MGT-492 KEY ASSIGNMENT Using Chapter 02 (below) – “Overcrowding in a Hospital Emergency Department" from the Wilding (2019) textbook as a baseline, consider how operations management and logistics are closely related. Either use your workplace as an example or research an organization that has been involved in organizing a relief effort during a crisis. Show how they problem-solved to alleviate bottlenecks in the supply chain. Provide graphs and charts as necessary. This assignment is due by the conclusion of Module 7. The 6-10 page formal report should be in APA style. In addition, you will prepare a brief 5-10 slide PowerPoint or Prezi presentation on your findings and recommendations. Your presentation should consist of (1) the slides and (2) written narrative of what you would say if presenting your findings and recommendations to an executive board for consideration. Chapter 2- Overcrowding in a Hospital Emergency department Introduction The nature of emergency medicine has changed dramatically in recent years with the introduction of new treatment options and the availability of modern medical technology. Nevertheless, patients presenting to the ED with conditions today are considered time critical. The ED is often seen as the ‘safety net’ for patients, and many experts have noted that the ED is really the ‘gateway to the rest of the hospital’. If, at this early stage of the supply chain, problems arise in the ED, they have the potential to affect the rest of the hospital’s supply chain processes. The healthcare supply chain is characteristically complex. One is not just dealing with products and services, but also dealing with real people and their health and wellbeing. Additional complexities include the involvement of GPs, government, insurance companies and regulatory agencies. Each part of the supply chain often works independently, which prevents it from working as an interrelated and interconnected system. Patient flow through the ED is a multifaceted supply chain, starting with the patient who may arrive at the ED on the recommendation of their GP. The purpose of this case study is to review the introduction of a single point of contact, known as ‘the Bed Bureau’, and how it offers options for the GP and for patients to avoid poor outcomes, poor patient experience times and spending extended periods of time on a trolley awaiting an inpatient bed. Patient pathway Currently, if a patient is unwell, they can attend the ED either by self-presenting or by calling the ambulance service. Alternatively, several patients attend their GP who in turn refers them to the ED, and it is this cohort of patients that are referred to in the case study. Overcrowding is often blamed on patients attending for ‘minor illness’, but most patients with minor illness prefer not to be in the ED at all. Nevertheless, overcrowding in the ED is a regular phenomenon and causes negative reputational damage to the organization. The hospital group under re ...

1. MGT-492 KEY ASSIGNMENT
Using Chapter 02 (below) – “Overcrowding in a Hospital
Emergency Department" from the Wilding (2019) textbook as a
baseline, consider how operations management and logistics are
closely related. Either use your workplace as an example or
research an organization that has been involved in organizing a
relief effort during a crisis. Show how they problem-solved to
alleviate bottlenecks in the supply chain. Provide graphs and
charts as necessary. This assignment is due by the concl usion of
Module 7. The 6-10 page formal report should be in APA style.
In addition, you will prepare a brief 5-10 slide PowerPoint or
Prezi presentation on your findings and recommendations. Your
presentation should consist of (1) the slides and (2) written
narrative of what you would say if presenting your findings and
recommendations to an executive board for consideration.
Chapter 2- Overcrowding in a Hospital Emergency department
Introduction
The nature of emergency medicine has changed dramatically i n
recent years with the introduction of new treatment options and
the availability of modern medical technology. Nevertheless,
patients presenting to the ED with conditions today are
considered time critical. The ED is often seen as the ‘safety net’
for patients, and many experts have noted that the ED is really
the ‘gateway to the rest of the hospital’. If, at this early stage of
the supply chain, problems arise in the ED, they have the
potential to affect the rest of the hospital’s supply chain
processes.
The healthcare supply chain is characteristically complex. One
is not just dealing with products and services, but also dealing
with real people and their health and wellbeing. Additional

2. complexities include the involvement of GPs, government,
insurance companies and regulatory agencies. Each part of the
supply chain often works independently, which prevents it from
working as an interrelated and interconnected system. Patient
flow through the ED is a multifaceted supply chain, starting
with the patient who may arrive at the ED on the
recommendation of their GP.
The purpose of this case study is to review the introduction of a
single point of contact, known as ‘the Bed Bureau’, and how it
offers options for the GP and for patients to avoid poor
outcomes, poor patient experience times and spending extended
periods of time on a trolley awaiting an inpatient bed.
Patient pathway
Currently, if a patient is unwell, they can attend the ED either
by self-presenting or by calling the ambulance service.
Alternatively, several patients attend their GP who in turn refers
them to the ED, and it is this cohort of patients that are referred
to in the case study. Overcrowding is often blamed on patients
attending for ‘minor illness’, but most patients with minor
illness prefer not to be in the ED at all. Nevertheless,
overcrowding in the ED is a regular phenomenon and causes
negative reputational damage to the organization. The hospital
group under review for this case study makes regular media
headlines in terms of the number of patients awaiting treatment
in the ED and patients spending time on trolleys.
The hospital group comprises six clinical sites functioning
collectively as a single hospital system. This group, known as
the UL Hospital Group (ULHG), provides a range of acute
inpatient and day-care services to a relatively largely populated
area in the mid-west region of Ireland. University Hospital
Limerick (UHL) is the only hospital in the group that provides
major surgery, cancer treatment and care, and a range of other
medical, diagnostic and therapy services, and has the busiest ED

3. in Ireland, providing the only 24/7 emergency services in the
group. The rest of the group is made up of specialty hospitals
providing, for example, obstetric, neonatal, medical assessment
units, local injuries units and day surgeries.
The GPs in the region, through their GP Forum, have advised
that they are unable to access services in the local hospitals and
therefore often use the ED as a default option. The patient
pathway through the ED at the hospital is viewed as a very
complex and challenging supply chain path. There are regular
issues over patients waiting for a bed and therefore patients
spend excessive time on trolleys. This then results in a very
poor experience for the patient and often leads to a breakdown
in trust with the patients who are the ‘customers’. Prior to the
introduction of the Bed Bureau at the hospital, there were
several steps taken by the GP to get their patient treated
appropriately. Medical assessment units (MAUs) are located
across the area within the six clinical sites and they serve the
main hospital. Each MAU functions as an independent unit,
requiring separate phone calls to book appointments. The GPs
have stated that they must wait too long for outpatient
appointments to the units and viewed the steps noted below as
too complex:
1. Patient is seen by the GP and a hospital assessment is
determined.
2. The GP establishes what hospital assessment unit is suitable
for the patient’s needs.
3. A call is made to the appropriate MAU.
4. If there is a medical assessment appointment available, the
patient can attend on the day and time appointed.
5. If there is no appointment available for the patient, the
patient is sent directly to the ED.

4. What is a Bed Bureau?
The Bed Bureau facilitates a highly efficient and more
structured supply chain process to deal with patients accessing
the ED. The Bed Bureau introduces a single point of contact for
the GPs, offering options for the patients for applicable care
other than the ED. This single point of contact required the
establishment of a centralized Bed Bureau at UHL. This was
staged by competent staff using a carefully designed computer
system for receiving and processing referrals based on a single
criterion for the patient to access a relevant MAU as opposed to
going to the ED directly. Communication with all the
players/stakeholders in the pathway was critical and their buy-
in to the process was imperative. The partakers of interest
included the chief executive officer (CEO) and the chief
operations officer (COO) of the hospital group, the executive
management team and clinicians, as well as the communication
manager, GP Forum, clinical directors, bed managers, patient
flow staff, ED staff and the staff at the MAUs at the clinical
sites.
With a newfound focus on the patient pathway, this supply
chain improvement process gave rise to an increasing
championing of the Bed Bureau. While approaches may differ
from hospital to hospital nationally and indeed globally, the
common drive for this Bed Bureau from the stakeholders was a
need for the patient to have a better experience and reduce the
number of patients attending the ED. This common goal has led
to all agreeing that the healthcare supply chain for patient
pathways needed to be more efficient and provide a better
service for all.
Implementing the Bed Bureau
The setting up of the Bed Bureau for the hospital group was a
new and innovative way to improve access for the GPs and in
turn improve the patience experience. Unscheduled care and the

5. flow of patients through the hospital system is the brief of the
COO. It is the responsibility of this post holder to manage and
mitigate the associated risks of poor patient experiences and
poor patient outcomes. Keeping these metrics in mind, there
was clear support to introduce a Bed Bureau. With the support
and operations of key stakeholders, noted previously, software
was developed by a lead clinician and an external information
technology (IT) company to produce a database system that
would now be known as the ‘Bed Bureau’. In summary for this
case study, several activities took place:
· A room to host the Bed Bureau was identified and desks,
computers and headphones were installed.
· Staff were recruited through the nursing and Human Resource
(HR) department.
· A paramedic coordinated the transfer of patients from UHL to
other hospitals or returned the patient home.
· An administrator redeployed to work with the team became the
superuser of the IT system and provided training to the Bed
Bureau staff and to the staff on all the other sites.
· The governance of the Bed Bureau was provided by the Bed
Manager and her office was near the staff answering the phones.
Initially 30 GPs were contacted to test the concept.
Communication to the MAUs was also imperative as their work
lists would now be generated by the Bed Bureau staff. The staff
at the clinical sites would no longer take calls from their local
GPs and book the patients in. There would now be a group-wide
approach and the sites would no longer work in isolation. Each
site agreed a number of slots every day that the staff in the Bed
Bureau could populate. The staff in the Bed Bureau travelled to
each of the sites, met the local staff and discussed the criteria

6. and number of slots allocated. Each site had visibility of the
other sites and agreed to use the criteria set up on the software
system.
In addition, when the Bed Bureau commenced, the ED was very
busy and it was decided that patients attending the ED with a
GP letter and who met the criteria for MAUs at UHL would be
transferred there once booked in through the Bed Bureau
booking system. The ED staff in this instance rang the Bed
Bureau and booked the patient in. This alleviated the pressure in
the ED and ensured the other MAUs were populated first with
appropriate patients.
The Bed Bureau was set up on a phased basis initially, with the
key aim to formalize the interaction between the referring
doctor in primary care and the acute hospital and to ensure
patients are streamed to the most appropriate clinical site within
the hospital group that has the appropriate environment to deal
with the patient’s problem in an effective and timely manner.
The steps now taken by the GP are identified as follows:
1. Patient is seen by the GP and a hospital assessment is
determined.
2. The GP telephones a dedicated phone line for the Bed
Bureau.
3. The GP is offered an appointment for one of the relevant
assessment units or referred to the ED as appropriate.
Data measured
Over the period of design and implementation of the Bed
Bureau, a collection of data using both quantitative and
qualitative methods was obtained, reviewed and analysed.
Surveys were carried out and interviews undertaken with
relevant staff, and the Planning, Performance and Business

7. Intelligence Unit at the hospital and the Bed Bureau software
program extrapolated certain data criteria for review. This also
coincided with pre and post the implementation of the Bed
Bureau. Data measured included:
· The number of attendances to the ED in the four months
preceding the introduction of the Bed Bureau and the same
information for the four months after the introduction of the
Bed Bureau.
· These data were also used to establish the age profile of the
patients attending, the total number of hours spent in the ED,
the number of patients on trolleys and the total number of
admissions to the hospital group.
· Attendances at the MAUs on all sites were measured pre and
post implementation of the Bed Bureau.
· In addition, data from the Bed Bureau IT system were obtained
to establish the number of calls made by the GPs and the
number of slots filled in each MAU as well as the numbers of
patients who attended their appointments and those who did not
attend.
· Furthermore, the numbers of admissions and the number of
patients discharged from the MAUs were identified.
· Additional information available included:
· Identifying the number of times GPs used the Bed Bureau to
access the system and alternatively identify the number of GPs
who don’t use the Bed Bureau and continue to refer their
patients to the ED.
During this period the satisfaction rate of the GPs was
continuously monitored.

