Chapter 1

Topic 1: Introduoicection to Economics

1. The Economic Problem
1.1 What is Economics?
The social science that studies the choices that individuals, business,
governments, and entire societies make as they cope with scarcity and the
incentives that influence and reconcile those choices.
Choice
Limited resources----------unlimited wants(products)

1.2 Resources and Goods 生产要素

-- Resources can be called as factors of production or inputs, they are used
to produce the outputs or products.
Classification of factors of production:
a. Land (Natural resource) raw meterials:naturally exist in the world eg.
Water, air, mineral
b. Labor  Human resources : work/effort contributed by people
 Human capital :skill/knowledge/experience of peeople
c. Capital  Physical capital :manufactured capital/products eg.
Machines, tools, buildings
financal capital
d. Enterpreneurshiptechnology

-- Goods are the outputs/products that individuals derive satisfaction or

happiness.
Goods
Free goods: if price=0， quantity available in the market>quantity people want
eg. Air, water
Economic goods: if price=0, quantity available in the market< quantity people
want
Economic goods are tangible goods – they are goods that are scarce, for
which the desired quantity of an economic good exceeds the amount that is
directly available at a zero price.
Services are intangible goods – they are tasks that are performed for
someone else, such as cleaning, hospital care, restaurant meal preparation,
teaching, and so on.
Economic goods: 1 tangible goods(有形)
—non-durable(不耐用)：life span< 3 years
—durable(耐用)： life span>3 years [Link]
Life span（可以使用多少年，而非可以保存多少年，有些事物会随着科技进步而改变，例如十年前手机很耐用，如今一两年就要换新）
2 intangible goods
services
Resources Goods & Services
Inputs Outputs

1.3 Microeconomics and Macroeconomics

4 major decision-making units

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 Households/consumers
 Firms/produders
 Government
 foreigners
There are 2 major divisions of Economics.
-- Microeconomics individual
It deals with the functioning of individual industries and the behavior of
individual decision-making units: business firms and households.
Price: if income ^  consumers want to buy more applesprice of apples ^
-- Macroeconomics
It looks at the economy as a whole.
Price: if total income^ al people want to buy more of most of the
goodsoverall price^ (inflation^ )
1.4 Four Key Economic Questions
-- What is produced and how? Resourcesoutput
-- What is consumed and by whom? Outputconsumers
-- How much unemployment and inflation exist?
-- Is productive capacity growing? total output (GDP) growth

2. Method of Economics
Positive Economics is a value-free statement. It is a statement of What is or
will be true or false. Eg. If price^ , people will buy less
- Descriptive economics and economic theory
Descriptive economics is simply the combination of data that describe
facts and phenomena. Eg. Unemployment rate in Macao last year = 4%
Economic Theory is a statement or set of related statement about cause and
effect, action and reaction. Eg. If the price of apple^, people will buy less

Normative Economics involves the value judgment. Such judgments are the
opinions of the speaker; no one can prove that the judgment is or is not
correct. It also called Policy Economics.
Eg. If price of apples^ , people will buy less, government should control the price of
apples

3. Scarcity, Choice, and Opportunity Cost

3.1 Scarcity 稀少
There is no enough resources allow people to produce what they want. This is
scarcity.
3.2 Choice 抵消
Scarcity forces people to make choices. People face a trade-off: to satisfy
more of one need means satisfying less of another.
3.3 Opportunity Cost 机会成本
When a good is scarce, choosing to use resources for a certain purpose is the
benefit given up by not using them in an alternative way. Opportunity cost of
something is the highest-valued alternative that must be given up to attain
something or to satisfy a want.
A:1
B:4
C:2
D:3

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E:5

Scarcity Choice Costs

Example: There are three tasks: Task A is worth $100,000, Task B is worth
$75,000, and Task C is worth $50,000. What is the opportunity cost of Task
A? Task B? and Task C?

