Topic 1 1.

Two Big Economic Questions: - How do the choice make up determining what, how, when, where and whom the goods are being produced? - When do the choices made in pursuit of self-interest also meeting the social interest? 2. Goods and services are the objects that people value and produce in order to satisfy people needs. 3. What determines the quantities of goods and services that are being produced. - What we produce change over time. For instance, the change of technology enables us to build a better equipped home, to manufacturer more foods as well as to provide better quality of goods and services. 4. How determines the ways of producing goods and services. - For instance, in order to buy a factory-made kitchen, one can either go to IKEA to choose the parts and assemble by him or herself or one can even appoint a carpenter for help. 5. Factors of production Land, Labour, Capital, and Entrepreneurship (help to answer the question how?) 6. Land - Gift of nature that will be used to produce food and services. 7. Labour Work time and effort that people devote to produce food and services. Labour encompasses all the physical and mental efforts that are being used in the production of foods and services. 8. Capital Input that will be required in the production of foods and services. - Human capital normally referring to the knowledge that people obtained from education, training and work experience. - Capital also includes tools, equipments, machines and buildings that are being adapted for the purpose of producing foods and services. - Financial capital such as money, shares and bonds are not considered as capital the financial capitals are not adopted for the production of goods and services instead that are being used to finance the business activities only.

9. Entrepreneurship Human resources that organize the land, labour and capital. Entrepreneur usually come out with the ideas of what should be produces, how to produce make business decision as well as finding way to mitigate the risk. 10. When determines the timing of producing the goods and services. - For instance, when there is high employment rate within a particular country due to low production, government could provide more incentives to companies for the purpose of increasing the productions as this will subsequently boost up the employment level within a country. 11. Where determines the places that goods and services should be produced. - For instance, more universities are choosing to set up their campuses in Singapore instead of other countries as there is an increase in demand of the education services within Singapore. 12. Whom determines the specific groups in which the foods and services are being produced. - Who gets the goods and services that are produced will be dependent on the income level of people. -People can earn income by selling the services of the factors of productions that they owned such as land earned rent, labour earned wages, capital earned interest and entrepreneur earn profits. 13. Self-interest -People tend to make decisions or choices that are in the best interest of themselves. They often ignore how their choices will affect others. For instance, a person only order a pizza only when the person is hungry rather than thinking the delivery person or cook needs an income for living. - When a person made decision, that person will come into contact with many people who produce and deliver the goods and services to the person. Similarly, these people are also making their choices for the purpose of satisfying their needs. For instance, pizza delivery person who delivery pizza to a person is not acting in the best interest of that person, the delivery person is making decision in the best of his interest, which is to earn income for living instead of thinking on whether the ordering person is hungry or not. 14. Social interest - Choices that are best for the society as a whole. 15. Conflict between social interest and self interest can be illustrated with ten topics that generate heated discussions in today world.

- Privatization 9 November 1989, Berlin Wall tumbled and with its destruction, two Germany embarks on the path of unity. West Germany was designed on the model of rest of the Western Europe. In these nation, people own their properties and businesses. Privately owned businesses produce goods and services and trade them freely. All the economic activities are conducted by people who pursue their own interest. East Germany on the other hand was designed on the model of Soviet Union, which is a communist state. In this nation, people are not free to own property and business as well as to trade freely. The government owns factories, shops and offices and it decides how, when, what and for whom the goods are being produced. The people will be required to follow the instructions that are directed by the central government. In today, most of the countries including China which is previously a communist country are moving towards privatization. Do the publicly owned businesses which are coordinated by central government serve the social interest better than privately owned businesses that are trade freely? - Globalization Globalization, expansion of investment and trade activities had been going on for many countries. During 1990s, the advance in microchip, satellite and fiber optics had provided a valuable aid in helping most countries in reducing the cost of communication. People all over the world will be able to communicate with each other with the lowest cost possible. Besides that, when Nike decides to produce more sport shoes, people who live in China, Malaysia and Indonesia will be getting job as factories will be set up. When Sony decided to create a new game for PlayStation 2, programmers from India and New Zealand will be hirer to write the code. When China Airlines decided to buy more airplanes, the Europeans workers from Airbus or the Americans workers from Boeing will be required to build the airplanes. However, some of the nations such as Africa and South America did not get the prosperity of globalization instead are being left behind as under developed countries. Is globalization a good thing? Who will be beneficial? Globalization is pretty clearly in the interest of owners of multinational companies that profit by producing low cost region and selling in high cost region. However, is the interest of these companies represents the interest of the workers within the low cost region and consumers within the high cost region? Is it social interest? - The New Economy Revolution had made the life of many people easier as the changes that occurred during the revolution until today was very incredible especially technology development. The discovery of microprocessor and computer chip had caused the telecommunications to be much cheaper and faster, music and reading become more realistic and cheaper and millions of task that required humans decision and actions are being automated. When Gordon Moore set up Intel and producing chip, no one had told him to do so and he did not even think whether his production will be able to make the life of people easier. Bill Gates who had set up Microsoft also did not think whether the operation system that had been introduced will enhance the peoples computer experiences. These entrepreneurs only make decisions that are in their own best interest, which is to obtain high payoff. Could more being done? Does Intel use the highest quality of materials in producing high quality of chips? Does

