What is economics? Economics is the study of how people use the limited economic resources to fulfill their unlimited needs of goods and services

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1 What is economics? Economics is the study of how people use the limited economic resources to fulfill their unlimited needs of goods and services What are the economic resources? (factor of production?) Things used to produce goods and services which are: 1. Natural resources. Resources provided by nature and used to produce goods and services. 2. Labor. Human efforts, including both physical and mental effort, used to produce goods and services. 3. Physical capital. The stock of equipment, machines, structures, and infrastructure that is used to produce goods and services. 4. Human capital. The knowledge and skills acquired by a worker through education and experience and used to produce goods and services. 5. Entrepreneurship. The effort used to coordinate the factors of production (natural resources, labor, physical capital, and human capital) to produce and sell products. Note: Economists use the word "scarcity" to convey the idea that resources are limited Who make the economic choice? The economic choice can be made in a variety of ways, sometimes we make our decision as individuals, and other times we participate in collective decision making by allowing the government and other organization to choose for us. Note: Many of our choices happen within market using money (Labor market), but we make other choices outside markets (political choices) How economics helps in making decisions? Economics doesn't tell us what to choose, but simply helps us to understand the possible choices and how trade-off them. Page 1 of 5 By: Ehab Abdou (Mob: )

2 How we can understand possible choices? Economics is using two method of economic analysis to understand to possible choices, these methods are: 1. Positive analysis (Most modern economics is based on) Which predict the consequence of each alternative action by answering the question "what is" or "what will be" 2. Normative analysis Which answer the question "what ought to be" Table 1.1 Comparing positive and normative questions What is the three Key Economic questions? The choices of individuals, firms and government answer three questions What products do we produce? (Cars or Televisions) How do we produce the products? (physical capital or human capital) Who consumes the products? (rich people or poor people) How economics explores the choices? Economists use economic models to explores the choices people make and the consequence of those choices. What is the economic model? An economic model is a simplified representation of an economic environment, with all but the essential features of the environment eliminated. Most economic models use graphs to represent the economic environment. Page 2 of 5 By: Ehab Abdou (Mob: )

3 1-2 Economic analysis and modern problems Economic analysis provides important insights into real world problems, for example: Economic view of traffic congestion. Economic view of poverty in Africa. Economic view of the current world recession 1-3 The Economic way of thinking How do economists think about problems and decision making? There are four elements of the economic way of thinking 1- Use assumption to simplify. Economists use assumption to make things simpler and focus on what really matters. a. If you use a road map to plan a car trip you assume that earth is flat. But if your plan a bike trip you can't assume that earth is flat, and you have to use globe. 2- Isolate variable. Economic analysis often involves variables, and how they affect one another, A variable is a measure of something that can take on different values. For example: To explore the relation between the price of apple and the quantity of purchase you must assume that anything else that influence apple purchase doesn't change during the period you are considering. 3- Think at the margin. Economic often consider how a small change in one variable affects another variable and what impact that has on people's decision. A small, one-unit change in value is called a marginal change. For example: If the price of apple increases by one dollar what is the effect on the amount of apple purchased. 4- Rational people respond to incentives. A key assumption of most economic analysis is that people act rationally, meaning that they act in their own self-interest, for example people change their behavior to get the benefit. Page 3 of 5 By: Ehab Abdou (Mob: )

4 1-4 preview of coming attractions: Macroeconomics The field of economic is divided into two categories (Macroeconomics and Microeconomics) a. Macroeconomics is the study of the nation's economy as a whole, it is focuses on the issue of inflation, unemployment, and economic growth, we can use macroeconomics to: 1. Understand why economic grow. Macroeconomics explain why resources increase over time and the consequence for our standard of living. 2. Economic fluctuate. Macroeconomics explain why the economy sometimes cools and sometimes overheats, and what the government can do to moderate the fluctuate. 3. Make informed business decisions. A manager who intends to borrow money for a new factory or store could use knowledge of macroeconomics to predict the effect of current public policies on interest rate and then decide whether to borrow the money now or later. 1-5 preview of coming attractions: Microeconomics The field of economic is divided into two categories (Macroeconomics and Microeconomics) b. Microeconomics Is the study of the choices made by households (an individual or a group of people living together) firms, and government and how these choices affect the markets for goods and services, we can use microeconomics to: 1. Understand markets and predict changes One reason for studying microeconomics is to better understand how markets work and to predict how various events affect the prices and quantities of product in market. 2. Make personal and managerial decisions On the personal level we use economic analysis to decide how to spend our time, and how to spend and save the money we earn. Managers use economic analysis to decide how to produce goods and services, how much to produce, and how much to charge for them. 3. Evaluate public policies. We can use the economic analysis to determine how well the government performs its roles in the market economy, we can also explore trade-offs associated with various public policies. Page 4 of 5 By: Ehab Abdou (Mob: )

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