2.2.1 Compulsory Part Topic Basic Economic Concepts Key Points: Economics as a social science Scarcity, choice and opportunity cost (i) The source of economic problems: scarcity Unlimited wants and limited resources Free and economic goods (ii) Choice and opportunity cost Economic decisions involving choices among alternatives Concept of cost in economics Interest as the cost of earlier availability of resources The three basic economic problems (i) What to produce? How to produce? For whom to produce? (ii) How society tackles the basic economic problems By society's customs and traditions By government decisions By the market mechanism (N.B. Illustrations by examples only. All theories on types of economic systems NOT required) (iii)Private property rights and its importance in a market economy Specialization and exchange Exchange as a condition for specialization Circular flow of economic activities (i) Consumption of households and production of firms (ii) The relationship among production, income and expenditure Positive and normative statements Distinction between positive statements and normative statements Topic: Firms and Production Key Points: 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) (i) Forms of ownership Public ownership Private ownership: sole proprietorship, partnership and limited company (N.B. Classification of partnership NOT required) (ii) Limited and unlimited liability (iii)Shares and bonds as sources of capital (N.B. Classification of shares and bonds NOT required) Types/stages of production Primary, secondary and tertiary production and their inter-relationship Types of goods and services produced (i) Producer and consumer goods (ii) Private and public goods (N.B. Modelling regarding public goods NOT required) Division of labour (i) Types: simple, complex and regional (ii) Advantages and disadvantages (iii)Limitations Topic: Factors of production Key Points: (i) Human resources Labour: supply, productivity, mobility and different methods of wage payments Entrepreneurship: risk-bearing and decision-making (ii) Natural resources Land: supply (iii)Man-made resources Capital: accumulation and depreciation (iv)The features of (i) to (iii) in Hong Kong 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 (ii) Law of diminishing marginal returns Illustration by total product, average product and marginal product schedules only (iii)Cost of production 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) (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) (v) Expansion and integration of firms Types: vertical, horizontal, lateral and conglomerate Motives Topic The objectives of firms: Key Points (i) Profit maximization with given prices 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) (ii) Other objectives: market share, provision of non-profit making services, corporate social responsibility, etc Law of Demand Individual demand (i) Factors affecting individual demand (ii) Complements and substitutes, superior and inferior goods (N.B. Giffen goods NOT required) (iii)Individual demand schedule and importance of the ceteris paribus assumption (iv)Difference between change in quantity demanded and change in demand Market demand (i) Horizontal summation of individual demand curves (ii) Factors affecting market demand Individual supply (i) Factors affecting individual supply (ii) Individual supply schedule and importance of the ceteris paribus assumption (iii)Difference between change in quantity supplied and change in supply Topic Market supply Key Points (i) Horizontal summation of individual supply curves (ii) Factors affecting market supply Interaction between demand, supply and price (i) Definition of equilibrium: no tendency to change (ii) Equilibrium price and quantity (iii)Effects of change in demand and/or change in supply on equilibrium price and quantity Consumer and producer surplus (i) Marginal benefit to consumers, willingness to pay, consumer surplus, demand curve and their relationship (ii) Marginal cost of firms, minimum supply-price, producer surplus, supply curve and their relationship (iii)Illustrate consumer surplus and producer surplus in a demand-supply diagram (N.B. Concepts of utility, marginal rate of substitution, and indifference curves NOT required) Functions of prices (i) Rationing function: existing supplies are distributed to users with highest value (ii) Allocative function: Demand is derived from marginal benefit, and supply is derived from marginal cost; the interaction between demand and supply then determines price and resources allocation Changes in relative prices and resource deployment (N.B. Graphical analysis NOT required) Price elasticity of demand (i) Arc elasticity (N.B. Point elasticity, cross elasticity and income elasticity NOT required) (ii) Relationship between price elasticity and total revenue (iii)Factors affecting price elasticity of demand Topic Price elasticity of supply Key Points (i) Arc elasticity (N.B. Point elasticity and cross elasticity NOT required) (ii) Factors affecting price elasticity of supply Market intervention (i) Price intervention: price ceiling and price floor (ii) Quantity intervention: quota Illustration of quota by a kinked supply curve (iii)Unit tax and unit subsidy Determination of the share of the tax burden/subsidy between producers and consumers (N.B. Graphical illustration of price ceiling, price floor, quota, unit tax and unit subsidy and their impact on price and quantity) Perfect competition and imperfect competition (monopolistic competition, oligopoly and monopoly) (i) Definition of market (ii) General features Number of sellers Number of buyers Nature of product Ease of entry Availability of information Price taker/price searcher (iii)Sources of monopoly power (N.B. The four different forms of market structure are theoretical constructs. Actual examples may only be approximations of the above constructs. General analysis with marginal revenue and marginal cost curves NOT required) Topic Efficiency, Equity and the Role of Government Key Points Efficiency (i) Conditions for efficiency: Maximization of total social surplus; marginal benefit equals marginal cost (ii) Deviations from efficiency: Price ceiling, price floor, tax, subsidy and quota Deadweight loss (iii)Divergence between private and social costs (benefits): market versus government solutions, illustrated by examples ONLY (N.B. Graphical analysis with illustration of consumer surplus and producer surplus in a demand-supply diagram only. The term “Pareto condition” NOT required) Equity (i) Efficiency and equity in a market economy (ii) Measuring income inequality: income distribution, Lorenz curve and Gini coefficient (N.B. Construction of the Lorenz curve and Gini coefficient NOT required) (iii)Sources of income inequality: human capital (e.g. skill differentials), discrimination and unequal ownership of capital, etc Policy concerns (i) Equalizing income or equalizing opportunities (ii) Disincentive effects of taxes and transfers (iii)Trade-off between equity and efficiency Topic Measurement of Economic Performance Key Points National income (i) National income as a general term for aggregates like Gross Domestic Product (GDP) and Gross National Product (GNP) (ii) Gross Domestic Product (GDP) The three approaches to measure GDP: production approach (value-added approach), income approach, expenditure approach (N.B. Components of GDP compiled under the income approach NOT required) GDP at current and constant market prices GDP at factor cost per capita GDP; growth rate of GDP (N.B. Other measures related to GDP NOT required) (iii)GNP as GDP plus net income from abroad (N.B. Other measures related to GNP NOT required) (iv)Uses and limitations of national income statistics as an indicator of economic welfare and for international comparison (N.B. Human Development Index NOT required) General price level as measured by Consumer Price Index and implicit price deflator of GDP (N.B. Construction of CPI and implicit price deflator of GDP NOT required) Unemployment and underemployment rates as measured in terms of the percentage of unemployed and underemployed persons in the labour force Recent trends of national income, general price level and unemployment in Hong Kong Topic National Income Determination and Price Level Key Points Aggregate demand (AD) (i) Reasons for a downward sloping AD curve (ii) Determinants of aggregate demand: Private consumption expenditure, which in turn depends on disposable income, the desire to save, wealth (value of assets), interest rate, etc Investment expenditure, which in turn depends on business prospect, interest rate, etc Government expenditure Net export, which in turn depends on the economic conditions of trading partners, exchange rate, etc (N.B. Derivation of the AD curve, magnitude of the shift in the AD curve and factors affecting the slope of the AD curve NOT required) Aggregate supply (AS) (i) Reasons for an upward sloping short run AS curve (ii) Reasons for a vertical long run AS curve (iii)Factors affecting short run and long run AS (N.B. Explanation by the Phillips curve and magnitude of the shift of the AS curve NOT required) The determination of level of output and price (i) Determination of the equilibrium level of output and price level in the AS-AD model (N.B. Quantity Theory of Money NOT required) (ii) Changes in the equilibrium level of output and price level caused by change(s) in the AD and/or AS (iii)Relationship between employment and output level (N.B. Interest rate is treated as exogenously determined) H Money and Banking Money (i) Definition of money (ii) Nature and functions of money Topic Banks: functions and services Key Points (i) Commercial banks and central bank (ii) Licensed banks, restricted licence banks and deposit-taking companies in Hong Kong (iii)How central banking functions are performed in Hong Kong Money supply (i) Definitions of money supply in Hong Kong (ii) Credit creation/contraction and the banking multiplier Money demand (i) Meaning of transactions demand for money and asset demand for money (ii) Money demand as a function of nominal interest rate and income Determination of interest rate in the money market Interaction of money supply and money demand Hong Kong as a financial centre (i) Factors contributing to its development as a financial centre (ii) Effects on the Hong Kong economy I Macroeconomic Problems and Policies Business cycles: a description of the short run fluctuations in real GDP around the long run trend (N.B. Theories of business cycles NOT required) Inflation and deflation (i) Definitions of inflation and deflation (ii) Relationship between nominal and real interest rates (iii)Redistributive effects (iv)Inflation and Quantity Theory of Money (N.B. Velocity of circulation of money assumed to be constant) Topic Unemployment Key Points (i) Meaning of unemployment (ii) Meaning of underemployment (iii)Cost of unemployment (N.B. Phillips curve NOT required) Fiscal policy (i) Meaning of fiscal policy Definition of budget; surplus budget, deficit budget and balanced budget Taxation − Principles − Classification of taxes - Direct and indirect taxes - Progressive, proportional and regressive taxes Public expenditure: classification by function (N.B. With specific reference to Hong Kong) (ii) Effect of fiscal policy on the level of output and price Monetary policy (i) Meaning of monetary policy (ii) Effect of monetary policy on the level of output and price Topic International Trade and Finance Key Points Free trade and trade barriers (i) Absolute advantage, comparative advantage and gains from trade (N.B. Illustration by the production possibilities frontier NOT required) (ii) Using the pattern of trade in Hong Kong to illustrate the principle of comparative advantage (iii)Importance of trade to Hong Kong’s economy (iv)Trade barriers Types Effects of tariff and quota on price and output for a small open economy Trade barriers faced by Hong Kong (v) Hong Kong’s attempts to overcome trade barriers Trade promotion Role of the HKSAR Government Role of international economic institutions (e.g. World Trade Organisation) Brief introduction to the balance of payments account Current account − Main components of the current account: goods, services, income and current transfers (N.B. Sub-classification of these components NOT required) Capital and financial account (N.B. Sub-classification of this account NOT required) Exchange rate (i) Meaning of exchange rate (N.B. Graphical analysis NOT required) (ii) Effect of a change in the exchange rate on import price and export price (iii)Brief introduction to the linked exchange rate system in Hong Kong (N.B. Mechanism of maintaining the linked exchange rate NOT required) 2.2.2 Elective Part Elective Part 1 Topic Monopoly Pricing Key Points (i) Simple monopoly pricing Determination of price and output Efficiency implications (N.B. Graphical and numerical illustrations with given demand, marginal revenue and marginal cost curves) (ii) Price discrimination Meaning of price discrimination Types: First, second and third degree price discrimination Conditions for different types of price discrimination (N.B. Price and output determination NOT required) Anti-competitive Behaviours and Competition Policy (i) Major forms of anti-competitive practices Horizontal agreements among competitors: agreements to restrict prices and output Vertical agreements between buyers and sellers Mergers: horizontal mergers, vertical mergers and potential competition mergers (ii) The impact of anti-competitive practices (N.B. Graphical analysis NOT required) (iii)Justifications and concerns for competition policy Personal, Social and Humanities Education Key Learning Area （ econ_final_e.pdf ）
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