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Economics - Coggle Diagram

- - - - Resources have alternative uses
      - Choices must be made to achieve the highest possible level of satisfaction
      - Choices to make:
        
        What and how much to produce
        
        How to produce
        
        For whom to produce
    - - Limited resources
        
        Land
        
        Labour
        
        Capital (factories/machines/tools)
        
        Entrepreneurship
      - Unlimited wants
        
        Desire for higher levels of consumption leads to unlimited wants
        
        Wants are satisfied by consumption of goods and services
    - - Next best alternative forgone
      - Free goods (air, dead leaves) have no opp cost as it can satisfy all existing wants so nothing is given up
      - Law of increasing opp cost
        
        As more of one good is produced, larger and larger quantities of alternative goods are sacrificed
    - - Shows all the different maximum attainable combinations of goods and services that can be produced in an economy when all available resources are fully and efficiently used at a given state of technology
      - Points inside curve are attainable but inefficient
      - Points outside are preferred but unattainable
      - Illustrating CPE
        
        Scarcity
        
        Combinations outside the PPC cannot be obtained although the economy may desire it
        
        Choice
        
        All combinations of goods on or bounded by PPC are attainable, but the economy can only have one of the alternatives
        
        Opp cost
        
        Negative slope of PPC, increasing one good decreases the other
        
        Law of increasing opp cost
        
        Concave PPC (relative to origin), each additional unit of capital goods produced requires the sacrifices of more and more consumer goods and vice versa
        
        X: 10, 20, 30, 40; Y: 18, 30, 40, 45
        
        Constant opp cost, straight line PPC
      - Illustrating economic growth
        
        Actual growth
        
        Outward movement of point inside PPC
        
        Potential growth
        
        Increase in production of both goods
        
        Outward shift of PPC
        
        Increase in production of one good
        
        Pivotal shift of PPC
        
        Current consumption vs economic growth
        
        Choosing to produce more consumer goods leads to less economic growth, smaller outward shift in PPC
        
        Choosing to produce more capital goods leads to larger outward shift in PPC
    - - Increase in an economy's level of output or GDP over time
      - Actual growth
        
        If economy is not fully utilising its resources, actual growth is achieved by encouraging greater use of existing resources or utilising resources more efficiently resources
      - Potential growth
        
        Increase in quantity of available resources
        
        More intensive exploration to discover new mineral deposits
        
        Greater investment of resources into capital goods
        
        Encourage population growth to grow workforce
        
        Improvement in quality of available resources
        
        Upskilling workforce
        
        Irrigation/fertiliser application
        
        Improvement of technology
    - - Information
      - Perspectives
      - Intended Consequences
      - Costs
      - Unintended Consequences
      - Benefits
      - Changes (internal/external)
      - Constraints
  - - - Demand: quantities of a good/service that consumers are willing and able to buy at various prices over a given time period, ceteris paribus
      - Supply: quantities of of a good/service producers are willing and able to offer for sale at various prices over a period of time, ceteris paribus
    - - Demand curve
        
        Law of diminishing marginal utility
        
        As more and more units of a good/service are consumed, additional utility a consumer derives from successive units eventually decreases
        
        As marginal utility falls, willingness to pay decreases so price decreases
        
        Law of demand
        
        There is an inverse relationship between price and quantity demanded of a good, c.p., resulting in negative slope of demand curve
        
        Demand curve represents the maximum price consumers are willing and able to pay for each quantity of a good/service
      - Supply curve
        
        Law of supply
        
        There is a direct relationship between price and quantity supplied of a good, c.p., resulting in positive slope of supply curve
        
        Supply curve represents the minimum price at which producers are willing and able to supply at each quantity
      - Equilibrium price and quantity
        
        The supply curve and demand curve intersect at a point which corresponds to the equilibrium price and equilibrium quantity
        
        Quantity demanded=quantity supplied at equilibrium price
        
        Surplus and shortage
        
        Surplus
        
        When price is above Peq, Qs>Qd
        
        Signals to producers to lower prices to increase Qd, Qs will decrease
        
        Shortage
        
        When price is below Peq, Qs<Qd
        
        Signals to producers to increase prices to increase Qs, Qd will decrease
      - Total revenue/total expenditure
        
        Area (0PeEQe)
      - Consumer surplus
        
        Difference between what buyers are willing and able to pay and what they actually pay
      - Producer surplus
        
        Difference between what a producer is willing and able to put up for sale and the actual price charged
    - - Change in quantity demanded/supplied (caused by price)
        
        Movement along curve
      - Change in demand/supply (caused by non-price factors)
        
        Shift in curve (right or left)
        
        Factors affecting demand
        
        Consumer Income (see YED)
        
        Inferior goods (public transport)
        
        As income increases, demand for inferior goods increases
        
        Normal goods (car)
        
        As income increases, demand for normal goods increases
        
        Prices of related goods (see CED)
        
        Substitutes (coke and pepsi)
        
        Increase in price of substitutes cause increase in demand
        
        Complements (burger and fries)
        
        Increase in price of complement leads to decrease in demand
        
        Tastes and preferences
        
        Fashion/trend
        
        Advertising
        
        Government policies
        
        Seasons/Festivals
        
        Demographics (market size, age, gender)
        
        Consumer's expectations (expected income, prices, demand)
        
        Factors affecting supply
        
        No. of producers (intuitive)
        
        Cost of production (intuitive)
        
        inputs (raw materials), state of technology, efficiency, government policies
        
        Prices of related goods
        
        Competitive supply (corn and wheat)
        
        Joint supply (beef and leather)
        
        Supply shocks
        
        Climatic conditions
        
        Abnormal circumstances
        
        Producers' expectations
      - Simultaneous shifts
        
        either change in Peq or Qeq will be indeterminate
    - - Cross elasticity of demand (CED)
        
        dor of demand to changes in price of related goods
        
        Positive cross elasticity
        
        Strong substitute CED>1
        
        Weak substitute 0<CED<1
        
        Negative cross elasticity
        
        Weak complement -1<CED<0
        
        Strong complement CED<-1
      - Income elasticity of demand (YED)
        
        dor of demand to changes in income
        
        Positive income elasticity
        
        Income elastic (YED>1)
        
        Luxury goods
        
        Income inelastic (0<YED<1)
        
        Necessities
        
        Negative income elasticity
        
        Inferior goods
        
        Factors affecting YED
        
        Nature of the good
        
        Level of income of customers (affects what is perceived as necessities/luxury/inferior)
      - Price elasticity of demand (PED)
        
        degree of responsiveness (dor) of quantity demanded to changes in price (dQd/Qd)/(dP/P)
        
        Elastic (|PED|>1)
        
        change in price results in more than proportionate change in quantity demanded
        
        Inelastic (0<|PED|<1)
        
        change in price results in less than proportionate change in quantity demanded
        
        PED is always negative since increase in quantity demanded leads to decrease in price
        
