Sunday, July 19, 2009




Reasons for growth:





Perfectly Inelastic Demand

Price elasticity of demand (PED) measures the responsiveness of demand for a good to a change in its price. It is given by the formula of:

PED = (% of change in quantity demanded) / (% of change in price)

We have 5 types of PED namely elastic in demand (price sensitive), inelastic in demand (less price sensitive) and perfectly inelastic in demand (NOT price sensitive at all)

The other two, unitary elasticity (PED = 1) and perfectly elastic in demand (PED = ∞) are true only in their mathematical property. In reality we don’t really come across goods and services that have similar percentage of change as its price (50% / -50% or -40% / +40%). The same goes for the latter. We will not come across situation where PED = 5000 (+50% / -0.01%)

For the discussion, I’m only concern with PED = 0. Many asked me if there is such good where it is not responsive to price AT ALL? The demand curve is vertical and as such parallel to price axis. The closest example to this will be collectible items or portrait of Mona Lisa. No matter how the prices change, people will only demand for one original portrait of hers because there is only one in the world

Another would be the case for organ transplant. No matter how low or how high is the price, a heart patient will only demand for one heart. So the demand curve stays put

Saturday, July 18, 2009

Video Lesson: Production Possibility Frontier

A good reflection on time management. Students whom manage their time efficiently, should be able to produce along the PPF. Point outside the PPF is unattainable given the present state of resources, unless students have more time to prepare before exam, tuition teachers, more past year papers, more reference materials etc

Monday, July 13, 2009

Can A Good Be Both Substitute And Complementary Simultaneously?



Can a good fall into both?



Why Mixed Economy Is Necessary?

Mixed economy is actually the hybrid of free market and command economy. In other word, under this economic system the both the private sector and government will play some significant roles in the economy. Perhaps this mould is the best and that’s the reason most countries practice it. To be truthful, there is actually no pure capitalist or socialist state in the world as dictated in most textbooks. Consider US and the super-scale financial intervention. Look at Cuba. There are various attempts every year by the communist government to crack down small enterprise

From the given example, why both private and public sector need to co-exist? Simple. To overcome the weakness of one another

Why mixed economy is necessary?

(1) Job security. Private firms exist for a reason and that is to maximise profits. They are very responsive to market. In the period of boom, strong demand for their goods and services will lead to rise in employment. In recession like now, companies will not tolerate excess labours as keeping idle workers will simply raise production costs. Therefore, it is said that private workers stand a higher chance to lose employment
Unlike the government, they have to adhere to strict labour acts and laws. For instance, every year a percentage of new employees have to be appointed. Workers with certain years of experience must be promoted. Since the aim is to maximise welfare, therefore chances are slim for anyone to get retrenched. In fact more people will be absorbed during this economic turmoil

(2) Avoid exploitation. Since private enterprise is profit oriented, basic human rights such as education and healthcare may be denied and restricted only to the very few capable. If this were to happen, the gap in the literacy rate and income inequality between the upper and lower social class will widen. To narrow the gap, government sets up various public higher institution and NHS

(3) Regulation of monopoly firms. A monopolist is defined as a single seller of a good or service in the market. Legally, a company is considered as monopoly if the control of market share is greater than 25%. This is a classic example of market failure. Prices are often higher leading to a loss of consumer surplus. Also since monopolists face lesser or no competition, there is lack of incentive to be cost efficient. To overcome this, government can liberalise the product market. It involves breaking down barriers to entry and making them more contestable-to encourage entrance of more firms. This will boost market supply, bringing down prices for consumers and increase competition, investment and productivity. The expansion of European Single Market which seek to promote free movement of goods, services, labour and financial capital help to expedite the process of liberalisation. Also in UK, there are regulators for privatised utilities such as Ofwat, Ofcom, Ofgem and ORR

