HWA CHONG INSTITUTION

Year One H1 & H2 Economics 2010

Tutorials 1-3

Road-Map : Where are we NOW and where are we GOING

Big Ideas .Story line
A.

Scarcity ( Idea W > R )

=> Rationality ( rational choices) => Resource Allocation

Best use of scarce resources
No WASTAGE
with alternative uses.
Efficient RA (ideal) or best use
weighing O.C. against benefits before making a rational
(welfare- max) decision.

B.

Resource Allocation
1. What to produce?
2. How much to produce?
3. How to produce?

Agricultural; manufactured; services; civilian; military;

consumer; investment goods; private goods; public goods
etc
What is the ideal or optimal quantity
How to combine inputs or resources to produce the output?

(1) + (2) = AE ( allocative efficiency)

(3)
= PE ( productive efficiency)
C . MARKET MECHANISM ( martyn )
Martyn will ensure that there is AE + PE.

Important economic principle:

Right goods produces in the right quantities at the
lowest cost => AE
At the end of the day this is what economizing is ALL about !
Right => according to consumers preferences/wants.
Final outcome => Consumers welfare is maximized !
Rational choices leads to welfare-maximising outcomes.
Hurray ! 3 cheers to Martyn!

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Year One H1 & H2 Economics 2010
Tutorials 1-3

TUTORIAL #3 SCARCITY, CHOICE, OPPORTUNITY COST &

PRODUCTION POSSIBILITY CURVE (1.75hrs)
At the end of the tutorial, students should be able to
Explain with illustrations the concept of opportunity cost
Discuss the need for efficient resource allocation arising from the central economic problem
of scarcity and the three basic economic problems of what, how and for whom to produce.
Define and explain the shape of and the shifts in production possibility curve
Using the PPC, explain:
o Inefficient output combinations
o Unattainable output combinations
o Graphical representation of opportunity cost
o Productive and allocative efficiency
Apply the basic concept of comparative advantage in everyday living and explain its benefits
in terms of specialisation, division of labour and exchange.

Section A: Issues & Applications

1.

Suppose you were given college education without having to pay any fees whatsoever,
are there opportunity costs involved for you?
[ NB: Economics teaches us to draw a distinction between money costs and real or
opportunity costs]
There are certainly opportunity costs even though there might be no money costs involved
for YOU.
In the sense that there must be alternative benefits that you have to forgo ( sacrificed or
give up) in order to pursue your college education in terms of giving up the ability to earn
income during that time period.
Society also bear some cost
Someone ( taxpayers) is paying for professors time, electricity for lighting etc.one
is paying for your education because you are using scarce resources buildings.
The money spent have an alternative use e.g. health-care; housing; defence.

2.

In 2004, GE changed its 100 year slogan and logo (see below). What is the opportunity
cost incurred?

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Year One H1 & H2 Economics 2010
Tutorials 1-3

Resources got to be used to change GE logo. It is costly.

The opportunity costs of using resources to change GE logo may include :
Forgone benefits of using these same resources to improve GE products and/or
services
breast cancer research,
reducing carbon emissions...etc.
However, opportunity costs is not
alternative benefit forgone.

3.

ALL possible benefits forgone but the next best

What is the opportunity cost of constructing the MRT Circle Line?

The value of the next best alternative goods and services that could be produced had the
Circle Line not been constructed. It could be more HDB flats or more schools depending
on what is considered as the next best alternative use of the resources diverted to produce
the circle line. .
Again, O.C. is not simply ALL possible alternatives forgone!

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Year One H1 & H2 Economics 2010
Tutorials 1-3

Section B: Structured Questions

1)

With reference to Figure 1, which point or points illustrate the following situation for Townley
Regional Health Authority
(a)
(b)
(c)
(d)

which is/are efficient?

which is/are inefficient?
of complete specialisation?
which is/are unobtainable?

Productively efficient
Productively Inefficient

A, B,C,D
Y
C, D
X

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Year One H1 & H2 Economics 2010
Tutorials 1-3

i.

With reference to Figure 1, explain the trade-offs that are facing the Townley Regional
Health Authority
The PPC illustrates the concept of efficiency and opportunity costs.
Choice ( marginal versus absolute choices)
Extreme points on the PPC represents absolute choices ie either GP or dental services.
In practice such absolute choices are NOT the norm. In reality the choice is not between
GP or dental services because both are needed/wanted. The real choice is between more
GP/less Dental or vice versa. Such choices are called marginal choices.

O.C.
The shape of the PPC shows that there is a trade-off between more GP and less dental
services or vice versa. It is downward-sloping.