the quality of chips too low and the rice of chips too high? Did Bill Gates have to pay $30 million to develop Microsoft and Windows? Does programme developed in social interest? - The Economic Response to 9-11 The economic shockwave that was occurred on 11 September 2011 had changed what, where, when, how and for whom the goods and services are being produced. The biggest change in production occurred in travel, accommodation and security. Many business travels are replaced by teleconferencing. Much holiday travel left air and went onto motorways and highways. The foreign trip had been cut down. Airlines lost business and cut back on their airplanes purchase. Banks which lent money to airlines lost millions of euros. Airports although operating at lower capacity but they had improved the security in airport by hiring more security agents and by installing state-of-the-arts scanners. Thousands of people made choices in pursuit of their self interest and these had result in changes of production. - Corporate Scandals The case of Enron and WorldCom in the year 2000 had caused the issue of corporate integrity to be arose. The hidings of debts by Enrons directors in order to increase the value of Enron had been discovered by the investigators and as a result the shareholders wealth had been wiped out. The shares hold by shareholders became valueless and many shareholders had suffered serious loss as a result of the scandals. Scott Sullivan, which was financial officers of WorldCom was being arrested for falsifying the profits of WorldCom in order to obtain higher bonuses as the bonuses that will be obtained are measure in accordance with the profits earned. These cases proposed that in the pursuit of self-interest, people are willing to break the laws. A company normally hires an executive for the purpose of maximizing the shareholders wealth. However, in perspectives of executives, they usually tend to act or make decision in their own self-interest, which is to maximizing profit to earn bonuses. Did the executives take concern of shareholders wealth? Does they taken into account of social interest when making decision? -HIV/AIDS HIV/ AIDS are considered to be killing diseases in today world. The most effective ways of treating HIV was the antiretroviral drugs that are developed by big multinational drugs companies. The production of the drugs is costly and risky. Drugs companies will tend to turn back for the production of these drugs in the event that the productions do not contribute to the companies self-interest. The selling price of the drugs will be much lower than the productions. - Disappearing Tropical Rain Forests Tropical rain forests are vital as the forests not only are the natural habitat for various species of flora and fauna, but the forests provide us with the ingredients of producing soap, paper, food preservatives, shampoos, nuts and fruits. The rain forests are also essentials in producing more oxygen via photosynthesis processes. However, due to logging, mining, farming, land development, the earth is only covered by 2% of the rain forest only. The decision of destroying the rain forest is made for the self-interest of people rather than

think of the lost of natural habitat to flora and fauna as well as lost of ingredients for the productions of products. Are the choice made damaging the social interest? - Water shortage Only 1% of water on the earth can be used for consumption. Finland, Canada and a few other places have more water than they can use, but Australia, Africa and California (and many other places) could use much more water than they can get. Some people pay less for water than others. Californian farmers, for example, pay less than Californian households. Some of the highest prices for water are faced by people in the poorest countries who must either buy water from a water-dealers truck or carry water in buckets over many miles. In India and Bangladesh, plenty of rain falls, but it falls during a short wet season and the rest of the year is dry. Dams could help, but not enough have been built in those countries. Are national and global water resources being managed properly? Are the decisions that we each make in our self-interest to use, conserve and transport water also in the social interest? - Unemployment In today world context, almost 40% of teenagers are unemployed in many countries. People get jobs because other people think they can make profits by hiring them. And people accept job because they think the pay and conditions are good. So the numbers of jobs are determined by self-interest of employers and workers. Bu the number of job is social interest? - Debts and deficit Every year since 1992, Americans have bought goods and services from the rest of the world in excess of what foreigners bought from them to the tune of $4 trillion or 40 per cent of a years production in the United States. To pay for these goods and services, Americans are borrowing from the rest of us. These enormous deficits and the debts they create cannot persist indefinitely and will somehow have to be repaid. Are the choices that Americans are making to buy from and sell to the rest of the world in the social interest? 16. Scarcity is the excess of human wants over what that had actually being produced . Because of scarcity, various choices need to be made between alternatives. 17. The choices we made are dependent on the incentive that we face. Incentive is a reward that encourage an action or penalty that discourage an action. 18. A trade-off is an exchange-giving up one thing to get something else. For instance, when you choose how you would like to spend your weekend, you will face trade-off between study and going out with friends. - What trade-off What goods and services that will be produced are dependent on each choice, by government as well as by business that are producing goods and services. For instance, people face trade-off of whether to go to movie or to go for few cups of coffee. Government face trade-off in deciding on how to spend on tax. Government will either use tax for study grant or to purchase more defense equipment. Business face trade-off when they want to produce. Gillette faces trade off to produce either toothbrushes or shavers.

