CENTRAL PROBLEM OF ECONOMICS 2

PRICE MECHANISM AND ITS APPLICATIONS 2

INDIRECT TAX 3
INDIRECT SUBSIDY 4
PRICE CEILING 5
PRICE FLOOR 5
FACTORS AFFECTING DEMAND AND SUPPLY 5

FIRMS AND DECISIONS 6

FEATURES OF MARKET STRUCTURES 6
Identify and explain the type of market structure which is likely to exist in the hawker
food industry in Singapore. 6
SURVIVAL OF FIRMS 7
FIRMS’ OBJECTIVES 9
FIRMS’ STRATEGIES 9
FIRMS’ STRATEGIES 10
PERFORMANCE OF FIRMS 12
PRICE DISCRIMINATION 14
ECONOMIES OF SCALE 14
DISECONOMIES OF SCALE 15

BARRIERS TO ENTRY 17

MARKET FAILURE AND GOVT INTERVENTION 18

INFORMATION FAILURE IN THE FORM OF ASYMMETRIC INFO 18
GOVERNMENT INTERVENTION 18
Measures to address production externalities and merit/ demerit goods 18
MEASURES TO REGULATE MARKET DOMINANCE 22
FREE MARKET LEADS TO EFFICIENCY IN RESOURCE ALLOCATION AND EQUITY IN
DISTRIBUTION 23
GOVERNMENT INTERVENTION 24

MACROECONOMIC 25
KEI/ SOL 25
EFFECTS ON ECONOMY/ COUNTRY 26
MACRO AIMS AND ISSUES 27
MACRO ECONOMIC POLICIES 28
MACRO ECONOMIC CONFLICTS/ POLICY CHOICE 31
CONFLICTS BETWEEN OBJECTIVES/ OTHER CONSIDERATION IN CHOICE OF
POLICIES 31
PRELIM PAPERS 40
ECON PRELIM 2020 PAPER 2 40
(B) ASSESS HOW RELATED MARKETS MAY BE AFFECTED BY THESE
DEVELOPMENTS 43
2017 PRELIM PAPER 2 QUESTION 2 44
B. DISCUSS IF THE ABILITY TO COMBAT THESE CHALLENGES IS MORE
DEPENDENT ON GOVERNMENT ASSISTANCE OR THE FIRMS’ OWN STRATEGIES.
46
To do: 2017 prelim qn 3 47
PRELIM 2017 QN 4 (economic performance, choice of policies) 47
B. DISCUSS WHETHER TRADE OFFS BETWEEN MACROECONOMIC OBJECTIVES
IS THE MAIN CONSIDERATION IN THE CHOICE OF POLICIES TO ACHIEVE
ECONOMIC GROWTH IN SINGAPORE. 49

CENTRAL PROBLEM OF ECONOMICS

1. EXPLAIN THE PROBLEM OF LIMITED RESOURCES AND UNLIMITED WANTS
SCARCITY: in relation to PPC. Points on or inside the PPC are attainable, points outside
the PPC are unattainable,

PRICE MECHANISM AND ITS APPLICATIONS

PRICE ADJUSTMENT PROCESS

Supply of crops increase from SS to SS1 as farmers are more willing and able to produce these
crops at all price levels with the lower MC. The increase in supply leads to a surplus at the initial
price P, leading to a downward pressure on price and eventually the market adjusts to a new
lower equilibrium price P1 and higher quantity Q1.

Before the subsidy, farmers earned total revenue of (P x Q). With the subsidy, consumers pay
price P1 but farmers receive the additional subsidy from the government to eventually be paid
price P2 per unit of output. Hence, with the subsidy, farmers now earn a higher revenue of (P2 x
Q1)

a) Using demand and supply diagrams, explain how the removal of quota and the
Russian’s ban might have led to the large number of dairy farmer exiting the industry.

A quota refers to a limit on the quantity of milk produced imposed by the government through
legislation and regulation. It is set below free equilibrium level. Russian’s ban of EU imports also
means another customer of milk has left.
Quota refers to co

INDIRECT TAX
Compulsory payment to government paid directly by producers. Impact falls on sellers, but tax
incidence can be shared between sellers and buyers

- Consumer + producer surplus (DIFFERENCE BETWEEN MAXIMUM PRICE CRS ARE

WILLING AND ABLE TO PAY AND WHAT THEY ACTLY PAY)
- Government revenue
- Impact on society’s welfare
- Incidence of taxation

ASSUMPTION: no market failure, specific/ per unit tax

TAX INCIDENCE depends on PED.

INDIRECT SUBSIDY
Cash transfers from government to sellers to incentivise them to increase supply. Impact falls on
sellers but incidence can be shared between sellers and buyers.

- Consumer + producer surplus

- Government expenditure
- Impact on society’s welfare in terms of AE
- Incidence of subsidy

PRICE CEILING
A maximum price set by the government that sellers are prohibited from selling above. Must be
set below the prevailing market equilibrium price to be effective
PRICE FLOOR
Minimum price set by government sellers are prohibited from selling below, must be set above
prevailing market equilibrium price to be effective.

- Quantity demanded falls from point B to point A- at higher price, consumers real income
falls, ability to consume falls
- Substitution effect: substitutes become relatively cheaper
-

FACTORS AFFECTING DEMAND AND SUPPLY

Demand: TIGERPIE
T- tastes and preference
I- income
G- government policies
E- exchange rates
R- related goods
P- population
I- interest rates
E- expectation of future prices

SUPPLY: ECONSGP
E- expectation of future price changes
C- cost of production
O- openness of economy
N- natural factor
S- state of economy
G- government policies
P- prices of related goods (competitive or joint supply)
FACTORS AFFECTING PED, PES
PED:
SHIT
SUBSTITUTES
HABITUALITY
INCOME (proportion of income spent on the good)
TIME HORIZON

DDinelastic

PES:
Levels of stocks or inventories
Availability of spare capacity
Mobility of factors of production
Time horizon
Length of production

S inelastic
FIRMS AND DECISIONS
FEATURES OF MARKET STRUCTURES

Identify and explain the type of market structure which is likely to exist in the hawker food
industry in Singapore.

Think about what the different features are: BTE → market concentration → number and size of firms
- Type of product
- Perfect knowledge
- Barriers to entry

BRING IN SHAPE OF DEMAND CURVE + WHAT COMPETITION THEY WILL ENGAGE IN

1. Define BTEs and explain absence of BTEs in hawker industry.

(BRING IN CONTEXT)
Barriers to entry are restrictions when they enter or leave the market.

Govt regulations: restrictive (government imposed like barriers like patents and licenses)
Set up costs + specialised knowledge

BRING IN CONTEXT: BTEs in hawker industry can refer to the cost of attaining a license to
serve food, cost of renting a hawker stall. However it is still relatively low as specialised
knowledge is not needed, recipe can be found online.
Resources can therefore move in and out of the industry with ease. Weak BTE means that it
is relatively easy for new stalls to set up to compete with existing stall holders, gives rise to
many small stalls.

2. IMPERFECT KNOWLEDGE: (in rivals + consumers)

1. Rivals don’t have complete information regarding all ingredients and used by each
other and full costs of operation.

2. Consumers don’t have complete information regarding all available prices and
ingredients used by all hawkers.

3. TYPE OF PRODUCT (HOMOGENOUS PDT/ HETEROGENOUS)

 Product differentiation: form of quality differences. It is differentiated products that gives MPC
firms some degree of market power.

If the product is identical to its rivals, they are perfect substitutes. It will be unable to determine
the price of its own product and sell it at the price that is determined by market demand and
supply, making it price takers.

+ SHAPE OF DD CURVE (PRICE SETTING ABILITY)

Able to raise prices without a total loss of demand: consumers perceive their offerings to be
somewhat different from a rival stall.
However, there are many close substitutes available.
Demand is fairly price elastic + price range is relatively narrow + price setting ability of
hawkers are limited. EXPLAIN WITH GRAPH.

NON PRICE COMPETITION AS THE DOMINANT MODE OF COMPETITION.

Hawker stalls seldom engage in price wars (prices are already low, no ability to engage)
Product differentiation in MPC are usually limited in scale and differences are superficial.

Think about ABILITY + WILLINGNESS, how they will differentiate their product.

SURVIVAL OF FIRMS
1.
The increase in foreign worker levy by the Singapore government has led to higher unit
labour cost.
(a)
Explain how the above measure could affect the survival of firms in different market
structures.
[10]

SET CONTEXT: Explain how firms in Singapore face rising labour costs due to imposition of foreign
worker levy. If a firm hires foreign workers, it will have to pay a levy per head to govt → raises MC of
firms.

Shutdown condition: survival of firm that requires the firm at least makes normal profit in
LR
MR=MC
Briefly explain features of MPC. MPC firms are characterised by large number of small firms,
low BTE, some degree of imperfect knowledge and differentiated products.

Low BTE results in highly competitive firms that constantly seek to create a niche through creating
differentiated products that will capture the likes of a certain group of consumers → allows them to enjoy
a certain degree of market power where increase in price will not result in all quantity demanded lost

Due to features, only normal profits in LR.

Demand is likely highly price elastic and small relative to size of entire industry.
They can make all profits in the short run, but only normal profit in long run.

IMPACT OF CHANGE IN COSTS= at new profit maximising quantity Q’ whe

IN SR: the MPC can remain in operation as long as P>AVC

If the firm manages to differentiate its product according to the likes of the consumers and gains
a larger AR, the firm may be able to survive in the LR

Briefly explain features of oligopoly

Small number of large firms, high BTE, high degree of imperfect knowledge and differentiated or
homogenous products

High BTE results in a less competitive environment where existing firms are able to keep out
new entrants and gain large market power. Able to increase price without losing significant
quantity demanded.

Due to features, able to retain supernormal profits in the long run.

- Presence of few substitutes: each firm’s AR is price inelastic and large relative to mthe
size of entire industry
- These firms are able to make supernormal profits in the LR as they are able to
effectively keep put new entrants from competing away their market share because of
high BTE

Impact of change in costs: increase in MC may reduce level of supernormal profits available to the firm
but not cause it to make losses and face the possibility of shut down → oligiopolies may be more able to
survive than a firm that is operating in the MPC industry due to higher price setting ability

CONCLUSION
Firms may consider it as LT change in MC rather than just a ST increase in costs.

FIRMS’ OBJECTIVES
1.Discuss whether firms in the real world set prices at profit-maximising level.
Profit maximising level; output that is where MC=MR and the corresponding price is a point on
the AR

Firms are assumed to be profit maximisers and this is the fundamental assumption applied in
the allocation of resources in an economy.

