[Tuition Notes - Overmugged] Chapter 1 - Central Problem of Economics

CHAN YING RU(COPYRIGHTED) © CHAN YING RU (COPYRIGHTED) © CHAPTER 1: Central Problem of Economics

CHAPTER ANALYSIS THE ABOUT TIME EXAM WEIGHTAGE CHAN YING RU (COPYRIGHTED) ©

CENTRAL PROBLEM OF ECONOMICS FUNDAMENTAL PROBLEMS MARKET ECONOMY SELF INTEREST IN RESOURCE ALLOCATION Production Possibility Curve [Essay] KEY CONCEPT CHAN YING RU (COPYRIGHTED) ©

FUNDAMENTAL PROBLEMS CHAN YING RU (COPYRIGHTED) © SCARCITY CHOICE OPPORTUNITY COST Limited resources available are unable to satisfy unlimited human wants. • As resources are scarce, they have alternative uses. • Individuals and society must make choices among the alternative uses to maximise use of resources to achieve the highest possible satisfaction. Opportunity cost measures the cost of making a choice in terms of the next best alternative foregone - Unlimited human wants : the desire for higher levels of consumption that are satisfied through consumption of goods and services - Resources are means of production and are finite in amount which limit quantity of output what to produce; how and how much to produce; and for whom to produce the goods and services for.

CHAN YING RU (COPYRIGHTED) © MARKET ECONOMY All economic agents (individuals, firms, resource owners) seek to promote their own self-interests 1 Consumers Producers Resource Owners Aim to maximise profits with a given amount of expenditure on resources Aim to maximise their factor income on the unit of factors that they own Aim to maximise utility from consumption of goods and services given their limited disposable income

CHAN YING RU (COPYRIGHTED) © MARKET ECONOMY Price Mechanism 2 • Means by which decisions taken by consumers and businesses interact to determine allocation of scarce resources between competing use. • Price mechanism serves to signal and ration Consume r Produce r • Indicate to producers what and how much they desire through the price they are willing and able to pay. • Self-interest of consumers to pay according to the satisfaction they derive from each additional unit of good to maximise utility. • Higher price signal higher profits for producers  Producers’ self-interest to maximise profits  Incentive to produce goods and services that command high prices. • Aim to maximise revenue, minimize cost  Hence need to maximise use of each factor to achieve highest return • Consumers must be willing & able to pay for the good • Supply usually insufficient to meet demands of those who have the ability to pay for it  Competition amongst consumers → drives up prices  Eliminate those unable to pay the higher prices → ration goods to those who can afford

CHAN YING RU (COPYRIGHTED) © INTEREST IN RESOURCE ALLOCATION Demand Curve Consumer self-interest: Maximizing consumer surplus from consumption of G&S, given their limited disposable income. • Constrained by ability and