Chapter1:TheScopeofEconomicAnalysisHKALMicroeconomicsT.W.G.Hs.LoKonTingMemorialCollegeReferences:A-LevelMicroeconomics,CH.1,2&15HKALEMicroeconomics,CH.1,2,14&19張五?！督?jīng)濟(jì)解釋卷一》第一至第三章ExchangeandProduction,CH.1&5ByMr.LAUsan-fat/ver20041CH1-TheScopeofEconomicAnalysisChapter1:TheScopeofEconomWhatisEconomics?anempiricalsciencerestingon

the

assertionorpostulateofself-interesttoexplainobservableeconomicbehaviororphenomenahistoryrepeatsitself,however,factsdonotspeakforthemselveseconomiststhereforeneedto‘theorize’inordertoexplainandpredictfacts/economicphenomena.ByMr.LAUsan-fat/ver20042CH1-TheScopeofEconomicAnalysisWhatisEconomics?anempiricalWhatisEconomics?Asanempiricalscience,economictheoriesareconstructed:toexplainhumanbehaviorbyfindingoutwhatconditionsleadtowhatconsequencestopredicttheoccurrenceofsimilareventsinthefutureandhowbehaviorwillchangewhenthereisachangeintheconstraintstheyface.ByMr.LAUsan-fat/ver20043CH1-TheScopeofEconomicAnalysisWhatisEconomics?AsanempiriPositiveVersusNormativeEconomicsPositiveeconomicscontainsdescriptivestatements,propositionsandpredictionsabouttheworld.Normativeeconomicsmakesstatementsaboutwhatoughttobe,oraboutwhataperson,organizationornationoughttodo.Ex1:IsA-Leconomicsconcerningaboutpositiveornormativeone?ByMr.LAUsan-fat/ver20044CH1-TheScopeofEconomicAnalysisPositiveVersusNormativeEconAttributesofEconomicAnalysisEconomicanalysisissolelyscientificandstrictlypositive.Economictheoryrestsonunderstandingofhumantraits.theoriesareabstractionsoftheworldtotheorizeistopickoutthe‘relevants’fromthe‘irrelevants’Economistsconstructandtesttheories.ByMr.LAUsan-fat/ver20045CH1-TheScopeofEconomicAnalysisAttributesofEconomicAnalysiMethodology–ScientificInquiry:ConstructingTheoriesinterestingreal-worldobservationsprompttheconstructionofatheorypostulatingeconomicbehavior(i.e.makingaxiomsorbasicassumptions)pickingout'relevants'fromthe'irrelevants'(i.e.makingabstractions)ByMr.LAUsan-fat/ver20046CH1-TheScopeofEconomicAnalysisMethodology–ScientificInquiMethodology–ScientificInquiry:ConstructingaTheoryestablishingtheinterrelationshipamongvariablesandideasintheformofhypothesis(including‘testconditions’&‘predictedoutcomes’)i.e.‘IfA,thenB’vialogicaldeductionmakingalogicallyconsistentimplicationorpredictionByMr.LAUsan-fat/ver20047CH1-TheScopeofEconomicAnalysisMethodology–ScientificInquiMethodology–ScientificInquiry:ConstructingaTheoryconfrontingthereal-worldobservationswiththetestableimplication(i.e.testingthehypothesis/model/theory)atheoryisvalidifitisconfirmed/notrejectedbythefactsByMr.LAUsan-fat/ver20048CH1-TheScopeofEconomicAnalysisMethodology–ScientificInquiMethodology–ScientificInquiry:ConstructingaTheoryatheoryisinvalidifitisrejectedbyfacts,andisbeingdiscardedoramendedwithaddingmoreconstraintsandisbeingre-tested.ByMr.LAUsan-fat/ver20049CH1-TheScopeofEconomicAnalysisMethodology–ScientificInquiSixBasicPostulatesEachpersondesiresmanygoods&hasmanygoals.Foreachperson,somegoodsarescarce.Eachpersoniswillingtoforsakesomeofagoodtogetmoreofothergoods.ByMr.LAUsan-fat/ver200410