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Shift in PPC 1. Increase in qty of resources/productivity of resources 2. Increase in productive capacity, i.e. increase in maximum output that can be produced by the country when all resources are fully and efficiently employed 3. Illustrated by shift of PPC from PPC to PPC1...

Shift in PPC 1. Increase in qty of resources/productivity of resources 2. Increase in productive capacity, i.e. increase in maximum output that can be produced by the country when all resources are fully and efficiently employed 3. Illustrated by shift of PPC from PPC to PPC1 4. The city thus experiences potential growth Movement of a point in PPC to a point on PPC 1. The country initially produces at point A, where resources are not fully employed 2. With ___, more resource/labour would be employed, resources are now more efficiently utilised, unemployment decreases 3. The country now operates at point B, which is also the maximum output that can be produced when all resources are fully and efficiently employed 4. The country experiences actual growth and lower unemployment Decision-making framework 1. Objective Self-interested ___ would aim to maximise ___. 2. Benefit ___ would consider the benefit of ___ such as ___. (link to TR or profit) 3. Cost ___ would also consider the explicit costs such as ___. Should also consider opportunity cost (which is also implicit cost) which is the value of the next best alternative forgone such as ___. 4. Weigh MB and MC ___ would weight the MB and MC of ___. If MB is more than or equal to MC, continue. If MB is less than MC, should not continue. 5. Review decision (2m) Possible changes in laws/weather etc. Simultaneous shift in DD & SS 1. Identify the DD & SS factor 2. Identify the certain effect and the indeterminate effect on Px & qty 3. Weigh extent of shift of DD & SS (e.g. magnitude of trigger) 4. Price adjustment process (effect on equilibrium Px & qty) Non-price factors affecting demand E – expectation of future prices G – government policies Y – income (normal & inferior goods) P – price of related goods (complements & substitutes) T – taste & preference Non-price factors affecting supply G – government policies C – cost of production W – weather E – expectation of future prices P – price of related goods (joint & competitive supply) T – technology Price adjustment process 1. Qs in relation to Qd (shortage or surplus) 2. Upwards/downwards pressure on price 3. Effect on sellers and consumers 4. New equilibrium where qty DD = qty SS to clear the shortage/surplus Elasticity 1. Elasticity trigger 2. Definition, formula, sign, magnitude 3. Justification 4. Basic cause and effect 5. Extent/direction of shift 6. ATQ (e.g. equilibrium Px & qty, TR) PED trigger – change in Px or change in SS Degree of responsiveness of qty DD of a good to change in Px PED = % change in qty DD of good X / % change in Px of good X Sign = always negative as Px and qty DD are inversely related Magnitude o 0 1 = luxury good Factors of YED 1. Degree of necessity of good 2. Income level of consumers XED trigger – change in price of related good Degree of responsiveness of DD for good A to a change in Px of good B XED = % change in qty DD of good A / % change in Px of good B Sign o Positive = substitute o Negative = complement Magnitude o |XED|>1 = closely related o |XED| Qs, there is over- production of good shown by QsQe 5. MSC > MSB, additional cost to society is more than the benefit of producing these units. Total deadweight loss to society at area ABC as societal welfare is not maximised Negative externality (consumption) 1. Self-interested consumers consume up to MPB which is (e.g. of benefit to consumer). Self-interested producers produce up to MPC which is (e.g. of cost to consumer) 2. At free market equilibrium, qty consumed of good is at Qe, where MPB = MPC 3. However, consumption of good generates negative externalities i.e. MEC to third parties such as (e.g. of monetary cost). MEC results in divergence between MSC and MPC. Hence, MSC curve is above the MPC curve and MSC = MPC + MEC 4. Socially optimal level of good consumption is at Qs, where MSC = MSB. Qe > Qs, there is over-consumption of good shown by QsQe 5. MSC > MSB, additional cost to society is more than the benefit of consuming these units. Total deadweight loss to society at area ABC as societal welfare is not maximised Positive externality (production) 1. Self-interested consumers consume up to MPB which is (e.g. of benefit to consumer). Self-interested producers produce up to MPC which is (e.g. of COP) 2. At free market equilibrium, qty consumed of good is at Qe, where MPB = MPC 3. However, production of good generates positive externalities i.e. MEB to thirst parties (e.g. of monetary cost). MEB results in divergence between MSB and MPB. Hence, MSB curve is above MPB curve and MSB = MPB + MEB 4. Socially optimal level of good production is at Qs, where MSB = MSC. Qs > Qe, there is under- production of (good). Under-production of (good) shown by QeQs. 5. MSB > MSC, additional benefit to society is more than cost of producing these units. Total deadweight loss to society at area ABC as societal welfare is not maximised Positive externality (consumption) 1. Self-interested consumers consume up to MPB which is (e.g. of benefit to consumer). Self-interested producers produce up to MPC which is (e.g. of COP) 2. At free market equilibrium, qty consumed of good is at Qe, where MPB = MPC 3. However, consumption of good generates positive externalities i.e. MEB to thirst parties (e.g. of monetary cost). MEB results in divergence between MSB and MPB. Hence, MSB curve is above MPB curve and MSB = MPB + MEB 4. Socially optimal level of good consumption is at Qs, where MSB = MSC. Qs > Qe, there is under-consumption of (good). Under-production of (good) shown by QeQs. 5. MSB > MSC, additional benefit to society is more than cost of consuming these units. Total deadweight loss to society at area ABC as societal welfare is not maximised Imperfect information 1. Free market equilibrium is at Qs where MPBperceived = MPC, consumers consider perceived MPB (e.g.), while producers consider MPC (e.g) 2. As a result of imperfect information (e.g.), there is a lack of awareness of true benefit, resulting in divergence between perceived MPB and actual MPB 3. Socially optimum level of consumption is at Qs where actual MPB = MPC 4. Between Qe and Qs, actual MPB > perceived MPB, consumers valuation of an additional unit of good is less than what it costs to produce, there is underconsumption of good, societal welfare not maximised, resulting in deadweight loss of area ABC Government intervention Taxes & subsidies (H) Tax Subsidy 1. Amount of tax/subsidy The government could impose The government could grant a a tax per unit of output that is subsidy per unit of output that equal to the marginal external is equal to the marginal cost at the socially optimum external benefit at the socially level of output optimum level of output 2. How tax/subsidy affects This increases the COP and This decreases the COP and costs producers will be induced to producers will be induced to produce less of good because produce more of good because of the higher marginal COP of the lower marginal COP OR OR This increases the cost of This decreases the cost of consumption and consumers consumption and consumers are less willing and able to are more willing and able to consume good consume good 3. Link to shift of MPC curve MPC shifts upwards to MPCtax MPC shifts downwards to as shown in fig. 1 MPCsubsidy as shown in fig. 1 4. How the new equilibrium in The free market equilibrium The free market equilibrium the free market is derived will now be operating at the will now be operating at the output level where MPB = output level where MPB = MPCtax which coincides with MPCsubsidy which coincides with the socially