businesses Body 1) Could be a natural monopoly  Market size cannot operate with more than one player at MES: huge sunk cost – AC keeps falling – private firms likely to be monopolistic – charge very high prices – need for regulation P/R/C Pm Pc MR 0 Qm Qc AR AC MC Quantity 2) Private – does not cater to lower income group vs.

government: save costs for advertising 5) Earns revenue for government since it is essential Conclusion Main point is that government does not want to risk anything because electricity and similar services are so essential 75 .3) Huge initial investment – private firm likely to charge higher price to cover costs vs. government can subsidise from revenue / taxes 4) If there is competition among a few private firms – wastage + duplication of resources vs.

Chapter 8: Government Intervention in the Market II 1. electricity. Regulation of Natural Monopolies  MC pricing: monopoly charge a price that is equal to MC in order to achieve allocative efficiency  But monopoly incurs a loss – shut down – public deprived of vital service  Need to be supplemented with government subsidies: costly to government. Taxation  Lump-sum tax on monopolist’s excessive profits – shifts AC curve upwards – profits reduced – normal profits 76 . costly to acquire new information  Regulatory lag: firms may have to operate at a loss during time lag  Costly to administer 2. market conditions change constantly. burden on taxpayers  2-tier pricing: consumers pay a fixed sum of money for access to service and price per unit consumed to cover marginal cost  Eg. gas  Producer meets all COP and minimizes loss of social welfare  AC pricing: monopoly charge a price equal to AC – lower price and greater output – increase in society’s welfare  Normal profits – viable in long run  Still not allocatively efficient  Firms no incentive to keep costs low since price is at whatever AC they are at  Problems  Difficult to obtain accurate information on demand and cost estimates: firms tend to overstate cost.

eliminate wasteful duplication 77 . steel and coal industry. predatory pricing: setting price below COP to eliminate competition  Imposing standards of provision eg. the other will own applications  May not be applicable to natural monopoly / monopolies with great incentives to undertake r+d  Forbidding certain practices: eg. Legislation  Anti-trust laws: Anti-trust Act (US) / Competition Law (Singapore): break up monopoly  Eg. Redistribute income from producer to consumer  Use tax revenue to subsidise welfare schemes / production of merit goods  May create disincentive for monopolist to be cost-efficient  Monopoly can pass burden to consumers due to price inelastic demand  Dynamic efficiency compromised 3. Public Transport Authority in Singapore governs standards of public transportation to ensure guaranteed quality of product  Insisting on certain levels of competition in industry: Singapore government increasingly deregulates monopoly 4. presence of positive externalities. large spending on r+d required  Unfair competition of state-owned enterprises with private sector  Efficiency  Natural monopoly. Microsoft Corporation: one firm own Windows operating system. Nationalisation  Growth  Industries with major investment eg.

just to keep employment figures high  Equity  Special pricing policies eg. wider choice. Privatisation  Competition  Increased competition – cost efficiency + benefits for consumers eg. national defence  Seen as a move towards communism 5. free bus rides for pensioners  Service which would otherwise not be provided eg. possibly lower output and higher price  If high BTE 78 . bus route to remote areas  State monopoly no less disadvantageous to consumer than private one – no higher authority to maintain checks and balances  Stability  For strategic reasons eg. Lack of competition pressure – lack of incentive – Xinefficiency  Bureaucracy – heavier burden on tax payers  Sunset industry  Decision may be made for political rather than economic reasons eg. improved quality  Unfair competition of state-owned enterprises with private sector  Could be worse outcome  If state monopoly replaced with private monopoly. lower prices.

externalities. higher returns on investments  Greater accountability to public – constantly need to perform well or risk takeover by another firm  Natural monopolies. equity issues  Revenue  Revenue from selling state assets  Higher corporate tax receipts if privatized company is profitable  Long term loss of revenue had the privatized firm been profitable 79 . Efficiency  Greater efficiency  Commercially sounder decision making eg.

32 Chapter 10: Income and Employment Determination 33 Explain what information an economist would require to decide whether the US needed ‘an economic stimulus’. 37 What are the main causes of Singapore’s recessions? 38 Chapter 11: International Economics 39 Explain the theory of comparative advantage.J2 Topics No Title . 42 Explain the rationale for free trade and discuss the extent to which FTAs are beneficial. Page No. 34 Explain what is meant by the equilibrium level of national income. 50-51 52-53 54 55-58 59 59 60 61 62 63-66 67 68-69 70-71 72-74 75-76 77 80 . 35 Analyse the effect on the equilibrium level of income of an increase in the level of savings and an increase in the level of exports. 29 Chapter 9: Key Economic Indicators 30 How far can this information lead you to conclude that there is a rising standard of living in Singapore? 31 Discuss the factors that contribute to economic growth in a country. 36 Discuss the extent to which the US fiscal stimulus might lead to a sustained increase in national income. 40 To what extent does the theory of comparative advantage explain the pattern of trade between Singapore and the rest of the world? 41 Discuss whether protection offers any advantages over specialization. 43 To what extent can economies benefit from globalisation? 44 Discuss the opportunities and threats of globalisation for Singapore and other Asian economies.

low inflation and stable economic growth. In the fourth quarter of 2004. Policies to remedy Singapore’s recession Evaluate methods the Malaysian government might use to slow down import growth and increase new export business. Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy. Discuss whether supply-side policies are the best way of achieving full employment in Singapore. “To be considered successful. an economy needs to achieve low unemployment. of Singapore’s changing tax structure. an economy needs to achieve low unemployment. other than on the general price level. Why Singapore does not use interest rate policy Problems with exchange rate instability 78 79 80 81 81 82 83 84 84 81 . low inflation and stable economic growth.” How far do you agree with the statement? “To be considered successful. Singapore’s unemployment rate rose to 3.7%.” Explain this statement.45 46 47 48 49 50 51 52 53 Consider the effects.

crime rates.Chapter 9: Key Economic Indicators 1. National Income Statistics  Gross domestic product: value of all final goods and services produced within a given country during a given period of time  Measure economic growth  Limitations  Understate nation’s output: omission of non-market activities (voluntary welfare services) and underground economy  Difficulties in measuring SOL  Leisure time  Externalities  Production does not equal consumption: expenditure could be for potential growth  Income distribution  Other social factors: eg. freedom  International comparisons  Difference in account procedures and items included  Exchange rates: need to use PPP  Population: need GDP per capita  Difference in climate and culture: different needs – different costs  Difference in underground economy: Sweden’s underground economy 13% of GDP 82 . Key Macroeconomic Aims  Strong sustained economic growth  Low inflation  Low unemployment rate  Healthy BOP 2.

