Market Structure

Price and output decisions, SR to LR adjustment process

Overview of Market Structure, Characteristics and
Implications
Characteristics Perfect Competition Monopolistic Oligopoly Monopoly
Competition
Ease of Entry or Exit No barriers to entry No barriers to entry High barriers to High barriers to
(in theory) entry entry
Implications • Only normal profits in the LR • Firms can retain market power and
• Any supernormal profit earned in the SR continue to earn supernormal profits in
will be competed away in the LR by the the LR
entry of new firms into the industry • High BTE due to licenses, branding,
deter potential entrants
(a) Perfect Competition

• The initial market equilibrium is P0 where D0=S0 (Fig 1a), since the PC firm is a price taker, it will
charge price P0 and produce at profit maximising level of output Q0 (Fig 1b).
• At price P0, the PC firm earns supernormal profits and the lack of BTE will attract firms outside
the industry to reallocate their resources to this industry.
• The entry of new firms will increase the market supply from S0 to S1. Assuming demand remains
unchanged, the market equilibrium price will fall from P0 to P1.
• For the PC firms, each will have to charge a lower price P1, and produce at Q1. The PC firms’
supernormal profits will be eroded until only normal profits are earned in the long run.
(b) Monopolistic Competition

• In the SR, the MC firm initially makes supernormal profit.

• Due to no BTE, other firms are attracted to enter this industry, resulting in an increase in number
of firms. This reduces DD of the existing firm and shifts its DD from D0 to D1. With more
substitutes, DD curve is relatively more price elastic
• This adjustment process will continue until all firms in the industry only earn normal profits and
there is no incentive for firms to enter the industry
• In the LR, the MC firm can only earn normal profit and will have to lower equilibrium price and
output to P1 and Q1 respectively
(c) Oligopoly

• In the SR, at the profit maximising level of output (MR=MC) Q0, the oligopolist
charges price P0 and makes supernormal profit of area C0P0KB.
• Due to high BTE (eg patents, branding), potential competitors/firms are not able
to enter freely into the industry to compete on an equal basis with the existing
firms  high and rigid prices
• In the LR, the oligopolist can continue to earn supernormal profits and price and
output can also remain unchanged at P0 and Q0 respectively.
(d) Monopoly

• In the SR, at the profit maximising level of output (MR=MC) Qm, the monopolist
charges price Pm and makes supernormal profit of area C0PmAB.
• Due to high BTE (eg patents, EOS, branding, government license), potential
competitors/firms are not able to enter freely into the industry to compete on an
equal basis with the existing firm.
• In the LR, the monopolist can continue to earn supernormal profits and price and
output can also remain unchanged at Pm and Qm respectively.
 A Level 2015 Q3
“Market dominance is the main factor determining the profitability of
firms.”
(a) Explain how market dominance can influence a firm’s price and
output decisions. [10]
(a) Explain how market dominance can influence a firm’s price and output
decisions.

Introduction:
• Define market dominance (when a firm holds significant market power, is a price setter and has a downward
sloping market demand curve)
• Monopoly (strongest market dominance) vs perfect competitive (no market dominance)

Main:
• How monopoly makes price and output decisions, LR profit
• How PC firm makes price and output decisions, LR profit

Conclusion:
• Price and output decision if determined by the profit maximising condition (MR=MC)
• Monopoly tends to restrict output in order to set high price while PC firm accepts the market price as a given
and determine its individual output level
Monopoly price and output decisions

• Monopoly=one single firm in the industry selling a good with no close substitutes
• The market demand curve is also the firm’s demand curve since the monopolist represents the
industry
• Downward sloping demand curve  must lower price if it wishes to sell a greater quantity and if
it wants to sell at higher price, then must reduce output
• Sole seller  high degree of market power due to high BTE  Price setter  can raise price and
consumers can either pay or go without the good as they cannot turn to other alternatives
• Firms generally set prices based on the profit-maximising condition, where MR=MC and MC cuts
MR from below
Monopoly price and output decisions

