After studying this topic, you will be able to:

1. Define economics
2. Explain the kinds of questions that economists try to answer by applying
basic concepts in economics
3. Explain the ideas that define the economic way of thinking
4. Explain how economics is useful as a life skills

Tutorial exercises
Students are required to complete the tutorial exercise of topic 1 before attending the
tutorial meeting. Join the tutorial with your completed tutorial exercise.

*** Textbook Reading and Revision Assignment:

 Chapter 1
 Checkpoint 1.1, 1.2, 1.3
 Chapter Summary (Chapter 1)

BHMH 2002, Introduction to Economics 1 Copyright © 2024 by PolyU-HKCC. Some copyright materials are from Pearson with authorization to
be posted on the e-learning platform of PolyU-HKCC.
 Economics Defined
Economics is the social science that studies the choices that individuals,
businesses, and governments make as they cope with scarcity, all the things that
influence those choices, and the arrangements that coordinate them.

Reference - Why is ‘definition’ important?

• Use of correct economic term definition is very important to avoid committing the fallacy of
reasoning such as circular reasoning and ambiguity.
• The layman terms found in the general dictionary or the use of your own wording is not
recommended because the economic term is not well defined.

BHMH 2002, Introduction to Economics 2

  Scarcity
is the condition that arises because resources are limited relative to unlimited
human wants.

 The ability of all of us as a society to satisfy our wants is limited by the productive
resources that exist. These resources include the gifts of nature (Land), our
labour and ingenuity, and the tools and equipment that we have made.

 These scarce resources become the constraints of our economic behavior

(resource constraint).

You attend today’s class. Is being in school the best use of your time?

There are different choices for using the same time period such as enjoying your
sports, hanging out with your friends, staying in your home and rest. You cannot
do everything you want at the same time because time is ‘scarce’. Our inability to
satisfy all our wants is called scarcity.

BHMH 2002, Introduction to Economics 3

  Faced with scarcity, we must make choices. We must choose among the
available alternatives and face tradeoff.

 The choices we make depend on the incentives we face.

 Even people in the wealthiest societies are in a state of scarcity.

 All economic questions and problems arise because human wants exceed
the resources available to satisfy them.

BHMH 2002, Introduction to Economics 4

  Economics has two broad parts:
• Microeconomics is the study of the choices that individuals and businesses made
and the way these choices interact and are influenced by governments. E.g. Will
you buy a 4K TV or standard one?

• Macroeconomics is the study of the aggregate (or total) effects on the national
economy and the global economy of the choices that individuals, businesses,
and governments make. E.g. Why is unemployment in Europe so high?

BHMH 2002, Introduction to Economics 5

  Questions define the scope of economics in response to scarcity constraint:
How do choices end up determining what, how and for whom goods and
services get produced?

Goods and services: are the objects (goods) and actions (services) that people value
and produce to satisfy human wants.

* What to produce? – What kind of goods and services get produced and in what
quantities?
* How to produce? – How are goods and services produced? i.e. refer to which
production method is used to produce goods and services e.g. To
help a customer to place an order in a restaurant, there is a choice
between employing a waiter (labour services) or providing a mini-
ipad (mechanization) for the customers to do so.
* For Whom to produce? – For Whom are the various goods and services produced?
Who are the buyers/users/consumers? Besides, the answer also
depends on the incomes that people earn and the prices they pay
for the goods and services they buy.

BHMH 2002, Introduction to Economics 6

 1. Which of the following statements best describes the study of economics?
Economics studies how
a) firms make profits.
b) we make choices in face of scarcity.
c) to make scarcity does not exist.
d) businesses reach decisions.
Remark:
For the assessment of BHMH
2002, four options are provided
in any multiple choice question.

2. “Should I study accounting program or finance program when I apply for HKCC?" is an
example of a what / how / for whom question.

3. The question “Would accounting majors or finance majors earn more after they
graduate?" is an example of a what / how / for whom question.

BHMH 2002, Introduction to Economics 7

 You’re now going to see how economists approach their work. We’ll explain the ideas that
economists use to frame their view of the world. These ideas will soon have you thinking like
an economist.

 6 ideas define the economic way of thinking in response to scarcity (resource constraint):
 Choice is a tradeoff
 Cost is what you must give up to get something
 Benefit is what you gain from something
 People make rational choices by comparing benefits and cost
 Most choices are made at the margin
(It is a ‘more-or-less’ question. It is not an all-or-nothing decision.)
 Choices respond to incentives

 Warm reminder:
The Economic terms are well defined to avoid any ambiguity or unclear meaning in discussion. To
illustrate, the definition of cost in Economics is significantly different from the one of accounting or
the one used by layman found in a dictionary. As a result, students are reminded to use the proper
definitions of Economic concepts in this course.

