Demand & Supply

1. Market: The Market can be defined as a convenient arrangement whereby buyers and sellers, motivated by self-interest, can communicate with each other in order to exchange goods, services, or factors of production at an agreed price. 2. Theory Of Demand Demand is defined as the amount of goods consumers are willing and able to buy in a given period of time at a given price, ceteris paribus(other things remaining constant) 3. Law of Demand The law of demand states that in a given time period, the quantity demanded of a product is inversely related to its price, ceteris paribus. 4. Theory Of Supply Supply of a good refers to the amount of a good producers are willing and able to sell in a given period of time at a given price, ceteris paribus. 5. Law Of Supply Law of Supply states that in a given time period, the quantity supplied of a product is directly related to its price, ceteris paribus 6. Equilibrium Price Equilibrium price refers to price that has no tendency to change, The equilibrium price occurs when which quantity demanded by consumers is equal to quantity supplied by producers i.e price where market demand curve intersects market supply curve. 7. Consumer surplus Consumer surplus is the difference between the price buyers are willing and able to pay for a good and the actual price paid. i.e the area below the demand curve and above the price line. 8. Producer Surplus Producer surplus is the difference between the price sellers are willing to accept for a good and the actual price they receive. It represents some kind of gain to producers as they receive more than what they are willing to accept. i.e the area below the price line but above the supply curve.

Elasticity of DD & SS and its applications

1. Price Elasticity of Demand (PED) PED measures the responsiveness of quantity demanded of a good due to a change in its price, ceteris paribus. PED = Percentage change in quantity demanded of Good A Percentage Change in price of Good A 2. Price Elasticity of Supply (PES) PES measures the responsiveness of quantity supplied of a good due to a change in the price of the good itself, ceteris paribus. PES = Percentage change in quantity supplied of Good A Percentage Change in price of Good A

3. Price Floor An effective price floor is a legally established minimum price above the market equilibrium price. 4. Price Ceilings An effective price ceiling is a legally established maximum price below the market equilibrium price. 5. Indirect taxes Taxes that are levied on goods and services are called indirect taxes. Specific tax A specific taxt or per unit tax is a fixed amount of tax per unit of a good. Ad valorem tax Calculated as a percentage of the sales price of a commodity 6. Tax incidence Tax incidence is the division of a tax burden between the consumers and producers.

National Income Accounting

1. The production or output approach It is the sum of the money value created resulting from the activity of producing goods and services by the various industries in the country. It indicates the value added of output measured. 2. The income approach It is the sum of all incomes that accure to resident resource owners from their participation in the various industries. It indicates the money value of earnings (wages, rent, interests and profits) measured by recipient categories or resources owners (labour, land, capital and entrepreneurship). 3. The Expenditure Approach It is the sum of spending necessary to purchase output or assets of the country. It indicates the total money value of consumption expenditure, government expenditure, gross investment expenditure and net exports expenditure to the rest of the world. 4. The circular flow The circular flow is a continuous and simultaneous flow of both final goods and services and payments in exchange for these goods, services and factors of production (land, labour, capital and entrepreneurship)

National Income = National Product = National Expenditure

5. Gross Domestic Product Gross Domestic Product is the total money value of final goods and services produced using resources within the territory of the country in a particular year. 6. Gross National Product Gross National Product is the total money value of final goods and services produced using resources owned by the residents of the country in a particular year. 7. Net National Product National Income is the toal money value of all final goods and services produced using resources owned by residents of the country after deducting depreciation of capital goods during a specific period of time, usually a year.

