+Scarcity
–Definition:We don’t have enough resources to satisfy all our wants
*Scarcity is a relative concept
*Scarcity won’t be solved even if the choice is made
*Scarcity → Competition (price+non-price competition) → Discrimination (winners+losers Aka
those who fail to meet the criteria won’t get the scarce goods)
Opportunity cost
–Definition:the highest-valued option forgone
Ans format:
E.g option chosen:(0) ; O.C:(a) ;option 1:(b)
[Change in values of options]
Q:Change in O.C ?
{A} aka (a)$ ++
The highest-valued option forgone changes from (a) to (b)
Since the value of (b) is lower than that of (a)
So the opportunity cost decreases
{B} aka (b)$ –
The highest-valued option forgone will still be (a)
The change {B} won’t affect the value of the highest-valued option forgone,it just lowers the
value of (0)
So the opportunity cost remains unchanged
{C} aka (b)$ +
Not necessarily remain unchanged
The value oif (b) increases if the value of (b) is higher than that of (a)
The opportunity cost of (0) may increase
*The opportunity cost doesn’t change when the value of the chosen option changes only
*The opportunity cost isn’t limited to 1 good only aka money included in O.C
*Changes →chosen option’s value +/–
→O.C value +/–
→chosen option’s value +/– → O.C value +/–
*Sunk cost aka historical cost
–Definition:cost incurred by a past option which isn’t no longer available now
→ XO.C
Opportunity cost=time cost + money cost
Ans format:
Q: Is everyone’s O.C the same?
No,as the highest-valued alternative use of time may be different
Q: good (a) $+ ; sb piqueuing to buy (a) = <c> ; payment to (a) + online = <b> ; Is it
necessary that ppl paid to (a) at a higher price total cost?
Full cost=time cost+money cost
The time cost of <b> is lower than those queuing all night
When difference in the time cost () is larger than that in the money cost (<b>)
Ppl paid to (a) may incur lower total cost
Money cost
Ans format
E.g English course:$600 (8 hrs total value)
Waiter wage per hr:$50
Q:Cost of Eng course?
The total cost will be the sum of the course fee and income forgone
(Cal. steps + marking)
Cost = $(600+50x8) = $1000
E.g A man owns an apartment $2 mil and lives in it (a)
Sell it and put the money into a bank 5% interest (b)
Rent out it at $8,000 a month
Q:O.C yearly of (a)?
The interest received = $2,000,000x5% = $100,000
The rental income = $8,000x12 = $ 96,000
O.C of (a) is (b),$96,000
*O.C can be anything tangible or intangible
Goods
–Definition:something at least someone wants OR something that can satisfy wants
–Anything → [Can satisfy wants?]
→No—------------------->Bads (Less is preferred)
→Yes—------------------> [Scarce?]
→yes→economic goods (more is preferred)
→no→free goods (more isn’t preferred)
Economic goods
–Definition:a good whose quantity isn’t sufficient/enough to satisfy all our wants
Ans format:
More of the (good) is preferred’
The goods produced from scarce resources which have alternative uses
Limited resources are used in production → opportunity cost involved in the production
Free goods
–Definition:a good whose quantity is sufficient/enough to satisfy all our wants
Ans format:
More of the (good) isn’t preferred
Opportunity cost doesn’t involve in the production
Must be free of charge
*A good that is free of charge =/= free good OR = economic goods
*A free good must be free of charge
Interest
–Definition:
(for borrower) cost of earlier availability of resources
(for lende) compensation the one receive in return for referring their consumption of
resources
*Caueses: 1.inflation ; 2.risk of not returning $ ; 3.earlier consumption
*Interest exists in any forms and in barter economies + monetary economies
*interest rate + → borrower doesn’t want to borrow $ → consume less
→ lender wants to lend $ → consume less
3 basic economic problems
A.What to produce
What goods to be produced with the resources?
