National Junior College

Economics Revision Package

The Central Problem of Economics

CENTRAL PROBLEM OF ECONOMICS

Scarcity
Desire > Resources

PRODUCTION POSSIBILITY FRONTIER

Factor Endowment
Embodiment of Technology
Economic Growth
Substitutability of Factors of Production

Choice
Opportunity Cost

What to Produce?
How to Produce?
For Whom to Produce?

RESOURCE ALLOCATION
Productive Efficiency
Allocative Efficiency

Mixed Economy
Price Mechanism
Government

Planned Economy
Allocation determined
by the Government

Externalities
- Positive
- Negative

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Types of Goods
- Free Goods
- Merit Goods
- Public Goods

Planned Economy
Allocation determined
by the Government

Benefits / Costs
- Private
- Social

Economics Revised Syllabus (9079)

Central Problem of Economics

National Junior College

Economics Revision Package

The Central Problem of Economics (Contd)

ECONOMIC SYSTEMS

Allocative Mechanism

The Planned System

(Command Economy)

The Ownership of Resources

Private

The Market System

Collective

The Market Economy

Decentralised decision making

A system of Private Property

Free enterprise and choice

Limited government role

Self interest

Competition in unrestricted markets

Coordinated via the Price

Mechanism (The Invisible Hand)

The Planned Economy

Centralised decision making

State ownership of non-human resources

Absence of competitive markets

Centralised Planning

What to Produce?

Direction of Resources
- Manpower Planning

Central planners determine the relative rewards and coordinate all production

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Economics Revised Syllabus (9079)

Central Problem of Economics

National Junior College

Economics Revision Package

The Central Problem of Economics (Contd)

A simple Illustration of the Price Mechanism
e.g. Given resources are allocated to the production of milk and beef
Milk
Production unchanged

Demand increases

The Price Mechanism

and the Allocation of
Scarce Resources

Beef
Demand decreases

The Competitive Market

A shortage develops

A surplus develops

A Pricing Mechanism
Firms

Households
Price rises

Price falls

Unit Price and

Profit Signals
Buyers

Costs unchanged

More profitable

Less profitable

[examine the changes

that will take place in
the resource markets]

Transfer of
Resources
Production expanded

Sellers

Utility
Maximisation

Profit
Maximisation

Production reduced

The change in buyers preferences, working through the pricing system, signals a re-allocation of scarce resources.
Shortage removed

Price falls

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Surplus removed

Price rise

Economics Revised Syllabus (9079)

Central Problem of Economics

National Junior College

Economics Revision Package

The Price Theory

THE MARKET
Facilitate exchange between buyers and sellers

THE THEORY OF DEMAND

Desire, Willingness, Ability
Price , Quantity Demanded

MARKET EQUILIBRIUM
Interaction of Demand and Supply
Equilibrium Price: Price at which
Qty DD = Qty SS

INDIVIDUAL DEMAND CURVE

Downward Sloping

MARKET DEMAND CURVE

Horizontal Summation of
Individual Demand Curves

MOVEMENT ALONG THE

CURVE
(Quantity Demanded)
Price Effect
Price , Qty DD

TYPES OF GOODS

Normal

Inferior

Giffen

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THE THEORY OF SUPPLY

Qty offered for sale at a price
Price , Quantity Supplied

INDIVIDUAL SUPPLY CURVE

Upward Sloping
EFFECTS OF CHANGES
IN DEMAND

Dd , Pe , Qty Ss

Dd , Pe , Qty Ss

SHIFT OF THE CURVE

(Demand)
Non-Price Effects

Income

Price of Related Gds

Taste

Population

Expectations

EFFECTS OF CHANGES
IN SUPPLY

Ss , Pe , Qty Dd

Ss , Pe , Qty Dd

MARKET CLEARING

Process

PRICE CONTROLS
Price Ceiling: Highest
Price
Price Floor: Lowest Price

MARKET
DISEQUILIBRIUM
Shortages: Dd > Ss
Excess: Ss > Dd

MARKET SUPPLY CURVE

Horizontal Summation of
Individual Supply Curves

SHIFT OF THE CURVE

(Supply)
Non-Price Effects

Price of Factor Input

Technology

Taxes

Subsidies

Market Share

MOVEMENT ALONG
THE CURVE
(Quantity Supplied)
Price Effect
Price , Qty Supplied

Economics Revised Syllabus (9079)