optimum level of the socially optimum level of output at Qs output at Qs 5. Overall effect on P & Q and There is a rise in equilibrium There is a fall in equilibrium link to end point (socially price to Ps and a fall in price to Ps and a rise in optimum level of output) equilibrium qty to the socially equilibrium qty to the socially efficient level of output at Qs. efficient level of output at Qs. External cost is now External benefit is now internalised internalised (L – taxes) Difficult to assess monetary value of the MEC → difficult to decide appropriate amount of tax Difficult to ascertain how much of costs was due to negative externality or other factors Difficult to decide on monetary value of intangibles Problems may only manifest after long term exposure to negative externality If DD for good is price inelastic (likely PED → link to context) Price inelastic → increase in price will only result in a less than proportionate fall in qty DD, Qs is not attained. To get to socially optimum level, a large tax needs to be imposed → politically unfavourable + can cause inequity issue (L – subsidy) Difficult to assess monetary value of external benefits → difficult to decide appropriate amount of subsidy Difficult to ascertain how much of benefits was due to positive externality or other factors Difficult to decide on monetary value of intangibles Benefits may only manifest after long term exposure to positive externality Difficult to decide appropriate amount of subsidy → under/over-subsidy If under-subsidy, DWL in free market is not fully removed If over-subsidy, can cause bigger DWL → government failure → DWL (ABC) in free market > DWL (XYZ) after government intervention If DD for good is price inelastic (likely PED → link to context) Price inelastic → reduction in price due to subsidy will only result in a less than proportionate increase in qty DD, Qs is not attained. To get socially optimum level, a large subsidy needs to be granted → opportunity cost/cost constraints Provision of information (H) Addressing lack of awareness Addressing lack of awareness of actual cost of actual benefit 1. Specify the method of The government could conduct The government could conduct providing information and campaigns/advertisements etc campaigns/advertisements etc exactly what type of to educate to educate information to provide to the consumers/producers about consumers/producers about people the actual cost of (activity) such the actual benefit of (activity) as (e.g.) such as (e.g.) 2. How provision of info By raising awareness of the By raising awareness of the affects cost/benefit actual cost of (activity), actual benefit of (activity), consumers/producers consumers/producers perceived cost is increased perceived benefit is increased 3. Link to shift of the curve If the advertising campaign is If the advertising campaign is successful, the MPCperceived successful, the MPBperceived curve shifts upwards to the curve shifts upwards to the MPCactual curve as shown in fig. MPBactual curve as shown in fig. 1, removing the divergence 1, removing the divergence between MPCperceived and between MPBperceived and MPCactual MPBactual 4. How the new equilibrium The free market equilibrium The free market equilibrium in the free market is derived will now be at the output level will now be at the output level where MPB = MPCactual which where MPBactual = MPC which coincides with optimum level coincides with optimum level of output at Qa of output Qa 5. Overall effect on P & Q and There is a rise in equilibrium There is a fall in equilibrium link to end point (optimum price to Pa and fall in price to Pa and rise in level of output) equilibrium qty to optimum equilibrium qty to optimum level of output Qa, as level of output Qa, as consumption/production falls consumption/production rises (L) Takes time to change mindset o Campaign needs to be sustained → strain on government budget → incurs opportunity cost o Not an immediate measure → not effective in SR (need to use other measures if immediate solution is required) Direct provision (NOT full subsidy!) 1. Government directly provides to get to Qs (goods are directly produced by the government) 2. MPC/SS increases 3. Link to diagram (rightward shift) 4. How the new equilibrium in the free market is derived 5. Overall effect on P & Q and link to end point (optimum level of output Qs) (L) Not profit driven → not motivated to improve quality → productive inefficient Price ceiling Legal maximum on the price at which the good can be sold 1. When price ceiling is implemented, price falls from P to Pc 2. Consumers are more willing and able to consume at lower price Pc, hence qty DD increases to Qd 3. Producers are less willing and able to produce good at the lower price Pc, hence qty SS falls to Qs 4. A shortage of QsQd occurs. The shortage will be permanent as the free market is unable to adjust to equilibrium (L) The group of people the government intends to help may not benefit as due to shortage, they may not be able to obtain the good to begin with Allocative inefficient o As the market is only consuming Qs of good while desired qty is Qe, there is under- allocation of resources to the market of good. Between Qs and Qd, society values an additional unit of the good less than the cost to produce it, resulting in a deadweight loss of area ABC Black market Black market 1. Due to shortage, not all consumers are able to obtain the good. Consumers who are more willing and able to purchase the good would be willing to pay high prices for it and hence turn to the black market 2. Sellers/producers may also want to sell at higher prices for higher profitability 3. Low income group that the public policy intends to help will lose out as they cannot afford the black market prices → inequity issue 4. Black market price is higher than the equilibrium price, this would worsen the current situation Revenue concepts Total revenue Total earnings from selling any given output per period of time TR = P x Q Average revenue Average revenue of a firm per unit output 𝑻𝑹 𝑷×𝑸 AR = = = P 𝑸 𝑸 Marginal revenue Additional revenue earned from selling an additional unit of output △𝑻𝑹 MR = = TRn – TRn-1 △𝑸 Cost concepts Short run Long run Definition Time period where firm has at least one fixed Time period where all FOP are FOP variable Total cost Total cost = Total fixed cost and total variable Total cost = Total variable costs cost (all costs variable in LR) TC = TFC + TVC TC = TVC Related Law of diminishing marginal returns Internal economies & concepts diseconomies of scale, external economies & diseconomies of scale SR cost of production Short run total cost Sum of total fixed cost and total variable cost. Varies with output; at zero output, TC = TFC as TVC = 0 TC = TFC + TVC Total cost Sum of all costs of production that do not vary with output level Total variable cost Total cost of hiring variable factors of production. Varies directly with level of output Short run average cost Total cost per unit of output (sum of average fixed cost and average variable cost) (𝑻𝑭𝑪+𝑻𝑽𝑪) AC = = AFC + AVC 𝑸 Average fixed cost Total fixed cost per unit of output. Total fixed cost is constant → average fixed cost falls continuously as output rises 𝑻𝑭𝑪 AFC = 𝑸 Average variable cost Total variable cost per unit of output 𝑻𝑽𝑪 AVC = 𝑸 Marginal cost Change in total cost as a result of producing one more unit of output △𝑻𝑪 △𝑻𝑽𝑪 MC = = △𝑸 △𝑸 LR cost of production Long run total cost No fixed FOP, total cost is equal to total variable cost. Varies directly with output level; at zero output, TC = TVC = 0 TC = TVC Long run average cost Long run cost per unit of output produced. LRAC curve shows lowest possible cost per unit of output for any given level of output when all FOP are variable 𝑇𝐶 LRAC = 𝑄 Internal economies of scale Cost savings a firm enjoys when it increases scale of production leading to