ECO1001

Topic 1:

Introduction
&
Overview Textbook: Ch. 1 & 2
0
In this topic,
look for the answers to these questions:
Part 1 (Textbook Ch. 1)
A. What is economics? What is the difference between
microeconomics and macroeconomics?
B. What are the ten principles of economics ?

Part 2 (Textbook Ch. 2)

A. What are economists’ two roles? How do they differ?
B. What are models? How do economists use them?
C. What is the difference between positive and normative
statements?

1
Topic 1 Part 1 (Textbook Ch.1)

Wojciech Gerson (1831-1901)

Part 1
What is Economics?

2
What is Economics?
• Economics is a subject that you must face in you
daily lives.
• We are faced with many decisions.
• Example:
– Attend class punctually or sleep a bit longer?
– Buy new or used textbooks?
– Lunch in Block B or Block M canteen?
• The fundamental economic problem is:
resources are scarce.

3
Scarcity

稀⼩性理的
• Scarcity: the society’s resources are limited
relative to our wants.
• The limited resources available are insufficient to
satisfy unlimited wants. Therefore, scarcity
problem is unavoidable.
• In face of scarcity, we need to make choice /
decision.

4
Scarcity, Choice and Cost
彰
• Making decisions (choices) involves costs.

• The opportunity cost of any item is

whatever must be given up to obtain it.

5
Definition of Economics
• Economics: the study of how society
manages its scarce resources, e.g.
– how people decide what to buy,
how much to work, save, and spend
– how firms decide how much to produce,
how many workers to hire
– how society decides how to divide its resources
between national defense, consumer goods,
protecting the environment, and other needs

6
 微观 个体 宏观/德体
2-1f Microeconomics and Macroeconomics
• Microeconomics is the study of how
家滋 公司
households and firms make decisions and how
耺⼒
they interact in markets.
• Macroeconomics is the study of economy-
现象
wide phenomena, including inflation, 通脹
失業 壣蠏
unemployment, and economic growth.
• These two branches of economics are closely
related, yet different—they address different
questions.
7
 ©lithian/Shutterstock.com

What are the Ten Principles

of Economics?
8
10 Principles of Economics
3 categories
1. How Individuals Make Decisions
(Principles 1-4)
2. How People Interact (Principles 5-7)
3. How the Economy as a Whole Works
(Principles 8-10) [Not covered in this
module. Interested students please go to
the appendix.]

9
 1-1
How Individuals Make
Decisions

Principles 1 – 4

10
 权衡
PRINCIPLE #1: People Face Tradeoffs
All decisions involve tradeoffs.
Recall previous examples:
– Attend class punctually or sleep a bit longer?
– Lunch in Block B or Block M canteen?
Another example (a firm’s decision):
– Protecting the environment requires resources
that could otherwise be used to produce
consumer goods.

11
 原理
PRINCIPLE #1: People Face Tradeoffs
• Society faces an important tradeoff:
效率 平等
efficiency vs equality
• Efficiency: when society gets the most from its
scarce resources
• Equality: when prosperity is distributed
uniformly among society’s members
• Tradeoff: To achieve greater equality,
could redistribute income from wealthy to poor.
But this reduces incentive to work and produce,
shrinks the size of the economic “pie.”
12
PRINCIPLE #2: The Cost of Something Is
What You Give Up to Get It
• Making decisions requires comparing the
costs and benefits of alternative choices.

• The opportunity cost is the relevant cost for

decision making.
• Money cost + time cost (can be measured by value
of the highest-valued option forgone)

13
 PRINCIPLE #2: The Cost of Something Is
What You Give Up to Get It
Examples:
What is the opportunity cost of
going to the university (HSU BBA programme)?
The opportunity cost of…
…going to the university for a year is not just the tuition and
book fees, but also value of the time you spent in the
university, which can be measured by the foregone wages
(if going to work is what you would choose to do next
should you choose not to go to the university).
14
 PRINCIPLE #2: The Cost of Something Is
What You Give Up to Get It
Examples:
What is the opportunity cost of
watching a movie?
The opportunity cost of…
…watching a movie is not just the price of the ticket,
but the value of the time you spend in the cinema.
Q: If you do not choose to watch the movie, you would like to have
lunch with your friends rather than shopping with your mom,
what is the opportunity cost of watching a movie? (Hint: which
one is your highest-valued option now?) 15
PRINCIPLE #3: Rational People Think at the
Margin
Rational people
 systematically and purposefully do the best they
can to achieve their objectives.
 make decisions by evaluating all relevant costs and
benefits of marginal changes, incremental
adjustments to an existing plan.