The Price Theory

National Junior College

Economics Revision Package

Elasticity of Demand and Supply

ELASTICITY
Measurement of Responsiveness

DEMAND ELASTICITY
Measures the degree of
responsiveness in quantity demanded

PRICE ELASTICITY OF DEMAND

Change in QD in response to a
change in price

SLOPE OF DEMAND
CURVE
Time
Substitutability
Luxury vs Necessities
Proportion of Income
Habits

DEGREE OF ELASTICITY
Perfectly Inelastic, |EP| = 0
Inelastic, 0 < |EP| < 1
Unitary Elastic, |EP| = 1
Elastic, 1 < |EP| <
Perfectly Elastic, |EP| =
Relationship To

0 < |ED| < 1;

P() TR ()
|ED| = 1;
P() TR unchanged
1 < |ED| < ;
P() TR ()

1 < |ED| <

|ED| = 1

0
TR

DEGREE OF ELASTICITY
Negative Income Elasticity, EY < 0
Zero Income Elasticity, EY = 0
Positive Income Elasticity, EY > 0

Fig: A Linear Demand

0 < |ED| < 1

|ED| = 0

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|ED| =

TOTAL REVENUE

CROSS ELASTICITY OF DEMAND

Change in QD in response to a
change in price of other goods

INCOME ELASTICITY OF DEMAND

Change in QD in response to a
change in income

Affected By

SUPPLY ELASTICITY
Measures the degree of
responsiveness in quantity supplied

Qty

Determined By
TYPES OF GOODS
If EY < 0, Inferior Goods
If 0 EY 1, Necessities
If EY > 1, Luxury Goods

DEGREE OF ELASTICITY
Negative Income Elasticity, EXY < 0
Zero Income Elasticity, EXY = 0
Positive Income Elasticity, EXY > 0
Determined By

RELATIONSHIP BETWEEN GOODS

If EXY < 0, Complementary Goods
If EXY = 0, Not related goods
If EXY > 0, Substitutable Goods

Qty

Economics Revised Syllabus (9079)

Elasticity of Demand and Supply

National Junior College

Economics Revision Package

Elasticity of Demand and Supply (Contd)

ELASTICITY
Measurement of Responsiveness

FORMULA

|E| =

DEMAND ELASTICITY
Measures the degree of
responsiveness in quantity
demanded

SUPPLY ELASTICITY
Measures the degree of
responsiveness in quantity supplied

|ED| =
=

PRICE ELASTICITY OF SUPPLY

Change in QS in response to a
change in price

|Es| =
=

Affected By

|EY| =
=

DEGREE OF ELASTICITY
Perfectly Inelastic, ES = 0
Inelastic, 0 < ES < 1
Unitary Elastic, ES = 1
Elastic, 1 < ES <
Perfectly Elastic, ES =

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SLOPE OF THE SUPPLY CURVE

Time
Existence of Spare Capacity
Availability and Durability of
Stocks
Length of Production Period
Factor Mobility

|EXY| =

% Qty
% Related Variable
QD P0

Q0
P
% Qty DD
% Price of the Good
Qs P0

P Q0
% Qty SS
% Price of the Good

QD P0

Y0
Y
% Qty DD
% Income

QX PY 0

PY Qx0
% Qty DD of Gd X
% Price of Gd Y

Economics Revised Syllabus (9079)

Elasticity of Demand and Supply

National Junior College

Economics Revision Package

Theory of Production and Costs

PRODUCTION AND COSTS

SURVIVAL OF SMALL FIRMS

SHORT
RUN

EFFICIENCY
Technical Efficiency (Average
Cost Minimum)

Output Decisions
Determined by

Varying variable factors with

fixed factors unchanged

Total Product, TP
Average Product, AP
Marginal Product, MP

TP
AP =
QV

TP
MP =
QV

Varying all factors of production

Input-Output

Output-Cost
FIXED & VARIABLE COSTS

Total Fixed Cost

Total Variable Cost
Total Cost

Average Fixed Cost

Average Variable Cost
Average Cost

Marginal Cost

Output-Cost

LAW OF RETURNS TO SCALE

Increasing Returns
Constant Returns
Decreasing Returns

ECONOMIES OF SCALE

Internal Economies
- Economies of Scale (falling
LRAC)
- Diseconomies of Scale (rising
LRAC)

External Economies
- Economies of Scale (downward
shift of LRAC)
- Diseconomies of Scale (upward
shift of LRAC)

MC
SRAC

AFC

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Output Decisions
Determined by

To
Achieve

Input-Output
LAW OF DIMINISHING
RETURNS (LAW OF
VARIABLE PROPORTIONS)

