This document provides an overview of key economic concepts including: - Economics is the study of how societies allocate scarce resources to satisfy unlimited wants. It can be divided into microeconomics and macroeconomics. - The economic problem involves determining what, how, and for whom to produce goods and services. - Opportunity cost, tradeoffs, and rational decision making are important concepts in economics for understanding how individuals and societies make choices.

1. Principles of economics
Dr/ samia samy

2. • This module introduces you to:
• Economics main concepts.
• Definition of economics.
• The differences between microeconomics and macroeconomics.
• Economic Problem.
• The Economic Way of Thinking.
• How People Make Decisions?(opportunity cost).
• Production Possibility Frontier (PPF) Theory.
Basic Economic Concepts

3. Is economics about money: How people make it and spend it? Is it about business,
government, and jobs?
Is economics about why some people and some nations are rich and others poor?
Economics is about all these things, but its core is the study of choices and their
consequences.
Your life will be shaped by the challenges you face and the opportunities that you
create.
But to face those challenges and seize the opportunities, you must understand the
powerful forces at play.
The economics that you’re about to learn will become your most reliable guide.

4. * the household must allocate its scarce resources among its various members,
taking into account each member’s abilities, efforts and desires.
• A society faces many decisions too:
-A society must decide what jobs will be done and who will do them.
-It needs some people to grow food, other people to make clothing.
A society must also allocate the output of goods and services that it produces.
• The management of society’s resources is important because resources are scarce.
Scarcity means that the society has limited resources and therefore cannot produce
all the goods and services people wish to have.
Introduction.

6. Is economics about money? How people make it and spend it? Is it about business,
government, and jobs?
Is economics about why some people and some nations are rich and others poor?
Economics is about all these things, but its core is the study of choices and their
consequences, in the presence of scarcity
Your life will be shaped by the challenges you face and the opportunities that you
create.
But to face those challenges and maximize the opportunities, you must understand
the economics as a guide to your decisions.
Economics

7.  Economics is driven by two certain realities.
• First, the society has limited resources.
• Second, our wants and desires are unlimited. We all want more.
 Economics is generally defined as the study of how our limited resources are
allocated to satisfy our unlimited wants for goods and services.
 Economics is the social science that studies the choices that individuals,
businesses, governments, and societies make as they cope with scarcity.
Economics – the study of how society manages its scarce resources.
Definition of Economics.

8.  ** Scarcity
 • The limited nature of society’s resources.
 • Society has shortage of resources and therefore cannot produce all
the goods and services people need.
 • The combination of limited resources and unlimited wants implies a
shortage, or scarcity.
 • Scarcity forces us to make choices, after tradeoffs.
 **Tradeoffs
 • Decisions about what to do, which necessarily involve decisions
decisions about what not to do.
 • when we sacrifice one thing to obtain another, that's called a trade-
trade-off.

9. opportunity cost

10.  . Only have enough cash to buy a car or an apartment, but not both?
 That's a trade-off. Trade-offs creates opportunity costs, one of the most
important concepts in economics.
 Whenever you make a trade-off, the thing that you do not choose is
your opportunity cost.
 Opportunity cost is the route not taken : You bought that car? Then
the apartment was your opportunity cost.

11. Efficiency and Equity

12.  Efficiency is a measurable concept that can be determined by
determining the ratio of useful output to total input. It minimizes the
waste of resources while successfully achieving the desired output.
 means that society is getting the maximum it can from its scarce
resources.
Efficiency and Equity

13.  Equity – means that the benefits of those resources are
distributed equally among society’s members.
 • Policies such as taxes and welfare make incomes more
equal but these policies reduce returns to hard work, and,
therefore the economy doesn’t produce as much.

14.  Microeconomics is the study of choices that individuals and businesses
make, the way those choices interact in markets, and the influence of
governments.
 An example of a microeconomic question is: Why are people buying
more e-books and fewer hard copy books?
 Macroeconomics is the study of the performance of the national and
global economies.
 An example of a macroeconomic question is: Why is the unemployment
rate in the United States so high?
Economics divides in two main parts:

16.  In order to solve the problem of scarcity all societies, must to answer three basic
questions.
 What to produce?
the best combination of goods and services to meet their needs
 How to produce?
the best combination of factors to create the desired output of goods and services.
 For whom to produce?
who will get the output from the country’s economic activity, and how much they
will get.
Economic Problem.

