Lecture 1: Introduction to Economics
Concepts
Learning Outcomes
By the end of this unit, you should be able to:
 Describe the study of Economics;
 Differentiate between Microeconomics and Macroeconomics
 Differentiate between Scarcity, Choice and Opportunity Cost;
 Explain what is Production Possibility Curve (PPC);
 describe
the features/characteristics of the Three (3)
Economic Systems:
 Identify the strength and weakness of the Economic Systems.
Unit 1
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2
What is “economic activity”?
 The life of humanity and its development are too
complicated and full of different problems
 One of the main problems of humanity is to satisfy
their needs
 The most important activity among the other
functions of humanity is the economic activity
which provides people with goods and services
necessary for living and progressing
The word “economy”
 In past the main form of economic activity took
place in house keeping. Therefore in a lot of
novels of Xenophontus, Plato and Aristotle the
“economy” was mentioned as “Management of
House keeping”
 In Arabic lexicology economy mentioned as
“saving” (iqtisad)
 Now the word economy means a complex
system of relationships between different
organizational units
What does “Economics” study?
 Economics is a social science that
attempts to explain the economic
behavior of individuals, businesses and
governments in production, distribution,
exchange and consumption processes
to satisfy their unlimited wants with the
limited resources
Circular flow of economic activity
Economics …
 is the study of how people make choices (decisions) under
conditions of scarcity and of the results of those choices for
society.
 is the study of how people and society choose to use scarce
productive resources to produce goods and services and to
allocate them in such a way as to satisfy the unlimited
wants of the various persons and groups in a society.
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Economics …
 is the study of how to use limited resources (scarcity) to
satisfy human wants.
 is a social science which is concerned with the allocation of
resources to provide goods and services which meet the
needs and wants of society.
 A science can be defined as a field of study which involves
the systematic acquisition of knowledge through observation
and/or experiment in which findings are critically tested and
brought under general principles or theories – in this case,
consumer behaviours.
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Scarcity and Economics
 The scarcity of resources—and the choices it
forces us to make—is the source of the problems
studied in economics
Households allocate limited income among goods and
services
 Business firms choices of what to produce and how
much are limited by costs of production
 Government agencies work with limited budgets and
must carefully choose which goals to pursue

 Economists study these decisions to
 Explain how our economic system works
 Forecast the future of our economy
 Suggest ways to make that future even better
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Scarce (limited) resources
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Factors of Production (Economic
Resources)
 Resources are inputs (factors) of production, notably, land,
labour, capital and entrepreneurship.
 These resources are called the factors of production:
 Land (natural resources, e.g. agricultural land, minerals,
gases, products of forests and oceans);
 Labour (human resources both physical and mental abilities)
 Capital (man-made resources);
 Enterprise (supplied by entrepreneurs who take the risk to
organize production). Entrepreneurship is the willingness to
take certain risks in the pursuit of goals.
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Economic Resources / Factors of
Production
Unit 1
Opportunity Cost
 Opportunity cost can be defined as the next best
alternative foregone, i.e., something which must be
sacrificed in order to obtain something else.
 For example: A resource which can be used to produce one
unit of Good X or 2 units of Good Y. The opportunity cost of
1X is 2Y and the opportunity of 1Y is ½ X
 Note that opportunity cost is not the value of all alternative
forgone but the next best alternative forgone
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Opportunity Cost
Some examples:
The opportunity cost of …………
…going to university for a year is not just the tuition,
books, and fees, but also the foregone wages.
…seeing a film is not just the price of the ticket, but
the value of the time you spend in the cinema.
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14
Studies of Economics

Microeconomics is the study of decision-making by
households and firms in the marketplace. It is the study of
a small portion of the economy. It is the study of how
households and firms make decisions and how they
interact in markets.