• Wrt Fig 1, profit maximising level of output is Q1, where MR=MC and MC cuts MR from below
• The price charged is determined from the demand curve at P1
• The total revenue earned is 0P1AQ1 and the total cost incurred is 0C1BQ1  Total profit is
ABC1P1
• Due to high BTE, the monopolist would be able to earn supernormal profits in the LR and profits
will not be competed away
PC firm price and output decisions

• No market dominance in PC market

• No BTE (ease of entry/exit), large number of sellers selling a homogenous good  no single firm
has the market power to influence market price by changing output
• PC firm accepts the market price, determined by the intersection of the downward sloping
industry demand curve and the upward slopping industry supply curve  each PC firm is a price
taker with no price setting ability
• If the firm decides to raise prices, it will result in zero sales as consumers can turn to other firms
selling identical products (individual firm has perfectly price elastic demand curve)
PC firm price and output decisions

• Wrt Fig 2, PC firm initially earning supernormal profits at price P0.

• Since PC firms are price takers, MR and AR curve would be at D0=AR0=MR0. PC firm would take the market
price at P0 and produce at the profit maximising level of output q0 where MR=MC and MC cuts MR from below
• Since there are no BTE, supernormal profits will attract new entrants into the industry, increasing the industry
supply curve from S0 to S1.
• The market equilibrium price will fall from P0 to P1 and MR and AR curve would fall to D1=AR1=MR1. The profit
maximising level of output would be at q1
• In the LR, due to absence of BTE, PC firms would be earning normal profits
 A Level 2008 Q2
(b) Discuss the extent to which firms in different market structures in
Singapore are able to make independent pricing decisions. [15]
(b) Discuss the extent to which firms in different market structures in
Singapore are able to make independent pricing decisions.

Introduction:
• Common market structures of firms in SG: oligopoly and monopolistic competitive, monopoly to a smaller
extent
• Whether firms are able to set prices independently depends on the competition model, level of rival
consciousness, degree of government intervention etc
• The different implications arising from the features of the market structures will determine the extent to
which firms can make independent pricing decisions

Main:
• Thesis: Firms that are able to make independent pricing decisions
• Anti-thesis: Firms that are unable to make independent pricing decisions

Conclusion: Evaluation
Thesis: Firms that are able to make independent pricing decisions

Monopoly
• In theory, a monopoly is able to make independent pricing decisions regardless of actions of other
firms because: single dominant firm producing g/s with no close substitutes, high BTE to prevent
other firms from competing on an equal basis  no immediate competitor
• Eg utilities in SG is a natural monopoly and the producer has a high degree of market power to influence the price of
its good i.e. independent price setter
• [EV]: In reality, the monopolist’s pricing decision can be affected by the threat of competition i.e.
greater contestability of the market and government intervention
• GI in public transport industry to address issue caused by monopoly  introduce competition to the market, instead
of merely SMRT and SBS Transit, allow other operators to bid for the right to operate an MRT line for a fixed period of
time based on their proposed costs and/or quality of services offered
• The threat of losing their licenses to other operators provides the monopoly a strong incentive to be cost-efficient
and adopt competitive pricing
• Another GI: price caps to ensure that basic necessities are made available at affordable prices (equity concerns)
• Hence, the nature of the industry determines whether the government is likely to intervene and affects the ability of
firms to make independent pricing decisions
Thesis: Firms that are able to make independent pricing decisions

Monopolistic competitive
• In theory, large number of sellers, no/low BTE  too many firms  collusion amongst them
difficult and action of any one firm is unlikely to have significant impact on the sales of other firms
 low rival consciousness  unnecessary to take into account reaction of competitors when
making pricing decisions i.e. able to make independent pricing decisions
• Eg F&B industry: each firm’s ability to price its products differently from its competitors largely depends on the
success of its product differentiation  MC firms continue to leverage on product promotion and product
development to reduce degree of substitutability since this allows them to gain some degree of market power and
independence over price determination
• [EV]: In reality, given SG’s small domestic market and the proliferation of MC firms esp in the F&B
industry, rival consciousness is heightened when firms are highly concentrated in a small
geographic area  each firm WILL consider competitors’ actions when setting price, leading to
greater degree of mutual interdependence
Anti-thesis: Firms are that unable to make independent pricing decisions

