Unit 1 Scarcity & Choice How do people make choices?

EQ What is your economic literacy score? 20 questions pre-test on economic knowledge

Your dreams  Your future What will make you Needs and Wants… Source of Income… Intangibles that money can’t buy… Create a visual using pictures, images, drawings, words

What is Economics? Economics is the study of how individuals and societies use their scarce resources to satisfy their unlimited wants. Scarce = limited Resources = things used to make other things (goods & services)

Land

Labor

Capital

Entrepreneur Organize Resources Consumers buys things they need or want. Producers make money.

Basic Economic Terms EconomicsThe study of how individuals and societies use their scarce resources to satisfy unlimited needs. ScarcityLimited; time, money, resources, and space ResourcesFactors of production; land, labor, capital “Things used to make other things” LandItems found in nature LaborWork done by people CapitalTools, equipment, factory, building NOT $ GoodsTangible items of value; computer ServicesIntangible items of value; fixing a car EntrepreneurStart a business; goal to make $ ProducerBusiness who sells goods/services ConsumerPeople who buys goods/services

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 $ 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 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

No. of coupons Gifts51520CupBagCamera Mary has accumulated 20 Coupons. What is the opportunity cost to her if she uses them to exchange for one camera? A.Cup B. Bag C. Cup and Bag D. Cup or Bag

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

Decision-making tool #1 Cost-benefit analysis This decision-making tool is best use when solving the problem of scarcity when you need to compare positives and negatives of which action to take or wise choice to make. Alternative: any possible course of action in a given situation. Benefit: positive consequence of action Cost: negative consequence of action Trade-off: giving up one thing to gain another Wise Choice: decision which gives the greatest benefit, least cost

Cost-Benefit Analysis AlternativeBenefit Cost  Wise choice is…

Economists Handy Dandy Guide

Why is Elvis reported as being alive? Use your “handy dandy guide” to solve the mystery!!!

TNSTAAFL Economics can be summed up in one word: TNSTAAFL “There’s no such thing as a free lunch”

TNSTAAFL Relationship between choice & opportunity cost… 20 hours free time Simplify to 2 options Illustrate scarcity, trade-off, & opportunity cost

Production Possibility Curve Production possibilities ~ different quantities of goods that an economy can produce with given resources, time and technology. Economists use the Production Possibility Curve (PPC) to demonstrate scarcity, trade-off, & opportunity cost for a society.

Production Possibility Curve Scarcity leads to maximum production Trade-off to increase production of one; have to decrease production of another Inefficiency can get more without giving anything up What is the opportunity cost of moving from Point A to B?

Scarcity,Trade-off & PPC Production Possibilities Curve (PPC) illustrates the maximum output combination of two goods; “on the line” Points A & B desirable; “best”? Point C is not possible Point D is inefficient To increase production of guns; Must decrease production of butter.

PPF for a Farmer Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

FIGURE 1. PPF for a Farmer Attainable region Soybeans Wheat E D C B A Unattainable region Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Negatively sloped ↑ Q wheat by moving resources out of soybean production and into wheat production Slope = opportunity cost Bowed outward ↑ Opportunity cost of wheat as ↑ wheat production Why? Inputs tend to be specialized. E.g., some land may be better suited for wheat vs. soybean production. Features of the PPF Copyright© 2006 South-Western/Thomson Learning. All rights reserved.