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NSS Understanding and Interpreting the Economics Curriculum

NSS Understanding and Interpreting the Economics Curriculum. Session 1 Microeconomics part of the NSS Economics Curriculum 7 April 2009(Tue). Agenda. Topic A Basic Economic Concepts Topic B Firms and Production ( Max. 10 mins. Q&A) Topic C Market and Price

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NSS Understanding and Interpreting the Economics Curriculum

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  1. NSS Understanding and Interpreting the Economics Curriculum Session 1 Microeconomics part of the NSS Economics Curriculum 7 April 2009(Tue)

  2. Agenda • Topic A Basic Economic Concepts • Topic B Firms and Production (Max. 10 mins. Q&A) • Topic C Market and Price • Topic D Competition and Market Structure (Max. 10 mins. Q&A) • Break (15 mins.) • Topic E Efficiency and Equity and the Role of Government (Max. 10 mins. Q&A) • Elective 1 • Q&A Session

  3. (A) Basic Economic Concepts Economics as a social science • Study of human behaviors • Based on the postulate of constrained maximization • Use examples to illustrate the scope of economic analysis • Methodology of scientific study NOT required

  4. (A) Basic Economic Concepts Scarcity Choice and opportunity cost (i) The source of economic problems : scarcity • Unlimited wants and limited resources • Meaning of scarcity • Relationship between scarcity and choice • Relationship between scarcity, competition and discrimination • Difference between scarcity and shortage

  5. (A) Basic Economic Concepts • Free and Economic goods • Meaning of goods • Definition free goods and economic goods • Examples of free goods and economic goods

  6. (A) Basic Economic Concepts (ii) Choice and opportunity cost • Economic decisions involving choices among alternatives • Concept of cost in economics • Relationship between choice and cost • Definition of opportunity cost • Explain why only the highest-valued option forgone count as cost

  7. (A) Basic Economic Concepts • Identify / calculate the cost involved in choosing an option : out-of-pocket cost and implicit cost • Explain whether / how cost changes under different circumstances • Is Sunk Cost required? • The term is NOT required but students should be able to explain why past expenditure, that is not recoverable, is not a cost.

  8. (A) Basic Economic Concepts • Interest as the cost of earlier availability of resources • Explain why interest is the cost of earlier availability of resources • Is inter-temporal choice required? Yes • Explain how interest rate, present consumption and saving are related • [Relationship between interest rate, investment and money demand are required (to be explained in the Macro section)] • [Calculation of present value is NOT required]

  9. (A) Basic Economic Concepts The three basic economic problems (i) What to produce? How to produce? For whom to produce? • Meaning of each economic question illustrate with examples

  10. (A) Basic Economic Concepts (ii) How society tackles the basic economic problems • By society’s customs and tradition • By government decisions • By the market mechanism • (N.B. Illustrations by examples only. All theories on types of economic systems NOT required) • Examples of each of the above methods in tackling economic problems

  11. (A) Basic Economic Concepts (iii) Private property rights and its importance in a market economy • Meaning of private property rights • exclusive right to use • exclusive right to receive income, and • right to transfer • Explain why private property rights is important in a market economy : • Clear delineating of private property rights is the perquisite for the use of price mechanism in market exchange, which ensure resources to be allocated to the highest-valued users.

  12. (A) Basic Economic Concepts Specialization and exchange • Exchange as a condition for specialization • Explain why exchange is a “necessary” condition for specialization

  13. (A) Basic Economic Concepts Circular flow of economic activities (i) Consumption of households and production of firms (ii) The relationship among production, income and expenditure • Stretch a well-labeled circular flow diagram in a closed economy. • Relationship among (the value of) production, (factor) income and expenditure

  14. (A) Basic Economic Concepts Normative vs. Positive statements • Distinction between positive statements and normative statements • Normative statements :Involve value judgment ; Disagreement cannot be settled by appealing to facts • Positive statements :Do not involve value judgment ; Refutable by facts - Disagreement can be settled by appealing to facts • Examples of normative and positive statements

  15. (A) Basic Economic Concepts • Value  Positive analysis  normative policy suggestion • From the standpoint of maximising social gains, should the illegal practice of reproducing discs be firmly suppressed so that only the higher-priced original discs can be found on the market? Explain. (HKALE 1994 Q8)

  16. (B) Firms and Production Ownership of firms • (N.B. Firm as a unit that makes decisions regarding the employment of factors of production and the production of goods and services) • To give the meaning of firms

  17. (B) Firms and Production (i) Forms of ownership • Public ownership • Meaning of public ownership: ownership by government or its agencies with the right to own, control, use and dispose of property(e.g. government departments and public corporation) • Examples of organizations or institutions in Hong Kong operating under public ownership.

