Scarcity

All socities will face the issue of scarcity arising from us having limited resources and unlimited wants

Factors of Production

To produce any goods and services (e.g. food, laptops), we would need to use resources. In the study of H2 Economics, these resources are known as factors of production

• Capital: Man-Made Resources such as factories and machineries
• Entrepreneurship: Responsible for making decisions for his firm and using the other FOPs
• Land: All the natural resouces availiable in Earth
• Labour: Human Capital / Working Populaton

Study Tip

You can use the CELL acronym to remember the factors of production!

Opportunity Cost

Opportunity Cost is defined as the next best alternative foregone

Imagine you are in dilemma, stuck between purchasing a $80 shoe or a $80 watch. If you have purchased the $80 shoe, and you will not be able to purchase the watch!

CSQ Tip

For any CSQ questions testing on the concept of opportunity cost:

• Define Opportunity Cost
• Explain the dilemma with reference to the context.

Marginalist Principle

• Marginal Benefit (MB) is referred to as the additional benefit earned from consuming an arbitary unit of a good and service
• Marginal Cost (MC) is referred to as the additional cost incurred from consuming an arbitary unit of goods and service

The Marginalist Principle states that any rationale agent will only consume the good or service when the Marginal Benefit (MB) > Marginal Cost (MC)

(Consumer) Marginalist Principal

Consumers will consume goods and services to maximise satisfaction (utility)

Imagine you are in a scenario where you are considering whether to buy a fan.

As a rationale mugger in JC, you will need to weigh marginal benefits and marginal costs of purchasing the fan

• Benefit: With the purchase of one extra fan, I will enjoy the benefits of cool environment to study and be more productive

• Implicit (Hidden) Cost: With the purchase of one extra fan, I need to foot a higher electrical bill and need to carry the fan back home

• Explicit Cost: With the purchase of one extra fan, I need to pay $50 for the fan

If you feel that the benefits of increased productivity with the cooler environemnt outweighs the cost of purchasing the fan, you purchase the fan to continue mugging which also means that the (MB > MC)

If you feel that the cost of purchasing the fan is more than the benefits, you will not purchase the fan (MC > MB)

(Firms) Marginalist Principal

Firms aims to maximise profits

Imagine the scenario where you are deciding to hire one more worker for your fast food restaurant.

As a rationale manager, you will weigh the benefits and cost of hiring the extra worker

Benefit: With one more person, we can help to speed up the food serving process and sell more

Explicit Cost: With one more person, we will need to pay one more worker salary

Implicit Cost: With one more person, we will need to spend time to train one more worker

If the firm feels that the additional productivity with the hiring of one worker will help with the serving process outweigh the extra costs and time spent on training the worker, the firm will hire the worker (MR > MC)

If the firm feels that the additional salary paid and time to train the worker outweighs the additional productivity the workers can bring, the firm will not hire the worker. (MC > MR)

Essay Tip

• Use the terms productivity and profits if you are using the marginalist principle describe how firms make decisions
• Define benefits, implicit cost, explicit cost in any essays asking you about the marginalist principle!

(Government) Marginalist Principle

Government aims to improve society welfare by ensuring equity & efficiency Imagine you are leading the government in making a decision on whether to build a hospital in Sengkang.

As a rationale leader, you will need weigh the benefits and costs of building the hospital.

Benefit: Convenient healthcare services, Stronger Economy with healthy citizens

Implicit Cost: Not being able to use the land as a office space to power the economy

Explicit Cost: Huge one time payment of all the facilities

If you feel that the healthier citizens is better for the society outweights the money spent and land used on building the hospitals, you would proceed to build the hospital. (MSB > MSC)

If you feel that the money spent and land use of better off in building another office building than the healthier citizens, you would proceed to not build the hospital. (MSC > MSB)

Production Possibility Curve (PPC)

Production Possibility Curve: shows all possible combinations of two goods that a country can produce within a specific time period, with all of its resources fully and efficient employed at a given state of technology.

PPC Demonstrates:

• Scarcity: Look at Point A (lying inside the PPC) and Point B (lying outside the PPC)
  • Negative Slope of the PPC sets a boundary between attainable & unattianble combinations of the two goods
  • Not all wants can be satisfied at a given level of technology
• Choice: Look at Point C and Point D of the PPC
  • With limited resources, society can only choose one of the many possible combinations of output
  • Trade-off incurred when having one more unit of Good X will result in lesser units of Good Y
• Opportunity Cost: Look at Point E and Point F
  • Society choose to produce OE units of Good X, it will forgo OF unit of Good Y

Experience

Question on what the PPC demonstrates are very rare and have not came out in the past 10 years. Rather, the more common question demonstrating actual and potential growth with the PPC

Movement of PPC

• Quantity of FOP
• Quality of FOP
• Technology level

Memory Tip

Use the acronym QQT to memorise the factors which cause a shift of PPC