Year 11 Preliminary HSC Economics - Bored of Studies fileYear 11 Preliminary HSC Economics Tutoring 2 Lesson Plan By the end of this lesson you will: 1. Understand what economics and

1 Year 11 Preliminary HSC Economics Tutoring

Name ………………………...

Year 11

Preliminary HSC

Economics

Topic: The Economic Problem

and Opportunity Cost


Lesson Plan

By the end of this lesson you will:

1. Understand what economics and the economic problem is

2. Appreciate the importance of ‘choice’ at an individual, business and

government level, including

a. The ‘future implication of current choices’

b. The factors that underlie economic decision making by these groups

3. Understand what an ‘opportunity cost’ is and can draw, interpret and solve

problems using a ‘production possibility frontier’

Lesson Structure

I. The Economic Problem and How to Solve it

II. Background theory – Wants, Goods, Services & Resources

III. Opportunity Cost: Individual, Business and Government Choices

IV. Opportunity Cost: Production Possibility Frontiers

V. The Future Implication of Current Choices

VI. Economic Factors that underlie decision-making


I. The Economic Problem and How to Solve It

What is Economics ‘Economics is the study of the production, distribution and exchange of goods and services in an economic system. It is a science which studies human behavior as a relationship between needs and wants and scarce resources with alternative uses’ (p3, Riley).

What is the Economic Problem The economic problem refers to the fact: supply of resources is limited in relation to the demands of individuals. We solve the economic problem by making choices about how best to use those resources including:

How to produce?

What and How Much to Produce?

To Whom to Distribute? An economy is how a society is structured to solve the economic problem.


II. Background Theory

Wants, Needs, Goods and Services

In economics, wants are the ‘desires of individuals for goods and services’. There

are many different types of wants including:

Basic Wants (‘needs’)

Recurring Wants

Substitute Wants

Luxury Wants

Complementary Wants

Individual Wants

Collective Wants


As mentioned wants are satisfied by goods and services. There are two main

types of goods:

Consumer Goods

Capital Goods

Resources

In economics, resources are the inputs that are used to create ‘things’ (goods) or

provide services. The four economic resources listed below are called the factors

of production. People who own or provide the factors of production will demand

factor incomes in return for their use by selling their resources on factor markets.


III. Opportunity Cost: Why is it so important?

Economics never talk about the ‘cost’ of something because economics is all

about choices – instead we talk about ‘opportunity cost’.

Opportunity Cost

Definition: The cost of the opportunity foregone in pursuing one alternative. Opportunity cost can be money, time, or general satisfaction. Our ability to choose the best alternative, and minimise opportunity cost is called economising.

Illustration: Opportunity Cost


Opportunity costs is one of the most important concepts in economics because it

effects everyone including:

Individuals

Societies

Businesses


IV. Opportunity Cost: Production Possibility Frontiers

Economists often use ‘models’ (usually mathematical in some way) to visualize

concepts like opportunity costs to communicate economic insights. One such

model is called a production possibility frontier which is often used to

demonstrate the full potential of an economy to deploy resources. We use

production possibility schedules to draw production possibility frontiers.

Class Example 1:

I have $100 that I can either spend on clothing or meals. Each meal costs $10 and

each item of clothing costs $20.

a) Create a “production” possibility schedule for my ability to purchase meals

and clothing with what information you know

b) Draw a production possibility frontier

c) What is the opportunity cost/”marginal rate of substitution” of

a. Clothing

b. Meals

Hence fill out the rest of the production possibility frontier

d) Shade the “feasible region” for all my possibilities

e) Show visually why I cannot buy 7 items of clothing and 4 meals

a)

Clothing Meals


b) , d) and e)

c)

Clothing

Meals


Class Example 2:

Country X can either produce coal or wheat. If it devoted all its resources to coal –

it could produce 100 Mt. If it devoted all its resources to food it could produce 50

Mt of wheat. (Assuming a constant marginal rate of substitution)

a) Create a “production” possibility schedule for Country X’s ability to produce

coal and wheat

b) Draw a production possibility frontier

c) What is the opportunity cost/”marginal rate of substitution” of

a. Coal

b. Wheat

Hence fill out the rest of the production possibility frontier

d) Can this country produce 40 Mt of coal AND 60 Mt of wheat?

e) Shade the region that corresponds to an inefficient allocation of resources

f) Country X gets twice as efficient at produces food from wheat for the same

amount of resources – draw a new production possibility frontier

a)

Coal

Wheat

b)

c)


c)

d)

Assumptions of the Production Possibility Frontier

1. Only two goods can be produced – there are limited and finite resources available

2. All resources are fully employed on the production possibility curve – this represents full employment of all resources (land, labour, capital and enterprise)

3. The level of technology is constant or fixed 4. Resources are fixed or finite but can be allocated between the two goods

and are completely 5. Transferrable or mobile resources between production of both goods


V. The Future Implication of Current Choices

Everyone wants to get the most out of what they have. In economics we call this

“maximizing utility” (utility = satisfaction). When an individual, a business or a

government allocates their resources to maximize their utility - this is called

allocative efficiency.

But ‘time’ is an important factor because the decisions you make now will have an

impact on your ability to make choices in the future. For example if I choose to

spend $10 on lunch at the canteen, I will have $10 less to spend tomorrow. I am

trading a better standard of living today for a not so good standard of living

tomorrow. Basically opportunity cost also has a time element to it.


What are the future implications of current choices for:

Consumers

Businesses

Governments


I. Economic Factors that underlie decision-making

Decisions made by Consumers, Businesses and Governments are affected by

numerous factors. Here we restrict ourselves to those which can be analyzed

from the lens of an economist.

a. Factors underlying decision making for consumers

i) “Propensity” to spend vs. save:

ii) Income/Work:

iii) Education:

iv) Retirement:

v) Political Alignment:


b. Factors underlying decision making for businesses

Most businesses are run to maximise profits. This means either increasing

revenues or reducing costs because

𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡𝑠

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃𝑟𝑖𝑐𝑒 ∗ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 | 𝐶𝑜𝑠𝑡𝑠 = 𝐼𝑛𝑝𝑢𝑡 𝐶𝑜𝑠𝑡 ∗ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

i) Pricing and Production:

ii) Resource Use:

iii) Industrial Relations:


c. How governments can influence the decisions of individuals and businesses

i) Spending allocation:

ii) Economic Stabilisation:

iii) Social Goals:

iv) Regulation of Economic Behaviour:

Documents

Year 11 Preliminary HSC Economics - Bored of Studies fileYear 11 Preliminary HSC Economics Tutoring 2 Lesson Plan By the end of this lesson you will: 1. Understand what economics and