        Factors affecting PED
        
        Availability of substitutes (number and closeness)
        
        Degree of necessity
        
        Proportion of income
      - Price elasticity of supply (PES)
        
        dor of quantity supplied to changes in price
        
        Always positive since increase in quantity supplied leads to increase in price
        
        Inelastic (PES<1)
        
        Elastic (PES>1)
        
        Factors affecting PES
        
        Spare capacity (unused manpower/resources)
        
        Nature of production
        
        Degree of factor mobility (how fast you can move resources and increase productivity)
        
        Length of production period (Crops take a while to grow so a few years needed to adjust, supply is price inelastic)
        
        Ease of accumulating inventory
        
        Time period (most goods elastic in long run and inelastic in short term)
      - Limitations
        
        Ceteris paribus assumption
        
        Demand elasticities neglect cop
        
        Lack of perfect information
    - - Tax
        
        Direct tax
        
        Indirect tax
        
        Specific (fixed amount)
        
        Upward parallel (leftward) shift in supply curve
        
        Vertical distance between S0 and S1 is the tax amount
        
        Ad valorem (percentage)
        
        Supply curve pivots about origin
        
        Purpose of indirect tax
        
        Raise tax revenue
        
        Reduce consumption of undesirable goods
      - Subsidy
        
        Artificially lower costs
        
        Downwards (rightwards) shift in supply curve
        
        Consequences of subsidy
        
        Producer income increased
        
        Lower price for consumers
        
        Higher quantity exchanged
        
        Transfer of income from taxpayers to producers
        
        Allocation of resources to subsidised industries
        
        Strain on govt budget
      - Price control
        
        Price floor
        
        Legally established minimum price above the market equilibrium price
        
        Purpose
        
        Protect producer income
        
        Create surplus to store for future shortages
        
        Minimum wage to reduce poverty and inequality
        
        Effects
        
        Change in expenditure depends on PED
        
        Creates surplus (unemployment in the case of min wage)
        
        Decrease in consumer surplus
        
        If govt buys up excess
        
        Producer surplus increase
        
        Revenue increases
        
        Excess not bought
        
        Black market, goods sold illegally below minimum price
        
        Price ceiling
        
        Legally established maximum price below market equilibrium price
        
        Purpose
        
        Keep price of good affordable to majority
        
        Prevent exploitation by suppliers during times of shortage
        
        Stabilise prices
        
        Effects
        
        Shortage (rationing)
        
        Consumer surplus increase
        
        Producer surplus decrease
        
        Decrease in expenditure/revenue
      - Quantity control
        
        Quota
  - - - The free market does not always allocate scarce resources efficiently in a way that maximises society's welfare
      - Marginal Private Benefit/Cost
        
        MPB: the benefit consumers gain from consuming an additional unit of a good
        
        MPC: the cost producers incur from producing and additional unit of a good
        
        Demand and supply curves can be used to represent MPB/MPC respectively
      - Marginal Social Benefit/Cost
        
        MSB: benefit to society from the consumption or production of an additional unit of a good
        
        MSC: cost to society from the consumption or production of an additional unit of a good
        
        Social Welfare is maximised when MSB=MSC
        
        Below Qm, MSB>MSC, more resources can be allocated to production and consumption of the good
        
        Above Qm, MSB<MSC, less resources can be allocated to production and consumption of the good
        
        At Qm, MSB=MSC in the absence of market failure
    - - Externalities
        
        Marginal External Benefit/Cost
        
        MEB: benefit to third parties from the consumption or production of an additional unit of the good
        
        MEC: cost to third parties from the consumption or production of an additional unit of the good
        
        MSB=MPB+MEB
        
        MSC=MPC+MEC
        
        Negative externalities
        
        External costs cause a divergence between private and social costs so MSC>MPC
        
        MSC intersection with MSB is the socially efficient quantity Qs<Qm
        
        Left-pointing triangle bound by Qs and Qm represents deadweight loss
        
        Cost is incurred by third parties due to the production or consumption of a good without compensation
        
        Positive externalities
        
        External benefits cause a divergence between private and social benefits so MSB>MPB
        
        Right pointing triangle bounded by Qs and Qm represents deadweight loss
        
        Production or consumption of a good generates external benefits for third parties without compensation
        
        Solutions
        
        Negative production externalities
        
        Taxes
        
        By imposing a tax such that Tax=MEC at Qs, there will be an upward shift in the MPC curve such that Qs becomes the new market equilibrium quantity, externality is internalised
        
        Limitations: Lack of info, impractical to have different tax rates depending on pollution levels
        
        Regulation
        
        Require by law that producers equip factories with emission reduction devices and enforce by conducting checks and imposing fines/suspensions
        
        Limitations: lack of compliance, high administrative costs, blunt instrument, unsustainable
        
        Total ban on product
        
        Only when MEC is large such that MSC is much higher than MSB so there is a net welfare gain from imposing the ban
        
        Tradable/marketable permits (quota)
        
        Government places a cap on the total permissible level of pollution based on estimates of what level is socially efficient
        
        Firms are issued permits which allow a certain amount of pollution, permits can be traded between firms
        
        Advantages: efficient distribution of permits, incentive to reduce pollution
        
        Limitations: lack of perfect information, compliance and admin
        
        Negative consumption externalities
        
        Taxes
        
        Regulations
        
        Positive consumption externalities
        
        Subsidies
        
        By giving a subsidy such that subsidy=MEB at Qs, there is a downward shift in the MPC curve such that Qs becomes the new market equilibrium quantity, externality is internalised
        
        Limitations: Lack of info, opportunity cost for government budget
        
        Unintended consequences: inefficiency, budget strain
        
        Direct provision from government
        
        Government provides goods and services with positive externalities, may not be free
        
        Limitations: inefficiency, poor service standard, budget
      - Public goods
        
        Public goods are goods and services that have the characteristics of non-excludability and non-rivalry in consumption
        
        The free market fails to allocate any resources to produce such goods that can enhance the welfare of society
        
        Characteristics
        
        Non-excludability
        
        Consumption of a good or service cannot be limited to paying consumers
        
        Non-rivalry
        
        The consumption of a good or service by one consumer does not reduce its availability to another consumer
        
        Non-rejectability
        
        Inability of a consumer to refuse the consumption of a good once it is produced
        
        Solutions
        
        Direct provision by government
        
        Free market will not provide public goods, government has to provide them to enhance society's welfare
        
        Government's objective is not to maximise profits but social welfare
        
        May be provided by government or outsourced to private company with cost born by government
        
        Limitations
        
        Lack of information
        
        Lack of public funds
        
        Political Pressures
        
        Implications
        
        Free ridership
        
        Due to non-excludability, people can free-ride on a good by receiving benefits of a good without paying
        