16
 理性 的 ⼈
PRINCIPLE #3: Rational People Think at the
Margin
Examples:
• When a student considers whether to go to the
university for an additional year, he compares
the fees & foregone wages to the extra income
he could earn with the extra year of education.
• When a manager considers whether to increase
output, she compares the extra cost of the
needed labor and materials to the extra revenue.
17
PRINCIPLE #4: People Respond to
Incentives
刺漲
• Incentive: something that induces a person to act, i.e.
the prospect of a reward or punishment.
• Rational people respond to incentives.
• Change in incentives  change in behaviour / decision
Examples:
 When gas prices rise, consumers buy more electric
cars.
 When cigarette taxes increase, teen smoking falls.
 When I deduct exam scores of late comers for their
lateness, students will be more punctual to class.
18
EXAMPLE: Applying the principles
You are selling your Benz, a very old model. You have
already spent $60,000 on repairs over the past 5 years.
At the last minute, the transmission dies. You can pay
$5,000 to have it repaired, or sell the car “as is.”
In each of the following scenarios, should you have the
transmission repaired? Explain.
A. Blue book value (what you could get for the car) is
$65,000 if transmission works, $57,000 if it doesn’t.
B. Blue book value is $58,000 if transmission works,
$55,000 if it doesn’t.

19
EXAMPLE: Applying the principles
Answers
Cost of fixing transmission = $5000
A. Blue book value is $65000 if transmission works,
$5700 if it doesn’t.
Benefit of fixing transmission = $8000
($65000 – 57000).
Benefit > Cost  Fix the transmission
B. Blue book value is $58000 if transmission works,
$55000 if it doesn’t.
Benefit of fixing the transmission is $3000.
Do not fix the transmission
20
 1-2
How People Interact

Principles 5 – 7

©Pressmaster/Shutterstock.com

21
PRINCIPLE #5: Trade Can Make Everyone
Better Off
• Rather than being self-sufficient,
people can specialize in producing one good
or service and exchange it for other goods.
• Countries also benefit from trade and
specialization.
• Think:
What does HK specialize in producing? What
does HK get in return from selling its products?
What do WE gain?
22
PRINCIPLE #6: Markets Are Usually A Good
Way to Organize Economic Activity
• Market: a group of buyers and sellers
(need not be in a single location)
• “Organize economic activity” means
determining
 what goods to produce
 how to produce them
 how much of each to produce
 who gets them

23
 PRINCIPLE #6: Markets Are Usually A Good
Way to Organize Economic Activity
分配
• A market economy allocates resources through the
癥 分权 湘 利已
decentralized decisions of many self-interested
households and firms as they interact in markets.
• Famous insight by Adam Smith in The Wealth of Nations
(1776):
Each of these households and firms acts as if “led by
an invisible hand” to promote general economic well-
being.
• The invisible hand works through the price system – i.e.
站
the interaction of buyers and sellers determines prices. 24
 PRINCIPLE #7: Governments Can
Sometimes Improve Market Outcomes
傾俞
• People are less inclined to work, produce, invest, or
purchase if large risk of their property being stolen.
宏施 資章 杖
• Important role for government: enforce property rights
(with police, courts); i.e. to follow the “rule of the game”.
瓣 at times.
• However, market can fail (to achieve efficiency)
• Market failure: when the market fails to allocate society’s
resources efficiently, say, due to market power.
• Public policy (e.g. tax; welfare policies) may promote
efficiency.
25
Do Tutorial Q1 – Q2
 Tu t o r i a l Q u e s t i o n 1
Economics is best described as the study of

:
a) how society manages its scarce resources.
b) how to run a business most profitably.

tM
lhtnff
潮。 失業
c) how to predict inflation, unemployment, and
stock prices.
d) how the government can stop the harm from
unchecked self-interest.
*㘚
利。
ANS: a)

26
 Tu t o r i a l Q u e s t i o n 2
Adam Smith’s “invisible hand” refers to
a) the subtle and often hidden methods that businesses use
⼀ssteets t s stet ⼀ᵗThtt eht5Atth0S㫼thbt⼀etoeesst s T⼀Stts setohᵗDtsoett t otstEt sS⼀可
to profit at consumers’ expenses.
0hrs20
⼀⼀

观
b) the ability of free markets to reach desirable outcomes,
利已 成
即使 despite the self-interest of market participants.
c) the ability of government regulation to benefit

⼀
consumers, even if the consumers are unaware of the
regulations.
d) the way in which producers and consumers in
unregulated markets impose costs on innocent
bystanders.

ANS: b)
27
SUMMARY on
The principles of decision making (#1-4)
1. People face tradeoffs.
素
比較 避
2. The cost of any action is measured in terms of
foregone opportunities. 預科 中 的 机会
3. Rational people make decisions by comparing
marginal costs and marginal benefits.
刺激
4. People respond to incentives.

28
SUMMARY on
1起由
The principles of interactions among people (#5-7)

5. Trade can be mutually beneficial.

調節
6. Markets are usually a good way of coordinating
trade.
7. Government can potentially improve market
outcomes if there is a market failure or if the
market outcome is inequitable. 不公平

29
 附錯
Appendix: Principles 8 – 10
How the Economy as a Whole Works
原以 全 佸 ⽔準
• Principle 8: A country’s standard of living depends on
its ability to produce goods and services
原理
• Principle 9: Prices rise when the government prints
too much money
短斯 彰
• Principle 10: Society faces a short-run trade-off
通脈 ⽣景
between inflation and unemployment

30
Topic 1 Part 2 (Textbook Ch.2)

Part 2
Thinking Like an Economist

31
 2-1
The Economist as
Scientist

32
 The roles of an Economist
• Economists play two roles:
科鶅
1. Scientists: try to explain the world
提出 政策
2. Policy advisors: try to improve it

•
⽤ 和
In the first, economists employ the scientific
別出
method, by the development and testing of
theories about how the world works.
䶲插 福

33
𥟠
 Economics as a Science
Economics as a science can be broken down
观客
Scientific Method: Observation  Model
Building  Testing Model
观客 發展 5
1. Observations help us to develop theory.
假款
2. We make some assumptions in building the model
to simplify the complex world
3. Data can be collected and analyzed to evaluate or
test the theories.

