Chapter
IS
T
Basic Economic
Concepts
1.1
Nature of Economics
1.2
Wants, Scarcity and Choice
Wants
Scarcity
Choice
A
e-Learning Hub
A
R
1.2.1
1.2.2
1.2.3
O
1
1.3 Relationship between Scarcity, Competition and
Discrimination
1.4
Opportunity Cost
1.4.1
1.4.2
1.4.3
1.4.4
Concept of Opportunity Cost
Changes of Opportunity Cost
Concept of Full Cost
Past Expenditure is Not a Cost
1.5 Relationship between Interest and
Opportunity Cost
1.6
Free Goods and Economic Goods
1.6.1
1.6.2
Free Goods
Economic Goods
1.7
Circular Flow of Economic Activities
1.8
Positive Statements and Normative Statements
What do you think economics
is? Many students have a
misunderstanding about
economics and think it is simply
a study of money and financial
markets. In fact, economics
is much more than that. As a
starting point, we will study
some basic economic concepts
in this chapter.
Chapter
1.1
1
Nature of Economics
Brainstorm 1.1
A
What is economics?
IS
T
O
1Why do you choose to study economics? What do you think economics is about,
the money market, the stock market, ways to get rich or other things?
2Scan the QR code and watch a video to learn more about the nature of economics.
A
R
Economics is a social science that studies, analyses and predicts human
behaviour. It examines how individuals, firms and societies make
decisions on how to allocate scarce resources to satisfy their wants under
constraints (i.e. constrained maximisation). It is a study of how people
make choices under the condition of scarcity.
BScarcity is the source of all economic problems
Scarcity of resources (e.g. time and money) is the constraint on our
decision making. In economics, we assume that people maximise
something they desire within constraints.
Examples
Individuals need to make choices.
For example, suppose a student, Sally, only has two weeks to
revise for the final examination. The two-week time period
is the constraint, and she needs to decide how much time
she should assign to each subject in order to get the best
results.
2
economics 經濟學 social science 社會科學 resource 資源
constrained maximisation 在局限下爭取最高利益；在局限條件下利益極大化 choice 選擇
Flipped
Classroom
Basic Economic Concepts
Firms need to choose how to use their limited resources
when running a business.
For example, an investment firm needs to decide whether to
use its money to buy shares or keep it in a bank. The amount of
money available for investment and the availability of market
information are the constraints, and the firm needs to decide
how to invest to maximise the return within these constraints.
A society also needs to make choices.
IS
T
O
For example, a government needs to decide how to allocate its
limited resources to maximise the well-being of the people.
Figure 1.1 A government needs to decide how to use its budget to
maximise the well-being of the people.
C
Microeconomics and macroeconomics
a
A
R
Generally, economics can be classified into two branches:
Microeconomics
Microeconomics analyses the behaviours of individuals and
firms. Economic principles and concepts have been developed to
explain and predict how individuals and firms make consumption
and production decisions.
b
Macroeconomics
Macroeconomics analyses the operation of the economy as a
whole. Economic principles and concepts have been developed to
explain and predict how societies make economic decisions and
how these decisions affect individuals and firms.
Figure 1.2 In macroeconomics, we
discuss how the government allocates
the limited resources.
Exercise 1.1
Determine if the following statements are true or false. Put a tick ( ) in the appropriate boxes.
Statement
a.
True False
Economics studies how to make more money.
b.Economics studies how to allocate the limited resources we have.
c.
Economics studies how to solve the problem of scarcity.
microeconomics 微觀經濟學 macroeconomics 宏觀經濟學 economy 經濟體系
3
Chapter
1.2
1
Wants, Scarcity and Choice
Brainstorm 1.2
1
2
Make a list of wants that you have.
Can all of the wants on the list be satisfied? Why?
As mentioned, economics is a study of how people make decisions on
the allocation of scarce resources to satisfy their wants. When there is
scarcity, people need to make choices. Also, people need to compete for
the scarce resources whose quantities are not enough to satisfy all their
wants.
Wants are human desires.
IS
T
1.2.1 Wants
Definition
O
The following explains what these concepts mean and how they are
related.
A
R
Different people have different desires. They can be tangible or
intangible. Some people may want to have things such as mobile
phones, books or big houses. On the other hand, some people may want
intangible things such as love, respect and happiness. In economics, these
human desires are called wants.
Human wants are unlimited. However, the resources people use to
produce goods and services to satisfy wants are limited and thus not
enough to satisfy our unlimited wants.
Wants can never be fully satisfied. New wants will come up when some
wants are satisfied.
4
wants 慾望 desires 慾望；願望
Examples of resources used to
produce goods and services:
• human resources
•natural resources (e.g.
sunlight and minerals)
•man-made resources
(e.g. cars, computers and
machines)
We will further discuss the
resources used to produce goods
and services in Chapter 5.
Basic Economic Concepts
1.2.2 Scarcity
Definition
Scarcity refers to the situation in which the resources available
are not enough to satisfy all people’s wants.
With limited resources and unlimited wants, scarcity always exists.
Everyone, whether rich or poor, faces the problem of scarcity. Scarcity is
the source of all economic problems.
For example, if the government of an economy wants to provide every
household with a flat but does not have enough land to do so, the
economy faces the problem of scarcity – the scarcity of land.
O
Scarcity is a relative concept. We need to compare the availability of
resources against people’s wants in order to determine whether there is
scarcity.
Figure 1.3 Given the limited supply of
land, land development has always been
challenging in Hong Kong.
A
R
IS
T
If people have unlimited resources that can satisfy all their wants,
there is no scarcity.
If resources are limited but can still satisfy all people’s wants, there
is no scarcity either.
Scarcity exists only when the resources available are not enough to
satisfy all people’s wants.
1.2.3 Choice
When scarcity exists, people need to make choices. As people cannot
satisfy all their wants with the limited resources available, they need to
choose which wants to satisfy and which wants to give up. If a person is
rational, he or she will choose an option with the highest value.
For example, if Aaron has one hour to spend, he can use that hour to
browse the Internet or to sleep. If he chooses to browse the Internet, he
will miss one hour of sleep.
Exercise 1.2
Explain if you agree with the following statements.
a. A billionaire does not face the problem of scarcity.
b.
If a resource is fixed in supply, the resource must be scarce.
c.
If scarcity does not exist, people do not have to make choices.
scarcity 稀少性；缺乏
5
Chapter
1
1.3 Relationship between Scarcity,
Competition and Discrimination
Brainstorm 1.3
EMILY
9:00pm
I went to the Food Festival this morning. The queue
kept growing even before the opening time as all
discounted offers were limited to stock on hand ...
O
1Do you think everyone in the queue was able to get the discounted products they wanted?
2What method was used to decide who could get the discounted products?
IS
T
The concepts of scarcity, competition and discrimination cannot be
separated. Scarcity exists when the resources or goods available are not
enough to satisfy all people’s wants. People inevitably need to compete
against each other for the resources or goods.
Competition can take the form of price competition or non-price
competition.
6
Non-price competition
Explanation
People compete for
resources or goods on the
basis of price. Only those
who are willing and able to
pay the market price can
get the resources or goods.
People compete for
resources or goods on
the basis of factors other
than price, such as age,
sex, race, qualification and
friendship. Only those who
meet the criteria can get
the resources or goods.
Example
Some works of art, such as
paintings and sculptures,
are sold at auctions. The
person who offers the
highest price gets the work.
Students compete for
subsidised university places
mainly on the basis of their
examination results.
A
R
Price competition
Figure 1.4 Property owners usually sell
their properties to buyers who are willing
to pay the highest prices.
competition 競爭 discrimination 歧視 price competition 價格競爭 non-price competition 非價格競爭
Basic Economic Concepts
Regardless of the form of competition, discrimination is always implied.
There must be people who cannot get the goods or resources because of
scarcity. These people are said to be discriminated against by the rules of
competition.
IS
T
O
Price competition favours people who can pay the market price
and discriminates against those who cannot.
Non-price competition favours those who meet the criteria and
discriminates against those who do not.
Figure 1.5 ‘First-come, first-served’ and competition on the basis of results are two
common forms of non-price competition.
A
R
To conclude, scarcity implies competition and competition implies
discrimination.
Exercise 1.3
‘When there is no scarcity, competition does not exist.‘ Do you agree with this statement? Explain.
