Category archives: Latest Articles

  • Introduction Income inequity may lead to failure of the free market to allocate some goods and services to the people who need them more. Effective demand is the desire to buy backed by the ability to pay. Ineffective demand is merely the desire to buy not backed by the ability to pay. The free market only responds to effective demand which means that it only distributes goods and services to the people with the willingness and the ability to pay for them. However, the ability to pay for a good does not reflect the need for the good. Therefore, individuals who need some goods and services but do not have the ability to pay for them have to go without the goods and services. In the free market, the prices of goods and services are determined by the market forces of demand and supply. If the income gap is large, high income individuals with a high willingness and ability to pay may push up the prices of some goods and services to the levels which make the goods and services unaffordable to low income individuals with a low ability to pay. This is a matter of concern particularly if the goods and services are necessities. For example, education is a necessity particularly to low incom[...]
  • Introduction Substitutes are goods which are consumed in place of one another such as Coke and Pepsi. The cross elasticity of demand (XED) for a good with respect to another good is a measure of the degree of responsiveness of the demand for the first good to a change in the price of the second good, ceteris paribus. Many students think that public transport is not a close substitute for private cars for the same reason why private cars are not a close substitute for public transport. This economic misconception will be discussed in economics tuition at Economics Cafe. Exposition Private cars and public transport are substitutes as the two goods are consumed in place of one another. However, although some students argue that the two goods are close substitutes, some students argue that they are not. The truth is, whether private cars and public transport are close substitutes varies from individual to individual. However, the problem is that many of the students who argue that private cars and public transport are not close substitutes have not fully understood the relationship between the two goods. In particular, they think that public transport is not a close substitu[...]
  • Introduction The demand for a good is the quantity of the good that consumers are able and willing to buy at each price over a period of time, ceteris paribus. The supply of a good is the quantity of the good that firms are able and willing to sell at each price over a period of time, ceteris paribus. In the free market, the price of a good is determined by the market forces of demand and supply. Many students think that a rise in the price of a good will lead to a fall in the demand for the complements. Mr. Edmund Quek will provide a more detailed explanation on this economic misconception in economics tuition. Exposition The price of a good may rise due to a decrease in the supply. A decrease in the supply of a good will lead to a rise in the price resulting in a decrease in the quantity demanded. When this happens, the demand for the complements will fall. The supply of a good may fall due to several reasons. For example, a rise in the cost of production of a good will lead to a decrease in the supply. When the cost of production of a good rises, firms will increase the price at each quantity to maintain profitability. In other words, they will reduce the quantity sup[...]
  • Introduction The demand for a good is the quantity of the good that consumers are able and willing to buy at each price over a period of time, ceteris paribus. The law of demand states that there is an inverse relationship between price and quantity demanded. When the price of a good falls, the quantity demanded will rise. Conversely, when the price of a good rises, the quantity demanded will fall. The quantity of a good that consumers are able and willing to buy at each price can be shown by the demand curve. The demand curve shows the quantity demanded at each price and is downward sloping due to the law of demand. Many students think that when consumers buy more of a good, the demand curve will shift rightwards. Mr. Edmund Quek will provide a more detailed explanation in the economics tuition class on this economic misconception. Exposition Consumers may buy more of a good due to a change in a non-price determinant of demand. In other words, quantity demanded may increase at the same price. This is called an increase in demand and is shown by a rightward shift in the demand curve. There are several non-price determinants of demand that may lead to an increase in the demand for [...]
  • Introduction The production possibility curve (PPC) shows all the possible combinations of two goods that can be produced in the economy when resources are fully and efficiently employed, given the state of technology, assuming the economy can only produce the two goods. An increase in the production capacity in the economy will lead to an outward shift in the PPC resulting in a decrease in scarcity, and vice versa. When the PPC shifts outwards, some of the points which were previously unattainable will become attainable. The production capacity in the economy may increase due to an increase in the quantity or the quality of the factors of production in the economy. For example, education and training which will lead to greater human capital will increase the skills and knowledge of labour and hence the production capacity in the economy. Research and development which will lead to technological advancement will increase the efficiency of capital and hence the production capacity in the economy. Many students think that a decrease in investment expenditure will lead to an inward shift in the production possibility curve. Mr. Edmund Quek will provide a more detailed explanation[...]
  • The answer is not necessarily. The Marshall-Lerner condition states that for a devaluation of domestic currency to improve the balance of payments, the sum of the price elasticities of demand for exports and imports must be greater than one. A fall in the exchange rate will increase the price of imports in domestic currency which will lead to a decrease in the quantity demanded. If the demand for imports is price elastic, which means that the increase in the price will lead to a larger proportionate decrease in the quantity demanded, import expenditure will fall which will improve the balance of trade. If the demand for imports is price inelastic, which means that the increase in the price will lead to a smaller proportionate decrease in the quantity demanded, import expenditure will rise. However, this may not worsen the balance of trade as export revenue will also rise. A fall in the exchange rate will decrease the price of exports in foreign currency which will lead to an increase in the quantity demanded. As the price of exports in domestic currency will not be affected by a fall in the exchange rate, an increase in the quantity demanded will lead to an increase in export reven[...]