CH1-TheScopeofEconomicAnalysisSixBasicPostulatesEachpersoSixBasicPostulatesThemoreofagoodonehas,thelargerthetotalpersonalusevalue,butthelowerthemarginalpersonalvalueofaunit.Notallpeoplehaveidenticaltastesandpreferences.Peopleareinnovativebutconsistent.ByMr.LAUsan-fat/ver200411CH1-TheScopeofEconomicAnalysisSixBasicPostulatesThemoreoTheValidityandUsefulnessofaTheoryatheoryissaidtobeausefulifithasimplicationsthatarepotentiallyrefutablebuthavenotyetrefutedEx2:Canatheorybeprovedwrong?Weneversayatheoryis'proven'becausewejustdonotknowwhetherthenextsetofcollecteddatawillstillagreewiththeimplicationsornot.ByMr.LAUsan-fat/ver200412CH1-TheScopeofEconomicAnalysisTheValidityandUsefulnessofTheValidityandUsefulnessofaTheoryIftheempiricallycollecteddataagreewiththeimplications,thenthetheoryissaidtobe'confirmed'and'valid'.Ifnot,itis'refuted'or'rejected'and'invalid'.Atheorythatcanneverberejectedisuselessbecauseitiseitheratautology(adefinitionalidentity)orwearenotclearwhatisabout.ByMr.LAUsan-fat/ver200413CH1-TheScopeofEconomicAnalysisTheValidityandUsefulnessofTheValidityandUsefulnessofaTheoryTheusefulnessofatheoryisbasedonitsexplanatoryandpredictivepower.AsMiltonFriedmansaid,"Thevalueofamodeldoesnotdependonthe'realism'ofitsassumptionsbutonitsabilitytoexplainorpredictrealworldevents.“ByMr.LAUsan-fat/ver200414CH1-TheScopeofEconomicAnalysisTheValidityandUsefulnessofAttributesofaUsefulTheoryeconomictheorymustbeasimplificationofrealityassumptionsmaybeunrealisticbecause:thestatementdoesnotgiveanexhaustivedescriptionofanobjectthestatementisfalseorhighlyimprobablethestatement(excludingtestconditions)isusedtoformulatepurecasesoridealtypestheargumentsmustbelogicallyconsistentifAthenBandBthenC,AispreferredtoCByMr.LAUsan-fat/ver200415CH1-TheScopeofEconomicAnalysisAttributesofaUsefulTheoryeAttributesofaUsefulTheoryimplicationsandpredictionsmustbetestableorobservablethetheoryispotentiallyrefutablebyfactsvariablesinthetheorymustbeobservableByMr.LAUsan-fat/ver200416CH1-TheScopeofEconomicAnalysisAttributesofaUsefulTheoryiAttributesofaUsefulTheorythepowertogeneralizeifahypothesisisrepeatedlysupportedbytheevidenceandrepeatedlyaccepted(orconfirmed),itmaybecalledalawGreatpredictivepower,notforecastingpowerEx3:Whatisthedifferencebetweenforecast&predict?ByMr.LAUsan-fat/ver200417CH1-TheScopeofEconomicAnalysisAttributesofaUsefulTheorytHypothesis,AdHocTheoryandTautologyHypothesisislogicallydeducted,testable,refutable,andusuallyexpressedintermsof'IfA(assumptions),thenB(implications)’.ByMr.LAUsan-fat/ver200418CH1-TheScopeofEconomicAnalysisHypothesis,AdHocTheoryandHypothesis,AdHocTheoryandTautologyRejectedtheorycanbemodifiedbyaddingmoreassumptionstothetheoryattheexpenseoflosingitspowertogeneralize,i.e.itcanapplytoanarrowervarietyofsituations.ByMr.LAUsan-fat/ver200419CH1-TheScopeofEconomicAnalysisHypothesis,AdHocTheoryandHypothesis,AdHocTheoryandTautologyanadhoctheoryisaveryspecifictheorythatcanbeappliedonlytoone(orafew)particularsituation.ByMr.LAUsan-fat/ver200420CH1-TheScopeofEconomicAnalysisHypothesis,AdHocTheoryandHypothesis,AdHocTheoryandTautologyAnexampleofadhoctheory:Ifitrains+outdoor+withoutumbrella+withoutraincoat+withoutcap+withouthat+withoutshelter+notstandingunderatree+notstandingunderacover(A),thenyou’llgetwet(B).ExamplefromStevenN.S.Cheung:droppingtemperatureinhighmountainsByMr.LAUsan-fat/ver200421CH1-TheScopeofEconomicAnalysisHypothesis,AdHocTheoryandHypothesis,AdHocTheoryandTautologyAtautology(adefinitionalidentity)issogeneralizedandtrueforallvaluesofthevariables.Example:‘Afour-leg-animalhasfourlegs’Itisemptyandhasnoexplanatorynorpredictivepoweratall.ByMr.LAUsan-fat/ver200422CH1-TheScopeofEconomicAnalysisHypothesis,AdHocTheoryandHypothesis,AdHocTheoryandTautologyButatautologycouldbedevelopedintoausefultheoryiftestableconditionsareadded.TheCoaseTheoremandQuantityTheoremofMoneyaretwoexamplesofthese.ByMr.LAUsan-fat/ver200423CH1-TheScopeofEconomicAnalysisHypothesis,AdHocTheoryandHypothesis,AdHocTheoryandTautologyEx4:Isanadhoctheoryoratautologybettertheory?ByMr.LAUsan-fat/ver200424CH1-TheScopeofEconomicAnalysisHypothesis,AdHocTheoryandHypothesis,AdHocTheoryandTautologyAusefultheorymustthenstrivefortherightbalancebetweenthedegreeofgeneralityandrefutabilitybyavoidingaddingtoospecificorgeneralizedconditionstoitsconstruction.Therefore,ausefultheorymustfallinbetweentheadhoctheoryandtautology.ByMr.LAUsan-fat/ver200425CH1-TheScopeofEconomicAnalysisHypothesis,AdHocTheoryandHypothesis,AdHocTheoryandTautology.ByMr.LAUsan-fat/ver200426CH1-TheScopeofEconomicAnalysisHypothesis,AdHocTheoryandLogicalFallaciesLogicallyspeaking,wemust

‘a(chǎn)ffirmtheantecedent’inthehypothesisinorderfortheconsequenttofollowwithlogicalnecessity.IfAistrue,thenBistrue;Aistrue,thereforeBistrue.ByMr.LAUsan-fat/ver200427CH1-TheScopeofEconomicAnalysisLogicalFallaciesLogicallyspeLogicalFallaciesExample:

IfJessieisatrainedsecretary,thensheknowshowtouseatypewritercorrectly;Jessieisatrainedsecretary,thereforesheknowshowtouseatypewritercorrectly.ByMr.LAUsan-fat/ver200428CH1-TheScopeofEconomicAnalysisLogicalFallaciesExample: ByMLogicalFallaciesOntheotherhand,wecandenythetruthofahypothesiswithreferencetothefacts:denyingtheconsequent.IfAistrue,thenBistrue;BisNOTtrue,thereforeAisNOTtrue.ByMr.LAUsan-fat/ver200429CH1-TheScopeofEconomicAnalysisLogicalFallaciesOntheotherLogicalFallaciesExample:IfJessieisatrainedsecretary,thensheknowshowtouseatypewritercorrectly;

Jessiedoesnotknowhowtouseatypewritercorrectly,thereforesheisnotatrainedsecretary.ByMr.LAUsan-fat/ver200430CH1-TheScopeofEconomicAnalysisLogicalFallaciesExample:IfJLogicalFallaciesFallacy1:AffirmingtheconsequentIfAistrue,thenBistrue;ifBistrue,thereforeAistrue.Example:IfJessieisatrainedsecretary,thensheknowshowtouseatypewritercorrectly;Jessieknowshowtouseatypewritercorrectly,thereforesheisatrainedsecretary.ByMr.LAUsan-fat/ver200431CH1-TheScopeofEconomicAnalysisLogicalFallaciesFallacy1:AfLogicalFallaciesFallacy2:DenyingtheantecedentIfAistrue,thenBistrue;ifAisnottrue,thereforeBisnottrue.Example:IfJessieisatrainedsecretary,thensheknowshowtouseatypewritercorrectly;Jessieisnotatrainedsecretary,thereforeshemustnotknowhowtouseatypewritercorrectly.ByMr.LAUsan-fat/ver200432CH1-TheScopeofEconomicAnalysisLogicalFallaciesFallacy2:DeLogicalFallaciesWhen“A”issaidtobeanecessaryconditionfor“B”,itmeansthatoccurrence(ortrue)of“B”impliestheoccurrence(ortrue)of“A”,i.e.