How many to be produced? E.g amount,ratio,more
B.How to produce
What kind of production method? Aka how to produce “product
C.For whom to produce
Who has the goods produced
Where to distribute the goods? E.g discount
Traditional economy
Resources
allocation
command/planned
economy
Follow the ancestors Follow the
practice,traditions
government
+customs
guidance
Ownership of MOST
resources
Government owned
Market economy
Under the market OR price
mechanism
Privatedly owned
Private property rights
Defintion:Exclusive rights to use (a) + exclusive rights to receive income (b) + right to
transfer property (c)
(a)
The owner has the right to exclude from others from using his property
No one is allowed to use the owner’s property without the one’s permission
(b)
The owner has the right to exclude right to receive income generated from the one’s property
No one can generate income from the property without the owner’s permission
(c)
The owner has the right to transfer the one’s property to other ppl
**private property right → exchange
Production
–Definition:
process of turning input (factors of production OR resources used in production)
Into output (goods and services) to satisfy human wants
*Production involves a change in the form of resources,change in place,provision of service
–Consumption definition:process of using goods directly to satisfy human wants
Exchange
–Definition:situation in which ppl get what they want by giving sth in return in a market
Type of production
–Primary production definition:
The direct extraction of natural resources or the use of natural resources in the production
E.g. farming,fishing etc AKA give me that mf nature
–Secondary production definition:
Process of turning raw materials into final or semi-final goods
E.g. toys,watches,building etc AKA manufacturing
–Tertiary production definition:
All types of provision of service
E.g. police,education,investment etc AKA how may I serve u mf
Ans format:sub the question word into the definition
*GDP OR production value =/= employment
*production value % + OR – =/= exact amount + OR –
Interdependence of 3 types of production
Types of goods
Consumer goods definition:
goods made for final consumption OR satisfying consumers’ wants directly
–Captial goods definition:goods used in the production process OR producing other goods
*The way the goods are used determines that it’s consumer good OR producer good
–Private goods definition:goods that are excludable and rival in competition
–Excludable:not costly for one to prevent others from using it
–Rival:a person’s consumption’ll reduce the amount available to others
–Public goods vice versa
*public goods are concurrent (can be consumed by individualS at the same time)
Factors of production AKA input
Factor
Meaning
Return
capital
Man-made resources
interest
land
Natural resources
rent
labour
Human resources e.g. human effort,physical + mental
wage
entrepreneurship Human resources e.g. risk bearing + decision making
profit
Capital
Fixed capital
Resources that don’t change its form during production
e.g.machines,factories etc
Working capital
Resources that may change its form OR be used upduring production e,g,
raw materials
Liquid capital
Money used for production purpose
Capital formation AKA investment
–Definition:process of making capital goods
–Purpose:replace the existing depreciated capital + increase the production capacity
Capital consumption AKA depreciation
–The value of capital goods depreciate over time and thus needs frequent repairing +
replacement
Capital accumulation
–Definition:A net increase in the stock of capital goods
–Rate of capital formation’s faster than that of capital consumption
Land AKA natural resources
–Defintion:all natural resources in the original form that can be used in production
E.g. soil,minerals,power resources OR cruel oil
*supply of land doesn’t involve O.C as land is gift of nature
*supply of land may change over time but DEFINITELY NOT due to human efforts
*Land becomes capital when moved by human efforts
Entrepreneurship
–Definition:human efforts that make decisions (final decision) + bear production risks (Loss)
*Those who can’t be fired ARE the true entrepreneurs
Ans format:
(Sub) is the owner of (obj) and provides capital + bear business risk
Labour
–Defintion:human efforts,physical + mental efforts put in production
*Unit:man-hour,NOT no. of workers
Formula:Labour supply = No. of workers x No. of working hrs per worker
Unit:unit of output per man hour
Ans format:sub (sub) into the definition
Factors affecting the labour supply
1.size of population (larger population → larger labbour supply)
2.proportion of working population in total production
–large proportion of students OR elderly → smaller labour supply
3.no. of working hrs (more public holidays → samller labour supply)
4.monetary rewards (higher monetary rewards OR lower tax rate → larger labour supply)
5.retirement age ++ → larger labour supply
6.allowance – → larger labour supply
Formula: Average labour productivity = output / labour supply
Factors affecting the labour productivity
1.education and training
2.working environment
3.health of wages
4.rewards and benefits
5.technology level of the production goods
6.methods of organizing and managing labour
Labour mobility=geographical mobility (a) + occupational mobility (b)