Revision Corner
1.1
Learning Focus
Topic/Key point
HKDSE
Paper 1
Paper 2
Meaning of economics
Scarcity
Meaning of scarcity
Relationship between scarcity and choice
Sample Paper Q1
Relationship between scarcity, competition and
discrimination
Practice Paper Q1
7
Chapter
1
1.4 Opportunity Cost
1.4.1 Concept of Opportunity Cost
Brainstorm 1.4.1
Scan the QR code and watch a video to learn more about the concept of
opportunity cost.
Inspiring
Video
O
Resources are limited and wants are unlimited, so scarcity always exists.
When a person uses resources to satisfy wants in one way, he or she gives
up alternative uses of those resources. In economics, we use the concept of
opportunity cost to explain how people make choices.
IS
T
Unlimited wants
Scarcity
Limited resources
Choice
Opportunity
cost
Definition
A
R
Figure 1.6 The relationship between wants, scarcity, choice and opportunity cost
The opportunity cost of a choice is the value of the highestvalued option forgone.
When people make a choice, they choose one option among all the
options available. They have to give up other options, but not all the
options forgone are considered the opportunity cost. Only the highestvalued option forgone is the opportunity cost.
If there is only one option
available, there is no choice
and thus no option is forgone.
So there is no opportunity cost.
Example
Ayden has an hour of leisure time. He can choose from the
activities in Table 1.1. He ranks them according to the value of
each option to him and comes up with an order of preference.
Order of
preference
Option
1st
going jogging
2nd
practising magic tricks
3rd
reading comics online
Table 1.1 Ayden’s options and
preferences
8
opportunity cost 機會成本
Basic Economic Concepts
Ayden cannot do all of the activities within one hour, so he faces
scarcity and needs to make a choice. If Ayden chooses to go
jogging, he will have to give up the options of practising magic
tricks and reading comics online.
O
Figure 1.7 If Ayden chooses to go jogging, he will have to give up all the
other options.
Order of preference
2nd
3rd
Option
going jogging
A
R
1st
IS
T
The opportunity cost of going jogging is the option of practising
magic tricks, which is the highest-valued option forgone. Note that
the opportunity cost of going jogging is not practising magic tricks
AND reading comics online. This is because his limited time does
not allow him to do all of them at the same time.
practising magic tricks
reading comics online
chosen option
highest-valued option forgone
(opportunity cost)
Table 1.2 The opportunity cost of going jogging is
practising magic tricks.
Exercise 1.4.1
1
What is opportunity cost?
The opportunity cost of a choice is
.
2
With reference to the above example, suppose Ayden hurts his leg and cannot go jogging.
a. Which option will he choose according to his order of preference?
b. What is the opportunity cost of choosing that option?
9
Chapter
1
1.4.2 Changes of Opportunity Cost
Brainstorm 1.4.2
Noah
ME
How was the movie?
Noah
It was good, but my view was blocked
by the person in front of me …
Do you think Noah’s opportunity cost of watching the movie would have changed
in the above case?
O
Opportunity cost is the value of the highest-valued option forgone. The
opportunity cost of choosing an option will change only if there is a
change in the value of the highest-valued option forgone.
IS
T
We will use Ayden’s example again to illustrate how opportunity cost
changes in different situations.
A Change in the value of the chosen option
A
R
The opportunity cost of choosing an option will not change when the
value of the chosen option changes.
Example
Suppose Ayden thinks that it will be too hot to go jogging. The
value of going jogging to him will decrease. If other options
remain unchanged, the opportunity cost for Ayden to go jogging
will not change. This is because the value of the highest-valued
option forgone (i.e. the option of practising magic tricks) remains
unchanged.
Order of preference
Option
1st
going jogging
2nd
practising magic tricks
3rd
reading comics online
Table 1.3 Even if the value of going jogging
decreases, Ayden’s opportunity cost of going jogging is
still practising magic tricks.
10
Figure 1.8 If there is only a change
in the value of going jogging, the
opportunity cost of going jogging will
not change.
chosen option: value
highest-valued option forgone
(opportunity cost): remains unchanged
Basic Economic Concepts
BChange in the value of the highest-valued
option forgone
The opportunity cost of choosing an option will change when the value
of the highest-valued option forgone changes.
Example
Suppose Ayden has learnt some new magic tricks and the value
of practising magic tricks increases. Given that the order of
preference remains unchanged, the opportunity cost for Ayden to
go jogging will increase because the value of the highest-valued
option forgone (i.e. practising magic tricks) increases.
Option
1st
going jogging
2nd
practising magic tricks
3rd
reading comics online
highest-valued option forgone: value
(opportunity cost )
IS
T
Table 1.4 When the value of practising magic tricks
changes, Ayden’s opportunity cost of going jogging
will change.
chosen option
O
Order of preference
CChange in the value of other options forgone
Examples
A
R
The opportunity cost of choosing an option may or may not change when
the value of other options forgone changes, depending on whether the value
of the highest-valued option forgone changes.
Case 1 The order of preference does not change
Suppose the value of reading comics online
increases but Ayden’s order of preference remains
the same. The opportunity cost of going jogging
will not change because the change in the value of
reading comics online does not affect the value of
the highest-valued option forgone (i.e. the option of
practising magic tricks).
Case 2 The order of preference changes
Suppose the value of reading comics online increases
and becomes the second best option. Reading
comics online is now the highest-valued option
forgone. Since the value of reading comics online is
now higher than that of practising magic tricks, the
value of the highest-valued option forgone increases,
i.e. the opportunity cost of going jogging increases.
Exercise 1.4.2
With reference to Ayden’s example, explain how the opportunity cost of going jogging will
change when
a. Ayden finds that he left his magic trick props at school.
b.
Ayden is unable to connect to the Internet so he cannot read comics online.
11
Chapter
1
1.4.3 Concept of Full Cost
Brainstorm 1.4.3
Suppose you need to attend tutorial classes after school. What do you think your cost of
attending them is?
In some cases, monetary payments are involved when one chooses an
option. The full cost of a choice is the sum of the monetary cost (explicit
cost) and the non-monetary cost (implicit cost).
Full cost = Monetary cost + Non-monetary cost
Monetary cost and nonmonetary cost are also known
as money cost and non-money
cost respectively.
O
Monetary cost refers to the actual payment involved in obtaining
the chosen option.
Non-monetary cost refers to the cost involved in obtaining the
chosen option with no actual payment made.
IS
T
Time cost, which is the highest-valued alternative use of the time involved
in obtaining the chosen option, is a common example of non-monetary
cost. It can be expressed in terms of the income forgone.
Example
A
R
Alison bought a concert ticket for $500. This $500 was her
monetary cost of buying the ticket. She spent an hour queueing up
to buy the concert ticket.
Alison could have studied at home if she
Case 1 had not queued up for the ticket
Her time cost of buying the ticket was the
value of studying for an hour.
The full cost of buying the ticket was $500
plus the value of studying at home for an
hour.
Alison could have earned an hourly rate
Case 2 of $50 working part-time if she had not
queued up for the ticket
Her time cost of buying the ticket was $50
(the income forgone).
The full cost of buying the ticket was $550
(= $500 + $50).
Exercise 1.4.3
A coffee shop launches a promotion of giving away free coffee which costs $35 each. Samuel is
thinking about whether to queue up for an hour to get the free coffee. Assume that he is rational.
Explain if he would choose to queue up for the free coffee in the following situations:
a.
He can work part-time and earn an hourly rate of $45.
b.His original plan was to play an online game. Now, he can still play the online game on his
phone while queuing for the coffee.
12
full cost 全成本 explicit cost 顯性成本 implicit cost 隱含成本
Basic Economic Concepts
1.4.4 Past Expenditure is Not a Cost
Brainstorm 1.4.4
uppose you just realised that you have taken the wrong bus after paying the bus fare, which
S
is not recoverable. Would the bus fare you have paid affect your decision on whether to get off
the bus or not?
When calculating the cost of choosing an option, one should consider
only the options available at the moment of decision making. The
cost that has been paid in the past and cannot be recovered is not the
opportunity cost of the choice and it does not affect current decision
making.
O
Example
IS
T
Suppose Mr. Wong bought a residential flat for $2 million 10
years ago. He is considering whether to keep the flat or sell it. The
current market price of Mr. Wong’s flat is $10 million.
This coffee shop keeps losing money.
Should I close it down or carry on?
I've invested a lot of money in it.
