Supply and Demand and Exchange Rate Policy

Topics: Supply and demand, Economics, Price elasticity of demand Pages: 9 (2039 words) Published: September 21, 2010
“When prices are volatile it is in the best interests of both consumers and producers for governments to control and moderate that volatility.” Examine and illustrate why the prices of some goods are more volatile than the prices of others. (10) Given their role in resource allocation, is it best for the government to accept whatever volatility of prices may occur in a free market?

“Monopolistic competition is the worst of all possible worlds, failing to achieve either the pricing efficiency created by the intensity of perfect competition or the scale economies and innovation of oligopoly and monopoly.” Explain what is meant by monopolistic competition, and why the majority of firms in Singapore are operating in such a market. (10) Does the existence of so many monopolistically competitive firms lead to inefficiency in the Singapore economy? (15)

With an aging population and an ever-increasing demand for health services, there is a growing recognition and a fragmented and specialty-centric model of health care provision would do little to improve the cost, quality and access of health services, especially for the elderly in Singapore. - Singhealth, Healthcare Roundtable VI, 1 Feb 2008

Discuss the economic reasons to support your arguments, whether the Singapore government currently adopts the most appropriate economic policies in the provision of healthcare. (25)

Assess the view that in a small open economy like Singapore, demand management policies are largely irrelevant, and therefore governments should focus their efforts on supply-side policy-making.

Consumer price inflation in Singapore rose from 1.0% in 2006 to 2.1% in 2007 and 6.5 % in 2008. Consider whether exchange rate policy is the most effective way to ease inflationary pressures in Singapore. (25)

“Modern protectionism is more subtle and varied than the 1930s version where tariffs were the weapon of choice.” Describe the different forms of protectionism in practice today. (10) Evaluate the arguments for protectionism in light of the current economic downturn. (15)


Price determined by demand and supply
price volatility - due mainly to price inelastic demand and price inelastic supply of

price inelastic demand - low responsiveness of qty dd to change in price. Primary goods, e,g, agricultural goods, fuel oil. Reasons for low PED: Basic products rather than luxuries, e.g. food. OR no close substitutes. E.g. computer games, rice, traveling, manufacturing vs. primary good COMPARED TO jewelry, coca cola...

Fig 1: market for Good A - elastic demand, supply shifts upwards, indicate price changes Fig 2: Market for good B - inelastic demand, supply shifts upwards, indicate price changes

price volatility when supply shifts
indicate why there is different in price elasticity of demand - HITS, apply to certain goods (recreational games vs. rice or staples)

Price inelastic supply - low responsiveness of qty supplied to change in price E.g. agricultural goods, fuel oil
Reasons: long gestation period, uncontrollable weather conditions, non-renewable (fossil fuel) COMPARED TO manufactured goods - e.g. computer game software, PES relatively higher; relatively easy to increase production by increasing inputs

Low price elasticities of demand and supply will result in large extent of price changes when demand (or supply) conditions vary.

Draw graph of primary product market (where dd and ss are both price inelastic) vs. manufactured product market (where dd and ss are both price elastic) show the shift, and the differences in price

For a given good, the different market structure may have an impact on the volatility of price. E.g. fr a given increase in demand for computers, a monopoly or oligopoly will be able to respond in supply because it may have excess capacity as compared to a PC firm which does not have excess capacity. Also these dominant firms have greater control over price and output and are unlikely to allow...
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