Exercise: According to the above example, if an owner of a small firm needs

to hire some managers. Assume that each manager has time to do only one
task. The owner hires only two managers, having one do Task A and the other
do Task B. What is the opportunity cost of Task B?
What is the opportunity cost of your 4 year university study?
Salary+working experience+tuition fee+other spending for study
Reason:time

4. Production Possibility Frontier (PPF)（生产可能曲线 PPC(C=curve)）mix

guantity
4.1 Definition
A graph that shows all the combinations of goods and services that can be
produced if all of society’s resources are used efficiently.(有效地)

4.2 Assumptions 假设
(1) Only two products are produced in the economy.
(2) We are looking at production over a specific time period.
(3) The resource inputs are fixed over this time period.
(4) Technology does not change over this time period.

4.3 Efficiency
On the Y-axis, we measure the quantity of good A produced, and on the X-
axis, the quantity of good B or other goods.
The PPF can be used to define the notions of efficiency, inefficiency, and
unattainable.
Good A
A

C
E PPF（ppc）

B Good B

PointD:attainable+inefficient, point E: unattainable Point a/b/c attainable+efficient

Efficiency and inefficiency

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All points on/below and to the left the curve represent combinations of good A
and good B that are possible for the society given the resources available and
existing technology.
Efficiency can mean many things to many people. Whenever the economy is
operating on the PPF (all points on the PPF  Point A, B, and C), we say that
is production efficiency.
Any point below the PPF (Point D) at which resources are being used
inefficiently. We call this point as inefficient point.
Efficiency=no waste
Waste: -some unused resources(includes unemployment)
-misallocation of resources(资源错配)（includes mismanagement）
-not the market needs

Unattainable
Any point lies outside the PPF (Point E) is unattainable point, because it is
impossible to achieve during the time period assumed. By definition, the PPF
indicates the maximum quantity of one good given some quantity of other.

Example: A worker has only four hours in total to produce two goods: chairs
and benches.
Determining Trade-offs Because of Resource Scarcity
Chairs Benches
Time Spent Product Made Time Spent Product Made
(in hours) QC (in hours) QB
0 0 A 4 20
1 4 B 3 18
2 7 C 2 14
3 9 D 1 8
4 10 E 0 0
1 hour of production:^4 chairs -2 benches
st

o.c. of 4 chairs=2 benches

2nd:^chairs-4 benches

4.4 Calculate Opportunity Cost per Unit for a PPF

1st hour of chair production:o.c. per chair=2/4=0.5benches/chair

2nd : o.c. per chair=4/3=1.33b/c

Example: Measuring Opportunity Cost

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The worker is currently spending one hour making chairs and three hours
making benches. What is the opportunity cost per chair of spending a second
hour in chair-making (assuming the worker is still limited to four hours)?
What is the dollar value of this opportunity cost if benches sell for $12 and
chairs sell for $25?
nd
2 hour: o.c. per chair=1.33 benches
Dollar value of o.c. per chair=4/3*12=16

4.5 Negative Slope and Opportunity Cost

The slope of the curve is the ratio of the change in the good on the vertical axis
to the change in good on the horizontal axis.

The absolute value of the slope of the PPF shows the opportunity cost.

4.6 Law of Increasing Opportunity Costs

The decreasing slope of PPF means opportunity cost is increasing, it illustrates
the law of increasing opportunity costs: As more of a good is produced, its
opportunity cost rises. Bowed-out shape

Moving from left to right along PPF, ^chair productionmore benches will be
given up
Resources are generally not perfectly adaptable for alternative uses, so the cost
of producing the additional units increases.
The more specialized the resources, the more bowed the production possibility
frontier.

4.7 Economic Growth and PPF

Over time, it is possible to have more of everything. This occurs through
economic growth. The economic growth can be illustrated by the upward and
outward shift of the PPF.
Benches

Chairs

Under economic growth, the PPF of two products may not be affected at the
same level. So, the movement of PPF is different.

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benches

Chair
-- Factors that cause economic growth
1) Increase in inputs eg. Discover new/more resources, population^, capital^
2) Innovation applies to technology, management, marketing
3) Increased division of labor ^specialization  efficiency/productivity 
output

PPF illustrates: -unattainable vs attainable

-efficiency vs inefficiency
-o.c. per unit
-increasing o.c.
-economic growth(outward shift)