Year One H1 & H2 Economics 2010
Tutorials 1-
Road-Map : Where are we NOW and where are we GOING
Big Ideas ….Story line
A. Scarcity ( Idea W > R ) => Rationality ( rational choices) => Resource Allocation
Best use of scarce resources No WASTA!
"ith alternati#e uses. !fficient RA (ideal) or $est use
"eighing %.&. against $enefits $efore 'a(ing a rational
("elfare) 'a*) decision.
B. Resource Allocation
+. What to ,roduce- Agricultural. 'anufactured. ser#ices. ci#ilian. 'ilitary.
consu'er. in#est'ent goods. ,ri#ate goods. ,u$lic goods
/. 0o" 'uch to ,roduce- What is the ideal or o,ti'al 1uantity
2. 0o" to ,roduce- 0o" to co'$ine in,uts or resources to ,roduce the out,ut-
(+) 3 (/) = A! ( allocati#e efficiency)
(2) = 4! ( ,roducti#e efficiency)
& . 5AR6!T 5!&0ANIS5 ( 'artyn )

5artyn "ill ensure that there is A! 3 4!.

I',ortant econo'ic ,rinci,le7
Right goods ,roduces in the right 1uantities at the
lo"est cost => A!

At the end of the day this is "hat econo'i8ing is A99 a$out :
;Right< => according to consu'ers ,references="ants.

