Economics

Chapter 2

Economic activities

Economic activities

Suppose you are going to start a business. What do you need to think about for your

business? What is about your business? Can you share your proposal?

Production

Activity that turn resources or input into goods or services.

A process through which resources are transformed into goods or services. E.g. Crops growing, car manufacturing,

teaching…

How can you explain your business in term of production?

Consumption

Activities that use goods or services to satify wants.

A process through which human wants are satisfied. E.g. Eating vegetables, buying a car, learning at

school…

How can you explain your business in term of consumption?

Specialization

A person cannot live on his own. Strength in one skill but weak in another. Efficient in specializing skill. Lower production cost (opportunity cost).

Specialization: Worker concentrate on the production of certain goods or services, or a certain production stage.

Exchange

After specialization: A produces one kind of goods only. B produces another kind of goods only.

Through exchange: A can own both A’s and B’s products. B can own both A’s and B’s products.

Economic activities

Production(Specialization

of Good A)

Consumption of Good A

Production(Specialization

of B)

Consumption of Good B

Exchange

Productivity can increase through specialization, and exchange is the necessary condition for specialization.

The 3 basic economic problems

What to produce? Under scarcity, what should be made to satisfy human wants?

How to produce? What is the most effective way to produce what we have decided? Self-sustained Crusoe Economy: catch fish by hands or tools? Specialized or non specialized? Cost-effectiveness

For whom to produce? Target person Distribution of goods and services, e.g. soccer team jersey, PS3

game disc, ipod… Income distribution: 平安米 , vaccine of swine flu, Social Security

Allowance (SSA) Scheme

Example

Situation People expect to have quick and easy method of payment. People expect deferred payment.

What to produce? Credit card Card with chips and magnetic bar

How to produce? Specialization Machine and computer

For whom? People over 18, with a certain level of income

Example

Situation: Seafood lovers want to have a good meal in Sai

Kung. What to produce?

A steamed fish. How to produce?

Manual cooking. For whom?

Customers of that restaurant.

Ways of tackling economic problems Traditional economy

Resources and income distribution by Social custom

car-park for disabilities lady-first queuing for MTR

Traditions elder son’s succession The Prince of Wales becomes the first successor of

the Kingdom of the Great Britian

Planned economy

By government commands or decisions Resources are owned be the government State-owned production unit. Prices are fixed by government. No free market. Example nations

U.S.S.R. (former Russia) early PRC

Market economy Directed by market mechanism (demand and

supply) Private property rights

Exclusive right to use (user is the owner himself) Exclusive right to receive income (user needs to pay for

using it) Right to transfer (buyer needs to pay for it)

E.g. mobile phone, a flat, taxi… Exchange = Transfer of private property right. Example nations

USA Australia HK

Market Price

Market price Directs production. The principle factor affecting the production

decision.

Market Price

What to produce? Consumers’ preferences Good popularity, price A signal to firm Information of customers’ preferences.

To solve the three basic economic problems

What to produce?

The price of sushi rises

I decide to produce more

sushi since I can gain more.

Producer

Market Price

How to produce? Production cost Most cost-effective way to produce / profitable

method

I decide to produce by machinery since the cost

is lower.

How to produce?

Producer

To solve the three basic economic problems

Market Price

For whom to produce? Market price decides income distribution Willingness to pay Ability to pay

Market price an incentive to produce earn more income exchange more goods

For whom to produce?

$200,000

Cars are too expensive for

me.

I can pay the market price for this car.

To solve the three basic economic problems

Mixed Economy

Integration of market, planned and tradtional economies No pure market, planned or tradional economies in reality. Goods and resources distribution are partly by

Price mechanism (Pr) Government (Gov’t) Social custom and traditions (Soc.)

E.g. HKSAR Toys selling (Pr) Water supply (Gov’t) Give way to primary students (Soc.)

Market Price

Market price

an incentive to produce

earn more income

exchange more goods

Reflected by the market price

Compare market economy & planned economy:

Planned economy Market economy

Resources owned The state Private individual

Economic decision The government Private individual

Resources allocation Gov’t command Market price

Distribution of goods Gov’t command Market price

Property rights Mainly owned by the gov’t

Mainly owned by the individuals

Integrating market, planned & traditional economies

Hong Kong

Goods market

Market economy

Public housing market

Planned economy

Walled villages

Traditional economy

Mixed economy

Economic system

Classified by methods of resource allocation & income distribution

Classified by ownership of resources

Market economy:Price mechanism

Planned economy:Government decisions

Traditional economy:Social customs &

traditions

Capitalist economy:Private ownership of production resources

Socialist economy:Government ownership of

production resources

Mixed economy:Price mechanism +

Government decisions +Social customs & traditions

Question Price mechanism production incentive economic growth Then, why government?

Law Protect private property right Opportunity for fair competition

Protects livelihood Weaknesses Low social status Disabilities

Infrastructure & International agreement Town planning Roads and bridges, airline routes Education, social security and medical affairs

Leading economic development Support industries Comprehensive and long-term economic plan

Factor market

Household

Firm

Labour

Household income / Production cost

Market economy & the circular flow of economic activities

Product market

Goods & services

Household expenditure / Firm’s revenue

Household

Firm

Market economy & the circular flow of economic activities

Circular flow of economic activities

Factor market

Product market

Household Firm

Factor of production

Income Production Cost

RevenueExpenditure

Factor of production

Goods and servicesGoods and services

Money flowReal flow

Real flow Factor of production Goods and services

Money flow Money as a medium of exchange Household expenditure Firm’s revenue Cost of production Household income

Revenue Total value of production (Goods &

services)

Total value of production Revenue – Cost

Cost

Circular flow of economic activities

Factor market

Product market

Household Firm

HouseholdIncome (I)

Production Cost (C)

Revenue (R)Expenditure (E)

In the model, I = C & E = R

Then, C + R = I + E

Total value of production = Household Income & Expenditure