Starting from Point C and moving down the PPC frontier suggests that additional
units of dental services can only be attained at the expense of less and less GP
services.
Law of Increasing O.C.
Moreover the trade-off is NOT constant. In fact the trade-off or O.C. increases with
each additional unit of GP or dental service produced. The PPC is not a straightline but concave to the origin.
This is known as the law of increasing O.C. The reason is because resources such
as medical doctors are not homogeneous ie not equally efficient in producing GP
and dental services. Increasing O.C. in the production of a good is the consequence
of transferring less and less suitable resources to produce more and more of the
good in question.
Simple illustration of Law of Increasing O.C.
Dr A is a skilled doctor who is well trained as a GP and only partially/poorly trained
as a dentist.
Assume:
He can treat 100 patients a day as a GP and 1 patient a day as a dentist.
What is the O.C. of transferring Dr A from a GP to a dentist?

ii.

How can opportunity cost be used to explain the shape of Townleys PPC?
The PPC is concave because it reflects the concept of diminishing returns
or increasing opportunity cost. Every additional GP transferred to provide dental
treatment will result in more and more GP treatments sacrificed/forgone.
This is because additional units of dental treatment require the use of better and

better GPs to cross over to perform dental treatment thus incurring a higher and
higher O.C. ( or sacrifice) in terms of GP services that these doctors could have
produced.
iii. If Townley Regional Health Authority makes a more efficient use of its available resources,
how will this affect its PPC? How will the PPC be affected if they managed to get more
dentist from other counties?

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Year One H1 & H2 Economics 2010
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Moving from a point inside PPC to a point on the PPC

To make more efficient or better use of its resources means to maximise productivity out

of its existing resources.

For instance, by managing the clinic and its manpower more efficiently the same
number of doctors can treat more pat ients e.g. implement a better system that cuts
down waiting time so each doctor can see more patients per day.
In other words, TRHA must employ all its available resources to the fullest.
This is shown by a movement of point within the PPC e,g, (Y) to a point nearer to or on
the PPC e.g. (B).

PPC shift outwards

If more dentists from other countries were recruited TRHA would have
more resources or a bigger productive capacity to provide more dental
services.
Assuming dentists are occupationally mobile ie can switch to become
GP, the PPC would shift outwards. TRHA now have the capacity to
provide more of both GP and dental services enabling it to attain a
previously unattainable point such as X which lies outside the original
PPC.
PPC pivot outwards?
However, if the new dentists are occupationally immobile, the
curve would just pivot outwards along the X-axis.

PPC

Re-cap
The above exercise is to build up your skills in using the PPC as an powerful tool for economic
analysis:
(1)
Shape Illustrate scarcity and opportunity costs.
(2)
Position growth ( shifts and pivots)
(3)
Points ( output combinations) efficiency and growth.
Points inside, on and outside the frontier.

2)

Study the table below and answer the questions that follow.

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Year One H1 & H2 Economics 2010
Tutorials 1-3

This new set of questions is very similar to TRHA in terms of

the application of basic concepts/principles related to the
PPC. Only the context has been changed.
You should be able to answer all of them correctly without
much difficulty. So try !

Context ( A comparison):
(4) Economy cf A health Authority
(5) 2 Goods ( rice and jeans) cf 2
services ( GP and Dental)
An economy produces only 2 goods one is a necessity good (rice) and the other a luxury
good (designer jeans). Given resources and technology, the alternative combinations of
goods of these 2 goods produced in a year are shown in the table below.
Combinations
A
B
C
D
E
F
G

Rice
21
20
18
15
11
6
0

Designer Jeans
0
1
2
3
4
5
6

(a) Calculate the opportunity costs of producing more and more units of jeans.
Jeans
Opp cost

1st
1

2nd
2

3rd
3

4th
4

5th
5

6th
6

(b) What is the above trying to illustrate regarding opportunity cost?

It is illustrating increasing opportunity cost as more and more units of jeans are produced.

(c) What causes this to happen?

Factors of production / resources are not perfectly homogeneous or equally suitable for the
production of jeans and rice.