  18. (B) Firms and Production • Private ownership: sole proprietorship, partnership and limited company • (N.B. Classification of partnership NOT required) • Classify a private firm into sole proprietorship, partnership, private limited company and public limited company • Key features (including legal status, liability, number of owners, etc.) of different forms of private ownership • Documentation involved in setting up business units NOT required • Advantages and disadvantages of different types of ownership NOT required

  19. (B) Firms and Production (ii) Limited and unlimited liability • Meaning of limited liability • Identify types of ownership that the owners could enjoy limited liability

  20. (B) Firms and Production (iii) Shares and bonds as sources of capital • (N.B. Classification of different types of shares and bonds NOT required) • Key differences between shares and bonds • Shares: Holders are owners; returns – dividends • Bonds :Holders are creditors; returns – interest • Advantages and disadvantages of issuing bonds and shares in raising capital • Advantages and disadvantages of buying bonds and shares from a small investor point of view

  21. (B) Firms and Production Types/stages of production • Primary, secondary and tertiary production and their inter-relationship • Meaning of primary, secondary and tertiary production • Examples of different types of production • Classify an given industryinto primary, secondary and tertiary production • Describe their inter-relationship • Recognize the contributions of each types of production to HK’s economy

  22. (B) Firms and Production Types of goods and services produced (i)  Goods and services • Production involves production of goods and / or provision of services (ii) Producer and consumer goods • Meaning of producer and consumer goods • Examples of producer and consumer goods

  23. (B) Firms and Production (iii)  Private and public goods • (N.B. Modeling regarding public goods NOT required) • Definitions of private and public goods • Examples of private and public goods • Is the concept of impure public goods required? Yes

  24. (B) Firms and Production Division of labour (i)  Types: simple, complex and regional • Meaning of simple, complex and regional division of labour • Examples of simple, complex and regional division of labour

  25. (B) Firms and Production (ii)  Advantages and disadvantages • Give advantages and disadvantages of division of labour (iii) Limitations • Recognize the limitations of division of labour

  26. (B) Firms and Production Factors of production (i) Human resources • Labour: supply, productivity, mobility and different methods of wage payments • Labour supply (measured in terms of man-hour) • Factors affecting labour supply (e.g. wages, population, population structure, etc.) • Meaning of average labour productivity • Calculate average labour productivity • Factors affecting labour productivity (e.g. education, training, capital endowments, etc.)

  27. (B) Firms and Production Factors of production (i) Human resources • Labour: supply, productivity, mobility and different methods of wage payments • Meaning of geographical and occupational mobility • Factors affecting labour mobility (geographical and occupational) • Advantages and disadvantages of different methods of wage payments

  28. (B) Firms and Production • Entrepreneurship: risk-bearing and decision-making • Special role of entrepreneur : risk-bearing and decision-making

  29. (B) Firms and Production (ii)  Natural resources • Land: supply • Recognize that supply of natural resources could not be changed by human efforts

  30. (B) Firms and Production (iii) Man-made resources • Capital: accumulation and depreciation • Meaning of capital accumulation (involving giving up present consumption for future consumption) and its relationship with interest rate • Meaning of depreciation

  31. (B) Firms and Production (iv)  The features of (i) to (iii) in Hong Kong • Describe the features of (i) to (iii) in Hong Kong • Remarks: • In the existing CE syllabus, ‘Classification’ is one of the subtopics under factors of production. The restructuring of the subtopics implies ‘classification of factors of production’ in the NSS Econ syllabus is not as important as the existing CE syllabus • Discussion of factors of production is limited to those areas stated in the syllabus

  32. (B) Firms and Production Production and costs in the short run and long run (i)  Definition of short-run and long-run • In terms of fixed and variable factors of production. • Meaning and examples of fixed and variable factors of production

