Welcome to

Economics (MCR001)

Lecture:
A:Thursday 8.30am

UBSS Sydney CBD Campus

Level 10 & 11 233 Castlereagh Street
Sydney NSW2000

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Economics (MCR001)

Lecture 1

Economics

Assistant Professor Harry TSE

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 Today’s Plan (Week 1 – Lecture1)
Part 1 : Welcome! About the subject
Subject Outline highlights

Part 2 : Formal Lecture content :

1) About economics in general
2) The 3 fundamental questions about economics
3) Think like a economist (business-person):
Opportunity Cost
Cost Benefit analysis (Marginal)
**Production Possibility Frontier (curve)
4) Efficiency

Part 3 : Tutorial class exercise

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 MBA Course Reference
Why Economics is a core subject in MBA?

Economics is “a way of thinking, grounded in a set of

broadly applicable principles that you’ll find useful ‘in
the ordinary business of life’”. (Textbook)

Formal way to learn so that we move away from an

“accidental leader and manager” to a “structured”
thinker and doer.
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 Subject Focus
♦ Gain theoretical understanding of microeconomics and macroeconomics
♦ Apply economic theory and analytical skills to make informed judgment and
decisions about a real-world case study or problem
● By reading and interpreting news articles (improve bus. Literacy)
● Why do you think this is important?

♦ Reflect on the use of economic reasoning in addressing problems. Know its

strength and limitations, and how economic decisions impact political and social
outcomes. (it’s about applying & problem solving)

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 Principle of Economics 6
Subject Learning Outcomes
• Demonstrate knowledge of the core economic principles, theories and
1. models.

• Apply core microeconomic principles, theories and models to economic

problems and current events in an analytical way.
2.

• Apply core macroeconomic principles, theories and models to economic

3. problems and current events in an analytical way.

• Reflect on the use of economic reasoning of economic issues and

developing a greater understanding on the political and social implication of
4
these issues
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 Economics ♦ Topic Outline
1. • Introduction to Economics
2. • Demand and Supply
3. • Elasticity and it’s applications
Micro
4. • Production & Costs
5. • Market Structures & Game Theory
.
• The Macroeconomics environment
6. (Economic Growth, Unemployment, Inflation)
7. • Macro Model: Aggregate Demand and Supply 1
Macro
8. • Macroeconomics Policy 1 – Fiscal Policy
9 • Macroeconomics Policy 2 – Monetary Policy

10 • Exchange Rate & Balance of Payments 1-7

 Subject Assessment
Please see course outline for additional details
Form of Weighting (%) Due date
assessment
Class Tests Assessment 1 In Week 5
(Test 1: 20%) (in the lecture)
(lecture 1 to 4)

Assignment Assessment 2 In Week 9

(20%) (due before the lecture)
(lecture 6 to 8)
Final Exam 60% TBA
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Topic 1: Introduction to Economics

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 Topic 1: Learning Outcomes
LO1. What is Economics?.
-Define what economics is.
-Be able to explain scarcity. (What is the economic problem?)
-Distinguish between microeconomics and macroeconomics,

LO2. The Three Fundamental Economic Questions.

Explain the three fundamental economic questions and define the main categories of
economic resources.
-Describe the role of Marginal benefit and Marginal cost and
- define opportunity cost.

LO3. The Production Possibilities Frontier (PPF).

Outline and apply the PPF model with reference to its assumptions, different production
points, its shape and how it is it linked with opportunity cost.

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 What is *economics? 11

♦“ Economics is the study of how societies use scarce

resources to produce valuable goods and services
(G$S) and distribute them among different
individuals”

♦ ie: *Economics is about ‘efficient allocation of scare resources” &

“distribution of income”.

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 Why study economics? …*Scarcity
Economics comes about because of …

♦How do we decide who gets these goods and

services (ie allocation of resources) and how much they get?
(ie distribution of income. A moral question!)

♦What role does economics play in answering these

questions?
ie Choices that are made in seeking to use scarce resources efficiently

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 The Economic Problem: Scarcity 13

➢Unlimited wants
• Material wants: the desires of consumers to obtain and use various
goods and services that give utility or satisfaction.

➢Scarce (limited) resources

• Economic resources includes all the natural, human and manufactured
resources that go into the production of goods and services. Includes:
►property resources – land, raw material and capital
►human resources – labour and enterprise
* ie Scarcity: limited resources with unlimited want

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 Topic 1: Review Questions
1. Economics may best be defined as the:
A. interaction between macro and micro considerations.
B. social science concerned with how individuals, institutions, and society make
optimal choices under conditions of scarcity.
C. empirical testing of value judgments through the use of logic.
D. use of policy to refute facts and hypotheses.