8. Analysis of Bed Bureau data
The data generated by the Bed Bureau for the period Januar y to
April 2017 were analysed post implementation and noted as
follows:
· The total number of GP referrals processed by the Bed Bureau
for a four-month period = 6,042 referrals.
· The average number of GP referrals per month processed by
the Bed Bureau for this period = 1,510 referrals.
· The highest number of referrals by a single GP per month for
this period = 15 referrals.
· The average number of referrals by a single GP per month for
this period = 5 referrals.
· The lowest number of referrals by a single GP per month for
this period = 0 referrals.
· The total number of referrals to one of the MAU sites per
month for this period is 184 GP referrals.
· Patient experience times and outcomes
· Patient flow through the ED is a complex supply chain, and
overcrowding results in poor outcomes and poor patient
experience. The introduction of the Bed Bureau simplified the
supply chain for patients who attended their GP and required
further medical assessment. Prior to the Bed Bureau, these
patients were often referred to the ED because accessing an
appointment in the MAUs was so complex, with each MAU
having a different criterion and a different contact number. The
Bed Bureau introduced a single point of contact for GPs across
the whole region, offering options other than the ED for
patients. This reduced the number of GP-referred patients going

9. to the ED, as these patients avoided the ED altogether and were
more appropriately assessed, diagnosed and treated in the
MAUs, which previously were resourced but underutilized.
· In setting up the Bed Bureau, the GPs were considered to be
key players in managing the major queues that occur in the ED,
and their feedback, although mainly informal and through a
short survey, was given due consideration. The setting up of the
Bed Bureau in UL hospitals was a new and innovative idea to
improve access for GPs and to improve the patient experience.
Communication on the sites was also very important, as their
work lists would now be generated by the Bed Bureau staff and
the staff on the sites would no longer take calls from their local
GPs and book patients in.
· The Bed Bureau facilitates a group-wide approach and the
sites no longer work in isolation. Each site agrees on a number
of slots every day that the staff in the Bed Bureau can populate
and each site has visibility of the other sites. This ensures that
all available slots on all sites are utilized. When the Bed Bureau
commenced, the ED was very busy, and it was decided that
patients attending the ED with a GP letter who met the criteria
for the acute MAU in the UHL would be transferred there. Once
they were booked in through the Bed Bureau booking system,
they avoided the bottlenecks in ED. The ED staff in this
instance ring the Bed Bureau and book the patient in. This
alleviates the pressure in the ED and ensures the other MAUs
are populated first with appropriate patients, as the available
slots on the UHL site are prioritized for ED. Eventually, it is
anticipated that these patients will be referred directly to the
Bed Bureau by their GPs. The Bed Bureau is now available
24/7, so that out-of-hours GPs can also use this resource.
· Benefits of the Bed Bureau
· The Bed Bureau was set up and introduced on a phased basis
and its impact to date has resulted in a number of benefits for

10. GPs and in turn patients. The benefits include:
· GP referrals are triaged at a central point: the Bed Bureau.
· GP referrals admitted via the MAU remove that cohort of
patients out of the ED, which in turn reduces the number of
patients that contribute to the overcrowding.
· The Bed Bureau generates data to evaluate referral patterns for
GPs over time.
· The Bed Bureau creates a database for oversight of bed
availability across the hospital.
· The Bed Bureau process standardizes referral/admission
criteria against which to audit for compliance.
· The Bed Bureau addresses the inefficiencies of the previous
process, reducing the patient pathway to three key steps as
opposed to five complex steps. This is now a lean process that
addresses the risk of variation in the system.
· The Bed Bureau facilitates a more efficient bed utilization of
bed capacity in the hospital.
Conclusions
The Bed Bureau has facilitated a single point of contact for GPs
and has improved the experience of suitable patients who can be
referred directly for a medical assessment in the MAUs across
all the hospitals in the group. These patients avoid the ED
altogether and the resources available are utilized in a much
more efficient way. The process for referring the pati ent has
been refined to reduce the many steps that were previously used
by the GP to refer patients to the MAUs. This leaner process has
reduced the variation that existed by standardizing the process
for all MAUs in the region.

11. Managing patient flow and pathways in healthcare is a complex
supply chain and the introduction of the Bed Bureau has
addressed the requirements for one group of patients, namely
those referred by GPs.
The approach of managing GP referrals to reduce overcrowding
in the ED at ULHG is pioneering work; nevertheless, we do
appreciate that the Bed Bureau may not or cannot address the
overall overcrowding issues that arise in EDs nationally or
indeed globally. It is widely recognized that there are many
other issues contributing to overcrowding. Examples include a
lack of acute bed capacity, difficulty in attracting consultants to
work (specifically in this case) in the Irish health system and a
lack of development and expansion of services in the
community, to name but a few. These are major challenges
facing hospital supply chains. For those patients who are
referred via the Bed Bureau directly, the patient experience time
and the patient’s outcome are much improved. Access to the
MAUs is much less cumbersome for GPs and the revised
pathway through the Bed Bureau is efficient. This allows GPs to
give the patient their appointment date and time before they
leave their GP surgery. The entire process can take less than a
three-minute conversation on the telephone now.

12. Exam Revision Package
Exam Format
Question 1: Topics 3 & 4 (20 marks) Demand and Supply
Question 2: Topics 5 & 6 (15 marks) GDP and Economic
Growth
Question 3: Topic 7 (15 marks) Business Cycle, Unemployment
and Inflation
Question 4: Topic 8 (15 marks) Fiscal Policy
Question 5: Topics 9 & 10 (15 marks) Market Structure
Total 80 marks
For the exam, no MCQ. All questions require you to either draw
(graphs), or answer in no more than three sentences, and
perform calculations
Calculators are allowed for the exam
Answer all questions on MS Word. For drawing of graphs, you
can draw on a piece of paper, take a picture then upload your
answer (drawing) onto MS Word
Closed Book exam
Q1: Demand and Supply (20 marks)
Definition and explanation of key terms (5 marks) e.g. define
the law of demand/supply or shortage/surplus/equilibrium.
Plot a demand and supply curve based on data provided and to
identify equilibrium price and quantity (5 marks) (Topic 4 Class
Activity 2)
Illustrating (drawing) and explaining how certain events might
affect the equilibrium price and quantity of a good (10 marks)

13. (Topic 4 Class Activity 3 and pre-lesson demand and supply
practice questions)
Q2: GDP and Economic Growth (15 marks)
Definition of key terms (1-2 marks) GDP, Real GDP, Nominal
GDP
Explain the expenditure/income approach to calculating GDP
(4-5 marks). Expenditure approach = AD. Income approach = Y
AD = C + I + G + (X – M)
Y = rent + wages + interest + profit
Calculation of production indicators (8-10 marks)
Real and Nominal GDP (No need GDP Deflator)
GDP Growth Rate
GDP per Capita
Q3: Business Cycle, Unemployment and Inflation (15 marks)
Definition of different stages of the business cycle,
unemployment, different types of unemployment (5-7 marks)
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Calculation of Labour Market indicators and Inflation Rate (8-
10 marks)
Unemployment Rate
Employment-to-Population Rate
Labour Force Participation Rate
Q4: Fiscal Policy (15 marks)
Effects of increase/decrease in Government Expenditure/Taxes
on GDP. E.g. How does an increase in Government Expenditure
affect the GDP and why?
Very important to remember AD = C + I + G + (X – M)

14. Application of Discretionary/Automatic Fiscal Policies on
Unstable Economies (Recessionary/Inflationary)
Calculation of budget balance and identifying budget status
Budget Balance = Tax Receipts (T) – Government Outlay (G)
Budget Status: Surplus (T>G), Deficit (T<G), Balanced Budget
(T=G)
Limitations of Discretionary Fiscal Policy / Methods of funding
a budget deficit
Q5: Market Structures (15 marks)
Characteristics on the different market structures AND, I will
ask you to compare them between market structures. (8 to 10
marks)
Strategies of different market structures (3 to 4 marks)
Identify which market structure an industry/product belongs to
(2 to 3 marks)

15. Principles of Economics
STUDY GUIDE
v2.0

16. Copyright © 2019 Kaplan Singapore. All rights reserved.
i
PRINCIPLES OF ECONOMICS
KHE-LCD-SGD-00040
PRINCIPLES OF ECONOMICS
KHE-LCD-SGD-00040
ii
Kaplan Desired Graduate Attributes
Through the reading of this module, Kaplan
Singapore intends to:
• Instill in students the value of lifelong and self-
directed learning by stimulating intellectual
curiosity, creative and critical thinking and an
awareness of cultural diversity;
• Assist students in developing professional
attributes, ethical values, social skills and

17. strategies that will nurture success in both their
professional and personal lives;
• Foster integrity, commitment, responsibility and a
sense of service to the community;
• Prepare students to meet the ever-changing
needs of their communities both now and in the
future; and
• Promote innovative and effective teaching.
Culminating from these institutional values and
educational goals, Kaplan Singapore’s Desired
Graduate Attributes are:
Inquiry and criticality: Graduates will be able to
critically collect, evaluate and apply information and
data in order to make decisions in a wide variety of
professional situations. This attribute is demonstrated
when students:

18. • Undertake, evaluate and apply appropriate
research, theories, concepts and tools to
investigate problems and find solutions;
• Exercise critical thinking and independent
judgement to assess situations and determine
solutions; and
• Have an informed respect for the principles,
methods, values and boundaries of their profession
and the capacity to question these.
Ethicality and discernment: Graduates will be able to
assess situations and respond in an ethically, socially
and professionally responsible manner. This attributed
is demonstrated when students:
• Act responsibly, ethically and with integrity in their
profession;
• Hold personal values and beliefs and participate
in the broad discussion of these values and beliefs

19. while respecting the views of others;
• Understand the broad local and global economic,
political, social and environmental systems and
their impact as appropriate to their discipline and
profession; and
• Acknowledge personal responsibility for their own
judgments and behaviour
Ability to communicate well: Graduates will
recognise the importance and value of communication
in the learning and professional environment. This
attributed is demonstrated when students:
• Create and present knowledge, arguments and
ideas confidently and effectively using a variety of
methods and technologies;
• Recognise the wide range of possible audiences
for information and respond with communication
strategies appropriate to those audiences; and

20. • Work collaboratively with people from diverse
backgrounds and be aware of the different roles
of team members and to function within that team.
Independent and reflective practitioner
• Graduates will be able to work independently and
be self-directed learners with the capacity and
motivation for continued professional learning and
development; and
• They will be able to critically reflect on their own
practice and evaluate and understand current
capacity and further development needs
Embedded within the desired graduate attributes are
the following skills:
• Conduct research.
• Analyse, organise and present data and
information.
• Think and read critically.

