2011 JC1 H2 Economics Syllabus 9732

Scarcity,Choiceand OpportunityCost

Mdm Shen Qiuhua Level Head/Economics

What is economics?

SocialScie nce

WhatIsEc o no mic s? Economics is a social science which studies how society uses scarce resources which have alternative uses to produce goods and services to satisfy unlimited human wants.

2BranchesofEconomics

2BranchesofEconomics

BasicTermsofEconomics

Consumption is the act of using the goods and services by individuals and households.

Basic T rmso fEc o no mic s e

Production is the act of making goods and providing services by firms.

Basic T rmso fEc o no mic s e

Productionof g oodsand se rvice s(by firms)

Consumptionof g oodsand se rvice s(by individualsand house holds)

Que stio nfo rtho ug ht: Willfirmspro duc e whatisac tuallywante dby individuals?Why?

Basic T rmso fEc o no mic s e Economics Goods are tangible things which vpossess utility or gives satisfaction vlimited in supply - money value & marketable

Basic T rmso fEc o no mic s e Free Goods are goods that are so abundant in nature that there is more than enough to meet all human wants.

E.g. sunshine, air and seawater.

Basic T rmso fEc o no mic s e Consumers goods are goods that give utility or satisfaction to the one who demands them.

E.g.: Television set, Cup, Drinks

Basic T rmso fEc o no mic s e Producers goods are goods that are used to produce consumers goods.

They are not demanded for their own sakes.

Think-pair-share

StudentAExplain

StudentBPresent

Question:Withtheaidofexamples,distinguish betweenconsumersgoodsandproducersgoods.

BasicTermsofEconomics Consumer durable goods are goods that yield their utility over an extended period of time. E.g. Refrigerator, stove, television set

Basic T rmso fEc o no mic s e Services are intangibles which also possess utility, are limited in supply have money value and are marketable.

E.g. Education, Transportation, Healthcare, Entertainment

BasicEconomicsConcepts(page10) Limitedresources/factorsofproduc

BasicTermsofEconomics

Copy

Households

refer

to consumers of goods and services make decisions on what to buy, where to buy and how much to buy aim to maximize satisfaction they are owners of factors of production, i.e. they sell labour, land and capital resources to firms and obtain income from firms

BasicTermsofEconomics

Copy

Firm/ Producer

unit of the economy that makes decisions regarding employment of factors of production and the production of goods and services aims to maximize profits

BasicTermsofEconomics

Price is the amount of money a consumer has to pay for a unit of a good or service. Cost refers to cost of production, i.e. the amount of money it takes to produce one unit of a good.

Basic T rmso fEc o no mic s e

Sc arc ity

Limite dRe so urc e s (limite dinSupply)

Unlimite dhuman wants

Basic T rmso fEc o no mic s e

Choice is the act of selecting between alternative goods or services. Opportunity cost is the cost of what is foregone or sacrificed when a choice is made or the next best alternative foregone.

Lecture Review

What are the aims of: A Consumers B Firms?

References

Economics , 6th Edition, John Sloman

Economics Principles and Tools, 4th Edition, OSullivan and Sheffrin, p 3 5. Principles of Economics, 3rd Edition, N. Gregory Mankiw, p 3 4. Economics for Today, 3rd Edition, Irvin Tucker, p 2 6.

How Economic Theories are Developed

Model Assumpti ons Implicati ons When predictions & facts disagree, develop new model REALITY Facts about economic activity to be explained Make Predictions & check them against facts

How Economic Theories are Developed

StateHypothesis Ifthepriceofapples Empiricalanalysis:usedatatotesthypotheses, increase,wecan EcCeterisParibus rve dthatpe o ple o no mistsodeterminewhetherornotahypothesisfitswell bse hypothesizethat withthefacts. boE.g.:Incomelevel,tasteandpreferencesof ught> apple swhe nitspric e fe ll. fewerappleswould Ifaneconomichypothesisissupportedbythedata, consumersremainunchanged. Variable s:Pric e ,quantityde mande d besold. wecantentativelyacceptasaneconomictheory.

Economic Theory

It is an accepted explanation of the relationship between economic variables.

It consists of 4 components:

Economic Model
A model means a representation of the actual object. simplified expressions of theories.

