Chapter 1

What is economics?

Think it over
1.  Wants, scarcity and choice
2.  The concept of opportunity cost

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 Think it over
1. Why are you studying economics?
Free answer
2. What are you going to study in this subject?
Free answer
3. Can economics help you earn a lot of money?
Free answer

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1) Wants, scarcity and choice

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A. Unlimited wants
• Wants are human desires for things.
• Wants are unlimited and can never be completely satisfied.
• When a particular want has been satisfied, new wants will emerge.

I love this!

I love this too!

I love all these!

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B. Limited resources and scarcity
• Human wants can be satisfied by goods and services, which require resources to produce.
• However, the amount of resources is limited, i.e., our resources are insufficient to produce goods and
services to satisfy our unlimited wants.
• This problem is called scarcity. It means we want more than we have.

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Test yourself
A rich man says, ‘I have $10 million. I don’t have other wants.’ Do you agree? Why?

unlimited . When a particular want has been satisfied, new wants will
No. Human wants are ________
_______
emerge. Even when the rich man is satisfied with the amount of money ($10 million) he has, he may
then want to pursue other goals, such as a better reputation and higher status in the community.

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Test yourself
Bill Gates is a billionaire. Does he face the problem of scarcity?

Yes / No, Bill Gates still faces / no need to face the problem of scarcity. For example, he may want more
time for charity work, management of his firm, etc.

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Test yourself

‘Scarcity is a relative concept.’ Do you agree? Why?

Yes / No. Whether a resource is scarce or not depends on its quantity available relative to its quantity
desired.

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C. Choice

• Under scarcity, every person has to make choices to decide what wants are to be satisfied and what wants to
be given up.
• If we are rational, we will choose an option that we value the most.

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 Test yourself

Without scarcity, we still have to

Because of scarcity, we have to make
make choices.
choices.

Student A Student B
Which one of them is right?

Student A is right / wrong. Under scarcity, we want more

than we have, so we have to make
choices to decide which wants are to be satisfied and which are to be given up.

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 Test yourself

Without scarcity, we still have to

Because of scarcity, we have to make
make choices.
choices.

Student A Student B
Which one of them is right?

Student B is right / wrong. If there is no scarcity, then we can have all the things we want.
There is a need / no need to make choices.

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D. Economics

• Economics is the study of resources and how they relate to the decisions that people make.
• It studies how people use scarce resources to satisfy unlimited wants
• It is also about how to allocate scarce resources among different uses and distribute income among different
people.
• Resource allocation and income distribution are two major issues in economics.

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Test yourself
Explain if the following statements are true, false or uncertain.
a. ‘Economics is a study about how to get rich.’

True / False. Economics is a study of human behaviour in using scarce

resources to satisfy
wants, not oneunlimited
about how to get rich.

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Test yourself (con’t)

Explain if the following statements are true, false or uncertain.

b. ‘Economics is a study about how to eliminate the problem of scarcity.’

True / False. Since our resources are always sufficient / insufficient to satisfy all our wants, the
problem of scarcity can never be eliminated, and economics can / cannot teach us how to
eliminate scarcity.

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Test yourself (con’t)
Explain if the following statements are true, false or uncertain.
c. ‘Economics is a study about how to get most out of the limited resources we have.’

True / False. Since economics is about how we use scarce resources

to satisfy unlimited
human wants , it is also about how we get the most out of the limited resources we have.

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E. Branches of Economics
Study of Economics can be divided into two main categories as follows:
•  Microeconomics
•  Macroeconomics

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A. Microeconomics
•  A study of behaviour of individual economic units

•  It is the study of the decisions made by individuals and firms as they relate to resources.

•  Examples: how households make consumption decisions and how firms make production decisions

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B. Macroeconomics
•  A study of the performance of an economy as a whole

•  It is the study of aggregate or total effects on an economy and how these effects influence behaviour.

•  Examples: total consumption, total production, national income and employment in an economy

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Discuss
Suppose that you spend an evening studying economics. How do you measure the cost of this decision?

Free answer

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2) The concept of opportunity cost

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The concept of opportunity cost
• Because of scarcity, we have to make choices.
• When we choose something, we have to give up something else. There is a cost in making our decision.
• In economics, we measure cost in terms of opportunity forgone. This is the concept of opportunity cost.

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A. Definition
• Opportunity cost (or simply ‘cost’) is the highest-valued option forgone (or the best alternative
forgone) in making a choice.
• We have to give up other options when we decide on a particular one.
• But not all the options forgone are the opportunity cost.
• Only the highest-valued option forgone is the opportunity cost.

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A. Definition
Example
Leo has three options of how to spend an evening. Based on his
preference, he prioritises the three options as follows:
1st choice: studying
2nd choice: writing a blog
3rd choice: playing online games

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A. Definition
What is Leo’s opportunity cost?
•  He will choose his first choice (i.e., studying) as it gives him the highest value.
•  The opportunity cost of his choice is the second choice (i.e., writing a blog)
only, which is the highest-valued option forgone.

This is because even if Leo did not study, he could spend the evening doing only
one thing (i.e., writing a blog), not all the other things.