21. • Make an oral presentation.
• Intellectual curiosity and awareness of culture and
diversity.
• Develop professional ethos and practice that will
foster success in career and life.
• Meet the ever changing needs of communities
now and in the future.
PRINCIPLES OF ECONOMICS
KHE-LCD-SGD-00040
iii
Table of Contents
ii
iii
iv
v
vi
vii
Kaplan Desired Graduate Attributes

22. Table of Contents
About this module
Instructions to Students
Scheme of Work
Assessment Matters
Topic 1
Introduction to Economics 1
Topic 2
Production Possibilities Frontier 10
Topic 3
Demand and Supply Model 1 22
Topic 4
Demand and Supply Model 2 35
Topic 5
GDP and Economic Growth 1 47
Topic 6
GDP and Economic Growth 2 55
Topic 7

23. Business Cycle, Unemployment & Inflation 62
Topic 8
Fiscal Policy 80
Topic 9
Perfect Competition & Monopoly Market Structures 89
Topic 10
Oligopoly and Monopolistic Market Structures 96
PRINCIPLES OF ECONOMICS
KHE-LCD-SGD-00040
iv
About this module
The study of Economics generally consists of
microeconomics and macroeconomics. The
success of a business depends substantially on
both microeconomics and macroeconomics.
Microeconomics provides the tools to

24. understand the different market structures and
analyse a competitive market whilst
macroeconomics provides the tools necessary to
assess the macroeconomic environment within
which a firm is operating. A strong economy
spells good opportunity for growth and
expansion; whilst, a weak economy is conducive
for business consolidation, capacity building, and
augmenting labour productivity in preparation for
the next phase of growth.
In this module, students will examine various
economic concepts, economic models, and other
analytical tools that are useful for economic
analysis and economic environment research so
that they may draw conclusions about
organisations’ business performance and
implications of policies. This skill set will be of
great relevance to facilitate the development of

25. business plan and for overcoming business
challenges.
Module Learning Outcomes
Upon successful completion of this module, the
student should be able to:
• Explain the competitive market through the
Demand and Supply model
• Compare and contrast the key elements of the
various market structures
• Discuss the performance of the national
economy
• Explain the economic problems of
unemployment and inflation
• Explain the role of fiscal policy in overcoming
economic problems
• Discuss impact of the economic environment
on businesses
Overview of Learning Resources

26. Recommended reading:
Bernanke, B. (2009). Principles of
Microeconomics (4th Ed.) USA: McGraw-Hill
Irwin
Begg, D., & Ward, D. (2013). Economics for
Business (4th Ed.). UK: McGraw Hill Education
J. Maclolm Dowling, Ma. Rebecca Valenzuela
(2010). Economic Development in Asia (2nd
ed.). Singapore: Cengage Learning Asia Pte
Ltd.
Nellis, J., Parker, D. (2006). Principles of
Business Economics (2nd Ed.) UK: Pearson
Sloman, J. (2008). Economics and the Business
Environment (2nd Ed.) UK: Pearson
Parkin, M. (2011). Economics (11th Ed.). USA:
Pearson

27. Online:
Topics Online Link
Trade-offs “What is Trade-off” by Gregory-
Mankiw, N:
http://www.youtube.com/
watch?v=Ha1yV32Tyog
Opportunity
cost
“Opportunity Cost” by Kanjo video:
http://www.youtube.com/
watch?v=QMIs6ILnS30
Demand and
supply
“Demand” by khan academy
https://www.youtube.com/
watch?v=ShzPtU7IOXs
Market

28. equilibrium
“Market Equilibrium” by khan
academy
https://www.youtube.com/
watch?v=ShzPtU7IOXs
Oligopoly and
Monopolistic
competition
“Oligopolies & Monopolistic
Competition”
https://www.youtube.com/
watch?v=igWYdYQZ1og
http://www.youtube.com/
http://www.youtube.com/
http://www.youtube.com/
http://www.youtube.com/
http://www.youtube.com/
PRINCIPLES OF ECONOMICS
KHE-LCD-SGD-00040

29. v
Instructions to Students
How to use this study guide
This study guide consists of written notes that
form the main treatise of the subject matter of
this module. You are strongly advised to study
these notes carefully and thoroughly, as well
as, examine the sources that have been cited.
Written quiz and examination will not test beyond
the scope of the contents found in the study guide.
However, in order to fully address the
assessment requirements of the assignment, you
will need to research beyond the confines of the
study guide. Nevertheless, the materials herein
are still a sound basis from which to build the

30. assignment.
Further supporting materials
The study guide is supplemented by the following:
• Reproduced PowerPoint slides used by the
lecturers
• Activity sheets
PowerPoint Slides
The PowerPoint slides are meant for the lecturers
to signpost the flow of the lesson and for you to
have a visual focus when in class. Outside of
class, they can also serve to help you recall the
activities that took place during the respective
lessons so that you might be reminded of key
learning points.
However, the PowerPoint slides must NOT

31. replace the need for you to read the written
notes in the study guide. The slides alone are
INSUFFICIENT for you to gain the necessary
understanding of the subject matter. As such,
they will NOT prepare you adequately for the
various summative assessment components.
Activity Sheets
It is imperative that you sincerely attempt all the
activities in class and document your responses
faithfully. These activity sheets are specially
designed to scaffold your learning; working
through the tasks is an integral part of
developing the desired skills.
Also, by making your thinking visible through the
activity sheets, it is then possible for your lecturer
to provide you with growth producing feedback
so that you may improve your performance or

32. have your doubts clarified.
PRINCIPLES OF ECONOMICS
KHE-LCD-SGD-00040
vi
Scheme of Work
LESSON TOPICS
1 01 Introduction to Economics
• Definition of Economics
• Macroeconomics and Microeconomics
• Fundamental Questions on Production
• Economic way of thinking
2 02 Production Possibilities Frontier
• Production Possibilities Frontier
• Production Efficiency and Allocative Efficiency
• Economic growth

33. 3 03 Demand and Supply Model 1
• Interaction of Firms and Households
• Circular flows through markets
• Perfect Competition or Competitive market
• Demand
4 04 Demand and Supply Model 2
• Supply
• Market Equilibrium
• Predicting Changes in Equilibrium Price and Quantity
5 05 GDP and Economic Growth 1
• Definition of GDP
• Circular Flow Model
• Two Methods for Measuring the GDP
6 06 GDP and Economic Growth 2
• Real GDP vs Nominal GDP
• GDP deflator
• Economic growth rate and GDP per capita
• Limitations of GDP as an indicator of social well-being

34. 7 Quiz revision
8 Quiz
9 07 Business Cycle, Unemployment & Inflation
• Business Cycle
• Labour market
• CPI and Inflation
10 08 Fiscal Policy
• Definition of Fiscal Policy
• Discretionary Fiscal Policy
• Automatic Fiscal Policy
• Government budget balance
11 09 Perfect Competition & Monopoly Market Structures
• Overview of market structures
• Perfect competition
• Monopoly market structure
12 10 Oligopoly and Monopolistic Market Structures
• Oligopoly
• Monopolistic Market Structure

35. • Comparison of four market structures
13
Module Consolidation
14
PRINCIPLES OF ECONOMICS
KHE-LCD-SGD-00040
vii
Assessment Matters
Assessment Overview
Assessment 1: Quiz
Weightage: 20% (40 marks)
Duration: 1 hour
Date: Lesson 8
Format:
• 20 MCQ & 2 Short Structured Questions

36. Assessment 2: Individual Assignment
Weightage: 40% (80 marks)
Word Limit: 2000 words
Date: Lesson 12
Citation Format: APA
References: You are required to consult and fully
reference a MINIMUM of 10 references.
Assessment 3: Examination
Weightage: 40% (80 marks)
Duration: 2 hours
Date: To be advised
Format: 4 Questions
Important Policies
Penalties for Plagiarism
Plagiarism in any form is not tolerated by
Kaplan Singapore. That said, direct quotations
and general similarities of common terms and

37. language mean the E-Learn LMS will often pick
up every small similarity so the likelihood of a
Turnitin Similarity report recording a result of 0%
is unrealistic. After all, no technology is perfect
and there is the need for some direct quotation
(provided you reference using APA guidelines,
of course) and to use commonly accepted terms
and language.
TOP TIP:
The surest way to succeed is to ensure all work
is correctly referenced. Keep a copy of the
Kaplan Singapore Academic Works and
APA Guide handy when you are typing your
assignments and use it to guide you as to
correct referencing, citation and other aspects of
academic writing.

38. PRINCIPLES OF ECONOMICS
KHE-LCD-SGD-00040
viii
Penalties for late submissions
Kaplan Singapore prepares students for the
realities of the workforce and further education by
requiring students to meet deadlines and submit
all work on time. As such, students are required
to seek approval and penalties will be imposed
on late assignment submissions in accordance
with the table below and cited in the Programme
Handbook:
No of days late Penalty
1 – 5 days 10% deduction per day from the
marks attained by students.
After 5 days Assignments that are submitted

39. more than 5 days after the due
date will not be accepted and it
will be deemed as “No Submis-
sion”. Student will be required to
re-module.
Assignments and Kaplan Learning Management
System
Kaplan Singapore School of Diploma
Studies requires you to submit Assignments
through the Learning Management System (E-
Learn LMS). When submitted, your
assignment is checked for plagiarism by
software called Turnitin linked to the E-Learn
LMS. The software is intended to provide one
more tool to improve the quality of academic
writing and as such will be compulsory for use.
It is important to note that this is merely one of

40. many tools available to you and that final
decisions about the quality of your work rest
with your lecturer.
Assigment Submission: How to Use E-Learn
LMS for Assignment Submission
1. You will be enrolled by the School of
Diploma Studies Programme Management
into the E-Learn LMS system only after your
fee payment is confirmed.
2. You will be sent your USER NAME and
PASSWORD via email.
3. Reset your password as prompted.
4. Enter the site at the following address:
https://elearn-diploma.kaplan.com.sg
5. To submit assignment please refer to the
LMS Manual
Please refer to your Student Handbook for more

41. details on Penalties for Plagiarism, Misconduct,
Examinations Rules and Regulations. Should
you have any queries, please contact
[email protected]
mailto:[email protected]
PRINCIPLES OF ECONOMICS
KHE-LCD-SGD-00040
ix
This page intentionally left blank
PRINCIPLES OF ECONOMICS
1
KHE-LCD-SGD-00040
Topic 1 – Introduction to Economics
This is the introductory Topic. Students will be introduced to
some fundamental concepts

42. of this module of Economics as well as the economic ways of
thinking.
Learning outcomes:
The following are the learning outcomes for this Topic. At the
end of the Topic, do a
self-check to ensure that you have achieved these outcomes:
• Define economics.
• Distinguish between microeconomics and macroeconomics.
• Define resources and incomes earned by resource-owners.
• Explain the key ideas that define the economic way of
thinking.
1.1 Definition of Economics
Economics is the social science that studies the choices that
individuals, businesses,
governments and entire societies make as they cope with
scarcity, the incentives that
influence those choices, and the arrangements that coordinate
the (Bade & Parkin, 2015).

