TUTORIAL 1 (WEEK 2)

TUTORIAL EXERCISES

Question 1
Describe in detail the relationship between the scarcity, choices, and opportunity cost.

At any one time, we live in a world that has only limited economic resources. Unfortunately, our wants
and desires for the good and services that we can produce with those limited resources are unlimited.
Therefore, the study of economics exists. It reflects a significant fact of economic life, which is scarcity.
Scarcity indicates a situation in which human’s unlimited wants exceed the limited resources available to
fulfil those wants. As a result of scarcity, we cannot say yes to each of our unlimited wants. Anyone,
including households, firms, and the government that uses the resource, is facing an economic problem
and necessarily deciding how to use it. Hence, the concept of trade-offs comes in when we are forced to
make choices among alternatives when the unlimited wants are colliding with the limits of resources.
Trade-offs in the idea that, because of scarcity, producing more of one good or service means will be
producing less of another good or service.

For example, suppose that a chocolate manufacturer is having its dark chocolate and milk chocolate as
its popular products in the market. Some scarce resources, such as raw materials – cocoa, plastic
packaging, wages paid to workers, and machinery; are required in the manufacturing process. Since the
resources are scarce for the chocolate manufacture, it must make a trade-off between the production. If
a manufacturer chooses to produce a bar of dark chocolate, the manufacturer will have chosen not to
and give up on produce a bar of milk chocolate, and vice versa. Like so, the concept of trade-offs due to
scarcity is formalized by the concept of opportunity cost. The opportunity cost of any activity or choice
implies the highest valued alternative that must be forgone and given up to engage in that activity. In
other words, the opportunity cost of producing a bar of dark chocolate is the value of producing a bar of
milk chocolate.

- Replenish definition for economics

Question 2
Are all economies based on free market economies? What determines the structure of economic
systems? Briefly discuss the reasons for your answer.

No – Command and mixed economies. Three economic questions (what, how, who)
Centrally planned economy – government decision
Pure market economy – households and firms
Mixed economy – both government and firms
- How the goods and services be distributed to society after production?

No, there are other economic system: centrally planned and modern mixed economy. 3 fundamental
economic question: who / how / what – will determine the structure of economic structure. List feature
of each economic market:
i. Centrally planned economy – the government makes most of the decision
ii. Market economy – most of the decision are made by household and the firms (individual
sector and private sector)
 iii. Modern mixed economy – Individual, firms, and government both owned and decide the
resources allocation. Whatever product the private sectors do not produce, government will
fulfill its importance to the society and distribute to the society.
- Who owns the resources + How the production take place + Who will make the decision + How
will the goods distribute to the society?

Question 3
A factory employs 10 people and has 2 machines able to produce and pack 300 glass bottles each day.
The same employees and machines could instead be used in the same factory to make and pack 400
glass jars each day.

The same 10 employees used to work on a farm and were very skilled at growing and harvesting corn
until the farm was sold and the factory was built on the farmland. Compared to the farm the factory is
noisy and pollutes the air with smoke.

a) What is the opportunity cost to the factory owners of using the 10 employees and 2
machines to make 300 bottles each day?

The opportunity cost to the factory owners of using the 10 employees and 2 machines to make 300 glass
bottles each day is the factory will not be able to produce the 400 glass jars. This is because, the factory
has shifted those resources for 400 glass jars to producing the 300-glass bottle.
Production of 400 glass jars each day

b) What is the opportunity cost to the employees of working in the factory?

Loss of skills of growing and harvesting corn

- (The opportunity cost to the employees of working in the factory is low productivity of factory
production. Employees used to be experienced at growing and harvesting corn. However, the
sudden change in work field of employees means that factory has to shift and transfer a
particular amount of their resources, such as money and labor, from producing glass bottles and
glass jars to conducting training session for the new employees in order for them to work
effectively. Moreover, it takes time for employees to adapt the changes in new working
environment which directly affect the efficiency of production.) ----- not stated/discussed in
article

c) What is the opportunity cost to society of the factory?

