Basic Economic Concepts-Lecture1

8/3/2019 Basic Economic Concepts-Lecture1

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Basics of Economics

By: Anjali C Kumar

ICRI,Mumbai


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Basic economic concepts

Scarcity and Choice

Opportunity cost


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Human wants

Unlimited wants


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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


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Types of resources

Natural resources: e.g. sunshine, rain,

crude oil

Human resources: labour service

Man made resources: e.g. machines,

equipments


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Scarcity Meaning: Resources are insufficient

to satisfy ALL human wants

A relative concept: we want more thanwe have

Basic economic problem in humansocieties


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Do they face scarcity problem?

United States

Hong Kong

North Korea

Africa


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Is sea water scarce?

Is it fixed in supply?

Do we want more sea water than we

have?

Sea water is not scarce


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Are they scarce? Sunshine in Thailand

A free sample of candies given at a shopping

centre

Fresh air in a caf with many smokers

Sand in the desert


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Are they scarce? Sunshine in Thailand 6

A free sample of candies given at a shopping

centre5

Fresh air in a caf with many smokers 5

Sand in the desert 6


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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


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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?


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What is economics? It studies how we allocate the limited

resources to satisfy unlimited wants


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Opportunity cost

Opportunity cost is the highest-valued

option forgone


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Choice among options

Rank options according to a persons

preference order

Option 1 going to cinema

Option 2 going to sing karaoke

Option 3 sleeping at home


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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


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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 opportunitycost


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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


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Full cost Option 1 going to an 1 hour concert and

pays Rs200 for a ticket

Option 2 working in Lifestyle as a salesman

earning Rs30 per hour Option 3 working as a tutor earning Rs100

per hour

Full cost of attending the concert = price ofticket + income forgone (highest-valuedoption forgone)

Full cost of attending the concert = Rs200 +

Rs100 = $300


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Complimentary tickets Going to Hong Kong Disneyland

Ticket : Free of charge

Money spent on food, transport..=$200

Income forgone = $500

Full cost of going forDisneyland (HK)

=$700


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I

sT

ime 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


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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, whatis her cost of living in that flat?


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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


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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 timetutoring a student at $70 per hour. She could use the time

on painting instead and earn a total of $170. If the price ofon painting instead and earn a total of $170. If the price of

the concert ticket is $250, what is the opportunity cost ofthe 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


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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 herWhat is the opportunity cost to herif she uses them to exchange for oneif she uses them to exchange for one

camera?camera?

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


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Which of the

following statements

about 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 poorpeople face the problem

of scarcity.

Answer: D


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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) only

Answer: C. (2) and (3) only

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