>inal outco'e => &onsu'ers "elfare is 'a*i'i8ed :
Rational choices leads to "elfare)'a*i'ising outco'es.
0urray : 2 cheers to 5artyn:
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Year One H1 & H2 Economics 2010
Tutorials 1-
#$#ORIA% &' SCARCI#() CHOIC*) O++OR#$NI#( COS# ,
+RO-$C#ION +OSSI.I%I#( C$R/* 01.23hrs4
At the end o5 the tutorial) students should 6e a6le to
• *7plain with illustrations the !on!ept o5 opportunit" !ost
• -is!uss the need 5or e55i!ient resour!e allo!ation arising 5ro8 the !entral e!ono8i! pro6le8
o5 s!ar!it" and the three 6asi! e!ono8i! pro6le8s o5 what) how and 5or who8 to produ!e.
• -e5ine and e7plain the shape o5 and the shi5ts in produ!tion possi6ilit" !urve
• $sing the ++C) e7plain:
o Ine55i!ient output !o86inations
o $nattaina6le output !o86inations
o Graphi!al representation o5 opportunit" !ost
o +rodu!tive and allo!ative e55i!ien!"
• Appl" the 6asi! !on!ept o5 !o8parative advantage in ever"da" living and e7plain its 6ene5its
in ter8s o5 spe!ialisation) division o5 la6our and e7!hange.
Se!tion A: Issues , Appli!ations
Su!!ose "ou #ere $i%en colle$e e&ucation #it'out 'a%in$ to !a" an" (ees #'atsoe%er)
are t'ere o!!ortunit" costs in%ol%e& (or "ou*
+ N,- Economics teac'es us to &ra# a &istinction .et#een mone" costs an& real or
o!!ortunit" costs/
There are certainly opportunity costs even though there might be no money costs involved
for YOU.
In the sense that there must be alternative benefits that you have to forgo ( sacrificed or
give up) in order to pursue your college education in terms of giving up the ability to earn
income during that time period.
Society also bear some cost…
♦ Someone ( tapayers) is paying for professors! time" electricity for lighting etc.one
is paying for your education because you are using scarce resources # buildings.
The money spent have an alternative use e.g. health$care% housing% defence.
In 2000) GE c'an$e& its 100 "ear slo$an an& lo$o 1see .elo#23 W'at is t'e o!!ortunit"
cost incurre&*
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Year One H1 & H2 Economics 2010
Tutorials 1-
&esources got to be used to change '( logo. It is costly.
The opportunity costs of using resources to change '( logo may include )
♦ *orgone benefits of using these same resources to improve '( products and+or
services #
♦ breast cancer research"
♦ reducing carbon emissions...etc.
,o-ever" opportunity costs is not .// possible benefits forgone but the net best
alternative benefit forgone.
W'at is t'e o!!ortunit" cost o( constructin$ t'e 45T Circle 6ine*
The value of the net best alternative goods and services that could be produced had the
0ircle /ine not been constructed. It could be more ,12 flats or more schools depending
on -hat is considered as the net best alternative use of the resources diverted to produce
the circle line. .
.gain" O.0. is not simply .// possible alternatives forgone3
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Year One H1 & H2 Economics 2010
Tutorials 1-
Se!tion .: Stru!tured :uestions
Wit' re(erence to 7i$ure 1) #'ic' !oint or !oints illustrate t'e (ollo#in$ situation (or To#nle"
5e$ional Healt' Aut'orit"
1a2 #'ic' is8are e((icient* 9ro&ucti%el" e((icient A) ,)C):
1.2 #'ic' is8are ine((icient* 9ro&ucti%el" Ine((icient Y
1c2 o( com!lete s!ecialisation* C) :
1&2 #'ic' is8are uno.taina.le* ;
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Year One H1 & H2 Economics 2010
Tutorials 1-
Wit' re(erence to 7i$ure 1) e<!lain t'e tra&e-o((s t'at are (acin$ t'e To#nle" 5e$ional
Healt' Aut'orit"
The 440 illustrates the concept of efficiency and opportunity costs.
0hoice ( marginal versus absolute choices)
(treme points on the 440 represents absolute choices ie either '4 or dental services.
In practice such absolute choices are 5OT the norm. In reality the choice is not bet-een
'4 or dental services because both are needed+-anted. The real choice is bet-een more
'4+less 1ental or vice versa. Such choices are called marginal choices.
The shape of the 440 sho-s that there is a trade$off bet-een more '4 and less dental
services or vice versa. It is do-n-ard$sloping.
Starting from 4oint 0 and moving do-n the 440 frontier suggests that additional
units of dental services can only be attained at the epense of less and less '4
/a- of Increasing O.0.
6oreover the trade$off is 5OT constant. In fact the trade$off or O.0. increases -ith
each additional unit of '4 or dental service produced. The 440 is not a straight$
line but concave to the origin.
#his is ;nown as the law o5 in!reasing O.C. #he reason is 6e!ause resour!es su!h
as 8edi!al do!tors are not ho8ogeneous ie not e<uall" e55i!ient in produ!ing G+
and dental servi!es. In!reasing O.C. in the produ!tion o5 a good is the !onse<uen!e
o5 trans5erring less and less suita6le resour!es to produ!e 8ore and 8ore o5 the
good in <uestion.
Si8ple illustration o5 %aw o5 In!reasing O.C.
-r A is a s;illed do!tor who is well trained as a G+ and onl" partiall"=poorl" trained
as a dentist.
He !an treat 1>> patients a da" as a G+ and 1 patient a da" as a dentist.
What is the O.C. o5 trans5erring -r A 5ro8 a G+ to a dentist?
Ho# can o!!ortunit" cost .e use& to e<!lain t'e s'a!e o( To#nle"=s 99C*
#he ++C is !on!ave 6e!ause it re5le!ts the !on!ept o5 di8inishing returns
or in!reasing opportunit" !ost. *ver" additional G+ trans5erred to provide dental
treat8ent will result in 8ore and 8ore G+ treat8ents sa!ri5i!ed=5orgone.
#his is 6e!ause additional units o5 dental treat8ent re1uire the use of $etter and
$etter 4s to cross o#er to ,erfor' dental treat'ent thus incurring a higher and
higher %.&. ( or sacrifice) in ter's of 4 ser#ices that these doctors could ha#e
I( To#nle" 5e$ional Healt' Aut'orit" ma>es a more e((icient use o( its a%aila.le resources)
'o# #ill t'is a((ect its 99C* Ho# #ill t'e 99C .e a((ecte& i( t'e" mana$e& to $et more
&entist (rom ot'er counties*
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Year One H1 & H2 Economics 2010
Tutorials 1-
Moving 5ro8 a point inside ++C to a point on the ++C
To ma>e more e((icient or .etter use o( its resources means to ma<imise !ro&ucti%ity out
of its e*isting resources3
7or instance) ." mana$in$ t'e clinic an& its man!o#er more e((icientl" t'e same
num.er o( &octors can treat more !atients e.g. i',le'ent a $etter syste' that cuts
do"n "aiting ti'e so each doctor can see 'ore ,atients ,er day.
In other "ordsB TR0A 'ust e',loy all its a#aila$le resources to the fullest.
T'is is s'o#n ." a mo%ement o( !oint #it'in t'e 99C e)$) 1Y2 to a !oint nearer to or on
t'e 99C e3$3 1,23
++C shi5t outwards
I5 8ore dentists 5ro8 other !ountries were re!ruited #RHA would have
8ore resour!es or a 6igger produ!tive !apa!it" to provide 8ore dental
Assu8ing dentists are o!!upationall" 8o6ile ie !an swit!h to 6e!o8e
G+) the ++C would shi5t outwards. #RHA now have the !apa!it" to
provide 8ore o5 6oth G+ and dental servi!es ena6ling it to attain a
previousl" unattaina6le point su!h as @ whi!h lies outside the original
++C pivot outwardsA?
However) i5 the new dentists are o!!upationall" i88o6ile) the ++C
!urve would Bust pivot outwards along the @-a7is.
T'e a.o%e e<ercise is to .uil& u! "our s>ills in usin$ t'e 99C as an !o#er(ul tool (or economic
112 S'a!e ?Illustrate scarcit" an& o!!ortunit" costs3
122 9osition ? $ro#t' 1 s'i(ts an& !i%ots2
12 9oints 1 out!ut com.inations2 ? e((icienc" an& $ro#t'3
9oints insi&e) on an& outsi&e t'e (rontier3
94 Stu&" t'e ta.le .elo# an& ans#er t'e @uestions t'at (ollo#3
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Year One H1 & H2 Economics 2010
Tutorials 1-
T'is ne# set o( @uestions is %er" similar to T5HA in terms o(
t'e a!!lication o( 6asi! !on!epts=prin!iples related to the
++C. Onl" the !onte7t has 6een !hanged.
(ou s'oul& .e a.le to ans#er all o( t'em correctl" #it'out
muc' &i((icult"3 So tr" A