fall in unit cost of production. Movement down LRAC curve when firm increases its own output level Sources of internal EOS (mrfat) Technical economies Increase in output → lower average COP - Specialisation & division of labour - Indivisibility of capital equipment - Increased dimensions Marketing economies Lower average COP with increasing purchase of supplies - Bulk buying - Advertising Administrative economies Better decision making, greater efficiency → lower unit COP Financial economies Borrow money at more favourable interest rates Risk-bearing economies Cost of uncertainty spread over a larger output Economies of scope Increase in variety of goods produced → lower average COP Internal diseconomies of scale Cost savings diminish and firms start to incur a higher LRAC as output increases. Movement up LRAC curve Sources of internal DOS Complexity in management/compliance Firm becomes more bureaucratic as more rules are laid out → slower decision-making process due to excessive red tape → longer production time Complexity in operation Too many departments and employees → problem in co-ordination of operations → bottlenecks may appear and hider production Low morale of employees Too impersonal to the needs of its workers → low morale of workers as they feel alienated → productively inefficient External economies of scale Cost savings a firm enjoys when the whole in industry expands. Downward shift of entire LRAC curve Sources of external EOS Economies of concentration If firms in an industry cluster in an area, they can reap economies of concentration - Ready access to inputs → lower transportation costs - Labour with specific skills and talents attracted to location → lower hiring costs as firms do not need to advertise as widely as before - Growth of supporting facilities → lower unit COP - Development of local infrastructure for better access to airports and seaports → lower transportation costs Economies of information (availability of shared resources) Information about the industry becomes more widely available, all firms in the industry benefit → lower cost of generating information for individual firms External diseconomies of scale Upward shift of entire LRAC curve Sources of external DOS Increased competition for common inputs Growing shortage of common inputs → greater competition for limited resources → increase in Px → increase in LRAC Less efficient resources Lower productivity → higher unit costs Infrastructure bottlenecks Increased strain on physical infrastructure → traffic congestion → workers or goods arrive late → lower productivity → increase in LRAC Increased pollution costs Increased pollution cost affects health and morale of workers → lower productivity + costs to reduce pollution to meet regulations → increase in LRAC Monopoly - One firm in the industry - High barriers to entry - Imperfect information - Unique product Monopolistic competition - Large number of small firms in the industry - Low barriers to entry - Imperfect information - Differentiated products Perfect competition - Large number of buyers and sellers in the industry - No barriers to entry and exit - Perfect information - Identical (homogenous) products Oligopoly - A few dominant firms in the industry - High degree of interdependence between firms - High barriers to entry - Imperfect information - Homogenous or differentiated products Barriers to entry - Access to inputs and markets - Costs barriers to entry o Economies of scale o High fixed cost - Financial barriers to entry - Legal barriers to entry o Patents o Copyright o Licenses - Strategic barriers to entry - Information barriers to entry How market dominance can influence a firm’s price & output decisions 1. Demonstrate understand of market dominance Firm with market dominance Market share of 60% or more Few/no competitors that customers can turn to Large control over price or output Firm in monopolistically competitive market Small market share/power Many competitors that customers can turn to Some control over price (differentiated product → downward sloping DD curve) Firm in perfectly competitive market Insignificant market share Many competitors that customers can turn to No control over price (price taker – takes price determined by DD and SS) 2. How the characteristics of market dominance influences the DD curve Firm with market dominance High market share → high DD Few competitors → few substitutes for firm’s product → relatively price inelastic DD curve Firm in monopolistically competitive market Small market share → low DD Many competitors → many substitutes for firm’s product → each firm faces a relatively price elastic DD curve Firm in perfectly competitive market Insignificant market share → low DD Homogenous product → perfectly substitutable → perfectly price elastic DD curve 3. Profit-maximising condition - Firms maximise profit by producing at output level where MR = MC - At Q1, MR > MC, producing an additional unit of the good would add more to the firm’s TR than TC, firms should continue to increase production to increase profits - At Q2, MR < MC, producing an additional unit of the good would add more to the firm’s TC than TR, firms should lower production to increase profits - Hence, firms will produce at Qe where MR = MC as this output level is where profit is maximised Firms with market dominance The price is determined by the high and steep DD curve Firms in monopolistically competitive market As the firm produces at output Qe, the price is determined by the low and gentle DD curve Firms in perfectly competitive market The firm is a price taker and has no influence over price. Price is determined by the DD and SS of the market 4. How market dominance affects price and output in the SR Firm with market dominance Hence with market dominance, the price charged is high at Pe while output is restricted at Qe Firm in monopolistically competitive market Because of no market dominance and small market share, the price charged is lower and the output is also low Firm in perfectly competitive market Because of no market dominance and insignificant market share, the price charged is lower and the output is also low 5. How market dominance affects price and output in the LR Firm with market dominance Suppose the firm is enjoying supernormal profits shown by ___. However, due to high BTE such as ___, rival firms are unlikely/not able to enter the market and compete away the profit. Therefore the firm can maintain its high price and low output in the LR Firm in monopolistically competitive market Suppose the firm is enjoying supernormal profits shown by ___. Since there are low BTE, other firms can enter the market and compete away the profits Each firm in the monopolistically competitive market faces a lower DD curve and more relatively price elastic DD curve Firm earns normal profits in the LR as price and output decreases Firm in perfectly competitive market Suppose the firm is enjoying supernormal profits shown by ___. Since there are no BTE, other firms can enter the market and compete away the profits Market SS increases as more firms enter the market, equilibrium price falls Since the firm is a price taker and their market share is competed away by new firms, the DD curve shifts down to ___ Firm earns normal profits in the LR as price and output decreases Interdependence (oligopoly) Due to there being a few dominant firms in the market, each firm will have a significant market share, there is high rival consciousness and mutual interdependence, each firm has to weigh the effects of its own strategies on rival firms’ behaviours and the effect of rival firms’ behaviour on itself When a firm lowers its price, the other firms will also lower their prices. The reduction in price for the former firm will only result in a less than proportionate rise in qty DD for each firm o DD is price inelastic below point A TR for