Oligopoly
• Few large, dominant firms, each producing a significant share of the total market output, high BTE
 prevent competitors from entering the industry and keep number of rival firms small  may
choose to collude or compete with each other
• Rival conscious and mutual interdependence: each firm’s pricing decision is based on the assumptions of possible
reactions by other firms in the industry + firm should be aware of the decisions of other firms as well to respond
accordingly
• Eg telecommunications industry dominated by 3 large firms SingTel, M1 and Starhub  each firm’s pricing behaviour
has significant impact on the other firms
• Theory of Kinked Demand curve: if a single firm lowers price, other firms will match the price cut
but if a single firm raises price, other firms will not match the price increase but will instead
attempt to capture a larger share by keeping prices constant
• An oligopolistic firm cannot try to sell more by lowering its price because other firms will match
its price fall for fear of losing their market share
Anti-thesis: Firms are that unable to make independent pricing decisions
• Theory of Kinked Demand Curve: the mutual interdependence of oligopolistic firms is reflected in
relatively rigid prices  oli firms have no incentive to either lower or raise their price unless
forced by market conditions  The firm will continue to produce the same level of output at the
same price, illustrating inflexibility in pricing. Hence, prices in an oligopoly market change very
little over time
• Eg Petroleum retail industry: if SPC decides to lower price per litre of petrol, other petroleum companies will
immediately follow suit and lower their prices simultaneously. However, price wars often last for a very short period
of time, reflecting ineffectiveness of price competition in oli market structure
• Hence, strong mutual interdependence and rival consciousness in oligopoly leads to lack of
independence in pricing decision
• In theory, price rigidity faced by oligopoly means firms have little incentive to change prices or
inability to independently set price.
• [EV]: In reality, when the oligopolist assumes and perceives rivals not to react to its pricing
decision eg limited period price promotion of telecommunication firms, firms may still set prices
independent of their rivals for a short period of time
Anti-thesis: Firms that are unable to make independent pricing decisions
• In SG, the most probable model of oli firms that chose to collude rather compete is the dominant-
firm price leadership theory
• One firm controls substantial market share and reaps significant EOS such that small firms are unlikely to consider
undercutting the prices set by the leader
• Price leader dictates prices, other firms would still be dependent on the price leadership of the dominant firm and
would tacitly agree to limit competition amongst themselves and follow the prices set by the market leader
• [EV] However, it is also likely that the dominant firm might continue to monitor and observe
the actions of smaller firms eg if smaller taxi operators in the industry did not follow
ComfortDelgro’s increase in fares, then ComfortDelgro would likely adopt other strategies to
assert its market power and dominant position to force the smaller players into compliance or
even exit the market
Conclusion

• The theories of market structures provide a framework to analyse the behaviour of firms with
respect to price determination
• Due to different factors eg cost structure, competition model, action of rivals, government
regulation etc affecting the pricing determination, different outcomes can be reached regarding
the relative abilities of firms to make independent pricing decisions
• While it can be argued that monopoly and monopolistic competition are more likely to enjoy
higher degree of independence in pricing decisions compared to oligopoly, in reality, the action
of competitors remain an important consideration for firms since all firms are rival conscious to
some extent.
• Comparatively lower level of inefficiencies in monopolistic competition, both allocative and
productive, due to greater exposure to competitive forces implies that the likelihood of
government intervention in pricing decision is also lower in this market structure compared to
oligopoly or monopoly
 Homework: A Level 2011
Q3
(a) Explain how the different features of monopolistic competition and
oligopoly affect price and output determination in these market
structures. [10]
Specimen Paper CSQ1
(a) Use an aggregate demand (AD) and aggregate supply (AS) diagram to
explain how a change in the trade balance might have contributed to a growth
in GDP in Colombia in the early 1980s. [3]

• Colombia had a positive trade balance where there is an increase in net exports (X-M). As net
exports is part of AD=C+I+G+X-M, the increase in net exports will result in an increase in AD from
AD0 to AD1, and via multiplier effect, an increase in national income from Y0 to Y1.
(b) With reference to the data, use supply and demand analysis to explain two
contrasting trends in the world price of coffee between January 2013 and
February 2015 shown in Figure 1. [4]

