Notesale: Turn your study into money

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Topic 1 Basic economic concept
Positive economics vs Normative economics

- refutable by facts - contains value judgment

Scarcity : the amount of resources is insufficient to satisfy the want for it
- limited resources but unlimited wants
- competition :
price , non-price ( first come first serve , lottery , ability etc
...
self interest
- minimize cost when making choices

opportunity cost : the highest valued option forgone due to an act
- time cost
- full cost= monetary cost + time cost
- highest valued alternative use of something ( money , time )
(the OP is the value of ……
...
Change in scale preference
2
...
we want more of it
2
...
g
...
( HAV PRODUCTION COST )
4
...
SCARCE

Free good: the amount of it is sufficient to satisfy people’s want for it and no more is
preferred
1
...
No production cost (must not have a price)
3
...
For more future consumption
Disinvestment : forgo more future consumption
...

Bad : don’t want it
...
G
- increase productivity
Private property right :
1
...
Right to transfer
3
...

- People have to produce everything
- No PPR , NO EXCHANGE
- All can use it , no one owns it , no one is willing to pay a price for it , market
exchange cannot take place

Market economy :
- decentralized decision ( private individuals )
- mostly PPR
1
...
for whom
- price , ability to pay

3
...
, centralized decision
Mixed economy : all three combined together

Common misconception:

1
...
Scarcity is the result of shortage
- when scarcity exists , shortage may not exist
...

- no scarcity , no price , no shortage
- whenever there is shortage, scarcity exists

3, competition will still occur when all goods are free-goods or in a one-man
economy
- will not occur

3
...
Opportunity cost still exists with no choice

5
...
Interest can exist without a market

7
...


Substitutes : replacement , competitive demand
Complements : work tgt to satisfy a demand
- Joint demand
Derived demand : by product of one another

Competitive supply :
Scarce resources , one use more than the other one hav less , S decrease
Joint supply : By product of one another
- beef , leather
- wool mutton
- increase supply , leads to an increase in another

nominal (MONEY / ABSOLUTE) price : MONEY PRICE
relative(REAL ) : in terms of another G
RP OF x : P of x / P of y

When the nP OF X in terms of Y increase , due to the law of D , PPL WILL CONSUME
RELAIVELY LESS OF X

ED/ ES :
measure the responsiveness of QD / QS of a good sue to the change of its price


Elastic : %QD>%p







Inelastic : %p>%QD


Unitarily :
ED=1
%p=%QD

perfectly inelastic : ED=0


perfectly elastic : ED = infinite


SUPPLY : moves along the supply curve
Elastic supply :



Inelastic supply :







Perfectly elastic :








Perfectly inelastic :





Unitarily elastic :


Price ceiling (max
...
) : above E
Quota : below QE
- decrease
- increase
- remove

Tax : reduce supply , as PC increase
- p will increase





Demand more elastic than S : more burden on producer







Demand less elastic : more burden on consumers








Perfectly Elastic Demand : ALL ON PRODUCER








Perfectly Inelastic Demand : all on consumer










Perfectly elastic supply : all on consumer









Perfectly inelastic supply : all on producer







Subsidy
- increase supply
- price decrease







Inelastic : enjoy more benefit
Perfectly inelastic demand: all on consumer
Supply: all on producer
Perfectly elastic demand: all on producer
Supply: all on consumer

















TOPIC 2

production and division of Labour


Production: the process of turning input into output
Aim: to satisfy human want
Types of output:
1
...
Consumer goods n capital good ( uses)
Directly satisfy want man-made resources – facilitate further
Production

3
...
pure public good : consume by all individuals at the same time
(POEM )
B
...
Gross Domestic Product( GDP)
2
...
Simple division of labour
- a person –specializes in producing a good or service
2
...
stage
3
...
Raise productivity
# choose the best person to do it – diff
...
On his own production
stage
...
Saving resources from producing capital good
- only do one part of the job- only need that set of tools
- less tools needed – save resources for producing consumer good

3
...
greater degree of interdependence ( employer)
- disruption in one stage – affect the whole production process

2
...
Greater risk of unemployment ( employee)
- trained to do one part only – difficult to find other jobs – need retraining
4
...