all firms fall When a firm raises its price, the rest will not follow suit. A rise in price will result in a more than proportionate fall in qty DD of the goods by the former firm o DD is price elastic above point A TR for former firm falls This results in price rigidity Firms in an oligopoly are more likely to engage in non-price strategies (e.g. R&D, advertising) o DD increase → price and qty increase → TR increase o Make DD more price inelastic as their goods become less substitutable so that they can increase prices in the future. When price increases, qty DD falls less than proportionately, TR increases in the future Oligopoly strategies to raise profit Strategy 1: Product Innovation 1. (Definition) Product innovation refers to efforts put in by a firm to come up with new, improved or differentiated products 2. (Strategy) R&D for T&P to change in favour of good 3. (Effect on DD & PED) Increases DD and makes DD more price inelastic as service is less substitutable, an increase in price will result in a less than proportionate fall in qty DD, TR of the firm rises. This is illustrated by the rightward shift of DD/AR & MR curves 4. (Firm’s output & price: final + initial) Initially firm produces at output Qe where MR = MC which is the profit maximising condition. Price determined by the corresponding DD is Pe. After changes in DD/AR & MR, firm produces at output Q1 where MR1 = MC1, and charges a higher price of P1. TR increases from ___ to ___ 5. (Increase in profit) Hence profit, which is obtained from TR subtracts TC, would increase as shown by the final profit area of ___ compared to initial profit area of ___ (L) High cost due to multiple trials and tests as well as uncertain outcome → possible loss + takes time o If a firm has been dominant in the industry for a long time, can use previous profits to shoulder the costs Strategy 2: Process innovation 1. Firms can invest in process innovation to increase productivity. By doing so, it will increase productive efficiency and lower cost of production 2. Conduct R&D to improve production processes (e.g. come up with better machinery that uses more automation in production process) 3. Better machinery → increase in productivity → lower cost per unit output → lower AC & MC 4. Demonstrated by downward shift of AC and MC curves from ___ to ___ 5. Profit increases, shown by final profit area of ___ compared to initial profit area of ___ Alternative strategy Use of self-service kiosks/self-checkout counters o increase in productivity → lower cost per unit output → lower AC & MC Use of robots instead of labour in production OR invest more in marketing/advertising Rightward shift of DD/AR & MR curves… TR increases... Effects of efficiency of increasing competition in industry Allocative efficiency Market share of each existing firm is competed away, hence DD facing each firm falls As more firms enter the market, more substitutes for each firm’s product are available, hence DD becomes more price elastic Shown by diagram as leftward shift of DD/AR & MR curve from ___ & ___ to ___ & ___ respectively The firms maximise profits at the output where MR = MC Initial price and output is at ___ while final price and output is at ___ At the original output Qe, P > MC. This means that society values an additional unit of the good less than what it costs to produce it. The socially optimum output is at Q s, where P = MC. Hence there is over-allocation of resources to the production of the good, causing a deadweight loss shown by area ABC As analysed earlier, new price is lower at ___ and output at ___. As the new price is lower, the difference between price & MC is smaller. Hence deadweight loss is smaller shown by area DEF The firm is now less allocative inefficient Productive efficiency Productive efficiency is obtained when the firm produces at an output level that incurs the minimum AC which is at the lowest point of the AC curve Previously, the firm produces at Qe, as analysed earlier. With more competition, as market share is competed away, as analysed earlier, the firm produces at Q1 Hence the firm is producing much further away from the output level where minimum AC is incurred Hence the firm is now more productive inefficient Perspective 2: Firm could be operating beyond minimum efficient scale where output level is where diseconomies of scale have already set in (give 1 e.g. of disEOS). At Qe, AC is higher Hence the reduction in output due to divestment could make the firm less productive inefficient as they are producing nearer to output level where minimum AC is incurred Alternative perspective 2: More competition in the industry o More pressure for the firm to produce using least cost technique of production/more pressure to be strict over cost controls → less productive inefficient o OR pressure to adopt more automation → lower cost per unit of output → lower SRAC and MC Dynamic efficiency Dynamic efficiency is achieved when firms invest in technology so productivity in production process and product quality will improve over time Market share is competed away → supernormal profit gets competed away → lower ability to conduct R&D to improve product quality or production process → less dynamic efficient More competition → more incentive to carry out R&D to improve product quality and production process → better production technique → increase in productivity → lower cost per unit → downwards shift of LRAC Shut-down condition 1. Subnormal profits (TR < TC) 2. Can cover variable cost fully? (P < AVC or TR < ATC) 3. If the firm chooses to stay, what is the loss? 4. If the firm chooses to leave, what is the loss? Shut-down caused by higher TC Rise in TC → the firms must be earning subnormal profits (ie TR < TC) However, the TVC must have increased significantly such that the firms’ TR cannot fully cover their TVC So if the firms continue to operate, they have to incur losses in terms of part of TVC and full TFC However, if the firms shut down, their loss is just the TFC Hence to minimise loss, they should shut down Firms’ strategies to reduce competition Reduction in competition → fall in number of firms in the market Firms will shut down when they are earning sub-normal profits and cannot even cover their AVC (ie P < AVC, which is the shut down condition) Strategy 1: Product innovation (non-pricing strategy) Product innovation refers to efforts put in by a firm to come up with new, improved or differentiated products such as… R&D for T&P to change in favour of good This increases DD facing the firm and makes DD more price inelastic as service is less substitutable. This is illustrated by the rightward shift of DD/AR & MR curves The firm now has a larger market share Rival firms experience a fall in DD and the DD curve becomes more price elastic Initially rival firms produce at output Qe where MR = MC which is the profit maximising condition. Price determined by the corresponding DD is Pe. After changes in DD/AR & MR, firm produces at output Q1 where MR1 = MC1 and charges a lower price of P1. TR decreases from ___ to ___ Hence profit, which is obtained from TR subtracts TC, would decrease as shown by the final profit area of ___ compared to initial profit area of ___ Rival firm is now earning subnormal profits, and is unable to cover its variable cost fully (P < AVC) If the firms continue to operate and produce, its loss is a part of variable cost and its fixed cost (make reference to diagram) If the firms shut down, its loss is only its fixed cost (make reference to diagram) Hence, to minimise losses, the firms will shut down This would reduce the competition in the market for the original firm (L) Takes time to do R&D as the product has to go through various trials and testing Hence, this may not be an effective measure if the objective is to decrease competition immediately Additionally, high R&D costs may also mean that firms may