2. The scarcity problem:

A. persists only because countries have failed to achieve continuous full
employment.
B. persists because economic wants exceed available productive resources.
C. has been solved in all industrialized nations.
D. has been eliminated in affluent societies such as the United States and Canada.
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 Two branches of economics 15

• Studies decision-making by a single individual,

Microeconomics household, firm, market, industry or level of
government.
http://www.theage.com.au/victoria/
banana-prices-bend-up-as-cyclone-
• Will be covered in Topics 1-5
shortage-hits-20110307-1bl65.html

Macroeconomics • Studies decision-making for the economy as a

whole.
http://www.guardian.co.uk/business
/2013/feb/28/spain-falls-further- • Will be covered in Topics 6-11
recession-gdp-plunges

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Class Exercise 1:
To do with microeconomics or macroeconomics.
Justify your answer.
1. Which of the following is a micro economic statement?
♦a) Real domestic output increased by 2.5% last year
♦b) Unemployment was 6.8% for the December quarter
♦c) The price of wheat has declined by 5.7% in the last month
♦d) The general level of prices have increase 2.1% this year
2. Macroeconomics studies economics from the viewpoint of:
♦ a) The entire economy
♦ b) Government departments
♦ c) Specific resource markets
♦ d) Individual firms

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 *The Three Fundamental Economic Questions
(in our society)

The fundamental economic questions around

production are:

* 1.What to * 2. How to *3. For whom to

produce? produce? produce?

Scarcity imposes What production Who benefits the

restrictions on ability technique should be goods and services that
to produce used? are produced?

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 *1. What goods and services to produce?
(depends on the economic system)

Class discussion: How would you answer this question?

(the market economy vs the command economy)

We will learn:
● About how the market and the forces and demand and
supply determine what to produce and in what quantities
[free market economy or mixed economy (eg US, Australia, UK, …)]

● About how governments can chose what to produce and

in what quantities [command planned economy / mixed
economy (eg North Korea, Cuba, Russia…)] 18
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 *2 : How to produce (Factors of production – Inputs (resources))
*3 : Who benefits from the production of the goods and services?

Land Labour Capital Entrepreneurship

Owner:
(land owners) (Owners of labours) (Owners of Capital) (Business Onwers)

Income : Rent Wages Interest Profit

Income

Consumption
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 Self-revision 20
2. Howto produce?
(Depends on the *Factors of Production = inputs to production = resources)

♦ We produce goods and services using *factors of production (ie inputs to

the production = resources):

● Land
►Natural resources provided from the “land”
● Labour
►Work, time and effort dedicated by workers
►Quality depends on human capital (knowledge and skills possessed by
labourer)

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 Self-revision 21
2. *How to produce? (cont.)

♦ **Factors of production:
● Capital
► Anything used to produce anything else
► Tools, instruments, machines, buildings etc.
► What is the difference with financial capital?

● Entrepreneurship
► Human effort which organises land, labour and capital to produce
goods and services

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 Self-revision
3. *For whom to produce?
(owners of the “factors of production” – income ------→ consumption G&S )

➢Who gets the goods and services (G&S) produced by the economy?

● In a free market economy this is whoever has the income to

purchase the goods and services at the market price

● **People acquire income by owning the *factors of production

(land, labour , capital (human capital, physical capital),
entrepreneurship) and earning (income) rent, wages, interest,
profit etc.

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Class Exercises 2
Answer inWorkshop Activity Guide

1. What is entrepreneurship? Can you think of an example of a famous

entrepreneur?
2. Are computer software programs an example of land, labour ,
entrepreneurship or capital? Explain your answer.

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Thinking like an economist (business-person)?

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#3 **Opportunity cost is the next best alternative given up
when making a choice/decision
“Scarcity”

Opportunity Is the cost of the next best alternative forgone

cost when a decision is made between alternatives
(ie make a choice / decision)

Hot dog or Highway or Internet or

hamburger? schools? shopfront?

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 1. What is *scarcity and why is it called the economic problem?

Learning
Outcome #3 2. What is the **opportunity cost of the following decisions?