A
R
In this case, the $2 million Mr. Wong paid for the flat 10 years
ago is not relevant to his current desicion making and is not the
opportunity cost of keeping the flat. It does not affect the cost of
the present decision. If he chooses to keep his flat, he forgoes the
option of selling it at the highest price available at present. Hence,
the cost of keeping the flat is $10 million.
Figure 1.9 Expenditure made in the
past is irrelevant to the owner’s current
decision.
Exercise 1.4.4
John bought a new mobile phone from a shop at the official selling price of $4,000. He can
use the mobile phone himself, resell the phone or return the phone to the shop and get a full
refund. What is John’s opportunity cost of using the phone himself in the following situations?
a.
The resale price of the mobile phone is $5,000.
b.The resale price of the mobile phone is $3,000 and the shop refuses to accept John’s
returned phone as the packaging is damaged.
13
Enrich
Yourself 1.1
Does cost still exist if no monetary payment is involved?
Cost exists whenever there is more than one option, even when no
monetary payment is involved. Look at the following example.
Suppose Mr. Lam owns a residential flat. He is considering how to use
the flat.
Mr. Lam can rent his flat out and earn a monthly rental
Choice 1
income of $10,000.
Mr. Lam can live in his own flat.
Choice 2
IS
T
O
Suppose Mr. Lam chooses to live in his own flat. One may think that
there is no cost involved for Mr. Lam to live in his own flat as he does
not need to pay any rent. In fact, his opportunity cost of living there is
$10,000 per month because he has to give up the rental income from
renting out his flat.
From this example, we can see that cost exists even when no monetary
payment is involved in the decision.
A
R
Enrich
Yourself 1.2
Does the ‘cost of using’ equal the ‘cost of owning’?
Look at the case of Mr. Lam in Enrich Yourself 1.1. When Mr. Lam lives
in his own flat, he needs to forgo the income from renting out the flat.
The rental income forgone of $10,000 per month is the cost of using the
flat.
Suppose now someone is willing to pay $5 million for Mr. Lam’s flat. If
Mr. Lam plans to keep his flat, he forgoes the option of selling the flat
for $5 million. The selling price of $5 million is the cost of owning the
flat.
In conclusion, we can see that the cost of using something is not the
same as the cost of owning it.
14
Around
1.1
Us
Big debate on land supply
Views on land supply options
The problem of land shortage has plagued Hong Kong for years. In 2018, the Task
Force on Land Supply invited the public to share their views on different land supply
options. The Task Force offered 18 land supply options for discussion, ranging from
short-to-medium term options, such as developing brownfield sites, to medium-tolong term options, such as reclamation outside Victoria Harbour. There were also
conceptual options like building housing units on top of the Kwai Tsing Container
Terminals and developing on the periphery of country parks.
The use of the Fanling Golf Course
IS
T
O
Among these options, turning recreational sites into residential sites was probably
the most controversial one. The Fanling Golf Course was the most frequently
mentioned recreational site. It comprises 172 hectares of land and could potentially
provide more than 13,000 housing units.
A
R
Supporters of the proposal claimed that the majority of the Hong Kong people had
never played golf at the Fanling Golf Course, and that developing the site for public
housing could benefit more people. Meanwhile, opponents to the proposal claimed
that the Fanling Golf Course could be used to host international golf tournaments,
which would help maintain Hong Kong’s image as an international metropolis.
Because of land scarcity, society has to make a choice on the use of the Fanling Golf
Course. Keeping the Fanling Golf Course means the value of building housing units
on it has to be forgone, while developing the site for residential use means the value
of using the site as a venue for international golf tournaments has to be forgone. It is
not easy to judge which option has a higher value.
15
Revision Corner
1.2
Guided practice
1.Macy can choose to go to school on foot or by bus. Which of the following situations will increase her
opportunity cost of going to school on foot?
A.
B.
C.
D.
The traffic jam makes the bus trip 10 minutes longer.
The bus company raises the bus fare by 10%.
The weather is very good, making it a pleasant walk to school.
There is a road closure and it takes Macy 10 more minutes to walk to school from home.
Approaching the question
(*Choose the correct option.)
Think about what the opportunity cost of going to school on foot is:
cost and the time cost (required travel time on foot).
the

Analyse how each given option will affect the cost of going to school on foot or by bus:
Option A:The traffic jam will *(increase/decrease/not affect) the time cost of going to school
O
by bus.
to school by bus.
IS
T
Option B:The increase in bus fare will *(increase/decrease/not affect) the monetary cost of going
Option C:The good weather will affect the value of going to school
, not the cost.
Option D:The road closure will *(increase/decrease/not affect) the time cost of going to school
on foot.
A
R
2.Casey bought a bouquet of flowers from an online shop. Under which of the following circumstances would
her cost of buying the bouquet of flowers decrease?
A. Casey received a vase from her friend as a gift after she had bought the bouquet of flowers.
B. The bouquet of flowers was not as beautiful as Casey expected.
C. The online shop offered free delivery to Casey as she was the 500th customer of the shop.
D. While waiting for delivery, Casey discovered that another online shop sold the
same bouquet of flowers at a lower price.
(*Choose the correct option.)
Approaching the question
Analyse which of the circumstances stated above would lower the cost of buying the bouquet of
flowers:
Option A:Receiving a vase would *(increase/decrease/not affect) the cost of buying the bouquet of
flowers.
Option B:The beauty of the flowers affected the
of buying the bouquet of
flowers.
Option C:Free delivery
the monetary cost of buying the bouquet of flowers.
Option D:As Casey was already waiting for delivery, the price of the bouquet at another online
shop would *(increase/decrease/not affect) the cost of buying the bouquet of flowers.
16
3.Some private residential estates provide clubhouse facilities for residents. Residents need to make a
booking at the management office in order to use the facilities. It is observed that there are queues of
residents waiting to make a reservation at the management office every morning. Suppose the waiting time
is the same for every resident. Is the cost of making a reservation necessarily the same for every resident?
Explain.
(3 marks)
Approaching the question
(*Choose the correct option.)
*(Yes/No).

(1 mark)
Think about whether the residents’ alternative uses of the time spent waiting to make a
reservation are necessarily the same.
(Hint: Explain your answer after answering yes/no. Your explanation should be logical and your
Learning Focus
IS
T
O
points should be consistent with each other.)
Concept of
opportunity cost
Application of
opportunity cost
A
R
Topic/Key point
(2 marks)
HKDSE
Paper 1
Paper 2
Identify and calculate the cost (explicit cost and implicit
cost) involved in choosing an option
2019 Q3
Practice Paper Q2
2018 Q1 (3)
2015 Q1b (3)
2013 Q9c (3)
Sample Paper
Q4b (5)
Explain whether and how cost changes under different
circumstances
2018 Q3
2016 Q3
2015 Q2
2014 Q1
2013 Q2
2012 Q2
Sample Paper Q2
2019 Q1 (5)
2017 Q1 (5)
2016 Q1 (3)
2014 Q1 (5)
Relationship between choice and cost
Definition of cost
Explain why past expenditure which is irrecoverable is
not a cost
17
Chapter
1
1.5 Relationship between Interest and
Opportunity Cost
Brainstorm 1.5
uppose your friend would like to borrow your economics textbook and he would return the
S
textbook to you a week later with a pen. Do you think the pen is an ‘interest‘ to you?
A Reasons for the existence of interest
Definition
IS
T
O
Interest is the cost of earlier availability of resources. It is the
price or cost paid by the borrower for obtaining goods or
resources earlier as well as the premium or compensation
received by the lender for deferring consumption of goods or
resources.
Most people have a positive time preference. They prefer to consume earlier.
The interest here refers to the
‘real interest’. It exists even
without the use of money.
Besides the real interest rate,
there is also the nominal interest
rate. For more details about
real and nominal interest rates,
please refer to Chapter 21.
A
R
People with a higher degree of positive time preference are
keener to consume at present, and are willing to pay more to
obtain goods now. They tend to be borrowers.
People with a lower degree of positive time preference are willing
to save and defer consumption in return for a certain amount of
compensation. They tend to be lenders.
In order to get goods or resources earlier, borrowers pay interests to
lenders to compensate them for deferring their current consumption
(present consumption) of goods or resources.
To lenders, interest refers to the premium or compensation they
receive for deferring their current consumption of resources.
To borrowers, interest is the price or cost of earlier availability of
resources.
In other words, interest is the premium of choosing current consumption
over future consumption of the same goods or resources.