experience a fall in current profits o If a firm has been dominant in the industry for a long time, can use previous profits to shoulder the costs o Could other firms also be conducting similar strategies? (EV) Is the firm conducting R&D a firm with high expertise in the field and has understanding of the needs in the market? o The extent of innovation will determine the extent to which competition can be reduced Are there patent rights in the country? Strategy 2: Predatory pricing (pricing strategy) Predatory pricing is a strategy that involves price cutting by the incumbent firm (predator) to force existing rival firms to operate at a loss and leave the industry. The incumbent firm (predator) may set its price below its competitor’s and even its own AC (ie Ppredatory pricing < AC). The firm may even choose to sell below its own AVC in the short run Over time, rival firms might not be able to cope with the losses as a result of matching the low prices set by this firm and choose to exit the market This reduces competition in the market This allows the remaining firms to increase their market share and corresponding level of market power, raise prices above those that the rival firm had been charging and maximise profits in the long run (L) Only firms that enjoy high EOS that enable them to operate at lower AC than other firms would be able to use such pricing strategy The firm has to be certain that its rivals cannot sustain the loses for long and have to leave the market, or else the firm carrying out the predatory pricing will suffer from even larger losses (EV) A firm that chooses to engage in predatory pricing also usually has sufficient past profits to cope with the short run losses incurred in the process They also tend to be the firms with the larger market share in the market, and therefore could be confident of the outcome in enacting predatory pricing Overall EV Which is the better strategy? (short term/long term) Is there an urgency to decrease competition in the short run? Are the firms subjected to anti-competitive laws in the country? Government intervention in markets to protect consumers (e.g. telco market) Option 1: Lower BTE The government could lower BTE by issuing more licences up for bidding to operate in SG This decreases DD facing the existing firms and makes DD more price elastic as service is more substitutable. This is illustrated by the leftward shift of DD/AR & MR curves (make reference to diagram) Initially rival firm produces at output Qe where MR = MC which is the profit maximising condition. Price determined by the corresponding DD is Pe. After changes in DD/AR & MR, firm produces at output Q1 where MR1 = MC1, and charges a lower price of P1. The fall in price means that there is an increase in consumer surplus (when compared with total demand) (L) An increase in price will result in a more than proportionate fall in qty DD, TR of existing firms fall TR decreases from ___ to ___ Hence profit, which is obtained from TR subtracts TC, would decrease as shown by the final profit area of ___ compared to initial profit area of ___ As there is a decrease in supernormal profits earned, there will be a decrease in R&D efforts made by firms (make reference to diagram) There will be a lack of improvements in the quality of telco services, which reduces consumer welfare (EV) Do we need more firms in the market? What is the level of minimum efficient scale relative to market demand? (ie can the market support having more firms?) The market might have reached its saturation point (some firms will have to leave) The MES in the market is still large relative to market demand. Having too many firms prevent the firms from enjoying sufficient EOS to remain competitive in the industry Option 2 (MC pricing) The government can regulate that price be set where P = MC (make reference to diagram) Consumers are thus able to purchase telco services at a lower price (show the increase in consumer surplus on the diagram) Consumers can also consume at a higher quantity of output, ie at Q MC Hence, consumer welfare increase (L) There is imperfect information on the exact MC of the firm and even if some estimations are made, cost structure may change over time It is difficult to track the MC of firms and firms may also not report their actual MC  There is opportunity cost in monitoring and enforcement of MC pricing as the government funds could have been used as grants to encourage R&D Overall EV To what extent has consumers' welfare been affected due to this oligopolistic market structure? Was it price or quality/variety of telco services that have been unfavourable? (weigh) Does price of quality of telco services matter more for consumers? How (trigger) affects firms’ price and output decisions Increase in market share - Expansion of firm - Collusion of firm to behave as one DD increases and becomes more price inelastic (AR : Profit-maximising condition) Increase in price More allocative inefficient Fall in consumer welfare, fall in equity Increase in output (Q) More EOS enjoyed (show on diagram) → less productive inefficient → increase in consumer welfare But firms could become complacent due to the lack of competitive pressure Produce above the firms’ SRAC (e.g. over-staffing) Diseconomies of scale (e.g. complexity in management) This would result in higher productive inefficiency Increase in TR and profits More able to engage in R&D Increase in dynamic efficiency → CW increases But increase in profits/lack of competitive pressure → no incentive to carry out R&D Dynamic inefficient → fall in CW Decrease in market share - Divestment - Government creates more competition → entrance of new firms DD falls and becomes more price elastic (AR : proft-maximising condition) Fall in price Less allocative inefficient Increase in consumer welfare, increase in equity Fall in output (Q) Lose a part of EOS (show on diagram) → produces at a point further away from minimum point on AC → more productive inefficient → fall in CW  But due to competitive pressure Produces on the AC curve → less productive inefficient → increase in CW Restructuring efforts → increase in productivity → fall in MC and SRAC → firm produces at an output level nearer the minimum point of LRAC → less productive inefficient → increase in CW Fall in TR and profits Les able to engage in R&D More dynamic inefficient → fall in CW But due to competitive pressure, higher incentive to conduct R&D More dynamic efficient → increase in CW Increase in price of FOP Increase in MC and AC (AR : profit-maximising condition) Increase in price Fall in output (Q) Fall in profits o But would this necessarily occur? o Response of firms to the rise in cost? Increase in productivity Fall in cost/unit of output (decrease in AC) and decrease in MC (AR : profit-maximising condition) Decrease in price Increase in output (Q) Increase TR and profits Assessing indicators of SOL 1. Increase in nominal GDP Increase in nominal GDP → increase in nominal Y → increase in purchasing power → able to consume more G&S → increase in material SOL However, nominal GDP is not adjusted for the effects of inflation. Thus, increases in nominal GDP could be largely due to increases in prices instead of actual output, hence need data on real GDP growth to accurately reflect on the availability of G&S in the country 2. Increase in real GDP Increase in real GDP → increase in real Y → increase in purchasing power → able to consume more G&S → increase in material SOL However, increase in real GDP may not necessarily mean the material SOL of the people in the country has increased if population growth exceeds real GDP growth, hence need data on change in real GDP/capita 3. Income distribution Even if real GDP/capita increases, it does not mean the material SOL of the median person increases The increases in real GDP/capita could have been attributed to a small group