Additional unit of output at/ more than revenue= cost, increase prodn until MR=MC

THERE ARE CERTAIN SITUATIONS WHERE FIRMS MAY CHOOSE NOT TO/ ARE UNABLE
TO PROFIT MAXIMISE AT MC=MR

1. Lack of perfect information/ costly to acquire the information on cost and revenue.
- Many different types of raw materials involved in the prodn of good, thus precise
MC is difficult to determine.
- The restaurant may apply a cost-plus pricing decision. (cost x 20%)
- Unable to accurately plot AC and AR curves due to dynamic market conditions
that cause AR and AC to change frequently
- Applies especially to fast moving goods that are fashionable only for a short
period of time
2. Alternative objectives: revenue maximisation (or growth maximisation)
- Paid through commission, their remuneration increases with value of products
they sell
- When a firm has grown very large → principal agent problem → managers may find it
easier to account to shareholders using higher revenue, rather than profits.
MANAGERIAL UTILITY → MR=0, instead of MC=MR
3. Government regulation
- Goods that should be considered necessities and should be affordable to the
masses for equity reasons (public utilities)
- NATURAL MONOPOLIES that enjoy significant IEOS, thus conferring upon them
significant market power- they may be able to exploit consumers by increasing
prices.
- Government may require the firm to practise MC P=MC so allocative efficient.
SYNTHESIS
Weigh which is the most important factor, depending on type of industry, time horizon (fast
moving goods, want to minimise cost)

PRODUCTIVE EFFICIENCY
FROM FIRMS’ POV: Refers to the lowest cost of producing any given level of output, assuming
constant state of technology, X-efficiency = productive efficiency from the firm’s point of view.
ALL POINTS ON THE LRAC ARE PRODUCTIVELY EFFICIENT.

FROM SOCIETY’S POV: Refers to the firm producing minimum efficient scale, in other words,
lowest point on LRAC curve.
Profit maximising PC curve in the LR → price taker, LR normal profits due to no BTE
FIRMS’ STRATEGIES
1.Today, Singapore is the largest manufacturer of oil jack-up rigs and command 70% of the
world market. However, firms in this sector are facing challenges from cyclical weakness and
competition from emerging economies. There has been a call on the government to defer the
increase in the foreign worker levy.
(b)
Discuss if the ability to combat these challenges is more dependent on government
assistance or the firms’ own strategies.

T: FIRMS ENGAGE IN STRATEGIES TO INCREASE TR AND DECREASE TC

AT: GOVT ASSISTANCE

1. Analyse how firms strategy/ govt assistance works

LINK: HOW DO THEY INCREASE PROFIT TO ENSURE SURVIVAL OF FIRMS
2. Evaluate pros and cons

FIRMS’ STRATEGIES
A. CONSOLIDATE MKT POWER
1. Mergers and acquisitions

HORIZONTAL INTEGRATION: firm combines with or takes over a similar firm at the same
stage of production to form a single entity.

To achieve market share dominance, by reducing competition, increase in market share and
also increase in market power, greater ability to raise price over marginal COP. More fully
available internal economies of scale such as technical, managerial and R&D.

VERTICAL INTEGRATION: combines with or takes over another firm at a different stage of
production.

To lower uncertainty with regards to access to markets and/or with regards to securing FOP
and hence improve supply chain coordination. + Fully exploit IEOS (managerial economies of
scale by consolidating management and/or marketing economies of scale)0

2. Collusion
3. Cooperation
B. COMPETITION
1. Price - predatory pricing

Prices are set very low by a dominant competitor in the market in order to restrict and
prevent competition. Limit pricing involves charging a price that is lower than profit
maximising price.
 Prevent rivals who typically operate on a smaller scale of production and hence incur
higher long run unit costs of production from entering the market because the the
potential entrant cannot match the price of incumbent firm without making a loss. It
drives out existing competitors and scares off potential entrants.

2. Non price - product innovation, process innovation, advertising

a. Advertising increases demand + revenue

Perceived differences are created, informing consumers on its benefits as well as

persuading consumers to aspire to own the good- reducing PED. Perceived decrease
in substitutability giving firms greater leeway to raise prices without fear of a loss of
market share.

b. Research and development

Creates real differences and it might be some time before competitors can respond
with a similarly improved product.

Costs can also be lowered, higher profits will allow firm to withstand any price war/
competition. Product differentiation → process of distinguishing a product/ service of a firm
from its rivals to make it more attractive to a target market.

A1. fall in number of competitors. DD rises, and becomes more price inelastic.
Think about: feasibility, appropriateness, side effects, time horizon, effectiveness, desirability

- ABLE TO COLLUDE?
- Cartels/ cooperation may fail due to distrust
- Diseconomies of scale

A2. Non price competition

- Product innovation: make customers see product as unique → reduce directness of
competition (reduce substitutability)
- Effects: 1. Increase dd directly, 2. Make dd more price inelastic, 3. Reduce degree of
substitutability between own goods and rivals’ good (especially important when one
might engage in price wars)
- PROCESS INNOVATION: increase efficiency in production process → lower AC and MC

Feasibility: involves high costs, company may not have sufficient resources, only increase
firm’s profits if increase in TR> rise in costs
Outcomes of R&D is uncertain
Time Horizon: strategies take time, not an immediate solution to the problem of cyclical
weakness

A3. GOVERNMENT ASSISTANCE

- TR ASSISTANCE
1. Sign FTAs with other countries to open new doors for local firms
2. Tariffs on imports
- TC ASSISTANCE
1. Delay in foreign worker levy
2. Subsidies for retraining of workers to increase productivity/ R&D
3. Depreciation of the exchange rate

Effectiveness: only mitigates external factors at best

Appropriateness: depends on industry (R&D for tech intensive industries)
TIme horizon: is it sustainable in LR?
Side effects: breeds dynamic and productive inefficiency as firms rely too much on these
subsidies.

JUDGEMENT/ SYNTHESIS
Make a stand (5M)
- Tie up essay
- JUDGE (which is most important, based on CONTEXT) assumption, time horizons

Possibility of both
Many of firms measures are LR in nature, so govt assistance is essential to help firms tide over
cyclical weakness in SR

Govt implemented stop-gap measures such as deferment of foreign worker levy. SG govt has
power to pass such legislation quickly, such that it can reach the firm quickly.

SITUATION: Depends on industry, since govt assistance may not be available to all. Govt will
only intervene in industries that are significant contributors to GDP and employment. Govt may
not intervene for oligopolies since they have SR profits to tide over cyclical downturn.

PERFORMANCE OF FIRMS
1.In 2015, US food processing companies Heinz and Kraft Foods merged to form The
Kraft Heinz Company, which is expected to be the fifth-largest food company in the world and
third-largest in the US.

(b) Assess whether the Singapore government should approve the merger of firms. [15]

SOCIETY BENCHMARKS
- Allocative efficiency (P=MC) Society produces and consumes a combination of goods
that maximised society’s welfare
 - Productive (firm: produce on LRAC, society: produce on MES) + (macro: resources are
used to maximum capacity): all resources are fully and efficiently utilised
- Dynamic: firms are technologically progressive in order to reduce the average cost of
production or to meet the changing wants and needs of consumers- product innovation,
process innovation
- Equity

CONSUMER BENCHMARKS
- Price, quantity (ALLOCATIVE AND PRODUCTIVE)
- Quality, choice + price and quantity (DYNAMIC)

P=MC
Deciding if firms achieve allocative efficiency → depends on if profit maximising output coincides with
allocative efficient output

Firms in imperfect competition are allocative inefficient

Price setter → P>MR
Profit maximiser → MR=MC
Therefore: P>MC

Significance
- Crs value the good more than alternative that could have been produced using the same
resources
- Society’s welfare can be increased by reallocating resources away from alternative to
the good in question (underproduction)
- Extent of underproduction and allocative inefficiency depends on the market power of
the firm

IMPACT OF MERGERS ON AE:

DD curve becomes more price inelastic → increase in px setting ability
Extent of mark up and allocative inefficiency has increased
IMPACT OF MERGERS ON PE:
Positive: more ability to reap IEOS, with increased OP and move closer to MES on LRAC → more PE
from society’s POV
Negative: reduction in competition might result in complacency
Even if it is not minimising cost by producing on LRAC, it can charge a price high enough to
cover its cost and still earn SR profits
Results in X-inefficiency, allowing its average cost to drift above LRAC

IMPACT OF MERGERS ON DE:

Positive:
ABILITY: increased LR supernormal profits enable merged firm to engage in R&D
WILLINGNESS: Presence of BTE allows monopolists to retain supernormal profits derived from
innovation
Negative:
Reduction in competition may result in complacency and loss of DE
Innovation involves risk because of possibility of failure, thus merged firm might choose not to
do so since it is already earning more supernormal profits even without R&D

GIVE EXAMPLES!

SYNTHESIS:
Depends on:
- Extent to which merger increase market power (if other firms are still very large, increase
in mark up price setting ability not so great, cannot be complacent)
- Which criteria is most important in the industry

PRICE DISCRIMINATION

Producer sells the same good at different prices whereby the price difference does not reflect
differences in the cost of supplying the customer

NECESSARY CONDITIONS:
1. Market power
2. Able to distinguish among buyers who would be willing to pay different prices or
identify and segment the market based on differences in price elasticity of demand.
3. Prevent resale and arbitrage
TYPES OF PRICE DISCRIMINATION
1. FIRST DEGREE
Maximum price that he is willing to pay for each unit, capture all consumer surplus. AR
curve become MR curve
However, it is impractical to charge each and every customer a different price.
A customer will not usually reveal the maximum price that he is willing to pay for each
unit of good.

2. SECOND DEGREE
Buying same product by offering them various pricing choices and allowing them to
choose among the different options

3. THIRD
Different price to different groups of consumers by segmenting the market based on
identifiable characteristics of these groups and the PED.
- Customer characteristics (age)
- Location
- Past purchase behaviour

ECONOMIES OF SCALE
INTERNAL EOS
 1. TECHNICAL
2. FINANCIAL
3. MANAGERIAL
4. MARKETING
5. RISK BEARING

TECHNICAL
- FACTOR INDIVISIBILITY
Some factors are of minimum size. Things like database technology is very expensive
and doesn’t make sense for smaller firms to use. In industries like mining, expensive
heavy equipment like drills can significantly improve output. But it is only bought by large
firms which can spread cost over a larger output

- Law of increased dimensions

Any capital equipment used to contain materials (oil tanker etc) will cost less per unit of
output the larger its size.
A greater capacity means average cost decrease for companies like energy services,
transportation or storage.