• A. Paying $25 to see a movie rather than going for a walk in the
Class park.
Exercise • B. A national government allocating $2 billion to defence
Questions spending. (if not, then may go to the Health Dept?)
• C. Full time study at an University
(What do you “give up” (trade-off) when you study at Uni?)
• D A professional sportsman earning a high salary playing
basketball rather than working as a teacher

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 (Rational) Marginal Analysis Decision making
♦ Rational choices are made by comparing costs and benefits at the
margin using Cost benefit analysis
♦ Choices between activities are made by comparing:
● Marginal benefits: Extra / additional benefit of consuming or
producing 1 more unit of a good or service
● Marginal costs: Extra /additional cost of consuming or producing
1 more unit of a good or service

• MC increase with quantity consumed/produced due to opportunity cost.

• MB decrease with quantity due to diminishing utility.
Optimal production and consumption for society is where *MB=MC

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 #3 A rational consumer consumes pizza up to the point where MC = MB
Notes: At the output Q* where MB (MR) = MC;
MC, MB it creates the highest profit for production or
It creates the highest satisfaction for
consumption.
5
MC
4

MC = MB 3
MC = MB
2

1 MB

Slices of pizza
1 2 3 Q*= 4 5
When the consumption of PIZZA = 4, it provides the highest satisfaction, ie when MB = MC 1-28
Self-revision exercises
MarginalAnalysis : MR (MB) = MC 29

I already have 2 cups of coffee. Should I buy another cup

of coffee? That is the question.

A buyer will only buy another cup of coffee if

the benefits (value )of the extra cup exceeds
the cost of buying it.

Marginal analysis helps decide between options.

Ex: Will the marginal benefits higher or lower for
the third cup of coffee?
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 #3 The Production Possibilities Frontier (PPF)
The production possibilities frontier (PPF) shows the maximum
combination of two goods an economy can produce, given
(Assume):

• Fixed resources and

• Constant technology

The slope of the PPF shows the opportunity cost in production

between the two goods

Economic growth can be shown in the PPF model when the PPF
shifts out and to the right
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#3 The PPF shows the maximum combination of two goods an
economy can produce, given resources and technology

A production possibilities frontier (PPF) assumes

Constant Productive
Two goods Fixed resources technology efficiency and
full
employment

ie Full-employment =
when all resources
Entrepre- (including labour) are
Land Labour Capital fully-employed efficiently
neurship
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#3 This PPF shows the maximum combination of socks and
gloves this economy can produce
Socks
a
50 b
40
c
30
d
20

10
e
gloves
10 20 30 40 50
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 Points outside the PPF are unobtainable;
#3
points inside the PPF are inefficient
Possible and
Socks most efficient
50 (ie on the PPF)

40 a
Possible but c
30 inefficient
Unobtainable
(ie outside PPF)
(ie inside PPF)
20

10 b
Gloves
10 20 30 40 50
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 The slope of this PPF gives the **opportunity cost of
#3
gloves in terms of socks
Socks Total Unit
Socks Gloves Opportunity Opportunity
a cost cost
50 b
a 50 0 -
40
c b 45 20 5 5/20 = 0.25
30 c 35 35 10 10/15 = 0.67
d
20 d 20 45 15 15/10 = 1.50

10 e 0 50 20 20/5 = 4.00

e
Gloves Note: Opportunity cost increases
10 20 30 40 50
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 Opportunity cost increases as we move down a PPF
#3
because of the “law of diminishing returns”
**Increasing opportunity
Unit cost means we have to
Socks Gloves
Opportunity cost give up more and more
a 50 0 - socks as we produce more
Socks Baked and more gloves
Down by beans
b 45 5 (MC) 20 Up by 20 5/20 = 0.25
(MR)
c 35 35 10/15 = 0.67 **Unit Opportunity cost =
No .of socks given up ÷ No. of gloves gained

d 20 45 15/10 = 1.50

e 0 50 20/5 = 4.00

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 Economic growth can be shown with:
#3 the PPF moving out and to the right
Socks
a
60
b
50
c
40 Notes:
Increase resources or
technology, PPF moves out,
30 Producing more of both
d
(socks & gloves).
20

10 PPF2
PPF1
e
Gloves
10 20 30 40 50 60
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 clothing Food
a 75 0
Consider the following PPF.
b 60 60

Learning 1. If this economy produces 60 Clothing c 45 80

Outcome #3 units of clothing, how much food d 30 90

can it produce? a e 0 100
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2. Can this economy produce 60 b f
The units of clothing and 80 units of 60
Production food? ie Point f, Why or why c
not? 45
Possibilities d
Frontier (PPF) 3. If we produce more food, what 30
is the opportunity cost of this? 15
e
4. What is the opportunity cost of
Class Exercise food when moving from b to c ? Food
20 40 60 80 100
5. What is the opportunity cost of
food when moving from d to e ?
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#3 Efficiency refers to:
the maximisation of productive outputs given limited inputs
Efficiency can be ...