        No price signals
        
        Market will not provide good due to lack of price signals arising from free ridership
        
        No user charge
        
        Marginal cost of providing a public good to an additional consumer is 0. Since Peq=MC, so producers cannot profit and the market does not provide the good
      - Information failure
        
        Imperfect information
        
        Incorrect information
        
        Consumers make bad choices as they have been misinformed or receive the wrong information from sellers
        
        Ignorance
        
        Consumers are ignorant to the actual benefits of a product and over/underestimate the MPB
        
        Due to low frequency of consumption and lack of experience, a consumer may not be able to accurately assess the true MPB
        
        Imperfect info on MPB
        
        Consumers will consume at Q1 where MPB perceived=MPC based on imperfect information
        
        Over/underconsumption Q2-Q1 where Q2 is the equilibrium quantity with perfect information
        
        Divergence between actual and perceived MPB
        
        Deadweight welfare loss of area ABC (points from Q1 to Q2)
        
        Imperfect info on MPC
        
        Consumers will consume at Q1 where MPC perceived=MPB based on imperfect information
        
        Rest is the same
        
        Divergence between actual and perceived MPC
        
        Solutions
        
        Education/Moral suasion
        
        Use morality to influence and change behaviour instead of force
        
        Limitations
        
        Loopholes in regulation
        
        Education is a long-drawn process
        
        Effectiveness of education depends on consumer response
        
        Addictive products may not be affected as much by education
        
        Regulation
        
        health warnings
        
        laws protecting against imperfect information
        
        laws protecting the ignorant (children)
        
        The free market allocates resources on the assumption that all consumers and producers have full or perfect information about the market and products and hence are able to make optimal choices to maximise their welfare
        
        Asymmetric information
        
        Economic agents involved in a transaction (consumers and producers) do not have the same amount of knowledge, resulting in distortion of incentives and inefficient market outcomes
        
        Adverse selection
        
        Occurs when a good is mainly bought or sold by a certain segment of the more informed party that would harm the uninformed party
        
        Knowledgeable sellers
        
        Used car market: Used car dealers have more information regarding a car's condition than the buyer and will hide some information from buyers to profit. Buyers take this into consideration and are willing to pay lower prices. Sellers of good cars are unwilling to sell at these prices so only low quality cars are sold
        
        Knowledgeable buyers
        
        Health insurance market: Buyers know more about their health than sellers and may conceal certain information. Higher risk individuals more likely to buy health insurance and opt for higher levels of coverage
        
        Moral hazard
        
        One party has more information than the other and changes his behaviour after the transaction as the costs are borne by the other party
        
        Effects
        
        Reduced market size
        
        Adverse impact on low-risk consumers
        
        Risky behaviour from insured parties
        
        Underconsumption by low-risk consumers
        
        Solutions
        
        Mandatory coverage
        
        Laws to prevent opportunism (anti-lemon laws) to prevent sellers from selling defective goods
        
        Equalising information (screening and signalling)
      - Immobility of factors of production
        
        Resources cannot respond to incentives to produce goods and services demanded by customers or disincentives to stop or cut production, productive efficiency is not obtained
        
        Labour immobility
        
        Occupational immobility
        
        Workers are unable to switch to different jobs immediately as they lack the right skills
        
        Geographical immobility
        
        Social ties and costs involved in moving
        
        Capital immobility
        
        Functional immobility
        
        Difficult to transfer from one use to another
        
        Geographical immobility
        
        Difficulty of transport
        
        Solutions
        
        Policies to overcome occupational immobility
        
        Retraining/reskilling
        
        Limitations
        
        Success/uptake rate
        
        Funding
        
        Policies to overcome geographical immobility of labour
        
        Bring workers to work
        
        Better transportation
        
        Affordable housing
        
        Bring work to workers
        
        Decentralise business centres, provide incentives for businesses to relocate
        
        Policies to overcome capital immobility
        
        Provide incentives to invest in new capital or relocate
        
        Limitations
        
        High risk due to information failure (government dk where to invest)
        
        Lack of compliance (misuse of funds)
      - Market dominance
        
        Quantity supplied is restricted in order to maximise profits, resulting in deadweight welfare loss
        
        Solutions
        
        Prevention/Prohibition
        
        Prevent monopolies from forming or prohibit monopolies from abusing their dominant position
        
        Deregulation
        
        Increase competition to keep prices competitive and improve efficiency
        
        Price regulation
        
        Force monopoly to charge a price equal to MC
    - - Efficient allocation may not result in equitable outcomes
        
        Markets unable to provide for those who lack purchasing power due to income and wealth inequality
        
        The poor are unable to gain access to essential goods and services, resulting in inequity, government must intervene to provide them
        
        Equity is normative, some goods are universally essential while others are subject to the values of different societies (e.g. petrol)
      - Equity is fairness in the distribution of economic welfare
      - Income inequality is the extent of income disparity between high and low income households (measured using Gini coefficient)
      - Solutions
        
        Progressive income tax
        
        Limitations: Too progressive --> no incentive to work
        
        Subsidies
        
        Tax collected is redistributed to low-income households
        
        Minimum wage
        
        Limitations: increases unemployment
        
        Training and skills upgrading schemes
        
        Close the gap in education and qualifications
        
        Workfare income supplements
        
        Immediate help to the low income, does not incentivise unemployment
    - - Definition: Government intervention results in greater market inefficiencies than would otherwise occur
      - Information failure/gap
      - Bureaucratic inefficiency
      - Costs of administration and compliance
      - Political factors
        
        Tendency to look for short term solutions
        
        Pursuit of self-interest
        
        Electoral pressures
        
        Lack of voter/political support
      - Unintended consequences (COE makes ppl drive more to get their money worth, worsening congestion)
      - Policy conflicts
  - - - Profit maximisation
        
        Total revenue exceeds total costs by the greatest amount
        
        Addition to total revenue from the sale of the last unit is equal to the addition to total cost of producing it (MC=MR)
        
        Reasons why firms do not operate at profit maximising output
        
        Lack of information and knowledge
        
        implicit costs are hard to compute
        
        hard for firms to gauge demand accurately and continuously
        
        Short term profit maximisation not in the long term interest of the firm
      - Alternative objectives
        
        Sales revenue maximisation
        
        Increase production to MR=0
        
        Increase market share
        
        Sales volume maximisation (market share dominance)
        
        Market share dominance can be measured in terms of output and sales revenue
        
        Engage in extensive product development to differentiate its good
        
        Increase market share in the short run, once good becomes PED inelastic
        
        Profit satisficing
        
        Shareholders seek profit while managers wish to grow the firm
        
        Attain reasonable profits to satisfy shareholders
    - - Costs of production
        
        Explicit costs
        
        Costs incurred when actual monetary payment is made
        
        Implicit costs
        
        Do not involve direct payment of money
        
        Involves opportunity cost
        
        Short run
        
        At least one fixed factor
        
        Output can only be adjusted by changing the quantities of variable factors
        
        Long run
        
        All factors of production variable
        
        Planning ahead to build an appropriate scale
        
        Minimum efficient scale output (lowest point on LRAC curve)
        
