Transcript Key Tools & Terms of Economics How?

ECON203
Principles of Macroeconomics
Week 2
Topic 1: Introduction
Topic 2: Circular Flow
Topic 3: Macroeconomic Goals
Dr. Mazharul Islam
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Lesson Plan
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Introduction – (Me and You)-15 minutes
Overview of the Course – 15 minutes
Introduction to Economics - 50 minutes
Circular Flow – 50 Minutes
Macroeconomic Goals – 20 Minutes
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Teaching Methods &
Assessment
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Lectures (interactive)
Class Exercise
Text Book (Parkin, Macroconomics : 10th edition, Pearson)
Other References (McConnell and Brue, Economics : Principles,
Problems and Policies 16th edition, McGraw-Hill 2002)
• Individual and Group assessments
– Class participation (10%)
– Home work (10%)
– Quizzes (15%)
– 2nd Exam. (25%)
– Final Exam (40%)
• http://marz.kau.edu.sa/admin/AdminFiles.aspx
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Lesson Objectives
To provide you with information about
 The Topics that we shall cover in this course
 The learning teaching and assessment arrangements for
this course.
To learn about
 the key tools and terms of economics that is essential to
know to understand economics clearly.
 how an economy works –Circular Flow Model
 Macroeconomic Goals
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Key Tools & Terms of
Economics
ECONOMICS
 It is the social science concern. It is a
study of how people use their scarce
resources to satisfy their unlimited wants.
It is categorized mainly into two parts
such
as
Macroeconomics
and
Microeconomics
MICROECONOMICS
 Microeconomics is the study that deals
with an individual industry, firm or
household. It means it talk about
individual decision maker.
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Key Tools & Terms of
Economics
MACROECONOMICS:
 It is a study that examine the economy as
a whole. It means that it is concerned with
the overall performance of the economy
Such as it does not discuss about the
market for Al Baik but about the market for
everything produced in the economy; not
about the price of Al Baik but about the
average price of all goods and services
produced in the economy.
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Key Tools & Terms of
Economics
ECONOMIC PROBLEM
 Basic economic problem is wants are virtually
unlimited while the resources available to
satisfy these wants are scarce.
SCARCITY
 Lack of enough resources to satisfy our all
desired uses of those resources. Resource are
scarce when they are not freely available 
alternatively we can say when its price
exceeds zero
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Key Tools & Terms of
Economics
SCARCITY
 Since human and property resources are
scarce, it follows that the goods and
services we produce must also be limited.
CHOICE
 Due to scarcity, we can’t have all that we
want. We must decide what we will have,
and what we must forgo. That is why we
make choices.
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Key Tools & Terms of
Economics
TWO BIG ECONOMIC QUESTIONS
 How do choices end up determining
what, how, and for whom goods and
services get produced?
 When do choices made in the pursuit of
self-interest ?
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Key Tools & Terms of
Economics
• What, How, and For Whom?
– Goods and services are the objects that
people value and produce to satisfy
human wants.
• What?
– In 2011, Agriculture accounts for 2% of
total Saudi Arabian production, Industry
goods for 69.1%, and Services for 28.9%
(Source: CIA World Factbook 2012).
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Key Tools & Terms of
Economics
How?
Goods and services are produced by using
productive resources that economists call
factors of production.
Factors of production are grouped into four
categories:
 Land
 Labor
 Capital
 Entrepreneurial Ability
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Key Tools & Terms of
Economics
LAND
It does not refer only a plots of ground but also
includes all other natural resources such as
crude oil, water, air, and minerals etc.
LABOR
It is not simply the number of human bodies but
it refers to the work time and work effort that
people devote to producing goods and services.
It categorized into two parts– physical and
mental (9.56 millions out of 26.53 millions in 2010 where about 80%
of the labor force is non-national - Source: CIA World Factbook 2012).