(4) Economic policy. This is one of the biggest responsibilities for government. Politicians and state economic advisors oversee the economic conditions of a country. In a recession, government will almost inevitably pump more money into the public sector. The money goes to repairing roads and bridges, building schools and hospitals, enlargement of government departments etc. The main aim is to create jobs. Also almost all tax will be lowered to increase spending and buying power. The independent financial institution such as Bank of England will likely reduce interest rates to encourage people to borrow and spend. The private sectors are only keen with profits and not state of the economy such as level of unemployment and inflation (although they contribute to it). Secondly, there is no way they can overtake governments in terms of financial capability

(5) Regulation of water and air pollution. Private enterprise was long known as the environmental villain. In the pursuit of greater profits, factories continuously consume scarce natural resources, and then belching out smoke, pouring out liquid effluents and dumping hazardous solid wastes irresponsibly. As such producers are said to be only concern with their own marginal private benefits (MPB) and marginal private costs (MPC) in decision making. This is why government needs to intervene and perhaps set certain level of compliance. For instance, the UK government is committed to meet the global and European targets of reducing carbon dioxide emissions by 80% in 2050

The EU government also introduced the Emission Carbon Trading (ETS) scheme in 2002. This will help limit the carbon emission in key industries such as energy, steel, cement, glass, brick-making, aircraft etc. The implementation to certain extent has some positive externalities. Other countries have begun to introduce such measures too

(6) Narrowing income inequality. In an almost-pure capitalist state, widening income disparity is a norm with the rich getting richer and the poor gets poorer. With no government intervention, at the end of day, we will have pyramid income distribution. The richest few will control larger proportion of the nation’s wealth or GDP. Again with state interventions, income can be distributed. First is the introduction of progressive tax system. Richer people will pay greater amount of tax than the poor. Also the introduction of national minimum wage which increases every year in UK in line with average earnings, unemployment and sickness benefits can help to mend the situation

(7) Provision of public goods. Public goods have two characteristics. First is non-rivalry. This means the consumption or usage of that public good will not reduce the amount available for other users. Second is non-excludability. Once provided, no one can be excluded from benefiting it. Clearly, private enterprise is not interested due to the problem of free rider. It is a situation where some people clearly ‘free-ride’ on those who pay for it without they themselves contributing anything. In the end, no one will be paying for it. Hence there will be need for government to provide it out of taxpayers’ money. This include street lighting, national defense and roads (quasi public-good)

Opportunity Costs Everywhere

Practical examples:




Wednesday, July 8, 2009

Slower Posting

Dear fellow readers,

I will be back in active blogging from next week onwards. I'm extremely busy in these two weeks. College reopens and as usual I have lots of updating to do. However this time I'm revamping whole set of notes for my students



Friday, July 3, 2009

Is Strong Dollar Good And A Weak Dollar Bad?

“The Euro has risen to record levels against the dollar”. “The pound sterling has risen to record levels against the dollar”. These are the common quotes that we usually bump into in any economic and financial headlines. What do these headlines mean? Do they matter to us?

Yes, of course. But it has different incentives onto different economic agents which we shall explore shortly. Basically weakening or falling of dollar against other currencies means the same. We need greater quantity of dollar to buy per unit of foreign currencies or a unit of dollar acquires lesser foreign currencies

Very often people are caught up with the idea that strengthening dollar is good and weakening dollar is bad. It is similar with the misperception that people usually have on current account. If deficit is bad but if it’s in surplus, then is good. To be honest there are both advantages and disadvantages to a strong or weak dollar with economic dangers lurking at either extreme

Here I’ll consider only the case of a strong dollar since the argument for weak dollar is just the mirror image
Advantages from a strong dollar:

(1) Lower price of foreign goods and services. With strong dollar, foreign luxury goods such as LCD televisions, handbags, shoes and sport cars from Western European countries which were once perceived expensive now seem to be more affordable. Even household goods such as food item, clothing and other necessities with inelastic demand can be bought in greater quantity. These two lead to rise in standard of living and is a great boost to welfare