GDP per man hour  Gross national product: value of all final goods and services produced by residents of a country. education. Alternative measures of SOL  HDI: life expectancy. GDP per capita at PPP rates  MEW: leisure. real: at constant prices 83 . during a given period  Net national product: GNP – depreciation  Nominal: at current prices vs. regardless of the location of production.

3. Inflation Rate  CPI: measures change in price of fixed basket of goods and services commonly purchased by households in a specified time period  Limitations  Not an accurate measure of COL  Substitution bias: consumers substitute toward goods that have become relatively cheaper – overstates COL  Quality adjustment: CPI increase might be due to quality adjustments – overstate inflation  New products: price declines sharply a few years after introduction – not added to market basket until years after introduction – price declines not recorded 4. Unemployment Rate  Unemployed: people aged 15 and over who are without work but were available for work and were actively looking for a job  Frictional unemployment: unemployment because time taken for workers to search jobs and for firms to search for suitable workers  Structural unemployment: workers do not have the skills needed to obtain long-term employment  Cyclical unemployment: unemployment during recession 5. Balance of Payments  Record of country’s international transactions  Current account  Visible: imports and exports of goods and services – BOT  Invisible: profit repatriation, interest, dividends, unilateral transfers  Capital account  Portfolio: bonds, shares, money in banks  Direct: FDI  Financial account: something like bank reserves


Singapore has enjoyed another year of robust growth in 2007, and the real GDP growth was 7.5% for the year. A record 172000 jobs were created in the first 3 quarters. However, in recent months, inflation has picked up and the inflation rate for the month of November alone was 4.2%. How far can this information lead you to conclude that there is a rising standard of living in Singapore? [25m] Introduction  SOL – material and non-material well being of each citizen Body A) Material well being  Real GDP per head: on average how much goods / services each citizen gets to consumer  Real: adjusted for inflation as converted to constant prices  High for a developed country  Limitation: does not show effect of changes in population size  Per head: effect of population size eg. if GDP increases by 7.5% but population increases by 9%, GDP per head falls  Singapore: over 1 year: changes in population size little but could have been some increase due to open-door policy  Income gap – Gini coefficient  Gini coefficient globally used as a measure of income disparity, with 0 indicating perfect equality and 1 perfect inequality  Singapore: 0.52 in 2006


 Increasing gap in Singapore due to globalisation: displaced by machines, structural changes, influx of foreign workers, outsourcing  Type of spending  Capital vs. consumption goods  Government spending  Defence vs. spending that directly increases SOL  172000 jobs  High incomes – increase consumer spending which increases demand for goods and services, generating more jobs and employment  Due to investments by foreign companies eg. in 2007 plant specializing in harnessing solar energy set up in Singapore – indicates investor confidence  Limitations: 60% jobs went to foreigners, number of jobs destroyed vs. number of jobs created, size of labour force may have changed so it is not that unemployment rates fell, composition of jobs (for lower-skilled workers?), ratio of dependants to working population


pollution Conclusion  Other indicators: HDI. MEW. QOL of some (lower-income group?) may be affected  Means-testing  Leisure: GDP per man hour  Others: negative externalities eg. heavily subsidized  Government emphasis on upgrading of skills and training subsidies to firms for such purposes  Healthcare – infant mortality rate / life expectancy  Singapore: individual responsibility + government spending – 3M framework – Medisave. partly GST  Lower-income group suffers more in the face of further increase in prices / income gap B) Non-material well being  Education – literacy rate  Singapore: high literacy rate due to compulsory primary education. Inflation rate  Real: adjusted for inflation  Cause: mainly cost factors like high imported oil price. GNP 87 . imported food shortages. Medifund  Avoid excessive burden on state and tax payers  With increasing medical costs + ageing population. Medishield.

change structure of economy in face of loss of comparative advantage and nurture comparative advantage in new areas  Conducive environment for business  Political stability  Price stability: reflection of good macroeconomic management by government. oil-rich Saudi Arabia  Labour – labour-abundant countries like China and India  Entrepreneurship – availability of talents and risk-taking individuals eg.Discuss the factors that contribute to economic growth in a country. competitive price and lowered COP – ability to attract FDI due to lower wages 88 . [12m] Introduction  Economic growth measured by GDP growth rate and is the means to improve living standards Body 1) Quantity and quality of resources  Quantity and availability enhance growth potential  Land: includes natural resources like mineral deposits and oil eg. self-made entrepreneurs in Hong Kong  Quality can be enhanced through government effort and policies  Increase labour productivity through training and education  Entrepreneurship  Capital – government efforts to make it more conducive for fixed capital formation 2) Role of government  Augment quality of labour through education and training  Strategise economic direction eg.

investment and government spending in economy  High consumption conducive when economy has unutilized resources while high savings conducive when economy near or at full employment  Savings provide investment funds necessary for growth  Government fiscal and interest rate policies  High export revenue due to competitiveness 89 .    Efficient infrastructure Attractive corporate taxes Less bureaucracy and red tape Ability to explore new markets / help businesses go global 3) Level of consumption.

