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KEY CONCEPTS

REVISION
EC1
• Micro vs macro
• Time series
• Market equilibrium
Micro vs Macro
• Microeconomics
• Microeconomics choices are choices that individuals
and businesses (firms) make, the way those choices
interact in markets, and the influence of governments.

• Macroeconomics
• Macroeconomics concerns the performance of large
entities, countries or groups of countries and their
economies.
Time-Series Graphs
 A time-series graph measures time (for example, months
or years) along the x-axis and the variable or variables in
which we are interested along the y-axis.
 The time-series graph on the next slide shows the price
of crude oil between 1979 and 201.
 The graph shows the level of the price, how it has
changed over time, when change was rapid or slow, and
whether there was any trend.
Source: www.resilience.org
Market Equilibrium
• Equilibrium is a situation in which opposing forces
balance each other. Equilibrium in a market occurs
when the price balances the plans of buyers and
sellers.
• The equilibrium price is the price at which the
quantity demanded equals the quantity supplied.
• The equilibrium quantity is the quantity bought and
sold at the equilibrium price.

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Market Equilibrium
• Market equilibrium occurs when
the market demand is equals to
the market supply.

• The price is $1.50 is the equilibrium


price and 10 million is the equilibrium
quantity.
• There is neither a shortage nor a
surplus.

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• Price elasticity
• Factors affecting price elasticity

• Income elasticity
Price Elasticity of Demand
• The price elasticity of demand is a units-free
measure of the responsiveness of the quantity
demanded of a good to a change in its price when all
other influences on buyers’ plans remain the same.

• The price elasticity of demand is calculated by


using the formula:

Percentage change in quantity demanded

Percentage change in price


Price Elasticity of Demand
• If the percentage change in the quantity demanded
is smaller than the percentage change in price,
• the price elasticity of demand is less than 1 and the
good has inelastic demand.
• If the percentage change in the quantity demanded
is greater than the percentage change in price,
• the price elasticity of demand is greater than 1 and
the good has elastic demand.
Factors that Influence the Price
Elasticity of Demand
• The elasticity of demand for a good depends on,
• The closeness of substitutes
• The proportion of income spent on the good
• The time elapsed since a price change
Factors that Influence the Price Elasticity
of Demand
Number of close substitutes
• The closer the substitutes for a good or service, the
more elastic are the demand for it.

Luxuries vs Necessities
• Necessities, such as food or housing, generally have
inelastic demand.
• Luxuries, such as exotic vacations, generally have
elastic demand.
Factors that Influence the Price Elasticity
of Demand
Proportion of income spent on the good
• The greater the proportion of income consumers spent
on a good, the larger is its elasticity of demand.

Time Elapsed Since Price Change (Response time)


• The more time consumers have to adjust to a price
change, or the longer that a good can be stored without
losing its value, the more elastic is the demand for that
good.
INCOME ELASTICITY
• The formula for calculating income elasticity of demand is as follows,

• Percentage change in quantity demanded


• Percentage change in income

• A product is normal good if the income elasticity of demand is positive. Most goods around
us are normal as we tend to buy more of them when we have more income. For example,
computers are normal goods. When consumers’ income rises, the demand for computers
will also increase.


• A good is an inferior good if the income elasticity is negative. For inferior goods a rise in
the income of the consumers will decrease the demand for inferior goods. Inferior
goods are low quality products. When consumers ‘ income rises, they will buy better
nd
quality goods. An example of inferior goods will be 2 hand clothes.


Market structure
• Oligopoly
• Monopoly
Characteristic of oligopolies
• Oligo is based on the Greek word for few and poly from Greek
word for sellers. They can act like monopolies if they are
coordinated and working together (colluding) or still compete
fiercely. Their products may vary from other firms (cars) or be
quite homogenous (oil).
• Firms in oligopoly competition structure are inter-dependent on
one another. In other word, what one firm does can affect the
others firms. For instance, if SingTel is to lower the price of
their mobile phone service, Starhub and M1 would likely be
affected as they may lose some of their customers to SingTel.
• Due to this inter-dependency, it is observed that firms in this
structure exhibit several typical behaviours namely,
• Collusion and formation of cartels.
• Price leadership
Collusion in oligopoly industry in the form
of price leadership.
• In an oligopoly there are only a few firms which dominate the industry. These
firms can act like monopolies if they are coordinated and working together
(colluding) or still compete fiercely. Firms in oligopoly competition structure are
inter-dependent on one another. Firms an oligopoly industry may collude.
• One form of informal collusion such as using price leadership.