Conte7t 0 A !o8parison4:
0C4 *!ono8" !5 A health Authorit"
034 9 Goods 0 ri!e and Beans4 !5 9
servi!es 0 G+ and -ental4
An econom" !ro&uces onl" 2 $oo&s ? one is a necessit" $oo& 1rice2 an& t'e ot'er a lu<ur"
$oo& 1&esi$ner Beans23 Gi%en resources an& tec'nolo$") t'e alternati%e com.inations o(
$oo&s o( t'ese 2 $oo&s !ro&uce& in a "ear are s'o#n in t'e ta.le .elo#3
Co86inations Ri!e -esigner Deans
A 21 0
, 20 1
C 1C 2
: 1D
E 11 0
7 E D
G 0 E
1a2 Calculate t'e o!!ortunit" costs o( !ro&ucin$ more an& more units o( Beans3
Deans 1

Opp !ost 7 8 9 : ; <
1.2 W'at is t'e a.o%e tr"in$ to illustrate re$ar&in$ o!!ortunit" cost*
It is illustrating increasing opportunity cost as more and more units of =eans are produced.
1c2 W'at causes t'is to 'a!!en*
*actors of production + resources are not perfectly homogeneous or e>ually suitable for the
production of =eans and rice.
(d) Gi%e 2 reasons as to 'o# an econom" can !ro&uce at a !oint insi&e t'e 99C3
#his is a sign that availa6le resour!es not 6eing used e55i!ientl" in 9 possi6le wa"s:
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Year One H1 & H2 Economics 2010
Tutorials 1-
0i4 $ne8plo"8ent 0 unused or idling or unprodu!tive4
0ii4 $ndere8plo"8ent 0 underused or underutilised4 e.g. Resour!es are underused i5
the" are produ!ing 6elow their potential !apa!it" e.g. nu!lear ph"si!ists
e8plo"ed as a ta7i drivers
1e2 I( t'ere is an im!ro%ement in t'e met'o& o( !ro&uction #'ic' increases rice "iel&)
i2 Wit' t'e ai& o( a &ia$ram) .rie(l" e<!lain 'o# t'is #oul& a((ect t'e 99C3
++C will pivot.
#he 8a7i8u8 a8ount o5 ri!e produ!tion will in!rease whilst the 8a7i8u8
a8ount o5 Beans that !an 6e produ!ed will re8ain !onstant.
ii2 Since t'is a&%ancement is restricte& onl" to rice culti%ation) s'o# on t'e same &ia$ram 'o#
mi$'t t'e econom" .rin$ a.out a simultaneous increase in t'e !ro&uction o( .ot' $oo&s3
." reallo!ating so8e resour!es 5ro8 ri!e to Beans produ!tion. *g. 5ro8 +oint A to +oint ..
1(2 W'en #oul& t'e econom" !ro&uce more rice #it'out 'a%in$ to !ro&uce less o( Beans) $i%en
tec'nolo$" an& resources remain unc'an$e&*