BHMH 2002, Introduction to Economics 8

 1. A Choice Is a Tradeoff
 A tradeoff is an exchange that giving up one thing to get something else.

 Because we face scarcity we must make choices. When we make a choice,

we select from available alternatives, i.e. if you decide to have something
more, you need to have some other thing less.

 You can think about your choices as tradeoffs.

 Does tradeoff exist in a one-man economy? Yes, when a person makes his
decision due to scarcity.

When you choose how to spend your Sunday, does it

involve tradeoff?

 Students should aware that ‘tradeoff’ and ‘trade’ are referred to 2 different economic
concepts. “Trade” only occurs when 2 or more persons have different values on their
possessions and happens in non-one-man economy. Don’t mix them up.

BHMH 2002, Introduction to Economics 9

2. Cost: What You Must Give Up

In Economics, there is no built-in value for each good or service. All concepts of “value”,
“benefit”, and “cost” are measured in terms of other goods and services relatively.

Money measurement is not a must theoretically. To illustrate, money does not exist in a
barter economy in which goods are exchanged for goods directly.

In Economics, all costs are in terms of the concept of “opportunity cost”. Opportunity cost
is the highest-valued option forgone for an act or a decision.

Why is it defined in this way?

If a person decides to get one thing, he needs to forgo an opportunity to use the same
resource to get the other thing due to scarcity (resource constraint). Thus, the ‘opportunity
cost’ is measured in terms of the highest-valued option forgone for an act or decision.

For example, if you spend $20 on a cup of coffee, you cant’s spend it on a sandwich. The
coffee really costs a sandwich.

Theoretically, if there is no option forgone, there is no cost.

BHMH 2002, Introduction to Economics 10

 Total opportunity cost may consist of more than 1 component in a non-one man economy
or in the real world application. It depends on the types of resources needed and the
scenario provided for a given decision.

When measuring the total cost of an act or a decision, technically, it involves different
classifications of costs. Besides the money cost, the highest valued option forgone for a given
period time is needed to considered if an action takes time to complete.

Total opportunity cost can be the sum of money cost and time cost. That is the best
alternative use of the money and time resource for a given act or decision.

Illustration
What is the total opportunity cost of completing a 2-year sub-degree programme?

Hints: Both the alternative uses of money and time resources should be considered for making
the decision whether a person should study the degree program.

Considerations:
1. What types of resources are needed?
2. How much resources is needed?
3. What are their alternative use?
4. What is the total opportunity cost?

BHMH 2002, Introduction to Economics 11

 Economic way of thinking (Framework):
Decision Study and complete a 2-year sub-degree program
Resource needed Money resources Time resources
Amount Alternative use of the Money cost Time cost is significant for this decision because
paid for tuition fee and related the study lasts for 2 years (Duration), which is
expenses is the direct cost of this not a short time period.
decision.
The cost is measured in terms of
money for summation and
quantitative analysis (Amount).

Alternative use of The alternatives used of the Alternatives used of the 2 years of time can be:
resources money should be specified if it is Rank No. 1 - go out to work and earn wage
provided in the scenario. (wage forgone); or
#Must use the ‘correct Rank No. 2 - stay at home and do nothing
economic terms’ for
In this case, the wage forgone will be the time
different components cost because only the highest valued option
of total opportunity forgone for the use of same time period can be
cost. treated as part of the opportunity cost.

Wage forgone, the time cost (indirect cost) in

this case, is an amount measured in terms of
money.

BHMH 2002, Introduction to Economics 12

 Economic way of thinking:
Decision Study and complete a 2-year sub-degree program
Total opportunity cost Total opportunity cost = money cost + time cost
of studying a 2-year i.e. the sum of money cost (tuition fee and related expenses) and time cost (wage
sub-degree program forgone) For simplicity, the concept of time value of money is ignored.).

If both money cost and time cost are in terms of money, summation can be done
for analysis and comparison. The total opportunity cost of this decision can be
calculated.
However, the use of money for measurement may not be applied for all scenarios
and questions.

Remark: To calculate the total opportunity cost of a decision in the real world application, the
most challenging part is to determine what the “time cost” is.
The time cost can be measured (i) in terms of money or (ii) in terms of the value of
other goods and services forgone due to the alternatives use of the same time
period. It is different case by case.

BHMH 2002, Introduction to Economics 13

3. Benefit: What You Gain
Benefit of something
- is the gain or pleasure that it brings
- is determined by personal preferences – likes and dislikes
- is measured by “what you are willing to give up” to get the product you want.
- Conceptually, it is measured in terms of other goods or services to show the same level of
satisfaction you can obtain from this product (Illustration 1).
- If money is allowed to be used as the unit of measurement, the benefit can be measured in
terms of money (Illustration 2).