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Key Tools & Terms of
Economics
CAPITAL
In economics the term capital refers to final
goods produced for use in further production. It
also categorized into two parts. These are:
– Physical capital: factories, machines, tools,
buildings,
airports,
highways
and
other
manufactured items employed to produce goods
and services.
– Human capital: consists of the knowledge and
skill people acquire to enhance their labor
productivity.
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Key Tools & Terms of
Economics
ENTREPRENEURIAL ABILITY
– Special kind of human skill
– Talent required to dream up a new product
or find a better way to produce an existing
one.
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Key Tools & Terms of
Economics
PAYMENTS FOR RESOURCES
Wages  payment for use of labor
Interest  payment for the use of capital
Rent  payment for use of land
Profit  reward for entrepreneur’s effort
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Key Tools & Terms of
Economics
FOR WHOM?
Who gets the goods and services depends on
the incomes that people earn.
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Key Tools & Terms of
Economics
When is the Pursuit of Self-Interest?
Economics assumes that human behavior
reflects “rational self-interest”. It means that
people always try to make the best choices
they can, given the available information.
Moreover, Individuals try to maximize the
expected benefit achieved with a given cost or
minimize the expected cost of achieving a
given benefit. Peoples allocate their time,
energy, and money to maximize it.
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Key Tools & Terms of
Economics
GOODS AND SERVICES
Goods
– Tangible items
– Require scarce resources
– Satisfy human wants
Services
– Intangible items
– Require scarce resources
– Satisfy human wants
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Circular-Flow Model
The interaction between four decision makers
(Households, Firms, Government, and Rest of the
world) and two broad markets (Goods/Products,
and Resources/Factors) can be conveyed by the
circular flow model.
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Circular-Flow Model
Households supply resources in the
resource market and demand goods
and services in the product market
Firms supply goods and services in
product
market
and
demand
resources in the resource market
Money flows in resource market
determine wages, interest, rents, and
profits which flow as income to
households
Product markets determine the
prices for goods and services which
flow as revenue to firms
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Circular-Flow Model
Households
 As consumer, households demand the goods
and services produced.
 As resource owners they supply labor, capital,
land, and entrepreneurial ability to firms,
governments, and the rest of the world
Firms, governments, and the rest of the world
 Demand the resources
 Supply the goods and services
 Rest of the world  foreign households, firms
and governments
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Circular-Flow Model
Product/Goods markets
 Markets in which goods and services are
bought and sold.
Resource/Factors Markets
 Markets in which the resources are exchanged
 Labor, or job market is the most important of
the resource markets.
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Circular-Flow Model
MARKET
Means by which buyers and sellers carry out
exchanges
– Bring together the two sides of exchange to
determine price and quantity by providing
information about the quantity, quality, and
price of products offered for sale.
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Macroeconomic Goals
Economic Goals
Positive Growth
Full Employment
Economic Efficiency
Price Level Stability
Economic Freedom
Equitable Distribution
Economic Security
Balance of Trade
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Macroeconomic Goals
Economic Growth
Produce more and better goods and services. It
could be positive or negative. If the output
deference between last year and current year is
positive it means positive growth if negative
means negative growth.
Full Employment
Provide suitable jobs for all citizens who are
willing and able to do work. It does not mean
zero unemployment.
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Macroeconomic Goals
Economic Efficiency
Achieve maximum output by using limited
available resources.
Price-Level Stability
Avoid upswings and downswings in the
general price level; that is avoid inflation and
deflation.
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Macroeconomic Goals
Economic Freedom
Government’s guarantee to businessman,
workers and consumers to have a high degree of
freedom in their economic activities.
Equitable Distribution
Ensure that no group of citizens faces poverty
while ,most others enjoy large wealth.
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Macroeconomic Goals
Economic Security
Provide benefits for those who are
chronically ill, disabled, laid off, aged, or
otherwise unable to earn minimal levels of
income
Balance of Trade
Seek reasonable overall balance with the
rest of the world in international trade and
financial transactions.
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Now it’s over for
today. Do you have
any question?
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