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

Questions & Answers

Q1 Answer : C. $430 Miss Cheng could spend two hours at a concert or 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 the concert ticket is $250, what is the opportunity cost of her choice of going to the concert? A. $410 B. $420 C. $430 D $440 Answer : C. $430

Q2 Answer: C. Cup and Bag Mary has accumulated 20 Coupons. What is the opportunity cost to her if she uses them to exchange for one camera? No. of coupons Gifts 5 15 20 Cup Bag Camera A.Cup B. Bag C. Cup and Bag D. Cup or Bag Answer: C. Cup and Bag

Q3 Which of the following statements about scarcity is true? Answer: D A. Once a choice is made, the problem of scarcity is solved. B. A good is scarce if not everyone has it. Which of the following statements about scarcity is true? C. Scarcity means unlimited human wants. D. Both rich people and poor people face the problem of scarcity. Answer: D

Q4 Answer: 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 Answer: D. (2) and (4) only C. (2) and (3) only