Basic economic concepts

• Scarcity and Choice

• Opportunity cost

Human wants

• Unlimited wants

Resources

• used to produce goods / services to satisfy human wants

• limited in supply

• scarce: i.e. their quantities are insufficient to satisfy all human wants

Types of resources

• Natural resources: e.g. sunshine, rain, crude oil

• Human resources: labour service

• Man made resources: e.g. machines, equipments

Scarcity

• Meaning: Resources are insufficient to satisfy ALL human wants

• A relative concept: we want more than we have

• Basic economic problem in human societies

Do they face scarcity problem?

• United States

• Hong Kong

• North Korea

• Africa

Is sea water scarce?

• Is it fixed in supply?

• Do we want more sea water than we have?

• Sea water is not scarce

Are they scarce?

• Sunshine in Thailand

• A free sample of candies given at a shopping centre

• Fresh air in a café with many smokers

• Sand in the desert

Are they scarce?

• Sunshine in Thailand

• A free sample of candies given at a shopping centre

• Fresh air in a café with many smokers

• Sand in the desert

Competition

• We compete for the use of limited resources

– 2 ways of competition – Price competition– Non price competition e.g. waiting,

examination, lucky draw, violence…

Making choices

• Which restaurant will you go for lunch?

• What would you like to study at university?

• What will you buy with $100? CD or dress ?

• Which girl (boy) will you marry?

What is economics?

• It studies how we allocate the limited resources to satisfy unlimited wants

Opportunity cost

• Opportunity cost is the highest-valued option forgone

Choice among options

• Rank options according to a person’s preference order

• Option 1 going to cinema

• Option 2 going to sing karaoke

• Option 3 sleeping at home

What is the cost of going to the cinema?

• Going to sing karaoke (highest-valued option forgone)

• We cannot choose option 2 and option 3 at the same time, we only forgo option 2 when we select option 1

Choosing a career / job

• Option 1 being an actress ( $10 Mn. p.a.)• Option 2 being a nurse ( $ 0.5 Mn. p.a.)• .• Income forgone being an actress < income

forgone being a nurse• Cost being an actress < cost being a

nurse

• Choose the job with the lowest opportunity cost

More elderly found in queues

• Before festivals, wait for gifts (rice, mooncakes, red envelopes etc)

• In public clinics

• Income forgone by elderly < income forgone by working persons

• Cost of waiting by elderly < cost of waiting by working persons

Full cost

• Option 1 going to a 1 hour concert and pays $200 for a ticket

• Option 2 working in Park’n as a salesman earning $30 per hour

• Option 3 working as a tutor earning $100 per hour

• Full cost of attending the concert = price of ticket + income forgone (highest-valued option forgone)

• Full cost of attending the concert = $200 + $100 = $300

Complimentary tickets

• Going to Hong Kong Disneyland

• Ticket : Free of charge

• Money spent on food, transport..=$200

• Income forgone = $500

• Full cost of going for Disneyland (HK) =$700

Is Time a cost?

• Price of a mobile phone =$1 800

• Search = one evening

• Income forgone while searching = $200

• Opportunity cost of buying the mobile phone is $2 000

Uses of a flat

• Mrs Lo has the following options for her flat in Shatin :

• Option 1 Owner occupied• Option 2 Vacant• Option 3 Lease with a rental income

$50 000 per year

• Suppose she chooses to live in her flat, what is her cost of living in that flat?

Social Cost

• Building a new railway $100 million

• Creating pollution nearby (e.g. cutting trees, noises) $5 million

• Social cost of building highway

• = private cost + external cost

• = $105 million

Miss Cheng could spend two hours at a concert orMiss Cheng could spend two hours at a concert ortutoring a student at $70 per hour. She could use the time tutoring a student at $70 per hour. She could use the time on painting instead and earn a total of $170. If the price of on painting instead and earn a total of $170. If the price of the concert ticket is $250, what is the opportunity cost of the concert ticket is $250, what is the opportunity cost of her choice of going to the concert?her choice of going to the concert?

A. $410A. $410 B. $420B. $420 C. $430C. $430 D $440D $440

No. of couponsNo. of coupons GiftsGifts

55

1515

2020

CupCup

BagBag

CameraCamera

Mary has accumulated 20 Coupons.Mary has accumulated 20 Coupons.What is the opportunity cost to her What is the opportunity cost to her if she uses them to exchange for one if she uses them to exchange for one camera?camera?

A.Cup A.Cup B. BagB. Bag C. Cup and BagC. Cup and Bag D. Cup or BagD. Cup or Bag

Which of the following statementsabout scarcity is true?

A. Once a choice is made, the problem of scarcity is solved.

B. A good is scarce if not everyone has it.

C. Scarcity means unlimited human wants.

D. Both rich people and poor people face the problem

of scarcity.

Answer: D

Which of the following are opportunity costs of attending school?

(1) Poor examination results

(2) Income forgone

(3) School fees

(4) Expenditure on dinners

A. (1) and (4) only

B. (1) and (3) only

C. (2) and (3) only

D. (2) and (4) onlyAnswer: C. (2) and (3) only