inflation  Changes in government policies  Changes in world economy: income abroad. exchange rates 2. Aggregate Demand  Total level of spending in an economy  AD curve slopes downwards because  Wealth / real balance effect: GPL higher – purchasing power of financial assets falls – discourages domestic consumption – lower level of output  Interest rate effect: higher GPL – increase demand for money from households and firms + might shift wealth out of financial assets – decreasing supply of loanable funds – increase in interest rates – more expensive to purchase goods and services on credit – households purchase less goods + businesses invest less – lower national output  International substitution effect: higher GPL – locals buy more foreign goods + foreigners buy less domestic goods – net exports fall – lower national output  Factors that cause a shift  Changes in expectations: income and profits. real wealth.Chapter 10: Income and Employment Determination 1. Aggregate Supply  Total output of goods and services that firms as a whole would like to produce and sell at each possible price level  Shape  Horizontal: producers can produce all they want due to abundant resources  Upward sloping: output rises but pressure on prices  Vertical: need time to adjust to new cost structures 90 . foreign price level.

 Factors that cause a shift  Change in input prices  Change in quality of labour input  Change in expected rate of inflation  Change in technology  Government policies (local and foreign) 91 .

3. Z = savings  C = a+bY  a represents autonomous consumption: level of consumption that does not vary with income – still need to consume even though no income  bY represents induced consumption: household expenditures that vary directly with income  b: MPC = change in C / change in Y  Non-income determinants  Wealth: amount of money. Consumption Function  Act of using income for the purchase of goods and services to satisfy current wants Consumption Y=C Z X W C = a + bY Income W = dissavings. X = breakeven point. fixed assets and financial assets households have  Expectations of future prices and income  Distribution of income  Interest rate and availability on credit 92 .

induced  Expected rate of return > rate of interest – will invest  Factors that cause shift  Business confidence and expectations  Cost and availability of capital goods  Rate of change of income: accelerator effect  Government policies  Change in technology 93 . Tastes and attitudes 4. Investment  Act of acquiring new fixed capital assets and accumulating stocks and inventories  Autonomous: not influenced by national income vs.

Interest rate Investment 5. Equilibrium Level of Income AE Y = AE B b c A d a Autonomous consumption Y2 Y0 National output 94 .

The initial rise in income due to (any rise in component: depends on question context) will induce consumption by recipients of the income. Y = by  AE < Y  unplanned inventory investment ab  next period firms reduce output  Y1 falls to equilibrium Y0 At OY2 AE = dY2. The Multiplier Effect A change in any component of aggregate expenditure (ie.At OY1 AE = aY. since AE is now greater than actual national output. In the next period. I. the national income will eventually rise by 2 times the initial injection. causing the level of national income to rise eventually to Y1. Assuming an initial injection of $100m and a constant MPC of 0. firms would increase output. As shown in the diagram below [refer to diagram above]. the national income will eventually rise by a multiple of the initial rise in the AE. At the original level of national income Y0. 95 . Y = cY2  AE > Y  excess demand. there is an unplanned fall in stocks of AB.5. C. firms draw on stocks  unplanned disinvestments cd  next period firms increase output  Y2 rises to equilibrium Y0 6. G or X) will work through the multiplier to change the national income more than proportionately. As one man’s spending generates income for the next person. where the new AE equates the national output. an increase in AE will cause the AE curve to shift from AE0 to AE1.

Evaluation  Magnitude of increase in NY depends on size of multiplier  Larger the MPW. the multiplier measures the change in national income as a result of the change in AE.In short. It has a direct relationship with the MPC. expressed as k=1/(1-MPC). smaller the multiplier  May lead to demand-pull inflation if near or at full employment  BOP – inflation affects price of exports and may have adverse effect on BOT 7. Inflationary / Deflationary Gap  Amount of AE that falls short of (cd)/ exceeds (ab) the level necessary to achieve FE 96 .

wages and profits.cyclical – no job – demand deficient unemployment Explain what is meant by the equilibrium level of national income. induced: fall in GDP – fall in investment  Inflation: fall in GDP – fall in AD – fall in GPL / fall in inflation rate  Need inflation rate to arrive at real GDP  Firms and bankruptcy. bankruptcy  Inflation: fall in GPL but stagflation (economy weakening but price increasing) – price increase in US not due to recession: not AD factors but AS factors  Unemployment rate – rough guide: 4% . firms and decreasing profits  Stock markets: indices fall – confidence fall OR  Fall in real GDP  What causes fall: C/I/G/X-M: BOT: more relevant for Singapore since Singapore’s recession mainly due to BOT  GDP – income. [10m] 97 .Explain what information an economist would require to decide whether the US needed ‘an economic stimulus’. [10m] Introduction Weak economy – assume pending recession – fall in GDP for 2 consecutive quarters (negative GDP growth) Development  Fall in real GDP  Components of AD: fall in AD – fall in GDP  Consumption level of households: due to fall in income / saving in fear of retrenchment  Fall in investment: business pessimism.

AE curve cuts 45 degree line  Adjustment to equilibrium  Conclusion: when economy is in equilibrium. NY: as measured by GDP (definition)  Equilibrium: no tendency to move from that equilibrium  Describe briefly components of AE  C (households): shape of AE follows shape of consumption function C=a+by  Simple explanation of components  Sign of 45 degree line: every point is an equilibrium point where AE=Y  Equilibrium level of NY: planned AE = Y. may not be at full employment / recession 98 .

Analyse the effect on the equilibrium level of income of an increase in the level of savings and an increase in the level of exports. smaller K  Eg. Singapore 99 . Exports  Increase X – increase AE – AE curve shifts from AE2 to AE1  Show adjustment to equilibrium  Evaluation  Increase X – if have unemployed resources – increase NY  Increase X – if near / at FE – NY may not increase as fast / demand-pull inflation  Discuss multiplier process in detail Conclusion  Magnitude of change in national income depends on size of multiplier  Larger MPW. Savings  Y=C+S  Increase in S – fall in C – AE falls – AE curve shifts from AE1 to AE2  Show adjustment to equilibrium  Summation: increase savings – fall in C – works through multiplier – fall in NY by a few multiples  Evaluation  Savings can be good for economic growth – increase supply of loanable funds – interest rate falls – cost of borrowing falls – increase I – increase productive capacity – increase AS – increase NY  Summation: S decreases actual growth but increases potential growth B. [15m] A.

