Economics Notes.docx

Table of Contents {#table-of-contents.TOCHeading} ================= [Week 1: Introduction 1](#_Toc178757437) [Week 2: Economics Decisions 4](#week-2-economics-decisions) [Week 3: Market Failure 9](#_Toc178757439) [Week 4: Economy 13](#week-4-economy) [Week 5: Money 17](#week-5-money) [Week 6:...

Table of Contents {#table-of-contents.TOCHeading} ================= [Week 1: Introduction 1](#_Toc178757437) [Week 2: Economics Decisions 4](#week-2-economics-decisions) [Week 3: Market Failure 9](#_Toc178757439) [Week 4: Economy 13](#week-4-economy) [Week 5: Money 17](#week-5-money) [Week 6: Globalisation 21](#week-6-globalisation) []{#_Toc178757437.anchor} Week 1: Introduction ==================== **[Pre-Reading / Lecture Notes]** [Chapter 1.1: The Scope of Economics] - Economics is a social science that studies **human behaviour, choice and scarce resources**. - Economic agents: Individuals / groups that make **choices**. Maximise XX, subject to YY constraints. Different objectives. - Scarce resources are things people want, where quantity wanted is more than quantity available. **Unlimited wants, limited resources** - Economics is the study of how agents choose to allocate scarce resources and how these choices affect society - Resources: G&S, tangibles, intangibles, factors of production (FOP) - Positive Economics = What people do. Can be tested and confirmed with data - Normative Economics = What people ought to do. - Government policy creates winners and losers, economists must make ethical judgements. [Chapter 1.2: Micro/Macroeconomics] - Microeconomics is the study of **how individuals, households, firms and governments make choices**, and how these choices affect prices, resource allocation, and the wellbeing of other agents. - Macroeconomics is the study of **the whole economy, on the national, regional or global scale.** Economic phenomena, like growth rate of countries total economic output, inflation rate, unemployment rate. - Overlaps between the two: E.g. Singapore housing policy, financial sector. *Concepts of Economics:* - Optimization: Trying to pick the **best feasible option**, given whatever limited information, knowledge, experience and training the agent has. - Equilibrium: All agents simultaneously optimize; nobody believes that benefits from changing their behaviour given the choices of others. **Economic forces (DD, SS) are balanced and in the absence of external influences the (equilibrium) values of the variables will not change.** (Partial -- micro, ceteris paribus. General -- more macro, many interacting markets). - Empiricism: Evidence-based analysis [Chapter 1.3: Optimisation] - **Rationality: Choosing the best feasible** (available, affordable) **option given the information available**. - Normative (prescriptive) economics help agents to realise mistakes and make better choices in the future - What is optimized varies from person to person, and group to group. (e.g. firms optimize profits, HH optimize wellbeing) *Constraints:* - Trade-offs: Some benefits sacrificed to gain others - Budget Constraint: Set of things that a person can choose to do without breaking their budget. Quantifies trade-offs. - Opportunity cost: Best alternate use of a resource *What to Optimise? Who Optimises?:* - Cost-Benefit Analysis: Calculation that identifies the best option by summing benefits and subtracting costs, with both benefits and costs denominated in a common unit of measurement. - Net benefit: Sum of benefits of choosing an alternative minus the sum of costs of choosing that alternative - Firms -- profit, social enterprise -- social objective, governments -- economic growth, central bank -- control inflation, economic growth etc. - Singapore focusing on services rather than tangible products - Domestic economy: HH, labour markets, corporates, property, O&G Commodities, etc. Regulated by government: ministries and stat boards - Domestic financial system: Financial institutions, markets, infrastructure. MAS as a financial regulator. - International bodies don't really have any power (50min). Singapore follows international guidelines to get along with everyone. - What if the large countries don't follow international guidelines, or impose sanctions and tariffs that hamper international trade, and hence global economic growth? A diagram of a financial system Description automatically generated [Chapter 3.1: Optimisation] - Optimisation used to predict most choices made. **Assumes rationality.