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B. Important points about opportunity cost
1. Only the highest-valued option forgone is relevant
Other options are not part of the cost of making the choice.

2. No choice implies no cost

If there are no other options available, the cost will be zero. This is because nothing is given up when
making a choice.

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B. Important points about opportunity cost
3. Cost will change only if there is a change in the highest-valued option forgone
There is no change in cost even if there is a change in the value of the chosen option.

A change in the A change in the
value of a choice ≠ cost of a choice

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B. Important points about opportunity cost
3. Cost will change only if there is a change in the highest-valued option forgone
Example 1: Leo finds studying very boring.
Will this affect his cost of studying?
No, his cost of studying remains the same, i.e., the value of writing a blog.

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B. Important points about opportunity cost
3. Cost will change only if there is a change in the highest-valued option forgone
Example 2: Leo finds that writing a blog is more interesting than before.
Will this affect his cost of studying?
Yes, his cost of studying increases. This is because the value of the highest-valued option forgone (i.e.,
writing a blog) increases.

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B. Important points about opportunity cost
4. Full cost = money cost + non-money cost
The cost of buying something may include money cost (the money price of the good) as well as non-
money cost (e.g., time cost).

I need to spend $200 on the @cket and an hour

The cost of buying a football match ticket: queuing for it.

$200 (money cost)

+
The forgone value of the time spent on
queuing (time cost)

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B. Important points about opportunity cost
When we refer to the time cost, it can be monetary (in terms of income forgone) or non-monetary
(in terms of the value of another activity forgone).

Example 1: The highest-valued option forgone = earning $50 (one hour)

Full cost of buying the ticket
= $200 (money cost) + $50 (time cost in terms of the income forgone)
= $250

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 B. Important points about opportunity cost

When we refer to the time cost, it can be monetary (in terms of income forgone) or non-monetary (in terms
of the value of another activity forgone).

Example 2: The highest-valued option forgone = watching a TV programme (one hour)

Full cost of buying the ticket
= $200 (money cost) + the value of watching the TV programme
(time cost in terms of the value of an activity forgone)

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 B. Important points about opportunity cost
5. Cost considers only options available at the moment of decision
When measuring the cost of choosing or doing something, we only consider options available at the moment
of decision. We do not count the cost we paid in the past.

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Test yourself
‘Opportunity cost refers to all the things that a person has to give up in making a choice.’ Do you agree?
Explain?

Yes / No. Opportunity cost refers to the highest-valued option (among all the forgone options) that a
person has to give up
in making a choice, not all the things or all the other options that the
person has to give up.

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Test yourself
Jay has the following options; each costs $100.

Value to Jay

1. A DVD $150

2. A T-shirt $120

3. A dinner $100

a. What is the cost of choosing a dinner?

A DVD / A T-shirt / A dinner.

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Test yourself (con’t)
Jay has the following options; each costs $100.

Value to Jay

1. A DVD $150

2. A T-shirt $120

3. A dinner $100

b. What is the cost of choosing a T-shirt?

A DVD / A T-shirt / A dinner.

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Test yourself (con’t)
Jay has the following options; each costs $100.

Value to Jay

1. A DVD $150

2. A T-shirt $120

3. A dinner $100

c. If Jay is rational, which of the above options will he choose?

A DVD / A T-shirt / A dinner. Because its value is the highest among the three options.

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Test yourself
What is your cost of attending school? Explain whether the following items are included:
a. Money
to be spent on buying textbooks
Included / Not included.
b. Transportation cost incurred when going to school
Included / Not included.

c. The highest-valued alternative use of your time (e.g., working)

Included / Not included.

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Test yourself (con’t)
What is your cost of attending school? Explain whether the following items are included:

d. Tuition fee already paid

Uncertain. If the tuition fee is refundable, you can get it back when you choose not to attend
school. In this case, it is included / not included as the cost of attending school.

If the tuition fee is not refundable, you cannot get it back even when you choose not to attend
school. In this case, it is included / not included as the cost of attending school.

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Test yourself (con’t)
What is your cost of attending school? Explain whether the following items are included:

e. The boredom you suffer from lessons

Included / Not included. The boredom you suffer from lessons affects the value
of attending
cost school.
school, not the of attending

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Class Practice
1. Peter is an S6 graduate who could not get a study place in any university. Which of the following may
lower the cost of repeating S6 for Peter?

A. The tuition fee for study in S6 increases.

B. The tuition fee for study in universities decreases.

C. The wage rate for S6 graduates decreases.

D. Peter’s new S6 English teacher teaches badly.

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Class Practice
2. Medical doctors seldom change their occupation. Which of the following can explain this phenomenon?

A. They have spent much time and effort in getting their professional licence.
B. They have incurred high costs in accumulating the skills and knowledge required for the
profession.
C. For medical doctors, changing occupation has a high cost.
D. Being medical doctors has a high cost.

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Class Practice
3. David is choosing between two ways of spending his summer vacation: to take a summer job or to join an
exchange programme to the United Kingdom. Which of the following will increase his opportunity cost of
taking the summer job?

A. The fee for the exchange programme increases.
B. The summer job pays a higher salary.
C. A valuable course is added to the exchange programme.
D. Less training for the summer job is provided.

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