ECON 2103 (Spring 2020)

13 March, 2020 (Tutorial 1)

This week:
Review on Chapter 1 and 2
Discussion on Assignment 1

Chapter 1 Principles of Economics

 How people make economic decisions: 10 economic principles

 Scarcity: the limited nature of society’s resources

 Opportunity cost: whatever must be given up to obtain some item/ best or highest
valued alternative you give up

 Sunk cost: a cost that has already been committed and cannot be recovered (not
relevant in decision making)

Example: What items would you include to figure out the opportunity cost of a vacation to
Universal Studio?
Monetary costs (ticket, travel, souvenirs, etc.)
Time cost (if you go to work instead, the time cost is the money you could have earned)

Example: you decide how to spend your time tonight, you have 3 options: (A) Study, (B)
Movie, (C) Gym

 Marginal change: a small incremental adjustment to a plan of action (marginal cost and
marginal benefit)

Example: Why is water so cheap while diamonds are expensive?

The marginal benefit of a good depends on how many units a person already has.
If water is plentiful, the marginal benefit of an additional cup is small.
Diamonds are rare, the marginal benefit of an extra diamond is high.

1
Chapter 2 Thinking like an Economist
 Circular flow of the economy (flows of goods and services, inputs and money)
 Two markets: goods and services market., inputs market
 Households: buyers of goods and services, owners of factors of production
 Firms: producers of goods and services, users of factors of production

 Production possibilities frontier: PPF shows the combinations of output that the
economy can produce given the amount of inputs and technology

 Efficient production point?

 Inefficient production point?
 Feasible/ infeasible production point?
 Trade off
 Slope of PPF: opportunity cost
 Shape of PPF? (bowed outward? Linear?
 Increasing opportunity cost (Why?)
 Shifts of PPF (change in technology)

Example:
It takes 10 minutes for Adrian to make a bread and it takes him 20 minutes to make a cake.
Suppose Adrian has 2 hours, draw PPF. (shape of PPF? Opportunity cost?)

In 3 hours, Adrian can make 12 breads OR 6 cakes.

Opportunity cost: 1 Bread = 0.5 Bread, equivalently 1 Cake = 2 Bread

 positive statements: claims that attempt to describe the world as it is

 normative statements: claims that attempt to prescribe how the world should be