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Foundations in Economics (2020) (Microeconomics (Session 2: Demand and…
Foundations in Economics (2020)
Microeconomics
Session 2: Demand and Supply Model
D. DD and SS price elasticities
Demand Elasticity, Total Revenue
Example: Glady's demand for gasoline
Unit elastic demand
Inelastic demand
Elastic demand
Example: DD for iTunes
It helps to know where you are on the DD schedule!
Application: Singapore Cab fare hikes, 2008
C. Using Supply and Demand
Example i: Hurricane Irma & Oranges (2017)
Example ii: High gasoline prices & Oranges (2011)
Example iii: Rising middle class & edible of oils (2008)
Example iv: Improving life style, technology & Obesity (2009)
A. DD, SS and Equilibrium
Shift in Curves
Movements along Curves
Quantity Demand and Demand
Quantity Supply and Supply
Application: Harley-Davidson (1982) ITC
Example: Demand for coffee (graph / slope / coefficients)
B. Consumer and Producer Surplus
Maximising welfare
Market equilibrium and disequilibrium,
Sessions 4-7: Theory of the Firm
C. Market Structure
2. Monopoly
(
ignore
)
Profit Maximisation (MR=MC; P > MC)
Welfare Loss from Monopolist
MR below P (DD Schedule)
Price Discriminating Monopolist
Perfect (1st degree)
Market segmentation (3rd degree)
Example: Sugar Refinery
1. Perfect Competition
Profit Maximisation Rule (MR=MC, P = MC)
MR-MC (numbers and graph)
TR-TC (numbers and graphs)
Calculus
Short Run: Economic Profit > 0; Long Run: Economic Profit = 0
SR and LR Business Decisions (5 scenarios)
Exit Business (P<Min LR-ATC)
(iii) Min Loss (Min AVC < P < Min ATC); do not shut down
(ii) Zero Profit (P=min ATC)
(iv) Shut Down Temporarily (P < Min AVC); do not continue producing
(i) Max Profit (P > Min ATC)
MC curve is Firm's SS curve
Distinguish
Price-taker vs price setter
Individual DD curve faced by single firm X
Market demand curve in industry
3. Monopolistic Competition
(ignore)
Profit Maximisation (MR=MC; P>MC)
Short Run: Economic Profit > 0; Long Run: Economic Profit = 0
A. Production and Cost Analysis I (Short Run)
2. Production Function
Increasing & Decreasing Marginal Productivity
Total Product TP (Average Product, Marginal Product)
3. Costs
Short Run and Long Run Costs
SR: Fixed inputs + variable inputs
LR: all inputs are variable
Total Cost (TC) (Fixed Cost FC + Variable Cost VC)
Relationship Between
Marginal Product and Marginal Cost
Total Product and Total Cost
Average Product and Average Cost
Why U-shaped cost curve? Diminishing MPL
Why MC cuts through the min points of AVC and ATC?
ATC = AFC + AVC
Marginal Cost
1. Role of the Firm
Transformation of factors of production
Production Function: Labor and Capital Q=f(A, L, K)
(i) Choose the production technique, given the technology available
(ii) Ensure the firm is on the production function
(iii) Choose the least cost input combination (K,L) to produce given output
Goal: Profit Maximization (Profit=TR-TC) - Session #5
Choose the price to sell the good (price taker / price setter?)
Choose the quantity to sell (affect cost and revenue)
Context: Lim Kee Food Manufacturing
B. Production and Cost Analysis II (Long Run)
2. Long Run ATC
Economies of Scale
Constant Returns to Scale (minimum efficient level)
Diseconomies of Scale
Envelope: Short Run and Long Run ATC
1. Production Decision in LR
Least Cost Input Combination (economically efficient)
Iso-cost and Iso Quant
3D Diagram
Session 8: International Trade Models
B. Tariffs
Welfare Effects
Revenue Effect (c)
Consumption Effect (d)
Production Effect (a)
Protective Effect (b)
Terms of Trade Effect (e)
Tariffs by Small Nation (Guatemala, motorcycle)
Tariffs for Large Nation (US, w/machine)
A. Background
Trade data
Balance of trade & Net International Position
Session 1: Welcome
A. About the Course
Assessments
Online Assessment (40%)
Practice Quizzes (10%)
Final Examination (50%); 7 Dec 2020 7.30 pm - 9.30 pm
Platforms
SMU eLearn
McGraw-Hill's Connect
C. Economic Concepts
Scarcity, Trade-offs & Opportunity Costs (as individual)
Example: History and Economics (time constraint)
Example: Mugs and Pots (time constraint)
Example: Cartoon; Mum and Daughter (budget and time constraint)
Example: Steak and seafood (budget constraint)
Production Possibility Curve (national level; guns and butter)
Constant Opportunity Cost
Increasing Opportunity Cost
Depict scarcity, trade-off and OC
B. The Study of Economics
Circular Flow Model
Coordination Problems
How to produce?
Whom to produce for?
Invisible Hand Theory (DD and SS model)
What to produce?