  • The exchange rate of a currency is the rate at which the currency can be exchanged for another currency. It is also defined as the price of the currency in terms of another currency. This is known as the nominal exchange rate. For instance, the nominal exchange rate of the Singapore dollar against the Malaysian ringgit is about RM2.50/S$ which means that 2.5 Malaysian ringgits are required to exchange for or purchase 1 Singapore dollar. It is important to note that the exchange rate of a currency is expressed as the amount of foreign currency that is required to purchase one unit of the currency. Unlike the nominal exchange rate of a currency which refers to the amount of foreign currency that is required to exchange for or purchase one unit of the currency, the real exchange rate of a currency refers to the amount of foreign goods and services that is required to exchange for or purchase one unit of domestic goods and services. Mathematically, it can be expressed as                                      N[...]
  • Public goods will not be produced in the absence of government intervention. Public goods are goods that are non-excludable and non-rivalrous. A good is non-excludable when it is impossible or prohibitively costly to prevent non-payers from consuming the good once it has been produced. A good is non-rivalrous when the consumption of the good by a consumer will not reduce the amount available to other consumers. Examples of public goods include national defence and street lighting. As public goods are non-excludable, consumers can consume them without paying for them. Therefore, consumers will want to consume public goods without contributing to their production which is known as the free-rider problem. As consumers have no incentive to pay for public goods, private firms which are profit-oriented have no incentive to produce them. Therefore, in the absence of government intervention, public goods will not be produced due to the characteristic of non-excludability. Many students think that the characteristic of non-rivalry of public goods leads to non-provision in the absence of government intervention. Mr. Edmund Quek will discuss this economic misconception in economics tuition wi[...]
  • Fact 1 The US dollar has been depreciating against the major currencies in the world over the last few decades. This is mainly due to the rising imports in the US and hence the increasing supply of US dollars in the forex market. Fact 2 Australia is well endowed with natural resources such as minerals, metals and fuels. Therefore, the exchange rate of the Australian dollar depends to a large extent on the exports of these resources. Note: The two facts above will be explained in greater detail in economics tuition. Prediction Suppose you predict that the world economy will move into a recession soon. Question How can you make use of these facts and prediction to increase your wealth? Answer Well, you can convert your savings in Singapore dollars to US dollars. If the US economy moves into a recession, the imports will fall which will lead to a decrease in the demand for foreign currencies. When this happens, the supply of US dollars will fall which will lead to a rise in the exchange rate. These will lead to an increase in your wealth (which will be in US dollars) in terms of Singapore dollars. The story does not end here. If the US economy moves into a recession[...]
  • The reason is that many students do not fully understand the difference between current prices and base-year prices in the balance of payments and aggregate demand. The Marshall-Lerner condition states that for a devaluation of domestic currency to improve the balance of payments, the sum of the price elasticities of demand for exports and imports must be greater than one. A fall in the exchange rate will increase the price of imports in domestic currency which will lead to a decrease in the quantity demanded. If the demand for imports is price elastic, which means that the increase in the price will lead to a larger proportionate decrease in the quantity demanded, import expenditure will fall which will improve the balance of trade. If the demand for imports is price inelastic, which means that the increase in the price will lead to a smaller proportionate decrease in the quantity demanded, import expenditure will rise. However, this may not worsen the balance of trade as export revenue will also rise. A fall in the exchange rate will decrease the price of exports in foreign currency which will lead to an increase in the quantity demanded. As the price of exports in domestic cur[...]
  • Introduction Tariffs are taxes imposed on imports. Many students think that an increase in tariffs will lead to an increase in import expenditure if the demand for imports is price inelastic. This economic misconception will be explained in economics tuition in greater detail. Exposition A persistent balance of payments deficit may lead to problems such as high imported inflation, lower national output and hence national income, higher unemployment and rising public debt, depending on the exchange rate system. Therefore, in the face of a persistent balance of payments deficit, the government may increase tariffs to correct the deficit. If the government increases tariffs, the prices of imports will rise. When this happens, households and firms will switch from imports to domestic goods which will lead to a decrease in import expenditure resulting in an improvement in the current account and hence the balance of payments. Many students think that if the demand for imports is price inelastic, an increase in the price will lead to a smaller proportionate decrease in the quantity demanded. If this happens, import expenditure will rise which will worsen the current account and henc[...]
  • Introduction The multiplier effect is the effect of an increase in autonomous expenditure resulting in a larger increase in national output and hence national income. The multiplier is the number of times by which national output and hence national income rises due to an increase in autonomous expenditure. Many students think that a small multiplier is undesirable for the economy. This economic misconception will be discussed in greater detail in economics tuition. Exposition An increase in autonomous expenditure will lead to an increase in aggregate demand. When aggregate demand rises, firms will employ more factor inputs from households to increase production and hence will pay households more factor income. When households’ income rises, they will increase consumption expenditure. Due to the increase in consumption expenditure and hence aggregate demand, firms will employ even more factor inputs from households to further increase production and hence will pay households even more factor income. When this happens, households’ income will rise further which will induce them to further increase consumption expenditure. Therefore, the initial increase in aggregate demand due [...]