Macroeconomics is the study of the forces and trends that
affect the economy as a whole. It is the study of economywide phenomena, including inflation, unemployment, and
economic growth. It looks at a national or international as
a whole.
Unit 1
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Microeconomics vs. Macroeconomics
Microeconomics:
How does an individual household decide to spend its income?
How does an individual firm decide what volume of output to
produce or what products to make? How is the price of an
individual product determined? How are wages determined in a
particular industry?
Macroeconomics:
Total output (GDP), unemployment, inflation, interest rate and
the balance of trade (Export and Import) and what economic
policies (Monetary Policy and Fiscal Policy) a government can
pursue to influence the condition of the national economy.
Unit 1
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Q Which one of the following is a
microeconomic issue?
A. The government spends more than it receives in tax
revenue.
B. House prices rise more rapidly.
C. Unemployment rises.
D. The Bank of England raises interest rates.
E. Imports exceed exports.
Production Possibilities Curve (PPC)
 The production possibility curve is a
graph that shows the combinations of
two goods the economy can possibly
produce given the available resources
and the available technology within a
period of time, e.g. one year.
 The curve is downward sloping and
concave from the point of origin if
resources are heterogeneous.
 It will be a straight line if all
resources are homogeneous.
Unit 1
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19
A production possibility curve
8
Units of food (millions)
7
6
Units of food Units of clothing
(millions)
(millions)
5
4
8
7
6
5
4
3
2
1
0
3
2
1
0.0
2.2
4.0
5.0
5.6
6.0
6.4
6.7
7.0
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
a
Units of food (millions)
7
6
5
Units of food Units of clothing
(millions)
(millions)
4
a
8
7
6
5
4
3
2
1
0
3
2
1
0.0
2.2
4.0
5.0
5.6
6.0
6.4
6.7
7.0
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
b
Units of food (millions)
7
6
Units of food Units of clothing
(millions)
(millions)
5
4
8
7
6
5
4
3
2
1
0
b
3
2
1
0.0
2.2
4.0
5.0
5.6
6.0
6.4
6.7
7.0
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
Units of food (millions)
7
c
6
Units of food Units of clothing
(millions)
(millions)
5
4
8
7
6
5
4
3
2
1
0
c
3
2
1
0.0
2.2
4.0
5.0
5.6
6.0
6.4
6.7
7.0
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
Units of food (millions)
7
6
Units of food Units of clothing
(millions)
(millions)
5
4
8
7
6
5
4
3
2
1
0
3
2
1
0.0
2.2
4.0
5.0
5.6
6.0
6.4
6.7
7.0
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
Units of food (millions)
7
6
5
4
3
2
1
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
A production possibility curve
8
w
Units of food (millions)
7
x
6
5
4
3
2
1
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
Modelling Economic Relationships
 The production possibility (PP) curve
 what
the curve shows
 microeconomics
and the PP curve:
choices and opportunity cost
increasing opportunity cost
Increasing opportunity costs
8
Units of food (millions)
7
x
6
1
5
y
1
2
4
z
3
1
2
1
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
Q Assume that a firm can produce
6 units of good X or 12 units of good Y
per hour with its current resources.
The opportunity cost of a unit of X is:
A.
B.
C.
D.
E.
72 units of Y
12 units of Y
6 units of Y
2 units of Y
½ unit of Y
Modelling Economic Relationships
 The production possibility (PP) curve
 what the curve shows
 microeconomics and the PP curve:
 choices
and opportunity cost
 increasing opportunity cost

macroeconomics and the PP curve:
 production
within the curve
Making a fuller use of resources
x
Food
Production inside
the production
possibility curve
y
v
O
Clothing
 Concave
production possibility frontier implies increasing
opportunity cost
ANALYSING PPC:
 Points on the PPC
Efficient use of resources / Productive Efficiency
 Full Employment

 Points inside the PPC
Attainable
 Inefficient use of resources / wastage of resources
 High unemployment level

 Points outside the PPC

Unattainable Production Point due to Scarcity
Unit 1
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Modelling Economic Relationships
 The production possibility (PP) curve
 what
the curve shows
 microeconomics and the PP curve:
choices and opportunity cost
increasing opportunity cost
 macroeconomics and the PP curve:
production within the curve
shifts in the curve
Food
Growth in full-capacity output
Now
O
Clothing
Growth in full-capacity output
Food
5 years’ time
Now
O
Clothing
Growth in full-capacity and actual output
Food
Growth in full-capacity output shown
by outward shift in in PP curve
O
Clothing
Growth in full-capacity and actual output
y
Growth in actual output shown by
movement from x to y
Food
x
O
Clothing
Economic Growth
 It refers to increase in production of goods and services.
 It results in shift out the PPC to the right.
 Sources of Economic Growth:
 Addition
of labour and capital
 Invention and Innovation
 Discovery of new resources
 Improvement in productivity
 Better educated and more skilled labour force
Unit 1
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Q Which of the following would shift the
PP curve outwards?
A.
B.
C.
D.
E.
An increase in the population of working age
A reduction in unemployment
A reduction in VAT
An increase in the general level of prices
A reduction in expenditure on education
Modelling Economic Relationships
 Modelling economic relationships
 the
importance of assumptions
 simplification:
ceteris paribus assumption
 The production possibility curve
 what
the curve shows
Economics Statements:
Positive and Normative Economics
 As scientists, economists make positive statements, which
attempt to describe the world as it is.
 As
policy advisors, economists make normative
statements, which attempt to prescribe how the world
should be.
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Positive Economic Statements
 Positive economics can be described as “what is, what was,
and what probably will be” economics. Statements are
based on economic theory (objective analysis of economy
based on facts of an issue) rather than subjective value
judgments or emotions.
 Positive statements can be confirmed or refuted, normative
statements cannot.
 For example: if sales taxes increases people will have lower
spending power.
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Normative Economic Statements
 Normative economics revolve around issues which are
subject to value judgment. Normative statements are
subjective - based on opinion only - often without a basis in
fact or theory. They are value-laden, emotional statements
that focus on "what ought to be".
 For
examples: Government should not raise taxes;
Government should build more universities.
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The end… (kind of!)