External costs, also known as negative externalities, such as sound and air pollution are the opportunity
cost from the factory to society. External costs are directly associated with producing or delivering good
or service in the production. Private costs are borne by the factory; however, some external costs of
pollution that are passed on to and borne by society, who is neither the buyer nor the sellers, but the
other parties beyond those involved. (loss of quiet farm environment and clean air, noisy, environment
has been polluted)

- Economic production that causes environmental damage. This tradeoff arises for all countries,
whether high-income or low-income, and whether their economies are market-oriented or
 command-oriented. Every country needs to strike some balance between production and
environmental quality.
- Traditionally, policies for environmental protection have focused on governmental limits on how
much of each pollutant could be emitted. While this approach has had some success,
economists have suggested a range of more flexible, market-oriented policies that reduce
pollution at a lower cost.
- Private markets offer an efficient way to put buyers and sellers together and determine what
goods are produced, how they are produced, and who gets them. The principle that voluntary
exchange benefits both buyers and sellers, is a fundamental building block of the economic way
of thinking. But what happens when a voluntary exchange affects a third party who is neither
the buyer nor the seller? The effect of a market exchange on a third party who is outside, or
external, to exchange is called an externality. Because externalities that occur in market
transactions affect other parties beyond those involved, they are sometimes called spillovers.

Question 4
Every week, Kate plays tennis for two hours, and her grade on each math test is 70 percent. Last week,
after playing for two hours, Kate considered playing for another hour. She decided to play for another
hour and cut her study time by one hour. But last week, her math grade fell to 60 percent. Use this
information to answer the below questions.

a) What was Kate’s opportunity cost of the third hour of tennis?

The opportunity cost to the third hour of tennis is degraded in Kate’s math grades that her marks
dropped from 70 to 60. Time is scare, which means Kate faces trade-offs: she spent an hour more for
tennis, she has one hour less to spend studying for her math exam that directly impact on her marks.
The finite amount of time Kate has limited her ability to attain her goals. (a drop in Kate’s grade by 10%)

b) Given that Kate played the third hour, what can you conclude about her marginal benefit
and marginal cost of the second hour of tennis?

The marginal benefit of playing tennis for three hours is the additional satisfaction and enjoyment Kate
received while engaging in the activity she enjoyed. Meanwhile, the marginal cost would be the
reduction of marks in her math grade from having studied an hour less.

Marginal benefit from the second hour of tennis should be exceeded the marginal cost of the second
hours. Therefore, Kate chose to play the third hour of tennis (MB greater than MC).

- The marginal benefit from the second hour of tennis must have exceeded the marginal costs of
the second hour – Kate chose to play the third hour.

c) Was Kate’s decision to play the third hour of tennis rational?

If marginal benefit exceeded marginal cost, then Kate’s decision was rational.

d) Did Kate make her decision on the margin?

Margin – compared the benefit and cost of one more hour (MB and MC) make the decision on the
margin, then she continue to play tennis for another one more hour (the third hour)
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IMPORTANT!!!

Media Review Analysis: Answer the questions based on the excerpt below.

Nearly 25% of The World's Population Faces a Water Crisis, And We Can't Ignore It

Within the past hundred years, water use has been growing at more than twice the rate of the human
population. As water supplies continue to shrink, some parts of the world are facing a looming crisis. As
of 2019, 17 countries in total are now experiencing "extremely high" levels of baseline water stress,
according to recent data from the World Resources Institute (WRI).

This, in essence, means that nearly one-quarter of the world's population - around 1.7 billion people -
currently lives in areas where agriculture, industries and cities withdraw 80 percent of their available
water supply every year. In such a vulnerable state, even a small dry spell could be enough to cause a
crisis. And these dry events, scientists agree, are only going to get worse with climate change. "Its
consequences are in plain sight in the form of food insecurity, conflict and migration, and financial
instability."