(d) Give 2 reasons as to how an economy can produce at a point inside the PPC.
This is a sign that available resources not being used efficiently in 2 possible ways:

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Year One H1 & H2 Economics 2010
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(i) Unemployment ( unused or idling or unproductive)
(ii) Underemployment ( underused or underutilised) e.g. Resources are underused if
they are producing below their potential capacity e.g. nuclear physicists
employed as a taxi drivers

.
(e) If there is an improvement in the method of production which increases rice yield,
i) With the aid of a diagram, briefly explain how this would affect the PPC.
PPC will pivot.
The maximum amount of rice production will increase whilst the maximum
amount of jeans that can be produced will remain constant.
Rice
(i)

B
A

(ii) Point A to B

Designer Jeans

ii) Since this advancement is restricted only to rice cultivation, show on the same diagram how
might the economy bring about a simultaneous increase in the production of both goods.
By reallocating some resources from rice to jeans production. Eg. from Point A to Point B.

(f) When would the economy produce more rice without having to produce less of jeans, given
technology and resources remain unchanged?
If they are originally operating at a point inside the PPC.
Ask: 'How can the economy consume ( not the same as produce!) more
rice without having to consume less of jeans'
Ans: Through international or external trade with other countries.
This is big macroeconomic topic to be taught later.
NB:
Without access to international trade a countrys ability to consume must in principle be
limited or bounded by its ability to produce. This limitation however could be overcome
through international specialization and trade. In other words via international trade individual
countries can actually leverage on the resources of other countries ( virtually the whole world
if they are highly globalised/integrated into the world economy like SG !)

(g) (i) Use the PPC to briefly explain the difference between actual and potential growth.

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Year One H1 & H2 Economics 2010
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Actual growth:
Actual output is the output produced currently by the economy.
Actual economic growth is the increase in the current output produced by the economy.

Potential growth
Potential output is the maximum output that an economy is capable of producing. It represents
the economys productive capacity.
Potential growth is hence the increase in a countrys potential output or productive capacity.
Diagrammatically:

PPC frontier represents the countrys potential output. The growth in potential output is
therefore represented by an outward shift of the PPC frontier.
The actual output is where an economy is currently producing. It could be either inside or on a
PPC frontier. The growth in actual output could coincide ( move in tandem) with the potential
output (ideally this is called a Goldilocks economy); or it could lag behind the potential output.
In reality actual growth could even outstripped potential growth in nominal terms. This happens
when an economy is overheating.
NB:
All these concepts will be applied later in the study of macroeconomic growth theory.
So KIV Ok!

Good Y
Actual growth: e.g. a to b, b to c, c
to d
d
c
b
Ask: What happens if potential
PPCI
growth PPCII
is slower than actual
(ii) Explain whether it is always efficient if economy operates on its PPC.
a

0
2 meaning (types) of efficiency :

Good X

NB:
The generic meaning of efficiency is the absence of wastage. Its corollary is the
maximisation of Welfare or level of satisfaction. Afterall scarce resources are meant for
the production of goods and services to satisfy our wants. So if a country can get the
MOST BENEFITS out of its available resources the people must be enjoying the highest
level of welfare possible.
The bottom-line is the more efficiently resources are used the most wants can be
satisfied! Thats the goal or holy grail in the study of economics - how to hit this
objective!
Productive Efficiency (PE)
Yes.. any point on the PPC frontier indicates that the economy is using its resources
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Year One H1 & H2 Economics 2010
Tutorials 1-3
efficiently in the PE sense. There is no waste of scarce resources in the sense that all the
resources are fully employed.
If that is the case, then all available resources are being used to produce the max output
possible right? Put in another way, every unit of output must have been produced using
the minimum or least amount of inputs or resources. This is the very essence of PE.
Example:
If 10 men ( labour) can produce a max of 10 units of output ( Pair of Jeans)
Then each pair of jean uses 1 unit of input or man to produce.
However, if labour is used inefficiently such that 10 men produces only 5 pairs of jeans,
then each pair of jean actually takes 2 men to produce right? It is productively
inefficient!
Allocative Efficiency (AE)
Depends
AE is not the same as PE. It is about whether the best combination of goods or the
output mixed is optimal?
Best => the combination that maximises the consumers or societys welfare or level of
satisfaction.
So, if the economy produces 3 pairs of jeans + 15 units of rice is this the best
combination?
It may or may not be.
It all depends on the tastes/preferences of the consumers what they like or want at a
given point of time. Taste and preferences may also change over time. Hence, all points
on the PPC are PE and at any given point of time, there can only be one particular point
that represents the best combination given the tastes/preferences prevailing at that
time.
Conclusion:
By looking at a PPC it is always possible to tell whether an economy is PE but not
necessarily whether it is AE.
In other words whilst an economy should always aim to use its available resources to the
fullest, it might not always want the SAME combination as well as SAME of goods and
services. Societys tastes and preferences change over time. New products come on
stream e.g. smartphones whilst some existing products are no longer desired e.g.
floppy diskettes.

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