43. Examples of such key economic questions which touch on all
aspects of our lives include,
• Should you take a taxi or a bus to school? Taxi is faster and
more comfortable but
bus fare is much cheaper. Which do you prefer and which would
you trade-off?
Would you trade-off your time and comfort to save money?
• Should you spend two hours doing homework or watching a
movie? Watching a movie
is more enjoyable but doing homework is more necessary for a
student. Would you
trade-off your enjoyment to do what is more important for you
as a student.
• Should you bring your own lunch or eat out with friends? If
you bring your own lunch
which cost you lesser financially, you will miss out on the
shared experience of having
a meal with friends.
PRINCIPLES OF ECONOMICS
2
KHE-LCD-SGD-00040

44. These everyday questions relate to us, our behaviours, our
preferences and things we
have to give up in making those choices. Compare these
decisions, apply some of the
models and you may be surprised by the helpfulness of the
lessons you are going to
learn.
Economics is about decisions that all participants in the
economy make, whether as
individuals, firms or governments. All participants face the
same fundamental problem of
scarcity. Our inability to satisfy all our wants is called scarcity
(Bade & Parkin, 2015).
Economics is thus, concerned with how individuals and
corporations make decisions and
choices in the world of scarcity. Or in simpler term, how
economic participants try to
achieve the best outcome from their limited resources.
A rational participant will make a choice taking into
consideration the incentives that come
with the choice. In economic context, incentives may be the

45. reward for a good choice
but it could also be the penalty that discourage us from a path
of action. For example, in
the case of a country with an under-qualified workforce (a
scarcity of educated workers),
incentives for government to offer a students’ study loan to its
citizens may be to generate
a higher quality workforce (reward) but this will put a strain on
government’s budget
(penalty).
1.2 Macroeconomics and Microeconomics
Economics is traditionally divided into two main branches,
Microeconomics and
Macroeconomics.
Microeconomics is the study of the choices that individuals and
businesses make and
the way these choices interact and are influenced by
governments (Bade & Parkin, 2015).
Examples of microeconomic questions are: Will you buy an
iPhone or a Samsung phone?
Will Kaplan attracts more students if it lowers the school fee?

46. PRINCIPLES OF ECONOMICS
3
KHE-LCD-SGD-00040
Macroeconomics is the study of the aggregate (or total) effects
on the national economy
and the global economy of the choices that individuals,
businesses, and governments
make (Bade & Parkin, 2015). Some examples of macroeconomic
questions are: Why is
the economy of Singapore growing so slowly? Why are incomes
growing much faster in
China and India than in Japan?
1.3 Fundamental Questions on Production
Whether in macro or micro context, economists always try to
address three fundamental
questions:
• WHAT goods and services to produce,

47. • HOW should they be produced, and
• FOR WHOM to produce.
1.3.1 WHAT to produce
A society cannot produce all it desires. It must choose which
goods and services to
produce from the available resources. Any decision about what
items to produce also
implies a decision on how much to produce.
For example, for a fashion firm, they need to know WHAT
clothing consumers are willing
and able to buy - trendy, comfortable and/or stylish.
1.3.2 HOW to produce
The society also has to decide how to produce the goods and
services. There are many
ways of producing a particular output from the available
resources. A country can choose
more labour, machines or increasingly artificial intelligence in
their production of goods
and services.

48. PRINCIPLES OF ECONOMICS
4
KHE-LCD-SGD-00040
The four economic resources or factors of production are land,
labour, capital and
entrepreneurship.
Land is where raw materials come from (Begg & Ward, 2016).
This include physical land
as well as all naturally occurring resources such as crude oil,
base metals and other
minerals, which form the raw materials for the production of
many goods.
Labour is the ability of individuals to work (Begg & Ward,
2016). Labour refers to the
physical and mental effort of human being to produce goods and
services. The supply of
labour is constrained by the size of population in the working
age group as well as the
length of a working hours. In populous countries like China and

49. India, value is created
from the big volume of workers. In other countries like the
United States of America,
wealth is created through more highly skilled and educated
workers.
Capital refers to the production machinery, computers, office
space or retail shops (Begg
& Ward, 2016). Capital also includes infrastructure in a country
such as the Information
Technology infrastructure and the road network. In everyday
language, we talk about
money, stocks and bonds as being “capital”. These items are
financial capital. Financial
capital is not used to produce goods and services and it is not a
factor of production.
Entrepreneurship is the human resource that organises land,
labour and capital to
produce goods and services (Parkin, 2016). Examples of
entrepreneurial talents in our
generations include Bill Gates, who founded the Microsoft
Empire and Jack Ma, who
founded Alibaba.com.

50. The four factors of production are provided either directly or
indirectly by households in
the economy. When viewed individually, these resources are
sources of income to the
resource-owners or the households providing them, which in
turn allow them to further
consume and buy goods and services.
PRINCIPLES OF ECONOMICS
5
KHE-LCD-SGD-00040
1.3.3 FOR WHOM to Produce
When economists refer to FOR WHOM question, the answer
boils down to what
households, firms and governments think they can consume
given their earnings or
income.
Households earn their incomes by selling the services of the
factors of production they

51. own:
• Land earns rent
• Labour earns wages
• Capital earns interest
• Entrepreneurs earns profit
Earnings under the four categories can be hard to classify as an
individual can play
different roles that will affect the amount of each income s/ he
can earn. For example, if
you are the owner of a cafe, are your earnings classified as
wages from labour or profits
from your role as the entrepreneur?
PRINCIPLES OF ECONOMICS
6
KHE-LCD-SGD-00040
1.4 Economic way of thinking
How do we make an economic choice? What are the principles
which we typically follow

52. when making a rational choice?
1.4.1 Self-interest and Social-interest
When you make a choice in your self-interest, you think that the
choice is the best one
available for you (Parkin, 2016).
All the rational choices that people make on how to use their
time and other resources
are made in the pursuit of self-interest. For example, you order
pizza delivery because
you are hungry and not because the delivery person needs a job.
And when he delivers
your food, he is doing it out of his self-interest to earn a wage
and not to do you a favour.
When a choice is made for social interest, it is a choice that is
best for society as a whole
(Parkin, 2016). For example, Ted, an entrepreneur creates a new
business. He hires a
thousand workers and pays them $20 an hour, $1 more than
what they earned in their
old jobs. Ted’s business is extremely profitable and his own

53. earnings increases by $1
million per week.
You can see that Ted’s decision to create the business is for his
own self-interest. He
gains $1 million a week. You can also see that the decision of
the workers to work for
Ted are in their own self-interest as they now earn more than
their old job. However, as
everyone is better off and there is no loser, the element of
social interest also exists.
1.4.2 Trade-off and Opportunity cost
As all of us face scarcity, we must select from the available
alternatives to make a choice.
For example, you can spend this Saturday evening studying for
the next Economics 1
Quiz, going out with your friends or work in a restaurant, but
not all activities because of
PRINCIPLES OF ECONOMICS
7
KHE-LCD-SGD-00040

54. scarcity of time. Hence, you must choose how much time to
devote to each activity.
Whatever choice you make, you have to trade-off the other
activities. A Trade-off is an
exchange – giving up one thing to get something else (Bade &
Parkin, 2015).
McDonalds, operating in Australia in early part of this century,
traded-off shorter
preparation times and possible loss of customers for a healthier -
choice menu featuring
salads and lower-fat food choices, to meet the growing demand
from consumers of
healthier food.
In Singapore and many developed nations, the bid to achieve
greater economic growth
come with trade-offs. The strong growth of the Singapore
economy in the last fifty years
came with a trade-off of leisure time for many households.
All trade-offs come at the cost of alternatives given up and
these costs are known as

55. opportunity costs. Opportunity cost is the sacrifice of a next-
best alternative (Schiller,
2016).
For example, imagine you have $1000 to either buy a new
iPhone or go for a short
overseas vacation in Vietnam. The opportunity cost of buying a
new iPhone (instead of
going for a vacation), is the satisfaction and knowledge gained
from the vacation in
Vietnam. The above example of opportunity cost is an all -or-
nothing type, that is, you
either buy an iPhone or travel. Most real-world situations are
not like this but involve
choosing how much of an activity to do.
1.4.3 Choices at the margin
We make rational choices by comparing costs and benefits in
connection with the choice.
Making a choice on the margin means comparing all the
relevant alternatives
systematically and incrementally (Bade & Parkin, 2015).

56. PRINCIPLES OF ECONOMICS
8
KHE-LCD-SGD-00040
In the previous example given, you can allocate the hours
between studying and going
out with friends and working in a restaurant, but the choice is
not all or nothing. You must
decide how much time to spend on each activity. To make this
decision, you compare the
benefit of a little bit more study time with its cost involved
when you make your choice at
the margin.
Marginal benefits are benefits that arise from an increase in an
activity (Parkin, 2016).
For example, your marginal benefit from one more evening of
study before a Quiz is the
addition marks you will score in your grade. Your marginal
benefit does not include the
grade you are already getting without that extra evening of
study.