• A price leader is a firm whose price is adopted by the rest of the industry.
• This is a form of informal collusion in oligopoly. The market has a firm which is
seen to be the price leader. When the price leader sets the price, the rest of the
market followers will set the price same as that price.
• Price leadership is less effective if there is are lot of product differences among
firms.


What is monopoly? Explain with one example.

Monopoly market structure characteristics:


• There is only one firm in the whole industry.
• Therefore, the firm produce a unique product for which there
are no substitutes.
• The firm is a price maker, has the ability to set their own prices.
• The reason why this form of market structure arises is due to
the high barriers of entry which are so restrictive that entry into
the industry is essentially blocked. Examples of such barriers
to entry are legal protection, control of essential resources or
economies of scale.
• The monopoly will earn abnormal profits. There are no
competitiors.
• Examples: Water supply company, post office in a small
village.
• GDP calculations
• Policies to achieve economic growth
Products Quantity output Price
(Tons) $
2012
Cheese 1,000 80
Bread 600 50

2013
Cheese 1,200 84
Bread 700 55

Assume that the country of Utopia produce two goods:

(i) Calculate the nominal GDP in 2012.

(ii) Calculate the nominal GDP in 2013.

(iii) Calculate the real GDP in 2013.


(i) Nominal GDP in 2012.

Cheese: 1,000 tons x $80 = $80,000

Bread: 600 tons x 50 = $ 30,000

Nominal GDP = $110,000

(ii) Nominal GDP in 2013.

Cheese: 1,200 tons x $84 = $100,800

Bread: 700 tons x $55 = 38,500


Nominal GDP = $ $139,300

(iii) Real GDP in 2013.

Cheese: 1,200 tons x $80 = $96,000

Bread: 700 tons x $50 = 35,000

Real GDP = $ $131,000


Government Policies to Achieve Economic
Growth
• Encourage Population Growth including the Import of
Foreign Labour
• This may include population growth through natural birth
as well as attracting foreign immigrants including foreign
workers.

• Mobilise of Working-age Population not in the Labour


Force
• One important strategy that has been adopted by China
since economic liberalization is the mobilizing of people
from the rural areas to the cities to work in factories, to
increase the aggregate labour hours.
Government Policies to Achieve Economic Growth

• Stimulate Domestic Saving and Attract Foreign Direct


Investment (FDI)
• Saving finances and investment, so higher saving rates
increase physical capital growth. Tax incentives might be
provided to boost saving. To supplement inadequate domestic
saving, the country can also establish policies to attract FDIs.

• Stimulate Research and Development


• The market might allocate too few resources to research and
development because R and D, of benefit to more than just the
producer, encounters the obstacle to efficiency known as
‘working in the public good’ (Ch. 5), so government subsidies
and direct funding may be needed in lieu of this to stimulate
increase supply of basic research and development in cases
where markets under produce in this area.

• Define unemployment
• Cyclical unemployment
• Problems or costs of unemployment
Who is considered unemployed?
To be counted as unemployed, a person must be in one
of the following categories:
1) Without work but has made specific efforts to find a
job within the previous four weeks.
2) Waiting to be called back to a job from which he or
she has been laid off.
3) Waiting to start a new job within 30 days.

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Cyclical Unemployment

• The third type of unemployment occurs during periods of


recession (i.e. period of low production) and is called
cyclical unemployment. Over time, the economy
experiences many ups and downs. That's what we
call cyclical unemployment because it goes in cycles.
Cyclical unemployment occurs because of these cycles.
When the economy enters a recession, many of the jobs
lost are considered cyclical unemployment. Increase in
cyclical unemployment, although they are relatively short-
lived, are associated with significant declines in real GDP
and are therefore quite costly economically.
Negative Impacts of Unemployment
With wide-spread unemployment,
1) Households have no income to spend. This will lead to fall in
households’ consumption, leading to further decline in the real
GDP of the economy.
2) With no income, some people resort to crimes such as theft and
robbery.
3) In the long-term, average standard of living in the country will fall.
4) Foreign investors may avoid the country due to instable society
and economy.
Defer paper
• Positive and normative • The law of demand and the
statements in economics income and substitution effects
• Role of the entrepreneur • Factors affecting the supply of
• Time series and cross section a good.
graphs • Shift of the demand curve –
• Curvilinear graph factors which will shift it
rightwards.
• Perfect competition
• Types of barriers to entry • Factors which affect labour
supply
• CPI • Effects of population increase
• Inflation
• Business cycle
• Weakness of CPI
• Effects of inflation