Interest exists in both barter economies and monetary economies. It
can be in the form of goods or money. As long as there is scarcity and a
market for exchanging present and future resources, interest exists.
18
In the past
Which of the following statements
about interest are correct?
(1)Interest is the compensation
for deferring consumption.
(2)Interest exists because people
are impatient to wait.
(3)Interest exists in a barter
economy.
A.(1) and (2) only
B.(1) and (3) only
C.(2) and (3) only
D.(1), (2) and (3)
[HKDSE/2016/Paper 1/4]
interest 利息 premium 溢價 consumption 消費 time preference 時間偏好 current consumption 當時消費
barter economy 以物易物經濟
Basic Economic Concepts
BRelationship between interest rate, present
consumption and saving
An increase in the interest rate will lead to an increase in the cost of
current consumption. This will discourage current consumption. Thus,
when the interest rate increases, current consumption will decrease and
saving will increase. Conversely, when the interest rate decreases, current
consumption will increase and saving will decrease.
Interest rate ( )
-›Cost of current
consumption ( )
-› Current consumption ( )
-› Saving ( )
Example
O
I’m lending you the game console.
When you return it to me in 3
months, buy me a new game as
compensation.
IS
T
Suppose Josie has $10,000 and she can choose
to spend it immediately or deposit it into a bank.
If the interest rate is 8%, she can get $10,800
[= $10,000 × (1 + 8%)] one year later. If she
chooses to spend it immediately, she cannot get
the $800 interest. In other words, interest is the
opportunity cost of current consumption.
All right.
I can’t wait
to play it.
In reality, there is more than one interest rate in
the market, e.g. the deposit rate and the loan rate.
Changes in these interest rates affect the behaviour
of individuals and firms in the economy.
Figure 1.10 The new game is regarded as the interest paid for
borrowing the game console.
A
R
Exercise 1.5
Determine if the following statements about interest are true or false. Put a tick ( ) in the
appropriate boxes.
Statement
True
a.
When the interest rate increases, people will consume less at present.
b.
Interest only exists in the form of money.
c.
Saving will decrease when there is a drop in the interest rate.
Revision Corner
False
1.3
Learning Focus
Topic/Key point
Interest as the
cost of earlier
availability of
resources
HKDSE
Paper 1
Meaning of interest
2012 Q3
Explain why interest can be regarded as an opportunity
cost
2017 Q2
2016 Q4
3Relationship between interest rate, current consumption
and saving
Practice Paper Q3
Paper 2
Practice Paper Q1 (4)
19
Chapter
1
1.6 Free Goods and Economic Goods
Brainstorm 1.6
1Are you willing to pay for more food? Are you willing to pay for more air? Why?
2 Give two examples of things that you can obtain free of charge in daily life.
Economics is concerned with the allocation of scarce resources to satisfy
human wants. Human wants can be satisfied by the consumption of
goods.
In economics, goods are broadly defined as anything, including tangible
goods and intangible services, which can satisfy human wants. They
are things of which people prefer to have some rather than none.
O
Bads are the opposite of goods.
They are anything which people
prefer not to have.
IS
T
According to their availability relative to human wants, goods can be
classified into two categories: free goods and economic goods.
1.6.1 Free Goods
Definition
Bad smell from landfills, noise
from construction sites, polluted
water and traffic congestion are
examples of bads.
A
R
Free goods refer to those goods that people do not prefer more
of as the quantity available is sufficient to satisfy all human
wants.
The quantity of free goods available is sufficient to satisfy all human
wants and people do not want more of these goods.
All human wants for free goods are satisfied, so scarcity does not exist.
As there is no competition for these goods, no one is willing to pay for
them. In addition, they are not produced from scarce resources which
have alternative uses.
Example
Air in a forest is an example of a free good. People can normally
breathe in whatever amount of air they want and have no desire to
get more of it.
20
Figure 1.11 Sea water is commonly
regarded as a free good.
allocation 分配/配置/調配 good 物品；貨品 bad 負消費品；負值品 free good 免費物品
Basic Economic Concepts
The quantity of free goods
available is sufficient to satisfy
all human wants. Does it mean
that people do not want these
goods?
No! People do not want MORE
of these goods, but they want
some rather than none. Air is
a good example.
1.6.2 Economic Goods
Definition
O
Figure 1.12 More free goods are not preferred, but some is preferred to none.
IS
T
Economic goods refer to those goods that people prefer more
of as the quantity available is not sufficient to satisfy all human
wants.
Example
A
R
The quantity of economic goods available is insufficient to satisfy all
people’s wants and people prefer more of the goods, so scarcity exists.
People are willing to pay and compete for these goods. In addition, their
provision involves the use of scarce resources which have alternative uses.
Snacks are economic goods because their quantity available is
insufficient to satisfy all people’s wants. We are willing to pay for
more snacks. These snacks are produced from scarce resources such
as sugar and flour.
Other examples of economic
goods:
• tap water
• fireworks
• recycled paper
• free education
•songs and pictures
downloaded from the Internet
•free shuttle bus services
provided by shopping malls
Some goods can be regarded as free goods in some contexts and
economic goods in other contexts. It depends on the availability of the
goods relative to human wants in different contexts.
Example
Under most circumstances, air is abundant enough to satisfy all
people’s wants to breathe. Thus, air is a free good in this case.
However, as air is relatively thin at the top of a high mountain,
the quantity of air is insufficient to satisfy all people’s wants and
people may be willing to pay for an oxygen tank. Therefore, air at
the top of a high mountain is an economic good.
economic good 經濟物品
Figure 1.13 Air under the sea is an
economic good because its quantity is
insufficient to satisfy our wants to breathe.
21
Chapter
1
Whether a good is considered a free good or an economic good also
depends on how the good is defined.
Example
Air in a natural environment is a free good while clean air is
an economic good in Hong Kong and many cities in the world
because we prefer more of it and its availability is not sufficient to
satisfy all our wants. Sometimes, we are willing to pay a price for
clean air.
IS
T
O
Note that goods that are free of charge are not necessarily free goods.
Economic goods can be provided to consumers free-of-charge.
Examples of economic goods
that are provided free-of-charge:
•free newspaper articles
available on the Internet
•free wireless Internet service
at MTR stations
•free education provided by
the government
•free TV programmes
Example
A
R
Figure 1.14 Free newspapers are economic goods rather than free goods.
The free emergency ambulance service provided by the Fire
Services Department is not a free good, as people prefer to have
more of it and scarce resources which have alternative uses are used
to provide such service. The service is free to recipients because the
government pays for them.
Exercise 1.6
Match each of the following features to the correct type of goods. Put a tick ( ) in each correct box.
Features
a.Their quantities available are sufficient to satisfy all
people’s wants.
22
b.
People prefer more of them.
c.
Scarcity exists.
d.
People are willing to pay for them.
Free
goods
Economic
goods
Revision Corner
1.4
Guided practice
1.Which of the following statements about economic goods is CORRECT?
A.
B.
C.
D.
Economic goods must have a price.
Economic goods must be limited in supply.
Economic goods are preferrable to free goods.
The quantity of an economic good is enough to satisfy all people’s want.
Approaching the question
(*Choose the correct option.)
Think about what economic goods are:
Economic goods refer to those goods that people prefer *(more/less) of as the quantity available
*(is/is not) sufficient to satisfy all human wants.

Analyse whether the given options are correct:
O
Option A:An economic good *(can be/cannot be) free-of-charge.
Option B:The quantity of economic goods available *(is/is not) sufficient to satisfy all people’s wants,
i.e. the supply *(is/is not) limited.
IS
T
Option C:Whether a good is a free good or an economic good *(is/is not) related to people’s
preferences.
Option D:The quantity of economic goods available *(is/is not) sufficient to satisfy all people’s wants.
(*Choose the correct option.)
A
R
2.Chris said, ‘I get my email account for free, and I can send and receive emails for free. The email service is
therefore a free good.’ Do you agree with Chris? Explain.
(2 marks)
Approaching the question
Think about whether scarce resources are involved in producing the email service.
*(Yes/No), because
(2 marks)
Learning Focus
Topic/Key point
Free goods
and economic
goods
HKDSE
Paper 1
Paper 2
Definition of free goods and economic goods
2016 Q1
2014 Q3
2012 Q1 (3)
Distinguishing between free goods and
economic goods
2016 Q2
2015 Q1ai (2)
2013 Q9b (2)
Sample Paper Q1 (3)
Meaning of goods
23
Chapter
1
1.7 Circular Flow of Economic Activities
Brainstorm 1.7
can the QR code and watch a video to learn more about the circular flow of
S
economic activities in an economy.
