1.
Introducing

2.
Course Description
This course will cover:
Basic economic principles that are
applied to current social issues and
problems.

3.
Learning outcomes
Upon completion of this course the
student should:
Have a good background about the
theory of demand and supply.
Analysis of costs.
 Theory of production.

4.
The role of the government intervention
in the individual markets(Smith &
Keynes)
* Role of fiscal and monetary policy in
macroeconomic management.

5.
Be able to solve and manipulate a
variety of simple diagrammatic and
algebraic models in micro-and
macroeconomics.

6.
Try to Define Economics

7.
Definition of 'Economics'
A social science that studies how
individuals,
governments,
firms and nations
make choices on allocating scarce
resources to satisfy their
unlimited wants.

8.
Approaches in economics
Two major approaches: classical and
Keynesian.
Classical economists believe that markets:
 function very well;
 will quickly react to any changes in
equilibrium and that a "laissez faire"
government policy works best.

9.
Approaches in economics
Whereas, Keynesian economists believe
that:
 Markets react very slowly to changes in
equilibrium (especial to changes in prices)
and that active government intervention is
important to get the economy back into
equilibrium.

10.
The Economic Problem
How to allocate scarce
given unlimited wants
This forces choices to be made:
(1) what to produce?
(2) How to produce ?
(3) For whom to produce?
resources
Capital
Enterprise
Land
Labour

11.
Scarcity
In a class:

12.
Scarcity means:
There are only a limited amount of
resources available;
To produce the unlimited amount of
goods and services we desire.

13.
EXAMPLES OF SOME DECISIONS
ECONOMISTS HAVE ANALYZED
Whether to buy a car this week!
Whether to buy a home or to rent a
home!
Whether to marry your sweetheart!
Introduction
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14.
Factors in decision making
1. People face tradeoffs
2. Opportunity cost
3. Making decisions at the margin
4. People respond to incentives
Introduction

15.
 Microeconomics, which deals with
individual agents such as households and
business.
 Macroeconomics, which consider the
economy. (GDP, Inflation….)

16.
Aspects receiving attention in
economics are:
1. resources allocation;
2. production;
3. distribution;
4.trade;
5. and competition.

17.
Introduction
MICROECONOMIC AGENTS
Firms
–Produce and sell goods and services
–Buy inputs (labor, capital & raw materials)
Consumers
–Buy goods and services
–Sell inputs (labor services, loanable funds)

18.
Methodology: Positive v. Normative
Economics
Positive economic:
Studies the way the world is
Examples:
How much will a new gasoline tax raise the
price of gasoline?
Will an increase in the minimum wage
increase unemployment?
Introduction

19.
Introduction
Normative economic:
 Studies the way the world should be
Example:
Who Should solve the problem of
unemployment?
Methodology: Positive v. Normative
Economics

20.
Introduction
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Models and theories
A model is a hypothesis about the
relationships among variables.
 theory is a plausible or scientifically
acceptable general principle or body of
principles offered to explain phenomena

21.
Contents of models
List of variables:
Dependent v. independent variables
Hypothesized relationships among the
variables. (Income/Consumption)
Using tables of values, graphs, or
equations.
Introduction

22.
A model of Consumption
Income
Consumption
TC = a + b(Y)
a
C
Y
b = C/Y

23.
A better model?
Consumption = f (income, taste,
price of substitutes,….)
Introduction

24.
MODEL SUMMARY
Three ways to describe models
Graphs
Tables of values
Mathematical functions (equations)
Important concepts
Dependent and independent variables
Linear function, intercept and slope

25.
AN ECONOMIC MODEL
The Production Possibility Curve
Purposes of model
Show scarcity constraint
Illustrate economic efficiency
Introduce opportunity cost concept
 Variables
Quantities of goods that may be produced
 Givens
Total amounts of inputs available
Technology of production

26.
PPF DEFINED
The Production Possibility Curve (or
frontier) shows the maximum amount of a
good you can produce.
given the total amounts of inputs
available and given the technology of
production.

27.
PPC EXAMPLE
Assumptions:
There are only two goods, pizza and
spaghetti.
There are limited inputs and given
technology of production.
Definition:
The PPC shows the maximum amount of
pizza you can produce, given the amount of
spaghetti to be produced.
Introduction

28.
PRODUCTION POSSIBILITY
CURVE
Introduction
SPAGHETTI
PIZZA
Which points are attainable
and which points are unattainable?
0
100
200
300
400
0 10 20 30 40 50 60
Go to hidden slide

29.
PRODUCTION POSSIBILITY
CURVE
Introduction
SPAGHETTI
PIZZA
What’s the effect of an improvement
in the technology for producing
spaghetti?
0
100
200
300
400
0 10 20 30 40 50 60
Go to hidden slide

30.
PRODUCTION POSSIBILITY
CURVE
Introduction
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SPAGHETTI
PIZZA
What’s the effect of an increase in
total resources (inputs)?
0
100
200
300
400
0 10 20 30 40 50 60
Go to hidden slide

31.
Introduction
Points “inside” the PPC are inefficient.
Note that while points on the PPC are
efficient, we cannot say at this time
whether some are better for society than
others.

32.
The PPC can show
opportunity cost
Suppose you are at some point on a
PPC.
Then suppose you want to consume
one more pizza.
Introduction

33.
PRODUCTION POSSIBILITY
CURVE
Introduction
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SPAGHETTI
PIZZA
More pizza means less spaghetti
0
100
200
300
400
0 10 20 30 40 50 60

34.
OPPORTUNITY COST INCREASES
AS MORE OF A GOOD IS
PRODUCED
Not only does more pizza mean less
spaghetti, but each additional pizza costs
more than the one before it.
This idea shows up as the PPC being
concave to the origin. (The curve bows
out.)
Introduction
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35.
Introduction
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Opportunity cost of more pizza is
constant.
Production Possibility Curve
0
100
200
300
400
0 10 20 30 40 50 60
SPAGHETTI
PIZZA

36.
Introduction
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We will use Production Possibilities
Curves that are straight lines (i.e., that
have constant opportunity cost) to
illustrate some important economic
principles.

37.
Exercise:

38.
How to calculate the opportunity cost
Point Chairs TVs
A 10
5
0
10
B 5
5
10
10
C 0 20

39.
 1/ calculate the difference
 2/ write the sentence
 3/ divide
 The O.C of 10TVs is 5 chairs
 Divide: the O.C of 10/10TVs is 5/10
chairs
 the O.C of 1TV is ½ chair
 Or the O.C of 1 chair is 2TVs