[15m] Introduction  Fiscal: increase G.Discuss the extent to which the US fiscal stimulus might lead to a sustained increase in national income. cannot sustain  Multiplier in detail  Evaluation: depends on size of multiplier  USA – MPM could be high because hug e trade deficit – may reduce size of k  Crowding out effect: increase in G if borrowed from public – decrease in supply of loanable funds – increase in interest rate – crowd out C/I – cannot sustain  Effects of taxes on C and I unpredictable due to pessimism  Reaches FE: cannot sustain  Therefore need supply-side measures to increase AS for sustained growth – potential growth / increase in productive capacity  Increase in G on infrastructure – facilitates business – increase AS  Tax – increase NY (potential)  Decrease personal taxes – increase incentive to work – increase AS  Decrease corporate taxes – increase I – increase LRAS  Condition: if rebates are permanent but according to preamble. rebates seem to be one-off 100 . decrease T  Sustained: actual + potential growth Development  How fiscal stimulus works: lower taxes (increase C/ increase I) + increase G – increase AD – increase NY: actual growth.

but recognize that fall in AS can also create a recession 101 . SARS (only caused a slowdown in Singapore’s economy). 1997 Asian crisis – C/I fall  Trade deficit: value of X fell due to 911  Lose CA – goods more expensive  Fall in income of trading partner 2) External recessions  US recession – US GDP fall – buy less Singapore goods – Singapore’s X falls – AD falls – GDP falls (multiplier effect)  Singapore may not be that affected – can ride on growth of China / India  But China huge trade partner of USA  Singapore: international momentum  Extension of MRT – increase G – k – increase NY  IR: increase I – increase NY + tourist revenue  YOG: tourist revenue  Cannot sustain since k is small 3) Supply-side factors  Supply shocks: 1973 oil crisis – increase COP – fall in AS But overwhelming cause is due to AD.Conclusion  More policies to boost AS – education and training – increase productivity – increase LRAS What are the main causes of Singapore’s recessions? [10m] 1) Factors leading to fall in AD  External factors – pessimism eg. 911.

involving the use of different currencies and crossing international borders  Theory of comparative advantage: produce good at lower opportunity cost than another country  Sources  Differences in factor endowments that can change over time  Differences in technology  Dynamic comparative advantage  Advantages of trade  Greater world output and higher consumption of goods and services (possible at previously unattainable levels)  Reduction in unit cost of production: EOS. Theory of International Trade  Exchange of goods and services between countries.Chapter 11: International Economics 1. better quality products  Dynamic gains from trade: gains grow larger over time  Disadvantages of trade  Unfair competition and dumping / unnecessary government subsidies  Over dependence on other countries  Import harmful goods 102 . lower prices compared with local products. countries gain experience over time  Stimulate economic development and growth: enlarge market. increase competition in home market  Facilitate transfer of technology and ideas: increase efficiency of production – economic growth. help developing countries leap frog stages  Promotes beneficial political links  Benefits consumers: more choice and higher satisfaction levels.

 Terms of trade: rate at which country exchanges its exports for imports  Factors  Change in demand conditions: population. income. cause of change. availability of substitutes  Change in supply conditions: technology. depletion of natural non-renewable resources  Consequences of change in TOT  Change in BOT and SOL: dependent on PED of exports and imports. responses that follow  Reallocation of resources  Change in consumption patterns 103 .

charges made on people purchasing foreign currencies 104 . just a source of government revenue  Cuts volume of imports – improve BOT – exchange rate appreciates – exports more expensive abroad – reduce exports in the long run  Non-tariff: import quotas  Greater certainty of protection since revenue earned by foreign suppliers may not be as badly affected as tariff  Export subsidies: cash grants by government to local producers  Reduces COP – sell more of good at prevailing price  May induce complacency  Drain on government funds  Foreign exchange control: government control over sale and purchase of foreign exchange  Financial quotas.2. Barriers to Trade  Natural  High transport costs – raises COP and lowers relative efficiency  Lack of mobility of factors  Increasing COP due to LDMR beyond certain level of output  Other market imperfections: imperfect information and market conditions – may not specialize to extent that theory suggests  Artificial: protectionism  Tariff: custom duties imposed on imports of goods and services by government  Depends on PED of imports and how much foreign suppliers are willing to absorb – may not protect domestic producers.

Japan’s 105 . international cartels  New protectionist measure: technical specifications and standards which discriminate in favour of domestic producers  Administrative regulations regarding import procedures to delay and reduce volume of imports  Voluntary export restraints (VER): exporting country voluntarily reduces its exports under threats of allround trade restrictions eg. trade agreements. US automobile industry vs. Malaysia used this method to recover from 1997 Asian financial crisis  Difficult to enforce and might result in black market for foreign exchange  Works best in communist countries because government monopolises money conversion  Others: embargo.

