Question 6 textbook pg 19

ACTUAL: not realising fullest potential

POTENTIAL: when u improve from ur maximum

a.​ New oil reserves → potential growth, new resources u didnt know u had, ur
country’s potential increases. Oil shouldn’t be on the axis, as its a resource, but
goods on axis must be those that are produced by the resource
b.​ Firms hire more workers → actual growth, implied that they were unemployed before
c.​ A vaccine for contagious disease invented → actual growth, u can be more efficient
to your fullest potential bc u were inefficient at first
d.​ Firms improve how they manufacture and lower costs of production → potential
growth, less input more output, same for the widespread use of new tech
e.​ A violent conflict → Potential decrease, quantity of capital resource decreases
f.​ Large cuts in govt spending → negative potential growth
g.​ Increase in qty of capital goods → Potential growth
h.​ Improvement in education and skills of workers → potential growth
i.​ Industrial pollution destroys the environment → potential decrease

Demand of an individual consumer refers to the various quantities of a product the

consumer is willing and able to buy at various possible prices per period of time, ceteris
paribus. (everything else held constant)

Rationale behind law of demand: law of diminishing marginal utility

As consumption of a good increases, the marginal utility derived by a consumer decreases.
Marginal utility: for each additional unit of the good that's produced, the amount of
satisfaction that consumers gain from consuming something
As more quantities are consumed, total utility rises but marginal utility falls.

Substitution effect and income effect

Market demand refers to the various quantities of a product the consumers are willing and
able to buy at various possible prices per period of time, ceteris paribus
QUANTITY DEMANDED vs DEMAND

Quantity demanded
-​ A point on the curve
-​ Quantity demanded increase/decrease → a point moving along one demand curve
-​ Change in price

Demand
-​ Entire curve
-​ Demand increase/decrease → shift of the entire curve
-​ Change in non-price determinants

NON PRICE DETERMINANTS

-​ Changes in income
-​ Income ↑, purchasing power ↑, greater ability to buy the good, QD at all
prices ↑, Demand ↑ (normal goods)
-​ Inferior goods → canned food, second hand goods
-​ Changes in taste and preferences
-​ Advertisement, research findings
-​ A favourable change in taste, Demand ↑
-​ Changes in price of related goods
-​ Substitutes
-​ The demand varies directly with the change in price of substitutes
-​ Price of good A ↑, demand of good B ↑
-​ Complements
-​ The demand varies indirectly with the change in price of
complements
-​ Price of good A ↑ , demand of good B ↓
-​ Number of consumers

ESSAYS
-​ Global recession (trigger) → Fall in income
-​ Assume holiday package, normal good (State assumption)
-​ As income Y falls, purchasing power falls
-​ Consumers are less willing and able to consume holiday packages
-​ Quantity demanded ↓ at every price
-​ For example, at P1, qtydd falls from Q2 to Q1
-​ Leftward shift of demand from D2 to D1
-​ Demand for holiday packages will fall (state outcome)
Supply of an individual firm refers to the quantities of a good/service that a
producer/supplier is willing and able to sell at various prices per period of time, ceteris
paribus.

Law of supply: Higher the price of a good, the higher the quantity supplied, ceteris paribus
Marginal cost: cost of producing an additional unit of output increases as output increases
Higher prices are required to produce higher units of output, increase in price, increase in
quantity supplied