of high-income earners instead of the remaining majority, hence material SOL of a median person may not have increased Hence need data on Gini coefficient which measures the extent to which the distribution of income among individuals or households within an economy deviates from a perfectly equal distribution, values lying between 0 and 1, where 0 represents perfect equality and 1 represents perfect inequality Option 1 (HDI) Real GDP/capita and Gini coefficient only affects material SOL There is a need to consider the non-material aspects of SOL, such as life expectancy, which reflects the quality of healthcare services, sanitation etc. as well as years of schooling as access to those would show how well-informed the citizens are Hence a better alternative indicator is HDI, which is a more holistic indicator of SOL HDI is a composite index that takes into account achievements in three dimensions, such as life expectancy index, minimum years of education, standard of living measured using PPP adjusted GNI/capita Option 2 (MEW) Increase in real GDP/capita could have come about due to long working hours → lower leisure hours → lower non-material SOL Increase in real GDP/capita could have come about at the expense of the environment where firms resort to using cheap but pollutive techniques of production → more pollution → lower air quality → lower non-material SOL Hence a more holistic alternative indicator is Measure of Economic Welfare (MEW), which adjusts the measure of total national output to include items such as the value of leisure time and deduct effects of environmental damage SOL (flip) 1. Fall in real GDP The fall in real GDP does not necessarily translate to a fall in average income. There is a need to consider population growth If the rate of fall in real GDP is lower than the rate of fall in population, there could be a rise in real GDP per capita In other words, the average material SOL in the country would actually rise Hence need data on real GDP/capita 2. Income distribution In addition, even if real GDP/capita indeed falls, the extent of fall in material SOL for the median person cannot be ascertained if there is wide income disparity in the country There could be a small group of high-income earners who may experience only small decreases in income whereas the remaining majority experience larger proportion of falls in income than that reflected by the fall in real GDP/capita Hence the material SOL of the median person may have fallen more There is a need to look at the Gini coefficient data which measures the extent to which the distribution of income among individuals or households within an economy deviates from a perfectly equal distribution, values lying between 0 and 1, where 0 represents perfect equality and 1 represents perfect inequality 3. Non-material SOL In addition, the above-mentioned indicators only gave some indication of the change in material SOL and not non-material aspect of SOL Option 1 (MEW) The fall in real GDP could mean shorter working hours for the workers and more leisure time This could improve well-being and non-material SOL of the people In addition, the fall in real GDP means there is lower production, possibly resulting in lower air and water pollution This thus improves the people’s non-material SOL OR For example, if a country has improvement in life expectancy, this could be indicative of access to better quality of healthcare services as well as better sanitation and living conditions In addition, if the people are spending more years in education, they could make better, well- informed decisions in different aspects of their life, improving non-material SOL (if no indicators of non-material SOL had been provided) However, no indicators of these are given in the preamble Hence to determine the change in their non-material SOL, we could consider a holistic indicator like… Measure of Economic Welfare, which adjusts the measure of total national output to include items such as the value of leisure time and deduct effects of environmental damage OR Human Development Index, which measures average achievement in three key dimensions of human development: life expectancy, mean years of schooling and PPP-adjusted GNI per capita PPP adjusted GDP After conversion to a common currency, a significantly higher GDP per capita in Country A than Country B may indicate that the people in A are enjoying a significantly higher material SOL than those in B as with higher income per capita, the people have higher purchasing power, they are able to consume more G&S However, even though GDP per capita is significantly higher in A than B, the purchasing power of people in A may not be that significantly higher than B due to differences in cost of living in the two countries The same US$100 may be able to purchase more items in B than A due to the lower cost of living in B Hence to more accurately determine the difference in the material standard of living in 2 countries, need to look at Purchasing Power Parity adjusted GDP/capita PPP adjusted GDP at international price equalises the purchasing power of different currencies by eliminating the difference in price levels Increase in GDP Increase in GDP → increase in GPL → increase in Y → higher purchasing power → able to consume more goods and services → higher material SOL OR Increase in GDP → more goods and services available for consumption → higher material SOL Macroeconomic indicators Real/PPP-adjusted GDP growth rate What is considered healthy Positive How indicator reflects economic performance The country is producing more output than the year before Higher availability of G&S → higher material SOL Inflation rate What is considered healthy Many policymakers: 2-3% World Bank: 1, a fall in foreign price of X will result in a more than proportionate rise in qty DD of X → X revenue increases Deficit on BOT/current account balance is reduced in the future Overseas investment (effect on BOP) Effect 1 (main) Outward investment from Country A into other countries In other words, there is an outflow of long-term capital Outflow on capital & financial account balance Effect 2 Country A’s people who invest abroad will repatriate profits back to Country A Hence there will be inflow on the primary income balance Current account balance improves Working abroad (effect on BOP) Effect 1 (main) The people repatriate wages back to country A Inflow of primary income balance Current account balance improves Effect 2 The people provide/send remittances to family members in Country A Inflow of secondary income balance Current account balance improves Increase in interest rate (effect on BOP) NO EFFECT ON FDI More inflow of hot money/short-term capital into the country as there is higher returns on the funds Inflow on capital & financial account balance Recession (effect on BOP) Recession is the fall in RNY/real GDP of a country → fall in Y → fall in purchasing power Fall in DD for M → fall in M expenditure BOT improves Inflow on current account balance Recession in other countries (effect on BOP) (definition) Fall in RNY/real GDP of Country A Fall in Y of Country A → fall in purchasing power of Country A Fall in DD for M by Country A → fall in M expenditure of Country A Fall in X revenue of other countries → fall in AD of other countries → fall in RNY of other countries → fall in Y in other countries Other countries DD less of Country A’s X → fall in X revenue of Country A Extent of fall in X revenue vs M expenditure during recession 1. Income elasticity DD for Country A’s M could be more income elastic than Country A’s X Country A’s X such as ___ could be seen as more of a necessity, hence the DD for its X is less Y elastic DD for X falls by a smaller extent than DD for M Fall in M expenditure > fall in X revenue 2. Origin of recession Since the recession occurred in Country A, they would be more badly affected