Illustration 1
‘Jenny is willing to give up a cup of coffee for a can of coke’.
Jenny tries to reveal her benefit of drinking a can of coke in terms of the value of another good. Based
on the statement, we can deduce that Jenny’s benefit/satisfaction of drinking a can of coke is at least as
much as the one of drinking a cup of coffee. This illustrates the theoretical concept of “benefit” in
Economics, but is not an illustration of the ‘cost’ concept.

Illustration 2
‘The benefit of studying a degree program is the expected increase in future income stream’.
Based on this statement, we can deduce that the benefit of this decision is directly referred to the
‘gain’ of studying a degree program, i.e. the expected increase in future income stream (The concept of
time value of money is ignore for simplicity) and measured in terms of money practically. Usually, if the
scenario is rather complicated, it is easier to make analysis and comparison when the benefit is
measured in terms of money. However, some benefits may not be quantified easily, e.g. knowledge
gained or wisdom developed. You may require to explain the total benefit in terms of different
components in words instead of by calculation.

BHMH 2002, Introduction to Economics 14

 4. Rational Choice (Core Economics Assumption: Rationality)
 A basic idea of economics - in making choices, people act rationally.
 A rational choice is one that uses the available resources to best achieve the
objective of the person making the choice.
 We make rational choices by comparing benefits and costs of the alternatives
option and choosing the alternative that makes net benefit  benefit minus
cost  as large as possible.
 A rational choice might turn out not to have been the best choice after the fact.

This slide aims at explaining what is rational choice.

To make a rational choice, always refers the “Rule of Making a Rational Choice” on Slide No.18.

Illustration
a) What is the cost of a Filet-O-Fish?
b) How to measure the benefit of a Filet-O-Fish?
c) How to make a rational choice? Buy it or not?
d) Do you make the same decision as your classmate? Why are they the
same/different?

BHMH 2002, Introduction to Economics 15

 5. Choosing at the Margin
 Making a choice at the margin means comparing the relevant alternatives
systematically and incrementally (additionally).
 Marginal analysis is used of a, not an all-or-nothing decision. ‘more-or-less’
question
 All-or-nothing decision : Should I spend my spare time, i.e. 3 hours, on studying and
playing video game?
 Marginal analysis : How much of my spare time, i.e. 3 hours, to be allocated
between studying and playing video game?

Mathematically:

 Marginal cost [MC] of something is the opportunity cost of a one- TC

unit increase in an activity. It is measured in terms of what you MC 
must give up to get one additional unit of it.
QOutput

 Marginal benefit [MB] is the what you gain when you get one TB
more unit of something. It is measured by what you are willing to MB 
give up to get one additional unit of it. QOutput

BHMH 2002, Introduction to Economics 16

For simplicity, the cost is measured in terms of money in the following exercises:

Marginal cost: Illustration

A boutique is on sale. Suppose all items in this boutique cost $199. Big Sales
Fill in the missing data in table and show your workings. 10% off for the 2nd item
Round your figures to one decimal place if applicable. 25% off for the 3rd item

Quantity Total Cost Marginal Cost

1 $199 ($199 – 0) / (1 - 0) = $199
2 $199 + $199 x 0.9 = $378.1

3 $199 + $199 x 0.9 + $199 x 0.75 =

$527.4

How many would you buy? How to make a rational choice?

BHMH 2002, Introduction to Economics 17

  Making a Rational Choice with Marginal Analysis
 People make choices at the margin by comparing the benefit of a one-
unit change in an activity (which is the marginal benefit) to the cost of
making a one-unit change in an activity (which is the marginal cost).
 If the marginal benefit of an action exceeds the marginal cost of the
action, then the rational choice is to take the action.
 To encourage one person to take an action or make a decision, the
marginal benefit (MB) should exceed the marginal cost (MC) of the
first unit. [MB > MC at the 1st unit]
 When will the action stop? The action will stop at which the marginal
benefit equals marginal cost at the last unit. [MB = MC at the last unit]

Rule of Making a Rational Choice

You make a rational choice when you take those actions for which
marginal benefit exceeds marginal cost until they are equal at the last
unit (Equi-marginal principle).

BHMH 2002, Introduction to Economics 18

6. Choices Respond to Incentives
• The choices we make depend on the incentives we face.
• An incentive changes marginal benefit or marginal cost that we face and leads
us to change our actions.
• a reward — a “carrot” that encourages an action.
• a penalty—a “stick” that discourages an action.
• We respond positively to “carrots” and negatively to “sticks.”
• A central idea of economics is that by observing changes in incentives, we can
predict how choices change.

