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1.1. Structure of Structure of EconomicsEconomics

1.1. Structure of Structure of EconomicsEconomics

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Chapter 1 : main menu1.

1Understanding economics Progress Checkpoint 1

1.2

Opportunity cost

Concept Explorer 1.1Theory in Life 1.1Concept Explorer 1.2Progress Checkpoint 2

1.3

GoodsTheory in Life 1.2Concept Explorer 1.3Progress Checkpoint 3

1.5

Circular flow of economic activities

Progress Checkpoint 4

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Progress Checkpoint 1Q. An economics student

says, “When a choice is made, the problem of scarcity is solved.” Do you agree?

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Progress Checkpoint 1• No. We have to make choices because of

the problem of scarcity.• Making choices does not solve the

problem of scarcity, but partly satisfies human wants.

• As long as resources are insufficient to satisfy all human wants, scarcity still exists, and we still have to make choices.

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Concept Explorer 1.1• Sam owns a taxi worth $1,500,000.

He can :1. drive the taxi himself and earn an annual

income of $200,000, or2. sell the taxi and put the money in a bank

to earn interest at 10% p.a., or3. rent out the taxi and earn a monthly

rental of $12,000.

• Are the opportunity costs of driving the taxi by himself and renting out the taxi the same?

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2. selling the taxi and putting the money in a bank =

=

Concept Explorer 1.1• The income of :

1. driving the taxi by himself =If hechooses the cost is :

If hechooses the cost is :

cost of driving

the taxi by himself

cost of renting

out the taxi<

$200,000 a year

$1,500,000 x 10% $150,000 a year

$144,000 a year $12,000 x 12 3. renting out the taxi

==

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Theory in Life 1.1• Mrs. Chan is an engineer. Although she

can do housework very well, she chooses not to be a full-time housewife but employs a Filipino maid.

• How can we apply the concept of opportunity cost to explain her decision?

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Theory in Life 1.1

If Mrs. Chan employs the Filipino maid, the cost involved is the payment to the maid.

If she does the housework herself, the cost is the forgone income from being an engineer.

<To maximize / minimize cost

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Concept Explorer 1.2• Simon wants to watch a two-hour movie. The

ticket price is $60. Alternatively, he can spend the two hours on being a private tutor and earn $100 per hour, or being a part-time salesman and earn a total of $180.

• What are the opportunity costs of (a) buying the movie ticket, and (b) watching the movie?

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The cost of spending the two hours on watching the movie = the $ forgone income from being a private tutor / part-time salesman.

Concept Explorer 1.2• Cost of buying the movie ticket = $60

200

If two hours spent on watching the movie, he can alternatively earn $ from being a private tutor or earn $ from being a part-time salesman.

Cost of watching the movie =$60 + $200

= $260

200180

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Progress Checkpoint 2 Carmen is given a coupon from a

department store. The coupon entitles her to obtain goods worth $500 in the store. What is her opportunity cost of using the coupon if it is

(a) non-transferable, and

(b) transferable?

Cost = 0Cost = $500

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Theory in Life 1.2• Free rice• Free shampoo• Free tissue• Free bus service• Free tutorial classes• Free snacks

Quantity availablesufficient to satisfyall wants?

Opportunity costinvolved inproduction?

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Concept Explorer 1.3Q. Student X : ‘Ice is a scarce good.’

Student Y : ‘Ice is a free good.’Under what condition(s) will both studentsbe correct?

A. In Hong Kong, the quantity of ice available is insufficient to satisfy all wants. More of ice is preferred, and people are willing to pay a price to obtain ice. Since opportunity cost is involved in producing ice, it is a scarce good in Hong Kong.In South Pole, the quantity of ice available is sufficient to satisfy all wants. More of ice is not preferred, and people are not willing to pay a price to obtain ice. Since no cost is involved in producing ice, it is a free good in South Pole.

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Progress Checkpoint 3• Classify the following into consumer or

capital good.(a) A refrigerator in a fast food shop(b) A refrigerator at home(c) An aircraft owned by Cathay Pacific(d) An aircraft owned privately by Mr.

Wong who uses it only on holidays for fun

Consumer good

Consumer good

Capital good

Capital good

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Progress Checkpoint 4• Refer to the following diagram. For

Flows A to E below,(a) name each of the flows,(b) classify each into real or money flow, and(c) determine whether it passes through the

product or factor market.

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Progress Checkpoint 4

market

goods & services

E

A B

D Cmarket

Firms Households

E

goods & services

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Progress Checkpoint 4

Flow A Flow B Flow C Flow D Flow E

(a) Name

(b) Flow

(c) Market

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Progress Checkpoint 4

Flow A Flow B Flow C Flow D Flow E

(a) Namefactor cost

factor income

expenditure

revenue

factor service

(b) Flow money money money money real

(c) Market factor factor product product factor

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End of Chapter 1