Flipped
Classroom
Firm
Household´s
consumption
expenditure
IS
T
Firm´s
revenue
O
The circular flow model is a simple economic model showing how an
economy is organised, i.e. how money, goods and services as well as factors of
production flow between the basic economic units (firm and household). The
circular flow of economic activities is shown in Figure 1.15.
Household
Factor
income
Skills Check
diagram
reading
A
R
Cost of
production
Figure 1.15 The circular flow of economic activities
A The basic economic units
There are two basic economic units in an economy.
A firm is the basic unit of production.
A household is the basic unit of consumption.
B
Product market and factor market
When people get what they want by giving something in return in a
market, exchange takes place. There are two markets for exchanging goods
and services as well as factors of production.
a
In economics, production
refers to the process of turning
inputs, or factors of production,
into goods and services.
Consumption refers to the
process of using goods and
services to satisfy human wants
directly.
Product market
he product market is a market for exchanging final goods and
T
services between the household and the firm.
b
Factor market
he factor market is a market for exchanging factors of production
T
between the household and the firm.
24
circular flow model 循環流程模型 firm 廠商 production 生產 household 住戶 exchange 交換
factor of production 生產要素 product market 產品市場 factor market 生產要素市場
Basic Economic Concepts
C
Real flow and money flow
The relationship between the firm and the household can be represented
by the real flow and the money flow.
a
The real flow (Circular flow of goods and services)
The household buys final goods and services from the firm in the
product market and supplies factors of production to the firm in
the factor market. In other words, final goods and services flow
from the firm to the household, while factors of production flow
from the household to the firm.
b
The money flow (Circular flow of money)
The firm pays the household for the factors of production the
household supplies, whereas the household spends its income on
buying final goods and services produced by the firm.
Exercise 1.7
IS
T
O
The spending of the household on final goods and services, namely
the household’s consumption expenditure, becomes the revenue
of the firm. The money that the firm pays for the factors of
production is the cost of production to the firm, which becomes
the factor income of the household.
A
R
Refer to the following circular flow diagram of an economy and fill in the blanks.
Flow A
Household
Cost of production /
Factor income
Flow B
Firm
the
flow
the
flow
Final goods and services
Flow A represents
Flow B represents
real flow 實質流程 money flow 貨幣流程
; while
.
25
Chapter
1
1.8 Positive Statements and
Normative Statements
Brainstorm 1.8
Do you agree with the following statements? Why or why not?
 The size of Hong Kong‘s population has kept increasing in recent years.
2 Living in the New Territories is better than living on Hong Kong Island.
When we study economics, we will come across two kinds of statements.
Definition
O
Positive statements are statements that describe what is, with no
value judgement. They are refutable by facts.
IS
T
Definition
Example
A
R
Normative statements are statements that describe what ought
to be. They involve value judgement on what is desirable or the
best. They are not refutable by facts.
Consider the following two statements:
1
2
Imposing a general sales tax
increases government revenue.
A general sales tax should be imposed
to increase government revenue.
Statement 1 is a positive statement. It is either true or false and
it can be tested against objective facts. People can settle their
disagreements on positive statements by referring to the facts.
Statement 2 is a normative statement. It involves one’s own value
judgement. Suppose statement 1 is found to be true. It does not
follow that we should introduce a general sales tax. Statement 2 is
based on one’s own view about the desirability of a certain policy
or option. People cannot settle their disagreements on normative
statements by referring to the objective facts.
26
positive statement 實證性陳述 normative statement 規範性陳述
Basic Economic Concepts
When people want to make normative policy suggestions, it is necessary
for them to develop a good understanding of the issues in question by
conducting a positive economic analysis first. Based on the findings
obtained and taking into consideration their own personal values and
beliefs, people can then put forward well-grounded opinions and
arguments over certain economic issues or policies.
When distinguishing positive statements from normative statements, try
to look for words or phrases like the following:
Normative statements/questions
what will happen
how it affects
what is/are the effect(s)
what is/are the result(s)
should
ought to
the best
good
IS
T
A
R
Two International Finance
Centre is the tallest
building in
Hong Kong.
Normative statements:
•It would be better for the
government to lower the
price level.
•The government is right to
introduce a minimum wage
law.
O
Positive statements/questions
More examples:
Positive statements:
•The price level of this year is
higher than that of last year.
•The introduction of a
minimum wage law narrows
the income gap between the
rich and the poor.
No! International
Commerce Centre is taller
than Two International
Finance Centre.
Figure 1.16 Although Jane’s statement is wrong, both Jane’s and Anthony’s
statements are positive statements. They can be tested against objective facts with no
value judgement.
Exercise 1.8
Determine if the following statements are positive or normative. Put a tick () in the appropriate
boxes.
Statement
a.
Positive
Normative
Raising penalty fines for speeding reduces traffic accidents.
b.Penalty fines for speeding ought to be raised to reduce traffic
accidents.
c.A lower income tax rate should be introduced to stimulate
people’s consumption.
d.Lowering the income tax rate increases people’s consumption
expenditure.
27
Revision Corner
1.5
Guided practice
Which of the following are positive statements?
(1) The legislation of standard working hours is a good way to improve people’s standard of living.
(2) The legislation of standard working hours would raise the unemployment rate.
(3)The government should speed up the legislation of standard working hours as this can protect most
employees.
(4) The average wage rate will increase after the legislation of standard working hours.
A.
B.
C.
D.
(1) and (3) only
(2) and (4) only
(1), (2) and (4) only
(2), (3) and (4) only
Approaching the question
.
IS
T
Positive statements are statements that
O
Think about what positive statements are:
Eliminate the choices that involve value judgement, particularly those which include words like
‘should’ or ‘the best’ which are often used in normative statements.
Options
are normative statements. Each of them describes what ought to
be, with value judgement.
are positive statements. Each of them describes what is, with no
A
R
Options
value judgement.
Learning Focus
Topic/Key point
Distinction between positive statements and normative statements
28
HKDSE
Paper 1
Paper 2
2018 Q4
2015 Q1
2012 Q1
Sample Paper Q3
2019 Q2a (2)
Basic Economic Concepts
CONCEPT MAP
Economics
Microeconomics
and
Macroeconomics
Positive statements
and
Normative statements
Unlimited wants and
limited resources
Scarcity
IS
T
O
Choice
Opportunity
cost
Interest
A
R
Goods
Economic goods
Economic activities
Free goods
Circular
flow model
29
Chapter
1
CHECKLIST
I am now able to …
 understand what economics is;
 understand the concepts of wants, scarcity and choice as well as opportunity cost,
and apply the concepts to explain economic phenomena;
 understand the relationship between scarcity, competition and discrimination;
 understand what interest is;
 distinguish between free goods and economic goods;
 describe the circular flow of economic activities;
 distinguish between positive statements and normative statements.
O
(Put a tick (ü) against the information that applies.)
IS
T
GLOSSARY
A
R
allocation 分配/配置/調配
bad 負消費品；負值品
barter economy 以物易物經濟
choice 選擇
circular flow model 循環流程模型
competition 競爭
constrained maximisation 在局限下爭取
最高利益；在局限條件下利益極大化
consumption 消費
current consumption 當時消費
desires 慾望；願望
discrimination 歧視
economic good 經濟物品
economics 經濟學
economy 經濟體系
exchange 交換
explicit cost 顯性成本
factor market 生產要素市場
factor of production 生產要素
firm 廠商
free good 免費物品
full cost 全成本
30
good 物品；貨品
household 住戶
implicit cost 隱含成本
interest 利息
macroeconomics 宏觀經濟學
microeconomics 微觀經濟學
money flow 貨幣流程
non-price competition 非價格競爭
normative statement 規範性陳述
opportunity cost 機會成本
positive statement 實證性陳述
premium 溢價
price competition 價格競爭
product market 產品市場
production 生產
real flow 實質流程
resource 資源
scarcity 稀少性；缺乏
social science 社會科學
time preference 時間偏好
wants 慾望
A
e-Word Bank
Basic Economic Concepts
CHAPTER SUMMARY
Familiarising yourself with items in green is important for effective revision.
Paying attention to items in the
boxes is helpful for understanding the
concept(s).
Make your
own notes
1.1 Nature of Economics
Economics is a social science that studies, analyses and predicts human
behaviour.
