HKDSE Economics Notes
Unit 1 Basic Economics Concepts
1.1 Scarcity
Wants:
• Human Desires
• Unlimited
Scarcity:
• Resources available are insufficient to satisfy all unlimited human wants.
- Universal problem: both developed and developing countries face the same problem
- Relative concept: need to compare the availability of resources against people’s wants
Choices:
• As scarcity exists people need to choose which wants to satisfy and which wants to give up.
• Unlimited Wants > Limited Resources —> Scarcity —> Choice
Competition:
• An inevitable result of scarcity.
- Price competition: People who are willing to pay the price will get the thing they want.
- Non-price competition: All forms of competition other than that of price e.g. ability, ballot,
queue.
Question: In what circumstances will there be scarcity but no competition?
Discrimination:
• Regardless of the form of competition, there will be some winners and some losers.
- Prize competition favours people who can pay the market price and discriminates against
those who cannot.
- Non-price competition favours so so can meet the criteria and discriminates against those
who cannot. e.g. if the beauty if used as a criteria only beautiful people will get the resources
and discriminates against those ugly people.
Question: Among all forms of competition, which one is the most desirable?
1.2 What is Economics?
• Economics is an empirical social science which rests on the postulate of constrained
maximisation to study resource allocation and income distribution, so as to satisfy unlimited
human wants.
• People maximises their own benefits subject to limited resources.
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HKDSE Economics Notes
1.3 Opportunity Cost
Unlimited Wants > Limited Resources —> Scarcity —> Choice —> Opportunity Cost
Opportunity Cost (OC):
• The highest-valued option forgone (HVOF).
- Only the HVOF is the cost, but not all options forgone.
- When there is no alternative, there is no OC.
Full Cost:
• Explicit (Money) Cost + Implicit Cost (i.e. Time Cost)
Interest:
• Assume people have positive time preference. i.e. we choose to consume sooner than later.
• To Borrower:
- The price of earlier availability or advancing consumption.
- The borrower pays interest to obtain goods earlier.
• To Lender:
- The compensation for deferred consumption of the resources.
- The lender sacrifices present consumption for more future consumption when the borrower
repays the principal and interest in the future.
• Higher Interest Rate —> Higher Cost of Present Consumption —> Lower Present Consumption
• Can exist in barter economy.
1.4 Goods
Economic/ Scarce Goods
Free Goods
1. Insufficient to satisfy all human wants.
1. Sufficient to satisfy all human wants.
2. Cost or production is positive as it involves the
use of scarce resources.
2. Cost or production is zero.
3. More of it is preferred.
3. More of it isn’t preferred
Question: Can a goods be a free goods under one situation but an economic goods under
another?
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HKDSE Economics Notes
1.5 Circular Flow of Economic Activities
-Real Flow: flow of goods and
services
-Money Flow: flow of money
• Output Value = Expenditure = Money
1.6 Positive and Normative Statements
Positive Statements
Normative Statements
1. Does not involve value judgement
1. Involve value judgement
2. Concern with what is and what is not
2. Concern with what should be or what ought to
be
3. Testable and refutable
3. Non-testable and non-refutable
1.7 Microeconomics and Macroeconomics
Microeconomics:
• The study of the behaviours of individual economic units.
Macroeconomics:
• The study of the performance of an economy.
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HKDSE Economics Notes
1.8 The Three Basic Economic Problems
1. What to produce? i.e. choice of types and quantities of goods and services to be produced.
2. How to produce? i,e. choice of production method.
3. For whom to produce? i.e. methods to distribute and allocate the resources
How Does the Society Tackle the Three Basic Economic Problems?
Market Economy
Traditional Economy
Planned Economy
Ownership of Resources
Mainly privately owned
Mainly privately owned
Mainly stately owned
Decision of Resource
Allocation
Price mechanism
Tradition and custom
Government control
(centralised decisionmaking)
1.9 Private Property Rights
1. Exclusive right to use
2. Exclusive right to derive income
3. Right to transfer
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