NSS Understanding and
Interpreting the Economics
Curriculum
Session 1
Microeconomics part of the NSS
Economics Curriculum
7 April 2009(Tue)
Agenda
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Topic A
Topic B
Topic C
Topic D
Basic Economic Concepts
Firms and Production
(Max. 10 mins. Q&A)
Market and Price
Competition and Market Structure
(Max. 10 mins. Q&A)
Break (15 mins.)
Topic E
Efficiency and Equity and the Role of
Government
(Max. 10 mins. Q&A)
Elective 1
Q&A Session
(A) Basic Economic Concepts
Economics as a social science
 Study of human behaviors
 Based on the postulate of constrained
maximization
 Use examples to illustrate the scope of
economic analysis
 Methodology of scientific study NOT required
(A) Basic Economic Concepts
Scarcity Choice and opportunity cost
(i) The source of economic problems : scarcity
 Unlimited wants and limited resources
 Meaning of scarcity
 Relationship between scarcity and choice
 Relationship between scarcity, competition
and discrimination
 Difference between scarcity and shortage
(A) Basic Economic Concepts

Free and Economic goods
 Meaning
of goods
 Definition
free goods and economic goods
 Examples
of free goods and economic goods
(A) Basic Economic Concepts
(ii) Choice and opportunity cost
 Economic decisions involving choices among
alternatives

Concept of cost in economics
 Relationship between choice and cost
 Definition of opportunity cost
 Explain why only the highest-valued option
forgone count as cost
(A) Basic Economic Concepts
 Identify
/ calculate the cost involved in choosing
an option : out-of-pocket cost and implicit cost
 Explain whether / how cost changes under
different circumstances
 Is Sunk Cost required?
• The term is NOT required but students should
be able to explain why past expenditure, that is
not recoverable, is not a cost.
(A) Basic Economic Concepts

Interest as the cost of earlier availability of
resources
Explain why interest is the cost of earlier availability
of resources
 Is inter-temporal choice required? Yes
 Explain how interest rate, present consumption and
saving are related
 [Relationship between interest rate, investment and
money demand are required (to be explained in the
Macro section)]
 [Calculation of present value is NOT required]

(A) Basic Economic Concepts
The three basic economic problems
(i) What to produce? How to produce?
For whom to produce?
 Meaning of each economic question illustrate
with examples
(A) Basic Economic Concepts
(ii) How society tackles the basic economic
problems