Independent DependentVariable Variable

Economic Model Tables Relationship between Income & Savings Income (Y) $ 100 200 300 400 Savings (S) $ 20 40 60 80

Economic Model Graphs Relationship between Income & Savings S S = 0.2Y

Figure 1: Relationship between Savings and Income

Economic Model

In the real world, relationships are rarely restricted to two or three variables. For advanced theories, economists often need to work with numerous variables which require mathematical models.

Lecture Review

List out the ways in which an economic model can be expressed?

E.g.: Slow economic growth will result in unemployment rate to increase.

E.g. Government should provide free education.

Think-Pair-Share Activity
Pause and Think!

Tools for Economic Analysis

Use of Mathematics Mathematical symbols and equations are often used to present economic theories. E.g.: DZ = f (PZ, PX, Y, T..) The demand for a good Z is affected by price of the good, price of a related good, consumers income and taste.

Working with Graphs

The

most useful graph for our purposes is one that merely connects a vertical line (the Yaxis) with a horizontal line (the X-axis).

Exhibit 1: Plotting a Graph

Y 50 40 30 20 10 -50 -40 -30 -20 -10 -10 -20 -30 -40 -50 10 20 30 40 50 X

Tools for Economic Analysis

Use of Graphs Linear Relations/ Straight Line Graph Need to know only 2 numbers, the intercept and the slope.

Tools for Economic Analysis

Straight Line Graph

X O

X & Y has a Positive relationshiop

X & Y has a Negative relationshiop

A positive relationshipmeans that two variables move in the same direction. That is, an increase in one variable (practice time) is accompanied by an increase in another variable (overall score) or a decrease in one variable is accompanied by a decrease in another variable.

Exhibit 3: A Positive Relationship

Source: www.singstat.gov.sg

When two variables move in different directions, there is a negative relationship between the two variables. When one variable rises, the other variable falls.

downward sloping line, the demand curve, shows the different combinations of price and quantity purchased.

The

higher you go up on the vertical (price) axis, the smaller the quantity purchased on the horizontal axis, and the lower you go down along the vertical (price) axis, the greater the quantity purchased.

Exhibit 4: Emilys Demand Curve A Negative Relationship

$25 Demand Curve (1, $25) A B (2, $20) C (3, $15) D (4, $10) E (5, $5)

Price of CDs

20 15 10 5 0

downward slope of the curve means that price and quantity are inversely, or negatively related. As price falls, quantity purchased increases.

The

1 2 3 4 5 6 Quantity of CDs Purchased

Tools for Economic Analysis

Use of Graphs Non-Linear Relations/ Curve The slope of a non-linear curve at any point is defined as the slope of the line tangent to it at that point. The line tangent can therefore have a positive, negative or zero slope along different points on the curve

Exhibit 9: The Slope of a Nonlinear Curve

LABOUR FORCE PARTICIPATION RATE

Source: www.singstat.gov.sg

Time-Series Data
Table 2: UK Unemployment, 2000 2003 2000 Unemployment (%) 5.39 2001 5.03 2002 5.11 2003 5.10

Time-Series Data

Source: www.singstat.gov.sg

Time-Series Data
UNEMPLOYMENT RATE

Source: www.singstat.gov.sg

Cross-Section Data
Cross-section data are measurements of a variable for different economic units, e.g. households, firms, government, at the same point in time.

Cross-Section Data
Demographic Structure of Singapore Population

Source: www.singstat.gov.sg

Cross-Section Data
Table 3: Income before taxes and benefits, 2000/1 Quintile groups of households
Bottom Next 20% 20% 2 7 Middle 20% 15 Next 20% 25 Top 20% Total

51

100

HOUSEHOLD INCOME FROM WORK IN CURRENT AND 1990 DOLLARS 1990 Average Household 3,076 Income ($) In1990Dollars Median Household Income ($) In1990Dollars 3,076 2,296 2,296 2000 4,943 4,166 3,607 3,040 Average Annual Change, 1990 2000 (%) 4.9 3.1 4.6 2.8