GNP = GDP + net factor income from abroad

8. Nominal GDP The Nominal GDP is a national income accounting statistic evaluated at current market prices that reflect the money value of all goods and services produced within the territory but have not been adjusted for price changes. 9. Real GDP Real GDP is a macroeconomic measure of the money value of all goods and services produced within the territory adjusted for price changes (eg. Inflation) Real GDP = Nominal GDP x Price Index (base year) GDP deflator (current year)

Macroeconomics
1. Aggregate Demand (AD) AD is the total demand by households, firms, government and foreign sectors for the final goods and services that is produced in the economy at price levels. 2. Consumption Expenditure Consumption is the purchase of domestically produced goods and services for the satisfaction of consumer wants. Consumption expenditure (C) is that part of national income (Y) that is spent on domestically produced consumer goods. 3. Investment Expenditure Investments are expenditure on capital goods such as equipment, plants as well as additions to stocks of raw materials and intermediate goods 4. Govt Expenditure G is the amount of spending by the government on goods and services. 5. Aggregate Supply (AS) AS is the total output that firms in the economy are willing and able to supply at different price levels in a given time period.

Government Policy Tools

1. Fiscal policy Fiscal policy involves the altering of government expenditure and/or tax revenue and expenditure to affect the level of economic activities in the economy. Non-discretionary fiscal policy depends on automatic or built-in stabilizers which influence government spending or tax yields without the need for conscious government intervention. Discretionary fiscal policy refers to the deliberate changing of taxes and government spending especially for the purpose of regulating the level of economic activity in order to influence the national income of the country. 2. Monetary Policy (MP) MP is the regulation of the money supply in a country so as to influence the level of economic activity and the national income of the country. 3. Exchange Rate Policy (ER) ER policy is the deliberate attempt by the government to manipulate the ER of the conutrys currency in order to influence the economy. 4. Income and price policy Income and price policies are economic- wide wage and price controls. They consists of persuasion by the government as well as legislation in controlling wages and prices of goods.

Inflation
1. Inflation is defined as an economic situation where there is a sustained increase in the general price level. i.e implies a reduction in the purchasing power of money Rate of inflation = percentage change of a price index

2. Mild inflation Price level rises slowly ( ~ 0 to 2%). Most economists feel that a low rate of inflation may stimulate economic expansion. 3. Creeping inflation A situation where there is a more substantial and persistent increase in the GPL, usually referring to an annual rate of inflation of about 6~7%. 4. Hyperinflation Situation where prices rise at a phenomenal rate. Prices rise so fast that money ceases to be a medium of exchange or a store of value and normal economic activity may break down. (frequently associated with social instability and leads to disruptions in the economy) 5. Demand-pull inflation Occurs wshen there are persistent rises in aggregate demand (AD) in the economy that are not matched by the output of goods and services (AS). In other words, rising AD is not matched by AS. 6. Cost-push inflation Occurs when there are persistent rises in costs of production (eg. Increases in wages, rents, interests, etc) , independent of aggregate demand. (A supply-side phenomenon) 7. Disinflation A term describing a drop in inflation rate where prices are still rising but at a reduced rate. 8. Deflation Defined as a persistent fall in general price levels thus implying that supplyis greater than demand.

Unemployment
1. Labour force Made up of those who are employed and those who are unemployed but are actively looking for a job. It is also referred to as the working population or the economically active population. 2. Unemployment Defined as the situation in which people who are willing and able to work but cannot find work. 3. Frictional Unemployment Associated with normal labour turnover, aggravated by geographical immobility of labour and imperfect market knowledge. 4. Structural Unemployment Results from immobility of resources, such as when the structure of the economy changes or when there are permanent changes in demand and supply conditions. 5. Cyclical Unemployment Caused by inadequate demand for a countrys goods due to weak foreign and domestic demand. 6. Business cycle A business or trade cycle is the fluctuating pattern of GDP growth over time characterized by periods of expansion, then contraction, then expansion again. 7. Seasonal Unemployment Seasonal nature of the demand for the final product and thus the fluctuating demand for labour. 8. Disguised Unemployment This type of unemployment is due to the inadequacy of capital investment in relation to the needs of the growing labour force, resulting from an increase in population. 9. Stagflation A term referring to periods when the economy is simultaneously experiencing the twin evils of inflation and high unemployment.