• By society’s customs and tradition
• By government decisions
• By the market mechanism
(N.B. Illustrations by examples only. All theories on
types of economic systems NOT required)
Examples of each of the above methods in
tackling economic problems
(A) Basic Economic Concepts
(iii) Private property rights and its importance in
a market economy
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Meaning of private property rights
 exclusive right to use
 exclusive right to receive income, and
 right to transfer
Explain why private property rights is important in a market
economy :
 Clear delineating of private property rights is the
perquisite for the use of price mechanism in market
exchange, which ensure resources to be allocated to the
highest-valued users.
(A) Basic Economic Concepts
Specialization and exchange
• Exchange as a condition for specialization
• Explain why exchange is a “necessary”
condition for specialization
(A) Basic Economic Concepts
Circular flow of economic activities
(i) Consumption of households and production
of firms
(ii) The relationship among production, income
and expenditure
• Stretch a well-labeled circular flow diagram in
a closed economy.
• Relationship among (the value of) production,
(factor) income and expenditure
(A) Basic Economic Concepts
Normative vs. Positive statements
• Distinction between positive statements and
normative statements
• Normative statements : Involve value judgment ;
Disagreement cannot be settled by appealing to facts
• Positive statements : Do not involve value judgment ;
Refutable by facts - Disagreement can be settled by
appealing to facts
• Examples of normative and positive statements
(A) Basic Economic Concepts
• Value  Positive analysis  normative
policy suggestion
• From the standpoint of maximising social
gains, should the illegal practice of
reproducing discs be firmly suppressed so
that only the higher-priced original discs can
be found on the market? Explain.
(HKALE 1994 Q8)
(B) Firms and Production
Ownership of firms
• (N.B. Firm as a unit that makes decisions
regarding the employment of factors of
production and the production of goods
and services)
• To give the meaning of firms
(B) Firms and Production
(i) Forms of ownership
• Public ownership
• Meaning of public ownership: ownership by
government or its agencies with the right to own,
control, use and dispose of property
(e.g. government departments and public
corporation)
• Examples of organizations or institutions in Hong
Kong operating under public ownership.
(B) Firms and Production
• Private ownership: sole proprietorship,
partnership and limited company
• (N.B. Classification of partnership NOT required)
• Classify a private firm into sole proprietorship, partnership,
private limited company and public limited company
• Key features (including legal status, liability, number of
owners, etc.) of different forms of private ownership
• Documentation involved in setting up business units NOT
required
• Advantages and disadvantages of different types of ownership
NOT required
(B) Firms and Production
(ii) Limited and unlimited liability
• Meaning of limited liability
• Identify types of ownership that the owners
could enjoy limited liability
(B) Firms and Production
(iii) Shares and bonds as sources of capital
• (N.B. Classification of different types of
shares and bonds NOT required)
• Key differences between shares and bonds
• Shares: Holders are owners; returns – dividends
• Bonds :Holders are creditors; returns – interest
• Advantages and disadvantages of issuing bonds
and shares in raising capital
• Advantages and disadvantages of buying bonds
and shares from a small investor point of view
(B) Firms and Production
Types/stages of production
• Primary, secondary and tertiary production
and their inter-relationship
• Meaning of primary, secondary and tertiary
production
• Examples of different types of production
• Classify an given industry into primary,
secondary and tertiary production
• Describe their inter-relationship
• Recognize the contributions of each types of
production to HK’s economy
(B) Firms and Production
Types of goods and services produced
(i) Goods and services
• Production involves production of goods and /
or provision of services
(ii) Producer and consumer goods
• Meaning of producer and consumer goods
• Examples of producer and consumer goods
(B) Firms and Production
(iii) Private and public goods
• (N.B. Modeling regarding public goods NOT
required)
• Definitions of private and public goods
• Examples of private and public goods
• Is the concept of impure public goods required?
Yes
(B) Firms and Production
Division of labour
(i) Types: simple, complex and regional
• Meaning of simple, complex and regional
division of labour
• Examples of simple, complex and regional
division of labour
(B) Firms and Production
(ii) Advantages and disadvantages
• Give advantages and disadvantages of
division of labour
(iii) Limitations
• Recognize the limitations of division of labour
(B) Firms and Production
Factors of production
(i) Human resources
• Labour: supply, productivity, mobility and
different methods of wage payments
• Labour supply (measured in terms of man-hour)
• Factors affecting labour supply (e.g. wages,
population, population structure, etc.)
• Meaning of average labour productivity
• Calculate average labour productivity
• Factors affecting labour productivity (e.g. education,
training, capital endowments, etc.)
(B) Firms and Production
Factors of production
(i) Human resources
•
Labour: supply, productivity, mobility and
different methods of wage payments
• Meaning of geographical and occupational
mobility
• Factors affecting labour mobility
(geographical and occupational)
• Advantages and disadvantages of different
methods of wage payments
(B) Firms and Production
• Entrepreneurship: risk-bearing and decisionmaking
• Special role of entrepreneur : risk-bearing and
decision-making
(B) Firms and Production
(ii) Natural resources
• Land: supply
• Recognize that supply of natural resources
could not be changed by human efforts
(B) Firms and Production
(iii) Man-made resources
• Capital: accumulation and depreciation
• Meaning of capital accumulation (involving
giving up present consumption for future
consumption) and its relationship with interest
rate
• Meaning of depreciation
(B) Firms and Production
(iv)
•
•
•
The features of (i) to (iii) in Hong Kong
Describe the features of (i) to (iii) in Hong Kong
Remarks:
In the existing CE syllabus, ‘Classification’ is one of
the subtopics under factors of production. The
restructuring of the subtopics implies ‘classification
of factors of production’ in the NSS Econ syllabus is
not as important as the existing CE syllabus
• Discussion of factors of production is limited to
those areas stated in the syllabus
(B) Firms and Production
Production and costs in the short run and
long run
(i) Definition of short-run and long-run
• In terms of fixed and variable factors of
production.
• Meaning and examples of fixed and
variable factors of production
(B) Firms and Production
(ii) Law of diminishing marginal returns