Source: www.singstat.gov.sg

TABLE 2: RESIDENT HOUSEHOLDS BY INCOME FR WORK

Monthly Household Income ($) Number (000) 1990 2000 Total 661.7 923.3 Below 1,000 105.7 116.3 1,000 1,999 179.3 128.9 2,000 2,999 133.3 136.1 3,000 3,999 86.1 121.3 4,000 4,999 54.0 95.2 5,000 5,999 33.5 75.4 6,000 6,999 21.7 57.5 7,000 7,999 13.8 42.2 8,000 8,999 9.5 32.4 9,000 9,999 6.5 23.4 10,000 & Over 18.3 94.6 Per Cent 1990 100.0 16.0 27.1 20.1 13.0 8.2 5.1 3.3 2.1 1.4 1.0 2.8 2000 100.0 12.6 14.0 14.7 13.1 10.3 8.2 6.2 4.6 3.5 2.5 10.3

Source: www.singstat.gov.sg

Source: www.singstat.gov.sg

The Concept of Scarcity, Choice & Opportunity Cost

Recall: Economics is the study of how society uses scarce resources to produce goods and services to satisfy unlimited wants.

The Concept of Scarcity, Choice & Opportunity Cost

The central problem of economics is:

Scarcit y of Resources it ed Hum an Want s Unlim

there are not enough to meet everyones wants for goods &

For bot h t he rich & t he poor

Scarcit y

Scarcity exists because human wants always exceed what can be produced with the limited resources and time that nature makes available.

Human wants > resources

Unlimited Human Wants

Due to the desire for even higher levels of consumption once a particular level is attained. Similarly, desires increase over time as old wants are satisfied and new wants are created.

Maslow Hierarchy of Needs

Food for Thought

Is the concept of Scarcity the same as the concept of shortages?

Basic Economic Problem

Resources

Limited

Land

Labour

Capital

Entrepreneurship

Alternative Use Goods & Services

Unlimited Human Wants

Scarcity

Limited Scarce Resources

Unlim it ed Hum an Want s

Choice

Choice
Choice is the act of selecting among alternatives

Ch oice s: VivoCit y Exp a n d PSA Con d om in iu m

Choice
Choice is the act of selecting among alternatives

Choices: Int egrat ed Resort Disneyland

Choice

What to produce ? An Example:

How m uch of each good m ust be produced

Overproduct ion

Underproduct ion

Producer will st rive t o: vUse t he least -cost m et hod of product ion Why? vMaxim izes t he level of out put or vMinim izes wast age of resources.

For Whom to Produce

Scarcity The Central Economic Problem

Limited Scarce Unlim it ed Hum an Want s Resources

Choice

Opport unit y Cost s

Opportunity Cost

The opportunity cost of any action is the next best alternative foregone

Opportunity Cost

If you cannot have everything you want, then you have to choose among the alternatives. The next best alternative which you forgo is the opportunity cost of the thing you chose. There are trade-offs in every choice we make

Opportunity Cost

Opportunity costs measures the real cost of the activity.

Such costs may but do not always coincide with money expenditure of the activity.

Example 1
Tom has $2 to spend on either bread or chocolate. If he decides to buy bread instead of chocolates, the opportunity cost of buying the bread is the amount of chocolates that he could have bought with the $2, not the $2 spent.

Think-Pair-Share Activity

Give an exam ple of opport unit y cost t hat you face in daily life?

Resources Limited hv alternative uses

Human Wants Unlimited Vary in Importance

Limited amt of gds & srvs produced at any one time

Can never satisfy all of societys unlimited wants with limited resources

Unlimited amts of gd & srvcs desired

Scarcity Choice Opportunity Costs

Exceptional Cases where Opportunity Costs are ZERO:

Free goods

Free goods can be defined as goods with zero opportunity cost. They are abundant in supply. Examples are air, sunlight, snow and rain-water.

Nothing is sacrificed or forgone.

Exceptional Cases where Opportunity Costs are ZERO:

Unemployed resources

There could be periods where substantial amounts are left idle due to low demand for them.

When the originally unemployed resources are put to use later, there is no giving up of the production of another good now.

Lecture Review
The basic economic problem is that scarcity Resources of __________. ___________ are limited in supply relative to our virtually ________________ wants unlimited for the goods sand services those resources can produce. All societies must therefore _________ which choose goods and services to produce, incurring ___________________________ in opportunity costalternative good terms of next best or service foregone.