Economics: Optimization and Decision-Making

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Questions and Answers

What does rationality in economics primarily focus on?

Implementing government regulations

Predicting international economic trends

Choosing the best feasible option given available information (correct)

Maximizing social welfare

What is meant by 'opportunity cost'?

The financial loss incurred after making a choice

The benefit received from the best alternative use of a resource

The total cost of all alternatives foregone

The best alternate use of a resource (correct)

Which of the following is NOT a constraint in optimizing choices?

Budget constraints

Income level (correct)

Trade-offs

Opportunity cost

What does a cost-benefit analysis entail?

Summing benefits and subtracting costs in a common unit Signup and view all the answers

In the context of households optimizing their choices, what is often prioritized?

Increasing well-being Signup and view all the answers

What is the focus of marginal analysis in optimization?

Differences among feasible options Signup and view all the answers

What primary assumption does optimization make about individuals?

Individuals act rationally in their decision-making Signup and view all the answers

Which entity is typically focused on controlling inflation and economic growth?

Central banks Signup and view all the answers

What happens to the willingness to pay for an additional unit of a good as consumption increases?

It diminishes. Signup and view all the answers

What factor does NOT cause a shift in the demand curve?

Changes in the price of the good. Signup and view all the answers

If the price of a substitute good rises, what generally happens to the demand for the related good?

Increases. Signup and view all the answers

Which of the following statements about normal goods is true?

As income rises, demand increases. Signup and view all the answers

What occurs due to a movement along the demand curve?

A change in the price of the good. Signup and view all the answers

For inferior goods, what occurs when income rises?

Demand decreases. Signup and view all the answers

Which of the following is a reason for a shift in the demand curve?

A change in consumer income. Signup and view all the answers

If the price of a complement good increases, what typically happens to the demand of the associated good?

Demand decreases. Signup and view all the answers

What are reserve assets primarily used for?

Influencing currency exchange rates Signup and view all the answers

Which of the following is NOT included in reserve assets?

Loans to local businesses Signup and view all the answers

Why is international liquidity important for a country?

It allows for quick financing of trade deficits. Signup and view all the answers

How do reserves help during a crisis?

By stabilizing currency values. Signup and view all the answers

What role do monetary authorities play in managing reserve assets?

They control reserves to meet BOP financing needs. Signup and view all the answers

What can reserves be considered a basis for?

Foreign borrowing Signup and view all the answers

Which of the following statements is true regarding the definition of reserves?

They should be readily available in foreign currency. Signup and view all the answers

What is one purpose of maintaining confidence in currency through reserve assets?

To ensure the stability of the economy Signup and view all the answers

What does a price elasticity greater than 1 indicate about a good?

The demand for the good is elastic. Signup and view all the answers

In the context of demand elasticity, what characterizes a 'luxury good'?

It possesses elastic demand. Signup and view all the answers

What is the formula used to calculate price elasticity of demand (DD)?

e = | %ΔQd / %ΔP | Signup and view all the answers

What happens when a country experiences a price/demand surplus?

It enjoys net gains from trade. Signup and view all the answers

Which of the following measures can be used to shift an industry in the context of supply and demand?

Providing subsidies to producers. Signup and view all the answers

What does inelastic demand (e < 1) imply about a good?

Changes in price will lead to proportionally smaller changes in quantity demanded. Signup and view all the answers

What role do upskilling workers play in economic trade adjustments?

They help shift the industry towards more productive practices. Signup and view all the answers

Which term best describes the result of an effective complete ban on vapes?

Reduction in consumer choices. Signup and view all the answers

What defines variable costs in a business context?

Costs that change according to output levels Signup and view all the answers

What does marginal cost represent?

The change in total variable costs from producing one more unit Signup and view all the answers

When does a business typically decide to suspend production?

When price is less than average variable costs Signup and view all the answers

Under what condition is a business expected to shut down in the short-run?

When price is less than average total costs Signup and view all the answers

What does total revenue equal?