57. Marginal costs are the opportunity costs of an increase in an
activity (Parkin, 2016). For
example, the marginal cost of studying one more evening is the
$50 you could have
earned if you have gone to work in the restaurant.
To make your decision, you compare marginal benefit and
marginal cost. If the marginal
benefit from an extra evening of study exceeds the marginal
cost of working in a
restaurant, you have incentive to study the extra evening.
Incentives occur when there
is more marginal benefit than marginal cost for choosing an
activity. If the marginal cost
outweighs the marginal benefit, you will not study the extra
evening.
PRINCIPLES OF ECONOMICS
9
KHE-LCD-SGD-00040
REFERENCES

58. Bade, R. & Parkin, M. (2015). Essential Foundations of
Economics. (7th
ed.). USA: Pearson Education Inc.
Begg, D. & Ward, D. (2016). Economics for Business. (5th ed.).
USA: McGraw-Hill
Education.
Parkin, M. (2016). Economics. (12th ed.). England: Pearson
Education Limited.
Schiller, B.R. (2016). Essentials of Economics. (10th ed.). USA:
McGraw-Hill Education.
PRINCIPLES OF ECONOMICS
10
KHE-LCD-SGD-00040
Topic 2 – Production Possibilities Frontier
In this Topic, we will be going into more depth in
understanding the concepts of scarcity,
opportunity cost as well as marginal cost and benefit analysis

59. learnt in Topic 1.
Specifically, we will be studying an economic model called the
Production Possibilities
Frontier (PPF).
Learning outcomes
The following are the learning outcomes for this Topic. At the
end of the Topic, do a
self-check to ensure that you have achieved these outcomes:
1. Define the production possibilities frontier.
2. Differentiate between production efficiency and allocative
efficiency.
3. Explain how current production choices expand future
production possibilities.
2.1 Production Possibilities Frontier
The PPF is the boundary between those combination of goods
and services that can be
produced and those that cannot (Parkin, 2016). To illustrate the
PPF, we focus on two
goods at a time and hold the quantities of all other goods and

60. services constant. That is,
we look at a model economy in which everything remains the
same (ceteris paribus)
during this period of analysis, except the two goods we’re
considering.
2.1.1 Drawing the PPF
To illustrate, let look at Country Dino which produces two
goods namely Compact Discs
(CDs) and pizzas. The table below shows the production output
combination possibilities
of the two products that can be produced in a year. Using the
various production output
combination, the PPF can be drawn with the x-axis showing the
quantity of pizzas
produced while the y-axis showing the quantity of CDs
produced (Figure 1).
PRINCIPLES OF ECONOMICS
11
KHE-LCD-SGD-00040

61. Possibility CDs (million units) Pizzas (million units)
A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
Figure 1: Production Possibilities of Country Dino
2.1.2 Interpretation of the PPF
The PPF can be used to illustrate a number of fundamental
economic concepts we
have learnt in Topic 1.
The concept of choice is shown by the various points on the
PPF. The PPF separates
those output choices that are attainable from those that are

62. unattainable. We can produce
PRINCIPLES OF ECONOMICS
12
KHE-LCD-SGD-00040
any output combination inside the PPF and on the PPF. These
combinations are, thus,
attainable.
The country can choose to produce any of the combination of
CDs and pizzas
represented by point A to F, depending on its objectives. For
instant, with the existing
production resources and technology, the country can choose to
produce 9 million CDs
and 3 million pizzas (point D) or 14 million CDs and 1 million
pizzas (point B). Moving
along the PPF from point F to point A, the country produces
lesser pizzas and more CDs
while moving from point A to point F, the country produces
more pizzas and lesser CDs.

63. Scarcity is implied by the unattainable combinations of output.
Point G is unattainable
given the country’s existing productive capacity.
Unemployment and inefficiency: When the economy is
operating at a point inside the
boundary such as Z, there is inefficient use or under-utilisation
of available resources.
Resources could be utilised more fully and efficiently in order
to increase production of
both CDs and pizzas towards the maximum combination of
output represented on the
PPF.
2.2 Production Efficiency and Allocative Efficiency
2.2.1 Production Efficiency
Production Efficiency occurs when the economy is getting all
that it can from its
resources. We achieve production efficiency if we cannot
produce more of one good
without producing less of some other good (Bade & Parkin,
2015). In simpler term,

64. resources are fully utilised and there is no waste. This outcome
occurs at all the output
combinations on the PPF.
At points inside the PPF, production is not efficient because we
are giving up more than
necessary of one good to produce a given quantity of the other
good. For example, at
PRINCIPLES OF ECONOMICS
13
KHE-LCD-SGD-00040
point Z in the PPF of Country Dino, the country produces 5
million CDs and 3 million
pizza, but we actually have sufficient resources to produce 5
million CDs and 4 million
pizzas. Alternatively, we can also produce 10 million CDs and 3
million pizzas.
Production inside the PPF is inefficient because resources are
either unemployed and/or
misallocated. Resources are unemployed when they are idle but
could be working

65. (Parkin, 2016). For example, some workable machine in a
factory are left idle.
On the other hand, resources are misallocated when they are
assigned to tasks for which
they are not the best match (Parkin, 2016). For example, when
CDs workers in a factory
are assigned to work in a bakery to produce pizzas, the workers
may not be so productive
in their new tasks. We would get more CDs and more pizzas if
we have allocated these
workers to their respective profession.
2.2.2 Trade-off and Opportunity Cost along the PPF
Every choice along the PPF involves a trade-off. At any given
time, we have a fixed
amount of labour, land, capital and entrepreneurship and a given
state of technology. We
can employ these resources and technology to produce goods
and services, but we are
limited in what we can produce. The negative slope of the PPF
shows the concept of
opportunity cost. In Country Dino, to produce more pizzas, we
have to produce lesser

66. CDs, vice-versa.
As we have learnt in Topic 1, opportunity cost of an action is
the highest-valued
alternative forgone. Looking at Country Dino again, if we want
to increase the production
of pizzas from 1 million to 2 million, the country must reduce
production of CDs from 14
million to 12 million, or a reduction of 2 million CDs. The
opportunity cost of the additional
1 million pizzas is 2 million CDs. In other words, the
opportunity cost of 1 pizza is 2 CDs.
Conversely, the opportunity cost of 1 CD is ½ pizza. The
opportunity cost of one item is
the inverse of the opportunity cost of the other item between
these two output
combinations.
PRINCIPLES OF ECONOMICS
14
KHE-LCD-SGD-00040

67. As we produce more pizzas and less CDs, the opportunity cost
of producing pizza
increases. The outward-bowed shape of the PPF reflects the law
of increasing
opportunity cost. As society takes more resources away from 1
good e.g. CDs and
applies to produce another good e.g. pizza, the opportunity cost
of each additional unit of
pizza produced increases.
When we produce a large quantity of CDs and a small quantity
of pizza, between point A
and B, the frontier has a gentle slope. An increase in the
quantity of pizza costs a small
decrease in quantity of CD. Specifically, an increase in 1 unit of
pizza will result in a
decrease of 1 unit of CD. On the other hand, between point E
and F, the frontier is steep,
when we produce a small quantity of CDs and a large quantity
of pizza, an increase in
the quantity of pizza costs a large decrease in quantity of CDs.
In this case, an increase
in 1 unit of pizza will result in a decrease of 5 unit of CDs,
much more than between point

68. A and B.
Opportunity cost of producing pizzas increases as resources are
not equally productive
in all activities. Some factors of production are better suited for
the production of one
good than they are for other goods. For example, the CDs
workers are good at producing
CDs but they are not as good in producing pizzas, hence when
we reallocate more CDs
workers to pizza production, we get a small increase in quantity
of pizzas but a huge drop
in quantity of CDs produced. The more of either good we try to
produce, the less
productive are the additional resources we channel in to produce
that good, hence, the
larger is the opportunity cost of producing one more unit of that
good (See Figure 2).
2.2.3 Allocative Efficiency
The above discussion leads to the next important question of,
which production output
combination of goods is the best for the country? To address
this question, allocative

69. efficiency comes into play now. Allocative efficiency is a
situation in which the
quantities of goods and services produced are those that people
value most highly. In
PRINCIPLES OF ECONOMICS
15
KHE-LCD-SGD-00040
other words, it is not possible to produce more of a good or
service without giving up
some of another good that people value more highly (Bade &
Parkin, 2015).
A country or a firm achieved production efficiency at every
output combinations on the
PPF, but which output choice will achieve allocative efficiency?
We have learnt in Topic 1, Marginal cost is the opportunity cost
of an increase in an
activity. We can calculate marginal cost from the slope of the
PPF. As the quantity of
pizzas produced increases, the PPF gets steeper and the

70. marginal cost of a pizza
increases. Figure 3 below shows the increasing marginal cost of
producing pizzas,
calculated in the shaded area when quantity of pizzas produced
increases.
Figure 2: Increasing opportunity cost Figure 3: Increasing
marginal cost
Marginal benefit from a good or service is the benefit received
from consuming one more
unit of it. This benefit is subjective. It depends on people’s
preference or what people
like and dislike, and the intensity of those feelings. Preferences
describe what people
like and want while the production possibilities frontier
describe the limits or constraints
on what is feasible, thus they are unrelated.
PRINCIPLES OF ECONOMICS
16

71. KHE-LCD-SGD-00040
We can measure the marginal benefit from a good or service by
the most that people are
willing to pay for an additional unit of it. Marginal benefit
decreases as quantity of goods
produced increases. Consumers will allocate their scarce
resources in such a way that
will maximise their satisfaction. However, as more units are
purchased, they will
experience diminishing marginal benefit. In other words, the
more we consume of any
one good or service, we will get bored of it and hence, less
willing to pay high price for it.
Imagine, if you eat pizza once a year, you will be more willing
to pay high price for it.
However, if you eat pizza every day, you will be less willing to
pay the same high price to
buy the pizza. Thus, marginal benefit has negative linear
relationship with quantity of
goods produced as illustrated in Figure 4 below.

72. Figure 4: Principle of diminishing marginal benefit.
The diagrams below shows the marginal cost and marginal
benefit curves of Pizzas for
Country Dino. The point where the two graphs meet represents
the optimum where
marginal cost is equal to marginal benefit (Figure 5). Allocative
efficiency is achieved
at this specific quantity of pizza produced, that is, 2.5 million
pizzas. At this quantity, both
Producers and Consumers are in agreement on the optimal
quantity of pizzas produced.
PRINCIPLES OF ECONOMICS
17
KHE-LCD-SGD-00040
MC
Therefore, in this situation the quantity of pizzas and CDs
produced is just the right
amount to minimise waste (cost) and meet consumer preferences
(benefit).

73. Figure 5: Allocative efficiency achieved
when MB = MC.
Figure 6: Output of allocative efficiency on
the PPF.
At any point on the PPF, we cannot produce more of one good
without giving up some
other good. At the best point on the PPF, we cannot produce
more of one good without
giving up on some other goods that provide greater benefit
(Parkin, 2016). This is Point
B on the PPF of Country Dino in Figure 6. Before or after this
point of efficiency on the
slopes, any more pizzas produced will mean increased
operational cost and any less will
mean the pizzas producers are not producing enough to
maximise customer willingness
to pay.
In summary, when all resources are fully employed, societies
would achieve its maximum
possible output of goods and services and enjoy the highest

74. standard of living possible.
It will thus be operating on its production possibilities frontier.
All combinations on the PPF
achieves production efficiency when production of each items is
at minimum cost and
we cannot produce more of one good without giving up some
other good. Allocative
efficiency, however, occurs only at a particular point on the
PPF where the right amount
of the right good is produced. The economy is operating at a
point on the PPF with what
PRINCIPLES OF ECONOMICS
18
KHE-LCD-SGD-00040
is desired by the society. Allocative Efficiency is thus the most
valuable point on the PPF
slope.
In summary, for a society to attain full economic efficiency, it
must meet the two
conditions of production efficiency and allocative efficiency.