Arguments for Protectionism  Economic  Protect infant industry eg.3. Singapore had protective duties covering ~300 items in 1960s  Difficult to identify currently unprofitable industries that might acquire comparative advantage in the long run  Difficult to decide when industry can be independent of protection  Encourage inefficiency  Reduce BOP deficits  Dependent on PED of imports and exports  Need to look at root causes  Invite retaliation – reduced exports – reduced total volume of world trade  Prevent unfair trade practices  Dumping – distorts market – justifiable  If consumers benefit in the long run from lower import prices – not justified  Diversify economic structure  May not support theory of comparative advantage  Pattern of comparative advantage can change over time naturally (discovery of new raw materials) / through deliberate policies  Protect mature industries  Trade unions  Misuse of resources since protectionism will not increase total employment  Retaliation  Protect against low-wage foreign labour  Rejection of theory of comparative advantage  Could shut down industries and divert resources to more productive ones 106 .

should be imposed on goods which are price inelastic  Retaliation  Retaliation  Unhealthy for word trade and ineffective  Distort and reduce differences in comparative advantage  Welfare loss  Misallocation of resources: firms unnecessarily retained  Difficult to remove protectionist measures once in place  Other industries may demand for protectionism  Better alternative: stimulate export competitiveness by increasing AS  Political  Essential to produce on military weapons in case of crisis – subsidies industry to ensure continuous supply eg. Japan’s  Nation poorer but value of national security higher  Trade as weapon of foreign policy eg Gulf war: US imposed trade sanctions against Iraq  Social  Subsidise agricultural sector to avoid further depletion of population in rural areas / prevent further rural-urban migration to overpopulated cities  Restrict import of harmful goods 107 . Consumers denied opportunity to buy from cheaper source – benefits of trade lost  Increase domestic production: counter-cyclical measure  Increase government revenue  To be effective. US 1980s semiconductor industry for high-tech weaponry vs.

Increase revenue . c become tax revenue.Reduce consumption from OQ4 to OQ3 . Tariff Diagram Loss in consumer surplus = a + b + c + d a becomes producer surplus.Reduce consumption of imports and switch to domestically produced substitutes . b + d becomes deadweight loss Consumption effect: .Producer surplus increases Government revenue effect: .4.Receives as tax revenue extra amount paid by consumers for the imported quantity 108 .Pay extra amount (P2 – P1) .Consumer surplus falls Production effect: .Expand production from OQ1 to OQ2 .

Explain the theory of comparative advantage. initially use 10 units to produce each good Table 1: Before specialization Cars Textiles USA 100 60 China 5 10 Total 105 70 USA: CA in production of cars – give up less textile China: CA in textile – give up less cars Opportunity Cost 1C: 0.6T 1C: 2T USA devotes 1/10 more to car. [10m] Introduction  Comparative advantage: specialize based on lower opportunity cost – less of the other good foregone Body  Assumptions: 2 countries 2 goods. China complete specialization. Table 2: After specialization Cars USA 110 China 0 Total 110 World output increases Textiles 54 20 74 109 . constant returns to scale: LRAC remains constant Assume USA and China each has 20 units of resources. no transport costs.

6T < 1C <2T – 1C traded for 1T USA exports 10 cars. increase growth  Limitations of CA: relax assumptions 110 . gets 10 textiles Table 3: After trade Cars USA 100 China 10 Total 110 Textiles 64 10 75 Gains from trade: higher level of consumption Conclusion  Comparative advantage – gains from trade.Terms of trade: mutually beneficial 0. more choices.

moving towards services like banking and finance. tourism 1990s and Electronics. 111 1980s Move towards higher-end products and electronic products. knowledge-intensive.To what extent does the theory of comparative advantage explain the pattern of trade between Singapore and the rest of the world? [15m] Introduction  Singapore’s constraints – lack of natural resources. . unskilled and surplus labour Capital-intensive industries: More educated workforce and improved technology Loss of CA in labourintensive industries to countries like Malaysia and Indonesia which have huge labour force High value-added. pharmaceuticals. small geographical size and population – human capital our only resource  Singapore’s relative strengths – good geographical location  Our constraints and strengths determine where our CA lies  Pattern of trade: type of exports and imports of goods and services Body A) Yes Type of exports 1970s Textiles and simple manufactured products CA Labour-intensive industries: Cheap.

beyond telecommunication equipment. medical hub technology-intensive industries: Highly qualified labour force. educational hub. capital goods for development and infrastructure building Lack of CA Lack of natural resources especially lack of land for agriculture and to support huge export base 112 . tourism. food. raw materials. r+d infrastructure Continue to lose CA in manufacturing industries to countries like China and India Type of imports Imports: consumer items. disk drives. integrated circuits Services: banking and finance.

there are other factors  Trade based on world demand  CA only gives rationale for trade but countries try to augment and develop CA in industries with world demand  For country to develop and provide opportunities for its population of diverse talents.B) No. Newater  Re-exports 113 . needs to have spectrum of industries  Diversification to reduce negative consequences of overdependence  Desire not to rely on foreign supplier for essential goods  National pride / security eg.

welfare gain if world price cheaper than domestic price Body  Infant industries  Rationale: NIE.Discuss whether protection offers any advantages over specialization. EOS – fall in LRAC – competitive prices. increase X – economic growth. [13m] Introduction  Protectionist measures  Advantages of specialization based on CA: gains from trade. steel  LR implications  Grow – enjoy EOS – lower LRAC – lower price of exports – able to compete internationally – BOT improves if demand is price elastic – increase in total revenue from exports – increase exports – increase NY/N  If do not grow  If government subsidizing – waste of resources – could have been used elsewhere – education / healthcare / develop infrastructure  Consumers and society continue to suffer from inefficiency – higher prices 114 . wider choice. efficiency in resource allocation in the world. reasons of economic diversification – impose quotas / tariffs – allow new industries to grow and develop EOS  SR implications: applies for all reasons to protect as long as use quotas / tariffs  Society: DWL  Consumers: increase price  Other firms (some extent): increase COP if good protected is important input eg.

cars – cost-push inflation – affects domestic market and erodes export competitiveness  Summation: protect jobs in inefficient industries but more jobs lost elsewhere eg. However. housing. Shut down – massive retrenchment  Summation: To the extent that infant industries grow. car industry  Alternative solution: develop CA in new industries: capital-intensive. services. the infant industries normally do not grow and may become inefficient due to government subsidies. training 115 . US steel industry. textile: ‘slap’ tariffs / quotas on Chinese textiles / imported steel – allow inefficient firms to eventually be able to be more efficient – develop new technology / adjust cost structures  Eg. Protectionism cannot be long term.  Inefficient industries  Eg. steel – affects COP in many other industries eg. technology-intensive.

