2023 ACJC Central Economic Problem Lecture Notes

©ACJC Economics Dept/2022/H1H2 The Central Economic Problem 1 ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics 2023 H1 H2 THE CENTRAL ECONOMIC PROBLEM Section Content Page 1 Scarcity as the Central Economic Problem 5 1.1 Scarcity, Choice and Opportunity Cost 5 2 Decision Making in Economics 9 2.1 Decision-Making Process of Economic Agents 2.2 Cognitive Biases 9 13 3 Production Possibility Curve 15 3.1 Diagrammatic Representation 3.2 Productive Capacity 3.3 Attainable and Unattainable Points 3.4 Movement of Resources Between Uses 3.5 Shifts of the PPC 15 15 16 16 18 4 Applications of Production Possibility Curve 19 4.1 Attainable Standard of Living 4.2 Economic growth, Unemployment and Under- employment 4.3 Trade-offs Between Consumption and Investment 19 20 21 Learning Reflection & Annex 23 Reference Texts (Optional): 1. Sloman, Garratt & Guest, Economics 10th Edition, 2018, Pearson, Chapter 1. 2. Mankiw, Quah & Wilson, Principles of Economics, An Asian Edition, Cengage Learning, 2ND Edition, 2013, Chapters 1 & 2

©ACJC Economics Dept/2022/H1H2 The Central Economic Problem 2 WHAT IS THIS TOPIC ABOUT? This topic is an introduction to the subject of Economics. Economics is much more than just a body of concepts, principles and theories. It is a way of thinking. It will equip you with the understanding of the rationale underlying the decisions which individuals, businesses and governments make about what to do with their resources, such as time and income. Essentially, in all decisions we (consumers or producers) want to maximise the returns (or benefits we enjoy) in exchange for what we have to pay for or use up. For e.g. as consumers, we will look for the lowest price of a certain good (or minimise the costs) so that we can have the best outcomes in return for the money we spend; and as business owners , we want to produce the most output from a given amount of resources used. For students to understand the most essential ideas in every topic, it is very important to carefully read and u nderstand the learning outcomes below. When you end this lecture series, revisit these learning outcomes to check whether you have achieved them. If you have not, do not delay in asking your tutor for explanation or clarification . It is also important for you to answer the Essential Question and use the checklists provided because it will help you check your understanding as well as tie together all the key ideas in this topic LEARNING OUTCOMES Enduring Understanding: Students are to understand and note the following:  The central economic problem of scarcity arises because i ndividuals, firms, and governments have unlimited wants whereas the resources available for meeting these wants are limited.  Due to the conflict between unlimited wants and scarce resources, choices have to be made.  Choices are made by various economic agents to maximise their self- interest. However in the real world, decisions made may depart from this due to cognitive biases.  For every decision made on the use of resources, there is opportunity cost incurred. Overarching Essential Question: Given the constraint of limited resources, how do we make decisions so as to maximise our benefits relative to costs incurred?

©ACJC Economics Dept/2022/H1H2 The Central Economic Problem 3 This article is to be read and the following questions answered before your first economics lecture. Article: Cross Island Line could save commuters 40 minutes The Cross Island Line that will stretch from Jurong to Changi could save commuters up to 40 minutes of travel time, said Land Transport Authority (LTA) chief executive Chew Men Leong. The new MRT line, which is scheduled to be ready by 2030, has been the subject of controversy in recent weeks, over one pos sible option of running the line under the Central Catchment Nature Reserve. Some Singaporeans have even questioned the need for the line in the first place. Environmental groups in Singapore were also worried that the construction of the Cross Island Line would be harmful to the Central Catchment Nature Reserve, arguing that the Cross Island Line can potentially cause damage to highly valued ecosystems. As Central Catchment Nature Reserve is home to a diversity of plants such as the Keruing and Meranti and it also houses the Raffles Banded Langur and the Sunda Pangolin, both critically endangered animals. Speaking to current affairs programme Talking Point, Mr Chew sa id the new line – with a potential daily ridership of 600,000 - would connect residents along the East-West corridor “to key employment centres such as Changi logistics park and the Jurong Lake district “with significantly shorter travelling times”. “I giv e you an example. If the line is done, commuters from Ang Mo Kio can reach any part of the island using public transport within less than one hour, basically saving easily 30 to 40 minutes of travel time,” he said. In addition, “half of the 30-over stations have connections to other lines. This creates many more travel options for commuters. And it will help redistribute load in the other lines, generally giving better comfort to all commuters. At the same time, during disruptions, you have alternative travel options, enhancing the resilience of the entire network,” said Mr Chew. A debate currently centres around two possible alignments in the middle section of the Cross Island Line. One is a 4km stretch that would run for 2km under the nature reserve, at a depth of 40m. The second option is to skirt the reserve in a 9km route that might require land acquisition, and add 6 minutes to travel time. “We have looked at many options. Right now, we have come down to two. There are not really other feasible alignments at this juncture,” said Mr Chew. It may take two years for a decision to be made, Transport Minister Khaw Boon Wan has said. This is only after more environmental, technical and engineering studies as well as public consultations are carried out. Adapted from Channel News Asia, 6 March 2016 ** Refer to Annex (Pg 29) on the government’s decision on the Cross-Island Line

©ACJC Economics Dept/2022/H1H2 The Central Economic Problem 4 Questions: (to be attempted before first lecture) 1) What is the issue that the debate centres around? 2) Identify the different parties involved in the debate. 3) What are their aims and concerns? Parties involved Aims Concerns 4) Whose perspective are you more in favour of? Why?

©ACJC Economics Dept/2022/H1H2 The Central Economic Problem 5 1. SCARCITY AS THE CENTRAL ECONOMIC PROBLEM In the previous set of lecture notes, you have learnt that Economics is about economic agents making decisions about how to use their limited resources to achieve the best possible outcome for themselves. This decision-making approach will be further expanded in this section. 1.1 Scarcity, Choice and Opportunity Cost The decision-making process links closely to the concepts of scarcity, choice and opportunity cost. Specifically, these concepts provide the basis for economic agents to rationalise how resources are to be allocated in order to achieve efficient outcomes. 1.1.1 Scarcity Making a decision on how to use resources is necessary because of the ever present and universal problem of scarcity. Scarcity arises because human beings have unlimited wants but the resources available are limited. What is a ‘want’?  A want is a wish or a desire to have something. At any time, we have many wants. A want is not ‘demand’ because the person may not have the resources to attain the want. A want becomes a ‘ demand’ only when the person has the money to attain the want.  Individuals have unlimited wants because we always want to have/enjoy more of everything in the world (luxury car, fancy restaura