Chapter 1: Introduction of economics

concepts and tourism industry

learning outcomes:
Understand the scope of recreation, leisure and tourism
and their interrelationship
Explain the basic economic concern of scarcity, choice
and opportunity costs
Outline the allocation of resources in different economic
systems
Explain the methodology of economics
Understand the use of models in economics
Understand the use of economics to analyze issues in
recreation, leisure and tourism
Working definitions
Leisure- discretionary time, the time that
remains after working, commuting,
sleeping, and doing necessary household
and personal chores which can be used in a
chosen way.
Recreation- pursuits undertaken in leisure

time. It can be home-based activities

(watching TV and reading) and outside
activities (sport, theatre, travel)
 Tourism- visiting at least one night for
leisure and holiday, business and
professional or other tourism purposes.
Recreation, leisure and tourism sector

organizations- organizations producing

goods and services for use in leisure time,
organizations seeking to influence the use
of leisure time and supplying goods and
services.
Leisure and tourism
Home-based recreation
Listening to music
Watching TV and videos

Listening to radio

Reading

DIY arts work

Gardening

Playing games

Exercise

Hobbies

Leisure use of computers

Recreation away from
home
Sport participation
Watching entertainment
Hobbies
Visiting attraction
Eating and drinking
Betting and gaming
Travel and tourism
Travelling to destination
Accommodation at destination
Recreation at destination
What is economics?
It is a social science that studies human
behavior in the context of market.
Two alternative definitions of economics:
1) economics is the study of how societies

allocate scarce resources to satisfy

individuals unlimited wants or desires.
2) economics is the study of peoples

incentives and choices and how to

coordinate their decisions and activities.
Cont
It is the study of how people work together
to transform resources into goods and
services to satisfy their most pressing wants
and how they distribute these goods and
services among themselves.
Economics discusses all issues which relate

to the production, distribution and

consumption of goods and services.
Why study economics?
Improves analytical skills
Economics is a powerful tool of analysis to
understand events that are constantly going
around us that either directly or indirectly
affect us.
For instance, why has the oil price increased
lately? What are the consequences? Should I
continue study or should I start working now?
Should I spend my money to buy an iphone
5s or should I buy the economics textbook?
CONT
Enables more intelligent decision-making
the fact that individuals and societies wants are
unlimited and greater than the limited resources
available to satisfy those wants indicates that
people need to make choice at all time.
Economics is important to individuals who want
to maximize their satisfaction, to businessmen
who want to make maximum profits, to
politicians who want to obtain maximum votes
during election
EVERYBODY NEEDS TO KNOW ECONOMICS.
BRANCHES OF ECONOMICS
STUDY
1) Microeconomics
2) Macroeconomics
microeconomics
Micro means small
Focuses on the behavior of small units of

economy- individual entities

Firm, consumer, household, an industry, an

investor, a worker, and a single market that

makes up the broader economy
Deals with the problem of demand for a

particular goods and services, discusses a

single price determination, examines how a
tax cut affects a single firms output.
macroeconomics
Macro means large
Focuses on the behavior and choices that
relate to an entire economy- concern with the
large aggregates.
Deals with the problem of aggregate demand
for goods and services, discusses the general
price level, examines how tax cut affects the
entire economys output, determines the
national output and employment, total imports
and exports, and demand for the supply of
money, exchange rate and etc.
Levels of economics analysis
Positive economics
Normative economics
Positive economics
Attempts to determine what is
Deals with cause-effect relationship that can be

tested
Concerned with the investigation of the ways in

which different economic agents seek to achieve

their goals
Examples:

How does the stock market work? What are the

consequences of rent control on the market for

housing? An increased budget deficit will bring
down the present high employment but will increase
the rate of inflation.
Normative economics
Attempts to determine what should be
Deals with value judgments and opinions that

cannot be tested
Concerned with making suggestions about the

ways in which societys goals might be more

efficiently realized.
Examples:
The present high unemployment and inflation

rates ought to be reduced

The income distribution should be more equal
Inherited wealth should be taxed more heavily
Basic economics concepts

1) Resources and wants

2) Scarcity/choice
3) Opportunity cost
4) The production possibility frontier (PPF)
1) Resources and wants
Resources can be used to make goods and
services
Economists classified it into:

Land (raw materials), labor and capital

(machines).
Peoples wants appear unlimited and exceed

the resources available to satisfy these wants.

Basic needs- foods, clothing and shelter

Material wants- cars, property, holidays and

recreation are rarely fully satisfied.

2) Scarcity and choice
The existence of limited resources and unlimited
wants gives rise to the basic economic problem of
scarcity.
A situation arises when there is less of something
(eg. Economic resources, time, energy, money,
goods, and services) than people would like to have
if it were free.
Gives rise to price and the need to make choice as
well as efficient allocation of resources among
alternative competing uses
When choice is made, something has to be forgone.
Opportunity costs
In a world of scarcity, choosing one thing
means giving up something else
Due to the scarcity of resources, we must
always consider how to spend our limited
income or time and other resources to
maximize our satisfaction
Opportunity cost is the value of something that
must be sacrificed if we want to obtain
something else.
Example: to study or to watch television, to
hair perm or to body massage
 Opportunity cost is defined as the value of the
next best alternative forgone when an activity or
item is chosen.
It is not the sum of the values of all choices that
have been forgone but it is the value of next
best alternative forgone.
For instance, you could have used your time to
read this text book, to watch television, to send
e-mail to friends, or take a nap and so on. If you
chose to read this text book, and the next best
alternative in your list is watching TV, then the
opportunity cost of reading this text book is the
benefits that you have to sacrifice from watching
TV due to the choice chosen.
Where the opportunity cost is not a total up of
watching TV, send email, and take nap and so
on.
 Opportunity cost is subjective.
Only the individual involved can select the

most attractive alternative.