** - Implementation of optimisation can be done by (1) Total value of each feasible option, picks one with greatest total value or (2) Marginal Analysis: focus on differences among options - Behavioural economics: Explains why people pick/nearly pick the optimum in some situations, and don't come close in others, even when they try to choose well. **[Lecture Thoughts:]** "You are an economist working at the monetary authority of Singapore. You have decided to set a limit for housing loan tenures of 35 years, for banks that provide housing loans in Singapore. list the possible reasons why you have decided to do this, providing proper explanation and elaboration to your responses." Reason: Preventing housing market bubbles: Enable owners to take up larger loans, may lead to increase in demand of property. Prevents housing market from overheating. Week 2: Economics Decisions =========================== +-----------------------------------+-----------------------------------+ | **Outline** | **Key Takeaways** | +===================================+===================================+ | Markets | A market: Group of economic | | | agents who are trading a good or | | | service plus the rules and | | | arrangements for trading. | | | | | | Perfectly competitive markets: no | | | seller is powerful enough to | | | affect market P. Buyers and | | | Sellers are P-takers. | +-----------------------------------+-----------------------------------+ | Demand | Assumption that all goods are | | | private goods. Demonstrates | | | excludability (possible to | | | prevent c/s from having access to | | | a G&S. No pay, no G&S) and | | | rivalry (c/s one good diminishes | | | the Q available for the next | | | c/s). | | | | | | Quantity demanded: Amount of G&S | | | c/s willing to purchase at a | | | given P | | | | | | Law of Demand: Qd rises when the | | | P falls. | | | | | | Diminishing Marginal Benefit: As | | | consumption of G&S rises, | | | willingness to pay for an | | | additional unit fall. | | | | | | Demand Curve Shift: Tastes and | | | preferences, income and wealth, | | | availability and prices of | | | related goods, number and scale | | | of buyers, c/s sentiment. | | | | | | **Shift of DD curve** is due to | | | changes in external factors, | | | hence changes in DD. **Movement | | | along DD curve** is due to | | | changes in P, hence changes in | | | Qd. | | | | | |  | | | | | | Normal goods: Rise in Y \> Rise | | | in DD. Inferior goods: Rise in Y | | | \> Fall in DD. | | | | | | Substitutes: Rise in price of X | | | leads to fall in DD of Y. | | | | | | Complements: Rise in price of X | | | leads to rise in DD of Y. | +-----------------------------------+-----------------------------------+ | Supply | Quantity Supplied: Amount of G&S | | | sellers are willing to sell or | | | supply at a given P. | | | | | | Law of Supply: Qs falls when the | | | P falls. | | | | | | Supply Curve Shift: Prices of | | | Factors of Production (FOP), tech | | | used for pd, no. and scale of | | | sellers, seller sentiment. | | | | | | **Shift of SS curve** is due to | | | changes in external factors, | | | hence changes in SS. **Movement | | | along SS curve** is due to | | | changes in P, hence changes in | | | Qs. | | | | | | A diagram of a supply curve | | | Description automatically | | | generated | | | | | | FOP: Capital, labour, land, tech, | | | etc. | | | | | | Cost of production: Total Cost = | | | Variable -- Fixed | | | | | | Fixed/Sunk costs: Costs firms | | | must pay regardless of output | | | (e.g. Short-run) | | | | | | Variable costs: Costs that change | | | according to output (e.g. | | | Long-run) | | | | | | Marginal cost: Change in total / | | | variable costs when one more unit | | | of output is pd | | | | | | What is considered fixed and | | | variable costs will change over | | | time | | | | | | Total revenue = P x Q | | | | | | Marginal revenue: Change in total | | | revenue when one more unit of | | | output is pd | | | | | | Businesses suspend production | | | when P \< Average Variable costs | | | | | | Businesses shut-down after | | | short-run when P \< Average Total | | | costs | | | | | | Subsidies, rental waivers for | | | hawkers during COVID-19 are meant | | | to help with the fixed costs. | | | Government intervention in | | | supply. Another example being | | | Singapore rediscover vouchers, | | | which intervenes in the demand. | | | | | | If the hawkers have their stalls | | | in private property, government | | | provides subsidies to the | | | landlords, hoping that they would | | | pass down the cost savings to the | | | hawkers. Going to every hawker | | | would be strenuous on manpower. | | | | | | Situation in which Hawkers P \< | | | AFC, but P \> AVC, hence they | | | still make a profit for each dish | | | sold (price sold per dish is | | | higher than price of ingredients | | | etc). Since they already must pay | | | for fixed cost of rental until | | | the end of their contract lease, | | | they still sell dishes in order | | | to minimise losses caused by | | | rental. However, they will stop | | | making dishes if P \< AVC, in | | | which the inverse is true, and | | | they are making a net loss for | | | each dish sold. After the lease | | | expires, they will shut down the | | | business, since P \< ATC and they | | | are making a total net loss. | | | | | | For complete ban, would the | | | supply curve be a vertical line | | | through the y-axis? For every | | | price, Qs remains at 0. **Yes, | | | but be sure to isolate the | | | market. E.g. complete ban on ONLY | | | vapes supply curve of ONLY vapes | | | is as such.