        EOS and DOS
        
        Internal economies of scale
        
        Fall in unit cop when firm increases output by expanding its scale of production
        
        Sources
        
        Bulk purchase
        
        Spreading out fixed costs
        
        Division of labour/specialisation
        
        External economies of scale
        
        Fall in unit cop due to growth in the industry
        
        Sources
        
        More firms enter to operate at a locality
        
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        Sharing and disseminating information
        
        Internal diseconomies of scale
        
        Rise in unit cop when firm increases output by expanding its scale of production
        
        Sources
        
        Managerial difficulty
        
        Low morale
        
        External diseconomies of scale
        
        Rise in unit cop due to growth in the industry
        
        Sources
        
        Higher input prices
        
        Increased strain on infrastructure
        
        Shifts in LRAC curve
        
        When scale of production changes, movement along the LRAC curve
        
        External economies/diseconomies of scale cause curve to shift down or up respectively
        
        Total cost
        
        Total cost=total fixed cost+total variable cost (TC=TFC+TVC)
        
        Marginal cost
        
        Additional cost arising from an additional output (dTC/dQ)
        
        Average cost
        
        Cost per unit of output (AC=AFC+AVC=TC/Q)
      - Revenue
        
        Total revenue
        
        Total earnings per period of time from the sale of output
        
        Average revenue
        
        Amount earned per unit sold (TR/Q)
        
        Marginal revenue
        
        Additional revenue obtained when one more unit of output is sold (dTR/dQ)
      - Types of economic profit
        
        Normal (TR=TC)
        
        Subnormal (TR<TC)
        
        Supernormal (TR>TC)
      - Factors affecting profit, price and output
        
        Demand changes cause AR and MR to change, affecting equilibrium price and output
        
        Changes in fixed costs cause change in profit but not equilibrium price and output (AC shifts, MC still intersects minimum)
        
        Changes in variable costs cause equilibrium price and output to change (MC and AC shift)
    - - Market Structures
        
        Monopolistic Competition
        
        Differentiated goods (independence)
        
        Little to no BTE
        
        Many small firms (can start after 3 yrs of working)
        
        Imperfect knowledge
        
        Oligopoly
        
        Homogenous or differentiated product
        
        High BTE
        
        A few dominant firms (roughly <50)
        
        Imperfect knowledge
        
        Perfect Competition (imposssible)
        
        Many small firms and consumers
        
        Horizontal demand curve
        
        Price taker
        
        Homogenous product
        
        No barriers to entry and exit
        
        Producers and consumers have perfect knowledge of the market
        
        Monopoly
        
        Single seller
        
        Imperfect knowledge
        
        High barriers to entry and exit
        
        Substantial internal EOS
        
        Monopoly able to charge lower prices than new entrant
        
        Control of essential raw materials and wholesale/retail outlets
        
        Legal barriers (patents/copyrights)
        
        Brand loyalty
        
        Unique product
        
        PED inelastic
      - Non-price strategies
        
        Marketing
        
        Efforts taken by a firm to promote its product, usually advertising but can include free gifts, samples and lucky draws
        
        Innovation
        
        Effort by a firm to come up with new, improved or differentiated products, raising market power as demand for products increases and products become more PED inelastic.
        
        Can also apply to production process to raise productivity or lower costs
        
        Growth
        
        Expansion
        
        External
        
        Mergers and Acquisitions
        
        Horizontal integration
        
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        Side effects
        
        Debt from financing acquisition
        
        Poorer product quality
        
        Diseconomies of Scale
        
        Benefits
        
        Increase firm's capacity and market share rapidly
        
        Cost rationalisation (no need for duplicate factors)
        
        Internal
        
        Increase in scale of production
        
        Generally inferior to merger
        
        Diversification
        
        Mergers and Acquisitions
        
        Conglomerate integration
        
        Firms from different industries merge for risk diversification (risk spread out)
        
        Vertical integration
        
        Firms in different stages of production (forward and backward integration)
        
        Side effects
        
        Risk from entering unknown market
        
        Benefits
        
        Economies of scope
        
        Protection from competitors
        
        Revenue advantages
        
        Capture market share and increase market power
        
        PED inelastic --> Pricing power
        
        Larger revenue enables non-price competition like product development and promotion
        
        Cost advantages
        
        Increase IEOS
        
        Cooperation/Collusion
        
        Situation where firms in a market cooperate to jointly fix prices or output
        
        Big firms may cooperate in the area of R&D if costs are high and the pace of technical change is rapid by pooling knowledge and agreeing on technical standards
        
        Cartel
        
        Formal collusive agreement, causing oligopoly to behave like a monopoly
        
        Agreement sets monopoly price and allocates the output among members usually according to market share
        
        Tacit collusion
        
        Unwritten agreement
        
        Following the pricing policy of a recognised leader, usually the firm with largest market share
      - Pricing Strategies
        
        Predatory pricing
        
        Selling products below average cost in order to force competitors out of the market
        
        May start price war in oligopoly, quality of goods drops
        
        Price rigidity
        
        In an oligopoly, rivals will match any price decrease initiated by any one firm but will not match price increases according to kinked demand theory
        
        Raising prices causes more than proportionate fall in Qd
        
        Lowering prices causes rivals to lower prices so as to preserve market share, less than proportionate increase in Qd
        
        Limit pricing
        
        Setting prices slightly higher than average cost but lower than that of potential rivals, creating an artificial entry barrier and preventing new firms from entering the market
        
        Price discrimination
        
        Charging different prices for the same product to different groups of consumers, not due to differences in costs
        
        Conditions
        
        Price setter with a degree of monopoly power
        
        Different markets wth different PEDs
        
        Separate markets and prevent resale
        
        Benefit
        
        Improve equity by making good/service available to lower income groups
        
        Reinvestment in R&D, innovation, lower costs and lower prices, benefiting society
        
        Costs
        
        Fall in consumer surplus for consumers with price inelastic demand, producers profit at the expense of these consumers
      - Decision to shut down
        
        Short-run
        
        If AR>AVC, continuing production can help to cover some of the start up capital
        
        If AR<AVC, shut down temporarily to avoid incurring further losses until conditions are more favourable
        
        Long run
        
        Shut down permanently and leave the industry if TR<TC
      - Other influences on firm behaviour
        
        Behavioural economics
        
        Technological disruption
        
        Corporate social responsibility
    - - Efficiency
        
        Allocative Efficiency
        
        Output level where society's welfare is maximised (P=MC)
        
        If P>MC like for price setters, firm is allocative inefficient and society would benefit from production of additional units of the good
        