 Dumping  Foreign country selling goods below its actual COP – local firms driven out – eventually foreign country gains monopoly power  Difficult to ascertain if it is dumping / country really has CA in production of these goods – Chinese textile + abundance of cheap labour  Could be baseless accusation  Solution: force firms to be more cost-efficient (don’t protect). US huge trade deficit – USA consumes a lot. subsidise r+d  Economic diversification  Reduce over-dependence on a few key products / industries  Eg. steel – war weapons Conclusion  If country protects. Zambia: copper exports – what if world demand falls  Balance of trade deficit – value of imports > value of exports  Eg. training (subsidise firms for training). including on imports – breed further inefficiency  Alternative solution: increase interest rates – encourage people to save + discourage consumption  LR: high C – low S – low investment – affects productive capacity – low LRAS (inefficiency)  National security  Eg. other countries retaliate – world inefficiency 116 .

increase choice / increase society’s welfare.Explain the rationale for free trade and discuss the extent to which FTAs are beneficial. [25m] Introduction  Free trade – based on CA – lower opportunity cost ratio – gains from trade  FTA – remove tariff and non-tariff barriers – in theory – in practice eg Singapore’s FTAs – also include investment Development A) Expounding theory of CA – difference in factor endowments  Assumptions  3 tables  Summation: gains from trade. C increase can sustain itself based on internal economy  Cambodia / Vietnam: NIEs because people are poor  But increase X – demand-pull inflation when near / at FE – price of exports increase – volume of exports – may affect BOT – NY falls affects economic growth  Inflation  Access to cheaper consumer goods + raw materials / inputs – fall in COP – fall in price of exports – X increase – may increase BOT 117 . increase economic growth and SOL B) Are FTAs beneficial  On trade  Increase X – k – increase NY / N – associated benefit of large-scale production – EOS – fall in LRAC – able to price goods more competitively – may improve BOT  Singapore: small domestic market  China: may not be as dependent on X revenue because people are getting more affluent.

 Fall in COL – extra savings can be used to buy domestic Price increase goods goods – of consumerC / NY Sdom P Pw c a b Ddom 0 10 30 50 Quantity of consumer goods 118 .

firms forced to be more cost-efficient – cut costs in order for profits not to be eroded since P is at Pw Trade creation / diversion  Creation: increase volume of trade – from high-cost producer to low-cost producer – increase welfare of people  Diversion: from low-cost non-member to high-cost member – away from optimum allocation of resources  Draw diagram to illustrate effects Jobs: increase in X – increase N  But loss of CA – forced to restructure – move towards CA – structural unemployment  Outsourcing – firms benefit by relocating – increase BOT – increase GNP  But cost jobs in previous country On FDI  Outward investment to China from Singapore  Increase investment – increase productive capacity – increase AS  Increase investment – increase AD – increase N / NY  Transfer of technology  Useful for NIEs – lack wealth / local entrepreneurs eg. inefficient domestic firms forced to reduce output from 30 to 10  b: consumption effect: increase C from 30 to 50  From diagram. Singapore depends on MNCs  But footloose  But local firms cannot compete Others  Vulnerability to external shocks due to over-dependence – recession / imported inflation 119 .     a+b = welfare gain  a: production effect.

 Interdependence: economies become intertwined eg. USA recession – Singapore recession, worldwide food prices increase Conclusion  Possibility of unequal gains  Singapore  More ST capital outflow to China but LT profits – increase GNP  Loss of jobs as companies go to China  Shifted focus to capital-intensive / technologyintensive – focus on services  Gain – education: Chinese students come here to study


 USA  USA spend a lot because lost CA in lots of goods – need to buy more imports – worsen trade deficit – less savings – less investment – reduced productive capacity  India  Demand for capital goods  Summation  FTA: macroobjective – increase NY – increase SOL, fall in price – increase BOT  Trade creation > trade diversion *FTA means freer trade – no restrictions among countries vs. free trade, so arguments similar, only difference is trade creation / diversion


To what extent can economies benefit from globalisation? [25m] Introduction  Globalisation – free movement of goods and services, capital, labour  Economic integration: FTA, customs union Development A) Goods and services  Trade based on CA – gains + EOS  Poor – NIEs + Singapore (small domestic market) – increase X – increase NY / N – increase SOL  Access to cheaper goods  Consumer goods – lower COL  Raw materials – Singapore / Hong Kong  Capital goods for infrastructure – Cambodia / Vietnam – increase societal welfare + potential growth  Draw in free trade diagram and illustrate gains  Trade diversion vs. trade creation: diagram  Loss of CA eg. USA steel and textile industry, Europe car industry – but restructure and move towards new CA  Inter-dependency eg. USA affect China / India  Over-dependency due to CA and complete specialization – that’s why countries tend to partially specialize / diversify their economies  Effect on prices – imported inflation  Tariffs due to protectionism: draw in diagram B) Capital (associated technology) – FDI (inward and outward)  Receiving country  Increase inward investment – increase AS / AD – increase NY / N  Growth of local supporting industries

 Transfer of technology  Footloose – may cause massive retrenchment if suddenly leaves  Local industries cannot compete – lack of SMEs  Source country  SR: loss of jobs  SR: outflow of capital  LR: restructuring  LR: More companies internationally – increase GNP  LR: Create jobs 123 .

Vietnam – inflation ~19% . Singapore / EU – influx of workers into UK  Solution: provide training  Brain drain  Inequity issue  Manual workers wages fall  Skills demanded globally – increase demand for work – increase wages for skilled jobs  Dual economy  Caters to international market – people grow richer  Caters to domestic market – people do not really get richer 124 .lower income wage rise < price rise  Free flow of labour – influx of foreign workers – depress wages in jobs where supply elastic (abundant supply of manual workers) – no skills  Eg. no jobs  Eg.C) Labour  For LDCs. provide jobs for labour – cheap  May be SR exploitation – but vs.