- SPECIALISATION AND DIVISION OF LABOUR

More specific and repetitive jobs (less training and more efficient- less time is lost as
workers do not need to switch from one operation to another)

FINANCIAL
Better credit ratings, greater collateral. Larger firms- lower interest, interest payments can be
spread across a greater output- lower AC

MANAGERIAL
Use of specialist equipment and training managers.
This means improved communication, raise productivity and thereby reduce unit costs.
-supervising, communicating, coaching

RISK BEARING
Ability of firms to spread the uncertainty in cost of production.
-risk of research and development ( R and D) : pharmaceutical companies
- wide variety of products, and operating in many geographical locations :: spreading risk.
- obtaining resources from different sources- guarding against events like crop failures

EXTERNAL EOS
1. ECONOMIES OF INFORMATION
2. ECONOMIES OF CONCENTRATION/ AGGLOMERATION ECONOMIES
- Availability of skilled labour
- Well developed infrastructure
-
DISECONOMIES OF SCALE

INTERNAL
1. High cost of monitoring and management
2. Low morale of employees

High cost of monitoring and management

Management problems of coordination- poor coordination + higher transportation costs: rigid
organisation, long chain of authority. HIGHER AC

Low moral of employees

Sense of alienation: another cog in the machine, productivity falls : wastage of factor inputs,
HIGHER AC
Increase in costs as a result of firm’s expansion

NJC2020

Singapore's three major telcos –Singtel, StarHub and M1 –have been grappling with
disruption caused by technology and regulatory changes. While technology allows for the
expansion of network bandwidth and reduction of digital congestion with adoption of the new 5G
network, it also enables the entry of virtual mobile telcos like Circles.Life who does not
have its own physical mobile network but leases from existing telcos.Source: Adapted from The
Business Times, 9 October 2018

Using economic analysis, discuss how a major telco such as Singtel would likely respond to
these changes.[25]

The changes that have occurred:

Lowered barriers to entry in the form of lower start up costs- now, they do not have to consider
building up their own physical mobile network. This allows for the introduction of new
competition, and can potentially lead to a loss in market share and market power. Loss of
market power means that the telcos have less price setting ability, to set price above marginal
cost of production.

In order to maintain their market power, they may engage in price strategies and non price
strategies.
PRICE: 1. Predatory pricing and limit pricing
In order to drive out smaller firms that have less IEOS and thus higher LRAC, Singtel may set a very low
price. This would drive out firms who are unable to match incumbent firm’s price, as well as scare off
potential entrants. Limit pricing→ set price at price competitive level, which is still below profit
maximising price.

NON PRICE:

Answer offered::

FEATURES OF MARKET STRUCTURES

1. Barriers to entry and exit
2. Number of buyers and sellers
3. Nature of product
4. Information
5. Shape of DD curve (+ price setting ability)

BARRIERS TO ENTRY
EXAMPLES OF BTE:
- Structural
- Strategic
- Statutory

STRUCTURAL BTE
- Significant fixed costs
Few firms would be able to afford this HIGH INITIAL CAPITAL OUTLAY
Incumbent able to pass on its cost savings to consumers in the form of lower prices, and
new entrants will not be able to compete in terms of pricing since they are likely to
operate on a smaller scale and hence enjoy less IEOS.

Qd of new entrants’ services is likely to be low, resulting in low TR and likely subnormal profits
→ difficult to survive

STRATEGIC BTE
- Advertising
Instill brand loyalty since persuasive advertising has the effect of raising demand for the
incumbent’s services and making its demand less substitutable due to real and
perceived differences

Deters potential entrants since consumers are less likely to switch, even if new entrants try their
best in lowering prices to offer price-competitive services→ difficult for new entrants to capture a
 slice of the market and hence demand for their service would be low, resulting in subnormal
profits from entering industry.

STATUTORY BTE
- Licenses awarded to company by the government for the right to supply a particular
good
- Intellectual property rights- patent, copyrights, franchises
- Tarriffs (and other trade restrictions to keep out foreign competition)

BARRIERS TO ENTRY IN DIFFERENT MARKET STRUCTURES

- PERFECT COMPETITION: none
- MONOPOLISTIC COMPETITION: limites
- OLIGOPOLY: substantial BTE
- MONOPOLY: strong absolute barriers

NORMAL PROFITS/ LR SUPERNORMAL PROFITS

MARKET FAILURE AND GOVT INTERVENTION

INFORMATION FAILURE IN THE FORM OF ASYMMETRIC INFO
1. Adverse selection
Seller knows more about the attributes of the good than the buyer (sellers of used cars)
Or buyer knows more (private insurance)--> raising average price of insurance coverage
+ ever riskier pool of insured
Incentive of buyers and sellers to conceal info

2. Moral Hazard
Situation in which economic agents take greater risks than they normally would → higher
aggregated risk → higher insurance costs for all. Misallocation of resources

GOVERNMENT INTERVENTION
Government intervention
Measures to address production externalities and merit/ demerit
goods
TAXES SUBSIDIES GOVERNME DIRECT EDUCATION DIRECT
NT PROVISION AND PROVISION
LEGISLATIO OF MERIT CAMPAIGNS OF PUBLIC
N GOODS GOODS
CORRECTS PRODUCTIO GOVT AS Without
FOR N QUOTA SUPPLIER government
(maximum WHO intervention,
Negative amount) SUPPLEMEN public goods
production TS WHAT would not be
externalities, CAP AND THE provided
tax= MEC at TRADE PRIVATE
socially SECTOR
optimal level PROVIDES

Demerit Or
goods (-ve
consumption Govt as only
externality) supplier and
supplies FOC
Demerit good
(imperfect
ingo)

1. TAXES
a. Negative production externalities
- Per unit production tax equivalent to the monetary value of the MEC at the
socially optimal output level.
- Monetary value of the MEC at the socially optimal output level. → compels the polluting
firm to internalise the external costs.
- MECHANISM:
A specific tax of E1B (= to MEC at the socially optimal output level) will raise the
firm’s marginal cost of production, shifting it upwards from MPC to MPC+ unit
production tax.
This causes a SHORTAGE at original price Po that exerts an upward pressure
on price to P1. Hence consumers respond to the higher price by reducing
quantity demanded because the higher price reduces their real income, which
reduces their ability to pay. + consumers shift to relatively cheaper substitutes.

Production tax causes the effective price for producers to fall from Po to P2
which causes producers to respond by reducing their quantity supplied from Qe
to Qs.

Hence the unit production tax results in a lower equilibrium quantity OQs which si
also SOCIALLY OPTIMAL QUANTITY. At socially desired output level, OQs
where MSB=MSC, AE is achieved because the DWL arisen from overprodn is
eliminated.

b. Demerit goods (negative consumption externalities)

- SAME AS ABOVE.
c. Demerit goods (imperfect information)
 - Even though consumers still overvalue these goods due to imperfect
information, the higher price (p1>Po) will incentivise these self interested
consumers to reduce their quantity demanded from Qe to Qs as higher
price reduces their ability to pay for these goods.

ADVANTAGES
- Revenue which can be used for
redistribution
- Flexibility and financial incentives for
behavioural changes (DISTORTS
MARKET FORCES, BUT PRICE
MECHANISM STILL ALLOWED TO
CONTINUE → consumer sovereignty is
still present)
DISADVANTAGES
- Effectiveness of using an indirect
tax to reduce consumption levels is
limited by PED for the good. (small
tax imposed on cigarettes will have
limited effect in reducing smoking,
demand is highly price inelastic) →
ONLY WHEN PED IS LOW, A LARGE
TAX IS NEEDED. Unpopular with
governments because votes will be lost at
the polls. INDIRECT TAXES ARE
REGRESSIVE + INEQUITABLE AND
UNDESIRABLE.
- Government needs accurate and
complete info on the size of the
external costs but it is difficult to
quantify externalities. OVER
VALUATION-- o/p reduced to a level
below socially optimal. UNDER- o/p
not brought down to socially optimal.
Without precision, societal welfare
cannot be maximised.
- UNINTENDED CONSEQUENCES
(PERVERSE INCENTIVES AND
UNEXPECTED DRAWBACKS)

2. SUBSIDIES
It is a payment made either to a firm or to a consumer when the firm produces or when the consumer buys
a good or service. → incentivise private producers to increase their supply of goods that generate positive
externalities

Like the tax

a. POSITIVE PRODN EXTERNALITY
Subsidy equal to the positive production externality at OQs → given the firm for per unit of R&D
produced. Lowers MPC of prodn, reflected by downward shift of MPC curve from MPC to MSC
(MPC- indirect subsidy). This lowers the private cost of R&D, profit maximising producers are
incentivised to increase their quantity supplied to Qs because previously unprofitable R&D
projects are now profitable,

OUTPUT INCREASES FROM OQe to the socially optimal optimal level, MSC=MSB. Dwl
eliminated
 b. POSITIVE CONSN EXTERNALITY
When MPC curve shifts downwards from MPC to MPC- indirect subsidy, this causes the price
consumers pay to fall from Po to P1 and the post subsidy price received by profit maximising
producers to increase from Po to P2. → underconsumption of education is corrected as the
quantity of education rises from OQe to OQs, which eliminates dwl.

c. While consumers still undervalue these goods, the lower price they pay after receiving
the subsidy incentivises these self interested consumers to increase their quantity
demanded from Qe to Qs because the lower price increases their ability to pay for these
goods.

ADVANTAGES
- Popular and can be easily
implemented to bring about an
increase in production and
consumption + flexible enough to be
adjusted to the magnitude of the
problem
- CONSUMER SOVEREIGNTY,
financial incentive given to economic
agents to internalise the positive
externality.
DISADVANTAGES
- Valuation of external benefit is difficult
to quantity
- HUGE BURDEN ON GOVERNMENT
AND TAXPAYERS because huge
financial resources are required to
fund subsidies
(may have to set high direct tax rates:
personal income + corporate tax →
discouraging work effort if income effect
outweighs the substitution effect, reducing
investment in country + contributing to
brain drain) + (high tax rates are also
politically unpopular) (alternatively,
government can borrow from the private
sector, but this may result in unsustainable
levels of government debt)

- HUGE OPPORTUNITY COSTS

(Less government financial resources
available for other developmental
projects)

- ROOT CAUSE
(consumers are extrinsically motivated
rather than intrinsically motivated →
unsustainable over long term, once
subsidies are removed, underconsumption
will once again arise

- UNINTENDED CONSEQUENCE (if

low income families simply end up
purchasing low quality education to be
subsidised)

3. GOVERNMENT LEGISLATION AND REGULATION

Market provides the good + government regulation through laws and administrative rules,
providing the process of controlling its production or consumption activities.