Process

5
...
Nature of the good
- not all suitable – higher individuality , craftsmanship , personal contact

2
...
Free trade
- cant trade –size of the market limited – No specialization

Tips :


































Ch
...
Human resources – labour: human effort used
- entrepreneur: owner , make production decision + bears
risks
2
...
natural: land - natural resources ( X involved human effort )

Labour: 1
...
Mental
*******Labour productivity
**** Labour supply ( Labour service)
= total output
= total no
...
of workers ){ average working
Total no
...
of worker x

average working H)
**** Labour force : total no
...
OF WORKERS

1
...
provide more training and
= large labour
education
2
...
official skl learning age + retirement
2
...
practice larger scale of division
- late retirement – larger
of labour


WORKING HOURS
4
...
Public holiday – more – smaller S

- more over time work – larger S
5
...
Time rate – paid according to the amount of working time
- Unstandardized jobs ( hard to measure contributions)
- Quality **** more important > quantity

2
...
of products produced
- Standardized n easily measured

3
...
Tips – consumers to workers – to reward
** higher working incentive
** DIFFICULT TO ACESS PERFORMANCE **
# usually HAVE TIME RATE #

Time rate Piece rate profit/revenue tips
supervision
Higher
Lower
Lower
Lower
cost
-constant
- high working
** highest working @ higher working

supervision
incentive
incentive
incentive
-
prevent
- larger profit =
- get more tips
shrinking
larger income
when have gd

performance
QC-control






Lower
- pay more
attention
X Rush
through
process

Higher
- earn more –
pay less
attention to the
Q

Lower
- encouraged to
provide high
quality service

Lower
@


administrative
cost
( calculating
wages)


Lower
- easier to
calculate by
hours

Higher

Higher
- difficult in
assessing
performance

productivity


Lower
- diff
...
Occupational mobility
- ease a worker can change from one job to another
( ***Labour union – lower mobility )
Factors:
1
...
restriction by professional bodies
- professional – entrance requirements
3
...
market performance




Higher



- more info about job vacancies - easier

# singer stay in singing profession – even less poplular
- earn far more than other jobs
(opportunity cost , income )
# higher current income , lower occupational mobility #


2
...
Transport network
- better network , lower cost ( time n $) > HIGHER MOBILITY

2
...
salaries difference
- more employment opportunity , higher income > higher G mobility

4
...
make production decision
- what , how , for whom to produce
2
...
Employ expertise to manage the firm > higher productivity
2
...
of decision making

Disadvantage: 1
...
Increasing productivity of other factors
2
...
fixed in supply at any moment( XX OVER TIME e
...
billion of years)
2
...
X opportunity cost





- in producing
- but have , in using

#### IDENTIFY LAND N CAPITAL#######



Ch
...
financial economies
- raise capital more easily
- provide adequate collaterals to
banks
- borrow at a lower interest rate

2
...
marketing economies;
-advertising cost can spread over the
larger output

4
...
research and development

6
...
managerial


EXTERNAL ;
- ENJOY BY THE WHOLE
INDUSTRY ( the industry
enlarge in scale )
1
...
management diseconomies
- too big – problem of communication and
coordination

2
...
marketing :
- large enough to satisfy market demand
- difficult to further expand
- money spend on advertising has limited effect













External :



1
...
lower cost in using
supporting services
- supporting services like
transport will be
developed
- lower cost in consuming

3
...


prod
uctio
n by
incre
asing
all)











2
...
11 integration of firms
Internal growth : within your own
External : combine with others

1
...
vertical integration : SAME product , Different stage
3
...
vertical forward: later stage
5
...
conglomerate integration : Irrelevant

Motives
1
...
vertical backward
- ensure the stability of supply of resources – avoid the bottlenecks