Discuss the opportunities and threats of globalisation for Singapore and other Asian economies. trading partners could be adversely affected  Interdependency of countries  Economies of major trading partners take a slide. technology (MNCs) and talent (labour) 1) Globalisation and free trade  Opportunities  Export revenue and higher rate of economic growth  Increase in X – k – increase N / NY  Increase M of capital goods / raw materials eg. capital. countries will be affected eg. Vietnam / Cambodia / Singapore  Threats  Competition causes countries to lose CA  Singapore lost CA in labour-intensive industries in mid-80s to NIEs like China and Indonesia  SR: structural unemployment  LR: efforts may pay off if country realizes CA in new industries  Singapore shifted to capital-intensive then knowledge-intensive  Specialisation and over-dependency on few major products  If some countries adopt protectionist measures. [12m] Globalisation: high degree of freedom of movement of goods and services (trade). 911. US recession 2) Presence of MNCs and out-sourcing  Opportunities  Influx of MNCs in Asian countries helped their economies grow 125 .

adverse effect on jobs and economic growth  Dearth of local firms 3) Influx of talent  Increase quantity of resources – shift PPC outwards  But cheap foreign labour – wages in city fall – lower income 126 . Creation of jobs and contribution to GDP  Transfer of technical know-how  Outsourcing eg. UK IT companies phone service operations to India  Threats  Fear of over-dependency: MNCs footloose – if pull out.

the higher the percentage to tax – reduce income gap  Indirect taxes – regressive – lower the income. of Singapore’s changing tax structure. the higher percentage to tax – increase income gap – affects poor more  Cost-push inflation – increase COL – affects poor more  Lower direct taxes – increase income gap because rich pay proportionately less (usually reduce the percentage tax of rich more) 127 . other than on the general price level. A) Inflation  Effect of increased reliance on indirect taxes – definite inflation – shift in SRAS  Increase indirect taxes – increase COP for all firms – fall in AS – fall in NY (contractionary) + rise in GPL – cost-push inflation – BOT may worsen (depending on PED)  Effect of decreased reliance on direct taxes – may or may not have inflation – shift in LRAS and AD  Fall in direct taxes – C/I increase – AD increase – NY increase (growth) / N increase – if near / at FE: demandpull inflation (a little may be desirable because increase output) – BOT worsen (depending on PED)  Lower income taxes – income / substitution effect – may increase incentive to work – increase AS – increase NY – fall in GPL – BOT improves  Lower corporate taxes – increase I – increase NY – fall in GPL – BOT improves  Singapore: keep / attract talent – increase efficiency  Attract MNCS – increase FDI – increase AD (increase N) and increase AS (increase productive capacity) B) Equity  Income taxes (direct) – progressive – higher the income.Consider the effects.

 Corporate taxes fixed at 18%: neither progressive or regressive C) Tax base  Increase indirect taxes – widens tax base – better to rely on due to ageing population – increase number of dependants / decrease in size of labour force  Decrease direct taxes: on working population and firms D) Ability to evade  Indirect taxes: difficult to evade  Direct taxes: can evade but not in Singapore (jailed) – can under-declare 128 .

import all raw materials – COP increase – goods more expensive  Long term policy stance: gradual and modest appreciation of S$ . Fiscal Policy  Increase G to reduce business costs + training – need to subsidise firms and training grants  Fall in COP + increase productivity – increase LRAS – fall in GPL – price of exports fall – volume of exports increase  Evaluation: buy only if they recover from recession  But increase G to boost increase in NY limited effect in Singapore  Small k – need huge increase in G  Prudent  Why not increase G on public works  Limited land 2.price of exports fall in foreign dollars – volume of X increase  Government prefers soft option  Price of imports increase in S$ .Policies to remedy Singapore’s recession Recession in Singapore: externally induced: fall in X 1. Monetary Policy  Why not policies to directly increase X with exchange rate management  Short run solution: depreciation of S$ .import raw materials more cheaply – COP falls – prices more competitive  Modest: small increments – export competitiveness not drastically eroded in the immediate period  Gradual: firms can have time to adjust their cost structures – find ways to be more cost-efficient  Deals with cost-push inflation 129 .price of imports lower for S$ .

3. Other Ways  Explore new markets through trade missions and signing of FTAs – reduce over dependence on a few trading partner  Long term measure Conclusion  Fall in X is beyond our control  Measures can only be long run or interim ones 130 .

cannot afford to have fall in rate of growth  Use only if overheating B. Increase new export business  Subsidies to export firms 131 . Slow down import growth  Devaluation – weaken ringgit  Price of exports fall in foreign currency – volume of exports increase – total revenue from exports increase  Price of imports in ringgit increase – volume of imports fall – total expenditure on imports fall  BOT improves  Depends on price elasticity of demand for X and M – Malaysia demand for imports of capital goods could be price inelastic – COP rises  Can only be short term if Malaysia needs to import capital goods and raw materials  Persistent devaluation can lead to loss of confidence in economy  Tariff – tax on imports – price of imports rise – volume of imports fall – total expenditure on imports fall  Increase in COL  Deadweight loss to society  Retaliation  Contractionary policies: interest rate rise – investment and consumption falls – AD falls – k – fall in NY – fall in demand for imports  Malaysia may have small multiplier  Malaysian firms may want to buy capital goods  Malaysia still developing.Evaluate methods the Malaysian government might use to slow down import growth and increase new export business. A.

yield results in the long run 132 . COP falls – increase AS – GPL falls – price of exports fall  Inefficiency. burden on government and taxpayers  FTA / Trade missions to new countries – increase X – k – increase NY  Reduce over dependence on just a few major trading partners  Takes time – long term  Firms may not want to take the risk – uncharted territory – businessmen may be risk averse  Supply-side  Education and training – increase productivity – increase LRAS – fall in GPL – price of exports fall  Best measure.

