German University in Cairo

Introduction to Business Economics

Winter term 2011
Prof. Dr. Heiko Fritz
Department of Economics

26 September 2011

Business Economics

26 September 2011

Contents of this lecture

Fundamental economic concepts

Scarcity
Opportunity
The division of labour

Professor Heiko Fritz

Department of Economics

Fundamental economic concepts

Scarcity
A resource is scarce
when it is not available in
sufficient quantity to
fulfil all competing needs
and wants at the same
time.
In the most general way,
finite resources in
relation to infinite human
wants and needs imply
scarcity.
Regional dimension.
Time dimension.
Professor Heiko Fritz
Department of Economics

Scarcity requires a
mechanism of allocation.
Rationing
Price mechanism
When a good is scarce it
is called an economic
good.
Under certain assumptions
the consumption or
production of an economic
good involves opportunity
cost.

Fundamental economic concepts

Opportunity cost
The opportunity cost of
the production
(consumption) of a
particular good is the
amount of any other
good that needs to be
sacrificed in order to
produce (consume) an
extra unit of this good.
Opportunity cost can be
constant, increasing, or
decreasing.
Professor Heiko Fritz
Department of Economics

Constant opportunity
cost
Y

-Y

-Y
X
+1

+1

Scarcity and different allocation mechanism

Case study: Scarcity of road capacity in Cairo

Professor Heiko Fritz

Department of Economics

Fundamental economic concepts

Comparative advantage and the division of labour

Assume 2 countries, A and B, which have an identical

labour force and an identical capital stock. When all
resources are fully employed, country A could
produce 1000 tons of potatoes, or 500 computers, or
any linear combination of the two goods. Country B
could produce 100 tons of potatoes or 300
computers.
Is mutual trade beneficial for any of these countries?

Professor Heiko Fritz

Department of Economics

Fundamental economic concepts

Comparative advantage and the division of labour
A country has an absolute advantage in the
production of a good if it can produce this good
using less resources than another country.
Country A has an absolute advantage over country B
in the production of computers and in the production
of potatoes. Thus country A is more productive than
country B in any good.

Professor Heiko Fritz

Department of Economics

Fundamental economic concepts

Comparative advantage and the division of labour
A country has a comparative advantage in the
production of a good if it can produce this good at
lower opportunity cost than another country.
Country A has to sacrifice half a computer for an
extra ton of potatoes. Country B has to sacrifice 3
computers for an extra ton of potatoes. Thus country
A has lower opportunity cost for the production of
potatoes than country B.
Country A has to sacrifice 2 tons of potatoes for an
extra computer. Country B has to sacrifice 1/3 tons of
potatoes for an extra computer. Thus country B has
lower opportunity cost for the production of
computers than country B.
Professor Heiko Fritz
Department of Economics

Fundamental economic concepts

Comparative advantage and the division of labour
In foreign trade a country should specialise on the
production of those goods for which it has a
comparative advantage.
Country A should specialise on the production of
potatoes and, country B should specialise on the
production of computers.
Country A exports potatoes to country B and imports
computers from country B. The terms of trade are in
between the domestic opportunity cost of production.
The exact terms of trade depend on the bargaining
power of the two countries.
Professor Heiko Fritz
Department of Economics