Scarcity is the source of all economic problems.
Generally, economics can be classified into two branches:
Microeconomics
1.2 Wants, Scarcity and Choice
Wants are human desires.
Human wants are unlimited.
Scarcity
IS
T
Wants
O
Macroeconomics
A
R
Scarcity refers to the situation in which the resources available are not
enough to satisfy all people’s wants.
Scarcity is a relative concept. We need to compare the availability of
resources against people’s wants in order to determine whether there is
scarcity.
Choice
Wants and demand are different. (The
concept of ‘demand’ will be further
discussed in Chapter 8.)
•The problem of scarcity cannot be
solved by adjusting prices.
•Scarcity and shortage are different.
(The concept of ‘shortage’ will be
further discussed in Chapter 8.)
When scarcity exists, people need to make choices.
If a person is rational, he or she will choose an option with the highest
value.
1.3Relationship between Scarcity,
Competition and Discrimination
Scarcity exists when the resources or goods available are not enough to
satisfy all people’s wants.
People need to compete against each other for the resources or goods.
Discrimination is always implied regardless of the form of
competition.
31
Chapter
1
There are two forms of competition:
Price competition
Non-price competition
People compete for resources or
goods on the basis of price.
People compete for resources
or goods on the basis of factors
other than price, such as age, sex
and qualification.
1.4 Opportunity Cost
Concept of opportunity cost
The opportunity cost of a choice is the value of the highest-valued
option forgone.
Changes of opportunity cost
Situation
Effect on the opportunity cost
Concept of full cost
uncertain, depending on whether
the value of the highest-valued
option forgone changes
A
R
a change in the value of other
options forgone
will not change
IS
T
a change in the value of the
chosen option
will change
O
a change in the value of the
highest-valued option forgone
Full cost = Monetary cost (explicit cost) + Non-monetary cost (implicit cost)
Monetary cost refers to the actual payment involved in obtaining the
chosen option.
Non-monetary cost refers to the cost involved in obtaining the chosen
option with no actual payment made. Time cost is a common example
of non-monetary cost.
Past expenditure is not a cost
The cost that has been paid in the past and cannot be recovered:
is not the opportunity cost of the choice; and
does not affect current decision making.
32
People who choose the same option
do not necessarily incur the same
opportunity cost.
Basic Economic Concepts
1.5Relationship between Interest and
Opportunity Cost
Interest is the cost of earlier availability of resources. It is the price
or cost paid by the borrower for obtaining goods or resources earlier
as well as the premium or compensation received by the lender for
deferring consumption of goods or resources.
Interest exists in both barter economies and monetary economies. It can
be in the form of goods or money.
When the interest rate increases (decreases), current consumption will
decrease (increase) and saving will increase (decrease).
Interest exists even when there is no
inflation.
1.6 Free Goods and Economic Goods
Goods are:
broadly defined as anything, including tangible goods and intangible
services, which can satisfy human wants.
things of which people prefer to have some rather than none.
O

IS
T
Free goods
Free goods refer to those goods that people do not prefer more of as
the quantity available is sufficient to satisfy all human wants.
As all human wants for free goods are satisfied, scarcity does not exist.
The supply of free goods may not
be unlimited, but their quantity is
enough to satisfy all people’s wants.
As there is no competition for free goods, no one is willing to pay for
them.
Economic goods
A
R
Free goods are not produced from scarce resources which have
alternative uses.
Economic goods refer to those goods that people prefer more of as the
quantity available is not sufficient to satisfy all human wants.
As the quantity of economic goods available is not sufficient to satisfy
all people’s wants, scarcity exists.
People are willing to pay and compete for economic goods.
Economic goods may be produced from scarce resources which have
alternative uses.
Some goods can be regarded as free goods in some contexts and
economic goods in other contexts, depending on:

the availability of the goods relative to human wants.

how the good is defined.
Goods that are free of charge are not necessarily free goods. Economic
goods can be provided to consumers free-of-charge.
33
Chapter
1
1.7 Circular Flow of Economic Activities
The circular flow model is a simple economic model showing how an
economy is organised, i.e. how money, goods and services as well as
factors of production flow between the basic economic units (firm and
household).
Firm´s
revenue
Household´s
consumption
expenditure
Firm
Household
Factor
income
IS
T
O
Cost of
production
1.8Positive Statements and Normative
Statements
Positive statements are statements that describe what is, with no value
judgement. They are refutable by facts.
A
R
Normative statements are statements that describe what ought to be.
They involve value judgement on what is desirable or the best. They are
not refutable by facts.
34
A positive statement is either true or
false and it can be tested against the
objective facts in the world.
REVISION EXERCISE
Multiple Choice Questions
1.Which of the following about economics is
INCORRECT?
A. Economics is a social science.
B.Economists make both positive statements
and normative statements.
C.Economics studies how people make choices
under the condition of scarcity.
D.Economics only explains and predicts how
firms make production decisions.
2. When there is scarcity, this implies that
A.
B.
C.
D.
(1), (2) and (3)
(1), (2) and (4)
(1), (3) and (4)
(2), (3) and (4)
W h i c h o f t h e f o l l o w i n g c a n e x p l a i n t h i s
phenomenon?
A.The value of time spent queuing up was
lower for elderly people and housewives than
for working adults.
B.Elderly people and housewives incurred no
opportunity cost for getting the free tickets.
C.Elderly people and housewives valued the
tickets more highly than other people.
D.Elderly people and housewives did not have
to pay for the tickets.
5.Susan has $100,000. She can keep the money at
home, deposit it in a bank and earn an interest of
4% per year, or lend it to her friend and receive
$2,000 as interest a year later.
IS
T
(1) there is discrimination.
(2) all goods must have a market price.
(3)people have to compete for some goods and
services.
(4)not all people’s wants can be satisfied with
available resources.
4.
The Chinese People’s Liberation Army (PLA)
Hong Kong Garrison opened its barracks to the
public from 30 June to 2 July 2018 and 30,000
free entrance tickets were given out. It was
found that most of the people queuing up for
the tickets were elderly people or housewives.
O
Choose the best answer.
A
R
3.Which of the following statements about scarcity
is CORRECT?
A.If human wants are limited, there will be no
scarcity.
B.Scarcity does not exist after people have made
their choices.
C.If there is only one person in an economy,
scarcity does not exist.
D.The existence of scarcity implies that there is a
cost in obtaining some goods.
If only monetary return and monetary cost are
considered, Susan’s opportunity cost of keeping
the $100,000 at home for a year is
while her opportunity cost of depositing the
money in a bank for a year is
.
A.
B.
C.
D.
$2,000 … $2,000
$2,000 … $4,000
$4,000 … $2,000
$4,000 … $4,000
6.A theme park is undergoing an expansion project
and the completion of the new zone has just
announced to be delayed for one month. Which
of the following will lower the opportunity cost of
visiting the theme park now?
(1)Discount coupons are given by the park to
compensate for the inconvenience due to the
delay.
(2)There is loud noise caused by the construction
work inside the theme park.
(3)The overcrowding problem is eased as there
are fewer visitors because of the construction
work.
A.
B.
C.
D.
(1) only
(3) only
(1) and (2) only
(2) and (3) only
35
REVISION EXERCISE
7. R
aymond is going to Australia on a working
holiday for a year. Which of the following will
most likely lead to an increase in the opportunity
cost for him to go on a working holiday for a year?
10.Jackson spent $6,000,000 on a flat in Tsuen Wan.
He can either live in the flat himself or lease it
out. Which of the following would reduce his
opportunity cost of living in the flat himself?
A.Salaries in Australia are very high.
B.Raymond feels that working in an orchard in
Australia is hard.
C.During the year, the pay for most jobs in
Hong Kong rises.
D.During the year, the unemployment rate of
Hong Kong is high.
A. The management fee of the flat increased.
B.The view from the flat was blocked by a new
building.
C.The average market rental value of flats in
Tsuen Wan decreased.
D.The interest rate of the mortgage loan that
Jackson borrowed decreased.
8.Kathy is choosing between two ways of spending
her weekend. She can either work as a salesperson
in a boutique and earn $1,000, or take a short
trip to Macau. Which of the following will raise
Kathy’s opportunity cost of taking a short trip to
Macau?
11.Mr. Tang joined a tour to a city before an outburst
of political unrest there. The opportunity cost for
Mr. Tang of going on the tour would
because
.