Larger fall in M expenditure of Country A For other countries, Country A is just one of their trading partners Their RNY and hence DD for Country A’s X are not affected that significantly Smaller fall in X revenue of Country A Aiming for lower growth rates Benefit 1 (lower rate of inflation) Smaller increase in AD Rise in AD results in unplanned inventory depletion and a shortage, signalling firms to step up production As increase in AD is smaller, there is less competition for FOP COP rises to a small extent → GPL rises to a small extent Overheating of the economy/high DD-pull inflation is prevented Benefit 2 (non-material SOL) Smaller increases in production and pollution AND The government can better monitor and enforce pollution abatement measures Less pollution → better air quality → higher non-material SOL Benefit 3 (sustainable growth) Reduced rate of depletion of resources A slower growth rate means that there is more time for resources to renew Link to LRAS Link to sustainable growth Cost 1 (non-material SOL) Smaller increase in government tax revenue (link growth to tax revenue) The government could not significantly spend to improve the quality of infrastructure significantly Only small improvements in non-material SOL Cost 2 (material SOL) (Lower) growth rate < (higher) population growth Fall in RNY/capita → fall in purchasing power → people are able to consume less G&S Fall in material SOL OR Small increases in Y → only small increases in purchasing power → people are only able to consume slightly more G&S Only small increase in material SOL Cost 3 (DD-deficient unemployment) Only small increases in AD → (AR : DD-deficient unemployment) Only small decreases in DD-deficient unemployment Cost 4 (investor confidence) If the country switches its aim/position from a high to low growth rate Returns from investment would not be as high as expected Fall in investor confidence → fall in I → fall in AD → fall in future actual growth Exchange rate (Appreciation) 1 unit of domestic currency can be exchanged for more units of foreign currency This results in a rise in foreign price of X and a fall in domestic price of M Option 1 Assuming Marshall-Lerner Condition holds, i.e. |PEDx + PEDM|> 1 Appreciation will result in worsening of BOT This can be seen as a gauge of AD falling as (X – M) falls Option 2 (not applicable to SG) Assuming |PEDX|> 1 An increase in foreign price of X will result in a more than proportionate fall in qty DD of X X revenue decreases Assuming |PEDM|> 1 A fall in domestic price of M will result in a more than proportionate rise in qty DD of M M expenditure increases (X – M) for the domestic country decreases Option 3 1 unit of domestic currency can be exchanged for more units of foreign currency There is a fall in domestic price of imported inputs/price of FOP Fall in COP → fall in SRAS → (AR : GPL) → fall in GPL Thus, appreciation can be used to manage cost-push inflation Exchange rate (Depreciation) 1 unit of domestic currency can be exchanged for less units of foreign currency This results in a fall in foreign price of X and a rise in domestic price of M Option 1 Assuming Marshall-Lerner Condition holds, i.e. |PEDx + PEDM|> 1 Depreciation will result in an improvement of BOT This can be seen as a gauge of AD rising as (X – M) rises Option 2 (not applicable to SG) Assuming |PEDX|> 1 A decrease in foreign price of X will result in a more than proportionate rise in qty DD of X X revenue increases Assuming |PEDM|> 1 A rise in domestic price of M will result in a more than proportionate fall in qty DD of M M expenditure decreases Hence, (X – M) for the domestic country increases Impact of fall in global I/R on SG’s economy Perspective 1 (Positive impacts) Point 1: Quantitative easing is where the central bank buys government bonds and bonds from private firms to inject funds into the economy This improves credit access to households and firms There is a rise in C and I in other countries → rise in AD in other countries (AR for fall in I/R in other countries) (AR for rise in AD in other countries) The increase in RNY results in higher purchasing power of people in other countries People in other countries DD more M from SG In other words, DD for SG’s X increases X revenue of SG increases (AR for multiplied rise in AD in SG) - The rise in AD results in unplanned inventory depletion and a shortage in SG, signalling firms to step up production - As Singapore is operating near full employment level, there are limited resources available, resulting in supply bottlenecks - As the initial AD increased by the amount of X, there will be an equal increase in payment of factor incomes, triggering the multiplier process - For every increase in income, a portion of the increase in income will be spent on domestic goods based on the marginal propensity to consume (MPC), while the rest is withdrawn from the economy as savings, tax payments, and import expenditure - Hence there will be continued induced spending and increases in income, causing a multiplied increase in induced AD, resulting in a multiplied increase in RNY - As more resources are utilised to produce output, unemployment falls As X revenue of SG increases, SG’s BOT improves Point 2 (secondary): As the I/R in other countries falls, other countries’ firms borrow to invest in SG as SG is less affected by the financial crises Rise in FDI in SG Inflow on the capital and financial account AND Increase in quantity of capital stock → rise in quantity of resources OR Transfer of technology from foreign firms to SG → rise in productivity of resources (AR for increase in LRAS in SG) This indicates potential growth Evaluation Option 1 (small multiplier) However, SG has a small multiplier Due to its compulsory savings scheme, it has high MPS SG has limited resources and is reliant on M for production and consumption, so it has high MPM High MPS + high MPM → high MPW and hence low MPC This results in a small multiplier value The increase in AD of SG will only result in a small multiplied increase in RNY Option 2 (question the context) Even though QE and low I/R is intended to increase AD and RNY in other countries to a desired extent, this may not necessarily occur as firms and households have a poor economic outlook There will not be a significant increase in C and I in other countries Hence, with the small increase in RNY in other countries, the effect on SG is also reduced Perspective 2 (Negative impacts) Point 1: However, the increases in SG’s AD could fuel DD-pull inflation SG’s unemployment rate is generally low ( 1, a fall in foreign price of X will result in a more than proportionate rise in qty DD of X → X revenue increases → rise in AD → rise in RNY and fall in unemployment If the subsidy is temporary to slow down the decline of the agricultural industry so that the government can implement retraining measures at the same time to equip workers with relevant skills for other high value-add industries, then the measure is justified Without the protectionism, the country could face massive unemployment at once since a significant number of people are employed in that industry Option 3 (affordability and accessibility) Subsidise crops → fall in COP → rise in SS → fall in price of crops If country A has a large population and cannot rely on other countries for food, making them vulnerable to food security issues Additionally, if Country A has a high proportion of low income group, it is important for crops to remain affordable Perspective 2 (against) Option 1 (no CA) However, Country A has already provided subsidies that are far in excess of the limits agreed to, and is planning on increasing subsidies further This evidence suggests that Country A may not be the ones with/may have lost their CA in producing agricultural products Despite already enjoying huge subsidiaries, Country A stated that they even have to