A. PRODUCTION QUOTA
LIMIT ON THE QUANTITY PRODUCED. (check price mechanism for more!)

MEASURES TO REGULATE MARKET DOMINANCE

LEGISLATION PRICE TAXES AND NATIONALISM
REGULATIONS SUBSIDIES

Reduce BTE MC pricing Lump sum tax to Transfer in ownership

reduce excessive of a firm away from
Anti Trust Laws AC pricing monopoly profits the private sector,
toward government
Laws that demand Indirect subsidy to ownership.
firms conform to a increase OP to AE
certain standard of level
provision

MEASURES TO MANAGE INFO FAILURE DUE TO ASYMMETRIC INFO

EDUCATION AND CAMPAIGNS GOVERNMENT LEGISLATION AND

REGULATION

A. LAWS TO ADDRESS OVERCONSN

- Ensure quality standards and
safety features
- Force producers to provide
accurate and complete info
B. ADVERSE SELECTION IN GOODS
MARKET
- Lemon Law (protects
consumers against goods that
do not conform to contract or
are not of satisfactory quality
or performance standards at
the time of delivery)

C. Laws to address adverse selection in

the health insurance market
D. Laws to address moral hazard
(compulsory for buyer of insurance to
pay for part of damages- less
incentive to engage in irresponsible
behaviour)
FREE MARKET LEADS TO EFFICIENCY IN RESOURCE ALLOCATION
AND EQUITY IN DISTRIBUTION
In a free market economy, assuming perfect competition and the absence of market failures,
price mechanism can work to allocate resources efficiently.
- AE, PE, DE

Explain what needs to be considered when a govt to build project (apply ABCDE)

AIMS
Expected social benefits greater than or equal to expected social costs

BENEFITS
- SHORT RUN NON MONETARY BENEFITS (job creation in the construction sector,
lower une)
- LR NON MONETARY BENEFITS (reduced travelling time for people)
- LR MONETARY BENEFITS (reduction in business costs due to lower transport costs)
- POSITIVE EXTERNALITIES (increase in land value and higher econ growth
- CONSIDER POV OF DIFFERENT STAKEHOLDERS + GATHER INFO ON THEM,
estimate the monetary value of non monetary benefits like reduction in traveling time

CONSTRAINTS AND COSTS

- EXPLICIT COSTS: money costs of acquiring land, construction, machinery, maintaining
the mrt line
- IMPLICIT: other goods and services that must be sacrificed in order to construct the new
MRT line, cannot be spent to improve cycling trails
- NEGATIVE EXTERNALITIES: local air pollution, noise pollution, safety hazards,
congestion- difficult to estimate
- POV of landowners who have to give up their land, taxpayers who fund construction

Decision making
- Weigh expected MSB against expected MSC (msb > msc, provide additional mrt line)
(provide until MSB=MSC)
Evaluate
- Non monetary benefits and costs are difficult to quantify
- May lead to inaccurate CBA
- Increased risk and inefficient decision making
- Govt should review its decision after time.

INTRODUCTION
Definition of market failure. Market failure refers to failure of free market to achieve social goals
and allocate resources in an optimum and efficient manner.
Negative externalities cause market failure because of overproduction of chemicals in a
chemical industry. Pollution refers to the toxic discharge from chemical industries.

BODY:
MPC of chemicals industry measures the additional cost to chemical industry from the additional
production of chemicals (fuel, labour, chemical elements)
MPB - measures utility or additional value that consumer places on the additional unit of
chemicals consumed.
MEC to third parties. Third parties are those who are not directly involved in the market
transaction as producers or consumers.

Explain the diagram, focus on:

Without govt intervention, the mkt is at private equilibrium output where MPB=MPC where crs
and producers of chemicals only account for their own private benefit and costs. Mkt producers
output Q1 at price P1.

Socially optimum level of output where MSB=MSC. At socially optimum level of output, the
market produces chemicals at output level Qe at price Pe.

Over production or overconsumption created an increase in social cost represented by area… where social
benefit is only … → DWL or welfare loss represented by area ABC.

Thus, negative externalities cause divergence between private costs and social costs, there by
resulting in overproduction and inefficient allocation of resource. Mkt failure

GOVERNMENT INTERVENTION
EXPLAIN EFFECTIVENESS OF A TAX MEASURE.
Assuming govt has perfect knowledge of the social optimum output level and the extent of MEC.

A tax can help internalise the negative externality of pollution by pricing the costs of pollution, there by
compelling produces to factor not just MPC but MEC of prodn. Problem of overprodn solved. → socially
optimal level achieved, market failure fixed.

LIMITATIONS
Govt does not have perfect info of socially optimum level and the extent of MEC. The tax by the amount
of MEC may be over or under estimated. Thus, not able to arrive at socially optimum level.
Overestimation of MEC→ underprodn of chemicals, and vice versa

Effectiveness of tax depends on PED. If PED is more price elastic, due to other substitutes, a
large tax may be inappropriate + PED price inelastic due to taste and preference, a small tax
will have little effect. Indirect tax is also regressive and hence inequitable
QUOTA: govt restricts prodn of chemicals to socially optimal level, Qe → routine inspection and laws
Limitations: displaces price mechanism + suffers from imperfect info: may not know exact
socially optimum output level.
Enforcement may be difficult and expensive
Quota will not force firms to think of ways to reduce the pollution.

MACROECONOMIC
Types of qn:
1. KEI/ SOL

ECONOMIC Increase in the real gross domestic product. Economic growth rate(current
GROWTH (a) Actual growth is the increase in year)
national output actually produced for current-previous/previous x
a given period of time, commonly 100%
measured by the percentage
increase in real GDP LIMITATIONS OF GDP/ GNI
(b) Potential growth is the increase in (a) Presence of non
the productive capacity of the market activities (no
economy for a given period of time. transactions that
record the price of the
GDP: the value of all final goods and goods)
services produced within the geographical (b) Presence of
boundary of a country, within a given period underground
of time. economy (unreported
transactions- illegal
GNI: the value of all final output of goods and legal (home
and services produced by nationally owned tuition))
factors of production during a given period of
time.

SUSTAINED- a rate of economic growth that

can be maintained without creating other
significant economic problems, such as
depleted resources and environmental
problems, particularly for future generations.

INCLUSIVE- rate of growth that is broad

based across economic sectors, and creates
productive employment opportunities for the
majority of the country’s population

PRICE LOW AND STABLE RATE OF INFLATION. INFLATION (CPI)

STABILITY Inflation: sustained increase in GPL current-previous/previous x
Disinflation: substantial reduction in rate of 100%
inflation
Deflation: situation in which prices of most Limitations of CPI
foods and services are falling over time (a) Substitution bias:
when price of a good
CPI: price of fixed basket of goods and rises, consumers
services commonly purchased by a typical typically switch to
household. consuming less
expensive alternatives
(b) Quality adjustment
bias: price of good
rises when its real
value increases, such
that a better quality
version of a good is
more expensive

FULL NON ZERO, LOW RATE OF UNEMPLOYMENT RATE

EMPLOYMEN UNEMPLOYMENT No of unemployed persons/
T labour force x 100%
The situation in which people who are willing
and able to work are actively seeking work LIMITATIONS
but cannot find jobs Unemployed persons stop
looking for jobs (discouraged/
education and training/
education and training)

Can also increase because of

new entrants/ re entrants

FAVOURABLE AVOIDANCE OF LARGE AND/OR

POSITION OF PERSISTENT BOP DEFICITS, OR HAVING
BOP IMPROVED BOP DEFICITS

CA, KFA, RESERVE ASSETS ACCOUNT.

MATERIAL QUANTITY OF GOODS AND SERVICES REAL GDP PER CAPITA

SOL CONSUMED BY THE AVERAGE PERSON nominal/cpi current year X
IN A COUNTRY IN A GIVEN TIME PERIOD CPI base year

Calculated through real GDP per capita: Limitations of real gdp per
capita
+ Explain why it is important to (a) Income distribution
consider REAL GDP (income inequality)
Nominal GDP cannot be used to compare (b) Composition of GDP
production level over time as changes in (rising investment
nominal GDP reflects changes in both the could occur as more
price and volume of output produced. factories and plants
are produced)
 Real GDP eliminate increases in nominal
GDP that were merely due to an increase in
prices.

+ Explain why it is important to

consider per capita

NON Qualitative aspects of life

MATERIAL
SOL

→ DETERMINANTS: of living standards. Econ performance, increase in G/ increase in T/ increase in X/

increase in NY → trade prefers

→ comparison over time (within a country)

→ comparison between countries

GENERAL APPROACH:
- Identify the factor/s (using DATA, change in government expenditure, tax, exports)
- Explain the impact of factor on material welfare → with use of economic framework → real
GDP/ capita or GDP/capita (PPP: purchasing power parity is a theory of exchange rates
whereby a unit of any given currency should be able to buy the same quantity of goods
in all countries → take into account the prevailing exchange rate and adjust them for differences
in the cost of living) and non material welfare → qualitative aspects (edu/ health/ leisure/
environment
- Limitations (income inequality/ population/ non marketed activities)

With reference to Table 1, describe the trend in Brazil’s consumer prices between 2013
and 2018. (ii) Using AD/AS analysis, explain a factor to account for the relationship between
consumer prices and real GDP from 2015 to 2016.[3]
It has been rising at a falling rate, with the exception of year 2015 when consumer prices rised
at an increased rate. (FALLING RATE IS REFINEMENT, EXCEPTION IS ANOMALY, PICK
ONE)

When consumer prices increased at a faster rate, real GDP fell. (1M) Due to unstable
inflation levels, it may have deterred potential investors due to uncertainty and less risk taking.
This led to a fall in capital stock, productive capacity and thus lowering productive capacity.
AS curve shifts leftward. (1M) Thus, real GDP falls from Y0 to Y1.

SINGAPORE’S GDP AT 2005 PRICES GREW BY 4.9% TOTAL POPULATION GREW BY

2.5%, INFLATION- 5.2% AND OVERALL UE STOOF AT 1,(%
T; statistics. Change in SOL in singapore, compare SOL between cities

AT: change in sol in singapore (increase in income inequality), compare SOL before cities.

2. EFFECTS ON ECONOMY/ COUNTRY

Causes → macroeconomic problems. How above mentioned factors might have caused the rate of
inflation to rise in SIngapore

Internal (G policies? Consumption and investment) and external factors (change in income →
trade partners → FDI)

Factors → impact on AD/AS/ economy/ country

Population changes for Singapore’s economy (bring in KEI)

China’s BELT AND ROAD INITIATIVE: infrastructure.

● CAUSE OF MACROECONOMIC PROBLEMS.

● IMPACT ON AD/AS OR KEIs- EG/UE/INFLATION/ BOP OR SOL
● Weigh between the factors

GENERAL APPROACH:
- Identify the trigger
- Explain the impact on AD or AS or injections/ withdrawal
- Explain the process of impact on economy using appropriate tools (AD/AS- competition
for scarce resources- outbid, push up prices or circular flow of income) circular flow of
income (explain how withdrawals, savings or taxes change)
- Extent of the impact (extent of impact on AD, size of K, state of economy)
- Weigh between the factors- consider context, cyclical vs structural (LR) extent of impact

(b)With reference to Table 1, explain whether you would expect the change in trade
balance to lead to the change in Brazil’s exchange rate shown from 2017 to 2018.

Trade balance deproved (WRONG, USE TRADE SURPLUS HAS FALLEN- USE
QUANTIFIABLE TERMS), while Brazil’s currency DEPRECIATED. Assuming the change in
trade balance was caused by increase in number of imports in the Brazil, I would expect
Braxil’s exchange rate to depreciate. As supply of Brazilian reels has increased in the foreign
exchange market, it has caused the currency depreciated.