3
...
lateral + conleomerate
- diversification of products – reduce risk
- flexible use of resources
- benefit from the popularity of the brand name
- (goodwill of another film)

***** enjoy economics of scale #####
- FANACIAL ECONOMICS OF SCALE – enjoy lower interest rate – reduce
average cost of production










Ch
...
Perfect competition
- large no
...
imperfect competition
Monopoly : only one seller
- has to compete with others producing similar goods
( substitutes, factor input) - price n non-price comp
- homogeneous / heterogenous
- barriers for entry
- X perfect info
- price searcher

How is monopolist created :
1
...
Government ownership
3
...
By patent and copyright – exclusive rights over their inventions n ideas
5
...
Limited market demand – limited demand only

Regulation
1
...
Profit- maximum level of profit
3
...

- heterogeneous or differentiated products – quality or package design
- free entry and exit
- imperfect info
- price searchers- maximize profits – product differentiation – can raise price
without loosing all the consumers
- YES- price n nonprice






Oligopoly
- a small no
...
new entrants with small market share – hard to enjoy the same
economies of scale
2
...
government license may be required
- Imperfect info
- Interdependent in behavior – one reduce price – 0thers reduce price too –
####PRICE WAR ####

- Price searcher – product differentiation – can raise price without loosing c
### THERE MAY BE A PRICE LEADER ### others follow

* YES = price n non price
























Ch
...
CS = maximum amount willing to pay – actual amount
= TB-TE
( net gain from market exchange)
MB= maximum willingness to get one more unit of good


CS only , when TB>TE

MB>P = buy more
MB# MB=P # ----- CS maximized







3
...
Loss in TSS

2
...
Rationing – determines who can get the
government gain ( tax
good
revenue))
2
...
Price ceiling

#### DWL- depends on the
deviation of quantity

more elastic D/ S – greater

DWL









2
...
Quota








4
...
Subsidies







Ch
...
Bring harm – X conpensation ---will lead to --- overproduction





-











-

2
...
Government intervention
2
...
BY taxes – negative externality
increase production cost – MPC ( make them bare the M external cost)
discourage production







-







2
...
Quota – negative externality
-




4
...
g
...
Public ownership – negative externalities
government become a provider of a good
can produce according to SC n SB


MPC decrease by
MEB
S increase



• if unit
subsidy= MEB
- no DWL
- no underp



- Supple
decreases





Pollution permits
-pay more for more
permits
- increases MPC
- decrease output



-

6
...
well defined – private property right
2
...
5 income inequality
Equity : distribution of income and fairness in society
Normative : value judgment






Measurement of income distribution:
1
...
Decile group
- each group – 10% of the population
- 1st group – bottom group- least income

3
...
Gini coefficient

Formula :


=0 --- perfectly equal
=1 --- perfectly unequal

# increase gini coefficient --- X worsening poverty
increase- more uneven distribution of income
- the income of rich n poor may increase at the same time
- may be --- % increase in income of rich > % increase in income of the poor

Limitations
Affected measurements
1
...
Gini coefficient
2
...
redistribution effect
Gini coefficient
Gini coefficient of hk
- over state the problem of
- X calculated after
income inequality





redistribution of income
( TAX + SUBSIDY-
redistribute income from
the rich to the poor )

# will be less serious
3
...
difference in human capital

Productivity of worker – acquired
from education, training , experience
- more human cap
...
Difference in inborn ability
Intelligence , appearance , height etc
...
Different income in diff
...
Diff
...
industries
# occupational mobility – affect
income equality
5
...
Wage payment method
Time rate- more equal
Profit sharing/ revenue-sharing
- more unequal
7
...
taxes and transfer

e
...
CSSA, subsidy on public




Tax on rich , use the tax
revenue to help the poor


equal distribution
of income

welfare

transport , fruit money
# DISINCENTIVE EFFECT
- DWL to society
Discourage production- cause
loss