Quantity supplied VS supply

Quantity supplied → along the supply curve

Supply increase/decrease → Shift in supply curve

Non price determinants of Supply

-​ Cost of production
-​ Rise in unit cost of production will result in decrease of supply
-​ Affected by wages, rental, price of raw materials, interest
-​ Competitive supply
-​ Competitive goods are produced using the same resources, eg cow being
used for milk and beef, or land for corn and wheat
-​ The supply of good B varies indirectly with profitability of good A (Price of A
increase due to increase in demand for A, profitability of A goes up, supply of
B goes down)
-​ Increase in fuel costs
-​ Increase in unit COP of air travel
-​ At each price, potential profit per unit decreases
-​ Firms less willing and able to supply
-​ Decrease in quantity supplied at every price
-​ Leftward shift in sply curve
-​ Supply decrease
-​ Qqqqqqqqqqqqqqqqqqqqquueueueueueueueueueueeueuueueeueeuuueeuu
eueueuueueeuueueueueuueueueueueueueueeu eden suks sux
-​ Joint supply
-​ Produced jointly, derived from same resource that it is not possible to
produce more of one without producing more of the other, eg cows, beef and
leather
-​ The supply of good B varies directly with profitability of good A (Price of A
increase due to increase in demand for A, profitability of A goes up, supply of
B goes up)
-​ Taxes
-​ Indirect tax is a payment made by firms to the government
ESSAY
-​ Increase in fuel costs
-​ Increase in unit COP of air travel
-​ At each price, potential profit per unit decreases
-​ Firms less willing and able to supply
-​ Decrease in quantity supplied at every price
-​ Leftward shift in supply curve
-​ Supply decreases

Changes in market equilibrium

-​ Initial equilibrium (state equilibrium point, where eq price is P1 and quantity is Q1)
-​ Shift (Explain the shift)
-​ Shortage/surplus (At initial price P1, qty dd is Q3 but qty ss is Q1)
-​ Upward/downward pressure on prices (As price increases, qty dd from Q3 to Q2)
-​ Equilibrium again
ISSUE!!!!!!!

Price mechanism (functions of price)

1.​ Signalling function
a.​ As price changes, it communicates information to decision makers
2.​ Incentive function
a.​ As price changes, it motivates decision makers to respond in a certain way
based on their interests.
Helps to answer what and how much to produce, and for whom

a.​ Explain how price mechanism works to allocate scarce resources between
competing markets such as electric bicycles and traditional
-​ Price mechanism is a system where prices are determined through demand
and supply forces in competitive markets. Demand refers to various
quantities that consumers are willing and able to buy at various prices per
period of time, cp. Whereas, supply refers to various quantities that
producers are willing and able to sell at various prices per period of time, cp.
Consumers and producers interact in the market to determine the equilibrium
price of the good. As demand or supply changes, price changes. As price
changes, the price mechanism comes into play where price performs its two
functions of signalling and incentive.

Allocative efficiency
The goods or services that are most wanted are produced = max possible benefits
Consumer surplus - area between demand curve and price consumers pay, diff between
what they are willing and able to pay vs what they are actually paying for a good
Producer surplus (benefit/welfare)
Difference between what producers are willing and able to receive vs what they actually
receive for a unit of a good

Producer surplus is above supply curve and below the price line
At market eq,
Total society welfare is max
Qe is the allocative efficient level of output

Price ceiling
-​ Shortage in the market of q1q2
-​ Not all consumers who are willing and able to consume are able to do so → cannot
rely on price mechanism as price is fixed as Price ceiling
-​ Non price rationing required: eg ration cards

Large unemployment: lower output in the market from Qe to Q1 means some workers may
be laid off

Substitute goods: shortage of goods may mean substitute markets will have higher
demand.

Complementary goods: less complements, substitute markets will have lower demand

Price floor
-​ Protects sellers of the product, ensures certain level of income for producers of a
good or service
-​ Surplus in the market from q1q2

Indirect taxes
-​ Payment from firms to the government (direct taxes, individual people)
-​ Levied on the prod of sales of goods and services
-​ Covered by consumers when they buy these goods
-​ Per unit tax (tax for each specific amt sold)
-​ Ad valorem tax (a percentage of the price of the good)

Why?
-​ Source of revenue
-​ Discourage consumption of demerit goods
-​ Redistribution of income - eg taxing luxury goods
 -​ Improves allocative inefficiency

Indirect taxes fall on producers for each unit of product sold

Leftward shift in supply curve

Application of elasticity concept

Market - consumers and sellers interact to decide price and quantity

Market failure - price mech fails to achieve efficiency in allocating scarce resources and
results in over/under allocation of resources

Allocative efficiency - scarce resources are allocated in the best way possible, society’s
welfare is maximised