Illustration by total product, average product and
marginal product schedules only.
• State the law of diminishing marginal returns
• Transform MP to AP and TP, AP to MP and TP, TP
to MP and AP (numerically)
• Illustrate the law of diminishing returns by total
product, average product and marginal product
schedules
• [Relationship between law of diminishing returns
and U-shaped MC NOT required]
(B) Firms and Production
(iii) Cost of production
• Fixed and variable costs
• Meaning and examples of fixed and variable costs
• Total, marginal and average cost of production
• (N.B. General relationship between total, marginal
and average cost curves NOT required. Relationship
between short run and long run cost curves NOT
required.)
• Transform MC to AC and TC, AC to MC and TC,
TC to MC and AC (numerically)
(B) Firms and Production
(iv) Economies and diseconomies of scale
• Internal economies and diseconomies of scale
• External economies and diseconomies of scale
• (N.B. Economies and diseconomies of scale
illustrated by average cost. Further classification of
internal and external economies and diseconomies of
scale NOT required)
• Meaning of internal / external economies and
diseconomies of scale
• Illustrate internal / external economies and
diseconomies of scale by average cost
(B) Firms and Production
• Possible reasons leading to internal / external
economies and diseconomies of scale
• (Further classification of internal / external
economies and diseconomies of scale NOT
required)
(B) Firms and Production
(v) Expansion and integration of firms
• Types: vertical, horizontal, lateral and
conglomerate
• Motives
• Meaning of each types of integration
• Examples of each types of integration
• Give some possible motives behind each types
of integration
• Methods of integration (e.g. takeover, merger,
consolidation, etc.) NOT required
(B) Firms and Production
The objectives of firms:
(i) Profit maximization with given price and
marginal cost schedule
• Meaning of profit as the difference between total
revenue and total cost
• Profit-maximizing choice of output for individual
firms with given prices and marginal cost
schedule
• The marginal cost schedule as the supply schedule
of individual firms
• (N.B. Long run supply NOT required)
(B) Firms and Production
• Price taking assumption
• Explain why the marginal cost schedule is the
supply schedule of individual firms
• Shut down point, break even point, LR supply
NOT required
• Graphical relationship between MC, AC, AVC
and supply curve NOT required
• Long run supply ; monopoly does not have a
supply curve NOT required
(B) Firms and Production
(ii) Other objectives: market share, provision of
non-profit making services, corporate social
responsibility, etc.
• Illustrate with examples
10 Minutes Q&A
(C) Market and Price
Law of Demand
 State the law of demand
 Explain phenomena by using the law of
demand (full price / relative price)
 [Note: The change highlight the
importance of law of demand]
(C) Market and Price
Individual demand
(i) Factors affecting individual demand
(ii) Complements and substitutes, superior
and inferior goods
(N.B. Giffen goods NOT required)
 Meaning of complements and substitutes,
superior and inferior goods (N.B. Giffen
goods NOT required)
(C) Market and Price
 Explain
how price, price of related goods,
income, price expectations, weather, etc.
affect individual demand
(C) Market and Price
(iii) Individual demand schedule and importance
of the ceteris paribus assumption
(iv) Difference between change in quantity
demanded and change in demand
Distinguish between change in demand (caused
by changes in exogenous variables) and change
in quantity demanded (caused by changes in
price, an endogenous variable)
(C) Market and Price
Market demand
(i) Horizontal summation of individual demand
curves
 Meaning of horizontal summation
 Add up the individual demand curves /
schedules horizontally to obtain the market
demand curve / schedule (Graphically or
numerically)
 Explain under what condition market demand
could be obtained by horizontal summation of
individual demand
(C) Market and Price
Market demand
(ii) Factors affecting market demand
 similar
to those points mentioned in the
section about individual demand
 One of the additional factors: number of
consumers in the market
(C) Market and Price
Individual supply
(i) Factors affecting individual supply
 Explain how price, price of related goods, cost
of production, technology, price expectations,
weather etc. affect individual supply
 Give the meaning of joint supply and
competitive supply
 State the law of supply
(C) Market and Price
(ii) Individual supply schedule and importance
of the ceteris paribus assumption
(iii) Difference between change in quantity
supplied and change in supply
Distinguish between change in supply (caused
by changes in exogenous variables) and change
in quantity supplied (caused by changes in price,
an endogenous variable)
(C) Market and Price
Market supply
(i) Horizontal summation of individual supply curves