2
...
g
...
protecting private property
- in a market economy
rights and equal opportunities in - everyone has equal
the market
opportunity – guided by
market force

- gov
...
Education and training
Free education – children
of poor family
retraining programme-
unemployed workers
# accumulate human
capital – improve
productivity


Ch
...
2nd hand good
X current production

Value included in 1st transaction
2
...
Goods are not produced in that period X current production
4
...
insurance compensation from injury
X current production of service
6
...
unpaid services- by household – own X market value , X reliable data
consumption


Special case ( included)
1
...
buying insurance
PRODUCTION OF SERVICE
3
...
rental value of self-occupied property Provision of rental service for oneself
5
...
ppl spend welfare on services
Production of services



Circular flow model



Household Firm




1
...
contribution of Amy’s garment factory Only require one od the stage
2
...
Wage , profit tax
XXXXXXXX





4
...
measure standard of living
- higher per capita GDP – higher living standard


2
...
policy
3
...
a basis for business decision making


Limitations of GDP
1
...
effects of population

(NGDP / RGDP given , per capita GDP is
needed )

3
...
Composition of GDP

High nominal GDP –
May increase due to increase in price
only
High real GDP – may not have high
standard of living
-if it is shared among – huge population
# rate in increase of pop> rate of
increase of RGDP
– per capita real GDP may FALL

- unequal income distribution – no high
living standard


If most expenditure ,
On Capital / national defense
- LS may not be improved
- May be overestimated
2
...
underestimation of a country’s output - X include non-marketed good + illegal
items
# GDP x reflect the true output level








-


-






Limitations in international comparison
1
...
Problem of exchange rate
GDP expressed in terms of national currency
Exchange rate varies everyday – diff
...
dates



Efficiency question type :
1
...
Is a -/+ externality ,lead to market failure
private cost ( what?) – external cost (what?)
– without compensation/payment – divergence between private n social C
MSC> MSB – OVER-CONSUMPTION or ( MSB>MSC)-- under-consumption
MSC>MPC ---- over-production
MSB> MPB----- under-production



























Ch
...
retired person
2
...
below 15
4
...
employed population
( include underemployed – work less than his maximum cap
...
unemployed population


###Unemployment rate:
- depends on % change in U population and labor force
- real GDP – increase with the increase in employed pop
...

LF
Unempolyed U rate
A group of teacher quit their
population
increase
job- enroll a full-time course decrease

in Uni
unchanged
( as 分母
decrease)
2
...
of Increase Increase
Increase
job remains unchange
( as 分母, 分子

increase by
the same no
...
foreigners come and fill up Increase Unchange
Decrease
the long-vacant post





Cost of unemployment
To society



To the unemployed




1
...
social and political
-crime rate increase
disorder
-protest + civil
disturbance
X welfare ( enempolyment - transfer payment
benefits)
( tax revenue )
1
...
loss of income
Reduce expenditure ,
Living standard falls
3
...
--- rate decrease
% increase LF< % increase in U pop
...
-----rate unchange


Changes in price level
Inflation: persistent increase – general price level
Deflation: persistent decrease- general price level
Disinflation: slower rate of increase in price

X once and for all / short time increase X
X increase in price of one good X

Measuring General Price level
1
...
Implicit GDP Deflator
nominal GDP
___________________ x100 ( increase in deflator – increase in general price L)
Real GDP






Inflation rate = New-Old \ Old x 100%

CPI implicit GDP deflator
Basket of consumer goods
All final goods of services by local
(domestic production, imported
resident producing units
goods and services)

CPI – more accurate – cost of living
all consumer goods and services


But ---- implicit GDP deflator – include things that do not affect cost of living
e
...
– expanses on national defense / infrastructure

Effects of changes in price level

Inflation ( price increase) Deflation (price decrease)
Purchasing power of
DECREASE
Increase
money
Cost of living
Increase
Decrease
Government revenue
Increase
Decrease
( as money income will
-money income of ppl
increase as a
decrease
compensation for
-
inflation)
-more ppl fall into tax net
- existing tax payers –
higher tax rate
Balance of trade
- local inflation is higher

