Principles of Economics

By. Amir Alagab A.Gadir GC University

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Where this Word “Economics’’ come from?

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The term economics comes from the Ancient Greek “oikonomia” which

means "management of a household, administration.

Oik

House

O

CV

nomia

Management

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ProductsService

DistributionConsumption

Economics – Definitions

Economics is the study of how

scarce resources are allocated

among unlimited wants.

Adam Smith

The branch of social science that deals with the production and

distribution and consumption of goods and services and their

management. Wikipedia

Economics is the study of how society manages its scarce resources. N.G. Mankiw

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To understand this definition, we must examine the concepts of scarcity, economic choice,

and rational self-interest.

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Concepts

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Human Nature and Reality

•People have unlimited wants.•People have limited resources to acquire the things they want.•As a result, they must make choices.•Choices involve pursuing some things while forgoing others.

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Scarcity, Goods and Bads

• An item that costs something is called scarce. – Anything with a price on it is called an

economic good—these include goods and services.

– A free good is a good for which there is no scarcity.

• An economic bad is anything you want to get rid of (pollution, disease, garbage)

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Goods • Economic Goods: Its not found by nature and to

obtain it you need to specific limit of resources to get it

• Free Goods: its naturally available in a big quantities and no efforts pied to obtain it, e.g oxygen ”air “ and water sometimes.

• Necessary Goods, which satisfy the human biological needs e.g food, water , clothing and shelter.

• Luxurious Goods: Most people believe to obtain it its urgent.

as we see its not easy to differentiate between the necessity goods and luxurious one.

• Ordinary Goods: it’s the goods that it’s demand increases when the individual income increases vice-versa.

• Inferior Goods: its satisfying human needs in a low quality and when the income increase will move to better quality

• Perishable –Vanishing- Goods: the goods that looses its satisfying power after one time use e.g food stuffs.

• Durable Goods: the goods which satisfy the needs several times and lose its satisfaction gradually e.g clothes, equipment

• Complementary Goods: it’s the goods that can not satisfy the need separately unless we use other goods with it , e.g Tea and sugar . Car and fuel.

• Substitute Goods: it’s the goods that one can substitute other one to satisfy certain need, e.g Tea vs Coffee – Meats vs fish.

• Consumer Goods: It’s the goods that prepared for final consumption with any transforming process. E.g cloth, food.

• Capital Goods: It’s the goods that can’t used directly to satisfy the needs unless transformed, e.g Tools

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Clarifying Concepts

• Scarcity means that not enough is available for free.

• A shortage occurs when not enough is available at the current price. A shortage is a problem of price.

• Poverty occurs when the goods are scarce, and those who need them do not have the income to obtain them. Poverty is a problem of income.

Flow of IncomeSpending

Goods andservicesbought

Revenue

Goodsand services

sold

Labor, land,and capital

Income

Factors ofproduction

Wages, rent,and profit

FIRMS•Produce and sell

goods and services•Hire and use factorsof production

•Buy and consumegoods and services

•Own and sell factorsof production

HOUSEHOLDS

•Households sell•Firms buy

MARKETSFOR

FACTORS OF PRODUCTION

•Firms sell•Households buy

MARKETS

FOR

GOODS AND SERVICES

= Flow of inputs and outputs

= Flow of INCOME

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Goods to Produce Goods• Resources are the elements needed to

produce goods. Resources are also called – factors of production– inputs

• They are:– Land (includes natural resources)– Labor (physical and intellectual services of

people)– Capital (plant, machinery, equipment used in

production)

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Resource Suppliers

land

labor

capital

rent

wages

interest

Producers of Goods

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Scarcity and Choice

• Scarcity necessitates making choices.

Economics is the study of how people choose to use their resources in attempts to satisfy their unlimited wants.

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Rational Self-Interest• Economists believe that people choose options

that give them the greatest satisfaction.• This means that people:

– use all available time and information, – weigh the costs and benefits of all available alternatives,– and choose the alternative that they believe will bring them the most

benefit at the lowest cost. This is the alternative that they believe will bring them the most satisfaction.

• This does not mean that people are innately selfish. Self-interest is not greed.

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Decision

• People weigh the costs and benefits of various alternatives, choosing the alternative that makes them best off.– This behavior is called “economic decision

making”.

• Costs and benefits are sometimes referred to as negative and positive incentives. Hence incentives matter.

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Positive vs. Normative Economics

• Positive Economics– Focuses on “what is”.– Analyzes actual, measurable outcomes.– Does not impose value judgments, person

feelings or convictions.– Positive economics is economics as a science.

• Normative Economics– Focuses on what someone thinks “ought to

be” or “should be”.– Makes ethical judgments—value judgments.

Economics

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Micro vs. Macro

• Microeconomics– Studies the economy at the level of individual

consumers, workers, firms, goods, and markets• Macroeconomics

– Studies the economy at the aggregate level, at the level of the economy as a whole.

– Examines total consumer behavior, total employment, total production, total sales, etc.