- How trade-off How goods and services are produced dependent on the things we buy and choices of business. For example, Blockbuster opens a new store with automated vending machines and close down the old store that uses manual services. Blockbuster trades off labor with capital. - For whom trade-off For whom the good and services are being distributed is dependent o the purchasing power of people. Purchasing power can be transferred by voluntarily payments, theft as well as the tax and benefits organized by government. For voluntarily payment, people trade off a small portion of income for charity when people donate money to charitable organizations. Voting theft as an illegal activity and devote resources for law enforcement will cause trading off of food and services for the security of the property. We also vote for taxes and welfare arrangements that redistribute buying power from the rich to the poor. Government redistribution confronts society with what has been called the big trade-off the trade-off between equality and efficiency. Taxing the rich and making transfers to the poor bring greater economic equality. But taxing productive activities such as running a business, working hard, and saving and investing in capital discourages these activities. So taxing productive activities means producing less. A more equal distribution means there is less to share. 19. Opportunity cost is the highest value alternative that we give up to get something. 20. People make choices by using margin, which is to evaluate the consequences of making incremental changes in the use of their resources. 21. The benefits arise as a result of increase in activity is to be known as marginal benefits . For example, a student spent four nights to study and achieve average mark of 60. The student decides to spend additional day for study in order to get higher mark. The student gets an average of 70 after study additional day. Thus, the marginal benefits of study additional day will be the additional of 10 marks that the student obtained. 22. The cost of an increase in activity is known as marginal cost. For that student, the marginal cost of study additional night will be cost of the additional day that he does not spent with the friends. 23. A change in marginal benefit or marginal cost will change the incentives that people face and subsequently lead people to change their choices. 24. More of an activity is undertaken when its marginal cost falls or its marginal benefit rises; less of the activity is undertaken when the marginal benefit falls or marginal cost rises.

25. Marginal benefits > Marginal costs People have incentive to do more activity Marginal benefits < Marginal costs People have incentive to do less activity Marginal benefits = Marginal costs Rational choices as it maximize the net benefits of an activity 26. Economist distinguishes between two types of statement: What is statement is a positive statement and the statement might be right or wrong. Economist tests the positive statement by checking against the facts. (Sentence with will word) What ought to be are normative statement and the statement cannot be tested. (Sentence with the word could, should, would) 27. The productions possibility frontiers (PPF) is the boundary between those combination of goods and services that can be produced and those that cannot.

28. Figure above shows PPF for two products: CD and Pizzas. Any point within the PPF is attainable since there will be sufficient resources that can be adopted for the productions of CDs and Pizzas. The point that is located outside the PPF will not be attainable due to insufficient resources for the production of CDs and Pizzas. This will lead to scarcity where the demand of CDs and Pizzas exceeds the resources or the input available to satisfy the needs of people.

29. Production efficiency is achieved when we cannot produce more of one goods without producing less of others goods. Production is considered to be efficient if the point lied along the PPF (Point at PPF). If point lied within the PPF (such as point Z), production is inefficient since there is unused resources as well as misallocation of resources. Resources are unused when they are idle (not working) / unemployed. Resources are misallocated when they are being assigned to the tasks which they are not the best match. 30. Every choice along PPF involves trade-off. We must give up something for another thing. 31. Opportunity cost is a ratio. It is the decrease in quantity produced of one good divided by increase in the quantity of another good as we move along PPF. Moving from point D to point E: Opportunity Cost = 4(decrease in CDs) / 1 (increase in pizza) Moving from A to point B Opportunity cost = 1(decrease in CD) / 1(increase in pizza)