Optional
Derive DD schedule (for coffee)
Consumer optimization (2-goods; Coffee and Beer)
Consumer optimization (work and leisure)
Session 3: Role of Government
B. Price controls
Price Floor
Creates surplus of workers (problems is bigger in LR, when SS and DD becomes more elastic)
(Rwanda's Potato Prices, 2017)
(US Minimum Wage, 2018)
Price Ceiling
unintended consequences
Create shortage of apartments
(Toronto's Rent Control, 2018)
A. Taxation
Burden of Taxation
Elasticity of SS and DD
Consumer and Producer Surplus
Examples
Luxury tax on yachts (SS inelastic)
Sales tax (DD inelastic; DD elastic with online purchases)
C. Rent Seeking
Apartment rental Market
Tenants face "Inelastic SS"
Tenants will lobby government to prevent rental rise
Agriculture market
Farmers face "Inelastic DD"
Farmers will lobby government to restrict price fall
Macroeconomics
Sessions 9 & 10: Macroeconomics
A. Overview
1. Economic Growth vs Business Cycles vs Structural Stagnation
Classical Economists (non-activities policies)
Keynesian Economists (activities government policies)
2. Unemployment
Actual Unemployment Rate
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Target Rate of Unemployment / NAIRU / NRU
Beveridge Curve
Relationship (3 variables)
Optional: Unemployment and Growth (Okun's Law)
Optional: Inflation and Unemployment (Phillips Curve)
Price and GDP (AD-AS Model)
B. Measuring Aggregate Economy
Real vs Nominal GDP
Approach
(c) Income Approach (Renumeration, Profit, Tax)
(a) Expenditure Approach (Y=C+I+G+NX)
(b) Output Approach (Mfg, Wholesale and Retail, Finance, Construction)
Circular Flow Model, National Accounting Identity
Limitations of GDP
Inflation
GDP Deflator
Consumer Price Index (CPI)
Producer Price Index (PPI)
Personal Consumption Expenditure Deflator
Session 11: Models
3. Keynesian Short Run Policy
If government intervenes
Monetary Policy
Fiscal policy
Justify: Dynamic feedback effects
Recessionary gap
Self-correction (SR-AS)
Expectations, self-full filling prophesy
If market is left on its own
shifts in SR-AS
changes in factor prices
4. Classical Long Run Policy Model
(optional readings)
Supply-side Policies
Say's Law
3. Sources of Growth
Institutions
Investment and Capital
Available Resources
Technological Development
Entrepreneurship
2. Models
Classical Growth Model
Solow Growth Model (1956))
Savings-Investment-Capital Accumulation
Diminishing MPK, MPL
Steady-state
Harrods-Domar Growth Model (1940's)
Savings-Investment; Labor; Technology (A)
Policies (higher S, n, A)
New Growth Theory (ignore)
Technology
Learning by Doing
Knowledge
Increasing Returns
AD-AS Model (LAS); Production Possibility Curve
2. Aggregate Demand (AD) & Aggregate Supply (AS) Model
c. Equilibrium AD-AS
Long Run Adjustments
Recessionary Gap
Inflationary Gap
Short run Equilibrium
Shifts in AD
Shifts in SR-AS
Apply to 4 scenarios for US data
b. Aggregate Supply (AS) SR and LR
Upward Sloping (New Keynesian)
Sticky Wage
Sticky Prices (Menu Cost)
Perfectly Inelastic (Classical)
Perfectly Elastic (Keynesian)
Shift in SR-AS
Recessionary gap
Expansionary gap
Shifts in LR-AS
a. Aggregate Demand (AD)
Why AD Downward Sloping
International Effect
Money Wealth Effect
Interest Rate Effect
Optional: Derive AD from IS-LM Model
Background
Different school of thoughts / New Synthesis
Watch 2/3 videos
Data (US and Singapore)
Combine AD-AS (SR-midpoint-LR)
Session 12: Financial Sector and Monetary Policy
ignore
1. Functions of Money
Liquid
Unit of Account/Medium of Exchange/Store of Wealth
2. Different Measures of money
Monetary BASE
R: Reserves in BANKS
Required Reserves
Excess Reserves
C: Cash & Coins in CIRCULATION (or, M0)
MB = C + R = Currency in CIRCULATION + Reserves in BANKS
M0 / M1 / M2 / M3
Examples: US and Singapore Money Supply
4. Transmission of Monetary Policy
Goals of Central Bank
Stable Prices
Moderate l/t i/rates
Max Employment
Expansionary MP
Contractionary MP
Taylor Rule
MP after Great Recession
3. Print and Create Money / Fractional Reserve Banking
Central Bank (prints and issues bills): Treasury Department
Commercial bank (fractional reserve banking)
Money multiplier = 1 / Reserve Ratio
Reserve Requirement Ratio
Fed Funds Rate
Reserve Ratio
Session 12: Revision Week
C. Revision
A. Administrative Announcement
Tips for Final Exam
Course Feedback
Preliminary Release of Online Assessment
B. Group Discussion
Surviving the trade war (July 2019)
Identify 4 concepts
Explain
Analyze
Evaluate