        Dynamic Efficiency
        
        Firms invest in technology so productivity and product quality increase over time
        
        Innovation is used to erect barriers to entry, reduce costs and increase revenue, helping to retain supernormal profits in the long run
        
        Productive Efficiency
        
        Achieved when a given level of output is produced at the lowest cost (any point on LRAC)
        
        X-inefficiency
        
        Large dominating firms may become complacent and inefficient without competitive pressures as cost controls become lax. COP is higher than necessary so AC and MC are higher than on LRAC and LRMC curves.
      - Impacts of firms' strategies & decisions on efficiency and consumer welfare
        
        Price and output
        
        Collusion results in higher prices so consumers are adversely affected
        
        Competitive oligopolies price rigidity ensures consumers enjoy low prices even if costs have risen
        
        Price discrimination may reduce consumer surplus
        
        Predatory pricing and price wars may benefit in the short term until competitors exit
        
        Variety and quality of products
        
        Innovation actually improves variety and quality
        
        Advertising and branding only give the illusion of improvement
      - Government policies towards market dominance
        
        Reasons for government intervention
        
        X-inefficiency
        
        Dynamic inefficiency
        
        Allocative inefficiency
        
        Worsened equity
        
        Objectives of government intervention
        
        Improve consumer welfare and equity
        
        Promote economic efficiency
        
        Ensure big firms remain viable and innovative
        
        Policies
        
        Increase competition with competition/antitrust laws
        
        Prevent formation of monopolies/cartels
        
        Prevent the abuse of dominant position (predatory pricing)
        
        AR/MR shift left and become more price elastic
        
        Antitrust laws may be a blunt instrument as some mergers are to reduce costs through joint production
        
        Regulation
        
        Regulate prices by marginal cost pricing (P=MC)
        
        More common for natural monopolies (small market or high fixed costs, MES is very large)
        
        Reduction in supernormal profits disincentivises R&D
        
        Public ownership
        
        Government runs the firm but has no incentive to keep the firm profitable. P=MC for allocative efficiency and equity improves
- - - - The continuous cycle of production and consumption within an economy enables us to satisfy our material wants
    - - Internal goal
        
        Domestic price stability (low, stable inflation rate)
        
        Full employment
        
        Economic growth (Non-inflationary, sustainable, inclusive)
      - External goal
        
        Favourable balance of trade position (X-M)
    - - Price instability (High inflation or deflation)
      - High unemployment
      - Negative, slow or inflationary economic growth
      - Persistently large balance of trade defecit
    - - Purpose
        
        To track the economic performance of a country
        
        Indicate the overall standard of living of the people in the country
      - GDP
        
        Market value of all final goods and services newly produced within the geographical boundary of an economy in a given period of time (one year)
        
        Real vs Nominal GDP
        
        Real
        
        Measured at constant/base year prices
        
        Effects of price changes removed
        
        Nominal
        
        Effects of price changes not removed
        
        Measured at current market prices
        
        Real GDP = Nominal GDP/GDP deflator x 100
        
        Growth in real NI (% change) = growth in nomination NI (% change) - inflation (%)
        
        National income --> household income --> purchasing power --> consumption of goods --> material SOL
      - GNI/GNP
        
        Market value of all final goods and services newly produced anywhere in the world from resources belonging to residents of a country on a given time period (one year)
      - Net factor income from abroad (NFIA) = factor income from abroad (FIFA) + factor income paid abroad (FIPA)
      - GNI=GDP+NFIA
      - National income: Y=PxQ
      - Difficulties
        
        Ommisions in measurement
        
        Illegal activities
        
        Unreported activities
        
        Non-marketed activities
        
        Double counting
        
        Difficulty in obtaining reliable, complete information
    - - Material well-being
        
        Quantity and quality of goods and services available to residents for consumption
        
        Measured by real GDP per capita
      - Non-material well-being
        
        Intangibles/quality of life (working hours, stress level, pollution level)
      - Standard of living refers to the level of well-being or welfare enjoyed by an average person or resident of a country
      - Comparison
        
        Limitations to using national income statistics
        
        Inter-temporal comparison
        
        Non-material
        
        Changes in negative externalities
        
        Pollution, congestion, destruction of environment not counted
        
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        Changes in disamenities
        
        Longer working hours/stress also not counted
        
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        Material
        
        Changes in population
        
        GDP per capita ofc u need to look at population lah
        
        Changes in composition of NI
        
        Industrial machines and military goods (capital goods) are not consumed by consumers and do not contribute to standard of living
        
        Changes in price level
        
        If prices go up but output is the same living standards don't actually increase its just inflation. Use real GDP/GNI not nominal since it keeps price constant
        
        Changes in distribution of NI
        
        GDP per capita is only an average, does not account for income disparity
        
        Gini coefficient and Lorenz curve are better measures of income distribution
        
        International comparison
        
        Material
        
        Different currencies involved
        
        Comparison cannot be made using different currencies, must standardise (to USD)
        
        Fluctuation in market exchange rate
        
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        Differences in population
        
        Differences in composition of NI
        
        Differences in distribution of NI
        
        Different sizes of the non-monetised sector
        
        Less developed countries have more farming communities, where housewives, unpaid family workers and subsistence farming are all not counted in GDP
        
        Differences in availability and reliability of data
        
        Greenland and Africa + inaccuracy for bigger countries
        
        Non-material
        
        Differences in negative externalities
        
        Differences in disamenities
    - - Human Development Index (HDI)
        
        weighted average of GNP per capita, life expectancy and educational attainment
      - Net Economic Welfare (NEW)
        
        adds leisure and non-marketed activities and subtracts costs of pollution and disamenities from GNP
  - - - Firms
        
        Factor incomes (wages, rent, interest, profit)
      - Households/Consumers
        
        Consumer expenditure on goods and services (C)
      - At equilibrium
        
        national income = national expenditure = national output
        
        J=W
      - Governments
        
        Government expenditure (G)
        
        Injection into the circular flow
        
        Taxes (T)
        
        Withdrawal from the circular flow
      - External/Foreign Trade
        
        Imports (M)
        
        Withdrawal since money leaks out of local economy
        
        Exports (X)
        
        Injection since people overseas are creating income for domestic households and firms
      - Withdrawals (W) = Savings (S)+M+T
      - Injections (J) = Investment(I)+X+G
    - - "succinct" multiplier paragraph
        
        An injection will generate income for individuals employed by firms whose goods and services are initially being demanded for. These individuals will spend a proportion of the additional income on induced consumption, depending on their MPC, and the rest will be withdrawn as savings, taxes and import spending. The increase in induced consumption creates income for individuals employed in other sectors, who will then spend their additional income on induced consumption. This cycle of spending and re-spending will continue until the increase in income becomes negligible. The eventual increase in national income is several times the initial increase in injection. The multiplier, k, represents how many times the national income increases with respect to the initial change in injection.
      - ΔY=kΔJ, where k is the multiplier
      - k=1/(1-MPC)=1/MPW
        