(c) Explain the likely impact on the profits of the OPEC cartel and on the balance of trade of
its member countries following the developments in Extract 7. (5m)
 Even if it is a 5m qn → definitions needed
Define cartel and explain how cartels work to determine equilibrium price and output.
o Cartel - a formal agreement among oligopoly forms to collude in order to reduce
uncertainty arising from mutual interdependency between sellers in the oligopoly. In
colluding, sellers agree to maximize joint or cartel’s profits.
• Cartels act like a monopoly, joint profits are maximised at the profit-maximising output level
where the cartel’s MC = MR. The cartel’s marginal cost curve is the horizontal sum of the
individual members’ marginal cost curves while the cartel’s MR curve is derived from the
industry demand

Surging U.S shale oil production resulting in a lower market share means that OPEC cartel
lose price setting ability to set their prices higher above marginal COP. Thus, profits of OPEC
falls. Due to the introduction of “renewable energy sources”, there are stronger substitutes for
oil causing the price elasticity of oil to rise. (1m) Hence, OPEC cartel is also less able to
charge higher prices without a more than proportionate fall in demand. Hence, prices cannot
be increased without a great fall in demand, so price x quantity is lower, thus revenue falls.
Even if costs remain the same, profits fall.

Balance of trade of its member countries also fall due to economic slowdown, REDUCING
ABILITY AND WILLINGNESS TO BUY, resulting in less AD for oil imports. Net exports of oil
fall, and OPEC balance of trade worsen.

→ THINK OF THE IMPACT ON THE CARTEL:

Since cartel’s output has fallen, the output each individual member country exports is expected to fall if
it adheres to the argument. All their TR will fall. As BALANCE OF TRADE IS THE DIFFERENCE
BETWEEN EXPORT REVENUE AND IMPORT EXPENDITURE. BOT will worsen → CA surplus
could become CA deficit

DISCUSS LIKELY EFFECTS ON SINGAPORE’S NY AND ITS COMPONENTS WHEN ITS ER

APPRECIATES.
1. Identify trigger
Appreciate exchange rate
2. Explain the impact on AD or AS or injections/ withdrawal
- Rise in Px in exports of foreign currency → extent depends on PEDx
- Fall in Px of imports (in S$) → rise in Qm → depends on PEDm
This leads to a fall in export revenue, increase in import expenditure. Fall in consumption of
domestically produced goods. Fall in AD

*note it may also lead to fall in price of imported factors of production → fall in cop → increase in AS.
Hence even if there is a reverse multiplier process occurring leading to fall in NY, it will be dampened
due to rise in AS.

Extent of impact on AD
→ X is significant % of AD
→ size of K small - subsequent fall in induced C
 3. MACRO AIMS AND ISSUES

Explain macroeconomic aims.

-what are the aims
- benefits of achieving the aims
- consequences of failing to achieve the aims

HIGH AND UNSTABLE INFLATION CONS:

1. More difficult to protect material SOL
Nominal incomes do not keep pace with the increase in prices/

2. Reduces investment which hinders potential econ growth

3. Reduce international competitiveness and worsens BOP
4. Difficulty in sustained economic growth (lower consumption and investment)

Shoe Leather Costs (opportunity cost of time and effort that people spend trying to
counteract the effects of inflation)

5. Arbitrary restriction of income worsening

- Fixed income earners VS variable income earners

- Workers in strong trade union vs weak trade union
- Debtor vs creditor
- Physical/ real assets vs financial assets

6. Significant menu costs (cost of constantly revising and reprinting price lists as
firms have to constantly adjust the prices of G&S they sell)
7. HInders effective resource allocation
8. Wage price spiral

EXCHANGE RATE: price of country’s currency in terms of another currency or a basket

of foreign currencies

Fixed → managed float → free float

FREE FLOATING: market DEMAND is affected by SUPPLY

exchange rate is determined - Change in demand for
by interaction of market US goods and
services by foreigners
demand for and supply of a
- Changes in the
country’s currency + no relative interest rates
intervention by the Central between countries
bank - Changes in the
expectations of
- Change in demand for
foreign produced
goods and services by
US residents
- Changes in the
relative interest rates
between countries
- Changes in the
 currency traders/ expectations of
speculators about the currency traders/
future value of speculators about the
currencies future value of
currencies

MANAGES FLOAT: flexible

exchange rates but where
Central Bank intervenes to
prevent excessive
fluctuations in the ER

GENERAL APPROACH
● Identify the aim
● Explain the benefits of achieving the aims or the costs of not achieving the aim
- Impact on SOL
- Impact on other KEIs
- Impact on cost of living, income inequality
Priority- how it impacts other aims, but depends on economic conditions/ tradeoffs

DISCUSS WHETHER CONTROLLING THE RATE OF INFLATION SHOULD BE THE MAIN

PRIORITY OF SINGAPORE.

Low stable price

T: it is the main priority
- What are the benefits of price stability (Singapore is dependent on FDI, it is important to be
competitive → increase X and I → increase in AD + improve BOT/ BOP→ increase in EG +
reduce unemployment) (help achieve other macro goals at the same time)

AT: it is not the main priority

- Threat of increase in price low
- Negative EG → more of a problem
- TRADE OFFS in achieving price stability: appreciate ER to achieve price stability → fall in GPL
→ fall in profits, less EG

4. MACRO ECONOMIC POLICIES

→ policies which it should take

- EFFECTS
- LIMITATIONS
 - COMPARISON BETWEEN POLICIES
- CHOICE OF POLICIES

GENERAL APPROACH
- Identify the policy/ ies
- Explain the workings using economics framework
- Explain the limitations (EFFECTIVENESS/ FEASIBILITY, SUSTAINABILITY,
DESIRABILITY)
- Comparison (context/ root cause/ sr/lr etc)

SUPPLY SIDE POLICY

MARKET ORIENTED SSP FOR PRODUCT MARKET ORIENTED SSP FOR LABOUR
MARKET MARKETS

Aims to reduce the role of the government
and enable the market to work more freely
a. Privatisation
b. Pro competition policies
- Policies designed to curb anti
competitive practices like price
fixing
- Deregulation (removing BTE)
- Promoting freer trade between
nations via reduction or
elimination of tariffs
Aims to increase labour market and improve
the quality and quantity of labour in a given
country
a. Reducing the power of trade unions
(extent of wage push inflation/
eliminate incidence of work
stoppages)
b. Incomes policies (wage guides/ wage
freeze/ flexible wages) wages are
allowed to rise but should lag behind
productivity growth
c. Tax cuts
- Substitution effect vs income
effect
- Increase labour supply and
investment spending by firms
d. Cuts in welfare benefits (reduce the
incentive of unemployed labour to re
join the workforce and become
economically active again) increase
the willingness of these people to
work and accept jobs at lower wages

INTERVENTIONIST SSP

a. Education and training

b. Grants to encourage R&D
c. Encourage small business start ups/
entrepreneurship
d. Nationalisation
e. Wage subsidies
POLICY LIMITATIONS

EXPANSIONARY 1. SIZE OF K = 1/
FISCAL POLICY. MPS+MPT+MPM
Small and open economy (MPM high,
Whether it is dependent on imports) → k is small =
implemented or not increase in income is less than
depends on COST OF proportionate or proportionate (A LOT OF
RUNNING BUDGET MONEY MUST BE SPENT, budget
DEFICIT constraints) → policy limited

→ choice of instrument: 2. INTEREST RATE TAKER

raising govt expenditure Small and open economy
or reducing taxes (dependence on external sectors/
other countries)
→ time period: large X-M as a % of GDP is high
and persistent budget Implication on policy choice:
deficit (structural EXCHANGE RATE
deficit) vs cyclical Why i/r taker: need to give up control of
(temporary) deficit i/r because SG wants to keep capital flows
Accumulation of the free (hot money inflows/ outflows) →
budget deficit over open economy trilemma
time+ lack of political
will of the government 3. FP + TIME LAGS
in pursuing austerity Recognition
measures. Administrative (what are the more
pressing issues that this money can go
to?)
Operational (taxes takes months to
pay)

4. CROWDING OUT EFFECT

Govt borrows $$ from private sector → to
fund govt spending
Rise in demand for loanable funds
i/r rises
DOMESTIC : fall in C AND I : cost of
borrowing rises, AD falls, dampens
increase in RNY
OPEN ECONOMY: hot $$ inflow,
appreciate X-M worsens, dampens
increase in RNY

5. ROLE OF CONSUMER AND

BUSINESS CONFIDENCE
If they are uncertain about future
economic outlook, unlikely to increase
their consumption in response to a
lower income tax. They will save the
additional income to protect
 themselves against future uncertainty
and possible loss in employment

EXPANSIONARY MP 1. LIQUIDITY TAP

At very low levels of interest
+INTERNAL (C and I) rates, the demand for money
+ EXTERNAL (outflow becomes perfectly interest
of hot money → elastic. An increase in supply of
increase in supply → money from MSo to MS1 will
depreciation of the not have any effect on the rate
country’s currency. of interest as it is difficult for
Exports more price interest to fall below zero.
competitive)
2. INTEREST ELASTICITY OF
DEMAND FOR INVESTMENT
If a large proportion of an
economy’s investment is funded
by FDI → foreign MNCs have
their own sources of funds and
may not borrow from the local
banks. MEI curve is steep, demand
for investment is said to be interest
inelastic.

3. EXPECTATIONS OF THE
FUTURE STATE OF THE
ECONOMY
If businessmen are still
pessimistic about the future,
lowering of interest rates will
not induce them to undertake
more investments. MEI steep.

4. TIME LAGS
5. INABILITY TO ACHIEVE
CERTAIN SUPPLY SIDE
PROBLEMS LIKE
STRUCTURAL UNE

CONTRACTIONARY 1. SHORT/ LONG TERM BASIS

MP OF PROJECTS
2. CONFLICTS WITH OTHER
MACROECONOMIC GOALS
(national income and une)
 5. MACRO ECONOMIC CONFLICTS/ POLICY CHOICE
- Why Singapore chooses exchange rates rather than interest rates as its main
tool of monetary policy.

- CONFLICTS BETWEEN OBJECTIVES.

- DIFFICULTIES IN POLICY-MAKING
- POLICY CHOICES- DEPENDENT ON WHAT FACTORS? (root cause/ nature of
economy)

GENERAL APPROACH:
- Identify possible conflicts (you can create a problem, suggest policies)
- Explain how the workings of policies- will lead to conflicts- use AD/AS
- Explain limitations based on trade-offs/ factors
- Explain other considerations in policy decisions
(other limitations of policies) (extent of trade offs)

CONFLICTS BETWEEN OBJECTIVES/ OTHER CONSIDERATION IN

CHOICE OF POLICIES
A. CONFLICTS BETWEEN OBJECTIVES

1. Policy
2. Goal
3. AD/AS
4. Trade offs

FISCAL POLICY:
1. Policy: Increase in government expenditure and reduce taxes.
As expenditure =income and becomes the basis of future induced consumption,
the process of income creation will continue with the AD shifting to the right after
every round of induced consumption. The process of expansion in RNY will stop when
the initial injection has been fully withdrawn. Actual economic growth is achieved.