Checkpoint Questions
Classify the type of incentive and identify the possible effect on one’s behaviour:

(1) Being entitle for a lucky draw after vaccination

- It is a reward / penalty that encourages / discourages citizen to take a vaccine.

(2) Penalty for speeding offence excessing 100km/hour increases from HK$300 to
HK$1,000.
- It is a reward / penalty that encourages / discourages excessive speeding.

BHMH 2002, Introduction to Economics 19

 Checkpoint Questions
1) You have chosen to take a trip during spring break. If you had not gone, you
would either have worked at a temporary job or studied for exams. The
opportunity cost of your trip is
A. the wages you would have earned from working.
B. the wages you would have earned from working and the lower grade
earned by not studying.
C. the value of the trip.
D. We cannot determine what the opportunity cost is without knowing which
alternative, working or studying, you would have preferred.

Recall: Opportunity cost is “the highest-valued option forgone” for an act or a decision.

2) What is NOT true about rational choice?

A. It involves comparing costs and benefits.
B. It is the same for all individuals.
C. It might turn out not to have been the best choice after the event.
D. It is a choice that uses the available resources to best achieve the
objective of the person making the choice.

BHMH 2002, Introduction to Economics 20

  Economics is a decision-making tool kit;
 As a social science, it is a platform on which you will build critical thinking skills
that prepare you for your career and life.

 Economics as a Decision Tool

 The economic way of thinking provides you with tools for making decisions in all
aspects of your lives:
• Personal
• Business
• Government

 No matter a decision is made in any aspects of your lives, you can use the marginal
cost and marginal benefit analysis to make a better decisions based on this
systematic Economic approach.

BHMH 2002, Introduction to Economics 21

  Economics as a Social Science
 Economists try to understand and predict the effects of economic forces by using the
scientific method first developed by physicists. The scientific method is a systematic
approach to check what works and what doesn’t work.
It begins with a question about cause and effect arising from some observed facts.

Any differences between the following two

statements? Which one could be checked by using
systematic approach?

1. “We should cut back on our use of water.”

2. “Our planet is warming because of the quantity of coal that

we’re burning.”

BHMH 2002, Introduction to Economics 22

  Normative versus Positive

• Normative statements —statements about what ought to be.

 It doesn’t assert a fact that can be checked.
 You may agree or disagree with it, but you can’t test it.
 These statements depend on values, subjective judgement’ and cannot be
tested.
 The statement “We ought to cut back on our use of coal” is a normative
statement.
 Economists as social scientists try to avoid making normative statements.

• Positive statements —statements about what is.

 A positive statement might be right or wrong and can be tested.
 we can discover by careful observation of facts.
 “Our planet is warming because of the quantity of coal that we’re burning”
is a positive statement.
 Economists try to understand and predict the effects of economic forces
begins with positive statements.

BHMH 2002, Introduction to Economics 23

Checkpoint Questions

1. Which of the following is a normative statement?

a) Flood victims should pay for their own rebuilding.
b) When the price of kiwi fruit increases, fewer people eat kiwi fruit.
c) An increase in the supply of computers has caused computer prices to fall.
d) Recessions lead to increases in the unemployment rate.

2. The statement that "increases in the tax on gasoline increase the price of
gasoline" is an example of a
a) normative statement.
b) positive statement.
c) economics statement.
d) rational-decision statement.

BHMH 2002, Introduction to Economics 24

Reference Section
  Economics as an Aid to Critical Thinking
What is Critical Thinking?
Critical thinking is thinking that is logical and fact-based. It is thinking that
• begins with a question
• clarifies the question
• thinking with an open mind about how to answer the question
• identifies potential answers
• seeks the relevant facts to check the potential answers
• ends with a well-reasoned answer

Does this sequence of critical thinking activities seem familiar?

Economic science
 begins with a question about some economic event or activity;
 uses the economic way of thinking to clarify the question,
 think about how to answer it,
 identify possible answers, and
 check them against the fact;
 arrives at a well-reasoned answer.

As a student, you will have lots of opportunities to practice critical thinking. It will be a
major feature of this economic course. What you learn in this course and the critical
thinking and economic thinking skills that you develop will enrich your career and your life.

BHMH 2002, Introduction to Economics 26

Remarks for Assessments:

The abbreviations of economic terms are used for quick

reference in notes and teaching only.

The use of abbreviation in the assessment answers is NOT

accepted.

Students are required to provide FULL spelling of terms

and short paragraphs for their explanation in all
assessments.
Reminder!!

Always refer to the *** Textbook Reading and

Revision Assignment*** on the cover page

Weekly revision of the textbook and all learning

materials is suggested!