32. The opportunity cost of pizza increase when the quantity of pizza produced increases. This is the same for CDs. The phenomenon of increasing opportunity cost is reflected in the shape of PPF bowed outwards. Moving from point E to point F - The small increase in the quantity of pizza produced had caused a huge decrease in the quantity of CDs produced.(Opportunity cost of producing a pizza is large quantity of CDs) PPF bowed outwards as all the resources are not being equally productive in all the activities. People that had working to produce CDs might not be skillful in producing pizzas. If the CD producing labors being shifted to produce pizza, there will only be small increase in the quantity of pizza produced. However, there will be a huge decrease in the quantity of CDs produced. 33. The more of either goods we try to produce, the less effective the additional resources that we use to produce that good and the larger the opportunity cost of a unit of that good. As we move along PPF, we give up more and more CDs to increase pizza (increasing opportunity cost) 34. Marginal cost is the opportunity cost of producing one more unit.

A B C D E F

Pizza 0 1 2 3 4 5

CDs 15 14 12 9 5 0

Marginal Cost of Pizza 15-14 = 1 14-12 = 2 12-9 = 3 9-5 = 4 5-0 = 5

35. Preferences are the description of person likes and dislikes. Marginal benefits had been adopted for the purpose of describing preference. 36. Marginal benefit of goods and services is the benefit received from consuming one more unit of it.

37. Economist uses marginal benefit curve to illustrate preferences. The curve shows relationship between marginal benefit of goods and the quantity of goods consumed. 38. Principle of decreasing marginal benefit The more we have of any goods and services, the lesser the marginal benefits and the less we are willing to pay for the additional unit of it.

 The basic reason on why the marginal benefit decrease as the quantity of goods consumed increase is because we like variety. The more we consume one goods, the more we cans ee other things that would be better than the particular goods. When you are hungry, first slice of pizza you are buying bring benefit for you. Hence, you will be willing to pay huger price for it. However, for second slice, since you are not so hungry anymore, you will not willing to pay the same price as first slice of pizza. You will only willing to buy second slice only when the price of second slice is lower than first slice of pizza. 39. Allocative efficiency is achieved when we cannot produce more of one goods without sacrificing other good that we value more highly. Allocative efficiency is achieved at a point where marginal benefit = marginal cost in PPF.

40. Economic growth is the expansion of production that leads to increase in living standard. The faster the production growth, the greater the opportunity cost for economic growth.

41. Two keys factor that affect economic growth: Technological change Technological change includes development of new goods and of better way of producing new goods. Capital accumulation Capital accumulation involves growth of capital resources, which include human capital. 42. New technology and capital have opportunity cost. To use resource for research and development as well as to produce new capital, the resources devoted for the production of goods and services will be reduced. As shown in PPF above, if no resources are being devoted to produce 6 pizza ovens, the curve will remain the same as curve ABC. However, if the resources are being devoted to produce the 6 pizza ovens, we will have the capital (pizza oven) for production expansion possibilities and the curve will be shifting more outwards (to the right) than before in future which can be shown in line ABC. The lesser the resources that are devoted for production of pizza, the more resources can be devoted in producing the 6 ovens and subsequently there will be more possibility for production expansion.

43. Concentrating on the production of only one good or few goods are known as specialization. 44. A person had a comparative advantage in an activity if that person can perform activity at the lowest opportunity cost. Differences in opportunity cost arise from the difference in the human abilities and also from different characteristics of resources. 45. Because people have different abilities and the quality of resources are different, they will have different opportunity cost in producing goods. Such differences will give rise to comparative advantage. 46. We will be looking at the example of Ace Factory and Galaxy Factory. Ace and Galaxy each have a production line for discs and a production for cases and each firm produces all its own discs and cases. Total production from each factory is 3,000 CDs (6,000 CDs in total) an hour.

Ace Factory Based on the table below, possibility B shows that Ace will able to produce 3000 discs and 3000 cases. However, there is a possibility for Ace to produce 4000 of cases per hour in the event that Ace devotes all its resources in the production of cases. Of course in order to increase the production of cases, the production of disc must be reduced. So the opportunity cost of producing one additional case will be three discs.