18.  Goods and services are produced by using productive resources that economists
call factors of production.
 The factors of production are the inputs that are used in the production of goods
or services in order to make an economic profit. (How to produce?)
 The factors of production include:
 Land: this is a short-hand expression for any natural resource in addition to land
 Labor: this includes labor defined in terms of quantity the number of workers and
quality (the skills these workers possess)
The Factors of Production

19.  Capital: this includes the physical plants, machinery and equipment used to
produce other goods and services
 entrepreneurship is The human resource that organizes land, labor, and capital.
 Each factor gets an income or return;
 Land earns rent.
 Labor earns wages.
 Capital earns interest.
 Entrepreneur earns profit

21.  Quality of resources
Productivity of resources Affected by technology, education and training of
workforce.
 We achieve economic growth by increasing the quantity and/or quality of
resources, or by technological development.
Characteristics of Resources

22.  Needs: Are those things necessary to human survival e.g. food, shelter
 Wants: goods/services desired by the consumer e.g. travel, luxury cars
 Characteristics:
Unlimited
Recurrent
Complementary
Changeable
Consumer Needs and Wants

23.  1. Society’s wants are unlimited, but ALL resources are limited (scarcity).
 2. Due to scarcity, choices must be made. Every choice has a cost
(a trade-off).
 3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone
acts in their own “self-interest.”
 4. Everyone acts rationally by comparing the costs and benefits of every choice.
 5. Real-life situations can be explained and analyzed through simplified models
and graphs.
The Economic Way of Thinking

24.  How do people choose rationally?
The answers turn on benefits and costs.
 Benefit: What you Gain
 The benefit of something is the gain or pleasure that it brings and is
determined by preferences.
 Preferences are what a person likes and dislikes and the intensity of those
feelings.
The Economic Way of Thinking

26.  1. People face tradeoffs To get one thing that we like, we usually have to give up
another thing that we like. Making decisions requires trading off one goal against
another.
 Only have enough cash to buy a car or an apartment, but not both? That's a
trade-off.
 2. The Cost of Something Is What You Give Up to Get It Whenever you make a
trade-off, the thing that you do not choose is your opportunity cost.
 Opportunity cost is the route not taken: You bought that car? Then the apartment
was your opportunity cost.
How People Make Decisions?

27.  A simplified economic model which portrays scarcity, choice and
opportunity cost.
 Production possibilities frontier (PPF)
A curve showing the maximum attainable combinations of two
products that may be produced with available resources and current
technology.
Production Possibility Frontier (PPF) Theory

29.  The Static Production Possibility Frontier Analyses the economy at a fixed
point in time
 Is based on the following assumptions:
 There is a fixed quantity of resources
 The economy only produces two products
 Resources can be used interchangeably
 All resources within the economy are used
 Resources are used at maximum efficiency (Economic efficiency assumes
minimum cost for the production of a good or service, maximum output)
The static PPF

30. An Example of the Static PPF Model

31. The PPF Graph

32.  The PPF shows the maximum output of the economy
 If the economy devotes all of its resources to the production of VCRs it is able to
produce 800 (+ zero tractors)—Production Possibility A
 Alternatively, if the economy chooses Production Possibility C it is able to produce
200 tractors and 400 VCRs
 The PPF shows that to produce more of one product means producing less of
another
 Opportunity costs of production can be measured e.g. if the economy moves from
point C to D (along the PPF) it will produce an extra 100 tractors BUT 200 VCRs
must be sacrificed Hence the opportunity cost is 200 VCRs
Maximum Output Levels

33.  Points outside the PPF are not possible or unattainable using existing technology and resources
Points Outside the Static PPF

34.  At point z, the economy is satisfying fewer needs and wants than is
possible
 This is due to:
 Resources not being fully employed and/or Resources not being
used in the most efficient way.
 So point z is attainable but not efficient.
Points Inside the Static PPF

35.  This model differs from the static PPF in that it incorporates changes over time
 It demonstrates the effect of changes in the quantity and quality of productive resources
e.g. new resource discoveries, improvements in technology.
 Changes in the quantity and/or quality of resources will SHIFT the PPF
 When the quality/quantity of resources increases (decreases), the economy can produce
more (less) of both products and the entire curve will SHIFT outwards to right or (inwards
to left), when the PPF shift up that mean achieving economic growth but when it shift
down that mean an economic recession.
The Dynamic PPF Model

36. The Dynamic PPF Model