• There was a decline in the world price of coffee from January 2013 to November 2013 while a rise
in the world price of coffee between January 2013 and February 2015.
• The reason for the decline in price from January 2013 to November 2013 could be due to the
increase in the size of coffee industry with the entry of coffee producing countries such as
Vietnam and Indonesia. This increase in size will increase the supply of coffee. It can therefore be
assumed that the increase in supply must have exceeded the rise in demand for coffee, hence a
decline in the price of coffee during that period.
• On the other hand, the rise in price of coffee between January 2013 and February 2015 could be
due to the fall in supply of coffee due to adverse weather conditions such as the drought in Brazil.
With the increase in demand for coffee in the world market, this fall in supply will result in a
shortage of coffee, hence increasing the world price of coffee.
(c) Explain whether the information provided in Extract 3 is sufficient to
conclude that coffee can be classified as a normal good in India. [3]

• Extract 3 mentioned that with rising income, coffee drinking in countries such as China and India
will increase. It was also mentioned that the coffee consumption will grow proportionately to the
increase in incomes. This direct relationship between income and demand for coffee shows that
YED of coffee will be positive, hence justifying that coffee is a normal good in India. As a normal
good is when income increases, demand for the good increases as well.
• However, the increase in demand for coffee may also be due to changes in other factors of
demand, such as taste and preference. Promotional campaigns for coffee in India may have led to
an increasing taste and preference for coffee, increasing demand. In this case, the increase in
demand for coffee may be due to a change in taste and preference rather than changes in
income. Hence, it will be indefinite to conclude that coffee is a normal good in India based on this
information only.
(d) Use a diagram to explain the opportunity cost facing farmers in Nepal of
choosing to produce coffee rather than food. [2]

• The PPC shows the maximum combination of goods that an economy can choose to produce
when all resources are fully utilised.
• When a farmer in Nepal chooses to produce coffee rather than food, there will be increasing
opportunity cost of food forgone as we move along the curve from point A to point B as resources
are not homogenous.
(f) Discuss whether supply-side policies are likely to be effective in increasing
the production of coffee in both Brazil and Nepal. [10]

• Brazil has been facing a drought that has caused a fall in its coffee production whereas Nepal is
under-producing the amount of Nepalese coffee that is demanded. Supply-side policies (SSP) are
mainly policies that help to increase the productivity and productive capacity of an economy. In
these cases, with the appropriate SSP implemented for Brazil and Nepal’s coffee market, it should
help to increase the production of coffee in these countries.
• SSP will be able to increase coffee production in Brazil if they are policies that help to improve the
infrastructure or facilities that will increase the production of coffee despite facing a drought.
Drought has caused a huge lack of water for the coffee crops hence reducing its harvest. This is
made worse with deforestation where there is nothing to hold the water to the ground when rain
falls. If the government is able to invest in facilities that help collect or retain the rain water
underground, the crops may still survive, increasing the production of coffee.
Con’t (f)

• SSP to help coffee production in Brazil will also be effective as Brazil has the most suitable factor
endowment for coffee production. This can be inferred from Extract 2, where it was mentioned
that Brazil is the world’s largest producer and exporter. By being the largest producer, it must
have comparative advantage in the production of coffee. Hence with SSP that help in funding
better irrigation and retention of rainwater to the ground, production of coffee will definitely
increase as the factor endowment is already suitable.
• However, Brazil’s coffee market does not belong to a sunset or infant industry. Hence, there will
be a risk of Brazilian farmers being overly reliant on the help from the government and become
complacent and inefficient. In this case, government funding in SSP will hence be better spent on
other areas such as healthcare, to improve allocative efficiency and consumer’s standard of living.
Cont’d (f)

• As for Nepal, SSP which will help improve the farming techniques of farmers are likely to be
effective in increasing production of coffee in its country. As mentioned in Extract 3, the Nepalese
farmers lack the efficient techniques of coffee farming. The government has plans to bring in
agricultural technicians to teach farmers on better growing methods to improve the efficiency of
production and quality of coffee beans harvested. This will help to increase the productivity of the
coffee farmers and bring about greater output of coffee beans.
• However, Nepal may not have the most suitable factor endowment, and SSP might be misdirected
and a waste of government funding leading to allocative inefficiency. Despite training, the farmers
may still not be efficient in the production of coffee. Moreover, it is mentioned that it takes 5 years
before coffee harvest is possible. Hence, many still do not turn to coffee production fully, leading to
an inefficient allocation of resources in funding SSP for coffee production. This will be so unless
the farmers’ mindset is changed. This can be seen from Extract 3 where it mentioned that though
increasing land has been used for coffee cultivation, there is still an estimated 1.1 million hectares
of land available for planting coffee. Hence, resources are not fully utilised. Further
implementation of SSP may incur higher cost of production that does not reap returns instead.
Cont’d (f) [EV]

• However, as Nepal is still relatively young in coffee production, it is likely an infant industry and so
the government should still invest in SSP to increase its potential output and trade in the future. As
mentioned in Extract 3, it is only supplying about 10 percent of what is demanded of its coffee and is
highly regarded in the international market. Hence it has the potential in having a comparative
advantage in the production of coffee. Funding SSP in this case will be worthwhile.*
• Overall, SSP can be useful in increasing coffee production if the nature of the policies helps to solve
the root cause of the lack of coffee production in Brazil and Nepal. As Brazil’s lack of coffee
production is due to drought and not due to the lack of skills of its farmers, the SSP used for Nepal
cannot be used for Brazil and vice versa. Above that, the factor endowments in the two countries
might differ, to the extent that SSP might not be effective in both countries because the opportunity
costs may differ.

*NIS but good to use for EV

Knowing more about Supply
Side Policies!
Main purpose of SSP: Potential Economic Growth
What is Potential EG?

• By increasing the qty and qly of resources

• Increase in LRAS
• Growth in productive capacity  potential economic growth
What is Sustained EG?
• Increase in Actual EG which is only possible with:
1. An increase in productive capacity
2. No increase in price
• Aka non-inflationary EG
• VS Sustainable EG: care about environment
• VS Inclusive EG: care about income equity
How to depict Sustained EG on diagram?
• Is there actual growth when potential growth is achieved?
• Can both occur at the same time?

• Potential growth: Full employment o/p increased from Yf1 to Yf2

• Actual growth: NY increased from Yf1 to Y2
What is the key to Sustained EG?
• Potential EG helps actual EG to be sustained
• Differences between Rapid EG and Sustained EG
• P1-P2: Rapid EG (Actual growth)  focus on AD increase only  leads to inflationary
pressure (DD-pull inflation)
• P1-P3: Sustained EG  focus on AD and LRAS increase  curbs rise in GPL due to rise in
productive capacity
What are the ways to maintain Sustained EG?
• Demand Management Policy
• Actual growth
• Supply Side Policy
• Potential growth
Explain briefly how the policy works:
One of the SSP that the Singapore government has put in place is the Productivity and Innovation Credit
(PIC) that grants tax deductions of 400% on spending on production and innovation activities like workers
training and investment in research and development of up to a max of $600,000 per year.

Explain the economic analysis of the policy:

This lowers the cost of investing for firms and increases their returns on investment. As such, they are
incentivised to engage in such productivity and innovation activities which will increase the productivity of
workers and capital. This increases the quantity and quality of labour and capital.

Explain the impact on AD/AS diagram:

Increased productivity leads to increased productive capacity of the economy and the LRAS shifts to the
right. There is actual and potential growth.

Additional benefits of SSP towards Sustained EG:

At the same time, potential growth helps curb inflationary pressures in the economy which can spur further
investment, helping the economy achieve sustained economic growth in the future.
How can SSP be useful in reducing
unemployment?
• Under the ‘Adapt and Grow’ scheme, the Professional Conversion Programme helps PMETs reskill
and move to new jobs in growing sectors. This is complemented with $42,000 salary support (i.e.
government pays a portion of the salary) for employers to help defray the cost of hiring PMETs
who are out of job
• These schemes are on top of existing initiatives such as the Workfare Training Scheme (WTS) and
SkillsFuture Credit
• In these schemes, the government provides subsidies for training as well as absentee payroll, all
with the intention to encourage workers to go for training or employers to send workers for
training
• Note: useful for structural Unt, not cyclical!
Explain the economic analysis of this policy:
SSP helps to increase the quantity and quality of labour. This raises the productive capacity of the
economy, given by an increase in LRAS, and a rightward shift of the LRAS curve from LRAS0 to
LRAS1.