(a) definition:willingness + ability of resources to be moved from one workplace to another
Factors affecting (a)
1.transport cost (transport cost++ → [time cost + money cost] + → (a) – )
2.economic condition (more unemployment → (a) + )
3.social unrest and political factors
4.government policy (immigration policy stricter → (a) – )
(b) definition:willingness + ability of resources to be moved from one occupation to another
Factors affecting (b)
1:money income and non-monetary factors (income low → (b) ++ )
2.difference in skill (specialized skills → (b) – )
3.license requirement (profession aka license needed → (b) – )
4.market information (more access to jobs → (b) ++ )
5.age of workers (older → can’t adapt to the new job fast → (b) – )
6.training programme (more → (b)++ )
Ans format:(a) OR (b) – , explanation based on the info offered → labour mobility + OR –
Division of labour
–Definitioin:workers can specialize in providing a particular good OR services
*Division of labour improves workers’ productivity (output per hr)
Type of division of labour
definiton
simple
A worker specializes in producing a particular good
Workers do OR depend on each other in the production
complex
A worker specializes in a particular production stage of a good OR
specializes in a particular role in teamwork
Workers depend on each other in the production
regional
A region specializes in producing a particular good or a particular
production stage of a good
Advantage (productivity ++)
1.practice makes perfect
2.choose the right person to do the job
3.saving of time
–less time to train a worker for a task than the whole process ; no need for workers to switch
between tasks
4.mechanization enabled
–easier to design machines to work with labour to do a simpler task
5.economy in the use of capital good
–1 tool’s enough for each worker but not whole set of tools,reducing the waste of idle tools
Disadvantage
1.Over-independence (firms)
–problem in 1 stage,whole production line gg
2.Standardized products → less choices (consumers)
–mechanization→design and style standardized
3.Boring OR monotonous job (workers)
–workers find it boring by repeating the same job → efficiency – ; productivity –
4.Loss of craftsmanship (workers)
–complex division of labour → traditional craftsmanship replaced
5.higher chance of unemployment (workers)
–complex division of labour → worker only knows 1 part of the production,trained in the
specific skills AKA not well-round → risk of unemployment ++
6.over-reliance (country)
–regional division of labour
[a]→ some countries specialize in some products → rely too much on the exports
[b]→ some countries rely too much on the import → if imports’re unstable → economy gg
Limitation
1.nature of product
–jobs that require one’s skill OR creative ideas e.g arts
2.size of market
–If size market’s too small to absorb the extra output → division of labour unnecessary
3.transportation cost AKA communication cost
–Transport network can’t meet the demand → regional division of labour restricted
–if transportation cost > gain from the trade → x trade
Production in short run and long run
–Fixed factors definition:factors of production that don’t change in quantity as output
changes
–Variable factors definition:factors of production that change in quantity as output changes
–Short run definition:a period when some factors’re fixed and some’re variable
*A firm can vary its variable factors to change its output level
–Long run definition:a period when all factors’re variable
*A firm can increase its employment of all factors to increase output
*For short run and long run,level of technology is assumed to be constant
Economies and Diseconomies of scale
*ONLY IN LONG RUN
Cost per unit = Average cost (AC) ;
Economies of scale = production scale ++ ; Diseconomies of scale vice versa
Economies of scale → AC–
Optimal scale → AC at minimum
Diseconomies of scale → AC++
*AC at minimum =/= maximized profit of the firm
Economies of scale
–Definition:pros associated with large scale production
Internal economies of scale
–Definition:pros enjoyed by the a firm when the firm itself enlarges the scale of production
Internal economies of scale
1.Managerial economies of scale
Better management as higher degree of specialization can be employed
→ production – ; duplication of work –
2.Marketing economies of scale
The advertising and service cost can spread over a larger output
3.Marketing (Purchasing) economies of scale
Lower purchasing cost due to the discount received from the bulk purchase of raw materials
4.Financial economies of scale
Easier for larger firms to borrow money from banks and interest rate’re usually lower
5.Technical economies of scale
The cost of machinery can be spread over a larger output BUT large firms can utilize the
machines more fully and efficiently
6.Research and development economies of scale
More research and development better products OR production method
7.Risk-bearing economies of scale
Large firms can produce a greater variety of products
That allows them to spread risk through diversification of products
External economies of scale
–definition:pros enjoyed by a firm when other firms OR the industry enlarge the scale of
production
External economies of scale
1.Lower the transportation cost
Transport networth and other infrastructure will develop more quickly due to an increase in