It is a growing demand that shows no signs of slowing, and it is starting to get away from us. Today, WRI's
Aqueduct tool has identified no less than 44 countries experiencing "high" levels of water stress. That is
roughly a third of the planet whose available water supply is depleted by on average 40 percent annually.

Last year, Cape Town's water supply teetered on the brink of "Day Zero". This year, the city of Chennai in
India is close to running out of water. While there is currently no global water scarcity as such, the
United Nations says an increasing number of places are chronically short of water.

Using peer-reviewed data to map water risks such as floods, droughts, and stress, WRI has ranked water
stress, drought risk, and riverine flood risk across 189 countries and their sub-national regions, like states
and provinces.

The results clearly highlight the Middle East and North Africa as the most water-stressed region on Earth
by far. In fact, 12 out of the top 17 most water stressed countries listed by WRI were in this hot and dry
region, collectively known as MENA. Qatar, Israel, and Lebanon ranked in the top three.

India is the first country outside of MENA to show up on this list, although that does not necessarily
mean its water issues are any less dire. Water stress is just one dimension of water security;
management is another. With 1.3 billion people, India alone holds more than three times the population
of the other 16 countries in the list, and Chennai's water management problems are just the tip of the
iceberg.

In MENA, the problem has more to do with recycling wastewater. Over 80 percent of MENA's water is
not reused, so if these countries create infrastructure around this idea, it could create a whole new
source of clean water.
Australia is a good example of how effective management can save a country on the brink of water
stress. On the way to its own Day Zero during a millennium drought, the nation nearly halved its
domestic water use. That said, the country still experiences severe drought issues exacerbated by
climate change.

But looking at these problems country by country is not necessarily the best way to view the problem.
While the United States ranked well for water stress overall, for instance, the state of New Mexico had
"extremely high" pressure on water availability. It was like the United Arab Emirates and Eritrea.

And soon, this one state will have more company. A study in the US from earlier this year, predicted that
in just five decades, the central and southern Great Plains, the Southwest and central Rocky Mountain
States, California, and areas in the South and the Midwest are likely to experience significant water
shortages.

"In future periods, as population and economic growth plus the changing climate alter water yield and
demand, shortages are projected to increase substantially, in the absence of adaptation measures, with
many of the 14 futures we examined," the researchers of the study explain.

Nor will the US be alone in this grim future. Researchers at MIT say roughly half the world's projected 9.7
billion people will live in water-stressed regions by 2050. If the world does not improve its agricultural
efficiency, decrease its water use, and recycle and reuse wastewater, water scarcity could be a
permanent stress of the future.

Source: https://www.sciencealert.com/17-countries-are-facing-extreme-water-stress-and-they-hold-a-
quarter-of-the-world-s-population

Based on the article above, answer the following questions:

Main crisis: Water scarcity/shortage: unlimited wants exceed the limited resources
Reasons: High demand due to the population growth and economic growth, Poor water management –
the country unable to recycle and reuse the used water, Climatic issues/condition due to prolong
drought, Excess of water usage

2. Does scarcity force the affected society to incur opportunity cost? In what ways? Discuss.

Use for water for daily uses/working aspect – multiple usage/purpose of water
Yes, scarcity occurred when resources are short in supply to fulfill all water usage, too many activities
involved usage of water, therefore we have to make choice on multiple water usage.

3. Describe the four (4) factors of production. In which factor does the main resource above belong to?

Land, Labor, Entrepreneur, Capital (provide examples for each factors of production)
Land – limited natural resources

4. What are some of the possible solutions to the problems mentioned in the article above?
Recycling or reuse of the waste water
Improve agriculture and industrial efficiency
Encourage citizen to save water/decrease water usage
Increasing awareness of water usage
More aware of water adaption measures
Government policies – issue water permit – increasing the price of water