** | +-----------------------------------+-----------------------------------+ | Equilibrium |  | +-----------------------------------+-----------------------------------+ | Price Elasticity | **Price elasticity of DD: e =** | | | [\$\\left\| \\frac{\\mathbf{\\%\\ | | | \\mathrm{\\Delta}Qd}}{\\mathbf{\\ | | | %\\ | | | \\mathrm{\\Delta}P}} | | | \\right\|\$]{.math.inline}**. | | | Sensitivity of Qd to changes in | | | P.** | | | | | | Demand Elasticity e Effe | | | ct on Demand curve Examples | | | ------------------- ------ ---- | | | -------------------- ------------ | | | ------ | | | Elastic e\>1 Flat | | | ter Luxury goods | | | Inelastic e\0 DD rises | | | Normal Good | | | 0\ p/d surplus, country | | | enjoys net gains from trade | | | Distributional implications | | | (assuming no compensation to p/d) | | | upskill workers to shift industry | | | / subsidise, vouchers to p/d, | | | financed via taxes. (Country no | | | comparative advantage) | | | | | | P world \> P autarky, export c/s | | | suffer from higher prices, p/d | | | enjoy access to lucrative export | | | market c/s surplus \< p/d | | | surplus, country enjoys net gains | | | from trade Distributional | | | implications. Producers are | | | better off than consumers | | | Government can tax and reimburse. | | | | | | Why does government not | | | redistribute net gains from trade | | | instead of taxing? Or are the net | | | gains taxed AWAY from consumers | | | and producers? Who would object | | | to free trade: Imports (producers | | | lose, tend to be more organised, | | | producers are few and each one | | | suffers a heavy impact lobby | | | against congress), exports | | | (consumes lose, but losses are | | | more distributed). | +-----------------------------------+-----------------------------------+ | Balance of Payments | BOP: Captures trade and financial | | | globalisation. Record of the flow | | | of economic transactions between | | | residents of one country and the | | | rest of the world in a particular | | | period of time OR Record of a | | | country's international trading, | | | borrowing and lending. | | | | | | Elements: | | | | | | 1\) Current Account (CA): | | | Monetary value of international | | | flows associated with | | | transactions in G&S, Y flows | | | and international aid. Includes | | | transport fees of G&S also! | | | | | | Singapore is in CA surplus. | | | | | | 2\) Capital & Financial Account | | | (CFA): International purchases | | | or sales of assets (real | | | estate, corporates stocks & | | | bonds, government securities, | | | ordinary commercial, bank | | | deposits) including private | | | sector (direct investment, | | | portfolio investment, other | | | investments) and central bank | | | transactions (reserves). | | | | | | Putting money in DBS is not part | | | of BOP, but a foreigner doing so | | | is! | | | | | | 3\) Reserve Assets (R): External | | | assets readily available to and | | | controlled by monetary | | | authorities for meeting BOP | | | financing needs, for | | | intervention in exchange | | | markets to affect the currency | | | XCR, and for other related | | | purposes (e.g. maintaining | | | confidence in currency and the | | | economy and serving 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. | | | | | | Why hold reserves? | | | | | | \(a) International liquidity: | | | MAS reserves are short-term and | | | readily available. To finance | | | short-run trade deficits and | | | weather periodic currency | | | rises. MUST be defined in | | | foreign currency ability to | | | spend money even when country | | | does not produce during crisis, | | | to import etc. | | | | | | \(b) FX intervention / | | | stabilisation: Singapore with | | | managed float XCR, foreign | | | currency needed to intervene. | | | MAS buy or sell reserves in | | | private sector market to | | | support or stabilize XCR. | | | | | | \(c) Other purposes: Confidence | | | in currency and economy, basis | | | for foreign borrowing. | | | | | | Land is also part of SG reserves! | | | selling state land goes to the | | | reserves, not the budget. Land | | | reclamation also comes from the | | | reserves. | | | | | | Singapore separates reserve | | | assets and CFA. President keeps | | | an eye on Singapore's reserves, | | | along with MAS, Temasek Holdings | | | and GICs. | | | | | | \*CA + CFA + R = 0 | +-----------------------------------+-----------------------------------+