2. Goal: increase economic growth and reduce unemployment

3. AD/AS: (draw diagram)
4. Trade offs: INFLATION
However, GPL rises when economy is operating along intermediate/classical range
of AS. This gives rise to possible demand pull inflation if there is overshooting due to
time lags.

Trade offs: BALANCE OF PAYMENTS

•RNY ↑ ↑M, (X-M)↓or ↑GPL X↓(if PEDx >1) worsen BOT
 Rise in real national income may leads to greater consumption of imports as consumers are more
willing to able to consume more goods, especially if the imports are luxury (rise in consumer’s
income → more than proportionate rise in demand) → leading to fall in net exports.

Rise in GPL (inflation) may mean fall in exports → price competitiveness of exports may fall and
consumers will choose to consume relatively less expensive substitutes from other countries.
Thus, net export falls and balance of trade worsens.

EV: Therefore SG government needs to consider the above conflicts when

deciding when to use expansionary FP. For this reason fiscal policy in Singapore
is usually centered on increasing the AS of the economy to prevent overheating
and accompanying supply-side policies are used to prevent overheating through an
increase in productive capacity.

MONETARY POLICY (INTEREST RATE)

Policy: Influence the availability and cost of money and credit → Central bank increases money supply or
lowers interest rate to make credit more easily available and borrowing cheaper. Cost of borrowing falls,
consumers are more likely to purchase big ticket items, and more projects are profitable due to lower cost
of borrowed funds used to finance these projects. Thus INVESTMENT AND CONSUMPTION increase.
+ External: In an open economy where capital flows are unrestricted across countries,
there will be an outflow of hot money from the country in search for higher interest rates
in other countries.

Goal: Increased EG, reduced UNE

3. AD/AS
4. Trade offs: ECONOMIC GROWTH vs BALANCE OF PAYMENTS
Current account worsens due to outflow of hot money.

MONETARY POLICY (EXCHANGE RATES)

Policy: DEPRECIATION: fall in price of exports in foreign currency and rise in price of imports in
SGD. According to Marshall Lerner’s condition, if PEDx+PEDm > 1, net exports rise, and AD
increases, resulting in increase in real n national income

Trade offs: EG VS INFLATION

Price of imported raw materials will rise, and for Singapore which lacks raw materials, imported FOP
makes up a good proportion of domestic goods. Thus there will be rise in cost of production, cause AS
curve to shift downward (use diagram) and GPL rises → import induced cost push inflation.

EXPLAIN POLICY MECHANISM FOR ‘GRADUAL MODEST APPRECIATION’ in reducing prices

of imports and thus ensuring low inflation. → Assuming SG’s inflation rate is lower than foreign
countries, LR export price competitiveness is achieved as COP falls and this encourages investment and
exports growth.
SUPPLY SIDE POLICIES
Policy: grants to promote R&D or incentives to improve productivity and achieve potential
economic growth
Goal: Achieve potential growth
Trade offs: POTENTIAL GROWTH AND STRUCTURAL UNEMPLOYMENT
With the adoption of labour-saving technology, the displaced workers might not be equipped
with new skills to be employed in high-tech sector, and this mismatch will lead to an
increase in structural unemployment.

2. OTHER FACTORS MAY CAUSE DIFFICULTIES

- INTEREST RATE TAKER
- CROWDING OUT EFFECT
- SMALL SIZE OF MULTIPLIER

1. SIZE OF K = 1/ MPS+MPT+MPM
+ Small and open economy (MPM high, dependent on imports) → k is small = increase in
income is less than proportionate or proportionate (A LOT OF MONEY MUST BE
SPENT, budget constraints) → policy limited

2. INTEREST RATE TAKER

+ Small and open economy (dependence on external sectors/ other countries)
+ X-M as a % of GDP is high
+ Implication on policy choice: EXCHANGE RATE
+ Why i/r taker: need to give up control of i/r because SG wants to keep capital flows free
(hot money inflows/ outflows) → open economy trilemma

3. FP + TIME LAGS
+ Recognition
+ Administrative (what are the more pressing issues that this money can go to?)
 + Operational (taxes takes months to pay)

4. CROWDING OUT EFFECT

A) Govt borrows $$ from private sector → to fund govt spending
B) Rise in demand for loanable funds
C) i/r rises
D) DOMESTIC : fall in C AND I : cost of borrowing rises, AD falls, dampens
increase in RNY
E) OPEN ECONOMY: hot $$ inflow, appreciate X-M worsens, dampens increase in
RNY

CONCLUSION : sum all the main points, answer the essay qn in ½ sentences.
EVALUATION: substantiate with economic reasoning how the stand is arrived. Weigh the relative
importance of the causes → weigh relative importance of trade offs with other factors + include cases in
which trade offs are relatively more/ less important. → suggestions for policies should be linked to
relative importance of factors.
1. SIZE OF K = 1/ MPS+MPT+MPM
+ Small and open economy (MPM high, dependent on imports) → k is small = increase in
income is less than proportionate or proportionate (A LOT OF MONEY MUST BE
SPENT, budget constraints) → policy limited

2. INTEREST RATE TAKER

+ Small and open economy (dependence on external sectors/ other countries)
+ X-M as a % of GDP is high
+ Implication on policy choice: EXCHANGE RATE
+ Why i/r taker: need to give up control of i/r because SG wants to keep capital flows free
(hot money inflows/ outflows) → open economy trilemma: only 2 of the three
outcomes are possible. If the exchange rate is managed but the country is open
to cross border capital flows, it must relinquish control of the interest rate.

Capital flows

Ex rate
i/r
Small differences between foreign and domestic interest rates will lead to large inflow/ outflow of
hot money, thus making it difficult for MAS to control money supply/ interest rates effectively

3. FP + TIME LAGS
+ Recognition
+ Administrative (what are the more pressing issues that this money can go to?)
+ Operational (taxes takes months to pay)

4. CROWDING OUT EFFECT

A) Govt borrows $$ from private sector → to fund govt spending
B) Rise in demand for loanable funds
C) i/r rises
D) DOMESTIC : fall in C AND I : cost of borrowing rises, AD falls, dampens increase
in RNY
E) OPEN ECONOMY: hot $$ inflow, appreciate X-M worsens, dampens increase in
RNY

CONCLUSION : sum all the main points, answer the essay qn in ½ sentences.
EVALUATION: substantiate with economic reasoning how the stand is arrived. Weigh the relative
importance of the causes → weigh relative importance of trade offs with other factors + include cases in
which trade offs are relatively more/ less important. → suggestions for policies should be linked to
relative importance of factors.

There are many lessons that resource-rich countries can draw from Venezuela’s
experience. Discuss the policies that resource-rich countries can implement to
achieve sustainable economic growth.

DEFINE RESOURCE RICH

SUSTAINABLE ECON GROWTH: economic growth that does not create problems
for the future generations over the long run. → require limiting pollution to combat
climate change, ensuring potential growth keeps pace with actual growth and
prioritising collective welfare over self interests.
→ ceteris paribus, minimise the fall in quantity and quality of FOP
 → minimise fall in AS and in turn potential econ growth over LR. If technology
improves the productivity, AS and potential econ growth can increase over LR

THEN DEFINE THE PROBLEM:

ASSIGNING THE SOLUTION TO A PROBLEM

(((((OK THIS PART IS USELESS, SKIP COS I USED MACRO WHEN I WAS
SUPPOSED TO USE MICRO))))))
Resource-rich countries can use expansionary fiscal policy. Expansionary
fiscal policy increases government expenditure and decreases taxes in order to
stimulate the economy. It achieves economic growth and reduces
unemployment. As government expenditure can increase AD, (multiplier effect)
Resource rich countries are probably not operating at full capacity, and can
afford to increase AD without increasing general price level too much. Inflation
is thus low and stable, and economic growth can occur in a sustainable
manner. Expansionary policy is limited by (LIMITATIONS) the size of multiplier.
Even if the country is resource rich, if a large proportion of GDP is made up by
exports, much of government expenditure may not go towards local
businesses. Thus size of multiplier is small and may only lead to a
proportionate rise in national income. One is also limited to budget. Crowding
out effect may also occur when governments borrow loanable funds from
banks, thus pushing up interest rates. This may lead to a fall in consumption
and investment due to increased cost of borrowing. Thus, rise in national
income may be dampened, and there may not be a lot of economic growth.

Resource rich countries can use expansionary monetary policy. Depending on

the nature of the economy (small and open vs large and less open), one would
pick between interest rate or exchange rate centred.

→ depreciation of exchange rate improves price competitiveness of local exports

→ but can also cause inflation in the short run as price elasticities of demand for
exports and imports are low and MLC may not be satisfied.

COMPARE THE TWO POLICIES,

DISCUSS THE RELATIVE SIGNIFICANCE OF THE MULTIPLIER, THE PRICE

ELASTICITIES OF DEMAND FOR IMPORTS AND EXPORTS, AND CROWDING OUT
EFFECT IN INFLUENCING MACROECONOMIC POLICY DECISIONS.
 → command word: “discuss” - t-a-s : analyse concepts, extent to which it can influence.
Key words: relative significance, multiplier, PEDx, PEDm, crowding out, macro policy
decisions.

Introduction:
Macro economic policy decisions
Type of policies: FP, MP, ex rate, SS side
Depends on objectives → economic conditions. Economic growth, decrease unemployment
rate or dampen inflationary pressure
SET A CONTEXT WHENEVER QUESTION HAS NO CONTEXT GIVEN
Depends on country → small open economy, large less open economy. developed/
developing

BODY:
1. Analyse the significance of the multiplier
2. Analyse the significance of PEDx and PEDm
3. Analyse the significance crowding out effect

EXPLAIN THE CONCEPT: DEFINE, GIVE FORMULA, EXPLAIN HOW IT WORKS

RELEVANCE ON POLICY DECISION: how does it limit the effectiveness of policies: FP/ MP/
ER
IMPLICATIONS IN THE POLICY DECISION: extent to which the concept is significance/
limitations of the concept/ other considerations

1. Analyse the significance of the multiplier

a. Explain the concept of the multiplier

- The size of the multiplier determines the extent of change in NY due to an
autonomous change in AD
- Size of k = 1/1-MPC or 1/MPS+ MPT +MPM
- Determinants of size of k : implications- small open economies tend to have
small k, large less open economies tend to have larger k
- Explain the multiplier process
 b) relevance of the multiplier in policy decisions
- Size of k affects the effectiveness of demand management policies
- Set the context: pursue EG/ lower UE
- Fiscal policy- detemines the impact of rise in G and fall in T on AD and NY
- Monetary policy → i/r → C and I → determines the impact of rise in C and I on AD and
NY
- The smaller the size of K, the smaller will be the increase in Ny for given change
in autonomous AD

Possible application
- For small open economies with small k, need to increase G to a larger extent to achieve
desired increase in real NY
- This may not be sustainable in the LR due to a strain in government’s budget

c) implications of the multiplier in policy decisions

- Size of k has its limitations in influencing macro policy decisions
- May not have alternatives? small / open countries adopt dd management policies
despite small k
- Other considerations of FP: SS- side effects, timeliness of G, budget constraints even for
large less open economies. What about for MP?