( X-M)
then other country
- export decreases
( increase in X price)
Choice of wealth
spend on commodity
- amount of money
- protect the
hold increases
purchasing power
- prices of other
of money
goods decrease
amount of money hold
decreases


# real income – purchasing power of money income
- increase = living standard increase

income distribution









•
•
•
-

-

During unanticipated inflation ,
During unanticipated deflation,
The one who pay – gain
The one who pay- loose
The one who receive – loose The one who receive – gain
= decreases in real value , the
purchasing power decreases
(pay less interest in real value)


Nominal interest – in terms of money
Real interest – in terms of goods

During inflation,
Inflation rate – off set- nominal interest rate = N> R
- still receive the interest – but the purchasing power decreases – no real
interest

The Fisher equation
Nominal interest rate= Real interest + inflation rate (expected) (inflation
premium )

Realized real interest rate = nominal interest rate – actual inflation rate

must nominal interest rate > real interest rate ?
No – deflation - rate of inflation ( deflation) – negative
Real interest > nominal

Cost ( opportunity cost)
holding money – nominal interest rate

Nominal rate ( received from the bank e
...
interest)
of holding money – 0

The real rate of return
in holding money – inflation rate ( negative )

When the market nominal interest rate < expected
- people prefer to be borrower – borrow at a lower rate


# when actual real interest rate < expected
borrower (debtor ) gains – pay less interest in real value
lender ( creditor) looses

Decrease in inflation rate / CPI --- does not mean no inflation or drop in price
****** disinflation ****** the price is rising but in a slower rate





real income – when the general price level increases> increase in income –
purchasing power decreases – real income decreases

Differences between CPI and implicit GDP deflator
The basket of good and services
Measured
Fixed
Changes according to the output of
different period
Value of import – covered
Value of export – covered
- consumed in the economy
-produced by the economy


CPI -overestimating the effect of rising price levels on the cost of living

1
...
Quality improvement
- technological improvement – quality of good increase – prices of goods
decrease
- lower cost of living – but same living standard

GDP deflator- better indication of inflation
CPI – local general price level + better indication of the cost of living
- include consumer goods only
- but GDP includes capital good that may not affect the cost of living


The business cycle













Tough
Recovery
Boom
Recession
Growth rate of Lowest
Increasing
Highest
Decreasing










































GDP
Level of
low
Increasing
high
Decreasing
aggregate
demand
Unemployment High
Decreasing
Low
Increasing
rate
Inflation rate Low
Increasing
High
Decreasing

Recession
output decreases- laid-off workers
stagflation (inflation during recession )
at the beginning of recession – inflation rate is still high – rising
unemployment


Ch
...
Lack of double coincidence of want
- not easy to the find the person that wnt your gd and has the gd u
- time-consuming , inefficient

2
...
of gds - hard to work out the exchange ration

3
...
Lack of divisibility
- some gd will be useless if divided into smaller quantities- hard to conduct
smaller transactions

5
...
Inconvenience
- bulky gds , large transaction volume

7
...
medium of exchange or means of
Generally accepted by everyone
payment
Reduce the cost of exchange
2
...
of exchange rations

3
...
store of value

Purchasing power of money can be
stored up for future consumption
- more convenient for storing wealth



Qualities of good money

1
...
scarce in supply

- relatively scarce

3
...
Divisible

- can be divided into small unit without losing its
value

5
...
Portable

- easy to carry around *large transaction

7
...
Commodity money Physical good – had intrinsic value
- heavy metals are inconvenient to carry around

2
...
inconvertible ( fiat) - coins and banknotes
money
legal tender: issued by government treasury, central bank
or private commercial banks ( declared by the gov
...
Demand deposit (
- write cheques to make payments
current account)
- x interest
( as store of value/
- transactions involving large payment amount





medium of exchange )
2
...
Time deposit
(as store of value)

