Written Report

Introduction to Economics

AF2601

Q1.1 Q2.1

09817099d

Yu Li
Q1.1

The given statement argues about if there are more

alternatives people have given up in undertaking an action whether

opportunity will be higher. This argument focus on the relationship

between alternatives and opportunity cost. In order to make it clear

about the relationship, it is recommended to find out what

opportunity cost is and its linkage with alternatives follow with a

clear example to illustrate.

According to the basic knowledge of economics, the

opportunity cost of an action is the value of the next-best

alternative that must be given up in order to undertake that action.

This concept focuses on two important points, “value” and “next-

best alternative”. This means when people calculate the

opportunity cost, not only should they find the next-best alternative

but also should they acquire the value of this option.

Making an economic choice (alternative) is a process in which

people must give up something in order to acquire something with

higher value. The first step is to evaluate each choice to decide

their value. The next step is to rank the alternatives according to

the value and the final step is to analysis the value to decide which

the best option is and which the next-best option is. These values

are related with each option’s economic revenue but are

independent with people’s preference. For example, the net

revenue of planting apple trees is $1000 and the net revenue of

planting pear trees is $1500.In this situation, the best option is

obvious planting pear trees with the opportunity cost of $1000

even if people prefer apples than pears.

As it mentioned, opportunity cost is decided by the value of all

the choices, so the number of alternatives will also have an effect

on it. However, it is inaccurate to say that there is a positive

relationship between opportunity cost and number of alternatives. I

will use an example to illustrate this. Suppose we add a new option

of planting peach trees and the net revenue of it is $900. Compare

to the value of planting apple trees, it is not difficult to find out that

the opportunity cost of planting pear trees remains the same

($1000). So it can be concluded that the opportunity cost is not

always higher when there are more alternatives.

Q2.1

The set of questions ask about how price mechanism works.

According to the demand-supply model, price changes along with

the changes of supply and demand.

Considering the example of stock market, we could use

demand-supply model to handle this kind of problems. The price of

CLP increases along with its quantity demand from July 7 to July 8,

we can draw a curve to reflect this relationship and we find that it is

because of increasing in demand (1.1). As for HSBC, its price

declines with its quantity demand increases, it implies that supply

increases according to the curve (1.2).As for MTRC, it is the

reverse case of CLP and we can conclude that supply decreases.

(1.1)

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1.1 1.2

All examples above imply how price changes under the

situation that one of demand or supply changes and the other

remains the same. Let us look at some more difficult example. If

the price of CLP remains the same while its quantity demand

increased, according to the curve (2.1), we can find that both

demand and supply increased. If the price of HSBC declines with

its quantity demand remains the same, according to the curve

(3.1), we can find that its supply increases and its demand

decreases.

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2.1 3.1