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End of Lecturer One

Lecture 2 SUPPLY AND DEMAND I: HOW MARKETS WORK

The Market Forces of Supply and Demand

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The Economic Problem is the Problem of

1. [Scarcity ]Here we mean the Proportional Scarcity not the Absolute Scarcity ,resources are available but due to the increasing needs for it ,thus resources become scarce for its needs.

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– The management of society’s resources is important because resources are scarce.

Society and Scarce Resources:

- Scarcity. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

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2- A Problem of Choice

• Decisions require comparing costs and benefits of alternatives.– Whether to go to college or to work?– Whether to study or go out on a date?– Whether to buy a Laptop Computer or to buy

Digital Camera ?

The opportunity cost of an item is what you give up to obtain that item.

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• How people make decisions.– People face tradeoffs.– The cost of something is what you give up to get it.– Rational people think at the margin.– People respond to incentives.

To Solve this problem

• To solve economical problem we should basically answer the questions face the commuinty which are :

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1. What we Produce ? What type of goods and services we produce is it food , clothes or tools . 2. How we Produce ? Here we need to specify the technique we use in production of these goods. 3. To Whom we produce ? The distribution technique by which production delivered within the community and specifying consumers .

Lecture 2 SUPPLY AND DEMAND I: HOW MARKETS WORK

Graphs and Their Meaning

Price ofIce-Cream Cone

2.50

2.00

1.50

1.00

0.50

$3.00

1. A decrease in price ...

0 1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

12

2. ... increases quantity of cones demanded.

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Graphs are employed to help students visualize and understand important economic relationship. Graphs are a means by which ecnomists express their theories .

Definition Graph: What is it ?

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Graph Construction

It's a rpresentation of relationship between to variables. Graph is consist of Horizontal line called X Axis and Vertical line called Y Axis

The Original Point is the point where two lines meet usually equal Zero.

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Y Axis

X Axis

Original Point

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Graph Determining

Factors

Determining Factor , Represents on horizontal axis { X Axis }. Dependent Factor, Represents on vertical axis { Y Axis }. Representing the independent variable on the horizontal axis and dependent variable on the vertical axis

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Direct Relationship Example. 1.

Table.1 Total No of Cars { Y }

Petrol Consumption per million Ltr.{ X }

400 30 A

800 60 B

1200 90 C

1600 120 D

200 150 E

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Direct Relationship Example. 1.

Table.1

30 60 90 120 150

400

800

1200

1600

200

Y Axis

Cars Total N

o

petrol Consumption per million Ltr.

X Axis

Two sets of data which are positively or directly related = Graph as an upsloping line.

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Inverse Relationship Example. 2.

Table.2 Q P

2 25 A

4 20 B

6 15 C

8 10 D

10 5 E

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Consier table 2 which shows the realtionship between the demand of chicken and its price per kg .

Inverse Relationship

we observe a negative or inverse reationship between chicken demanded quantity and its price these 2 variables change in opposite direction.

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Inverse Relationship

Example. 2.

Table.2

2 4 6 8 10

10

15

20

25

Y Axis

Price per 100 gk

Chicken Demanded Quantity.

X Axis

We find that an inverse relationship will always graph as a downsloping line .

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End of Lecturer 2

Lecture 4

SUPPLY AND DEMAND I: HOW MARKETS WORK

The Market Forces of Supply and Demand

Definition

Market is an institution or a mechanism which brings together Buyers " Demanders" and Sellers " Suppliers" of a particular goods and services.

What is market?

Factors Determine Market

• The number of Sellers and consumers • Number of Producers and Sellers. • The degree of homogeneity . • Types & nature of the product.• Link and communication between sellers and buyers.

Types of Markets

1. Perfect Competition: In this market there are 4 main factors :

# Numerous buyers and sellers: Here the firm is a price taker so that each has no influence over price

# Product are the same" Homogeneous": Hers the products are similar enabling easy substituting one another. e.g. hair cutting service.

# Freedom entry and exit : This market has no restriction or barriers facing a new firm to enter this market.

Types of Markets

# Information and access to the data: The competitors must have an easy way to get the required information about how this market work and operate.

Types of Markets

Types of Markets

2. Monopoly :

One seller and seller controls market .

3. Monopolistic Competition :

- Many Sellers .

- Slight difference in the products . -Each seller may set a price for its product . e.g Mobilehone network service

Types of Markets

4. Oligopoly : Few sellers or producers.

No aggressive competition .

e.g Sugar manufacturing .

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End of Lecturer 3

Lecture 4

Supply , Demand and Equilibrium I

SUPPLY , DEMAND and Equilibrium I

• Supply and demand are the two words that economists use most often.

• Supply and demand are the forces that make market economies work.

• Modern microeconomics is about supply, demand, and market equilibrium.

Demand

Quantity demanded is the amount of a good that buyers are willing and able to purchase in different market price levels.

What is demand?

Demand

There are many factors which affect the demand the quantities that consumers willing to buy at a certain time and certain level of price such as:

Factors Determine Demand

Demand

1.Nmber of Buyers 2. Consumer Income

3. Testes

4. Prices of related goods

5. Consumer expectations

Factors Determine Demand

DemandLaw of Demand

The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.

