- 1 day ago
- 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[...]
Category archives: Latest Articles
- 2 months ago
- 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 [...]
- 5 months ago
- 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[...]
- 6 months ago
- 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[...]
- 9 months ago
- Introduction Interest rate is the cost of borrowing and the reward for lending. Foreign direct investment refers to direct investment made in the economy by foreign firms. Many students think that a fall in interest rates will lead to an increase in foreign direct investment. Mr. Edmund Quek will engage in a more detailed discussion with the students in economics tuition on this economic misconception. Exposition A fall in interest rates will lead to a fall in the costs of borrowing. When this happens, the number of profitable planned investments will increase which will induce firms to increase investment expenditure. Investment expenditure comprises investment expenditure made by domestic firms and investment expenditure made by foreign firms which is called foreign direct investment. It is correct to say that a fall in interest rates will lead to an increase in investment expenditure made by domestic firms as they generally borrow in the domestic economy to finance their investments. However, many students think that a fall in interest rates will also lead to an increase in foreign direct investment. This is erroneous. Unlike domestic firms, foreign firms generally do not [...]
- 11 months ago
- 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[...]
- 1 year ago
- Introduction 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. In other words, the non-excludability of public goods leads to the absence of effective demand. Since 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 non-excludability. Furthermore, as public goods are non-rivalrous, the marginal cost of provision, which is the additional cost resulting from pro[...]
- 1 year ago
- Introduction Aggregate demand is the total demand for the goods and services produced in the economy over a period of time and is comprised of consumption expenditure, investment expenditure, government expenditure on goods and services and net exports. Imports are foreign goods and services which are produced in other economies. Many students think that aggregate demand includes imports. The Principal Economics Tutor will discuss this economic misconception in economics tuition with the students. Exposition As aggregate demand refers to the total demand for the goods and services produced in the economy, it does not include imports. However, the components of aggregate demand which are consumption expenditure, investment expenditure, government expenditure on goods and services and exports include imports. Therefore, to derive aggregate demand, imports are subtracted from consumption expenditure, investment expenditure, government expenditure on goods and services and exports. AD = C + I + G + (X – M) In the above function, aggregate demand (AD) is the sum of consumption expenditure (C), investment expenditure (I), government expenditure on goods and services (G) a[...]
- 1 year ago
- Introduction Labour productivity refers to output per hour of labour. Many students think that an increase in labour productivity indicates an increase in the skills and knowledge of labour. This is an economic misconception which will be discussed in economics tuition at Economics Cafe Learning Centre. Exposition An increase in the skills and knowledge of labour will lead to an increase in labour productivity. When workers become more skillful and knowledgeable, the amount of output produced with one hour of labour will rise resulting in an increase in labour productivity. The skills and knowledge of labour may increase due to education and training which will lead to greater human capital. Many governments provide education and training directly, by setting up educational institutes, and indirectly, by giving subsidies or tax incentives to firms to induce them to send their workers for education and training. Although an increase in labour productivity may be due to an increase in the skills and knowledge of labour, this is not always the case. There are various factors which will lead to an increase in labour productivity. Apart from an increase in the skills and knowledge[...]
- 2 years ago
- Introduction A free trade agreement (FTA) is an agreement between two or more economies to remove or reduce barriers to trade with the objective of increasing the cross-border movement of goods and services between the economies. Exports are the expenditure made by foreigners on domestic goods and services. Imports are the expenditure made by domestic residents on foreign goods and services. Aggregate demand is the total demand for the goods and services produced in the economy over a period of time and is comprised of consumption expenditure, investment expenditure, government expenditure on goods and services and net exports. Many students think that signing more free trade agreements will not increase aggregate demand if it leads to a greater increase in imports than exports. This economic misconception will be discussed in economics tuition. Exposition Take Singapore for example. When tariffs on Singapore’s goods are removed or reduced in the FTA member countries, firms that import and sell Singapore’s goods in the FTA member countries will decrease prices to maintain competitiveness. Therefore, signing FTAs in Singapore will make Singapore’s goods cheaper in the FTA memb[...]
- 2 years ago
- Introduction Interest rate is the cost of borrowing and the reward for lending. Aggregate supply is the total supply of goods and services in the economy over a period of time and is determined by the production capacity and the cost of production in the economy. Many students think that an increase in interest rates will lead to a rise in the cost of production in the economy which will result in a decrease in aggregate supply. Mr. Edmund Quek will discuss this economic misconception in greater detail with the students in economics tuition. Exposition Firms employ factor inputs to produce output. These factor inputs include plants and machinery which are often financed through loans. As an increase in interest rates will lead to an increase in interest payments on loans, the cost of production in the economy will rise. Many students think that this will lead to a fall in aggregate supply. This is erroneous. To understand this, we simply need to draw a distinction between fixed costs and variable costs. Fixed costs are costs that do not vary with the output level. In other words, an increase in the output level will not lead to an increase in fixed costs. Fixed[...]
- 2 years ago
- 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 [...]