75. Production Efficiency ❖ Resources are fully employed.
❖ Society achieves its maximum possible output and
enjoy the highest possible material standard of living.
❖ Economy is operating on its PPF.
Allocative Efficiency ❖ The occurrence when no one is reaping
benefits at the
expense of others.
❖ The right amount of the right goods is produced.
❖ Economy is operating at a particular point on the PPF.
❖ This particular point changes depending on the
objectives and desires of the society.
2.3 Economic growth
Economic growth refers to the ability of the economy to
produce increasing quantities
of goods and services (Hubbard & O’Brien, 2015). Economic
growth increases standard
of living as people earn more incomes, but it does not overcome
scarcity and avoid

76. opportunity cost. To make an economy grow, we face a trade-
off. The faster production
grows in an economy, the greater is the opportunity cost of
economic growth. We will be
learning more about economic growth in Topic 6 but for now we
will focus on economic
growth in relation to the PPF.
Economic growth is illustrated by the outward shift of the PPF
(Figure 7). Such an
outward shift of the PPF represents potential economic growth.
An outward shift in the
PPF is caused by an increase in the quantity and/or quality of
resources and/or an
PRINCIPLES OF ECONOMICS
19
KHE-LCD-SGD-00040
advancement in the state of technology. The discovery of new
resources allows an
economy to produce more of all goods. New resources include
an increase in labour

77. supply arising from inward migration or increase in birth rate.
Figure 7: Outward shift of the PPF, representing economic
growth.
Economic growth also comes from technological change and
capital accumulation
(Parkin, 2016). Technological advancement is the development
of new goods and/or
better way of producing goods and services. Capital
accumulation is the growth of
capital resources, including physical capital and human capital
(Parkin, 2016)
Technological advances and capital accumulation can expand
the production possibilities
of a country or a firm by achieving greater productivity in the
use of resources. However,
there is no free lunch in this world. Technological advancement
and capital accumulation
come with a cost. To accumulate capital (build a road, buy a
tractor, build a
manufacturing plant) and to develop new technologies, society
must devote fewer

78. resources to produce consumer goods today. As production
possibilities expand,
consumption in the future also increases. However, when a
country chooses to produce
less capital goods and more consumer goods in the current
period, it will experience a
slower rate of potential economic growth in the future.
PRINCIPLES OF ECONOMICS
20
KHE-LCD-SGD-00040
On the same note, if we replace leisure with education today, in
the future we will have
more knowledge and skills and hence have greater productivity.
On the same note, if a
country replaces wastage with saving today, in the future the
country will have more
capital and can produce more goods and services. Thus, the
choices we make today
will greatly affect future production possibilities.

79. PRINCIPLES OF ECONOMICS
21
KHE-LCD-SGD-00040
REFERENCES
Bade, R. & Parkin, M. (2015). Essential Foundations of
Economics. (7th
ed.). USA: Pearson Education Inc.
Hubbard, R.G. & O'Brien, A.P. (2015). Essentials of
Economics. (4th
ed.). USA: Pearson Education Inc.
Parkin, M. (2016). Economics. (12th ed.). England: Pearson
Education Limited.
PRINCIPLES OF ECONOMICS
22
KHE-LCD-SGD-00040
Topic 3 – Demand and Supply Model 1

80. In the previous Topic, we have learnt about production
possibilities and economic growth.
In this Topic, we will focus on the interaction between the
buyers and sellers in the market,
by studying the demand and supply model.
Learning outcomes:
The following are the learning outcomes for this Topic. At the
end of the Topic, do a
self-check to ensure that you have achieved these outcomes:
• Appreciate how firms and households interact with the market.
• Describe a perfect competition market.
• Define demand and the law of demand.
• Explain the influences on demand.
3.1 Interaction of Firms and Households
In order for a country to achieve economic growth, there must
be some coordination
systems to work. The two extreme competing coordination
economic systems that have

81. been adopted by governments are command (or planned)
economy and market
economy.
Command economy or state-run type of economies function
poorly because economics
planners are unable to gather enough data about production
possibilities and consumers’
preference. Hence, production ends up inside the PPF and many
times, the wrong goods
are being produced. These economies have been proven to be
economically less
effective. Examples of such economies in the past include
Russia and China.
PRINCIPLES OF ECONOMICS
23
KHE-LCD-SGD-00040
Market economy or decentralised coordination system works
best but it requires the
interactions of four institutions namely firms, markets, property
rights and money.

82. 3.1.1 Four Institutions in the Market Economy
1. Firms
Firms are the institutions that organise the production of goods
and services (Bade &
Parkin, 2015). For example, Apple Inc., is a world-famous
technological firm that
generates billion dollars revenue every year from production to
retailing of electronic
devices. Apple Inc. hires resources of production namely land,
labour and capital, and
directs them to decide what goods and how much to produce.
However, the goods
produced by Apple Inc. need customers to buy and they cannot
produce everything
themselves thus they need to buy from other firms as well. All
these trading activities
need markets.
2. Market
A market is any arrangement that brings buyers and sellers

83. together and enable them to
get information and do business with each other (Parkin, 2016).
For example, the
housing market refers to a network of developers, customers,
property agencies and
brokers who buy and sell houses. A market, however, can work
only when there is
property rights.
3. Property Rights
Property rights refer to the legally established titles to the
ownership, use and disposal
of factors production and goods and services that are
enforceable in the courts (Bade &
Parkin, 2015). Real property includes land, building and durable
goods such as
equipment. Financial property includes stocks and bonds and
money in the bank while
intellectual property is the intangible product of creative effort
such as songs, writings,
PRINCIPLES OF ECONOMICS

84. 24
KHE-LCD-SGD-00040
inventions of all kinds that are protected by copyrights and
patents. With property rights,
people are motivated to specialise and produce the goods and
services which they have
competitive advantage. Such property rights can be exchanged
using money.
4. Money
Money is any commodity or token that is generally acceptable
as a mean of payment.
All these institutions are being “coordinated” in the market. For
example, firms produce
and supply televisions. Consumers are willing to pay a
particular price for the television,
and this is known as the demand for television. Importantly,
consumers and suppliers
accept that money is the only form to exchange for the
television in the market. The
television is the property right of the firm until such time when
the consumers have

85. traded the market price in terms of money for the television.
After which, the consumer
has the property right to the television.
3.2 Circular flows through markets
Exchange of goods and services and factors of production
creates flows of expenditures
and incomes between households and firms. Households supply
the factors of production
namely the labour, land, capital, and entrepreneurial services in
return for payments or
incomes in the forms of wages, rent, interest, and profits
respectively.
Households choose how to spend their incomes on goods and
services supplied by firms.
Firms supply goods and services to households for revenue and
with the revenue
received, hire factors of production from households. Firms can
choose the quantities of
factors of production to hire and quantities of goods and
services to produce. Markets
coordinate these choices through circular flow of incomes and

86. expenditures as illustrated
in figure 1 below.
PRINCIPLES OF ECONOMICS
25
KHE-LCD-SGD-00040
Figure 1. Circular flow of income and expenditures.
Market coordinates decisions through price adjustment. When
the price is right, desires
and availability match. The allocation of resources in a market
economy is based on the
price mechanism. The decisions of producers determine the
supply while the decisions
of buyers determine demand. This interaction of demand and
supply cause changes in
market price of a product. It is this movement in market price
which bring about changes
in the usage of society’s resources.

87. PRINCIPLES OF ECONOMICS
26
KHE-LCD-SGD-00040
3.3 Perfect Competition or Competitive market
As we have learnt above, a market is any arrangement that
enables buyers and sellers
to get information and to do business with each other. There are
many types of market
such as physical markets where buyers and sellers meet to agree
on price and other
transaction details. On the other hand, there are virtual markets
where sellers and buyers
never meet but do their trading through online platforms such as
Lazada and Shopee,
Markets vary in the intensity of competition that buyers and
sellers face. In this Topic, we
will be focusing on a competitive market which is a market that
has many buyers and
many sellers, so no single buyer or seller can influence the price
(Parkin, 2016). Other

88. key features of the market include perfect information and
standardised product. In this
market, a large number of producers compete with each other to
satisfy the wants and
needs of a large number of consumers. No single producer, or a
group of producers, and
no single consumer, or group of consumers, can dictate how the
market operates. Hence,
nobody can individually determine the price of goods and
services and the quantity that
is transacted in a given period of time.
A competitive market forms under certain conditions. For such a
market to work
effectively, there must be no significant information failure
affecting the decisions of
consumers and producers. It is assumed that the consumer of a
private good or service
knows what they are getting and they are able to estimate
accurately the net benefit they
are likely to derive. Net benefit is the private benefit to a
consumer in terms of satisfaction
or utility, less the private cost associated with buying the
product.