        Marginal Propensity to Consume (MPC)
        
        Marginal Propensity to Withdraw (MPW)
        
        MPW=MPS+MPT+MPM
        
        Marginal Propensity to Tax (MPT)
        
        Progressiveness of tax system
        
        Marginal Propensity to Save (MPS)
        
        Social security system
        
        Attitude towards thrift
        
        Interest rate
        
        Income level (richer ppl can afford to save)
        
        Marginal Propensity to Import (MPM)
        
        Attitude towards imports
        
        Openness of economy
      - Singapore's multiplier
        
        Although MPT is relatively low, MPM and MPS are high due to lack of natural resources and CPF and lack of pensions and unemployment benefits so multiplier is small
      - Autonomous vs Induced Expenditure
        
        Autonomous
        
        G, I, X assumed autonomous, kickstarts the multiplier process
        
        Induced
        
        Varies with income, increased consumption due to increase in income
    - - Aggregate Demand (AD)
        
        Total level of expenditure on all domestically produced goods and services by households, firms, governments and foreigners
        
        AD=C+I+G+(X-M)
        
        Consumption
        
        Factors affecting consumption
        
        Wealth
        
        Economic outlook/consumer confidence
        
        Income
        
        Government policy (CPF, tax)
        
        Economic growth --> economic outlook --> autonomous consumption --> income
        
        Availability and cost of credit
        
        Investment
        
        Types of investment
        
        Foreign direct investment (FDI)
        
        Investment in capital goods by foreign firms
        
        Residential housing
        
        Production or sale of residential housing is an investment as it can generate welfare for a prolonged period
        
        Business investment
        
        Fixed capital
        
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        Working capital
        
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        Factors affecting investment
        
        Marginal efficiency of investment (MEI)
        
        Expected rate of return on investment
        
        Factors affecting MEI
        
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        Interest rates
        
        Businesses usually take out loans to fund investments, if interest rate is lower than MEI, firm will invest and vice versa
        
        Government
        
        Types of government spending
        
        Recurrent expenditure (operation of publicly provided services)
        
        Fixed expenditure (infrastructure)
        
        Factors affecting government spending
        
        Budgetary considerations (tax, borrowing, reserves)
        
        Microeconomic factors
        
        Correcting market failure
        
        Macroeconomic factors
        
        boosting AD, output and employment during economic downturn
        
        spending on physical capital (infrastructure) and human capital (training/education) to raise future productive capacity
        
        reduce spending to curb AD, income and hence imports to deal with trade deficit
        
        Political factors
        
        Increased spending near elections for popularity, and on supporters and swing voters
        
        Net Exports
        
        Factors affecting net exports
        
        Income of foreign country affects demand for exports
        
        Domestic income affects expenditure on imports
        
        Price competitiveness of exports
        
        Exchange rates
        
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        Relative inflation rates
        
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        Non-price competitiveness of exports and imports
        
        Protectionism
        
        AD curve
        
        Downward sloping because of the inverse relationship between prices and real national output
        
        Change in general price level causes movement ALONG the AD curve. As GPL rises, wealth, interest rate and international trade effects causes consumers firms and foreigners to buy less domestic output
        
        Shift in AD curve
        
        When AD falls (due to CIGXM) AD curve shifts left and vice versa
      - Aggregate Supply (AS)
        
        Total output of G&S domestic firms produce and sell at each GPL for a given period of time
        
        Shape of AS curve
        
        Horizontal (Keynesian) range
        
        Large amounts of excess capacity and significant demand deficient unemployment
        
        Upward sloping (intermediate) range
        
        Production is close to full capacity, bottlenecks in resource supplies appear. Firms have to use increasingly less suitable resources resulting in rise in cop. Prices rise in order for firms to produce more.
        
        Vertical (Classical) Range
        
        Economy has utilised all available resources, operating at full employment/potential output, any rise in AD will only lead to higher prices
        
        Shifts in AS curve
        
        Vertical shift
        
        Cost of production
        
        As COP increases, AS falls and the AS curve shifts up
        
        Supply shock
        
        Positive supply shock implies increase in AS which causes the AS curve to shift down and vice versa
        
        Horizontal shift
        
        Change in productive capacity caused by change in quantity of resources
        
        Size of labour force
        
        Land and natural resources
        
        Investment in private capital stock
        
        Investment in public infrastructure
        
        Both
        
        Change in cop and productive capacity cause by change in quality (productivity) of resources
        
        Investment in human capital
        
        Improvement in technology
      - Macroeconomic equilibrium
        
        The equilibrium level of national income and real national output occur at the intersection between the AS and AD curves
        
        Types of equilibrium
        
        Near full employment equilibrium
        
        AD cuts intermediate range
        
        Spare capacity present but limited
        
        Full employment equilibrium
        
        AD just cuts vertical range
        
        No cyclical or demand-deficient unemployment
        
        Above full employment equilibrium
        
        AD cuts vertical range
        
        Increase in price with no increase in real national output
        
        Under full employment equilibrium (recession)
        
        AD cuts horizontal range
        
        Excess capacity, unemployment
  - - - Actual & Potential Growth
        
        Actual Growth
        
        Expansion or increase in an economy's level of output or real GDP over time
        
        Measured by rate of growth of real GDP (% change in RNY) over time
        
        Important terms and concepts
        
        Slowdown in economic growth
        
        GDP increases at a slower pace
        
        Negative economic growth
        
        Contraction in economic output over time
        
        Associated with economic recession
        
        Accompanied by unemployment
        
        Cyclical fluctuations
        
        Periodic changes in the value of economic activity
        
        Technical recession
        
        Economy contracts over 2 consecutive quarters
        
        Hard vs soft landing
        
        Hard: Sudden sharp or severe contraction in output
        
        Soft: Gradual slowdown of economy such that there is no major rise in unemployment
        
        Benefits
        
        Consumers
        
        Disposable income --> increased consumption --> higher mSOL
        
        Producers
        
        Increased levels of revenue and profits
        
        Government
        
        Create jobs and reduce unemployment
        
        Increased tax revenue to invest into potential, sustainable and inclusive growth
        
        Costs
        
        Price Stability
        
        Demand pull inflation if potential growth does not increase in tandem
        
        Structural unemployment
        
        Rapid growth --> innovation and technological changes leading to mismatch of skills
        
        Sustainability
        
        Depletion of natural resources
        
        -ve externalities (environmental pollution)
        
        Inclusiveness
        
        Growth presents more opportunities for the rich --> worsened income inequality --> social/political instability
        
        Current vs future consumption
        
        Potential Growth
        
        The increase in the productive capacity of the economy, which is the maximum output the economy is capable of producing given available resources and state of technology.
        
