Scarcity:

Amount of resources are unable to satisfy our wants.

Opportunity Cost：

Value of the highest valued option forgone.

Interest:
Borrower’s point of view: Cost of earlier availability of goods or resources.

Lender’s point of view: Compensation for deferring consumption of goods or resources.

Free Good:
-Amount of it is sufficient to satisfy our wants
-Scarcity does not exist

-No one is willing to pay for it

Economic Good:

-Amount of it is insufficient to satisfy our wants

-Resources used to produce it have alternative uses, production involves OC
-People are willing to pay for it

Private Property Right:

-Exclusive right to use
-Exclusive right to receive income

-Right to transfer
Positive Statement:
Statement that what it is, with no valued judgement. Can be tested or refuted by fact.

Normative Statement:
Statement describing what ought to be, with valued judgement. Cannot be tested and refuted by
fact.

Legal Entity:

The firms are the ones who own property, make contracts, and engage in lawsuits.

Unlimited Liability:
Loss of an owner if the firm is confined to his investment in the firm, you may need to use your
personal property to settle the firm’s debt.

Producer Good / Capital Good:

-Goods used in the production process to produce other goods and services.
-Don not directly satisfy human wants

Consumer Good:

-Goods used for final consumption.

-Directly satisfy human wants.

Private Good:
-Rival and excludable in consumption
-When people use that good, its quantity available for others will decrease
Public Good:
-Non-Rival and Non-excludable in consumption
-When people use that good, its quantity available for others will not decrease

Primary Production:

It refers to activities involving direct extraction of natural resources.

Secondary Production:
It refers to activities which turn raw materials into semi-finished products or finished products.

Tertiary Production:

It refers to activities provided services.

Simple Division Of Labour:

Different workers specialize in producing different goods.

Complex Division Of Labour:

Different workers specialize in different production stages of the same good or play different
roles in teamwork.

Regional Division of Labour:

Workers in different regions specialize in producing different goods or different production
stages of the same good.

Labour (Wages):

Human effort, both mental and physical.

Entrepreneurship (Profit):
Need to bear risk and make decisions.

Capital (Interest):
Man-made resources used in production. (Production good)

Land (Rent):
Natural resources

Occupational Mobility:
The ease with which a factor can change from one occupation to another occupation.

Geographical Mobility:
The ease with which a factor can move from one working place to another.

Fixed Factor:
The amount of factor will not change when output change.

Variable Factor:
The amount of factor will change when output change.

Fixed Cost:
The cost will not change when output change.

Variable Cost:
The cost will change when output change.
Law of diminishing marginal return:
When more and more variable factors are added continuously to a given quantity of fixed factors,
the marginal product will decrease, holding other factors being constant.

Horizontal expansion:

Firm expands into a business at the same production stage of the same product.

Vertical Expansion:

Backward: Firm expands into a preceding stage of production.

Forward: Firm expands into a later stage of production.

Conglomerate Expansion:
Firm expands into a business of unrelated products.

Lateral Expansion:
Firm expands into a business of related but not competitive product.

Rationing Function (Consumer):

Price can direct the goods to buyers with the highest maximum willingness to pay.

Allocative Function (Producer):

Market Price direct resources to produce the goods that have the highest benefit.
Negative Externality:
The negative effect imposed on others without paying any compensation.

Positive Externality:
The positive effect imposed on others without receiving any compensation.

Law of demand:
The law of demand states that the price and quantity demanded is negatively related, holding
other factors being constant.

Price elasticity of demand/supply:

It measures the responsiveness of the quantity demanded/supplied of a good to change in its
price.

Consumer Price Index:

-Consumer good included (import good included)

-Fixed basket of goods and weighting will revise every 5 years.

(Better in measuring Cost of living)

GDP Deflator:

-Locally produced final goods and services (import goods and services excluded)
-Variable baskets of goods for each year

(Better in measuring general price level)

Inflation:
The phenomenon of a persistent increase in the general price level.

Deflation:

The phenomenon of a persistent decrease in the general price level.

Labour Force:
People who are willing to and available for work.

AD curve Downward Sloping:

Wealth Effect: When the general price level increases, the purchasing power of money decreases,
purchasing power of wealth decreases, consumption expenditure decreases, resulting in
aggregate output demanded decrease.

Interest Rate Effect: When the general price level increases, people will hold more money for
consumption, saving decreases, bank will increase the interest rate, cost of borrowing money
from bank increase, C&I decrease, aggregate output demand decrease.

Net Export Effect: When general price level increase, price of domestic product rise relative to
price of their foreign substitutes, export volume decrease, price of foreign product becomes
relative to cheaper in the domestic market, import volume increase, aggregate output demanded
decrease.

SRAS upward sloping:

Imperfect adjustment of input and output prices: When the price level increases, the adjustment
of input prices is imperfect, so the cost of production in real terms has dropped. Quantities of
output supplied will increase. Therefore, higher price levels result in higher output levels.

