COURSE CODE:

BHHT1123

COURSE TITLE:
HOSPITALITY ECONOMICS
 ASSESSMENT FORMAT

Consist of :

A. Coursework = 60%
B. Final Exam = 40%
LECTURE 1

An Introduction to
Economics for Hospitality
Industry
Learning Outcomes

On completion of the chapter, the student will be

able to:

▪Describe the four categories of recourses

▪Explain normative and positive economics
▪Differentiate microeconomic and macroeconomic
▪Describe production possibilities frontier (PPC)
DEFINITION OF ECONOMICS

❑ Economics is a science which studies human

behaviours as a relationship between ends
and scarce which have alternative uses.
OR
❑ Economics is a study of how people use their
limited resources to try to fulfil unlimited
wants and involves alternatives or choices.
RESOURCES

• The production of all goods and services

requires resources.
Resources – the input or factors of production.
• Four (4) categories of resources:
1) Land.
2) Labour.
3) Capital.
4) Entrepreneur.
DEFINITION OF PRODUCTION

❑ Definition
– Production means the process of using the factor of
production to produce goods and services.
– Production is the process of transforming inputs into
outputs.
INPUTS OUTPUTS

Inputs refers to the Refers to what we

factors of production get at the end of the
Processing
that a firm use in the production process
production process. that is finished
products.
 LAND
All natural resources LABOUR
or gift of nature Physical or mental
activities of human beings

CLASSIFICATION
OF FACTORS
OF PRODUCTION

CAPITAL ENTREPRENEUR
Part of man-made wealth A person who combines the different
used for further production factors of production, and initiates
the process of production and also
bears the risk
RESOURCES

1) Land
- All natural resources, such as minerals,
forests, water, and unimproved land.
- i.e. oil, wood.

2) Labour
- The physical and mental talents people
contribute to the production process.
- i.e. a person building a house.
RESOURCES

3) Capital
- Produced goods that can be used as inputs for
further production.
- i.e. factories, machinery, tools, computers, and
buildings.
4) Entrepreneur
- The particular talent that some people have for:
i) organising the resources of land, labour and
capital to produce goods.
ii) seeking new business opportunities.
iii) developing new ways of doing things.
Quick Exercise
Think about everything you would like to own, or consume.
Table 1.1 contains a list of material items as examples, but it
could equally contain items such as a healthy life and peace
in the world.
Quick Exercise
Economics, the Science of Scarcity

- The science of how individuals and

societies deal with the fact that wants are
greater than the limited resources
available to satisfy those wants.
MICROECONOMICS VS. MACROECONOMICS

MICROECONOMICS MACROECONOMICS

The study of The study of the

individual parts of economic system as a
the economy, such whole, such as
as public choices, national income, trade
business choices cycle, unemployment
and personal rate, inflation and
choices. general price level.
Economic Categories
Microeconomic Questions

➢ What level of output does a firm produce?

➢ What price does a firm charge for the good it
produces?
➢ How does a consumer determine how much of
a good he or she will buy?
➢ Can government policy affect business
behavior?
➢ Can government policy affect consumer
behavior?
Macroeconomic Questions

➢ How does the economy work?

➢ What causes inflation?
➢ Why do some national economies grow
faster than other national economies?
POSITIVE VS. NORMATIVE ANALYSIS

❑ A positive analysis is to deal with the question

of “what is” and no indication of approval or
disapproval. It focuses on facts and cause-and-
effect relationships.
❑ Example:
✓ What is the impact on consumers and
automobile industry after removal of petrol and
diesel subsidies?
✓ If the government increases the minimum wage,
how many workers will lose their jobs?
POSITIVE VS. NORMATIVE ANALYSIS

❑ A normative analysis is to deal with the

question of “what ought to be”. It incorporates
value judgements about what the economy
should be or what policy should be used to
achieve economic goals.
❑ Example:
✓ Should the car manufacturer produce more fuel
efficient cars?
✓ Should the government impose lower corporate
tax on oil producing companies?
✓ Should the government restrict imports?
SCARCITY CHOICE

BASIC ECONOMIC
CONCEPTS

OPPORTUNITY COST
BASIC ECONOMIC CONCEPTS

❑ SCARCITY
– One of the important concepts in economics
is scarcity.
– Scarcity is defined as wants always exceed
limited resources to satisfy them.
– Scarcity is a universal problem faced by poor
as well as rich nations in order to fulfil their
needs.
BASIC ECONOMIC CONCEPTS (cont.)

❑ CHOICE
– When scarcity exists, choices are to be made.

❑ OPPORTUNITY COST
– Opportunity cost is defined as the second
best alternative that has to be forgone for
another choice which gives more satisfaction.
BASIC ECONOMIC PROBLEMS

1. WHAT TO PRODUCE?
❖ Refers to the type of goods and services to be produced

2. HOW TO PRODUCE?
❖ Refers to the cheapest method of production

3. FOR WHOM TO PRODUCE?

❖ Refers to the distribution of income
PRODUCTION POSSIBILITIES CURVE (PPC)

❑ Used to explain the basic economic concepts:

Scarcity, Choices and Opportunity cost.

