1.

1 Scarcity 
Scarcity is de ned as unlimited wants and limited resources.
Because there aren’t enough resources, people are forced to make trade-o s to meet their
wants.
Scarcity is the biggest problem facing all societies.

1.2 Opportunity cost

Economics is the study of choice.
Opportunity cost is the best alternative given up when making a choice.
Utility is used to measure how happy/satis ed you are.

1.3 Factors of production

Natural resources - land, timber, oil, etc.
Capital resources - machines and equipment needed to produce goods and services
Labor - the human e ort needed for production
Human capital - the skills and knowledge needed
Entrepreneurship - the “risk-taker” who creates the new business

1.4 Types of economic system

Market economy - Based on the laws of supply and demand. Free-enterprise, capitalism. The
price system allocates goods and services. Very limited government intervention. Private
ownership and protection of property rights is key.
Command economy - A centrally planned economy, the government answers the basic
economic questions.
Mixed economy - A market economy that has some government intervention. (Minimum wage
laws, environmental regulations etc.)

1.5 PPC (production possibility curve)

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 • PPC shows the trade-o s associated with allocating resources

• It shows the opportunity cost of producing more of one good
• It also illustrates economic growth or contraction
• The PPC is a model used to show the trade-o s associated with allocating resources.

A Constant-cost PPC

As you go from 20 units of donuts to 10,

you get 20 more units of cake. As you
move from 10 units of donuts to 0, you
get another 20 units of cake. There is a
constant cost to each unit of donut given
up.

Increasing cost PPC (Bowed out)

If you are currently at 60 units of capital

goods, you can also produce 1 unit of
consumer good. If you then want 2 more
units of consumer goods, you have to give
up 15 capital goods. If you then want 2
more units of consumer goods, you have
to give up 18 units of capital goods.
There is an increasing cost to each unit of
capital goods given up.

Economic growth

Cupcakes
Impossible production Possible

The PPC shifts outwards Economic growth 经济增⻓

(0,100)

(10, 80) Resource Productivity

(20, 60)
(60,60)
— Labor — Technology
— Land
— Capital

Donuts
(50,0)

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 The technology only affects the

production of one of the goods, it will
looks like this.

1.6 Absolute advantage and comparative advantage

Absolute Advantage - a situation in which an individual, business, or country can produce
more of a good or service than any other producer with the same quantity of resources. (Who
can produce fastest or make the most)
Comparative Advantage - a situation in which an individual, business, or country can produce
a good or service at a lower opportunity cost than another producer.

Opportunity cost calculation

1. Calculate the opportunity cost for one good

2. Compare the value of the opportunity cost, the party which

has lower opportunity cost has the comparative advantage in
producing the good.

Practice

The table below shows the maximum number of palm leaves or coconuts that
Robert and Frank can pick respectively in a single day. Which of the following is
true?
A. Robert has a comparative advantage in picking
coconuts.

B. Frank has a comparative advantage in picking palm

Palm Leaves Coconuts leaves.

C. Robert and Frank can both benefit from trade with

Robert 8 2 each other if 1 coconut is traded fro 1 palm leaf.

D. Robert and Frank can both benefit from trade with

Frank 10 5 each other if 1 coconut is traded fro 3 palm leaves.

E. Robert and Frank can both benefit from trade with

each other if 1 coconut is traded fro 5 palm leaves.

 Terms of Trade
What do we call the action (tribe A
focuses on producing good X)?

Specialization(专业化) - limiting study

(or production) to one particular
good.

Why we need specialization? And

what is its base?
Product specialization according to comparative advantage result
in exchange opportunities that leads to consumption possibilities
beyond the PPC.

1.7 Demand

Law of Demand
• Law of demand - a decrease in the price of the
good causes an increase in the quantity
demanded. Or an increase in price causes a
decrease in the quantity demanded (Qd)

• Important note - this is NOT a change in

demand, it’s a change in quantity demanded
• Demand curves slope downward and show
the relationship between price and quantity
demanded.
D’
• Buyers determine demand. It is a summation
of individual demand curves.

3 Reasons demand curves slope downward

• Diminishing Marginal Utility - the more of a good the consumers has,

the less the marginal utility of an additional unit.

• Income effect - when the price of a good falls, consumers experience

an increase in purchasing power.

• Substitution effect - when the price of a good increases, people will

substitute less expensive goods.
Substitutes
Complements

 Reasons for a change in demand

1. Change in income - if the good is normal good - as income

increases, D increases. If the good is inferior, as income increases
demand for the good decreases.

2. Change in the price of substitute goods - when a fall in the price of

one good reduces the demand for another good, the two goods
are called substitutes.

3. Change in the price of complimentary goods - if the price of the

compliment increases, demand for the good decreases.

4. Change in the number of buyers - if the number of buyers

Reasons for a change in demand
increases, demand for goods increase

5. Change in expectation - if people expect the price of the good to

increase, demand will increase now.

• Price can’t affect demand, it affects quantity demanded. However, the

expectation of a price change can affect current demand.

6. Change in styles/tastes - as styles change over time, so does

demand for goods/services.

D’

D’

Increase in demand Decrease in demand

1.8 Supply

Law of Supply

S
• The law of supply states that as prices
increase, the quantity supplied increases.

• Producers/Sellers determine supply

• Supply curves slope up to the right S S’

• Price doesn’t affect supply, it affects

the quantity of supply

Reasons for a change in supply

• Changes in the cost of production - if the cost of producing the good

increases, supply will decrease. If it gets cheaper to produce the
good, supply will increase
• Changes in technology - If technology makes it cheaper to produce
the good/service, supply will increase. This is also relates to
productivity - if workers get more productive the supply of good will
increase.
• Chang in the number of producers - an increase in the number of
producers would increase the supply of goods/service.

• Change in expectations - if producers expect the price to increase in

the future they will supply less now (what about the demand?)

S S’ S’ S

Increase in supply decrease in supply

 1.9 Market equilibrium, disequilibrium and changes in
equilibrium

Market Equilibrium
S

Market Equilibrium

Equilibrium - where quantity demanded equals

S
quantity supplied

P* 1. Qd=Qs
2. Allocative efficient, P=MC=MB
D 3. No surplus, no shortage
4. Total surplus is maximized
Q*

Decrease in Demand
S Increase in Demand S Price decreases
Price increases
Quantity decreases
Quantity increases
P’ P*
P* P’
D’ D
D D’

Q* Q’ Q’ Q*
Increase in Supply Decrease in Supply
Price decreases Price increases
Quantity increases Quantity decreases
S S’
S’ S

P* P’
P’ P*
D D

Q* Q’ Q’ Q*