89. For example, when consumers like Michael, purchases a cup of
coffee from his favourite
café, he will feel that he is clear about the net benefit he will
derive. Consciously or
instinctively, he will make a calculation that buying a coffee is
worth the $2 he is asked to
pay. It can be assumed that Michael’s decision to make this
purchase is guided by his
rational expectations. In other words, consumers based their
decision to consume on a
complete range of information gathered over the past, together
with a prediction of the
PRINCIPLES OF ECONOMICS
27
KHE-LCD-SGD-00040
future. Michael may have bought many cups of coffee at this
cafe previously, and has
always been satisfied with the quality of the coffee and the
service received. Hence, the
$2 expenditure is a ‘safe bet’. In the real world, however, there

90. may be many situations
where not all the information regarding the product is availabl e
to the consumers. In these
cases, the markets fail to work efficiently. For example,
Michael may not be aware that
consuming coffee on a regular basis can increases his blood
pressure and this might
trigger health problems for him subsequently.
Another feature of a competitive market is that the sellers in
these markets offer
reasonably homogenous or similar goods. In other words, there
is no substantial product
differentiation, branding, etc., and consumers in this market
view all of the goods in the
market as being, at least to a close approximation, perfect
substitutes of one another.
PRINCIPLES OF ECONOMICS
28
KHE-LCD-SGD-00040
3.4 Demand

91. Demand or effective demand refers to consumers’ wants, ability
and decision to purchase
a good or service. The quantity demanded is the amount of any
good, service, or
resource that people are willing and able to buy during a
specified period at a specified
price (Bade & Parkin, 2015). As we attempt to derive a
relationship between the quantity
demanded for a good per time period and the price of that good,
we must hold every other
influencing factors such as consumers’ taste and preference,
constant. In economics, we
use the term “ceteris paribus” to describe this situation. The
quantity demanded is
measured as an amount per unit time, such as 3 bowls of rice
per day. The quantity
demanded does not need to be the same as the quantity actually
bought as it depends
on the quantity of goods available in the market at that time, or
supply of the good. We
will learn more about the supply concept in the next Topic.
3.4.1 Law of Demand

92. Many factors influence the buying plans, and one of them is the
price. The relationship
between the quantity demanded of a good and its price is
illustrated by the law of
demand. The law of demand states that, other things remaining
the same, if the price of
a good rises, the quantity demanded of that good decreases; and
if the price of a good
falls, the quantity demanded of that good increases (Bade &
Parkin, 2015).
There are two reasons that lead to this inverse relationship
between price and quantity
demanded. They are substitution effect and income effect. These
two effects can occur
individually or together on a good or service.
1. Substitution Effect
When the price of a product rises, other things, remaining the
same, its opportunity cost
rises (Parkin, 2016). Although each product is unique, it has
substitutes, which are other

93. products that can be used. As the opportunity cost of a product
rises, the incentive to
PRINCIPLES OF ECONOMICS
29
KHE-LCD-SGD-00040
switch to a substitute becomes stronger. For example, Coke and
Pepsi are close
substitutes for many consumers. When the price of Coke
increases, people are more
inclined to purchase Pepsi which is cheaper to substitute the
Coke. The quantity of Coke
demanded thus, decreases. Hence, the substitution effect takes
place.
2. Income Effect
When the price of a good rises, other things remaining the same,
a given income can buy
fewer units of the good. The purchasing power of income of
consumers has fallen,
leading to the fall in quantity demanded of the good. For
example, a can of Coke is initially

94. priced at $1 per can. With $10 budget you can buy 10 cans of
Coke. However, if the
price rises to $2 per can, you can only buy 5 cans. Quantity of
Coke demanded
decreases. Hence, the income effect takes place.
3.4.2 Demand curve
Demand curve is a graph that shows the relationship between
the quantity demanded of
a good and its price when all other influences on buying plans
remain the same (Bade &
Parkin, 2015). We graph the demand curve with the quantity
demanded on the x-axis
and the price on the y-axis (Figure 2). The demand curve slopes
downward. As the price
falls, the quantity demanded increases. The demand curve can
be read in two ways. For
a given price, the demand curve tells us the quantity that people
are willing and able to
pay. For a given quantity, the demand curve tells us the
maximum price that consumers
are willing to pay for the last good available.

95. Before proceeding, we must acknowledge the important
distinction between demand and
quantity demanded. Quantity demanded refers to a point on a
demand curve or the
quantity demanded at a particular price. Changes in quantity
demanded for a good is
shown by the movement along demand curve (Figure 2).
PRINCIPLES OF ECONOMICS
30
KHE-LCD-SGD-00040
Figure 2: Movement along demand curve:
Figure 3: Change in demand causing shifts of demand curve:
The term demand refers to the entire relationship between the
price and the quantity
demanded of that good. Any change in demand for a good will
lead to the shifting of the

96. demand curve (Figure 3).
When any factor that influences buying plans of a good
changes, other than the price of
the good, there is a change in demand for the good. When
demand for the good
increases, the demand curve shifts rightward and the quantity
demanded for the good at
PRINCIPLES OF ECONOMICS
31
KHE-LCD-SGD-00040
each price is greater. When demand for the good decreases, the
demand curve shifts
leftward and the quantity demanded for the good at each price is
lower.
3.4.3 Factors that Change Demand
There are five main non-price factors that will have impact on
demand. They are,
1. Consumers’ income

97. 2. Number of consumers
3. Price of related goods
4. Consumers’ expectation
5. Consumers’ preference
1. Consumers’ income
The impact of change in consumers’ income on demand of a
good depends on whether
the good is a normal good or an inferior good.
A normal good has a demand that varies directly with changes
in consumers’ income. An
increase in income increases the purchasing power of consumer
and increases the
willingness and ability of consumers to pay for normal goods.
This leads to an increase
in the demand for normal goods. This is shown by a rightward
shift in the demand curve.
On the other hand, an inferior good has a demand that varies
indirectly with changes in
consumers’ income. People buy inferior goods as they are

98. unable to afford better quality
goods. On the other hand, an increase in income reduces their
willingness to pay for
inferior goods and lead to a fall in the demand for inferior
goods. This is shown by a
leftward shift in the demand curve. At each possible price,
fewer units of the good is
demanded. To illustrate, as income rises, the demand for budget
flight will fall as people
tend to choose full-service flight when they travel. The budget
flight service is deemed
inferior while the full-service flight is normal for many people.
PRINCIPLES OF ECONOMICS
32
KHE-LCD-SGD-00040
2. Number of Consumers
An increase in the number of consumers in a market will
increase the demand for a good,
vice-versa. For example, an increase in the grey population in
countries like Japan and

99. Singapore, will likely lead to increase in demand for nursing
home service for the elderly.
3. Price of related goods
The law of demand holds true in both cases of substitute
products and complements.
Substitute products are goods that can be consumed in place of
another good. (Bade &
Parkin, 2015). The range of substitutability can be narrow or
broad. The former could be
in terms of different products brand such as BMW or Ferrari
cars. The latter could be in
terms of different product groups such as different types of
transports namely MRT, buses
and cars. The closer two goods are as substitutes, the greater
will be the fall in the
demand for one good, for a given fall in the price of the
substitute good, vice versa.
Complement is a good that is consumed with another good
(Bade & Parkin, 2015). A
typical example would be cars and petrol. A fall in the price of
cars will lead to an increase

100. in the quantity demanded for cars, hence an increase in the
demand for petrol. The closer
the two goods are as complements, the greater will be the
change in demand for one
good, given the change in price of the other.
4. Consumers’ Expectation
Consumer expectations regarding future prices and future
income may prompt them to
buy more or less of a good in the current period.
If consumers expect the price of houses to rise next year, they
will increase their demand
for new houses in the current period to avoid paying higher
prices in the future, vice-
versa.
PRINCIPLES OF ECONOMICS
33
KHE-LCD-SGD-00040

101. When consumers expect increase in future income, demand for
normal goods or services
will increase as there is a tendency for consumers to spend
higher predicted earnings
before consumers have received them. On the other hand, if
consumers expect the
economy to perform poorly leading to a fall in future income,
the demand for such good
or services will decrease as people tend to save for their rainy
days.
5. Consumers’ preference
People with the same income have different demand for a good
if they have different
preference or taste for the product. A favourable or
unfavourable change in consumers’
preference for a product will affect demand for that product. For
example, when doctors
discover that drinking tea can reduce the risk of lung cancer,
there will be an increase in
demand for tea leaves in the market as consumers prefer to
drink tea now.

102. PRINCIPLES OF ECONOMICS
34
KHE-LCD-SGD-00040
REFERENCES
Bade, R. & Parkin, M. (2015). Essential Foundations of
Economics. (7th
ed.). USA: Pearson Education Inc.
Parkin, M. (2016). Economics. (12th ed.). England: Pearson
Education Limited.
PRINCIPLES OF ECONOMICS
35
KHE-LCD-SGD-00040
Topic 4 – Demand and Supply Model 2
From the law of demand learnt in previous Topic, we know that
the higher the price of a
good or service, the lower will be the quantity demanded for the

103. good by consumers.
However, the higher price of the good in the market means
higher returns for the suppliers
and, with other suppliers who are keen to share the pie
emerging, supply of the good will
increase.
Learning outcomes:
The following are the learning outcomes for this Topic. At the
end of the Topic, do a
self-check to ensure that you have achieved these outcomes:
• Define supply and the law of supply.
• Explain the influences on supply.
• Explain how demand and supply determine price and quantity
transacted.
• Apply demand and supply model to predict changes in price
and quantity.
4.1 Supply
Supply refers to the relationship between the quantity supplied
and the price of a good

104. when all other influences on selling plans remain the same
(Bade & Parkin, 2015). If a
firm supplies a good or service, then the firm must have the
resources and the technology
to produce the good. In addition, the firm is able to make a
profit and the firm has made
a definite plan to produce and sell the good.
Quantity supplied is the amount of any good, service, or
resource that people are willing
and able to sell during a specified period at a specified price
(Bade & Parkin, 2015).
Similar to quantity demanded, quantity supplied is measured as
an amount per unit time.
The actual quantity sold may not be the same as quantity
supplied, as the amount of
goods and services supplied may not be the same as quantity
demanded. To isolate the
PRINCIPLES OF ECONOMICS
36
KHE-LCD-SGD-00040

105. relationship between quantity supplied and its price, we keep all
other influences on
selling plans the same or ceteris paribus.
4.1.1 Law of Supply
The law of supply states that other things remaining the same, if
the price of a good
rises, the quantity supplied for that good increases; and if the
price of a good falls, the
quantity supplied of that good decreases (Bade & Parkin, 2015).
Hence, when the price
of a good rises, other things being constant, producers are
willing to incur a higher
marginal cost to increase production of the good concerned.
4.1.2 Supply Curve
The supply curve shows the relationship between the quantity
supplied of a good and its
price when all other influences on producers’ planned sales
remain the same. A rise in
price of a good, other things remaining the same, brings an
increase in the quantity

106. supplied of the good. This increase in price when mapped
against quantity supplied
causes the supply curve to rise towards the right-hand side. The
supply curve is
illustrated in Figure 1 below.
Figure 1: Movement along supply curve
PRINCIPLES OF ECONOMICS
37
KHE-LCD-SGD-00040
Graphically, changes in the supply curve (just like the demand
curve) reflect that any
increase in supply will shift the graph rightward and any
decrease in supply will move the
graph leftward. There is a difference between movement along
supply curve when there
is a change in quantity supplied and shift of supply curve when
there is a change in supply
which arises as a result of other influences on the market, but
not the price of the good.