I5 the" are originall" operating at a point inside the ++C.
As;: EHow !an the e!ono8" !onsu8e 0 not the sa8e as produ!eF4 8ore
ri!e without having to !onsu8e less o5 BeansAE
Ans: #hrough international or e7ternal trade with other !ountries.
#his is 6ig 8a!roe!ono8i! topi! to 6e taught later.
Without a!!ess to international trade a !ountr"s a6ilit" to !onsu8e 8ust in prin!iple 6e
li8ited or 6ounded 6" its a6ilit" to produ!e. #his li8itation however !ould 6e over!o8e
through international spe!ialiGation and trade. In other words via international trade individual
!ountries !an a!tuall" leverage on the resour!es o5 other !ountries 0 virtuall" the whole world
i5 the" are highl" glo6alised=integrated into the world e!ono8" li;e SG F4
1$2 1i2 Use t'e 99C to .rie(l" e<!lain t'e &i((erence .et#een actual an& !otential $ro#t'3
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:esi$ner Feans
1ii2 9oint A to ,
Year One H1 & H2 Economics 2010
Tutorials 1-
A!tual growth:
.ctual output is the output produced currently by the economy.
.ctual economic gro-th is the increase in the current output produced by the economy.
+otential growth
4otential output is the maimum output that an economy is capable of producing. It represents
the economy!s productive capacity.
4otential gro-th is hence the increase in a country!s potential output or productive capacity.
440 frontier represents the country!s potential output. The gro-th in potential output is
therefore represented by an out-ard shift of the 440 frontier.
The actual output is -here an economy is currently producing. It could be either inside or on a
440 frontier. The gro-th in actual output could coincide ( move in tandem) -ith the potential
output (ideally this is called a 'oldiloc?s economy)% or it could lag behind the potential output.
In reality actual gro-th could even outstripped potential gro-th in nominal terms. This happens
-hen an economy is overheating.
.ll these concepts -ill be applied later in the study of macroeconomic gro-th theory.
So @IA O?3
(ii) E<!lain #'et'er it is al#a"s e((icient i( econom" o!erates on its 99C3
9 8eaning 0t"pes4 o5 e55i!ien!" :
#he generi! 8eaning o5 e55i!ien!" is the a6sen!e o5 wastage. Its !orollar" is the
8a7i8isation o5 Wel5are or level o5 satis5a!tion. A5terall s!ar!e resour!es are 8eant 5or
the produ!tion o5 goods and servi!es to satis5" our wants. So i5 a !ountr" !an get the
MOS# .*N*HI#S out o5 its availa6le resour!es the people 8ust 6e enBo"ing the highest
level o5 wel5are possi6le.
#he 6otto8-line is the 8ore e55i!ientl" resour!es are used the 8ost wants !an 6e
satis5iedF #hats the goal or Ihol" grailJ in the stud" o5 e!ono8i!s - how to hit this
+rodu!tive *55i!ien!" 0+*4
(es.. an" point on the ++C 5rontier indi!ates that the e!ono8" is using its resour!es
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99CI 99CII
Goo& ;
Goo& Y
Actual $ro#t'- e3$3 a to .) . to c) c
to &
.s?) Bhat happens if potential
gro-th is slo-er than actual
Year One H1 & H2 Economics 2010
Tutorials 1-
e55i!ientl" in the +* sense. #here is no waste o5 s!ar!e resour!es in the sense that all the
resour!es are 5ull" e8plo"ed.
I5 that is the !ase) then all availa6le resour!es are 6eing used to produ!e the 8a7 output
possi6le right? +ut in another wa") ever" unit o5 output 8ust have 6een produ!ed using
the 8ini8u8 or least a8ount o5 inputs or resour!es. #his is the ver" essen!e o5 +*.
I5 1> 8en 0 la6our4 !an produ!e a 8a7 o5 1> units o5 output 0 +air o5 Deans4
#hen ea!h pair o5 Bean uses 1 unit o5 input or 8an to produ!e.
However) i5 la6our is used ine55i!ientl" su!h that 1> 8en produ!es onl" 3 pairs o5 Beans)
then ea!h pair o5 Bean a!tuall" ta;es 9 8en to produ!e right? It is produ!tivel"
Allo!ative *55i!ien!" 0A*4
A* is not the sa8e as +*. It is a6out whether the I6estJ !o86ination o5 goods or the
output 8i7ed is opti8al?
.est KL the !o86ination that 8a7i8ises the !onsu8ers or so!iet"s wel5are or level o5
So) i5 the e!ono8" produ!es ' pairs o5 Beans M 13 units o5 ri!e is this the I6estJ
It 8a" or 8a" not 6e.
It all depends on the tastes=pre5eren!es o5 the !onsu8ers N what the" li;e or want at a
given point o5 ti8e. #aste and pre5eren!es 8a" also !hange over ti8e. Hen!e) all points
on the ++C are +* and at an" given point o5 ti8e) there !an onl" 6e one parti!ular point
that represents the I6estJ !o86ination given the tastes=pre5eren!es prevailing at that
." loo;ing at a ++C it is alwa"s possi6le to tell whether an e!ono8" is +* 6ut not
ne!essaril" whether it is A*.
In other words whilst an e!ono8" should alwa"s ai8 to use its availa6le resour!es to the
5ullest) it 8ight not alwa"s want the SAM* !o86ination as well as SAM* o5 goods and
servi!es. So!iet"s tastes and pre5eren!es !hange over ti8e. New produ!ts !o8e on
strea8 e.g. s8artphones whilst so8e e7isting produ!ts are no longer desired e.g.
5lopp" dis;ettes.
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