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Learn the basics of microeconomics, including the definition of economics, the difference between microeconomics and macroeconomics, and the key ideas and tools of economics.
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College of Business – Rabigh FINA251 Fundamentals of Microeconomics Week 22016 Chapter-1
Lesson Objectives • Define economics and distinguish between microeconomics and macroeconomics. • Explain the two big questions of economics. • Explain the key ideas that define the economic way of thinking. • Explain how economists go about their work as social scientists and policy advisers
Definition of Economics • Economics is the social science concern that studies of how individuals, businesses, governments, and entire societies use their scarce resources to satisfy their unlimited wants. • Economics divides in two main parts: • Microeconomics • Macroeconomics
Definition of Economics • Microeconomics is the study that deals with an individual industry, firm or household. It means it talk about individual decision maker. An example of a microeconomic question is: Why is Dr. Islam prefers to buy e-books than hard copy of books?
Definition of Economics • Macroeconomics is a study that examine the economy as a whole. It means that it is concerned with the overall performance of the economy. An example of a macroeconomic question is: Why is the women unemployment rate in the Kingdom of Saudi Arabia so high?
Key Tools and Terms of Economics • ECONOMIC PROBLEM Basic economic problem is wants are virtually unlimited while the resources available to satisfy these wants are scarce.
Key Tools and Terms of Economics • SCARCITY Lack of enough resources to satisfy our all desired uses of those resources. Resource are scarce when they are not freely available. Since resources are scarce, it follows that the goods and services we produce must also be limited.
Key Tools and Terms of Economics • 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. • Goods • Tangible items • Require scarce resources • Satisfy human wants • Services • Intangible items • Require scarce resources • Satisfy human wants
Two Big Economic Questions • Two big questions summarize the scope of economics: • What, how, and for whom goods and services get produced? • How self-interest also promote the social interest?
Two Big Economic Questions • What, How, and For Whom? Goods and services are the things 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: Central Intelligence Agency (CIA) World Factbook 2012).
Two Big Economic Questions • 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
Two Big Economic Questions LAND It does not refer only a peice of ground but also includes all other natural resources such as crude oil, water, air, and minerals etc. that we use to produce goods and services 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).
Two Big Economic Questions 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.
Two Big Economic Questions 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.
Two Big Economic Questions • For Whom? Who gets the goods and services depends on the incomes that people earn. • Land earns rent. • Labor earns wages. • Capital earns interest. • Entrepreneurial ability earns profit.
Two Big Economic Questions • Self-Interest 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.
Two Big Economic Questions • Social Interest Choices that are best for society as a whole are said to be in the social interest. Social interest has two dimensions: • Efficiency • Equity
Two Big Economic Questions • Efficiency and Social Interest Resource use is efficient if it is not possible to make someone better off without making someone else worse off. • Equity and Social Interest Equity is fairness. The idea that the social interest requires “fair shares” is a deeply held one.
The Economic Way of Thinking Six key ideas define the economic way of thinking: • A choice is a tradeoff. • People make rational choices by comparing benefits and costs. • Benefit is what you gain from something. • Cost is what you must give up to get something. • Most choices are made based on “how-much” at the margin. • Choices respond to incentives.
Economics: A Social Science and Policy Tool • Economics as Social Science Economists distinguish between two types of statement: • What is —positive statements • What is —normative statements • Positive economic statement Absolute Facts. A statement about economic reality that can be supported or rejected by test.
Economics: A Social Science and Policy Tool • Normative economic statement What Ought to be • Reflects an opinion. • Cannot be shown to be true or false by reference to the facts. • Most of the disagreements in economics involve normative debates. • A normative statement can not be tested.
Economics: A Social Science and Policy Tool • Scientific Method To study economic problem, economists employ a process of theoretical investigation that is called the scientific method. It consists four steps: • Identify the question and define relevant variables • Specify assumptions • Formulate a hypothesis • Test the hypothesis
Economics: A Social Science and Policy Tool • Identify the Question and Define Relevant Variable. Example: The question might be “ What is the relationship between the price of Al-Baik and the quantity of Al-Baik purchased? Relevant variables of this question are ‘Price and Quantity’.
Economics: A Social Science and Policy Tool • Specify Assumptions One major category of assumptions is the ‘other things constant assumption’. It is called ‘ceteris paribus’ assumption. To isolate the relation between ‘price and quantity’, we assume that there are no changes in other relevant variables such as income, the price of McDonald, the price of KFC, the price of chicken etc.
Economics: A Social Science and Policy Tool • Formulate a hypothesis Hypothesis refers a theory about relationships among key variables. It means a theory about how key variables relate to each other. From our example, what will happen to the quantity purchased of Al-Baik if the price of Al-Baik goes up.
Economics: A Social Science and Policy Tool • Test the hypothesis By comparing its predictions with evidence, we test the validity of a hypothesis. The test lead us either to (1) Reject the hypothesis or (2) except the hypothesis.