107. The increase and decrease in supply are illustrated in Figure 2
and Figure 3 respectively.
Figure 2: Increase in Supply Figure 3: Decrease in Supply
4.1.3 Factors that Change Supply
The supply of a product may change due to a number of non-
price factors, causing the
supply curve to shift. The influence of these factors are
discussed below.
1. Cost of production
A rise in wages, rent or a rise in the price of a raw material will
increase the unit cost of
production. Holding the price constant, a higher average cost of
production would result
in a lower potential profit per unit of good produced. Hence, at
each possible price, fewer
units will be supplied as producers consider alternative goods to
produce. This will lead

108. to the supply curve shifting to the left. On the other hand, a
decrease in the average cost
PRINCIPLES OF ECONOMICS
38
KHE-LCD-SGD-00040
of production will lead to an increase in the supply of the good
and the supply curve
shifting to the right.
2. Price of related goods supplied
For the supplier of a good, the change in the price of related
good in production namely
a substitute or complement can also influence his decision on
the supply of his/her good.
Substitute in production is a good that can be produced in place
of another good (Bade
& Parkin, 2015). The increase in the price of a substitute good
means that producers are
likely to switch to producing the substitute good that use the
same resources as the good

109. they were originally producing. An example is the decision of
the producers in production
of natural rubber and palm oil. If the price of natural rubber
rises due to a rise in demand
for rubber, farmers find it more profitable to produce rubber.
This, thus, leads to the
diversification of resources away from the production of palm
oil towards the production
of natural rubber. Hence, there will be a fall in the supply of
palm oil, vice-versa.
Complement in production is a good that is produced along with
another good (Bade &
Parkin, 2015). The increased profitability from producing one
good will result in a rise in
supply of the complement good. An example of complements
are beef and leather
produced by the cattle farmers. An increase in the price of beef
due to an increase in
demand of beef increases the quantity supplied which leads to a
corresponding increase
in the supply of leather in the market, vice-versa.
3. State of technology used in production

110. If a new method is devised to produce a good more efficiently,
more output will be
produced with the same amount of inputs. If prices of factors of
production remain the
same, this would lead to a lower unit cost of production.
Holding the price of the good
constant, a lower unit cost of production results in a higher
potential profit per unit of
output. Thus, at each possible price, more will be supplied as
producer consider switching
PRINCIPLES OF ECONOMICS
39
KHE-LCD-SGD-00040
resources into this production. There is an increase in supply
and a rightward shift in the
supply curve, vice-versa. The increased production of crude oil
in USA in recent years is
a result of such advancement in “fracking” technology in the
exploration of crude oil.

111. 4. Suppliers’ Expectation
A change in the expectation of suppliers towards a good, can
affect the supply of the good
at the present moment. Suppliers who expect the increase in the
future price of a good
in the near future, will likely supply lesser of the good now, so
as to stockpile and supply
more in the future. On the other hand, suppliers’ expectation of
a fall in the future price
of the good, will lead to increase in supply of the good at the
present moment.
5. Nature, random shocks or unpredictable events
Adverse changes such as bad weather, disasters, war and
political events will decrease
supply of the good if the production process of the good is
disrupted. As a result, lesser
quantity of the good is supplied at each prevailing price level.
Such situations are
commonly known as “supply shocks”. On the other hand,
favourable weather condition
and greater political stability will tend to increase the supply of
a good.

112. PRINCIPLES OF ECONOMICS
40
KHE-LCD-SGD-00040
4.2 Market Equilibrium
When bargaining with a banana seller in Asia, there is a
common saying that, by the end
of a negotiation, if both parties are still smiling then the price is
fair one. The Seller has
received the price he is willing to sell and the Buyer is willing
to buy. This happy
transaction is a simple illustration of market demand and supply
at work.
After learning the law of supply and the law of demand, you
would have realised that they
are opposing forces. Specifically, when the price of a good
rises, quantity demanded
drops and quantity supplied rises. To determine a market price
to coordinate buying and
selling plans, we have to achieve an equilibrium in the market.

113. Figure 4: Market equilibrium
An equilibrium is a situation in which opposing forces balance
each other. Equilibrium
in a market occurs when the price balances buying plans and
selling plans of both
consumers and firms (Parkin, 2016). A market moves toward its
equilibrium because
price regulates buying and selling plans and price adjusts when
these plans do not match.
PRINCIPLES OF ECONOMICS
41
KHE-LCD-SGD-00040
Market equilibrium occurs when the quantity demanded equals
the quantity supplied
(Bade & Parkin, 2015). Please see Figure 4 above. The
equilibrium price is the price
at which the quantity demanded equals the quantity supplied

114. (Pe). The equilibrium
quantity is the quantity bought and sold at the equilibrium price
(Qe) (Bade & Parkin,
2015).
Despite the many factors that will affect demand and supply, the
market price remains
the balance by which we compare the willingness of consumer
to purchase and producers
to supply. Hence, when price varies from the equilibrium price,
theoretically the market
will either force the price back to the balance or a new market
equilibrium may be set.
If the price of the good is higher than the equilibrium price, the
quantity supplied exceeds
the quantity demanded. This leads to a surplus of the good in
the market. This will force
the price down to the original equilibrium price. If the price is
below the equilibrium price,
the quantity demanded exceeds the quantity supplied. This leads
to a shortage of the
good in the market. This will force the price up, to the original
equilibrium price.

115. To illustrate, suppose the price of a can of coke is $1.
Consumers plan to buy 14 million
cans and producers plan to sell only 7 million cans. Consumers
cannot force producers
to sell more than they plan, so the quantity that is actually
offered for sale is 7 million
cans. Some producers, noticing queues of unsatisfied
consumers, will start to raise the
price. The rising price reduces the shortage because it decreases
the quantity demanded
and increases the quantity supplied according to laws of demand
and supply. There are
movements of points along the demand and supply curve. When
the price has increased
to the point at which there is no longer a shortage, the force
moving the price upward stop
operating and the price comes to rest at its equilibrium price.
PRINCIPLES OF ECONOMICS
42
KHE-LCD-SGD-00040

116. 4.3 Predicting Changes in Equilibrium Price and Quantity
The demand and supply model provides a powerful way to
analyse the influences on
price of a good and the quantity bought and sold. According to
the model, the change in
price comes from the change in demand, change in supply or
change in both demand
and supply.
4.3.1 Increase in Demand
If demand for a particular good increases, its demand curve
shifts rightwards (Figure 5).
The quantity supplied cannot match the quantity demanded by
consumers, creating a
shortage at the original price. To eliminate the shortage, the
price must rise, as
consumers are now willing to offer higher prices to obtain the
good. When the equilibrium
price rises, producers are motivated to increase quantity
supplied according to the law of
supply. There is an increase in the quantity supplied causing a
movement along the

117. supply curve. The consumers also cut down on their
consumption according to the law of
demand. There is a movement up the new demand curve. The
adjustment process
continues until the new equilibrium is set where quantity
demanded equals to quantity
supplied. Hence, an increase in demand for a good will lead to
increase in equilibrium
price and equilibrium quantity of that good.
Figure 5: Increase in demand
PRINCIPLES OF ECONOMICS
43
KHE-LCD-SGD-00040
4.3.2 Decrease in Demand
A decrease in demand will cause the demand curve to shift
leftward (Figure 6). The
quantity supplied exceeds the quantity demanded at the original
price and hence a
surplus is created. A surplus causes a downwards pressure on

118. price, as producers are
now willing to lower prices to clear their inventories. As price
decreases, quantity
demanded rises and quantity supplied falls, stopping once the
surplus is eliminated at the
new equilibrium. A decrease in demand for a good, thus results
in a decrease in
equilibrium price and equilibrium quantity of the good.
Figure 6: Decrease in demand
4.3.3 Increase in Supply
If supply for a particular product increases, supply curve shifts
rightwards (Figure 7). The
quantity supplied exceeds the quantity demanded by consumers,
creating a surplus at
the original price. To eliminate the surplus, the price must drop,
as producers are now
willing to drop the price to clear their stocks. When the
equilibrium price drops, consumers
are more willing to increase their consumption according to the
law of demand. There is

119. a movement along the demand curve. The adjustment process
continues until the new
equilibrium is set where quantity demanded equals to quantity
supplied. At the new
equilibrium, equilibrium price decreases and equilibrium
quantity increases.
PRINCIPLES OF ECONOMICS
44
KHE-LCD-SGD-00040
Figure 7: Increase in supply
4.3.4 Decrease in supply
A decrease in supply resulting from any learnt factors, will
cause the supply curve to shift
leftward (Figure 8). The quantity supplied is lesser than the
quantity demanded and
hence a shortage is created. A shortage causes an upwards

120. pressure on price, as
consumers are more willing to spend to obtain the goods. As
price increases, quantity
demanded decreases and quantity supplied rises, stopping once
the shortage is
eliminated at the new equilibrium. Hence, a decrease in supply
will lead to an increase
equilibrium price and decrease in equilibrium quantity.
Figure 8: Decrease in supply
PRINCIPLES OF ECONOMICS
45
KHE-LCD-SGD-00040
In summary, for a competitive good, the change in demand or
supply (assuming only one
of them changes and the other one remains unchanged) will lead
to the change in the
equilibrium price and equilibrium quantity as below,

121. Market Force Change Equilibrium Price Equilibrium Quantity
Demand Increase Increase Increase
Decrease Decrease Decrease
Supply Increase Decrease Increase
Decrease Increase Decrease
However, in real market, both demand and supply can change
together. When this
happens, to predict the changes in price and quantity of the
good concerned, we must
combine the effects that you have just learnt.
PRINCIPLES OF ECONOMICS
46
KHE-LCD-SGD-00040
REFERENCES
Bade, R. & Parkin, M. (2015). Essential Foundations of
Economics. (7th
ed.). USA: Pearson Education Inc.

122. Parkin, M. (2016). Economics. (12th ed.). England: Pearson
Education Limited.
PRINCIPLES OF ECONOMICS
47
KHE-LCD-SGD-00040
Topic 5 –GDP and Economic Growth 1
Why the United States of America (USA) is ranked the biggest
economy in the world?
Why is India’s economy comparatively smaller when it is such a
big country with so many
rich and middle-class people? How does Singapore’s economy
compare to its old rival
Hong Kong? How do we make comparison of countries’
economic performance?
This Topic will answer the above questions and mark the start
of our journey into the
worldly “big picture” of Macroeconomics. We will make
comparison amongst countries
using many economic statistics including GDP, economic

123. growth rate, unemployment rate
and inflation rate. While learning this Topic, we not only must
know how to calculate the
various economic indicators but also be to tell what the
economic indicators can and
cannot tell us.
With this, we can begin our investigation of one key
measurement of macroeconomic
strength, the Gross Domestic Product or GDP.
Learning outcomes:
The following are the learning outcomes for this Topic. At the
end of the Topic, do a
self-check to ensure that you have achieved these outcomes:
• Define GDP.
• Explain why GDP equals aggregate expenditure and aggregate
income using the
circular flow model.
• Explain the two typical methods used to measure GDP.

124. PRINCIPLES OF ECONOMICS
48
KHE-LCD-SGD-00040
5.1 Definition of GDP
GDP is the market value of the final goods and services
produced within a country in a
given period of time (Sloman Norris & Garratt, 2013). This
definition has four significant
parts.
1) Market value
Market value which involves valuing items produced at their
market values or the prices
at which items are traded in the markets. For example, instead
of counting 5 apples
produced in the GDP, we count them at their market value of $2
per apple or $2 x 5 apples
= $10.
2) Final goods and services