ECONOMICS

Chapter 1
Question 1
Opportunity cost: is the cost of a good or service, not in terms of money,
but in terms of the next best alternative which has to be sacrificed in
order to obtain it
E.g. the opportunity cost of a field which was turned into a football field
instead of a car parking is the car parking
Economics: is the social science studying human behaviour and in
particular the way in which individuals and societies choose among the
alternate uses of scarce resources to satisfy their wants.
*Economics exist because resources are scarce. So is opportunity cost. If,
however, resources were abundant in supply, there would be neither
opportunity costs, nor economics.
Allocating a square block in the heart of Hong Kong for making a car park
would definitely entail a much higher opportunity cost than allocating a
square block at the edge of a typical outlying area. This is because the
field at the heart of Hong Kong could otherwise be used as buildings of
large firms, as museum or as a park, whereas the field at the edge of an
outlying area could be put into a much more limited use, e.g. for farming
land.
Question 3
In an attempt to solve the problem of scarcity, utility represents the
advantage of fulfilment a person receives from consuming a good or
service.
Utility explains how individuals and economies aim to gain optimal
satisfaction in dealing with scarcity.
Purposive behaviour indicates that behaviour of the consumers and
producers has a specific purpose. This purpose is to maximise selfinterest.
Thus, it seems that purposive behaviour theory is closely related to the
idea of utility, since maximisation of utility will achieve the purpose of
purposive behaviour, the self-interest.
Question 7
Most resources are not abundant in supply. They are rather scarce.
Economic resources are the scarce resources, which people have at their
disposal, to satisfy their wants and needs. In other words, they are the

input necessary for the production of the goods and services in the
economy.
Economic resources are generally classified into four categories: land,
labour, capital and enterprise.
Land includes everything from rivers, lakes to trees and even minerals
from the soil. They are the resources which can be naturally found on
earth.
Labour is the workforce of the economy, otherwise known as employees.
They provide the physical and mental contribution to the economy.
Capital is man-made machinery used to ease the production process.
Fixed capital: it is the capital which has not changed form during the
production process
e.g. leather in a leather wallet
circulating capital: this is type of capital which is changed into some other
form during the production process
e.g. wood into paper
enterprise: entrepreneurs are the managers of a firm. They are the people
who make all the decisions necessary and run all the risks associated with
the firms operation.

-Resources are called factors of production, since they are the factors
necessary in order for an effective production to take place.
They are also called inputs, since they provide the inputs necessary for
the output of goods and services.

Problems
Problem 1
Under the normal price of $1.10 per pound, Janice would be able to buy 5
pounds of potatoes.
1.10+1.10+1.10+1.10+1.10= $5.50 < $6 can buy
1.10*6= $6.60 > $6 cannot buy
BUT in this case
It appears that she can buy 10 pounds of potatoes- exactly double the
quantity
1.5+1.14+1.05+ (7*0.30)= $5.79 <$6 can buy
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If she had only $3:

Under normal circumstances only 2
1.1+1.1=2.2
NOW
Only 2
1.5+1.14= 2.64
*It is then concluded that the price difference makes no sense if Janice has
only $2, since one way or another she is going to buy the same amount of
potatoes. Nevertheless, if she has $6 she could buy 10 pounds of potatoes
under the latter price motif, which is exactly double the amount she could
buy under the former.

Appendix problems
Problem 1
A)
Graph illustrating the direct relationship between the rainfall and the
umbrellas sold
Umbrellas sold

rainfall/month (inches

B)
Graph illustrating the indirect relationship between the tuition level and
the university enrolment
Tuition amount ()
3

University enrolment

C)
Graph indicating the direct relationship between the popularity of
entertainer and the ticket prices
Ticket prices ()

Popularity of entertainer

Question 4
Study time
Exam Score
(hours)
(points)
0
10
2
30
4
50
6
70
8
90
Independent variable study time
Dependent variable exam score
Study time (x)
Exam score (y)
X y
X=ky
x-ky=0
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CHAPTER 2
Question 7
a) Technique 1: (3*5)+(4*2)+(2*2)+(2*4)=$35
Technique 2: (3*2)+(4*4)+(2*4)+(2*2)=$34
Technique 3: (3*3)+(4*2)+(2*5)+(2*4)=$35
It will be preferable to use either technique 1 or 3, since more towards the
desired output will be produced (nearer to $45)
It seems that unless $45 is produced the firm will face loss.
The firm will continue expanding until the production worth $45 occurs
Afterwards, if the company produces more than $45 of output it will start
facing losses.
b) Technique 4: (1*3)+(2*4)+(5*2)+(6*2)=$41
Yes. If the firm adopt this technique, it will be nearer to the optimal
production of $45.
c) Technique 1: (1*5)+(4*2)+(2*2)+(2*4)=$25
Technique 2: (1*2)+(4*4)+(2*4)+(2*2)=$30
Technique 3: (1*3)+(4*2)+(2*5)+(2*4)=$29
Technique 4: (1*3)+(2*4)+(5*2)+(6*2)=$41
It seems that although the price of labour will fall, technique 4 will
continue to be suitable, since the smallest amount of labour is used;
lading to more optimum results, though.
d) In a free market economy, the operation of the economy is dependent
upon the market forces. Thus, both producers and consumers drive the
basic market forces. The equilibrium between the demand and the
supply is the optimum in the free market system and long periods far
from the equilibrium will lead to market failure.
The law of demand states that as the price of a product rises, its quantity
will fall and vice versa.
In contrast, the law of supply states that as the price for a product
increases, its quantity will generally rise.
In a free market, an increase in the demand for a product will also
increase the price of the product. This is because, as aforementioned,
although the demand will increase, its quantity will fall, especially in the
short run; producers will not be able to cope with the increased demand
and produce the amount needed. So they will increase prices to control
the demand of the product.
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However, it is likely that an increase in demand will make producers even

more willing to use the scarce resources to produce this product, since
they will make much more profit and they will prefer to allocate the factor
of production for these goods or services.
It is important to note that the above statements are influenced by
different conditions of demand, e.g. substitutes, population, etc. and
conditions of supply, e.g. time, machinery available, unforeseen factors,
etc.
The answer in part a relates to the idea of the free market and the
increased demand, since it appears that by producing $45 of the product,
equilibrium, the optimum, will be achieved. The correct amount of
economic resources will be used for producing the required amount of
goods and services, under normal circumstances.