Add up the individual supply curves / schedules
horizontally to obtain the market supply curve /
schedule (graphically or numerically)
(ii) Factors affecting market supply
Similar to those points mentioned in the section about
individual supply
 One of the additional factors : number of sellers in the
market
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(C) Market and Price
Interaction between demand, supply and price
(i) Definition of equilibrium: no tendency to change
(ii) Equilibrium price and quantity
 Find the equilibrium price and quantity
graphically
 Find the equilibrium price and quantity, given
the demand and supply schedule
(C) Market and Price
(iii) Effects of change in demand and/or change in
supply on equilibrium price and quantity
 Explain the effect of change in demand and/or
change in supply on equilibrium price and
quantity, with the aid of diagram(s).
(C) Market and Price
Consumer and producer surplus
(i) Marginal benefit to consumers, maximum
willingness to pay, consumer surplus, demand
curve and their relationship.
 Definition of consumer surplus
 Show consumer surplus on a (supply-) demand
diagram
(C) Market and Price
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Marginal benefit is roughly the same as
maximum willingness to pay
Marginal use value is NOT required
because there are some technical
complications in defining marginal use
value
Methods in extracting consumer surplus
are NOT required
(C) Market and Price
(ii) Marginal cost of firms, minimum supply-price,
producer surplus, supply curve and their
relationship.
 Definition of producer surplus
 Show producer surplus on a supply-(demand)
diagram
(C) Market and Price
(iii) Illustrate consumer surplus and producer
surplus in a demand-supply diagram.

(N.B. Concepts of utility, marginal rate of
substitution, and indifference curves NOT
required.)
(C) Market and Price
Functions of prices
(i) Rationing function: existing supplies are
distributed to users with highest value.
 Exchange without production ; prices would
direct existing supplies to highest-valued users
(C) Market and Price
(ii) Allocative function:
 Demand is derived from marginal benefit, and
supply is derived from marginal cost, and then
price and resources allocation are determined.
 Resource deployment through changes in
relative prices.
 Changes in relative price lead to changes in
quantity of the goods produced, which implies a
change in resource deployment
 (N.B. Graphical analysis NOT required)
(C) Market and Price
Price elasticity of demand
(i) Arc elasticity
 (N.B. Point elasticity, cross elasticity and
income elasticity NOT required)
 Calculate the (arc) price elasticity of demand
(the average price and quantity method)
(ii) Relationship between price elasticity and total
revenue
 State and explain the relationship among price
change, price elasticity and total revenue
(C) Market and Price
(iii) Factors affecting price elasticity of demand
 Explain how the price ranges, availability of
substitutes, degree of necessity, time, durability,
proportion of total expenditure spent on the good,
number of uses, etc. affect the price elasticity of
demand.
 Second law of demand is NOT required but
students need to know time for adjustment is a
factor that affects price elasticity of demand
(C) Market and Price
Price elasticity of supply
(i) Arc elasticity
 (N.B. Point elasticity and cross elasticity NOT
required)
 Calculate the (arc) price elasticity of supply (the
average price and quantity method)
(C) Market and Price
(ii) Factors affecting price elasticity of supply
 Explain how factor mobility, flexibility of
production, time, etc. affect the price elasticity
of supply
(C) Market and Price
Market intervention
(i) Price intervention: price ceiling and price
floor
 Meaning of (effective) price ceiling, and
(effective) price floor
 Effects of the imposition of (effective) price
ceiling / floor on (money) price, quantity
transacted, consumer surplus, producer
surplus, etc., with the aid of diagram(s)
(C) Market and Price
(ii) Quantity intervention: quota
 Illustration of quota by a kinked supply curve
 Meaning of quota
 Effects of the imposition of quota on price,
quantity transacted, consumer surplus,
producer surplus, product quality, etc., with
the aid of diagram(s)
 Single (homogenous) product is assumed
 Quota on imported goods (of a price taking
country) is covered in Topic J
(C) Market and Price
(iii) Unit tax and unit subsidy
Determination of the share of the tax
burden/subsidy between producers and consumers
 Effects of the imposition of unit tax / provision of
unit subsidy on price, quantity transacted,
consumer surplus, producer surplus, etc., with the
aid of diagram(s)
 Show share of the tax burden/subsidy between
producers and consumers on a demand-supply
diagram
 Relationship between elasticity of demand-supply
and distribution of tax burden / subsidy