demand (e.g from a large no. of firms)
2.Lower the marketing cost
Since firms advertise their products,more people will know about the industry and its
products → lower the firms’ cost of marketing
3.Lower the recruitment training cost
More workers’d be attracted to the industry
Various institutions may offer training courses for workers who want to join the industry
4.Lower the cost of purchasing materials
A networth of supplies and other supporting industries will be drawn in and lower the
average cost of individual firms
Diseconomies of scale
–Definition:cons associated with large scale production
Internal diseconomies of scale
–Defintion:cons arise when the firm itself becomes too large
1.Marketing diseconomies of scale
When the output of a firm is large enough to satisfy market demand,it will be difficult to
further expand scales
The money spent on advertising will have a limited effect
The average cost of marketing its products is thus higher
2.Managerial diseconomies of scale
When the structure of a firm becomes complicated,more communication and coordinate
problems within a firm arise
The complicated structure will also delay decisions and lower the efficiency of management
→average cost ++
3.Financial diseconomies of scale
When a firm becomes too large,the risk of lending additional loans to this firm will be higher
→captial can be obtained ONLY at a higher interest rate
→average cost ++
External diseconomies of scale
–Defintion:cons arise when other firms OR the industry become too large
(a) Excessive expansion of an industry → a drastic increase in the demand for factor inputs
→great increase in input prices e.g. wages,rent,prices of raw materials and machines etc
→a firm suffers a higher average cost of production
(b) Increasing concentration of business activities in a district
→a substantial increase in traffic in that area
→traffic congestion rises the transportation costs
→a firm suffers a higher average cost of transportation
Circular flow of economic activities
- - - - -> : money flow ; ——>: real flow
–firms definition:economic unit responsible for making production decisions
–households definition:economic unit responsible for making conumpstion decisions and
provides factors of production to the firms
*exchange is voluntary and mutually beneficial
*Sepcialization occurs
when different ppl or economies concentrate on producing different goods
*exchange →specialization
Positive and normative statement
Positive statement
–Definition:A descriptive statement that deals with what is,was and will be
Normative statement
–Definiton:A subjective statement that deals with what we ought to be
(value judjement involved good or bad)
Positive statement
Normative statement
-Value judgement not involved
-scientific and can be refuted by facts
-Value judgement involved
-Not scientific and can’t be tested
*No “should” used in the sentence
*”Good” or “bad” ; “should” used
Ans format
{A}
Positive statement
It is refuted by facts and doesn’t involve value judgement
{B}
Normative statement
It can’t be refuted and involves value judgement
Payment method
Ans format
Time rate
Pros
(employer)
Cons
(employer)
Pros
(employee)
Cons
(employee)
–Simple and
easier to cal.
Wages
–workers’
working
incentive tends
to be lower
–regular and
stable income
–work more or less
and still get the same
income
–turnover rate
decreases
–higher
supervision cost
–lower the cost
of monitoring
the quality of
products
Piece rate
–lower
supervision cost
–cost of cal.
–possibly get
wage payment’s higher income
high
with more
–irregular and
unstable income
–workers’
working
incentive tends
to be higher
AKA
productivity
decreases
Basic salary +
comission
–lower cost of
supervision
(B.S + C)
–workers’
working
incentive tends
to be higher
AKA
productivity
increases
–higher cost of
monitoring the
quality of the
products
efforts OR
better service
–cost of cal.
wage payment
is high
–fair payment
system,possibly
get higher
income with
more efforts
OR better
survice
–irregular and
unstable income
–share the risk
of business with
employees
Profit sharing
~(B.S + C)
~(B.S + C)
~(B.S + C)
~(B.S + C)
Tips
~(B.S + C)
~(B.S + C)
~(B.S + C)
~(B.S + C)
Business ownerships
Different forms of business ownerships
Private enterprises
Differences between private and public limited company
*public company can be listed OR NOT listed
Pros and cons of different forms of SOME business ownerships
*Wider SOURCES of capital BUT NOT total sum of capital
*profit tax rate high OR low =/= profit large OR small
*(Sole propietorship) pros:high incentive to work
*(Partnership) cons:responsible for partners’mistakes on business decision
*(Sole proprietorship & partnership) pros:closer relationship with staff and customers
Public enterprises
Features
Differences between government department and public corporation
Government department
Public corporation
Aim
Non-profit motive
Profit-motive
Ownership
Government
Government
Finance
–Gov. pays for all the
operating expense of the
department and collects all
revenues
–Long-term loan from gov. and then become
financially independent
–Money is collected by sale of goods and services
–The firm has the power to borrow + issue stock
Management
–Controlled by gov. and
employees’re civil servants
–Managed by a board of directors appointed by
gov.