(2) Cheaper to import capital goods. Rise of dollar is a good news for companies in secondary sectors. It will provide them an incentive to upgrade or replenish those old capital equipments with falling productivity. From medium to long term perspective, it should be able to increase the productive capacity of US economy. Aggregate supply (AS) will shift rightward. This is important to maintain its productivity ahead of major rivals like Germany, France, UK and Japan. Rise in productivity will lead to many things such as falling price level, increase in national output thus economic growth and lowering unemployment. Second engine of growth is necessary since US depends too much on private consumption to steer its economy forward

(3) Easier to borrow. When the greenback is strong, it is a sign that the US economy is ‘vibrant’. Yes, some may argue that the American economy is in a pathetic state like now, but it is worthy to note that other major economies suffer too. So, generally when all economies are sinking, capital and funds will flock to US which is perceived as safest haven

Sustaining the might of dollar is inevitable. Only by doing so, investors will be keen to continuously hold dollar assets. Dollar run will be minimised. US government will also find it easier to finance their ballooning fiscal deficit by issuing bonds. China and Japan, the two biggest ‘banks’ for US will be very glad to snap up those securities. There are two reasons for this. First both have large dollar reserves and secondly, they are heavily depending on American consumers to buy their goods

(4) Cheaper to travel overseas. Since the dollar is now appreciating against RM we would expect more Americans to visit Malaysia during this summer holiday. More local goods can be bought thus contributing to an increase in economic welfare. Voyagers can also stretch their budgets to include other activities that would have otherwise been foregone. Also more part time jobs will be created in tourism related industries such as airline, hotel, food and beverages and craft industries. It will have multiplier effect although the effectiveness may somehow be slightly muted with recession in US. So, it’s a win-win situation

(5) More affordable foreign stocks. It is not only the consumers that benefit from rising dollar as companies on an acquisition binge do so as well. With stronger buying power, foreign stocks or companies become cheaper in valuation compared to US based firms. This will likely spark a wave of increase in cross border transactions such as vertical, horizontal or even conglomerate integrations. American companies can look forward to expand the scale of their operations or eliminate competitors by buying them out

(6) Reduce inflation. Stronger greenback will reduce the risk of imported inflation. Raw materials and many other intermediate goods will appear cheaper, thus reducing overall production costs. Some of the cost saving may be passed on to end consumers in the form of lower price. Consumer surplus will increase then

(1) Uncompetitive exports. This is a bad news for US manufacturing sectors. Stronger dollar against other foreign currencies will mean that importers now need more of their home currencies in order to exchange for the same US $1. American goods therefore become more expensive even when there is no changes in the actual price quoted in dollar. Demand for exports will fall in relative to imports. Current account deficit will worsen. Higher exchange rates will have different impacts onto different parts of the world. Japanese and Chinese government would most probably intervene to devalue their currency if there is an upward movement of yen and yuan against dollar. Meanwhile, for world’s largest manufacturer like German, there is nothing much it can do since the power to manipulate currency and interest rates is at the hand of ECB

(2) Outsourcing. US firms soon find it difficult to compete with local market in overseas due to uncompetitive reasons such as ridiculously high wages and high exchange rate. They will begin to outsource their production, mainly in emerging economies like China, Malaysia, Indonesia or Vietnam since labour costs are far lower and yet the productivity is high. If this happens, average Americans will lose their jobs when factories are shut. It may also lead to severe problems like regional unemployment, hysteresis and negative multiplier effect onto local supply chain

(3) Gloomy tourism sector. On average, US attracts more than 50 million tourists every year and the large influx is during summer. Popular destinations include New York, LA, Miami, San Francisco, Florida and many more. Most of these tourists are from European countries and Latin America. If dollar strengthens, most likely we will witness a fall in tourist arrival during this summer. American stores also expect to see their sales dip further compared to previous years

According to Commerce Department, about 90% of travellers make shopping their first priority and they generally spend more than local visitors. As such, it is not difficult to understand why their presence is important since it may contribute to increase in consumer and business confidence. Probably the US officials are banking on this when they announced that we will likely see a recovery by the 3rd quarter of 2009

(4) Lower overall profits for firms. Weakening home currency against the dollar means that any increase in sales revenue or profits will lead to nothing when repatriate to parent company in US