DEFINITION:
The PPC shows the various possible
combinations of goods and services
produced within a specified time period
with all its resources fully and
efficiently employed.
PRODUCTION POSSIBILITIES CURVE (PPC)
(cont.)
Assumptions:

1. The economy is operating in full employment

and full production capacity (full efficiency).
2. The amount of resources available are fixed.
3. The state of technology does not change
throughout the production.
PRODUCTION POSSIBILITIES CURVE (PPC)
(cont.)
Sewing Machine
If it allocates all its resources to sewing machine, it
will produce at Point A.
16
A If it allocates all its resources to butter, it will
produce at Point F.
14
The country Jaya, produces two products –
12 C butter and sewing machine.

If the country Jaya is at Point C

10 D on the PPC, it can produce the
combination of 2,000 kg butter
8 and 12,000 units of sewing
machine.
6
Point D shows the production of
4 3,000 kg butter and 9,000 units
of sewing machine.
2
F
0 1 2 3 4 5 Butter
PRODUCTION POSSIBILITIES CURVE
(PPC) (cont.)
Sewing Machine

16 Z
A
B UNATTAINABLE Point outside the PPC
14 (Point Z) ➔ SCARCITY
C
12 Y
Any point along the PPC
➔ CHOICES
10 D
8 Movement from one point
ATTAINABLE to another (point C to D)
➔ OPPORTUNITY COST
6 Point inside the PPC
(Point Y) ➔ Waste E
4 of resources and
inefficiency
2
F
0 1 2 3 4 5 Butter
FACTORS THAT INFLUENCE THE SHIFT OF
PPC
Sewing Machine
1. Economic
Growth 16
When the country
14 enjoys economic
growth, the PPC
12 bounds outward.

10

8
When the country
6 is struck by natural
disasters, economic
4 growth will decline
and the PPC will
2 shift to the left.
Butter
0 1 2 3 4 5
 FACTORS THAT INFLUENCE THE SHIFT OF
PPC (cont.)
Sewing Machine
2. Improvements
in Technology 16
Technology increases the
14 production of sewing machine.

12
Technology increases the
10 production of butter.

4
2

0 Butter
1 2 3 4 5
FACTORS THAT INFLUENCE THE SHIFT OF
PPC (cont.)
Sewing Machine
3. Population
16

14
Increase in
population
12

10

8
Decrease in
6
population
4
2

0 Butter
1 2 3 4 5
SHAPE OF PPC

Sewing Machine

16 PPC IS CONCAVE

14
Increasing Opportunity Cost
12

10

4
2

Butter
0 1 2 3 4 5
PPC-Increasing Opportunity Costs

• As more of one good is produced, the opp. costs

between computers and TV sets changes.
• As the economy produces more TV sets, the opp.
costs of producing TV sets increases.
i.e.
Point A to B => opp. cost of 1 TV = ½ computers.
Point B to C => opp. costs of 1 TV = ¾ computers.
SHAPE OF PPC (cont.)

Sewing Machine

16
PPC IS CONVEX
14

12
Decreasing Opportunity Cost
10

4
2

Butter
0 1 2 3 4 5
SHAPE OF PPC (cont.)

Sewing Machine

16
PPC IS LINEAR
14

12 Constant Opportunity Cost

10

4
2
Butter
0 1 2 3 4 5
 PPC-Constant Opportunity Costs

•Opportunity costs of 1 TV = 1 computer.

•Opp. Costs between TV and Computer is
constant: PPC is a straight line.
•i.e. Point A to B => 10k computers (from
50k to 40K) produced,10k TV set are
produced; ratio is 1:1.
PPC-Law of Increasing Opportunity
Costs
•As more of a good is produced, the
opportunity costs of producing that
good increase.

• In real world, most PPC lines are concave

downward.
Production
PPC Possibility Frontier
Framework for Understanding
PPC-Framework for Understanding
1) Scarcity
• Where wants (for goods) are greater than the
resources available to satisfy those wants.
• Scarcity implies that some things are attainable.
- Attainable
– consists of the points on the PPC and all point
below PPC.
- i.e. Point A to point F.
- Unattainable
- consists of the point above and beyond the PPC.
- i.e. Point G.
Production Possibility
Frontier
Framework for
Understanding
PPC-Framework for Understanding
2) Choice
- Individuals must choose the combination of the
two goods they want to produce within the
attainable region.
- i.e. Combination of goods represented by point A or
point B or point C.
3) Opportunity Costs
- The value of the best alternative forgone when a
choice is made.
- Move from one point to another point on the
PPC.
- i.e. Point A to point B => Opp. Cost of 1 car = ½ TV
sets.
PPC-Framework for Understanding
4) Productive Efficiency
• The condition where the maximum output is
produced with given resources and technology.
• Lie on PPC ( Point A , B , C , D & E).

5) Productive Inefficiency
• The condition where less than the maximum
output is produced with given resources and
technology.
• Productive inefficiency implies that more of one
good can be produced without any less of another
good being produced.
• Lie below/ inside the PPC (Point F).
PPC-Framework for Understanding

6) Unemployment
• Resources are unemployed when it is not
producing the maximum output with the available
resources and technology (productive
inefficiency)(Point F).

7) Economic growth
• An increase in resources (i.e. a new discovery
of resources) or an advance in technology can
increase the production capabilities of an
economy, leading to economic growth and shift
outward in the production possibilities curve.
PPC-Framework for Understanding

An advance in
technology commonly
refers to the ability to
produce more output
with a fixed amount of
resources or the ability
to produce the same
output with fewer
resources.