Explain the limitation of the policy:

While this may create more unemployment in the short run, the higher labour productivity also
encourages foreign investors to view Singapore as a favourable investment destination.
The resulting increase in FDI can boost AD from AD0 to AD1. Thus, real GDP increases from Y0 to Y1
and structural unemployment will be lowered in the long run.
• Structural unemployment is caused by a loss of comparative advantage and/or government
policies such as the 4th industrial revolution
• It is about the method to increase LRAS, that might cause structural unemployment.
• Eg the government has implemented policies to increase productivity and increase automation,
to cut down reliance on human labour, structural unemployment might increase
• But the government can mitigate this with training and upgrading programmes
Can SSP be used to maintain price stability?
DD-pull inflation Cost push inflation
Limitations of SSP
• Uncertainty about training and efforts in increasing innovation
• Costly
• Receptiveness amongst the workers could be low
Understanding of specific SSP initiatives
• What is the difference between tax cuts in SSP and tax cuts in EFP?
• Purpose of SSP is to shift LRAS, purpose of EFP is to shift AD
• How does deregulation and competition policies increase LRAS?
• Deregulation removes monopoly as investment flows in, competition policies reduce prices
• How does elimination of structural bottlenecks (red tapes, government
regulation) increase LRAS?
• Increase efficiency
• How does promoting labour mobility increase LRAS?
• Increase quantity of labour
• How does increasing productivity increase LRAS?
• By increasing investment
 A Level 2014 Q6
Since the economic crisis of 2009, rates of economic growth across the
world have differed considerably.
(a) Explain the key determinants of actual and potential economic
growth. [10]
(b) Assess the alternative economic policies that the Singapore
government could adopt to maintain a sustained rate of economic
growth into the future. [15]
(a) Explain the key determinants of actual and potential economic growth. [10]

Introduction:
• AEG = increase in NY
• PEG = increase in productive capacity

Main:
• AEG can be brought about by 1) Increase in AD, where AD=C+I+G+X-M, or 2) Increase in SRAS due to both
external and domestic factors
• PEG is brought by an increase of LRAS due to an increase in productive capacity, where productive capacity
is determined by the quantity and quality of factors of production (land, labour, capital, entrepreneurship)

Conclusion:
• Both AEG and PEG can be driven by several factors, some of which overlap.
• Eg increasing investments increases AD and thus drives AEG in the short run. In the long run, investment
will result in PEG as well
Determinants of Actual Growth

1) Increase in AD
• Components of AD (C,I,G,NX) determine AEG

• Wrt Fig 1, suppose the gov increases infrastructure expenditure by building MRT tracks and
stations  increase in AD from AD0 to AD1  increase in Y from Y1 to Y2  actual growth (true
for any increase in the components of AD)
• Low interest rate  increase in C and I respectively  increase in AD  increase in NY
• Weakening of e/r  increase in Xrev since Px in FC falls + decrease in Mexp since Pm in DC increases  If MLC is
satisfied, NX rises  increase in AD  increase in NY
Determinants of Actual Growth
2) Increase in SRAS
• Factors that determine shift of SRAS include:
• External supply shocks eg fall in crude oil prices that decreases the cost of production for industries across the
economy
• Domestic factors eg reduction in wages that lowers the cost of production
• Wrt Fig 1, an increase of SRAS from SRAS0 to SRAS1 leads to NY increasing from Y1 to Y3  actual
growth
Determinants of Potential Growth
• PEG occurs when LRAS increases

• Wrt Fig 2, when LRAS1 increase to LRAS2, Y at full employment increases from Yf1 to Yf2
• Increase in LRAS means productive capacity has increased  key factors that determine PEG are the
ability of the economy to increase the quantity and quality of factors of production
• Use fop (land, labour, capital, entrepreneurship)
• Firms invest in improving the quality of labour through skills training and upgrading, workers will become more efficient
and productive  produce more output with the same resources  increase productive capacity
• Level of investment increase (public investment: infrastructural development eg roads and transport system OR private
investment: technological processes in production)  increase productive capacity
• Increase in LRAS can also bring about actual growth: Yf1 to Y2
(b) Assess the alternative economic policies that the Singapore government could adopt to maintain a sustained rate of economic growth into the future. [15]