The demand curve slopes downward because, ceteris paribus, lower prices

imply a greater quantity demanded!

DemandDemand Schedule

• Demand Schedule –The demand schedule is a table that shows

the relationship between the price of the good and the quantity demanded.

DemandDemand Schedule

Point Price/kg/Sdg Quantity / week

A 300 10

B 350 8

C 400 6

D 450 4

E 500 2

F 550 0

DemandDemand Curve

The demand curve is a graph of the relationship between the price of a good and the quantity demanded. (DD – Sloping top to down backward )

Demand Curve

SDG550

500

450

400

350

300

21 3 4 5 6 7 8 9 10

12

11

Price of Chicken

Quantity of Chicken

0

DemandChange in Demand and Quantity

demanded

The quantity which consumers are willing and able to buy rely on other factors e.g.

DemandDemand Curve

1.Nmber of Buyers 2. Consumer Income

3. Testes

4. Prices of related goods

5. Consumer expectations

DemandChange in Consumer

Income

If the income increased in concern the buy ability will increase for ordinary goods, the demand cure will move to right

Consumer IncomeNormal Good

SDG3.00

2.502.001.501.000.50

21 3 4 5 6 7 8 9 10

12

11

Price of Ice-Cream

Quantity of Ice-Cream

0

Increasein demand

An increase

in income...

D1

D2

Demand

Consumer IncomeInferior Good

Sdg3.00

2.502.001.501.000.50

21 3 4 5 6 7 8 9 10

12

11

Price of Ice-Cream

Quantity of Ice-Cream

0

Decreasein demand

An increase

in income...

D1D2

Demand

Demand

When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes e.g (Coca Cola v Pepsi ).

When a fall in the price of one good increases the demand for another good, the two goods are called complements e.g ( Petrol v Cars ).

Change in Prices of Related GoodsSubstitutes & Complements

0D 1

Price of Toyota Cars.

Quantity of Hyundai Cars

Raises the price of Toyota Cars results in an increase in demand

for Hyundai cars.

8

1000

$2000

4

Changes in Quantity Demanded- Substitutes

12

D 2

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End of Lecturer 4

Demand Function: Qd = f ( P , Pn , I, N… )

Qd : Quantity demandedP: Price

Pn: Other goods price I: Consumer Income

N: Number of consumers or Population

• Demand for a good or service can be defined for an individual household, or for a group of households that make up a market.

• Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

From Household to Market

Demand

From Household Demand to Market Demand

• Assuming there are only two households in the market, market demand is derived as follows:

Lecture 5

Supply , Demand and Equilibrium I

Demand

SupplyWhat is supply?

SupplySupply is the number of units of a is the number of units of a product / Service that a firm would be product / Service that a firm would be willing and able to offer for sale at a willing and able to offer for sale at a particular price during a given time particular price during a given time period.period.

SupplySupply Schedule

A A supply schedulesupply schedule is a table is a table showing how much of a product firms showing how much of a product firms will supply at different prices.will supply at different prices.

SupplySupply Schedule

Point Price/ton/Sdg Quantity / AnnuelA 2 0

B 1.75 10

C 2.25 20

D 3 30

E 4 45

F 5 45

Wheat flour Production

• The law of supply states that there is a positive relationship between price and quantity of a good supplied.

• This means that supply curves typically have a positive slope.

The Law of Supply

0

1

2

3

4

5

6

0 10 20 30 40 50Millions ton of Wheat

produced per year

Pric

e of

whe

at p

er to

n (s

dg)

The Law of Supply

Supply Curve • A A supply curvesupply curve is a graph illustrating how much is a graph illustrating how much

of a product a firm will supply at different prices.of a product a firm will supply at different prices.

S

S

A

D

C

200

B

250

50

300

60

350

70

400

80

• Productivity (Improvements in machines and production processes of a good or service)

• Inputs ( Change in the price of inputs required to produce the good or service.)

• Government Actions (Subsidies` Financial Asisst. Taxes &Regulations)

• Technology (Improvements in machines and production processes of a good or service)

• Outputs ( Price changes in other products produced by the firm)

• Expectations (outlook of future prices and profits)• Size of Industry (Number of firms in the industry)

Determinants of Supply

A Change in Supply Versus a Change in Quantity Supplied

• A change in A change in supplysupply is is not the same as a not the same as a change in change in quantity quantity suppliedsupplied..

• In this example, a higher In this example, a higher price causes price causes higher higher quantity suppliedquantity supplied, and , and a a move alongmove along the the demand curve.demand curve.

• In this example, changes in determinants of supply, other In this example, changes in determinants of supply, other than price, cause an than price, cause an increase in supplyincrease in supply, or a , or a shiftshift of the of the entire supply curve, from entire supply curve, from SSAA to to SSBB..

sB

From Individual Supplyto Market Supply

• The supply of a good or service can be defined for an individual firm, or for a group of firms that make up a market or an industry.

• Market supply is the sum of all the quantities of a good or service supplied per period by all the firms selling in the market for that good or service.

Market Supply

• As with market demand, market supply is the horizontal summation of individual firms’ supply curves.

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End of Lecturer 5