4
...
electronic money
- money stored electronically
( plastic money)
- e
...
octopus card ( medium of exchange)


How currency is issued in Hong Kong
Coins , 10 notes – by gov
...
the Hong Kong and Shanghai Banking corporation ( HSBC)
2
...
The Bank of China

Through the linked exchange rate system
The exchange Fund – regulating the issue of banknotes ( keeping the reserve
of the country)

When a bank want to issue banknotes,
- pay the exchange fund in us dollar at the official rate( us 1= hk 7
...
g
...
Central banks
Government’s bank
( HKMA ,
- supervising the operation of the banking system ,
people’s bank of
maintain government accounts, carrying out monetary
China)
policies


3
...
g
...
Merchant bank
- privately owned – specialize in wholesale banking to
restricted license corporations
bank
=
( e
...
J
...
supervising and controlling private
- supervise all private banks
banks
- examine their operations – to avoid
bank crisis
2
...
on all matters of
(the financial services and the
money
treasury bureau : manages the gov
...
As lender of last resort
- private banks with financial difficulties
– obligation to help them
# run on the bank #
customers no longer trust the bank, all
try to withdraw at the same time





4, controlling foreign exchange reserve
5
...
Banknote issuing（ coins and 10
notes)


Functions not performed by HKMA

1
...
keeping the cash reserves of
private banks
( No central A in hk is responsible for
this)
Minimum reserve ration:

Commercial banks:

Functions:
1
...
Granting loans
3
...
Financing international trade





+ keep the exchange rate stable ( linked
exchange rate)
- control the money supply to regulate
the economic activity of the country
- by using financial instruments e
...

discount rate and reserve ratio
- but in other country , central bank ,
only body to issue coins and banknotes
- control the total money supply of the
country

A place where – banks exchange cheques
drawn on each other
-private banks settle any differences in
the value of the day’s cheques exchanged
among them
private banks are required to keep some
cash reserve with the central bank,
according to the reserve ratio , to protect
the banking system
Ensure that banks can meet norml
withdrawals and to enable the gov
...
fixed sum of money lended – required
to pay back the principal + interest
within a given period – interest rate
fixed / floating
2
...
letter of credit
- business letter written by the bsnk on
behalf of the importer – to the exporter –
authorize the exporter to draw a bill of



4
...
Underwriting shares

exchange on the bank for the value of
good
2
...
providing syndicated loan services - groups of lander collectively extend
a loan to a single borrower –
spreading the risk of large loans
3
...
investment management
- if large company has surplus fund,
the bank can accept them for
investment in the foreign exchange
market


Three- tier banking system in Hong Kong
Pls refer to the table on the notes

# Minimum liquidity ration : the ration of liquefiable assets ( e
...
bonds,
shares things that can be converted to money within one month) to liquefy
liabilities ( any deposits that are due within one month )

Hong Kong as a financial centre
Factors
1
...
well-developed financial services
- wide variety of financial services
and infrastructure
- airport, com
...
Minimum government control
Little control over business
organizations and investment
4
...
simple tax system with a relatively





low tax rate
6
...
Economic expansion in the Asia
pacific region


Benefits to hk

1
...
increasing economic links with the - foreign enterprises provide opp
...
increasing employment
- rapid growth in the financial sector
– provide more job opp
...
disrupt effect on the local
- large flow of money in n out Hk
economy
- affect local money supply and
interest rates
- diff
...
to control
2
...
18 ( part 3)

Money supply : total amount of $ available in the economy (money stock)
M1
Legal tender in public circulation ( held by public , not by
(transaction) bank) + demand D ( current account )

in licensed banks

M2
M1
(store of
+ Savings + time deposits + negotiable certificates of
value)
deposits ( NCD)
IN LICENSED BANKS
M3
M1 + M2
+ time deposits , NCD ,

by restricted license banks and deposit taking companies


# (m3) total money supply: all deposit + cash in pc
( affected only when , cash in transmitted to/ from other countries)

Monetary base : total amount of currency and legal tender
M0 = cash in public c + reserve