“IfAistrue,thenBistrue;Bistrue,thereforeAistrue”.ByMr.LAUsan-fat/ver200433CH1-TheScopeofEconomicAnalysisLogicalFallaciesWhen“A”issLogicalFallaciesWhile“A”issaidtobeasufficientconditionfor“B”,itmeansthattheoccurrence(ortrue)of“A”impliestheoccurrence(ortrue)of“B”,i.e.“IfAistrue,thenBistrue;Aistrue,thereforeBistrue”.ByMr.LAUsan-fat/ver200434CH1-TheScopeofEconomicAnalysisLogicalFallaciesWhile“A”isLogicalFallaciesWhen“A”isbothanecessaryandsufficientconditionfor“B”,itmeansthattheoccurrenceofoneimpliestheoccurrence(ortrue)oftheother,i.e.“IfAistrue,thenBistrue;Aistrue,thereforeBistrue”and“Bistrue,thereforeAistrue”.ByMr.LAUsan-fat/ver200435CH1-TheScopeofEconomicAnalysisLogicalFallaciesWhen“A”isbLogicalFallaciesEconomicproposition/hypothesisof“IfA,thenB”onlypositsthat“A”isasufficientconditionfortheoccurrenceof“B”,i.e.“IfAistrue,thenBistrue;Aistrue,thereforeBistrue.”(Affirmingtheantecedentbutwithnologicalfallacy)ByMr.LAUsan-fat/ver200436CH1-TheScopeofEconomicAnalysisLogicalFallaciesEconomicpropLogicalFallaciesExample:If“IfJessieisatrainedsecretary,thensheknowshowtouseatypewritercorrectly;Jessieisatrainedsecretary,thereforesheknowshowtouseatypewritercorrectly.”ByMr.LAUsan-fat/ver200437CH1-TheScopeofEconomicAnalysisLogicalFallaciesExample:If“LogicalFallaciesByconfrontingthehypothesiswithobservablefacts,ifJessieisatrainedsecretaryandgoodatusingatypewriter,thehypothesisissaidtobeconfirmed;if,however,sheisatrainedsecretarybutdoesNOTknowhowtouseatypewriter,thehypothesis(thoughisfreefromlogicalfallacy)issaidtoberejected(byfacts).ByMr.LAUsan-fat/ver200438CH1-TheScopeofEconomicAnalysisLogicalFallaciesByconfrontinLogicalFallacies‘IfAistrue,thenBistrue;BisNOTtrue,thereforeAisNOTtrue.”(Denyingtheconsequentbutwithnologicalfallacy.)ByMr.LAUsan-fat/ver200439CH1-TheScopeofEconomicAnalysisLogicalFallacies‘IfAistrueLogicalFallaciesExample:‘IfJessieisatrainedsecretary,thensheknowshowtouseatypewritercorrectly;JessiedoesNOTknowhowtousecorrectlyatypewriter,thereforesheisNOTatrainedsecretary.’ByMr.LAUsan-fat/ver200440CH1-TheScopeofEconomicAnalysisLogicalFallaciesExample:‘IfLogicalFallaciesByconfrontingwithobservablefacts,ifJessiedoesNOTknowhowtouseatypewritercorrectlyandisNOTatrainedsecretary,thehypothesisissaidtobeconfirmed;if,however,shedoesNOTknowofusingcorrectlyatypewriterbutisindeedatrainedsecretarythehypothesisissaidtoberejected.ByMr.LAUsan-fat/ver200441CH1-TheScopeofEconomicAnalysisLogicalFallaciesByconfrontinConstrainedMaximizationEconomistsassumeindividualsmakechoicessubjecttoconstraints(i.e.rulesofthegame)inordertomaximizehisgains(intermsofutility,income,wealth,rentorprofit)Ineconomics,individualchoiceandself-interestarebasicpostulatesusedtoexplainanindividual'smaximizingbehavior,subjecttoconstraints(availablealternatives).