Introduction:
• To achieve SEG, policies must achieve AEG and PEG
• Policies to adopt: EFP, e/r policy, SSP

Main:
• How EFP leads to SEG
• How e/r policy leads to SEG
• How SSP leads to SEG

Conclusion:
• A mix of DD-mgmt policies and SSP is crucial to maintain sustained rate of EG
• Increase in AD works in the SR to bring about AEG while increase in LRAS works in the LR to bring about
PEG and curb inflationary pressures
Expansionary Fiscal Policy (EFP)
• EFP involves increase in G and/or decrease in T (CIT/PIT)
• Increase in G eg hire more civil servants or spending on infrastructure projects.
• [EV]: SG gov has unveiled such plans in a timely manner over the years  increase G and subsequently AD in a
sustained manner. If the government were to keep up this practice of timely expenditure into the future, SG will be
able to maintain a sustained rate of EG in future
• Decrease CIT  increase after-tax profits  increase I
• Decrease PIT  increase consumers’ disposable income  increase C
• Overall, EFP will increase G, I, C  increase AD since AD=C+I+G+X-M
• Wrt Fig 1, AD will increase from AD0 to AD1  NY will increase from Y1 to Y2  AEG
• [EV]: In SG, lowering taxes may not be a feasible measure as by international standards, both PIT
and CIT are already one of the lowest in the world. SG has a history of adopting low taxes to
incentivise MNCs to set up their base of operations in SG. This encourages FDI, increasing I and
AD. Therefore, in terms of the effectiveness of the tools of EFP, gov spending is a better
alternative to lowering T that SG gov could adopt to maintain sustained rate of EG in future
Exchange rate policy

• SG maintains a strong SGD against other currencies

• Strong SGD helps to keep prices of imported fop low  lower COP  lower Px  increase X
competitiveness and offset the effects of strong SGD to a certain extent
• Strong SGD helps to control imported inflation as SG has no natural resources and is highly
dependent on M. Important for LT growth as stable prices build investor confidence in the
economy and encourages I  increase I, increase AD  maintain sustained rate of EG
Supply Side Policy (SSP)
• SSP increase SRAS or LRAS to bring about AEG or PEG
• To increase SRAS, SG gov could decrease FWL  lower COP for firms  SRAS shift right  AEG
occur
• [EV]: however, the scope for the gov to decrease FWL for industries across the economy is limited as this is a
politically unpopular measure due to the strain on infrastructure if there are too many foreigners in SG. Short of
subsidising the cost of fop which is unsustainable in the LT, SG gov cannot do much to increase SRAS with the
intention of generating AEG
• To increase LRAS, gov implemented PIC  lower cost of investing for firms and increase ROI 
incentivise firms to engage in innovation activities and R&D which will increase the productivity of
workers and capital  increase productive capacity  LRAS increase  AEG and PEG
• PEG also helps curb inflationary pressure  spur further investment which helps SG maintain
sustained EG in future
• [EV]: SSP with the aim of increasing LRAS rather than SRAS is a better approach that SG gov could
take to maintain a SEG
Evaluation
• DD-mgmt policies centred on gov expenditure and careful management of e/r can be measures to
enable SG to achieve a sustained rate of AEG into the future
• Apart from boosting AD, SG gov’s spending, which focuses on workers retraining and
infrastructure building and upgrading, has SS-side effects as well. Therefore, gov spending has the
dual effect of increasing AD in the SR and the LRAS in the LR
• Gov spending should also be prudent to ensure that EG is not pursued at the expense of the gov
budget balance. A persistent and worsening budget balance has the negative effect of reducing
investor confidence, leading to MNCs withdrawing from SG.
• This could in turn reduce the ability of the economy to maintain a sustained rate of EG
• SG gov has been rather prudent in spending. Therefore, budget deficit is unlikely to be a problem
• A policy mix is required for SG to maintained sustained rate of EG