O
IS
T
A.Kathy cannot try the SkyJump in Macau
because of bad weather.
B.Free meals provided by the boutique to the
staff are cancelled.
C.The owner of the boutique raises Kathy’s pay
to $1,500.
D.The price of accommodation in Macau
decreases.
A.increase … he would most likely visit fewer
tourist attractions
B.increase … he would have a higher exposure
to personal danger
C.remain unchanged … he had already paid the
fee for the tour
D.remain unchanged … he would stay in the
destination for the same number of days
A
R
9.Whitney is going on a trip to Thailand. Which
of the following will increase Whitney’s cost of
taking a trip to Thailand?
A.The weather in Thailand is not as good as
Whitney expected.
B.Whitney is sick during her trip and she cannot
go swimming in Thailand.
C.Whitney finds that the tour she joined is more
expensive than the tours provided by other
travel agencies.
D.The flight from Thailand to Hong Kong is
delayed, making Whitney unable to attend
her friend’s birthday party.
12.Which of the following statements about interest
is TRUE?
A.Interest still exists without scarcity.
B.Interest only exists when there is inflation.
C.Interest does not exist when there is no
money.
D.I n t e r e s t i s t h e p r e m i u m f o r d e f e r r i n g
consumption of resources.
13.A fall in interest rate will lead to
(1)
(2)
(3)
(4)
an increase in the cost of earlier consumption.
an increase in present consumption.
a decrease in investment incentive.
a decrease in savings.
A.(1) and (3) only
B.(1) and (4) only
C.(2) and (3) only
D.(2) and (4) only
36
14. A good must be a free good if
18.In an economy, there are only households and
firms. Which of the following about the circular
flow of economic activities in the economy are
CORRECT?
(1)the production of the good involves no cost.
(2)obtaining the good involves no cost.
(3)the good has no market price.
(4)no one owns it.
(1)Each real flow must have a corresponding
money flow.
(2)A person cannot be a firm and a household at
the same time.
(3)A household supplies factors of production to
the firm in exchange for factor income.
15.W hich of the following descriptions about an
economic good is INCORRECT?
A.It can be a natural resource.
B.People must pay a money price for it.
C.Its quantity available is not enough to satisfy
all people’s wants at zero price.
D.Cost is involved in getting more of it.
19.W hich of the following about the difference
between positive statements and normative
statements is/are CORRECT?
(1)Positive statements may contain a value
judgement while normative statements do not
contain any value judgement.
(2)We can settle disagreements on positive
statements by referring to facts while we
cannot settle disagreements on normative
statements in the same way.
(3)Positive statements are always true while
normative statements can be true or false.
IS
T
16.It is common for influential bloggers to offer gift
cards as free giveaways to attract new followers.
These gift cards are
A.(1) and (2) only
B.(1) and (3) only
C.(2) and (3) only
D.(1), (2) and (3)
O
A.(2) only
B.(3) only
C.(1) and (3) only
D.(2) and (4) only
A
R
A.free goods because they cost nothing to
acquire.
B.economic goods because they satisfy human
wants.
C.free goods because people can get as many as
they want.
D.economic goods because more of them are
preferred.
17.Refer to the following circular flow diagram of an
economy.
Real flow
Money flow
Household
Firm
Flow X
In the above diagram, Flow X represents
.
A.the household’s consumption expenditure on
final goods and services
B.the income earned by households from their
factor services
C.the firm’s revenue from selling final goods
and services
D.the total market value of all final goods and
services
A.(2) only
B.(3) only
C.(1) and (2) only
D.(2) and (3) only
20.W hich of the following is/are examples of
positive statements?
(1)The government should not substantially
increase the tobacco tax as this will make the
problem of tobacco smuggling more serious.
(2)The substantial increase in the tobacco tax by
the government helps encourage smokers to
quit smoking.
(3)The substantial increase in the tobacco tax
by the government may cause the revenue of
retailers to fall.
A.
B.
C.
D.
(1) only
(2) only
(1) and (3) only
(2) and (3) only
37
REVISION EXERCISE
Short Questions
1.‘Because a new source of energy is discovered, more goods can be produced and the
problem of scarcity can be solved.’ Do you agree with this statement? Explain. (3 marks)
2.Jason and Tim are going to a concert of a band. The concert lasts for 3 hours and each ticket
costs $380. Jason and Tim did not have to queue up to buy the tickets.
(a)Is the cost of buying the concert tickets necessarily the same for Jason and Tim? Explain.
(2 marks)
(b)Is the cost of watching the concert necessarily the same for Jason and Tim? Explain.
(3 marks)
3.Alfred is an artiste. His contract with TV station A will expire soon. He has several career
options for the coming year and his order of preference is shown below:
to film a TV drama series produced by a
TV station in Country C
Second preference:
to work with TV station B
Third preference:
to renew his contract with TV station A
IS
T
O
First preference:
Analyse whether Alfred’s opportunity cost of choosing to film a TV drama series in
Country C will necessarily change if
(2 marks)
(b) TV station A intends to renew his contract and offers him a pay rise.
(3 marks)
A
R
(a) the TV station in Country C fails to pay Alfred his salary.
4. Read the following news excerpt.
A sportswear brand released its limited edition sports shoes at its
stores around the world at the same time. Customers worldwide
queued up overnight to buy a pair. At the peak period, hundreds of
people were queuing outside its flagship store in Tsim Sha Tsui.
If the resale value of the limited edition sports shoes increases, will the opportunity cost of
queuing to buy the sports shoes increase? Explain your answer.
(3 marks)
5. (a)‘In a barter economy where money is not used, interest does not exist.’ Do you agree
with this statement? Explain.
(3 marks)
(b)Joanne lent her headphones to Benny two days ago. Benny promised to return the
headphones with a magazine to Joanne a week later. Can the magazine be regarded as
interest to both Joanne and Benny? Explain.
(5 marks)
6.‘When interest exists, there is scarcity.’ Do you agree with this statement? Explain.
(3 marks)
38
7.‘When the market price of a good is zero, it is a free good.’ Do you agree with this
statement? Explain.
(3 marks)
8.ViuTV is a television channel providing free television programmes such as news and
drama. Explain whether the television programmes provided by ViuTV are free goods.
(2 marks)
Long Questions
1.Mr. Lee owns a property in Mong Kok and the market rent for the property is $200,000
per month. He uses the property himself to run a bookshop and he employs many shop
assistants and cashiers.
(a)Explain whether the opportunity cost of using the property as a bookshop will
change if
(i) Mr. Lee extends the opening hours of his bookshop to 24 hours a day.
(2 marks)
(ii) the market rent of the property increases.
(2 marks)
(iii) the wages of the staff increase.
IS
T
O
(2 marks)
(b)Customers can read in the bookshop free of charge. Is this service an economic good or
a free good? Explain.
(3 marks)
(c) Explain whether each of the following is a positive statement or a normative statement.
(i) Running the bookshop 24 hours a day raises the production cost.
(2 marks)
(ii)Mr. Lee should not extend the opening hours of the bookshop to 24 hours a day as
the increase in sales revenue may not cover the cost.
(2 marks)
A
R
2.Mr. Lai has an amount of money. He considers spending it on either a residential flat or
some shares. He finally chooses to buy a residential flat.
(a)Suppose Mr. Lai discovers that the property management of the estate is poor. Will
this affect Mr. Lai’s opportunity cost of buying the residential flat? Explain. (3 marks)
(b)Using an example, explain under what condition Mr. Lai’s cost of living in the flat will
change.
(3 marks)
(c)Residents can make a booking at the management office in advance to use the leisure
facilities for free on a ‘first-come-first-served’ basis.
(i)As there are many residents who want to use the facilities, Mr. Lai always has
to leave home earlier in the morning and queue up at the management office for
reservation. Is there any cost involved for Mr. Lai to make a booking to use the
leisure facilities? Explain.
(2 marks)
(ii)Explain whether the free leisure facilities are free goods.
(3 marks)
39
DRQ Level-up
Read the information and answer the questions that follow.
The Hong Kong Marathon (香港馬拉松) is one of the largest outdoor sporting events in
Hong Kong. It attracts many runners from Hong Kong and other places in the world every
year.