        Importance of achieving both
        
        Actual growth must be in tandem with potential growth for the economy to grow at an uninterrupted rate
        
        If potential>actual growth is too slow and causes demand-deficient unemployment
        
        If actual>potential prices rise as the economy overheats and experiences strong inflationary pressures
      - Sustainable growth
        
        Definition: Rate of growth which can be maintained without creating other significant economic problems, particularly for future generations. It implies a positive and stable growth rate over an extended period.
        
        Problem: Rapid growth today may cause environmental problems for future generations
        
        Depletion of resources
        
        Finite resources extracted at rapid rates may lead to future generations having insufficient amounts
        
        Trade off between goods currently produced and produced in the future
        
        Environmental pollution
        
        Negative externalities like air, water, noise pollution, traffic congestion brought about by industrialisation
        
        Measurement of sustainable growth
        
        Green GDP (GDP - Net Natural Capital Consumption)
        
        Environmental consequences of growth factored in such as resource depletion, environmental degradation, protective and restorative environmental initiatives
        
        Traditional measure of GDP is inadequate
        
        Natural resources are poorly represented in GDP
        
        Insufficient weight given to future benefits of protective and restorative projects
        
        Positive externalities arising from forests etc. and negative externalities like pollution unaccounted for
        
        Depletion of resources not accounted for
        
        Policies to achieve sustainable growth
        
        Prevent depletion of resources (Prevent overfishing, reduce dependency on fossil fuels)
        
        Reverse climate change (Switch to renewables, regulation on greenhouse gas emissions)
      - Inclusive growth
        
        Definition: Economic growth that is distributed fairly across society and creates opportunities for all
        
        Problem: Rapid economic growth resulting from strategies which emphasise specialisation in capital, knowledge, skill or technology widens income disparity
        
        Focuses on productive employment for all sectors of society rather than on income redistribution
        
        Policies to achieve inclusive growth (SG)
        
        Inclusive growth program
        
        Aims to catalyse industry redevelopment, promote inclusive growth and ensure sharing of productivity gains with workers through higher wages
        
        Companies provided with funding to enhance productivity and upskill workers while sharing gains of growth with them
        
        Strengthening social safety net
        
        Alleviating cost burden of lower/middle income groups to facilitate social mobility through tax rebates/GST vouchers/subsidies in healthcare and education
    - - Labour Force: People who are willing and able to work
      - Labour productivity: Output produced per man-hour
      - Unempl*yment
        
        Unemployment is the situation where people in the work force (willing and able to work) are unable to find employment
        
        Must be of legal working age, physically and mentally able and actively looking for a job
        
        Types of unemployment
        
        Demand-deficient/cyclical unemployment
        
        Recession --> low AD --> businesses suffer poor sales --> retrench redundant staff --> cyclical UnE
        
        Structural unemployment
        
        Mismatch of skills: job seekers have a different set of skills than what is required by employers
        
        Causes
        
        Technological advancement
        
        The skills needed to perform jobs or the location of jobs change. People made redundant in one sector cannot immediately find jobs elsewhere due to lack of skills or unwillingness to move
        
        Policies
        
        Protectionism
        
        Supply-side policies
        
        Restructure economy to create new jobs to replace old job loss
        
        Retrain existing workforce to fit into other available jobs in the economy
        
        Frictional unemployment
        
        Temporary unemployment experienced by fresh graduates/those in-between jobs
        
        Causes
        
        Lack of information
        
        Job seekers do not know who is hiring and prospective employers do not know who is interested in filling existing vacancies
        
        Expectations mismatch
        
        Job seekers have certain expectations that need to be met and will not always accept the first job offered, will be worsened by unemployment benefits, parental support and mindset of job seekers
        
        Policies
        
        Provide job information to improve efficiency of labour market
        
        Moderate job expectations
        
        Solve transport issues by improving transportation system affordability and quality or decentralising workplaces
        
        Others
        
        Seasonal unemployment
        
        People not needed year round (fruit pickers)
        
        Diversify economy
        
        Underemployment
        
        Employment of workers with high skill level in low wage jobs that do not require such abilities
        
        Disguised unemployment
        
        Farmers inviting relative to work on farm who does not contribute much to production
        
        Measuring unemployment
        
        Unemployment rate = (Unemployed/Labour force) x 100%
        
        Consequences of unemployment
        
        Consumers: decrease in income --> reduced levels of consumption --> lower mSOL (prolonged unemployment --> workers lose touch of their skills --> unable to gain employment; loss of self esteem; social cost)
        
        Producers: Reduced levels of profits and investment due to low consumption (Poor business sentiments/social instability drives away investors)
        
        Government: Economic growth, SOL threatened, budget deficit
      - Full employment
        
        Non-zero, low rate of unemployment that is compatible with price stability (Enough jobs to match job seekers)
    - - Price stability
        
        General price level in an economy increases at a low, stable, expected rate (no high inflation/deflation)
      - Inflation: sustained increase in general price level of an economy over time
      - Deflation: Sustained decrease in general price level of an economy over time (-ve inflation)
      - Measuring inflation
        
        Consumer Price Index (CPI)
        
        Measures the average level of prices of a basket of goods and services consumed by a typical household
        
        Comprises
        
        Basket of goods and services to represent typical household consumption
        
        Base year as a reference point for comparing prices over time
        
        Weights to take into consideration the relative importance of each item in the basket of goods by % of total expenditure
        
        Uses
        
        Measure of inflation
        
        Cost of living
        
        Wage adjustment
        
        Limitations
        
        Doesn't apply to households whose consumption patterns diverge from that of a typical household (create specific indices for different household types like by income or race)
        
        Expenditure patterns change in the long run so computation of CPI has to be periodically updated
        
        Change in quality of goods and services often unaccounted for
        
        Inflation Rate = (CPI2-CPI1)/CPI1 x 100%
        
        Degrees of inflation
        
        Mild inflation (<=2%)
        
        Creeping/Moderate inflation (6-7%) so tuff
        
        Hyperinflation (Prices rising so fast that money ceases to be a medium of exchange)
        
        Disinflation: price levels rise at a decreasing rate
        
        Core and headline inflation
        
        Headline inflation
        
        Measure of the total inflation within an economy including food and energy prices
        
        Core inflation
        
        Excludes volatile food and energy prices since inflation is not a measure of price fluctuations or price instability
      - Consequences of high inflation/deflation
        
        Costs of high inflation
        
        Consumers
        
        Erodes internal value of money, increases cost of living, reduces material living standards
        
        Discourages savings and increases consumption
        
        Income Distribution
        
        Winners: Variable income earners, debtors, firms (demand-pull)
        
        Losers: Fixed income earners, creditors, consumers, firms (cost-push)
        
        Shoe-leather costs
        
        Opportunity cost of time and effort spent trying to counteract the effects of inflation
        