Price multiplied by quantity sold Signup and view all the answers

What is the impact of government subsidies during economic crises?

They are used to cover fixed costs Signup and view all the answers

What role do rental waivers serve in an economic context?

They assist with managing fixed costs for businesses Signup and view all the answers

What changes when the price falls below average variable costs?

Businesses are likely to suspend production Signup and view all the answers

Study Notes

Optimisation

Normative economics helps agents make better choices in the future
Firms optimize profits, households optimize well-being
Trade-offs are necessary in optimization due to constraints
The budget constraint quantifies trade-offs
Opportunity cost is the best alternative use of a resource
Cost-benefit analysis sums the benefits and subtracts costs, both denominated in a common unit of measurement
Net benefit is the sum of benefits minus the sum of costs
Singapore focuses on services rather than tangible products
Domestic economy includes households, labor markets, corporations, property, oil and gas commodities, and is regulated by the government
Domestic financial system includes financial institutions, markets, and infrastructure and is regulated by the Monetary Authority of Singapore (MAS)
International bodies don't have real power
Singapore follows international guidelines to get along with other countries
Optimisation is used to predict choices made
Assumes rationality
Implementation of optimisation can be done by calculating the total value of each feasible option and picking the one with greatest total value
Marginal analysis focuses on differences amongst options
Behavioural economics explains why people sometimes don't make optimal choices

Demand and Supply

Diminishing marginal benefit: As consumption rises, willingness to pay for an additional unit falls
Demand Curve Shift is due to changes in tastes and preferences, income and wealth, availability and prices of related goods, number and scale of buyers, and consumer sentiment
Normal goods: Rise in income leads to a rise in demand
Inferior goods: Rise in income leads to a fall in demand
Substitutes: Rise in price of one good leads to a fall in demand for the other
Complements: Rise in price of one good leads to a rise in demand for the other
Variable costs change according to outputs
Fixed costs do not change according to output
Marginal cost is the change in total or variable costs when one more unit of output is produced
What is considered fixed and variable costs change over time
Total revenue = Price x Quantity
Marginal revenue is the change in total revenue when one more unit of output is produced
Businesses suspend production when price is less than average variable costs
Businesses shut-down in the short run when the price is less than average total costs
Subsidies and rental waivers help with fixed costs
The government can intervene in supply and demand
Government interventions in supply during COVID-19: subsidies, rental waivers for hawkers
Government interventions in demand during COVID-19: Singapore rediscover vouchers
A complete ban on a good impacts supply and demand

Market Equilibrium

Equilibrium is the intersection of supply and demand

Price Elasticity

Price elasticity of demand (e) =| (percentage change in quantity demanded) / (percentage change in price)|
Price elasticity of demand is the sensitivity of quantity demanded to changes in price
Elastic demand: e > 1
Inelastic demand: e < 1
Unit elastic demand: e = 1

International Trade

Comparative advantage: country produces goods at a lower opportunity cost relative to another country
Absolute advantage: Country has a higher productivity rate than another country
Specialization and trade leads to a higher standard of living for both countries
Terms of trade (ToT): relative price of exports to imports
Improvement in ToT: Price of exports rises (more than imports)
Deterioration in ToT: Price of exports fall (more than imports)

Financial System

Reserves (R): Assets readily available that can be used to finance short-term trade deficits, weather periodic currency rises, maintain confidence in currency and the economy, and serve as a basis for foreign borrowing.
R includes: monetary gold, SDR holdings, reserve position in the IMF, currency and deposits, securities, financial derivatives, and other claims.

Objectives of Central Bank

Maintain price stability: Control inflation
Promote full employment
Foster economic growth
Ensure financial stability

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Description

This quiz explores key concepts in normative economics, focusing on how agents can make better future choices. Topics include optimization of profits and well-being, trade-offs, budget constraints, and cost-benefit analysis, with a special emphasis on the domestic economy and financial regulations in Singapore.