In calculating the opportunity cost, we have

to assume that people rationally choose the

most valued alternative.
Can opportunity cost be zero?
Normally, the production of one commodity requires
the giving up of some positive amount of other
commodities.
However, there are a few things that nature provides in

such abundance that no opportunity cost is involved in

their use.
They are free goods with zero opportunity cost, such as

oxygen, sunlight, rain water, etc.

In addition, all unemployed resources such as

unemployed labor, unemployed equipment has zero

opportunity cost as well.
There is no sacrifice involved while using the resources.
The production possibility
frontier (PPF)
PPF is a curve that shows the various
combinations of two products that can be
produced by an economy given its current
level of technological knowledge, quality
and quantity of inputs or resources.
The concepts of scarcity, choice,

opportunity cost, and efficiency are well

illustrated using the PPF.
PPF for leisure goods and
accommodation goods
 Figure above illustrates the opportunity cost concept
by use of a production possibility frontier (PPF).
It is assumed first that the economy only produces two

types of goods- leisure goods and accommodation

goods, and secondly, that it uses all its resources fully.
Curve PPF plots all the possible combinations of leisure

goods and accommodation goods that can be

produced in this economy.
The negative value of the slope indicates the tradeoff

between the two products due to scarcity.

We cannot have two products increase or decrease in

value at the same time.

To get more units of one product means we have to

give up some units of another product. It is drawn

concave to the origin (bowed outwards) since, as more
and more resources available become less suitable for
producing that commodity. It implies that to obtain one
more unit of leisure goods, more units of
accommodation goods need to be forgone.
Concept of maximize resources
The frontier of PPF indicates the maximum
amounts of production that can be obtained
by the current economy.
It is constrained by the limited or scarce

amount of resources (including technology

level) available in any economy.
If resources are not scarce, there will be no

PPF as there will be no restriction to infinite

production.
Concept of choice
Choice is illustrated by the various
combinations or points along the PPF, such
as point A, B, C, D, E.
Refer to the previous PPF, from point A to

Point B, we have to choose to have more

accommodation goods but lesser in leisure
goods.
Concept of opportunity cost
The slope of PPF measures the value of
opportunity cost.
The negative value of the slope indicates

the trade off between the two products due

to scarcity.
We cannot have two products increase or

decrease in the value at the same time.

To get more units of one product means we

have to give up some units of another

products.
Concept of efficiency
Efficient points refer to the points that
produce as many goods and services as
possible from available resources to
maximize total satisfaction.
Point A, B, C, D, E are considered as efficient

points in using the available resources.

PPF- Inefficient point

*D
 Figure above shows a combination that does not
employ resources fully at the efficient level.
Efficient point refers to points that produce as
many goods as possible from available resources
to maximize total satisfaction.
Any points that fall inside or outside the PPF
indicate inefficient combinations, for example plot
A in the above PPF.
By using resources more efficiently, the economy
can move from point A to point B to yield more
leisure goods but no fewer accommodation goods.
Likewise, the economy can move from point A to
point C yielding more accommodation goods but
no fewer leisure goods.
Any point outside the PPF, such as point D as
shown in the above figure, its represents the
unattainable combinations given the technology
level and resources available.
Can PPF change its positions?
When we construct the PPF, we have
assumed that the resources available as
well as the level of technology are fixed.
If we relaxed these assumptions, for

instance, over time, resource base may

change. What will happen to the PPF?
Lets check what will happen.
1) Increase in resources that
benefits both products
2) Increase in resources that
benefit leisure goods
3) Increase in resources that
benefit accommodation goods
Economy and economy system
An economy is the institutional structure
through which individuals in a society
coordinate their diverse wants and desires.
An economic system is the means by which

the economy is organized.

An economy system is classified based on:
1) who owns the factor of production
2) the methods used to co-ordinate and

direct economic activity

 Economic system
Market Command Mixed economy
economy economy
- Private - Public - A mixed of
ownership of (government) both pure
resources ownership of capitalism and
- Price and all resources command
market system - Decision economy
are used to making is - Decision on
coordinate and through central what, how and
direct economy economic for whom to
activity planning produce are
- Consumers - Everything is determined by
would controlled by a mixture of
determine and the government
influence the government and private
producers - The three decision
decisions to economics making
produce problem (what,
- No government how, and for
intervention whom) are
solve by the
Three economics questions in
the market economy
What shall be produced?
How shall it be produced?
For whom are goods produced?
What shall be produced?
I tem to be produced depend on consumer
preferences
This is answered by the signals of the

market prices
High oil prices stimulate oil production,

whereas low food prices drive resources out

of agriculture
Those who have the most dollar votes have

the greatest influence on what goods are

produced
How shall it be produced?
The manner or method of production depends
on the cheapest method of production
When the price of rice is low, it is not

profitable for farmers to use expensive

tractors and irrigation systems, as cost of
production may exceed revenue from the
production
When oil prices are high, oil companies drill in

deep offshore waters and employ novel

seismic techniques to find oil
For whom are goods produced?
For whom the goods are produced is
determined by dollar votes
The power of the purse dictates the

distribution of income and consumption

Those with higher income end up with the

larger houses, more clothing, and longer

vacations
When backed up by cash, the most urgently

felt needs get fulfilled through the demand

curve