Q;
- when M3 decreases : the amount is no longer included in public circulation and
the deposit in the banking system

Credit creation:
1
...
required reserve ratio : percentage of deposits kept by banks in cash
required by law

rrr : required reserve / deposit
actual reserve ratio: actual amount ( with excess reserve) / deposit

Assumptions for Maximum deposit creation
1
...
banks only operate one type of

deposit , invest in one kind of assets
3
...
X cash leakage

5
...
banking multiplier : 1/ RRR
Banking multiplier : 1/ARR

Method 1
Max
...
increase in loan:

Initial increase in loans
( initial increase in D ( 1-rrr)) x mc

Max
...
change in
total deposit ( new max
...
change in D + original amount


Max
...
Max
...
Max
...
Max
...
Max
...
Total money supply:
Total Cp + total deposit
6
...
increase in $ supply < max increase in deposit
( increase in D – decrease in cash) ( increase in D)

# when there is a fall , in the rrr, (X change in pc)
max
...
increase in deposit
( increase in D -0 ) ( increase in D)
NO CHANGE IN PC

Explanation:
1
...
deposit contraction
after the withdrawal of ($x m), the banks have a shortage of reserve ( $xm),
the banks will call back loans , lead to further withdrawal of D
the process will go on and on , until there is no longer any shortage of
reserve
the maximum decrease in total deposit =

# effect of withdrawal – fall in RR
1
...
find new new excess R

immediate change = x DEPOSIT CREATION / deposit contraction

3
...
change in MS= CHANGE IN CP + MAX
...
cash leakage
loans lent out by banks may not be all reposited back into the banking
system
one bank’s loan will- create a smaller deposit for another bank
each bank receives a smaller deposit , their- lending ability is reduced
smaller increase in bank deposits

-

2
...
insufficient demand for loan
amount of loan made to the customers decreases - excess reserve exists
less loan will be re-deposited to the banking system
the actual amount of deposit – cannot reach the maximum level


Factors:
Max
...
rrr ( decrease)
creation ability
2
...
cash in pc (decrease)
1
...
deposit ( more new)
3
...
19 Money, market and quantity theory of money
Money demand= amount of money that an economy desires to hold at a certain moment
( cash + deposit)
1
...
Asset demand for money = total amount of money-an economy desires to hold- as
a store of wealth

1
...
real income
Real national income + , expenditure + , more money for t
TD +

2
...
- less $ needed for t – TD –
(credit card, eps)
3
...
time interval between wage Longer time interval ( monthly income to yearly )
receipts
- need to keep more money for buying gds and services
- TD +

2
...
Cost of holding money
When hold money , give up nominal return from incomeearning assets
Cost of holding money= nominal interest rate
- higher nominal interest rate – higher cost of holding
money
- AD-


2
...
liquidity of income earning + , AD- , bonds and shares +
assets

# definition=
the ease of converting their income-earning assets into cash





without losing its market value
SUMMARY


Relation with
money demand
+

Td

Ad

Increase in real
+
_______
income
More advanced
+
-
______
payment tech
# Rise in nominal
-
_____
-
interest rate
Rise in brokerage +
________
+
for shares
transactions
Rise in risk of
+
________
+
holding bonds
Rise in liquidity of -
_________
-
income-earning
assets



Liquidity : ( not only the time needed , but also the cost involved)
e
...
suffering a loss when the shares are sold
Lowest: real estates
Shares
Time deposit
Saving deposit
Demand deposit
Cash (highest)

Money demand curve






Movement aong the MD curve ( d= PL ) Shift of the md curve
Nominal Interest rate - , m-
Liquidity of other assets

Price level
Payment tech
Real income
Risk of income earning assets






Money supply curve – fixed
Money supply- government or the central bank

###MS + , PRINTING MORE BANK NOTES / RRR
changes in money demand= changes in demand and price ##