Productive Allocative
efficiency efficiency

Involves using the lowest cost Gives the production mix

production methods most wanted by society

Achieved on the PPF Achieved at market equilibrium

ie producing at the lowest cost ie producing when MB = MC

Notes: 2 types of efficiency: allocative eff & productive efficiency 1-38

Self-revision Exercise:

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Learning
Outcome #3 #3 The Production Possibilities Frontier
Can you:
Self-revision • Explain what a PPF is, and what it shows?
(Outside of class)• State the assumptions underlying the PPF model?
• Explain why points inside the PPF are inefficient and why points outside
the PPF are unobtainable?
• Calculate opportunity cost and explain why opportunity cost increases
as we move down the PPF?
• Model economic growth using the PPF?
• Comment on the costs and benefits of producing capital goods versus
consumer goods?

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 41
Economics and Efficiency
♦ Efficiency is the use or administering of scarce resources to produce the
maximum amount of the desired goods and services, thereby achieving the
greatest possible fulfilment of society’s wants.

1. Allocative efficiency (ie at Q* where *MR = MC)

• Occurs when all available resources are devoted to the combination of
goods most wanted by society.

2. Productive efficiency (ie producing at ATC (min))

• Occurs when goods or services are produced using the lowest cost
production methods.
• When we are producing on the production possibilities frontier (PPF) (see
later slides) 4
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 What you should get out from Lecture 1… 42

Define what economics is as a discipline and distinguish between microeconomics and

macroeconomics.
1. Outline scarcity and explain why is it the economic problem.
2. Explain and apply the three fundamental questions in economics to different
economic systems and define the main categories of economic resources.
3. Describe the role of marginal benefits and marginal costs in rational decision making
using cost benefit analysis.
4. Define “opportunity cost” and apply this concept to real world situations.
5. Outline and apply the PPF model with reference to assumptions, different production
points, its shape and how it is it linked with opportunity cost. Apply knowledge to
numerical problems.
6. Formulate an argument about the problems of economic growth in a context of a
shrinking resource base.
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The END

Materials are adapted from the following textbooks:

Parkin M and Bade R., Microeconomics, 2nd edition, Pearson, 2020. (Ch1 and Ch 3)
Stevenson B., Wolfers J., Principles of Economics, 1st Ed, MacMillian International, 2020. (Ch 1)

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 Additional self-revision Homework exercise- PPF 44

1. The table reports the production possibilities frontier (PPF) for consumer goods (automobiles)
and capital goods (forklifts).

a) Show these data graphically (put automobiles on the x-axis). Upon what specific assumptions
is this production possibilities curve (PPF) based?
b) If the economy is at point C, what is the opportunity cost of one more automobile? Of one
more forklift?
c) If this economy was producing 3 automobiles and 20 fork lifts, what could you conclude
about the use of its available resources?
d) Suppose improvement occurs in the technology of producing forklifts and automobiles.
Draw a production possibilities curve that reflects technological improvement in the production
of both goods.
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 Additional Self-revision homework exercises 46

1. True or false. An opportunity cost is the total cost of

all other alternatives foregone whenever a choice is made.

2. True or false. The most efficient point on the

production possibilities frontier is the midpoint on the
curve.

3. Which of the following is not a factor of production?

a)Land b) Labour c) Money d) Capital
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Additional self-revision homework (PPF)
Use the PPF to answer questions 4, 5, 6, 7 and 8 Explain.
4. If the economy is operating at point C, the opportunity cost of producing an additional
20 units of butter is:
a) 10 units of guns b) 20 units of guns c)30 units of guns d)40 units of guns
5. Point F represents:
a) a combination of production that can be reached if we reduce the production of
guns by 20 units
b)a combination of production that is inefficient because there are unemployed
resources
c) a combination of production that can be reached if there is a sufficient advance in
technology
d)none of the above
6. As we move from point A to point D:
a) the opportunity costs of guns in terms of butter is constant
b)the opportunity cost of guns in terms of butter falls
c) the opportunity cost of guns in terms of butter rises
d)the economy becomes more efficient

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Additional self-revision Homework Exercises 4
8
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7. Refer to the above diagram. Other things equal, this economy will
achieve the most rapid rate of growth if:
A. the ratio of capital to consumer goods is minimized.
B. it chooses point E.
C. it chooses point D.
D. it chooses point A.

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