(C) Market and Price

(N.B. Graphical illustration of price ceiling,
price floor, quota, unit tax and unit subsidy
and their impact on price and quantity)
(D) Competition and Market Structure
Perfect competition and imperfect
competition (monopolistic competition,
oligopoly and monopoly)
(i) Definition of market
 Any arrangement that transactions take place
(D) Competition and Market Structure
(ii) General features
• Number of sellers
• Number of buyers
• Nature of product
• Ease of entry
• Availability of information
• Price taker/price searcher
 Examples of monopolistic competition,
oligopoly and monopoly
(D) Competition and Market Structure
(iii) Sources of monopoly power
 Natural monopoly, high set-up cost, legal
entrance restrictions, public ownership, etc.
(D) Competition and Market Structure

(N.B. The four different forms of market
structure are theoretical constructs. Actual
examples may only be approximations of the
above constructs. General analysis with
marginal revenue and marginal cost curves
NOT required.)
10 Minutes Q&A
Break
(E) Efficiency, Equity and the Role of Government
Efficiency
(i) Condition for efficiency: maximization of
total social surplus; marginal benefit equals
marginal cost.
 The terminology “Pareto condition” NOT
required
 “Inefficiency” is possible in a partial analysis
(“It is always efficient when all constraints are
considered” – NOT required)
(E) Efficiency, Equity and the Role of Government
(ii) Deviations from efficiency:
• Deadweight loss
• Price ceiling, price floors, taxes, subsidies
and quota
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The effect of price ceilings, price floors, taxes,
subsides and quotas on consumer surplus,
producer surplus, and efficiency, with the aid of
supply-demand diagram(s)
Meaning of deadweight loss and indicate the
deadweight loss on supply-demand diagram(s)
The above list that lead to deviations from
efficiency is NOT exhaustive
(E) Efficiency, Equity and the Role of Government
(iii) Divergence between private and social costs
(benefits): market versus government
solutions, illustrated by examples ONLY
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
Examples that involve a divergence between private
and social costs (benefits)
Explain the problem of divergence between private and
social costs (benefits)
• [over-production/consumption ;
• under-production/consumption]
(E) Efficiency, Equity and the Role of Government
(iii) Divergence between private and social costs
(benefits): market versus government
solutions, illustrated by examples ONLY
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Explain how the problem of divergence between private
and social costs (benefits) could be solved by government
solutions (e.g. taxes/penalties, subsidies, etc.)
Explain how the problem of divergence between private
and social costs (benefits) could be solved by market
mechanism
[The term Coase Theorem NOT required]
(E) Efficiency, Equity and the Role of Government

(N.B. Graphical analysis with illustration of
consumer surplus and producer surplus in a
demand-supply diagram only. The
terminology ‘Pareto condition’ NOT required)
(E) Efficiency, Equity and the Role of Government
Equity
(i) Efficiency and equity in a market economy
 Explain why a free competitive market is
efficient
 Recognize that even if resource allocation is
efficient, there is an issue of (income)
distribution
(E) Efficiency, Equity and the Role of Government
(ii) Measuring income inequality: income
distribution, Lorenz curve and Gini coefficient
 (N.B. Construction of the Lorenz Curve and
Gini coefficient NOT required).
 Interpretation
 HK’s situation
(E) Efficiency, Equity and the Role of Government
(iii) Sources of income inequality: human capital
(e.g. skill differentials), discrimination and
unequal ownership of capital etc.

