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BUSS1040 - Economics for Business
Decision Making, Semester 1, 2023
Lecture 1: Key Concepts and comparative advantage
Reading: NW Chapter 1 and 4
What is economics?
› "Economics can be defined in a few different ways. It’s the study of
scarcity, the study of how people use resources and respond to incentives,
or the study of decision-making. It often involves topics like wealth and
finance, but it’s not all about money. Economics is a broad discipline that
helps us understand historical trends, interpret today’s headlines, and
make predictions about the coming years.”
› Economics is the study of choice under scarcity.
o Scarcity is faced by consumers, businesses, government, countries, and so on.
› Key issues that need to be addressed in an economy are:
o (a) what to produce;
o (b) how to produce it; and
o (c) who should get what is made.
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What is economics?
› In a modern economy, these 3 questions are typically resolved in the
‘market’.
› A market is a place where buyers and sellers of a particular good or
service meet.
o Markets can look quite different, from a traditional bazaar to an online trading
site.
› Even in market economy, governments play a critical role in markets, for
example, by imposing taxes and regulations.
› Our focus is on the behaviour of individuals (consumers, firms,
government) in markets.
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Topic 1: Introduction and Key Concepts
› Start with some key ideas in economics
- Choice under scarcity
- Opportunity cost
- Gains from exchange/trade
› Familiarize with the tools and the way of thinking of economists
- Marginal analysis
- Correlation vs causation
- Ceteris Paribus
- Math referesher – on your own (Chapter 2)
Chapter 1 and 4 of NW Book. (& 2 on your own)
Review Questions in Tutorial 2.
Basic Economic Questions
› Scarcity: resources are limited, so that not all wants and needs can be
met
- For example, if I use my money to buy one product, then I cannot use it to buy
something else
› Because of scarcity, any choice involves a trade-off or opportunity cost
- Opportunity cost = what we give up when we make that choice, or “the value of
the next best foregone alternative”.
- This concept applies to any resource used when making a choice: how an
individual spends their time and other resources
Opportunity cost
› Examples of opportunity cost:
- On Saturday night you decide to watch a movie on TV with your flatmate but
you could have also accepted a babysitting job for $25/hour.
- What´s the opportunity cost of spending your time (2 hours) watching a
movie on a Saturday night?
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Opportunity cost
› Examples of opportunity cost:
- Elizabeth prefers to spend Saturday afternoon walking. Her next best choice
would have been to sleep, and her third best choice is to go swimming.
- Therefore, if Elizabeth goes for a walk, the opportunity cost of going for a walk
is sleeping – her best foregone opportunity.
- The option of swimming is not relevant here, because it is not the next best
opportunity.
- Q: What is the opportunity cost to you of attending this
lecture?
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Opportunity cost
› Opportunity costs include both explicit costs and implicit
costs.
o Explicit costs are costs that involve direct payment (or, in
other words, costs that would be considered as costs by
an accountant).
o Implicit costs are opportunities that are foregone that do
not involve an explicit cost.
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Opportunity cost
› Example:
o Stephen decides to go to university, and his next best option is to work at a
construction site and earn $80K over the year.
- Total opportunity cost = explicit costs + implicit costs
- The explicit costs are those that Stephen must directly pay to go to university,
such as student fees, the cost of textbooks, and so on. Lets say that it costs
$20k a year to go to university.
- The implicit costs are the opportunities that Stephen must forgo – that is,
working at the construction site and earning $80K.
- The total opportunity cost is thus $100k a year.