2. Analyse the significance of PEDx and PEDm

a) Explain concept of PED
- PEDx : a measure of the responsiveness of quantity demanded of exports to a given
change in price of X
- PEDm
- Determines whether Marshall-Lerner condition where PEDx + PEDm > 1 will hold
- determinants : time period, contractual obligations, availability of substitutes

b) relevance of PEDx and PEDm in policy decisions

- Affects the effectiveness of ER policy
- Set the context: pursue EG/ lower UE/ improve BOP- devaluation of ER
- Devaluation of ER → decrease in Px: fall in Qx → extent of rise in Qx depends on PEDx
 - Increase in Pm → fall in Qm → extent of fall in Qm depends on PEDm
- PEDx and PEDm determines the extent of increase in NX and AD → EG
POSSIBLE APPLICATION:
If PEDx and PEDm values are low → limited effectiveness of ER policy in stimulating EG, if M-L does
not hold, then fall in ER may lead to a fall in NX in BOT instead (J curve effect) → worsen the
BOT/BOP position → may not adopt ER policy

May need other SR policies to achieve objectives

May have an impact on protectionist policies, interest rate policy- open economy effects

c) Implications of PEDx and PEDm in policy decisions

- Devalue?
- Other considerations: impact on inflation? Conflict of aims? NX as a
component of GDP vs C and I? Will lead to retaliation? (tarifffs, trade war)
- Even if M-L holds → SR policy? Root cause? Other policies more effective to
boost X in the longer run?

3. ANALYSE THE SIGNIFICANCE OF CROWDING OUT EFFECT

A) Explain the crowding out effect.

B) Govt borrows $$ from private sector → to fund govt spending
C) Rise in demand for loanable funds
D) i/r rises
E) DOMESTIC : fall in C AND I : cost of borrowing rises, AD falls, dampens increase in
RNY
F) OPEN ECONOMY: hot $$ inflow, appreciate, X-M worsens, dampens increase in RNY

b) relevance of crowding out effect on policy decisions:

- Dampens the effects of exp FP
- Greater crowding out effect- more reduction of FP effect
- Application: may not use FP if crowding out is high as cost> benefits
c) implications
- Extent of crowding out: how much does govt need to borrow to fund budget
deficit + what is the MEI
- Other considerations: even with low crowding out, may not use FP → other limitations of
FP like size of k

CONCLUSION + OVERALL EVALUATION

Size of k, PEDx and PEDm and crowding out effect affects the effectiveness of macro
policy → affects choice of macro economic policy decision
 Size of k affects the subsequent change in AD after the initial injection whereas
PEDx and PEDm and crowding out effect affects the size of initial injection and
initial change in AD

Size of k seems to be more significant than PED and crowding out because it
impacts all dd-management policies whereas PED and crowding out affects
specific policies.

Other factors that may be more impt:

- Root cause/ alternatives/ budget constraints/ lr effects of policies.

PRELIM PAPERS
ECON PRELIM 2020 PAPER 2
1 Shortages of gaming consoles have led to price gougers reselling gaming consoles on e-Bay
at an average price of $410, well above the recommended retail price of $299.99. Shortages of
gaming consoles have coincided with strong sales of popular games such as Animal Crossing
while others have blamed the use of check-out bots to buy consoles in bulk and supply chain
disruptions for the shortage. Hence, some users have turned to Virtual Reality headsets and PC
gaming instead.Source: https://www.vice.com, April 2020

(a) Using supply and demand analysis, explain why excess demand may be large and
persistent for gaming consoles.[10]

(b) Discuss the usefulness of elasticity of demand concepts in assessing the impact of the
above developments on sellers of gaming consoles on e-Bay and sellers of other related
products. [1 5]

(a) Excess demand may be large and persistent due to price inelastic supply combined with
price inelastic demand. PED DEPENDS ON HITS

Excess demand refers to shortage as quantity of gaming consoles demanded exceed

quantity of gaming consoles supplied. Large and persistent excess demand means
consistent shortage.

Even with rise of price, as seen in”price gougers reselling gaming consoles” “well above
the recommended retail price”, the way demand is still high is due to its price inelasticity.
As a complement to the high demand of “popular games such as Animal Crossing”,
demand for gaming consoles have been rising. While there a
1 Meal delivery fever has hit Singapore, with companies like Uber and Grab announcing their
move into the food delivery market to join the likes of Deliveroo and FoodPanda. Analysts are
optimistic about this industry, given Singapore’s steady economic growth and the downtrend of
petrol prices. Consumers will now be spoilt for choice as they no longer have to dine in at
hawker centers and restaurant. Source: Channel News Asia 2016 (a) Explain the possible
reasons for the rapid growth of the market for delivered food. [10] (b) Assess how related
markets might be affected by these developments. [15]

NOTE that growth can be in terms of INCREASE in total revenue or in terms of equilibrium
quantity of delivered food sold by the firms
Rapid growth of the market is derived from higher demand, as well as lower costs that shift
supply curve to the right. Due to the expansion of industry, the market for delivered food can
also reap additional external economies of scale.

HIGHER DEMAND: TIGERPIE

- Strong complements for hawker centers and restaurant dining in. As Singaporeans
prefer to eat in the comfort of their home, CED magnitude is high as any fall in the price
of hawker centre or restaurant food will result in more than proportionate rise in demand
for food delivery services, as food delivery services are
- DEMAND: meets taste and preferences of consumers. “Meal delivery fever”
- DEMAND: Income levels of consumers: “Singapore’s steady economic growth” → they are
more willing and able to consume food delivery services. This is assuming YED value of food
delivery is more than 1, as in, it is a luxury due to increased costs caused by commission of the
food delivery service. Thus, when income of consumers rise, there will be a more than
proportionate rise in demand for food delivery services.
-
GREATER SUPPLY WHICH ALLOWS FOR REAPING OF EXTERNAL ECONOMIES OF
SCALE
- The industry is expanding as a whole → “Uber and Grab announcing their move into the food
delivery market” → the number of firms in the industry rises. They are more able to share
information about public reception to food delivery services- things like how to price food
effectively and the type of food most in demand. This allows them to reduce average costs overall
as the cost of information can be split across firms. Thus, they can exploit economies of
information.
- They are able to exploit economies of concentration when the industry becomes well
known- thus attracting skilled labour because the industry is established. Thus, they can
save labour search costs. Due to the increased need for motorcycles or PMDs food
delivery riders use, the government will cater to industry better by divvying up road/
walkway space for pedestrians and riders.
BRING IN ELASTICITY CONCEPTS
DEMAND MAY BE PRICE ELASTIC SINCE THERE ARE SO MANY SUBSTITUTES TO
DELIVERED FOOD AND IT MAY BE A SMALL PROPORTION OF THE BUYER’S INCOME. With
an increase in SS, The fall in price of delivered food will result in a more than proportionate increase in
quantity demanded. → illustrate using a diagram

GREATER SUPPLY ARISING FROM LOWER PETROL COSTS

- Given that petrol is a factor of production as food delivery riders use motorcycles that
require fuel. Cost of production falling reduces average costs and incentivises firms to
increase their supply as the production of food delivery becomes more profitable.

COMBINED SHIFTS OF DEMAND AND SUPPLY:

When demand increases, this will lead to an increase in equilibrium qty from Q0 to
Q11. This will be reinforced by an increase in supply. Eventually, the equilibrium
quantity is at Q1. Explain the price adjustment process and focus on the equilibrium
quantity that increases finally.At Po, after demand and supply increase, DD1 >SS1, this
shortage will cause an upward pressure on prices. As prices increase, quantity demanded
will decrease while quantity supplied will increase. Hence reducing the shortage. This will
continue until the shortage is eliminated. At the new equilibrium, price is increased to
P1 and quantity is increased to Q1

CONCLUSION BELOW COULD ADD: net effect on price is also likely to increase because of
greater increase in demand than supply. BOTH DEMAND AND SUPPLY INCREASE, leading to
rapid increase in equilibrium quantity
RAPID GROWTH can be achieved as rise in supply is coupled with rise in demand. If there is a
rise in demand without a rise in supply, there will simply be a shortage of food delivery and the
industry cannot grow.
 HOW TO SHOW AN INCREASE SUPPLY WITHOUT INCREASE IN PRICE ^^

(B) ASSESS HOW RELATED MARKETS MAY BE AFFECTED BY THESE DEVELOPMENTS

RELATED MARKETS may include the restaurants/ hawker centres, which are complements.
GROCERY STORES which sell ingredients for home cooks are substitutes.

STRONG COMPLEMENTS, ced positive and magnitude high.

Context.
Diagram.
Restaurant and hawker centres are derived demand for food delivery service, and are a factor of
production for food delivery services. → if the commission of food delivery services Is lower due to fall
in petrol costs, then the amount of food delivery from restaurants and hawker centres demanded rises.
Total quantity demanded rises.

COST FOR FIRMS will be lower due to the higher substitutes for food delivery services, thus
asking price for all restaurants to set up their business will be lower as well, To maintain price
competitiveness. PROFITABILITY RISES due to lower costs, shifting supply curve to the left.
As they are strong complements when the price of food delivery services falls (due to lower
costs) the demand for food from hawker centers in restaurants will have a more than
proportionate rise.

Thus as quantity demanded rises and quantity supplied rises, there will be a total increase in
equilibrium price and quantity. Thus the revenue of restaurant and hawker centers will increase.

GROCERY STORES AS WEAK SUBSTITUTES

Food delivery services are weak substitutes for grocery stores selling food for home cooks.
This is because people will still opt for healthier food they make themselves where they can
control salt and sugar level. However home cooks who only choose to cook at home due to
convenience may prefer food delivery services over cooking themselves as it is now even more
convenient to prepare food. Thus a fall in price of food delivery services may result in a less
than proportionate decrease in demand for grocery store selling ingredients.

Overall decrease in quantity demanded will result in equilibrium price and quantity of grocery
stores consumed to fall. Net revenue falls, and assuming average costs remain the same,
profits for grocery stores will fall.

INCLUDE FACTOR OF PRODUCTION MARKET: IT WILL DISTINGUISH YOUR RESPONSE

FROM OTHERS.
One can include the factor of production market and in the delivery crew market, packaging
Market, motorcycles. You can also try to incorporate the given changes in the Preamble into the
different markets. So for example the lower-cost of petrol means lower transport costs for
ingredients to the restaurant. Don't forget to comment about the impact on the equilibrium
price and output depending on the extent of shifts of the demand and supply.