34
𪆓
 Economic Model
观点
• An economic model describes some aspects of
the economic world that includes only those
特制 ⽬的
features needed for the purpose at hand.
• Economic models describe the economic world in
the same way that a road map explains the road
system: Both focus on only what is important
and both are abstract depictions of the real
world. 象 描述
柚

35
Some Familiar Models

36
 2-2
The Economist as
Policy Advisor

37
 2-2aPositive and Normative Statements

 Economists often make two kinds of statements:

positive statements and normative statements.
 A positive statement is about “what is” and is
0 贓
testable. 醉
 A normative statement is about “what的ought to

結
天性
be” and is an opinion and so isCinherently not
,
testable.

38
𨧻
Examples of Positive and Normative Statements

1. “Raising the tax on a gallon of gasoline will raise

the price of gasoline and lead more people to
buy smaller cars.”
(Positive statement )
2. The tax on a gallon of gasoline should be raised.”
(Normative statement )

39
EXAMPLE: Positive and Normative Statements
Which of these statements are “positive” and which are
“normative”? How can you tell the difference?
a. Prices rise when the government increases the
quantity of money. p
b. The government should print less money. N
c. A tax cut is needed to stimulate the economy. N
d. An increase in the price of bus rides will cause an
increase in consumer demand for taxi services. P

40
EXAMPLE: Positive and Normative Statements
Answers
a. Prices rise when the government increases the
quantity of money.
Positive – describes a relationship, could use
data to confirm or refute.

b. The government should print less money.

Normative – this is a value judgment, cannot be
confirmed or refuted.

41
EXAMPLE: Positive and Normative Statements
Answers
c. A tax cut is needed to stimulate the economy.
Normative – another value judgment.

d. An increase in the price of bus rides will cause an

increase in consumer demand for taxi services.

Positive – describes a relationship.

Note that a statement need not be true to be
positive.

Do Tutorial Q3 – Q5 42
 Tu t o r i a l Q u e s t i o n 3
An economic model is
a) a mechanical machine that replicates the

mmufunctioning of the economy.

b) a fully detailed, realistic description of the
economy.
陳迷 ⼜贴
c) a simplified representation of some aspect of the
economy.

omne
d) a computer program that predicts the future of
the economy.

ANS: c) 43
𤅎
 Tu t o r i a l Q u e st i o n 4
Which of the following is a positive
statement?
a) Law X will reduce national income.
b) Law X is a good piece of legislation.
c) Legislative Council ought to pass law X.
d) The Chief Executive should veto law X.

ANS: a)

44
 Tu t o r i a l Q u e st i o n 5
True/False Statement
If there were no scarcity, there would be no
Economics.
• True.
• Scarcity is the phenomenon in which the society’s
resources are limited relative to its wants.
• Economics is the study of how society manages its
scarce resources.
• If there were no scarcity, no choice/cost/competition.
• there would be no need to make decision or choice on
the use of resources.
45
 2-3 Why Economists Disagree?
• As scientists, economists make positive statements.
• As policy advisors, economists make normative
statements.
• Economists tend to agree on positive statements,
though they might disagree on normative statements.
雅
• Economists often give conflicting policy advice because:
格征出
– They sometimes disagree about the validity of
⼆
摆 排⾃
alternative positive theories about the world.
⼀

– They may have different values and, therefore,

different normative views about what policy should
try to accomplish. 實現 46
 2-3 Why Economists Disagree?
• As scientists, economists make positive statements.
• As policy advisors, economists make normative
statements.
• Economists tend to agree on positive statements,
though they might disagree on normative statements.
• Economists often give conflicting policy advice because:
– They sometimes disagree about the validity of
alternative positive theories about the world.
– They may have different values and, therefore,
different normative views about what policy should
try to accomplish. 46
 2-3 Why Economists Disagree?
• As scientists, economists make positive statements.
• As policy advisors, economists make normative
statements.
• Economists tend to agree on positive statements,
though they might disagree on normative statements.
• Economists often give conflicting policy advice because:
– They sometimes disagree about the validity of
alternative positive theories about the world.
– They may have different values and, therefore,
different normative views about what policy should
try to accomplish. 46
 2-3 Why Economists Disagree?
• As scientists, economists make positive statements.
• As policy advisors, economists make normative
statements.
• Economists tend to agree on positive statements,
though they might disagree on normative statements.
• Economists often give conflicting policy advice because:
– They sometimes disagree about the validity of
alternative positive theories about the world.
– They may have different values and, therefore,
different normative views about what policy should
try to accomplish. 46