 Similarly, if Ace wants to increase the production of discs, Ace must reduce the production of cases. The opportunity cost of producing one additional disc will be 1/3 of a case. Galaxy Factory Based on the table below, possibility B shows that Galaxy will able to produce 3000 discs and 3000 cases. However, Galaxy has machines that are being adopted for the production of cases and galaxy workers will be more skillful in producing cases. Galaxy production possibilities are different from Ace. If Galaxy uses all its resource to produce cases, 4000 cases can be produced within an hour (point A). On the other hand, if Galaxy devotes all its resource to produce cases, 12000 cases can be produced within an hour. If Galaxy intends to increase the production of disc, it will need to decrease the production of cases. For additional 1000 of disc produced, Galaxy will need to reduce the production of cases by 3000. Thus, the opportunity cost of produce on additional unit of disc will be 3 cases. On the other hand, if Galaxy wants to increase the production of cases, it will be required to reduce the production of disc. For additional 3000 of cases to be produced, Galaxy will need to give up the production of 1000 of discs. The opportunity cost of producing one additional unit of case will therefore be 1/3 of disc. 45. Based on the table above, Galaxy will have lower opportunity cost in producing cases and thus Galaxy will have comparative advantage in producing the case. Ace on the other hand will have comparative advantage in producing disc due to low opportunity cost. Thus, both Ace and Galaxy will be able to gain from specialization and trade with each other.

46. By specializing, Ace and Galaxy together can produce 12,000 cases and 12,000 discs an hour, double the total they can achieve without specialization. By specializing and trade also, Ace and Galaxy will be able to get outside their individual production possibilities frontiers. To achieve gains from specialization, both Ace and Galaxy must trade with each other. 47. In order to achive gain from trade, Ace must be agree to increase the production of disc from 3000 per hour to 12000 per hour. On the other hand, Galaxy must also agree to increase the production of cases from 3000 to 12000 per hour. Besides that, they must also agree to trade cases and dics at price of one dics for one case.

48. With this deal, Ace and Galaxy exchange along the trade line. They will exchange 6000 cases for 6000 discs. Ace will move to point F while Galaxy will move to F. 49 Both parties therefore experience trade of gains where Galaxy which can produce a disc at an opportunity cost of 3 cases per disc will be able to buy disc from Ace at cost of 1 case per disc. Ace, which can produce case at opportunity cost of 3 discs per case, will be able to buy case from Galaxy at the cost of 1 disc per case. 50. For Galaxy, the cost of a disc falls from 3 cases to 1 case. So it gets its discs more cheaply than it can produce them itself. For Ace, the cost of a case falls from 3 discs to 1 disc. So it gets its cases more cheaply than it can produce them itself. Because both Ace and Galaxy obtain the items they buy from the other at a lower cost than that at which they can produce the items themselves, they both gain from specialization and trade.

51. A person has an absolute advantage if a person is able to produce more of the goods and services with a given amount of resources as compare to others. A person with better technology, more capital and skilled workers will has a greater absolute advantage. Absolute advantage involves comparing productivity of one person with another. 52. Learning-by-doing is a phenomenon that people become more productive within an activity by repeatedly producing particular goods and services. 53. Dynamic comparative advantage is a comparative advantage that a person possesses as a result of having specialized in particular activity, and as a result of learning-by-doing, having become the producer with the lowest opportunity cost. Hong Kong and Singapore are examples of countries that have pursued dynamic comparative advantage vigorously. They have developed industries such as biotechnology in which initially they did not have a comparative advantage but, through learning-by-doing, became low opportunity cost producers in those industries. 54. Many possible methods are available for coordinating choice and allocating resources and they can be placed into three groups. Commands When commands had been adopted to coordinate entire economy and allocating resources, the economic system is to be known as planned economy. China and Soviet Union which are previously communist countries had adopted planned economy before. Today, only Cuba and North Korea adopted planned economy system. Experience with planned economy is generally an unfavorable one. Such an economy system will only work when there is a clear national objectives such as winning wars. Command systems however work effectively in smaller organization known as firm as compare to nation countries. Firm is an economic unit that employ factors of productions for the purpose of producing foods and services. The managers in the firm will use command systems to monitor the performance of the staffs. Command systems however might not be effective for large firms. Rules and Conventions Rules and conventions are being used to allocate resource and to coordinate activity. Example will be first come first serve, equal shares for all, children and women first. For example, we use contests to get the best performance out of professional athletes, tennis players and golfers. And we use equal shares in allocating votes for publicly provided resources and in allocating access to necessities such as basic health services. Like commands, rules and conventions cannot bear the entire burden of ensuring that our choices get coordinated and resources get used efficiently.

 Markets In economic context, market is an arrangement between buyers and sellers to get information and also to trade with each others.

Property rights are social arrangements that govern the ownership, use and disposal of resources, goods, and services. Property rights extend to real property (land, buildings and durable goods such as plant and equipment) financial property (shares, bonds and money in the bank) and intellectual property (books, music, computer programs and inventions).