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1 Year 11 Preliminary HSC Economics Tutoring
Name ………………………...
Year 11
Preliminary HSC
Economics
Topic: The Economic Problem
and Opportunity Cost
2 Year 11 Preliminary HSC Economics Tutoring
Lesson Plan
By the end of this lesson you will:
1. Understand what economics and the economic problem is
2. Appreciate the importance of ‘choice’ at an individual, business and
government level, including
a. The ‘future implication of current choices’
b. The factors that underlie economic decision making by these groups
3. Understand what an ‘opportunity cost’ is and can draw, interpret and solve
problems using a ‘production possibility frontier’
Lesson Structure
I. The Economic Problem and How to Solve it
II. Background theory – Wants, Goods, Services & Resources
III. Opportunity Cost: Individual, Business and Government Choices
IV. Opportunity Cost: Production Possibility Frontiers
V. The Future Implication of Current Choices
VI. Economic Factors that underlie decision-making
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I. The Economic Problem and How to Solve It
What is Economics ‘Economics is the study of the production, distribution and exchange of goods and services in an economic system. It is a science which studies human behavior as a relationship between needs and wants and scarce resources with alternative uses’ (p3, Riley).
What is the Economic Problem The economic problem refers to the fact: supply of resources is limited in relation to the demands of individuals. We solve the economic problem by making choices about how best to use those resources including:
How to produce?
What and How Much to Produce?
To Whom to Distribute? An economy is how a society is structured to solve the economic problem.
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II. Background Theory
Wants, Needs, Goods and Services
In economics, wants are the ‘desires of individuals for goods and services’. There
are many different types of wants including:
Basic Wants (‘needs’)
Recurring Wants
Substitute Wants
Luxury Wants
Complementary Wants
Individual Wants
Collective Wants
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As mentioned wants are satisfied by goods and services. There are two main
types of goods:
Consumer Goods
Capital Goods
Resources
In economics, resources are the inputs that are used to create ‘things’ (goods) or
provide services. The four economic resources listed below are called the factors
of production. People who own or provide the factors of production will demand
factor incomes in return for their use by selling their resources on factor markets.
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III. Opportunity Cost: Why is it so important?
Economics never talk about the ‘cost’ of something because economics is all
about choices – instead we talk about ‘opportunity cost’.
Opportunity Cost
Definition: The cost of the opportunity foregone in pursuing one alternative. Opportunity cost can be money, time, or general satisfaction. Our ability to choose the best alternative, and minimise opportunity cost is called economising.
Illustration: Opportunity Cost
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Opportunity costs is one of the most important concepts in economics because it
effects everyone including:
Individuals
Societies
Businesses
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IV. Opportunity Cost: Production Possibility Frontiers
Economists often use ‘models’ (usually mathematical in some way) to visualize
concepts like opportunity costs to communicate economic insights. One such
model is called a production possibility frontier which is often used to
demonstrate the full potential of an economy to deploy resources. We use
production possibility schedules to draw production possibility frontiers.
Class Example 1:
I have $100 that I can either spend on clothing or meals. Each meal costs $10 and
each item of clothing costs $20.
a) Create a “production” possibility schedule for my ability to purchase meals
and clothing with what information you know
b) Draw a production possibility frontier
c) What is the opportunity cost/”marginal rate of substitution” of
a. Clothing
b. Meals
Hence fill out the rest of the production possibility frontier
d) Shade the “feasible region” for all my possibilities
e) Show visually why I cannot buy 7 items of clothing and 4 meals
a)
Clothing Meals
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b) , d) and e)
c)
Clothing
Meals
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Class Example 2:
Country X can either produce coal or wheat. If it devoted all its resources to coal –
it could produce 100 Mt. If it devoted all its resources to food it could produce 50
Mt of wheat. (Assuming a constant marginal rate of substitution)
a) Create a “production” possibility schedule for Country X’s ability to produce
coal and wheat
b) Draw a production possibility frontier
c) What is the opportunity cost/”marginal rate of substitution” of
a. Coal
b. Wheat
Hence fill out the rest of the production possibility frontier
d) Can this country produce 40 Mt of coal AND 60 Mt of wheat?
e) Shade the region that corresponds to an inefficient allocation of resources
f) Country X gets twice as efficient at produces food from wheat for the same
amount of resources – draw a new production possibility frontier
a)
Coal
Wheat
b)
c)
11 Year 11 Preliminary HSC Economics Tutoring
c)
d)
Assumptions of the Production Possibility Frontier
1. Only two goods can be produced – there are limited and finite resources available
2. All resources are fully employed on the production possibility curve – this represents full employment of all resources (land, labour, capital and enterprise)
3. The level of technology is constant or fixed 4. Resources are fixed or finite but can be allocated between the two goods
and are completely 5. Transferrable or mobile resources between production of both goods
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V. The Future Implication of Current Choices
Everyone wants to get the most out of what they have. In economics we call this
“maximizing utility” (utility = satisfaction). When an individual, a business or a
government allocates their resources to maximize their utility - this is called
allocative efficiency.
But ‘time’ is an important factor because the decisions you make now will have an
impact on your ability to make choices in the future. For example if I choose to
spend $10 on lunch at the canteen, I will have $10 less to spend tomorrow. I am
trading a better standard of living today for a not so good standard of living
tomorrow. Basically opportunity cost also has a time element to it.
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What are the future implications of current choices for:
Consumers
Businesses
Governments
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I. Economic Factors that underlie decision-making
Decisions made by Consumers, Businesses and Governments are affected by
numerous factors. Here we restrict ourselves to those which can be analyzed
from the lens of an economist.
a. Factors underlying decision making for consumers
i) “Propensity” to spend vs. save:
ii) Income/Work:
iii) Education:
iv) Retirement:
v) Political Alignment:
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b. Factors underlying decision making for businesses
Most businesses are run to maximise profits. This means either increasing
revenues or reducing costs because
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡𝑠
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃𝑟𝑖𝑐𝑒 ∗ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 | 𝐶𝑜𝑠𝑡𝑠 = 𝐼𝑛𝑝𝑢𝑡 𝐶𝑜𝑠𝑡 ∗ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
i) Pricing and Production:
ii) Resource Use:
iii) Industrial Relations:
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c. How governments can influence the decisions of individuals and businesses
i) Spending allocation:
ii) Economic Stabilisation:
iii) Social Goals:
iv) Regulation of Economic Behaviour: