EJC H2Econs Topic4

1 © Eunoia Junior College Economics Department 2025 Topic 4: Government Intervention and the Labour Market Theme 2.1: Price Mechanism and its Applications How to use this set of lecture notes? 1) BEFORE LECTURES – UNDERSTANDING CONTENT - Reference your notes against your H2 syllabus. Mark out the key concepts so that you know what you MUST know - Read your notes ahead so that you can focus on listening and capturing additional notes during lectures 2) During lectures – APPLYING CONTENT - Bring your hard copy notes along, and use your PLDs to refer to the lecture slides concurrently - Capture additional notes, especially the real world examples where you can note down how concepts are applied and how economic analysis are developed in varying contexts - You should make use of a notetaking/consolidation tool to take notes during lessons and to consolidate your learning at timely junctures. Examples are MIRO, Notion, Good Notes, Notability, Microsoft OneNote, KAMI, and etc. The choice is yours! 3) After Lectures – TUTORIAL PREPARATION to use content flexibly to show application, analysis and evaluation skills - Revise concepts relevant for the case study and essay questions - Refer to the notes and use it flexibly to prepare your answers to meet question requirements. Pure memorisation will not work as it does not involve deep understanding. - Do share your notes with your friends to multiply learning!

2 © Eunoia Junior College Economics Department 2025 1. Introduction to Economic Welfare CONTENTS 1.1 Consumer surplus 1.2 Producer surplus 1.3 Society’s welfare 2. Introduction to Government Intervention in the Free Market 2.1 Taxes (Direct and indirect taxes) 2.2 Subsidies 2.3 Price controls 2.4 Quantity controls (Quotas) 3. Application of Demand and Supply Analysis to the Factor Market: The Labour Market 3.1 Wage determination in a free market 3.2 Wage determination in a free market using demand and supply model 3.3 Non-wage determinants of demand and supply of labour 3.4 Wage adjustment process 3.5 An economic analysis of minimum wage 3.6 Explaining wage differentials Summary of Government Interventions and Impacts Essential Questions: 1. Why do governments intervene in markets? 2. What impact does government intervention have on markets? What might influence the impact of government intervention?

3 © Eunoia Junior College Economics Department 2025 1. Introduction to Economic Welfare The central economic problem c oncerns the allocation of scarce resources among competing uses to satisfy unlimited human wants for goods. Hence, our decision-making on how to allocate these scarce resources to meet our unlimited wants is crucial. Thus far, we claim that the price mechanism is efficient in allocating those resources in the free market. Specifically, we will consider how the price mechanism is able to achieve allocative efficiency, where society produces the optimal/right mix of goods and services that maximises social welfare. This means that the sum of consumer and producer surpluses is at its maximum. In this topic, we will explore the analysis of societal welfare by considering how consumer and producer surpluses are derived. 1.1. Consumer surplus Consumer surplus is the difference between the maximum amount that a consumer is willing and able to pay for a good and the amount that he actually paid for the good. This is a measurement of consumers’ welfare. As mentioned earlier, each and every point on the demand curve represents the maximum price that consumers are willing and able to pay for the good. a. Tabular representation Consider this individual demand schedule: Price ($) 14 10 6 4 Quantity demanded 1 2 3 4 Assuming the equilibrium price in the market for the good is $4, then the individual consumer surplus will be: Quantity demanded Maximum price that consumer is willing to pay ($) Equilibrium price ($) Consumer surplus ($) 1 14 4 10 2 10 4 6 3 6 4 2 4 4 4 0

4 © Eunoia Junior College Economics Department 2025 Graphical representation The vertical distance between the demand curve and the price line is the consumer surplus for that unit the consumer buys. It represents the net benefit he receives for the good he buys. Hence, the area of the shaded triangle PAE bounded above the price line and the demand curve in Figure 1 represents the consumer surplus at the market equilibrium price. 1.2. Producer surplus Producer surplus is the difference between the amount that a producer of a good actually receives and the minimum amount that the producer is willing and able to sell the good. This is a measurement of producers’ welfare. Recall that the supply curve represents the minimum price that the producer is willing and able to sell the good. a. Tabular representation Consider this individual supply schedule: Price ($) 1 4 8 12 Quantity supplied 0 1 2 3 Assuming the equilibrium price is $12, the individual producer surplus is: Quantity supplied Minimum Price that producer is willing to sell ($) Equilibrium price ($) Producer surplus ($) 1 4 12 8 2 8 12 4 3 12 12 0 Price Quantity DD P A E 0 Q Figure 1: Consumer Surplus SS

5 © Eunoia Junior College Economics Department 2025 b. Graphical representation The vertical distance between the supply curve and the price line is the producer surplus for the unit that the producer sells. It represents the net benefit he receives for the good he sells. Hence, the area of the shaded triangle 0PE bounded below the price line and the supply curve represents the producer surplus at the market equilibrium price in Figure 2. 1.3. Society’s welfare As illustrated in Figure 3, the market equilibrium is the point where the sum of consumer and producer surplus is the largest i.e., society’s welfare is being maximised. Price Quantity DD P A E 0 Q Figure 2: Producer Surplus SS Price Quantity DD P A E 0 Q Figure 3: Society’s welfare maximised at market equilibrium SS

6 © Eunoia Junior College Economics Department 2025 Figures 4a and 4b shows what happens when a market is in disequilibrium – when prices are higher or lower than the equilibrium price. In Figure 4a, the price set at P0 is higher than the equilibrium price. At this price, a surplus is created because the quantity supplied Q s is more than the quantity demanded Q d. The surplus of Q dQs will not be traded as there are insufficient buyers, so only Q d is bought and sold at price P0. The consumer surplus for this quantity traded is AP 0C while the producer surplus is BP0CD. Thus, the society’s welfare is area ABCD. In Figure 4b, the price set at P0 is lower than the equilibrium price Pe. At this price, a shortage is created because the quantity demanded Q d is more than the quantity supplied Qs. Only Qs is bought and sold at price P0 since there are insufficient goods offered for sale. The consumer surplus is P0WYZ while the producer surplus is P0ZX. Thus, the society’s welfare is area WXZY. In both cases of disequilibrium, the quantity traded is lower than the equilibrium quantity. Increasing the quantity traded would improve society’s welfare. At the equilibrium quantity, the society’s welfare would be maximised. Hence, we can conclude that the free market is efficient in allocating resources, such that the resultant equilibrium will maximise society’s welfare. Therefore, the free market could be viewed as always leading to a desirable outcome. NOTE: These market disequilibrium(s) will be further analysed under Section 2 Government Intervention in the Free Market because at times, government policies can cause the market to be