  33. (B) Firms and Production (ii) Law of diminishing marginal returns • Illustration by total product, average product and marginal product schedules only. • State the law of diminishing marginal returns • Transform MP to AP and TP, AP to MP and TP, TP to MP and AP (numerically) • Illustrate the law of diminishing returns by total product, average product and marginal product schedules • [Relationship between law of diminishing returns and U-shaped MC NOT required]

  34. (B) Firms and Production (iii) Cost of production • Fixed and variable costs • Meaning and examples of fixed and variable costs • Total, marginal and average cost of production • (N.B. General relationship between total, marginal and average cost curves NOT required. Relationship between short run and long run cost curves NOT required.) • Transform MC to AC and TC, AC to MC and TC, TC to MC and AC (numerically)

  35. (B) Firms and Production (iv) Economies and diseconomies of scale • Internal economies and diseconomies of scale • External economies and diseconomies of scale • (N.B. Economies and diseconomies of scale illustrated by average cost. Further classification of internal and external economies and diseconomies of scale NOT required) • Meaning of internal / external economies and diseconomies of scale • Illustrate internal / external economies and diseconomies of scale by average cost

  36. (B) Firms and Production • Possible reasons leading to internal / external economies and diseconomies of scale • (Further classification of internal / external economies and diseconomies of scale NOT required)

  37. (B) Firms and Production (v) Expansion and integration of firms • Types: vertical, horizontal, lateral and conglomerate • Motives • Meaning of each types of integration • Examples of each types of integration • Give some possible motives behind each types of integration • Methods of integration (e.g. takeover, merger, consolidation, etc.) NOT required

  38. (B) Firms and Production The objectives of firms: (i)  Profit maximization with given price and marginal cost schedule • Meaning of profit as the difference between total revenue and total cost • Profit-maximizing choice of output for individual firms with given prices and marginal cost schedule • The marginal cost schedule as the supply schedule of individual firms • (N.B. Long run supply NOT required)

  39. (B) Firms and Production • Price taking assumption • Explain why the marginal cost schedule is the supply schedule of individual firms • Shut down point, break even point, LR supply NOT required • Graphical relationship between MC, AC, AVC and supply curve NOT required • Long run supply ; monopoly does not have a supply curve NOT required

  40. (B) Firms and Production (ii)  Other objectives: market share, provision of non-profit making services, corporate social responsibility, etc. • Illustrate with examples

  41. 10 Minutes Q&A

  42. (C) Market and Price Law of Demand • State the law of demand • Explain phenomena by using the law of demand (full price / relative price) • [Note: The change highlight the importance of law of demand]

  43. (C) Market and Price Individual demand (i)  Factors affecting individual demand (ii) Complements and substitutes, superior and inferior goods (N.B. Giffen goods NOT required) • Meaning of complements and substitutes, superior and inferior goods (N.B. Giffen goods NOT required)

  44. (C) Market and Price • Explain how price, price of related goods, income, price expectations, weather, etc. affect individual demand

  45. (C) Market and Price (iii) Individual demand schedule and importance of the ceteris paribus assumption (iv) Difference between change in quantity demanded and change in demand Distinguish between change in demand (caused by changes in exogenous variables) and change in quantity demanded (caused by changes in price, an endogenous variable)

  46. (C) Market and Price Market demand (i)  Horizontal summation of individual demand curves • Meaning of horizontal summation • Add up the individual demand curves / schedules horizontally to obtain the market demand curve / schedule (Graphically or numerically) • Explain under what condition market demand could be obtained by horizontal summation of individual demand

  47. (C) Market and Price Market demand (ii)  Factors affecting market demand • similar to those points mentioned in the section about individual demand • One of the additional factors: number of consumers in the market

  48. (C) Market and Price Individualsupply (i) Factors affecting individual supply • Explain how price, price of related goods, cost of production, technology, price expectations, weather etc. affect individual supply • Give the meaning of joint supply and competitive supply • State the law of supply

  49. (C) Market and Price (ii) Individual supply schedule and importance of the ceteris paribus assumption (iii)  Difference between change in quantity supplied and change in supply Distinguish between change in supply (caused by changes in exogenous variables) and change in quantity supplied (caused by changes in price, an endogenous variable)

  50. (C) Market and Price Market supply (i)  Horizontal summation of individual supply curves • Add up the individual supply curves / schedules horizontally to obtain the market supply curve / schedule (graphically or numerically) (ii)  Factors affecting market supply • Similar to those points mentioned in the section about individual supply • One of the additional factors : number of sellers in the market

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