–The firm has a separate legal entity
Liability
–Gov’s responsible for any
liability made by its
department
–Limited liability AKA gov. isn’t responsible for its
debts but annual accounts + reports must be
published
*Gov. departments e.g.Water Supplies Department,Fire Service Deparmtent
*Public corporations e.g.Hong Kong Tourism Board,Airport Authority Hong Kong,Hong Kong
Export Credit Insurance Corporation
*MTR is a PUBLIC LIMITED company that the gov. is one of the shareholders
Methods of raising capital
Owner’s
savings
Borrowing
from friends
or banks
Retained
earnings
Issuing bonds
AKA debentures
Issuing shares
Sole
proprietorship
yes
yes
yes
no
no
Partnership
yes
yes
yes
no
no
Private Ltd
company
yes
yes
yes
yes
yes
*(not to public)
Public Ltd
Company
uncertain
yes
yes
yes
yes
–Share definition:ownership of shareholders in a limited company
–Function:It entitles its holders to a share of the company’s profit
–Bonds AKA debentures definition:a certificate of debt issued to raise capital
–Function:It entitles its holders to earn interest until redemption on the maturity date
Differences between shares and bonds
Shares
Bonds
Holders
Shareholders = owners of the company Bondholders = creditors of the company
Return
–Shareholders receive dividends that
vary with the profit of the company
–Bondholders receive interest usually
fixed
–A lot of dividends are received if the
business’s successful BUT little or not
if profits’re low
–Bondholders can receive interest no
matter whether the company makes a
profit or not
Voting rights
–Shareholders have voting rights in
shareholders’ meetings OR Annual
General Meeting (AGM)
–Bondholders don’t have voting rights in
shareholders’ meetings OR Annual
General Meeting (AGM)
Priority in getting
back capital when
the company
liquidates
–Shareholders are the LAST to get
back their capital when the company
winds up
–Bondholders can get back their capital
before shareholders when the company
winds up
Maturity
Shares carry no maturity dates
Bond matures upon redemption
Order of getting repayment when a Ltd company liquidates (first to the last):
Account firm providing liquidation services (services) → government (taxes)
→ employees (wages) → bond holders AKA debenture holders (loans)
→ ordinary shareholders
Pros and cons of ISSUING shares OR bonds (to company)
Pros
Issuing shares over bonds
Issuing bonds over shares
–The company has no obligation to
pay a dividend to shareholders even
when there’s a profit
→no maturity date for ordinary
–Bondholders’re only the creditors of the
company
→the existing shareholders’ power of control over
shares,the company has no
redemption obligation to the shares
the company won’t be diluted
–No risk pf being taken over
–Reduce the debt-to-equity ratio
→easier to have more bank loans
Cons
–New shareholders may influence
company decisions
–The existing shareholders’ power of
control’ll be diluted
–Higher risk AKA easier to be taken
over as shares’re freely transferable
on the stock market
–There’s an obligation to pay fixed interest to
bondholders no matter the company makes a
profit or not
–Redemption obligation
→issuing more bonds raises the debt-to-equity
ratio
→more difficult to have more bank loans
Pros and cons of BUYING shares OR bonds (to investors)
Pros
Buying shares over bonds
Buying bonds over shares
–Dividend isn’t fixed ; if company doesn’t
huge profits
→dividend rate’ll often be higher
–Less risky in buying bonds ; bonds carry
a fixed rate of interest no matter the
company makes a profit or not
→stable return
–Voting rights in shareholders’ meetings OR
Annual General Meeting (AGM)
–Bondholders can claimrepayment prior
to shareholders if the company winds up
Cons
–More risky in buying shares ; dividend isn’t
fixed
→unstable return
–Shareholders’re the last to claim
repayment if the company winds up
–No voting rights in shareholders’
meetings OR Annual General Meeting
(AGM)
–Can’t earn more when the company
makes huge profits
Market
–Function:It enables buyers and sellers to have contact for business transaction
*market involves transactions of goods and services = product market
*market involves transactions of factor of production such as labour market and capital
market = factor market
Types of market structure
market structure → perfect competition
→imperfect competition →monoply
→oligoply
→monopolistic competition
*Criteria to identify the market structure
1.No.of buyers and sellers
2.Freedom of market entry and exit
3.Nature of goods and services
4.Availablitiy of market information
Features of market structure
Perfect competition
–Definition:An ideal market structure AKA IMPOSSIBLE TO EXIST
*All firms’re price takers
