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BASIC CONCEPT
Opportunity cost is the highest-valued option forgone.

Question: Does the opportunity cost of an action change?

Yes, it does because
The value of the highest-valued option forgone increased/ decreased/does not
change

Free good: Quantity available is enough for satisfying all human wants for it.
More of it is not preferred.
No one is willing to pay the price.
Opportunity cost in production is zero.

Economic good: Quantity available is not enough to satisfying all human wants
for it.
More of it is preferred.
Someone is willing to pay the price.
Opportunity cost in production is not zero.

Consumer good: It is for direct consumption

Producer good : it is for further production of goods and services.
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PRODUCTION
Primary production: It directly uses natural resources.
Secondary production: It turns raw materials into semi-finished goods or
finished goods.
Tertiary production: It provides services.

Division of labour ( increase productivity)

Adv.: Time-economy
Choosing the most suitable person for the job.
Practice make perfect.
Making full use of capital goods.
Dis.: Work becomes dull and monotonous
Greater degree of interdependence.
Greater risk of unemployment
Loss in the quality of craftsmanship.

FACTORS OF PRODUCTION
Land: All kinds of natural resources that can be used in production.
Labour: The human efforts of any kind that can be used in production
Capital: The stock of man-made resources for production.
Entrepreneur: Bear the risk
Make the decision.
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Productivity of labour measures the output per worker per unit of time.

How to increase labour productivity

There is more education and training.
There is better working conditions.
There is better method of organizing labour.
More and better capitals are used.

PAYMENT METHOD
Time rate: adv.: - There is a better quality of work because workers do not have to
work quickly.
- It is very easy to administer when calculation the wage.
Dis.: - Workers are less incentive to work.
- It is an unfair system.
Piece rate: adv.: It is a more fair system
Workers are more incentive to work
Dis.: - It is difficult to administer when calculating the wage in piece.
There is poor quality of goods because workers will work quickly.
Profit sharing: adv: increase incentive to work
Lower monitoring cost

PAYMENT RETURN
LAND RENT/RENTAL INCOME
LABOUR WAGE (fixed)
CAPITAL INTEREST
ENTREPRENER PROFIT: (not fixed)

INPUT-OUTPUT RELATIONSHIP
Fixed factors: they cannot be changed when there is a change in output level.
Fixed cost: cost cannot be changed when there is a change in output level.
Variable factors: they can be changed when there is a change in output level.
Variable cost: cost can be changed when there is a change in output level.

Short run: It is short run because there is fixed factor.

Long run: It is long run because there is no fixed factor.
-Law of diminishing marginal returns.
As more variable factors are added continuously to a fixed factor, marginal
product
will finally decrease.
Optimum scale is the firm producing at the lowest average cost.

Why the output increase, the average cost decrease when the firm expands?
It enjoys economies of scale
Financial economies: It is easier to borrow money from the bank at a lower
interest rate.
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Marketing economies: It can get discounts because it buys in bulk.

Managing economies: It can practice division of labour to increase
productivity

INTEGRATION
Horizontal integration: producing the same goods
1.) It can get rid of its competitors
2.) It can enjoy economies of scale. e.g. marketing
Vertical backward integration: It is its supplier.
1.) It can ensure the supply of raw material.
2.) It can enjoy economies of scale. e.g. marketing
Vertical forward integration: It is its buyer.
1.) It can ensure the market outlet.
2.) It can enjoy economies of scale. e.g. marketing.
Lateral integration: It produces related but not competitive goods.
1.) It can reduce the risk by diversification.
2.) It can enjoy economies of scale. e.g. marketing
Conglomerate integration: It produces different and unrelated goods.
1.) It can reduce the risk by diversification.
2.) It can enjoy economies of scale. e.g. marketing

BUSINESS OWNERSHIP
Public Ownership
Adv.: They can expand more easily and enjoy economies of scale.
They can make correct decisions and plans.
Dis.: lower incentive to reduce cost
have higher cost of production
Sole proprietorship
Adv.: Easy and simple to set up
higher incentive to work because it can earn all the profit
tax rate is lower than limited company
Dis.: narrower source of capital
No legal entity
Unlimited liability.

Partnership (2-20)
Adv. Simple and easy to set up
Cost and risks can be shared
Division of labour can be practiced.
tax rate is lower than limited company
Dis.: No legal entity
Bear unlimited liability.

Limited company (Public limited company and Private limited company)

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Adv.: Enjoy limited liability

They have legal entity.
Wider source of capital
Dis.:- lower incentive to work.
- difficult to set up
- larger set up cost
-Tax rate is higher

Ordinary share Preference Share Debenture ( Deposit)

Name of return dividend dividend interest (interest)
Rate not fixed fixed rate fixed rate fixed rate
Get back the capital last second first second

Why the firm issue debenture not share to raise fund?

MARKET STRUCTURE
Monopoly-There is one seller and many buyer
They are price setter
They have non-price competition. e.g. free gift, advertising.
Oligopoly-There are few dominance sellers and many buyer.
They have non-price competition. e.g. free gift, advertising.
They are price-setter.
No free entry.
Monopolistic Competition- many sellers
They have non-price competition. e.g. free gift, advertising.
They are price-setter.
free entry
no perfect information
Why is it not desirable to have one more firm to enter the (electricity supply )
industry?
Monopoly - natural monopoly : enjoy economies of scale
- limited market size
- different services

Why does the firm advertise?

- attract customers
- improve image
- provide information

How did the firm compete with other to attract customers?

1. non-price competition-free gift, advertising, provide different services
2. price competition: price cut.
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DEMAND & SUPPLY

Law of Demand states that as the price of a goods increase, the quantity demanded
for the goods will decrease, with other factors being unchanged, and vice versa.

What is the difference between quantity demanded and quantity supplied?

(需求量) Quantity demanded the quantity that a person is willing and able to buy
at one particular price.

(交易量)Quantity transacted the quantity a person is actually buy at market price.

Demand is the schedule of a good that a consumer is willing and able to buy a
different price during a given period of time, with other factors being unchanged.

Factors affecting Demand

- Taste of consumers
- Expectation of the change in the price of good
- Seasonal factor
- Number of consumers in the market
- Price of complements (joint demand)
- Price of substitutes (competitive demand
- Price of derived demand eg. Labour/ garment industry
- Real income of consumers.

Increase in Demand- Demand curve shift to right

Decrease in Demand- Demand curve shift to left

Factors affecting Supply

- price of raw material
- government intervention: tax or subsidy
- technology
- number of producers
- price of other goods: joint supply and competitive supply

Increase in Supply – Supply curve shift to right

Decrease in Demand – Demand curve shift to left