Source A: Information about the 2019 Hong Kong Marathon
Data
Reading
Race information:
Entry fee for local
participants
Entry fee for overseas
participants
Quota
10km
HK$360
US$60 (~HK$468)
32,000
Half Marathon
(21.0975km)
HK$400
US$65 (~HK$507)
19,500
Marathon
(42.195km)
HK$450
US$70 (~HK$546)
22,500
3km
Wheelchair
HK$350
US$60 (~HK$468)
10km
Wheelchair
HK$350
IS
T
Note:
O
Race category
US$60 (~HK$468)
50
20
1. (a) F
or the 10 km, Half Marathon and Marathon, if the number of applicants exceeds the quota
of the corresponding race category, the places will be distributed by a public ballot.
A
R
(b) For the Wheelchair Races, registration is on a first-come, first-served basis.
2. Runners meeting specific time standards in recognised races are eligible to apply via Priority
Entry. They do not have to go through the public ballot process.
3. Each of the Top 10 Individual Fundraisers in last year’s Marathon Charity Programme is given
a complimentary quota for this year’s Hong Kong Marathon.
(Source: Hong Kong Marathon’s website)
Source B: Excerpt from a news report about the 2018 Hong Kong Marathon
The Tsing Ma Bridge will once again be excluded from the route. The iconic bridge
and only road link to the airport had been part of the route for over a decade.
However, the race in 2016, coupled with a road accident, caused serious congestion.
Many motorists and passengers complained about the congestion. The bridge was
then excluded from the event from 2017.
(Source: various newspapers)
40
• G
o through all the
information given,
and base your answer
on the information
provided.
•W
hen reading a table,
read the heading of
each column and/or
row to understand
what information is
presented.
Source C: Social media post of a local participant of the 2019 Hong Kong Marathon
Topic
Explorer
Kenneth Wong
13 September
I am looking forward to participating in the Hong Kong Marathon!
Like
Comment
Share
The Hong Kong
Marathon is a popular
event every year.
Scan the QR code for
more information.
Comment
Jacky Liu
I was not selected in the public ballot last year. I bet this year will
be the same. The number of applicants is sure to exceed the quota
limit.
Kenneth Wong
IS
T
Jacky Liu
O
The entry fee for some race categories has increased. Last year the
fee was HK$350 for each race. And the quota for the Marathon also
increased by 4,000 to 22,500. I think I’ll have a better chance to be
selected in the public ballot.
The quota should be increased to 50,000 to meet the demand.
A
R
Questions
(a)With reference to Source A, name TWO forms of competition used for allocating
quotas for entry and who are favoured in each form.
(4 marks)
(b)With reference to Source B, how did the road accident and the Hong Kong
Marathon affect the opportunity cost of taking the bus from the airport to the
city? Explain.
(3 marks)
(c)Suppose both Kenneth and Jacky were local runners. With reference to Sources A
and C,
(i) explain if their costs of signing up for the race were necessarily the same.
(2 marks)
(ii)assuming they had been both selected for the Marathon race, explain if their
costs of running in the race would have necessarily been the same. (3 marks)
R elevant concepts
(a)relationship between
competition and
discrimination
(b)change of opportunity
cost
(c) full cost
(d)positive statements and
normative statements
(e)full cost, demand and
supply, national income,
etc.
(d)With reference to Source C, is Jacky’s comment about the quota for the Marathon
race a positive or a normative statement? Explain.
(2 marks)
(e)Referring to the information given, and applying your knowledge in economics,
explain ONE advantage and ONE disadvantage of further increasing the
quotas for all races of the Hong Kong Marathon. (Hint: How would different
stakeholders, e.g. racers, the organiser and other road users, be affected?)
(4 marks)
41
Suggested answers — Chapter 1
Short Questions
1 No. (1)
Even when more goods are produced, as long as the goods available are not enough to satisfy all
people’s wants, scarcity still exists. (2)
2 (a)Yes. Their costs of buying the concert tickets are the same because their monetary costs of
buying the concert tickets ($380) and their time costs ($0) are the same. (2)
(b)No. As they may have different alternative uses of the time spent watching the concert
(3 hours), their time costs may not be the same. (3)
3 (a)No. The failure of Country C’s TV station to pay the salary of Alfred will only lower the value
of Alfred’s chosen option, without affecting the value of the highest-valued option forgone. (2)
(b)No. The pay rise offered by TV station A will raise the value of the third option. If its value
does not exceed the value of the second option, the order of preference will not change.
Then the opportunity cost of filming a TV drama series in Country C will remain unchanged in
this case. (3)
4The full cost of buying the sports shoes includes the price of the sports shoes (monetary cost)
plus the time cost of queuing. The resale value of the sports shoes is not a forgone option. Thus,
the opportunity cost of queuing to buy the sports shoes does not change. (3)
OR
The full cost of buying the sports shoes includes the price of the sports shoes (monetary cost)
plus the time cost of queuing. The increase in resale value will increase the speculators’ demand
for the sports shoes and the excess demand will increase. More people will queue for the
sports shoes and the queuing time will be longer. The time cost of queuing will increase, so the
opportunity cost of queuing to buy the sports shoes will increase. (3)
IS
T
O
5 (a) No. (1)
Interest is the cost of earlier availability of resources. Without money, this cost still exists.
Interest can exist in the form of goods. (2)
(b) Yes. (1)
To Joanne, the magazine was the premium/compensation she received for deferring
consumption. (2)
To Benny, the magazine was the cost/price he paid for earlier availability of the
headphones. (2)
6 Yes. (1)
Interest is the cost of earlier availability of resources. When people are willing to pay for the
earlier availability of resources, it implies that the resources available are not enough to satisfy
all people’s want, so there is scarcity. (2)
A
R
7 No. (1)
The good may be produced from scarce resources which have alternative uses. / More of the
good may still be preferred. (2)
8 No. (1)
The television programmes are produced from scarce resources which have alternative uses. (1)
Long Questions
1 (a) (i) Yes. (1)
It will change if there are alternative uses of the property during the extended opening
hours. (1)
OR
No. (1)
It will not change if there is no alternative use of the property during the extended
opening hours. (1)
(ii) Yes. (1)
With a higher market rent, the cost of using the property as a bookshop increases. (1)
(iii) No. (1)
The value of the highest-valued option forgone of using the property as a bookshop does
not change. (1)
(b) An economic good. (1)
The service is produced from scarce resources which have alternative uses. / More of the
service may still be preferred. (2)
(c) (i) Positive statement. (1)
It describes what is, with no value judgement. It is refutable by facts. (1)
(ii) Normative statement. (1)
It describes what ought to be and involves value judgement on what is desirable or the
best. It is not refutable by facts. (1)
2 (a) No. (1)
The poor property management of the estate will only affect the value of buying the flat, but
not the value of the highest-valued option forgone (i.e. buying shares). (2)
(b) Mr. Lai’s cost of living in the flat can be the return from leasing out the flat. If the rental
income increases, for example, Mr. Lai’s cost of living in the flat will increase. (3)
(c) (i) Yes. (1)
A time cost is involved because Mr. Lai may have alternative uses of the time spent
queuing up for booking the leisure facilities. Therefore, opportunity cost is involved. (1)
(ii) No. (1)
The free leisure facilities are produced from scarce resources which have alternative uses.
/ More of the free leisure facilities are preferred. (2)
DRQ Level-up
A
R
IS
T
O
(a) Forms of competition:
- On a ‘first-come, first-served’ basis: those who have lower time cost are favoured
- By public ballot/drawing lots: those who are luckier are favoured
-By applicant’s ability: those who run faster/were more able to raise funds are favoured
(Mark the FIRST TWO points only, 2 marks each)
(b)It took a longer time to go to the city by bus when there was a road accident and the Hong Kong
Marathon took place, so the time cost of taking the bus would be higher. The opportunity cost of
taking the bus would increase. (3)
(c) (i) No. (1)
The time spent signing up for the race might be different. (1)
(ii) No. (1)
The time required for them to finish the race might have been different. They might have had
different alternative use of time and their time cost might not have been the same. (2)
(d) Normative statement. (1)
It describes what ought to be and involves value judgement on what is desirable or the best. It is
not refutable by facts. (1)
(e)Advantage:
- The organiser could earn a higher income by accepting more participants.
- The cost for wheelchair racers to sign up would be lower if there were more quotas.
-More overseas racers might participate in the race, leading to an increase in Hong Kong’s
GDP.
- any reasonable answer
(Mark the FIRST point only, 2 marks)
Disadvantage:
-It might take a longer time to finish the whole events, so the roads would be closed for a
longer time, increasing the time cost for road users.
- any reasonable answer
(Mark the FIRST point only, 2 marks)