Market price is determined by market supply and demand
If a seller sets a (slightly) higher price,the one’ll lose all customers as other sellers are small
and not associated with others
Monopolistic competition
–Definition:many companies are present in an industry, and they produce similar but
differentiated products
Oligopoly
–Definition:only a few dominant sellers
*The action of each seller affects the profit of another.leading to immediate action of other
firms. AKA Interdependence among sellers
Each of the sellers has certain degree of monopoly power in the market = oligopolist
Monopoly
–Definition:only 1 seller of the product and no close substitute (monopolist)
*A monoplist still faces competition as the one may engage in price + non-price competition
E.g. advertising + quality improvement → revenue ++
No direct competition BUT the one still needs to compete with sellers selling
substitutes,producers using similar factors of production for resources AND others for the
monopoly right TO maintain its monopoly status
→the one may still suffer from a loss
*Sources of monopoly power
1.Government franchise (exlusive right granted by gov. to the only producer)
2.Oownership of superior resources
(natural resources OR properties X available to private frims)
3.Trademark,copyright AKA patent (new product patent)
4.Cartel and integration
5.High setup cost and natural monopoly (start-up capital requirement very large)
*Same products’re sold at different prices in different places
as different services OR some shops may offer better after-sale service
→heterogeneous products
The market informatio’s imperfect.Ppl don’t know all the pricing information of different
places
Different locations → different rental cost
Ans format:
{Heterogeneous goods} Sellers provide heterogeneous goods e.g (deducted from question)
{Imperfect market info} The market information is imperfect.The buyers and sellers don’t
know all about the market → they will collect information cost that involves information cost
Expansion and integration of firms
Expansion of firms
→horizontal expansion
→lateral expansion
→conglomerate expansion
→vertical expansion →vertical backward
→ vertical forward
Types of business growth
–Internal expansion definition:a firm expands within its existing operation and management
structure e.g. buying new offices,factories OR extending more branches
–external expansion (integration) definition:a firm expands by combining with other firms
*more than 1 firm are involved in the expansion
General motives of integration AND expansion
1.Enhance the market competitiveness of products
2.To take advantage of the brand name
→firms benefit from the good will of the company ; advertising cost –
3.Firms enjoy the benefits from economies of scale
Financial economies of scale
Get backcredit easily and enjoy a low interest rate
Managerial economies of scale
–Combine OR dissolved duplicated departments
→more efficient use of resources
–Higher degree of division of labour
Marketing economies of scale
–Bulk purchase related materials can enjoy more discounts
Horizontal expansion OR integration
–Definition:when a firm expands into a business that is engaged in producing the same OR
similar goods OR services,OR at the stage of production
Specific motives:
1.It can enlarge the market share and turn competitors into partners
2.It has greater power in affecting the price of the products
Lateral expansion OR integration
–Definition:when a firm expands into a business of producing related but not competitive
products
Specific motives:
1.Product diversification helps spread risk
2.Easier for the firm to make use of its brand name and offer extra products as the goodwill
can be extended to new products
Vertical integration OR expansion
–Definiton:when a firm expands into a business that is engaged in producing at different
stages of the production of the same product
{a} Vertical backward expansion OR integration
–Definition:When a firm expands into a business in a earlier / preceding stage of production
Specific motives
1.To ensure a steady supply of raw materials
→reduce the risk of production disruption caused by inadequate input supply
{b} Vertical forward expansion OR integration
–Definition:when a firm expands into a business in a later stage of production
Specific motives
1.To ensure a steady market outlets for the products
2.The firm can collect market information more easily and adapt to changes in market
demand supply
Conglomerate expansion
–Definition:when a firm expands into a business of engaging in totally different lines of
production
Specific motives
1.Product diversification helps spread risk