increase subsidies further, showing that Country A is having trouble competing in the global market Country A possibly has high opportunity cost in production due to the lack of suitable resources With Country A’s subsidy, other countries with suitable resources to produce agricultural products and can produce at lower opportunity cost could be at risk of driven out of the market even though they may be the ones with true CA by Country A’s crop producers due to the unfair competitive advantage Country A’s producers receive from their government This is harmful from the POV of world resource allocation Thus, Country A’s policy is not justified Secondary point (cost/consequence) Consequence of tariffs Cost/consequence of protectionism (A61 – tariff DWL diagram + analysis) Or retaliation Or cost to other countries EV (1) However, if Country A’s objective is to ensure food security for its people, then they may continue to subsidise just for their domestic market These subsidised crops should not be exported and distort the opportunity cost of agricultural products in the global market Based on the evidence, Country A does not seem to have the CA in producing agricultural products Hence, Country A should move up the value-add chain and produce more knowledge-based goods to sustain growth in the long run EV (2) If the subsidy is just temporary to slow down the decline of the agricultural industry in Country A so that the government can implement retraining measures at the same time to equip workers with relevant skills for other high value-add industries, then the measure is justified Without the protection, Country A could face massive unemployment since a significant number of people are employed in the agricultural industry Tariff vs exchange rate policy to deal with a loss in competitiveness (H1) Tariff When tariff is imposed on imported goods, the price of imports increases Since DD for the imported good is likely to be price elastic as there are available substitutes, an increase in price of imports will result in a more than proportionate fall in qty DD of imports → M falls Domestic consumers switch to domestically produced goods → increase in qty DD of local goods → increase in revenue of domestic producers Hence competitiveness improves (H2) Exchange rate In periods of recession/low growth, the central bank may allow depreciation in accordance to market forces (AR: MLC) → BOT improves, hence competitiveness improves EV (question assumption) Whether tariff or exchange rate policy is a better measure depends not only on number of industries that lose competitiveness or how fast the measures can work It also depends on possible unintended outcomes of the measures on other industries in the country as sellers response of trading partners (context) In a world where trade wars are escalating. Tariffs should be avoided unless absolutely necessary to protect against unfair competition (R – secondary point) However in the long-term, a better measure to address the loss of competitiveness is SS side policy to boost price and non-price competitiveness OR (cause) It depends on the root cause of the loss of competitiveness (domestic factors vs unfair competition from abroad) Justification of protectionism Infant industry argument Yes (potential CA, EOS) Infant industries are newly established industries that have potential CA They are usually small and have higher AC due to inability to reap the full EOS and hence is unable to compete against foreign competition If the infant industries are protected and allowed time to grow competitive internationally, there will be higher X revenue, growth and employment in the LR and lower prices No Goes against specialisation theory leading to inefficiency in resource allocation Wastage of resources if there is wrong identification Thus, there may be higher prices in the short run Dumping argument Yes (P < MC) Dumping occurs when a good is sold in foreign markets at a price below marginal COP Protection may be justified to protect against predatory dumping where foreign producer temporarily reduces its price to force out domestic producers This may lead to monopoly power by foreign firms who exploit consumers by charging higher prices in the LR No It is difficult to distinguish between dumping and normal international competition where the lower prices of foreign products is due to CA If dumping is sporadic to remove unwanted stocks, consumers benefit from lower prices instead Causes of dumping Cause Dumping refers to the situation where firms sell their goods (exports) at a price below the marginal COP in the overseas or foreign markets The government’s subsidies for its producers in the ___ industry will artificially lower the unit cost of production, increasing the profitability of the firms This increases the firms’ willingness and ability to produce the goods ie, supply of the good increases (make reference to diagram) With an increase in supply, price of ___ falls The firms’ supply curve is also its MC curve Hence, being able to charge price (P1) which is below the firm’s initial marginal cost without the subsidy (MC1) shows that the provision of subsidies may allow the ___ producer to dump their goods in ___ Will there be a new market equilibrium at a sustainable price as a result of a price floor? Perspective 1 (yes) From the perspective of the producers, setting a minimum price above P1 results in an increase in their quantity supplied from Q1 to QS, while quantity demanded will fall from Q1 to Qd As quantity supplied exceeds quantity demanded, there will be a surplus, and if this surplus could be: 1. Exported to other countries 2. Purchased by their government There will be a ‘new market equilibrium at a sustainable price’ Perspective 2 (no) However, buying up the surplus could put a strain on the government budget and could lead to inefficient allocation of resources if there is no other market for the government to sell off the accumulated surplus to Hence in this regard, the market price is unsustainable EV If the government were to reduce their subsidies to SSSubsidy1, the surplus would be removed Benefits of globalisation to SG ‘X’ – Small domestic market With globalisation, there is a reduction of trade barriers SG is able to tap on the DD by the global market Increase in DD for X → increase in TRX → increase in AD and RNY AND SG can produce for a larger market and enjoy EOS (+1 example of internal EOS) This makes SG’s X more price competitive |PEDX|> 1 → increase in TRx → increase in AD and RNY ‘M’ – Lacks resources As SG lacks natural resources, there is a need to import final goods and raw materials Dsf Part 1 With globalisation, SG is able to source for raw materials at a lower cost SRAS analysis Part 2 With globalisation, there is a higher ability for SG to import This enables SG to specialise based on CA by producing goods that incur a lower opportunity cost (+example) and import goods that SG incurs a higher opportunity cost in producing (+example) Link to material SOL Part 3 SG is more able to attract FDI Transfer of technology → LRAS analysis Costs of globalisation to SG 1. Vulnerability to external shocks (e.g. recessions abroad) Small domestic market → small C and X is a significant component of AD 2. Vulnerability to imported inflation → higher SRAS Limited resources → reliant on M 3. Vulnerability to structural unemployment Openness of SG’s economy → when another country acquires CA Impact of escalating trade wars on consumers, employees, producers and assess whether protectionism can ever be justified Intro: briefly state the negative outcome of trade wars Consumers: (prices) consumer surplus, quantity/variety of goods and services Employees: employment Producers: TR – TC (profits) Perspective 1 Option 1: Dumping argument Perspective 2: Hard to determine Option 2: Infant industry argument Perspective 2: Does not have CA