Ex5:Whatarethemajorconstraints?ByMr.LAUsan-fat/ver200442CH1-TheScopeofEconomicAnalysisConstrainedMaximizationEconomMajorConstraintsConstraintsOne-maneconomySocietyScarcityofresourcesYesYesProductioncostYesYesTransactioncostsNoYesPropertyrightsNoYesByMr.LAUsan-fat/ver200443CH1-TheScopeofEconomicAnalysisMajorConstraintsConstraintsOnTransactionCostsTransactioncosts,intheirbroadestsense,encompassallthosecoststhatcannotbeconceivedtoexistinaRobinsonCrusoeeconomywheretherearenopropertyrights,transactionsoranykindofeconomicorganization.ByMr.LAUsan-fat/ver200444CH1-TheScopeofEconomicAnalysisTransactionCostsTransactioncTransactionCostsEconomicorganizationisdefinedasanyproductionandexchangeactivitieswhicharenotguidedbytheinvisiblehandofthemarket,thenallorganizationcostsaretransactioncosts.Transactioncostsareactuallyinstitutionalcosts,includingthecostsoforganizationandlawenforcement.ByMr.LAUsan-fat/ver200445CH1-TheScopeofEconomicAnalysisTransactionCostsEconomicorgaTransactionCostsasaSpectrumofInstitutionalCostsByMr.LAUsan-fat/ver200446CH1-TheScopeofEconomicAnalysisTransactionCostsasaSpectruTransactionCostsasaSpectrumofInstitutionalCostsinformationcostorsearchingcostdefiningcostordelineatingcostthecostincurredinsettingthelimitsintheuseofpropertyrightsbylegalorsocialinstitutionsmeasurementcostandpricingcostnegotiatingandcontractingorexchangecostspolicingandenforcingcostsByMr.LAUsan-fat/ver200447CH1-TheScopeofEconomicAnalysisTransactionCostsasaSpectruTransactionCostsasaSpectrumofInstitutionalCostsInaone-maneconomy,informationcostsandpolicingcosts(sayofpreventingwildanimals)wouldstillexist.However,theyarenotregardedastransactioncosts.Theyareregardedastheproductioncostsincurredinmaintainingthelivingstandard.Asitisalmostimpossibletodistinguishclearlybetweendifferenttypesofcosts,wesimplylumpthemtogetheras‘transactioncosts’.ByMr.LAUsan-fat/ver200448CH1-TheScopeofEconomicAnalysisTransactionCostsasaSpectruWaysofReducingTransactionCoststheuseofmoneyasacommonmediumofexchangetheexistenceofamarketplacetheexistenceofmiddlementheupholdingofprivatepropertyrightsbyaneffectivegovernmenttheexistenceofsocialcustomandetiquetteByMr.LAUsan-fat/ver200449CH1-TheScopeofEconomicAnalysisWaysofReducingTransactionCScarcity,Choices&OpportunityCostScarcitywewantmorethanwehavearelativeconceptauniversalproblemEx6:Isshortagethesameasscarcity?ByMr.LAUsan-fat/ver200450CH1-TheScopeofEconomicAnalysisScarcity,Choices&OpportunitScarcity,Choices&OpportunityCostScarcityShortageDefinitionWewantmorethanwehaveatzeroPQdislargerthanQsatapositivePCauseUnlimitedwantscannotsatisfiedwithlimitedresourcesMarketpriceiscontrolledalevelbelowtheequilibriumByMr.LAUsan-fat/ver200451CH1-TheScopeofEconomicAnalysisScarcity,Choices&OpportunitScarcity,Choices&OpportunityCostScarcityShortageCurable?NOwaytoeliminateByallowingthemarketpricetoadjusttotheequilibriumlevelOtherstheexistenceof“scarcity”doesNOTimplytheproblemof“shortage”theexistenceof“shortage”impliestheproblemof“scarcity”ByMr.LAUsan-fat/ver200452CH1-TheScopeofEconomicAnalysisScarcity,Choices&OpportunitScarcity,Choices&OpportunityCostPDS0QsQdQP=0PP1DS0QsQdQshortagescarcityByMr.LAUsan-fat/ver200453CH1-TheScopeofEconomicAnalysisScarcity,Choices&OpportunitScarcity,Choices&OpportunityCostWithscarcity,wechoosetheoptionthatincursthelowestopportunitycost.Opportunitycostisdefinedasthehighest-valuedoptionnecessarilyforgoneinmakingchoice.Wheneverwechoose,opportunitycostarises.Ex7:DoescostexistinRobinsonCrusoeorone-maneconomy?ByMr.LAUsan-fat/ver200454CH1-TheScopeofEconomicAnalysisScarcity,Choices&OpportunitScarcity,Choices&OpportunityCostWheneverthereiscompetition,discriminationthenfollows.Todiscriminateisjusttoseparatethewinnersfromthelosersinacompetition.ByMr.LAUsan-fat/ver200455CH1-TheScopeofEconomicAnalysisScarcity,Choices&OpportunitScarcity,Choices&OpportunityCostThecriteriaofcompetition(i.e.rulesofthegameorconstraints)arenotjustimportantindecidingwhoarewinnersorlosers,butalsoaffecthumanbehavior.Achangeinthecompetitioncriteriawilldefinitelyinducechangesinhumanbehavior.ByMr.LAUsan-fat/ver200456CH1-TheScopeofEconomicAnalysisScarcity,Choices&OpportunitFormsofCompetitionPriceCompetition:Goods&servicesareallocatedtothehighestbidderunderthepriceormarketsystem.Resourcesallocationunderpricecompetitionissaidtobeefficientbecausetheproductwillbeinthehandsofthehighest-valuedusers.ByMr.LAUsan-fat/ver200457CH1-TheScopeofEconomicAnalysisFormsofCompetitionPriceCompFormsofCompetitionNon-priceCompetition:bysocialcustoms&traditionsbyseniorityorbeautybyreligionaffiliationbyacademicperformancebyviolenceorphysicalforcebyqueuingorfirstcomefirstservedbylotteryorballotorrationingorluckEx7:Whichformofcompetitionismoreefficient?ByMr.LAUsan-fat/ver200458CH1-TheScopeofEconomicAnalysisFormsofCompetitionNon-priceRemarksonOpportunityCostWecanpredictwhetheracertainactwillbepursuedvoluntarilyornotbymeansofcomparingitsvalue(i.e.themaximumoneiswillingtopay)withitscost(i.e.themaximumonewillhavetosacrifice).Ifitsvalueexceedscost,theactwillbetaken,viceversa.ByMr.LAUsan-fat/ver200459CH1-TheScopeofEconomicAnalysisRemarksonOpportunityCostWeRemarksonOpportunityCostBadconsequencesandthecostofachoiceareNOTthesame.Ex8:IfPeter&Maryaresecondaryteachersearning$16000permonth,istheiropportunitycostofquittingthejobdefinitelythesame?Explain.ByMr.LAUsan-fat/ver200460CH1-TheScopeofEconomicAnalysisRemarksonOpportunityCostBadRemarksonOpportunityCostCostsarenotnecessarilyexpressedintermsofmoneyorout-of-pocketcost.fullcost=explicitcost+implicitcostexplicitcost=out-of-pocketcost=moneycostimplicitcost=incomeforgoneEx9:ReferringtoEx8,willPeter&Marybearthesameopportunitycostwhentheydecidetobecomeasecondaryteacher?ByMr.LAUsan-fat/ver200461CH1-TheScopeofEconomicAnalysisRemarksonOpportunityCostCosRemarksonOpportunityCostNochoice,nocost.Timeitselfisnotacost,however,thehighest-valuedalternativeuseofthatperiodispartofcost.Whencostincreases,itdoesNOTimplyoneisworseoff.however,itmeansthevalueofthehighest-valuedalternativeuseincreases.ByMr.LAUsan-fat/ver200462CH1-TheScopeofEconomicAnalysisRemarksonOpportunityCostNoHistoricalorSunkCostHistoricalorsunkcostissimplyapastexpenditure(forapastact)istheoriginalcostatwhichafirmacquiredafactorEx8:Distinguishsunkcostfromopportunitycost.ByMr.LAUsan-fat/ver200463CH1-TheScopeofEconomicAnalysisHistoricalorSunkCostHistoriSunkCostandOpportunityCostSunkCostOpportunityCostAnaccountingcost,whichishistoricalinnatureNotanaccountingcostAnex-postconcept:postandbackward-lookingAnex-anteconcept:anticipatedandforward-lookingByMr.LAUsan-fat/ver200464CH1-TheScopeofEconomicAnalysisSunkCostandOpportunityCostSunkCostandOpportunityCostSunkCostOpportunityCostCannotbeavoided,i.e.irrecoverableCanbeavoidDoesNOTaffectpresentorfuturedecision-makingAdeterminantofmaximumdecision-making:lowercostispreferredByMr.LAUsan-fat/ver200465CH1-TheScopeofEconomicAnalysisSunkCostandOpportunityCostFunctionsofInvisibleHandEx9:Whatis/arethefunction(s)ofprice?Pricetransmitsinformationforresourcesallocation.Priceprovidesincentivesthatmotivatedecision-makerstoactbecauseitrewardscorrectdecisionsandpenalizeswrongones.ByMr.LAUsan-fat/ver200466CH1-TheScopeofEconomicAnalysisFunctionsofInvisibleHandExFunctionsofInvisibleHandPricedistributesincomeasitdetermineswhogainhowmuchofwhat.Theabove3functionsareinter-related.ByMr.LAUsan-fat/ver200467CH1-TheScopeofEconomicAnalysisFunctionsofInvisibleHandPriPropertyRightsPropertyrightstosomethingaretheentiresetofpeoples’expectationsregardingwhattheycanandmaydo.Propertyrightsaretherulesofthegame,whichservetodeterminethewinnersandlosers;whentherulesofthegamechange,thewinnersandloserswillchange.ByMr.LAUsan-fat/ver200468CH1-TheScopeofEconomicAnalysisPropertyRightsPropertyrightsPropertyRightsInacapitalistsystem,propertyrightsexistoncapitalandconsumergoodsandonpersonalservices.Peoplecompeteinthefreemarketandthepricemechanismdeterminesresourceallocationandincomedistribution.ByMr.LAUsan-fat/ver200469CH1-TheScopeofEconomicAnalysisPropertyRightsInacapitalistPropertyRightsInasocialistsystem,income-generatinggoodsarecontrolledbythegovernmentandarenottransferableatmarketprices.Controlofscarceandvaluableresourcesisgainedbyaccesstopoliticalpowerratherthanthroughthepricemechanism.ByMr.LAUsan-fat/ver200470CH1-TheScopeofEconomicAnalysisPropertyRightsInasocialistPrivatePropertyRightsAgoodoranassetisdefinedasprivateproperty,ifandonlyif,withinwell-definedlimits,itsownerhasthreedistinctsetsofrights:theexclusiverighttousetheexclusiverighttoreceiveincomethetransferrightByMr.LAUsan-fat/ver200471CH1-TheScopeofEconomicAnalysisPrivatePropertyRightsAgoodPrivatePropertyRightsTheexclusiverighttouseistherighttoexcludeotherindividualssothattheowneralonemaydecideontheuseofagood.Theexclusiverighttoreceiveincomemeansthattheownerhastheexclusiverighttoextractincomegeneratedbytheuseofagood.ByMr.LAUsan-fat/ver200472CH1-TheScopeofEconomicAnalysisPrivatePropertyRightsTheexcPrivatePropertyRightsThetransferrightmeansthattheownerhasthefullrighttotransferoralienateapropertyorresourcetoanyoneheorsheseesfit.Itimpliestherighttoenterintocontractswithanyoneandtochoosetheirform.However,inpractice,exclusivityandtransferabilityofagoodarefrequentlymattersofdegree.ByMr.LAUsan-fat/ver200473CH1-TheScopeofEconomicAnalysisPrivatePropertyRightsThetraGoods,BadsandNeutersAgoodisanydesiredentityorobject;agoodissomethingofwhichsomeispreferredtomore.Abadisanyundesiredentityorobject;abadissomethingofwhichlessispreferredtomore.Aneuterissomethingwhichapersonisindifferenttohaving,anddoesnotcarewhetherheorsheacquiresmoreofitorless.ByMr.LAUsan-fat/ver200474CH1-TheScopeofEconomicAnalysisGoods,BadsandNeutersAgoodEconomicGoodsandFreeGoodsEconomicgoods:ascarcegood/madeofscarceresourcesadesiredentitythatwewantmorethanwehavemoreofitispreferredtolesscommandingapositivepriceQdislargerthanQsatzeropriceByMr.LAUsan-fat/ver200475CH1-TheScopeofEconomicAnalysisEconomicGoodsandFreeGoodsEEconomicGoodsandFreeGoodsFreegoods:anon-scarcegood/madeofnon-scarceresourcesadesiredentitythatwedonotwantmorethanwehavemoreofitisnotpreferredcommandingnopriceQdissmallerthanQsatzeropriceByMr.LAUsan-fat/ver200476CH1-TheScopeofEconomicAnalysisEconomicGoodsandFreeGoodsFProductionPossibilityCurve(PPC)&EfficiencyAssumptionsbehindPPC:acountryproducesonlytwogoodsresourcesavailablearegiventechnologyisgivenDefinitionofPPC:ThePPCshowsallcombinationsoftwogoodsthatacountrycanproduce,giventheresourcesandthebesttechnologyavailable.ByMr.LAUsan-fat/ver200477CH1-TheScopeofEconomicAn