Detailed analysis of the labour market (e.g.
labour demand curve =MRP curve) NOT
required
(E) Efficiency, Equity and the Role of Government
Policy concerns
(i) Equalizing income or equalizing opportunities
What is ‘fair’ / ‘equity’ ?
 Equity is not the same as income equity but here we
limit our consideration to only two commonly
considered ethical principles : equalizing outcome or
equalizing opportunities
 (A philosophical exploration of the general concept of
equity is NOT required)

(E) Efficiency, Equity and the Role of Government
Policy concerns
(i) Equalizing income or equalizing opportunities
 The normative choice of a different principle
would affect the policy choice
(E) Efficiency, Equity and the Role of Government
(ii) Disincentive effects of taxes and transfers
 Explain why some instruments that aim at
equalizing income (e.g. taxes and transfers)
may have disincentive effects
(E) Efficiency, Equity and the Role of Government
(iii) Trade off between equity and efficiency
 Discuss whether there is a trade off between
equity and efficiency
 Discuss how much redistribution is desirable
IF there is indeed a tradeoff between equity
and efficiency
10 Minutes Q&A
Elective 1
Monopoly pricing
(i) Simple monopoly pricing:
 Determination of price and output
 Efficiency implications
(N.B. Graphical and numerical illustration
with given demand, marginal revenue and
marginal cost curves)
Elective 1
 Relationship
between P and MR under simple
monopoly pricing (numerical illustration)
 Show the relationship between demand curve
and MR curve graphically
 Determination of profit-maximizing output and
price graphically / numerically
Elective 1
Explain why simple monopoly pricing is said to
be inefficient illustrated with the consumer
surplus, producer surplus and deadweight loss
 Compare the output, price and the efficiency
implications between a simple monopoly and a
perfect competitive market

Elective 1
(ii) Price discrimination
 Meaning of price discrimination
 Types: First, second and third degree price
discrimination
 Conditions for different types of price
discrimination
 (N.B. Price and output determination NOT
required)
Elective 1
 Illustrated
with examples
 Price and output determination (and hence
efficiency implications) NOT required
Elective 1
Anti-competitive behaviours and
competition policy
(i) Major forms of anti-competitive practices
Elective 1

Horizontal agreements among competitors:
agreements to restrict prices and output
 price fixing: an agreement between firms to fix
or raise price to restrict competition and earn
higher profits
 collusive bidding/bid rigging: (i) firms
agreeing to submit common bids, thus
eliminating price competition; (ii) firms
agreeing to submit the lowest bid by rotation
and thereby each getting a certain amount of
contracts
Elective 1

Horizontal agreements among competitors:
agreements to restrict prices and output
 market division: in products and locations
 customer allocation
 sales and production quotas
Elective 1

Vertical agreements between buyers and sellers
 resale price maintenance (RPM): a supplier
specifying the minimum or maximum price at
which a product must be re-sold to customers
by downstream firms, hence maintaining profit
margin;
 tie-in sales : the sale of one good on the
condition that another good is purchased
 exclusive dealing : sole distributor
Elective 1

Mergers: horizontal mergers, vertical mergers
and potential competition mergers
Elective 1
(ii) The impact of anti-competitive practices
 (N.B. Graphical analysis NOT required)
 Explain some possible impacts of anticompetitive practices (e.g. higher price, lower
output, lack of choices to consumers, reduce
the number of competitors, etc.)
Elective 1
(iii) Justifications and concerns for competition
policy
Justifications
(1) Providing a legal basis for the investigation
and sanctioning of anti-competitive conduct
(2) Strengthen institutional framework for
regulating competition and for its advocacy,
and hence promoting market discipline
(3) Improve the business environment and
promote a level playing-field for business
Elective 1
(iii) Justifications and concerns for competition
policy
Justifications
(4) Improve transparency through delineating
what constitutes anti-competitive conduct
(5) Without such regulatory regime, in the long
term there might be an adverse effect on our
relative competitiveness, especially in sectors
with high entry barriers.
Elective 1
Concerns
Concern 1: Do we need a competition policy?
 Arguments against the implementation of
competition policy
(1) Increase the cost of doing business
(2) No need to interfere with normal business
operations in a market place that already
works well
(3) There are alternative ways to enhance
competition without introducing a new
competition law
Elective 1
Concern 2 : Cross-sector competition law or
sector-specific competition law?
Concern 3: Scope of behavior to be covered by
competition law
Concern 4 : Any exclusions or exemptions?
Concern 5 : Criminal or civil offence?


Consultation Document on Competition policy
http://www.edlb.gov.hk/edb/eng/papers/compete/index1.html
Q&A Session