An EC1301 Example

First let’s recall one of the famous economic effects which is the substitution effect.

"Substitution Effect - Describes the effects of changes in relative prices on consumption. According to the substitution effect, an increase in price of one good causes a buyer to buy more of the other good, since the first good has become relatively expensive, and vice versa. The buyer substitutes consumption of the second good for consumption of the first."

Yes, that is what has happened in our National University of Singapore last week. The two products are flat outside campus and hostel inside campus. Obviously they are necessary consumption products for everyone, especially for international students.

The rising rental of flats outside campus cause students to get more CCA points in order to bid for hostel on campus. The supply of hostel is fixed while the demand increased. The amount of points is needed for accommodation increased.

Then let's look at the other important reason. Let's recall the effect of inflation.

"The rate at which the general nominal level of prices for goods and services is rising, and, subsequently, purchasing power is falling."

It means as inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.

If the right of living in campus is a kind of products, we can see CCA points as purchasing power to buy that product. In last two semesters, the nominal level of CCA points rised. It is mainly because OSA (office of students affair) give some points too easily and the aim of a lot of CCA groups is only to get points.

Due to the subsitution effect and inflation, the cut-off line is 46 points which is much higher than last year's 38 points.

I believe the main problem is not the cut-off points. In current situation, demand exceeds supply. This situation won't be changed until the new hostel is built in year 2010.