LONG
RUN

AVC

output

Economics Revised Syllabus (9079)

Theory of Production and Cost

National Junior College

Economics Revision Package

Market Structures

MARKET STRUCTURES
Concentration Ratios
Barriers to Entry
None

PERFECT COMPETITION
Large number of Firms
Homogeneous Products
Demand Curve: Horizontal
Equilibrium: MR=MC

PRODUCTION
Allocative Efficiency
Productive Efficiency
SR: Supernormal, Normal,
Subnormal Profits
LR: Normal Profits

Absolute

Some

MONOPOLISTIC COMPETITION
Many number of Firms
Differentiated Products
Demand Curve: Downward Sloping
Equilibrium: MR=MC

PRICE AND NON-PRICE

COMPETITION
Brand Loyalty
SR: Supernormal, Normal,
Subnormal Profits
LR: Normal Profits

OLIGOPOLY
Few number of Firms
Homogenous /
Differentiated Products
Demand Curve: Kinked
Equilibrium: MR=MC

COLLUSION
Tacit
Agreement

NONCOLLUSION
Non-price
competition
Dominant
Firm model

MONOPOLY
Sole seller
No close substitute / unique
product
Demand Curve: Downward
Sloping
Equilibrium: MR=MC

PRICE
GOVERNMENT
DISCRIMINATION INTERVENTION
First Degree
Regulation
Second Degree
Nationalisation
Third Degree
PRIVATISATION
Justifications
Singapores
Experience

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Economics Revised Syllabus (9079)

Market Structures

National Junior College

Economics Revision Package

Theory of Wages
THE LABOUR MARKET
(Factor Market)

LABOUR DEMAND
Downward Sloping
MRPL = MPP x MR

WAGE RATE DETERMINATION

Interaction of Demand for and Supply of Labour
Equilibrium: Wage and Employment at which
Labour Demand = Labour Supply

INDIVIDUAL LABOUR
DEMAND CURVE
Downward Sloping

INDUSTRY LABOUR
DEMAND CURVE
Horizontal Summation of
Individual Demand Curves

EFFECTS OF CHANGES
IN LABOUR DEMAND
DL, W, Quantity SSL
DL, W, Quantity SSL

EFFECTS OF CHANGES
IN LABOUR SUPPLY
SL, W, Quantity DDL
SL, W, Quantity DDL

MARKET CLEARING
Process

DETERMINATION OF
LABOUR DEMAND
ELASTICITY
Price elasticity of
demand for final
product
Substitutability of
Factors of Production
Proportion of Total
Costs of Production
Diminishing Marginal
Productivity
Time

LABOUR SUPPLY
Upward Sloping

SHIFT OF THE
LABOUR DEMAND
CURVE
Price of the final
product (hence
affecting MR of
product)
Productivity
Price of related
factors of production

Interference
MINIMUM WAGE
LAWS
Wage Floor: Lowest
Wage Allowed

INDIVIDUAL LABOUR
SUPPLY CURVE
Labour / Leisure Trade-off
Income / Substitution Effects

INDUSTRY LABOUR
SUPPLY CURVE
Horizontal Summation of
Individual Supply Curves

DETERMINATION OF
LABOUR SUPPLY
ELASTICITY
Training Period
Innate Abilities
Labour Mobility
- Restriction by Trade
Unions
- Geographical Mobility

DISEQUILIBRIUM
Unemployment: SL > DL

SHIFT OF THE
LABOUR SUPPLY
CURVE
Wage Rates
between different
industries
Trade Unions
Demographic
Factors
Non-Monetary
Aspects of Job

Transfer Earning
Economic Rent

PRINCIPLE OF NET ADVANTAGES

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Economics Revised Syllabus (9079)

Theory of Wages

National Junior College

Economics Revision Package

National Income

National Income

Why

Usefulness
Macroeconomic Tracking
Comparison Over Time
Comparison Between Countries
Facilitates Policy Formulation

GDP versus GNP

Gross versus Net
Factor Cost versus Market Price

What
Definition and Coverage
Market Value
Final Goods and Services
Newly Produced Goods and
Services

How

Measurement
Income Approach
Expenditure Approach
Output Approach

Limitations
Incomplete coverage of
productive activities
Inadequate or non-reflection of
- Quality and variety
- Costs of Growth
- Composition and
Distribution of Output
- Population growth

2003-05 All Rights Reserved

Economics Revised Syllabus (9079)

The Macroeconomy: National Income Statistics