If the increase in demand is more than the increase in supply, there will be a fall in price and
quantity. Total revenue will also be fall. If the decrease in demand is less than increase in
supply there's only a chance that total revenue may fall.

Explain the impact of developments on factor of production markets of delivered food. For
example the packaging Market. The demand for plastic containers is a derived demand of
delivered food. As the demand for the labor of food increases, the demand for plastic
containers. Assuming ceteris paribus, Supply being constant, equilibrium price and quantity will
increase

2017 PRELIM PAPER 2 QUESTION 2

2 Today, Singapore is the largest manufacturer of oil jack-up rigs and command 70% of the
world market. However, firms in this sector are facing challenges from cyclical weakness
and competition from emerging economies. There has been a call on the government to
defer the increase in the foreign worker levy.
(a) Explain how the survival of these firms is affected by the revenue and cost challenges.
[10]
(b) Discuss if the ability to combat these challenges is more dependent on government
assistance or the firms’ own strategies.
Introduction:
Market structure of this old wreck in this tree is a monopoly as there are a few firms in
Singapore and Singapore has more than 70% of the wall market share. The firms have
relatively steep AR and MR curves as they are price setters. Survival of the firms refers to the
ability of the firms to make at least LR normal profits.
Survival of firms depends on total revenue and variable costs: if total revenue is still more than
variable costs, the firms may choose to continue. If total revenue is less than variable costs, the
firm may choose to shut down.
OR (AR < AVC)

Revenue challenges faced by firms :

CYCLICAL WEAKNESS: REFERS TO the down turn of the global economy where world
incomes are falling or rising much lower. As the demand for final consumer goods Falls the
derived demand for factors of production such as oil rigs and oil falls.

1. Presence of substitutes

"competition from emerging economies"

when there is an increase in firms in the economy, market power of incumbent firms in the
economy Falls. Thus, firms must either decrease the price of their oil jack up rigs and earn lower
revenue (price x quantity), or conduct research and development to make the jack up rigs better
(meaning higher costs for firms). Otherwise, demand curve will shift leftward meaning fall in
quantity demanded as consumers may opt for the cheaper and better quality oil jack up rigs.

Bring in CED value of more than one → MENTION CONTEXT: they are likely to benefit from the
wages due to Surplus labor and CHEAPER RENTAL due to Abundant land

Cost challenges faced by firms:

BRING IN MC AND AC IDEAS!! LABOUR IS A VARIABLE FACTOR- LEVY WILL INCREASE
THE FIRM;S VARIABLE COSTS.
"defer the increase in the foreign worker levy" cost of hiring singaporeans a higher than the cost
of hiring foreign workers. The imposition of the foreign worker levy will mean an increase in the
cost of production for oil jack-up rigs. As foreign workers are a factor of production, the the fall
and supply of foreign workers will mean that firms will have to the bid up the prices in order to
compete for the lower supply of labor. the production of oil rigs becomes more unprofitable
assuming revenue stays the same.

DRAW DIAGRAM OF MONOPOLY CURVE→ WHERE MC AND AC RISES, AND AR AND MR

FALLS. PURE USE OF DD-SS FRAMEWORK WILL MEAN LOWER MARKS.

B. DISCUSS IF THE ABILITY TO COMBAT THESE CHALLENGES IS MORE DEPENDENT

ON GOVERNMENT ASSISTANCE OR THE FIRMS’ OWN STRATEGIES.
Don't forget to use cost-benefit analysis. IN REFERENCE TO ABILITY TO COMBAT THE
CHALLENGES

Government assistance May refer to subsidies and firm own strategies may refer to research
and development in order to increase product differentiation, End videos average costs.
Promise me also employ predatory pricing or merging with local firms all with foreign rivals.

POINT 1:
GOVERNMENT ASSISTANCE

Costs: if fall in total cost is less than fall in total revenue, this will mean that there is still fall in
total revenue for firms and they may not be able to survive.
Benefit: Fall in total cost
Analysis: depends on economic situation.

POINT 2:
FIRMS OWN STRATEGIES
- PREDATORY PRICING
Setting the price at cost price (below market price) in order to scare off potential entrants
as well as drive out competitors in the market, as they may be unable to match the
pricing of Singaporean firm. (u can add in context) This will lead to a fall in substitutes
and demand for Singapore oil rigs may rise again.

- MERGING WITH LOCAL FIRMS AND FOREIGN RIVALS

Merging with local firms and foreign Rivals will allow them to exploit IEOS for example
technical economies of scale and managerial economies of scale. This will result in the
fall of average cost, The merging with local firms and foreign rivals will reduce the
amount of substitutes in the market thus allowing for demand to rise again as market
power of the firm increase.

When Market power all of the firm increases not only will the demand increase through
lower substitutes, the firm will regain its price setting ability and will be able to charge
higher prices for its products.

OTHER STRATEGIES MAY INCLUDE PRODUCT DIFFERENTIATION THROUGH R

AND D

process of distinguishing a product/ service of a firm from its rivals to make it more attractive to
a target market. R and D mean better quality oil levies that might be able to carry more oil, or
improving the production process of oil levies, investing in technology that can increase output
per unit input. This will solve cost problem by reducing average cost.

Conclusion:
many of the firm's measures a long-term in nature, New government assistance is essential to
help firms tide over cyclical weakness. Thus, government stop gap measures such as the
deferment of foreign worker levy, subsidies and even the use of a depreciation exchange rate
can help.

OTHER CONSIDERATIONS : WILL ASSISTANCE BREED INEFFICIENCY

IMPACT ON GOVERNMENT BUDGET AND OPPORTUNITY COST
INEQUALITY IN INCOME GAP
OLIGOPOLY → SUPERNORMAL PROFITS TO TIDE OVER CYCLICAL DOWNTURN WORSENS
INCOME INEQUALITY

To do: 2017 prelim qn 3

3. Some countries provide free education to all its citizens whereas others provide free
elementary to high school education while university education requires payment. Explain
whether education is a public good and assess the economic case for the different approaches
taken by various countries in the education sector.[25]

PRELIM 2017 QN 4 (economic performance, choice of policies)

4 (a) Explain how an economist would assess changes in economic performance of an
economy. [10]
(b) Discuss whether trade-offs between macroeconomic objectives is the main
consideration in the choice of policies to achieve economic growth in Singapore. [15]

Economic performance involves economic growth, inflation, unemployment and balance of

payments.

FORMAT OF POINTS
1. DEFINITION
2. FORMULA
3. ASSESSING THE CHANGE IN PERFORMANCE
4. EXPLANATION OF PERFORMANCE (BENEFITS/ COSTS)

ECONOMIC GROWTH: the value of all final goods and services produced within the
geographical boundary of a country within a given period of time. rise in potential and actual EG.
Real national incomes increases due to increase in aggregate demand. When AS curve shifts
outward, it may also mean increase in productive capacity, leading to potential EG as well.
Combined potential and actual EG means sustained economic growth, meaning the growth can
be sustained across future generations as well. Inclusive economic growth must also be
considered so there is no income inequality.

PPP adjusted economic growth: PPP (PURCHASING POWER PARITY) is a theory of

exchange rates where one unit of any given currency should be able to purchase the same
amount of goods in another country.
NOTE: ONLY GDP GROWTH RATE MEASURES ECONOMIC PERFORMANCE. (real GDP
per capita measures SOL)
REAL VS NOMINAL. REAL ELIMINATES EFFECT OF INFLATION. Real = nominal/ CPI
current x CPI base year + GDP GROWTH RATE = real GDP current year- Real GDP previous
year/ Real GDP previous year x100%

EXPLAIN PERFORMANCE IN TERMS OF SOL:

The GDP growth rate reflects an increase in purchasing power and correlates to higher
consumption levels suggesting improvements in material SOL.

INFLATION: sustained increase in general price level. General price level is measured through
CPI (price index) that measures the price of fixed basket of goods and services commonly
purchased by a typical household during a given period of time. Inflation may be through cost-
push: which includes wage-push, import-induced, profit- push inflation, exhaustion of raw
materials and tax-push inflation. Low and stable inflation is the ideal. Inflation = CPI current -
CPI previous / CPI previous x 100%
Assessing the change in performance: fall in inflation rate if the current rate is above 2% OR
rise in inflation rate if current rate is below 2%, since low inflation is the goal.

EXPLANATION OF PERFORMANCE (benefits or costs)

Price stability aids in economic decision making, allowing agents to make accurate decisions
based on expected price movements. It instills confidence and encourages firms to invest as
profits can be accurately predicted.

UNEMPLOYMENT refers to the situation in which those willing and able to work and actively
seeking work are unable to secure jobs. Unemployment refers to no. of unemployed persons/
labour force x 100%. Fall in unemployment rate shows an improvement in performance.

EXPLANATION OF PERFORMANCE
ENsuring une is low, and at the natural rate → economy to operate near its potential output and achieve
productive efficiency. Conversely higher unemployment leads to fall in SOL, social stability and is a
strain on the government’s budget.

BALANCE OF PAYMENTS: BOP is a record of a country’s international transactions. BOP is a record

of a country’s international transactions. favourable balance of payments- current account, capital and
financial account, official reserves account surplus. BOP position: SUM OF CA, KFA AND ORA → bop
deficit: net outflow of funds. To have sustainable BOP: avoid large persistent deficit

EXPLANATION OF PERFORMANCE
- An improvement in the current account balance will increase AD and lead to economic
growth.
- BOP equilibrium leads to exchange rate stability
- Avoidance of a BOP deficit protects against a potential loss of foreign currency reserves
under a managed float exchange rate system.
B. DISCUSS WHETHER TRADE OFFS BETWEEN MACROECONOMIC OBJECTIVES IS THE
MAIN CONSIDERATION IN THE CHOICE OF POLICIES TO ACHIEVE ECONOMIC GROWTH
IN SINGAPORE.

POLICIES include demand-side policies- expansionary FP, expansionary MP (interest rates,

exchange rates) as well as supply side policies (interventionist/ market-oriented) for example,
reducing power of trade unions, education and training.

INTRO: EXPLAIN THE CONTEXT OF SINGAPORE → small, open economy that lacks natural
resources.

Trade offs between macro economic objectives (EXPANSIONARY FP)

Expansionary FP means increasing government expenditure and reducing taxes so as to

increase AD. (K EFFECT: expenditure =income and becomes the basis of future induced
consumption, the process of income creation will continue with the AD shifting to the
right after every round of induced consumption. The process of expansion in RNY will stop
when the initial injection has been fully withdrawn. Actual economic growth is achieved.)

CONFLICT 1: ECONOMIC GROWTH v INFLATION

When operating along intermediate/ classical range of AS curve, rise in GPL is steep as the
economy is operating close to full employment. THIS GIVES RISE TO DEMAND-PULL
INFLATION. (draw diagram)

CONFLICT 2: ECONOMIC GROWTH vs BALANCE OF PAYMENTS

WHen econom