Scarcity
Scarcity exists when the quantity available of a good is not enough to satisfy all human wants at zero price, i.e. more of it is preferred. Because of scarcity there must be choice and competition.
Free goods and economic goods
| Free good | Economic good | |
|---|---|---|
| Is it scarce? | No: the quantity available satisfies all wants at zero price | Yes |
| Opportunity cost to society | Zero: no scarce resources with alternative uses are used | Positive |
| Example | Air in an open field | Public library services, tap water |
Common mistake: "free of charge" does not mean "free good". A good provided free of charge (free MTR rides, free library books, free samples) is still an economic good if it is produced from scarce resources that have alternative uses.
Opportunity cost
Opportunity cost is the highest-valued option forgone. It is one option only, never the sum of all the options given up.
Full cost = monetary cost + non-monetary cost (e.g. time cost). Two people paying the same price may face different costs because their time has different alternative uses.
A classic DSE question asks whether a change affects the opportunity cost of a choice:
- A change in the value of the chosen option does not change its cost.
- Only a change in the value of the highest-valued option forgone changes the cost.
Example: if a concert you chose to attend turns out to be better than expected, the cost of going is unchanged; if your boss offers double pay for working that night instead, the cost rises.
The three basic economic problems
Every society must decide what to produce, how to produce and for whom to produce.
- Market (market-oriented) economy: most resources are privately owned and allocated by the price mechanism.
- Command (planned) economy: most resources are allocated by government commands.
- Mixed economy: both are used. Hong Kong is a market-oriented economy.
Competition and discrimination
Since resources are scarce, people must compete for them, and a criterion decides who wins: price, first come first served, lottery, government rules, and so on. Every criterion discriminates against those with less of what it rewards. When a price is held below equilibrium, non-price competition such as queuing appears.
Private property rights
Private property rights include the right to use a resource, the right to receive income from it, and the right to transfer it. Restricting any of these (e.g. flats that can only be sold back to the government) weakens the property rights.
Positive and normative statements
- Positive statement: a statement of fact that is refutable by facts (testable), even if it turns out to be false.
- Normative statement: involves a value judgement about what ought to be, e.g. "should", "too high", "unfair".
Interest
Interest is the price for the earlier availability of goods: the borrower pays it for consuming earlier, and the lender receives it as compensation for deferring consumption. Interest exists even without money.