Economic Growth
1. Actual growth Actual growth is the percentage annual increase in national output. Growth is usually calculated in real terms (i.e inflation-adjusted) to eliminate the effect of inflation on the price of goods and services produced. 2. Potential growth Potential growth is the rate at which the economy could grow if it were to use all its resources. It is used to explain determination of potential national income, and refers to the expansion of an economys capacity to produce goods and services over long periods of time. Long-run concept Represented by outward shift of PPC 3. Recession is a period where national output falls for two or more consecutive quarters.

International Trade
1. International trade It is the exchange of goods and services between countries. An import to Singapore is the Singapore purchase of a good or service made overseas. An export from Singapore is the sale of a Singapore-made good or service overseas. 2. Balance of Payment (BOP) BOP is a comprehensive record of international receipts and international payments between the residents and government of a country and the rest of the world over a period of time usually a calendar year. It uses the double entry accounting system. 3. Terms of trade (TOT) TOT measures the rate of exchange of one good or service for another when two countries trade with each other. It is the ratio of the index of export prices to the index of import prices. Terms of Trade Index = Export Price index (Px) x 100 Import Price Index (Pm)

4. Principle of Absolute Advantage When a country can produce more of a good with the same amount of resources than another country, it is said to have an absolute advantage in that good. 5. Principle of Comparative Advantage A country enjoyed comparative advantage over another when it can produce a good with a lower opportunity costs in terms of other goods forgone. The principle of comparative advantage states that trade can benefit all countries, even if one country has the absolute advantage in all goods, as long as each country specializes in the goods in which they have a comparative advantage. 6. Protectionism Protectionism refers to the protection of home industries from foreign competition by the imposition of trade barriers on foreign products by the government. 7. Trade Patterns refer to the type, volume, and direction of goods and services a country trades.

Market Failure
1. Total Private Costs Total Private costs are costs incurred directly by firms or consumers involved in an economic activity (the production or consumption of a good or service respectively) 2. Total Private Benefits Total Private Benefits are benefits that accure directly to firms or consumers involved in an economic acitivty. 3. Total Social Costs Total Social costs are costs that accrue to society when an economic activity is undertaken. They include both the private costs and the spill-over effects, namely the external costs. 4. Total External Costs Total External Costs are the total costs that are inflicted upon third parties other than the immediate buyer or seller in a transaction or when an economic activity is undertaken. (also known as total negative externality) 5. Total Social benefits They are benefits that accrue to third parties other than the buyer or seller in a transaction or when an economic activity is undertaken. 6. Marginal Private costs (MPC) MPC is the change in total private costs as a result of undertaking an additional uinit of an economic acitivty (consuming/producing a good/service) and the MPC curve is an upward-sloping curve just like the supply curve. 7. Marginal Private Benefit (MPB) MPB is the change in total private benefit as a result of undertaking an additional unit of an economic acitivty and the MPB curve is a downward-sloping curve just like the demand curve. 8. Marginal Social costs (MSC) MSC is the change in total social costs as a result of undertaking an additional unit of an economic activity. 9. Marginal Social Benefit (MSB) It is the change in total social benefit as a result of undertaking an additional unit of an economic activity. 10. Marginal External Benefit (MEB) is the change in total external benefit as a result of undertaking an additional unit of an economic activity.

11. Efficient allocation of resources Implies that adequate available resources are used in the production of goods and services to bring about maximum total economic surplus (ie. Sum of consumer and producer surplus) In doing so, social welfare is maximized. 12. Market Failure Occurs when the workings of the free market economy are imperfect and result in an inefficient or grossly unfair allocation of resources from the perspective of society. 13. An externality is a cost/benefit arising from an economic activity that falls on a third party (not directly involved in the transaction) and is not taken into account by those who directly participate in the economic activity. 14. Public Goods Goods that are, at least to some degree, both non-rivalry in consumption and nonexcludability in consumption. 15. Merit goods Merit goods are goods or services that are considered socially desirable. These are commodities that society values and judges everyone should have regardless whether an individual wants them. 16. Demerit Goods Demerit goods are goods or services that are considered socially undesirable. These are commodities that society judges and values everyone should not have regardless whether an individual wants them.