Quantity theory of money
Real national income = total output (Y)
Nominal= monetary value of the total output ( PY)
P= price level

Velocity of circulation of money = v
( average number of times a unit of money is circulate in a period to buy national
output)
v = PY/ M ( money supply)

# the equation of exchange – MV= PY

1, short run QTM
assumption – 1
...
Long run QTM
assumptions : 1
...
Real output constant ( Y)
# believe = full employment level of resources will be reached under the
price mechanism in the long run
( determined by the Q of production resources + production tech
...
20 Public finance


Budget – estimated
1
...
Surplus 3
...
fiscal surplus 2
...
Salaries tax ( progressive)
1
...
profits tax ( proportional )
2
...
property tax ( proportional )
3
...
hotel accommodation tax

5
...
Vehicle first registration tax

7
...
the principle of equity
2
...
the principle of convenience
4
...
the source principle
2
...
increase in progressive tax --- narrow the income gap

1
...
of tax payers Income gap decreases
(increase)
(low income)
2
...
tax band
Pay mess tax
Income gap increases
(middle income)

Changes
Increase in Increase in Increase in Increase in
TA
MTR
TB
STR
No
...
of ppl









standard tax
rate

Income gap

Post-tax gini
coefficient



















Effects on income distribution

increase in regressive tax

increase in profit tax

Increase in direct tax

Increase in indirect tax

Increase in salaries tax
Resources reallocation





increase income gap

reduce net profit for reinvestment
and expansion ----- lower investment
incentive

Decrease in disposable income –
decrease in AC
Decrease purchasing power, decrease
total expenditure
Increase P --- reduction in the
consumption of the taxed product
- increase price level

Reduce working incentive – work
more--- pay a larger proportion of
income as tax
Resources will be reallocated from
products with higher taxes --- to
products with lower taxes



Tax revenue
heavier direct tax --- increase tax revenue
lower working + investment incentives
rise in tax revenue < drop in tax revenue , becuz of drop in incentives
tax revenue will fall , vice versa

Stability
drop in direct tax > drop in indirect tax
spending on necessities is more stable
tax base of direct tax – smaller than indirect tax
indirect tax is more stable



Tax net: the grp of ppl who are tax payer
Tax base: scope of the sources of tax revenue

Public expenditure

Recurrent expenditure: regular expanses of the public sector (e
...
wages ,
social welfare)
Capital expenditure : non-regular expenditure

Expansionary effect : can spend more to increase the GDP

Public expenditure in relation to GDP = size of public sector
- shows how significant the government spending is relative to the aggregate
spending in HK





































-

-





Ch
...
price levels

Includes
Closed economy – C , I , G
Open economy – C, I ,G, net export

Curve
P L increase, qd decrease ( vice versa)





Why is it downward sloping ? ( Price level increases )
1
...
interest rate effect
3
...
p) of M Transaction value –
More import—increase
and FA -- decrease
increases
Qd --- relatively
cheaper
Real wealth of an
Need more money – MD Less export ---
economy -- decrease
increase
decrease Qd ---
relatively more
expensive
Consumption + I ---
MS fixed --- interest
Net export decreases
decrease
rate increase
Real output --- decrease Consumption +
Real out put decreases
investment ----
decrease

Real output --- decrease

# wealth : F assets , M












---

Title: micro and macro Economic notes ( for IB, A-level or ECON 101 )
Description: The 60 pages precise and concise economic notes featured topics such as : the definition of scarcity and opportunity cost, basic economic principles and problems, demand and supply, elasticity, division of labour, factors of production(types of resources and labour, types of payment, mobility) , the law of diminishing marginal return, types of firm integration, types of market structure , calculation of the market efficiency( Monopoly), externality, income inequality, GDP, unemployment, money and banking system( types of money and its definition and the explanation of the banking system) , money supply, the theory of money, Public finance ( taxation) and Aggregate demand. All the notes are typed by me after comprehension of the course material, thus, there are tables and abbreviations in the notes and most of the ideas are in point form.

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