        Producers
        
        Discourages investment due to uncertainty
        
        Menu cost: cost of updating prices more frequently
        
        Governments
        
        Hinders economic growth and employment
        
        Saving and investment discouraged
        
        Cost-push inflation leads to simultaneous rise in GPL and contraction in output (stagflation)
        
        Worsened balance of trade as exports become more expensive and imports become relatively cheap
        
        Capital flight as businessmen and foreign investors lose confidence in local currency
        
        Greater M and capital flight lead to decrease in supply of currency, lower X leads to decrease demand for currency, both lead to weaker currency
        
        Severity also depends on whether inflation is anticipated which is more likely with a low and stable inflation rate
        
        Benefits of low inflation
        
        Opposite of high inflation
        
        Harmful vs benign deflation
        
        Harmful
        
        AD falls
        
        Prolonged
        
        Benign
        
        AS rises
        
        Not prolonged
        
        Costs of harmful deflation
        
        Adverse effects on economic growth and employment
        
        Postponing consumption and investments
        
        Consumers delay consumption in anticipation of falling prices so businesses suffer losses and have no incentive to invest
        
        Cost of purchase of inputs at earlier date with higher prices possibly higher than sales revenue leading to widespread business closure
        
        Reduction in overall economic activity leads to deflationary spiral with high unemployment and low income
        
        Increased unemployment and fall in SOL
        
        Revenue falls but workers resist cuts to nominal wage, employers must retrench workers to maintain profitability, decreasing income and affecting material SOL
      - Causes and policies
        
        Demand-pull inflation
        
        Arises when there is excessive AD that outpaces AS, leading to a rise in GPL with little to no increase in real output
        
        Caused by:
        
        Excessive spending (caused by optimism in a booming economy)
        
        Excessive money supply (caused by availability of cheap and easy credit)
        
        Policies
        
        Same as actual growth too high (cos its p much the same thing)
        
        Cost-push inflation
        
        Arises when AS falls due to persistent increase in cop for reasons not associated with AD, leading to rise in GPL
        
        Types of cost-push inflation
        
        Imported inflation
        
        Rising prices of key imports
        
        Importing from countries experiencing inflation results in rise in COP shifting AS upwards (decrease in AS)
        
        Weak currency
        
        If importing country's currency gets weaker, importing country has to spend more even if exporting country's price is stable
        
        Policies
        
        Keep import prices from decreasing
        
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        Provide alternatives
        
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        Wage-push inflation
        
        Wages rise faster than labour productivity, unit cop increases, AS shifts up (decreases)
        
        Policies
        
        Freeze wage
        
        Clamp down labour unions
        
        Raise labour productivity (upskilling)
        
        Profit-push inflation
        
        If a firm or group of firms holds too much market power, when costs rise, prices rise far more than what is required to offset the increase in cost
        
        Policies
        
        Price ceiling
        
        Deregulate to increase competition among firms
        
        Negative supply shocks
        
        Unexpected events increase COP and thus AS shifts up
        
        Policies
        
        Temporary price control
        
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        Preparation for shocks
        
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        Statutory cost-push inflation
        
        Rise in indirect taxes on goods and services
        
        Cost of living increases because firms pass part of the higher indirect taxes to consumers through higher prices and firms cut back on production (AS decrease, curve shifts up)
        
        COE and ERP
        
        Increase the cost of transportation and cop of firms that use many vehicles
        
        Multi-causal inflation
        
        Inflation caused by shifts in both AD and AS
        
        Wage-price spiral
        
        Inflation expectation drives workers to demand higher wages, increasing unit cop with no improvement in productivity, AS shifts up. Firms cut back on hiring so the government boosts AD by spending more on infrastructure or cutting taxes, AD shifts right. Output barely changes, GPL increases significantly
        
        Policies should include demand management and supply side policies (abit risky to decrease AD while AS is shifting up since unemployment gets worse)
        
        Deflation
        
        Causes
        
        Harmful deflation caused by persistent fall in AD below full employment level
        
        Benign deflation due to rise in AS (increased output, lower prices OR fall in cop)
        
        Policies
        
        Stop people from postponing consumption by changing inflation expectations (deliberately creating inflation)
    - - Balance of payment
        
        Record or overall statement of all economic transactions between residents of a country with the rest of the world (set of official accounts used for tracking the net flow of Foreign Exchange (FX)
        
        Current Account
        
        Record of all trade flows in relation to the rest of the world
        
        Balance of trade
        
        Import and export of goods and services
        
        BOT = PxQx - PmQm
        
        Primary income account (rent, interest, profit, dividends)
        
        Secondary income account (unilateral transfers and remittances)
        
        Capital and Financial Account
        
        Record of all investment flows in relation to the rest of the world
        
        Foreign Direct Investment (FDI)
        
        Tangible assets, like setting up a business abroad
        
        Foreign investment is inflow, investing in foreign countries is outflow
        
        Portfolio investment (govt bonds & companies' shares)
        
        Affected by expectations of
        
        Short term capital flow (Hot money)
        
        Transfer of short-term funds from one country to another to take advantage of better interest rates/exchange rates, constantly moved around to adapt to changing rates
      - Consequences of improvement or deterioration in BOT and capital flow
        
        Capital inflow
        
        Inflow of FDI
        
        Government: FDI creates jobs in an economy, transfers technology, causing AD and AS to rise
        
        Consumers/Producers: rise in AD increases income and C, hence increasing mSOL. Producers encouraged to increase output level and I (similar to improved BOT)
        
        Inflow of hot money and portfolio investment
        
        Government: Local stocks/interest bearing assets(what you invest hot money in) are transacted in domestic currency, increase in demand for domestic currency, exerting upward pressure on exchange rate. Reduces price competitiveness of exports, worsens BOT.
        
        Improvement in BOT
        
        Government: Expansionary effect on economy caused by increase in net exports and multiplier process, reduced cyclical unemployment
        
        Producers: Increase in incomes causes demand for goods and services to increase. Production increases and more workers hired. Effects of rise in AD boost investor confidence. I increases
        
        Consumers: Economic growth leads to increase in consumer income and purchasing power. Consumer demand increases, consumption increases, purchase of more goods and services increases mSOL
        
        Deterioration of BOT
        
        Government: Contractionary effect on economy caused by reduced AD and multiplier process, workers retrenched leading to increase in cyclical unemployment
        
        Producers: Fall in income, demand for goods and services decreases, firms hire fewer workers and reduce production. Fall in AD reduces investor confidence, fall in I
        
        Consumers: Consumer income falls, purchasing power decreases, fall in demand, reduced consumption, lower mSOL
        
        Capital outflow
        
        Outflow of DI
        
        Government: Redirection of investments away from domestic economy to countries with lower labour cost, leading to fall in AD and multiplied fall in national income through reverse multiplier. Productive capacity grows at slower rate.