DD curve represents the marginal private benefit of consumers (MPB) - private benefit is
shown by price, reflects the benefits that consumers place on the last unit of the good.
Marginal private cost (MPC) - private cost is shown by price, reflects the price producers
are willing and able to receive rises as their private costs for producing an additional good
rises

Assuming no externalities, MPB = MSB and MPC = MSC

Hence, equilibrium price is socially ideal outcome

Externalities- spillover effects on third parties (neither producers nor consumers)

Negative externality
-​ Costs of production/consumption borne by third parties other than the prod or
consum, for no compensation
-​ Eg cigarettes, alcohol
Positive externality
Benefits of production/consumption gained by third parties other than the prod or
consum, for no compensation
Beneficial effects on other

1.​ EXPLAIN the equilibrium the market will produce at

2.​ Divergence, explain is it production or consumption that will diverge
3.​ Equilibrium, socially optimal equilibrium
4.​ Allocation of resources, why scarce resources are allocated where, over or
underproduction? Society incurs more cost or benefit?
5.​ Deadweight loss, highlight overallocation of resources and total social cost
a.​ Produce too much
b.​ Couldnt reap all the benefits
Market based policies

Indirect taxes
-​ Levied on producers for each unit of good produced to internalise the external cost
(taking accountability for 3rd party costs)
-​ Govt imposes indirect tax, increases unuit cost of production, marginal private cost
increases, mpc + tax= msc

Carbon taxes
-​ Levied on producers for each unit of carbon emitted. The more carbon emitted, the
higher the tax
-​ Govt imposes carbon tax, mpc increase, msc decrease.

Disadvantage
-​ Difficulty in measuring mec
-​ Difficult to monetize and estimate the external cost
-​ Could either overtax or undertax
-​ Problems associated with ped

Tradable permits
-​ Govt sets a limit on the amt of pollution permitted
-​ Issue pollution permits to firms
-​ Permits can be traded between firms
-​ Low pollution firms sell permits, high pollution firms buy permits as it is cheaper to
buy permits than adopting greener production methods

Advantages:
-​ Market based solution, easy to implement
-​ Firms have incentive to reduce pollution due to increased profit from selling permits

Disadvantages:
-​ May not reduce pollution levels merely changes the source of pollution
-​ A dommy firm may buy up all the permits, creating a barrier to entry for new terms
-​ Costly to monitor and enforce

Explain why alcohol market leads to a market failure

Evaluate the policies a govt uses to deal with the market failure associated with the
overconsumption of alcohol

Taxes
Legislation targeting consumers
PTublic education/provision of info

education : changes people’s t and p away/toward something

Policy: what it is, how it works, pros and cons of this measure

Clean air - common pool resource

1.​ Govt legislation/regulation

2.​ Collective self governance
3.​ Education and awareness creation
4.​ International agreements
5.​ Other measures previously mentioned such as
a.​ Carbon tax
b.​ Cap and trade (tradable permits)
c.​ Funding clean technology

1.​ Govt legislation and regulation

a.​ Granting of property rights: making the resource excludable. Once someone
has property rights, owner can oversee if resource is being exploited
i.​ More certain outcome than market based policies that rely on
incentives
1.​ Banning the use of harmful substances, restrictions on
hunting, logging and fishing
ii.​ Difficult to tax producers, especially if they are numerous small
producers who are uneducated: eg sustenance farming
b.​ Outright bans: restrict the areas/zones ​
c.​ Quota licences and permits: eg limit to number of fish you can fish.
d.​ Set emission standards

2.​ Collective self governance

a.​ Use the resources responsibly because they will collectively work toward the
preservation of the resource, and communicate with one another and set
rules for their behaviour as resource users.
b.​ Provide infrastructure such that competitors can collectively self govern

3.​ Education and awareness creation

a.​ Education of public regarding polluting activities by firms turn away
consumers from the products
b.​ Producers are forced to take consumers opinions into consideration and
change their production methods to reduce externalities on the environment
4.​ International agreement
a.​ Necessary when common resource extends beyond one country
b.​ Montreal protocol, kyoto protocol, eu emissions trading system, paris
agreement
c.​ Regional international cooperation - can be regional, like sg giving assistance
to indonesia to fight forest fires