an economy needs to achieve low unemployment. [12m] A) Low unemployment – success [any 2 well-discussed]  Maximise use of resources – reduces loss of potential output due to unemployment  Burden on government  Less tax revenue collected  More unemployment benefits  Increase budget deficit. increase FDI. one-off rebates  Low unemployment – people have jobs – higher C – fuels growth  Social problems – crime rates – social unrest – loss of man hours + deters investment (confidence) B) Low inflation – success [internal and external]  Internal: stimulates output.“To be considered successful. opportunity cost – less for other areas – healthcare. education  Singapore: GST offset package. encourages savings – increase investment in the long run  External: BOT improves [PED] 133 . Singapore shares. growth dividends. low inflation and stable economic growth. low inflation and stable economic growth.” How far DYA with the statement? [12m] Anti-thesis  Healthy BOPs – especially open economy – macro objective  Equity in distribution – micro objective  Efficiency in resource allocation – micro objective “To be considered successful. induces confidence.” Explain this statement. an economy needs to achieve low unemployment. increase investment due to certainty.

C) Stable economic growth – success [any 2 well-discussed]  Sustained growth: actual and potential growth: increase AD and As – continual increase in SOL  Confidence – increase investment + FDI – good macroeconomic management of government  Why unstable growth undesirable  AD keeps increase may cause overheating – demand –pull inflation – increase COL + affects BOT – instability  If economy lapses into recession: negative growth – hardship – fall in SOL Conclusion  Brief mention of other criteria for success  Conflict between growth and inflation: relentlessly pursues growth – demand-pull inflation: stable growth vs low inflation  Which criteria most important: low inflation – price stability – Singapore 134 .

[13m] Introduction  Sustainable + stable growth + low inflation – one of the keys to sustainable growth Development A) How FP works to attain growth  Increase G + decrease T – increase AD – k – increase NY  K brief + diagram  Evaluation  Size of k – small k – huge leakages – high savings / M – need huge increase in G – prudent: budget surplus  Small C / I by domestic firms – need export revenue – policies should target X  Crowding out: increase G financed by borrowing from public – increase interest rate – crowd out C/I/X  May not need to borrow – huge reserves – reserves can be depleted  More concerned about fall in X  Time lag: recognition.Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy. response  Small – shorter time lag  Taxes – unpredictable effect on C/I – k works only on the extra disposable income that is spent  Expectations: pessimism / optimism  Fall in direct taxes – rely more on indirect taxes (GST) (increase COL) – regressive – increase income gap B) Summation: FP in Singapore – limited role 135 . implementation.

check imported inflation (low inflation) + Singapore depends a lot on imported raw materials – lower COP – LT able to price competitively – stable growth – BOT increase (PED)  Price of X increases in immediate period  Gradual: Singapore firms to find other ways to reduce cost  Modest: not to totally erode export competitiveness  Supply-side policy: education and training. 911 US recession – policies should target X  Policy exchange rate management – sustainable growth  Gradual and modest appreciation of S$  Price of imports fall in S$ . If economy weakens (fall in GDP) – usually due to external factors like fall in X eg. welfare benefits. taxation incentives Conclusion  FP in Singapore limited effect on Ad. serves as supply-side measure to increase NY over long term + exchange rate management – to boost long term export competitiveness 136 .

Singapore’s unemployment rate rose to 3.7%. if cyclical Development A) Supply-side  Education and training – Budget 08  Schools and vocational institutes gear Singapore workers for the challenges of new economy – grants. places in university – focus: biomedical – increase employability  Subsidise firms for workers training – Skills Development Fund – upgrade skills – reduce structural unemployment  Life-long learning – knowledge can become obselete – constant upgrading of skills – reduces prospect of being structurally unemployed  Long term and may not yield results  Increase employability and attracts MNCs  Welfare benefits  Singapore no unemployment benefits – reduce frictional unemployment  Forced to upgrade skills – reduce structural unemployment  Reduce power of trade unions  NTUC: government body – harmonious relations – no labour unrest: attracts investment (FDI)  NWC: wage recommendations – wage increase < productivity increase – keep COP low 137 . Discuss whether supply-side policies are the best way of achieving full employment in Singapore. [25m] Introduction  Full employment: natural (frictional) rate of unemployment (some structural)  Cause for concern (very briefly): if structural severe.In the fourth quarter of 2004. scholarships.

 Increase employability of workers B) Policies to deal with cyclical unemployment: fall in AD  Supply-side – structural. cannot solve cyclical  FP: increase G. external factors  Exchange rate management  Recession due to fall in X: depreciation / appreciation  Depreciation: price of exports fall – immediate solution but Singapore cannot afford to – price of imports increase – COP increase – later price of exports increase (growth cannot sustain)  Singapore’s choice: gradual and modest appreciation (long term solution) Conclusion  Increase G on education and training + taxation incentives – supply-side policies – effect on AD and some effect on cyclical unemployment – limited role in Singapore due to small k 138 . decrease T but small k.

if Singapore’s interest rate falls to curb recession – ‘hot’ money outflow .Why Singapore does not use interest rate policy  Very dependent on overseas funds – small  Eg. If S$ depreciates  Price of Singapore exports fall in foreign currency – volume of exports increase  Price of imports increase in S$: dependent on raw materials (same for developing countries which need capital goods)  Eg.$ in Singapore banks fall – MS falls – interest rate increase – no control  Discuss interest rate only if not Singapore Problems with exchange rate instability Exchange rates determined by  Trade and investment between trading partners  Speculation  Government management / manipulation of exchange rate eg. If S$ appreciates – price of exports increase in foreign currency – affects export earnings 2) Investment  Persistent depreciation – loss of confidence in economy – fall in investment 3) Developing countries  Foreign loans in US$ denomination – if your currency depreciates – pay back more in your country’s $ 139 . buy US bonds to keep USD up 1) Trade  Affects business planning: need for certainty to forecast profits  Eg.

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