Question 2
a) Natashas job environment will change completely if she decides to
change from a manager to an entrepreneur. This is due to the fact that
a manager has a basic salary and then a responsibility to manage, i.e.
control the company. If she becomes an entrepreneur, she will be the
owner of her own firm, i.e. sole trader.
Sole traders have generally more flexibility and might make really
high profits if they manage to expand their firm and make it run
successfully. Entrepreneurs are able to make decisions as they would
like.
However, they possess a number of disadvantages. This is firstly
because of the risks they have to bear, of the money they have to
invest and of the fear of bankruptcy. In this case, they will have
unlimited liability, which means that they will not only lose the firms
assets, but also their personal belongings.
Natasha should be warned about the above issues before choosing to
become an entrepreneur.
b) If she chooses the second job, that of the internet, Natasha is not likely
to have any financial gain from this, except from the non-price related
advantages, which were mentioned before. This is because the
operational costs of this type of job are high and she will have only
$60,000 profit each year, the same wage as her manager job.
Nonetheless, it seems that if she chooses to engage into the first job,
the production of organic soaps, she is likely to make $5000 more than
her job as a manager; thus, $65,000.
Question 1
The law of demand indicates that as the price of a good or service
increases, the quantity demanded decreases and vice versa.
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The demand curve slopes downwards since the price is inversely

proportional to the quantity demanded.
By adding up the individual demand at each single price (=the demand
curve of an individual buyer) the market demand curve is created, i.e. the
demand curve of a product in a whole market. Thus the market demand
curve derives from the individual demand curves.
Question 2
Determinants of demand include
both price and non-price factors.
Price factor is the change in
demand caused by a change in
price.
If demand changes due to price
factors there is a movement along
the demand curve.

Non-price factors are conditions other than price which influence demand.
These cause a movement of the demand curve.
Conditions of demand:
change in the price of
substitutes
=goods and services in
competitive demand
As the price of the good or
service rises, the quantity
demanded for the substitute will
also rise.
e.g. if the price of Papafilippou
ice cream rises, the quantity
demanded for Reggis will rise
change in the price of complements
=goods which are bought together
As the price of a good or service rises, the quantity demanded for the
complement will fall

e.g. if the price of the DVD disks goes up, the quantity demanded for the
DVD recorders will fall
change in the income
Normal goods: they are the goods whose demand increases when there is
an increase in income and vice versa
e.g. the demand for luxury cars
inferior goods: they are the goods whose demand decreases when there is
an increase in income and vice versa
e.g. demand for second hand clothes
advertising and publicity
Favourable publicity: favourable publicity will increase the demand for
goods and services E.g. advertising the health benefits of biological
products will increase the demand for those goods and services
Adverse publicity: e.g. reporting that meat used by McDonalds is not
healthy
Question 3
a)
b)
c)
d)
e)

The
The
The
The
The

demand
demand
demand
demand
demand

for
for
for
for
for

small
small
small
small
small

automobiles
automobiles
automobiles
automobiles
automobiles

will
will
will
will
will

rise
rise
rise
fall
rise

Question 4
The law of demand indicates that as the price of a good or service
increases, the quantity supplied increases and vice versa.
The supply curve slopes upwards since the price is proportional to the
quantity supplied.
By adding up the individual supply at each single price (=the supply curve
of an individual seller), the market supply curve is created, i.e. the supply
curve of a product in a whole market. Thus the market supply curve
derives from the individual supply curves.
Question 5
Determinants of supply include both price and non-price factors.
Price factor is the change in supply caused by a change in price.
If supply changes due to price factors there is a movement along the
supply curve.

Nonthan price which influence supply.

price factors are conditions other

These cause a movement of the
supply curve.
Conditions of supply:
changes in the costs of
production
Lower costs of production lead to
an increase in supply and vice
versa
changes in technology
Improvement in technology, lower

costs faster output increase in supply

changes in government subsidies
The higher the subsidies, the higher the increase in supply
Question 6
a)
b)
c)
d)
e)
f)
g)

The
The
The
The
The
The
The

supply
supply
supply
supply
supply
supply
supply

of
of
of
of
of
of
of

auto
auto
auto
auto
auto
auto
auto

tires
tires
tires
tires
tires
tires
tires

will
will
will
will
will
will
will

rise
rise
fall
rise
fall
fall
rise

Question 12

Problem 1
a) 2, 12, 4, 36
b) 1st part (the least) Dex
2nd part (the most) Tex
c) Tex
d) If Tex withdrew market demand curve would shift to the left

If Tex doubled the quantitydemand curve shifts to the right

e) Change in the quantity demanded

Problem 3
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a) Equilibrium price $4
At $4 there is neither shortage nor surplus
Column
Shortage
Shortage
Surplus
Surplus
Surplus
b)

Surplus- 21
Surplus- 14
Shortage- 7

c) Shortage- 13

Question 2
$4 change in quantity/change in price
1/1=1
(always one)

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