Principles of taxation:
Equity Principle: Charging the same percentage of people’s income as tax
Economy Principle: The government should minimize the administrative cost incurred from tax
collection.
Convenience Principle: The time and methods of the tax payment should be convenient to the
taxpayers.
Certainty Principle: Taxpayers should be certain about the taxes to be paid, including the
amount, the timing, and the method of tax payment.
Direct Tax:
-A tax where taxpayer cannot shift the tax burden to another party
-A tax levied on income or wealth

Indirect Tax:

-A tax where taxpayer can shift the tax burden to another party.
-A tax levied on goods or services

Progressive Tax:

Average tax rates increase when the taxable income increase.

Regressive Tax:
Average tax rates decrease when the taxable income increases.

Proportional Tax:

Average tax rates remain unchanged when the taxable income increase.
Expansionary Fiscal Policy:
When the government cut tax and/or increase the expenditure to raise the aggregate output.

Contractionary Fiscal Policy:

When the government raise tax and/or decreases the expenditure to cool down the economy.

Barter:
Direct exchange of goods and services.

Money:

Anything that is generally acceptable as a medium of exchange.

Process of deposit creation:
When someone deposits an amount of cash in the banking system, more cash is injected to
commercial banks as reserves, actual reserve is larger than required reserve and there would be
excess reserves in the banking system. The bank will lend out the excess reserves, and the bank
loan will be re-deposited into the banking system, the process will continue until the actual
reserves are equal to required reserves.

Process of deposit contraction:

When someone withdrawal an amount of cash from the banking system, bank loss reserves,
actual reserve is smaller than required reserve and bank will call back loans. The customers have
to withdrawal their deposits to repay their loans, causing another round of decrease in deposit.
The process goes on and on until the actual reserves are equal to required reserves.

Transaction demand for Money:

People hold money to conduct transactions.

Assests demand for Money:

The amount of money people desires to hold as an asset for the purpose of storing wealth.

Expansionary Monetary Policy:

Measure that raises output level by increasing money supply.

Contractionary Monetary Policy:

Measure that reduces output level by cutting money supply.

Absolute Advantage:
-It can produce more output with the same amount resources than other country. /
-It can produce the same amount of output with less amount of resources than other country.
Comparative Advantage:
It can produce a good at a lower OC than other country.

Law of comparative advantage /Principle of comparative advantage:

If each country specializes in producing the good in which it has lower OC, the total output will
increase.

Tariff：

A tax on imports.

Import Quota:
A maximum limit on the quantity of imports.

Import Surcharge:
An extra fee/charge imposed on imports on the top of tariff.

Embargo:
A prohibition on trading with some countries.

This may imposed on some or all goods.

Export Subsidy:

A government grant/subsidy on exports on import-competing goods

Elective Part A
Price Discrimination:

-Different price are charged to different buyers

-The same good are provided to different buyers
-The goods are produced at the same cost.

Elective Part B
Horizontal Agreement:
They are agreements among competitors in the same market to restrict competition.

Price Fixing:

It is an agreement among competitors to fix or maintain the price of a good of they buy/sell.

Bid-rigging/Collusive Bidding:
It is an agreement among competitors to conspire together in contract bidding,public tenders or
auctions.

Output Agreement:Sales and production quota:

It is an agreement among competitors to restrict their output.

Market allocation/Consumer Allocation:

It is an agreement among competitors to divide sales territories.

Joint Boycotts:

It is an agreement among competitors not to deal with targeted individuals or businesses.

Vertical Agreement:
They are agreements between supplier and sellers along the supply chain to restrict competition.

Exclusive Dealing:
One party asked another party not to deal with other parties.

Exclusive Territory:
It is an agreement between supplier and distributor under which the distributor has an exclusive
right to sell a suppliers’ product within a particular territory.

Resale Price Maintainance:

It is an agreement between a supplier and its distributors that the distributors agree to resell a
good at recommended price sat by the supplier.

Abuse of Market Power:

-A firm is considered to be an dominant firm if it has significant market power in the relevant
product market or geographical market.
-The dominant firm may abuse its dominant position to restrict output,fix prices and extend its
market power to other market.

Predatory Pricing/Below Cost Pricing:

It is a strategy of charging a price below production cost.

Tie-in-sales:
It is an agreement in which a buyer who wants to buy a product from a supplier is required by the
supplier to also buy another product along with it.

Bundling:
It is an agreement in which a supplier sells two or more products in a single package.
Merger:
It is a method of integration.

Horizontal Merger:
It reduce market competition as the combined firm has a greater market share and greater power
to restrict the entry of potential competitors.

Potential Competitor Merger:

It is a merger between a firm and its potential competitors who are planning to enter the market.

Vertical Merger:
Backward: The combined firm can then refuse to supply the inputs to its competitors.
Forward: The combined firm can then prevent its competitors from obtaining distribution
channel.

First Conduct Rule:

This prohibits agreement and concerted practices that harm competition in HK.

Second Conduct Rule:

This prohibits a firm with a substantial degree of market power from abusing that power by
engaging in conduct that harms competition in HK.