Dr. Hisham Abdelbaki
ECON 140
Chapter ONE
Chapter ONE
Chapter Objective
After studying this chapter, you will be able to:
1- Define economics and distinguish between microeconomics and macroeconomics.
2- Explain the big questions of economics.
3- Explain the key ideas that define the economic way of thinking.
4- Explain how economics go about their work as social science.
Definition of Economics
Economics subject is the study of choice made to cope with scarcity.
Distinguish among the following terms:
Economics, economy, economic and economist
Economic problem

two sides of economic problem: limited resources ( factors of production) and
unlimited wants.

means economic resources are not sufficient to satisfy all wants. This is called
relative scarcity.
Scarcity

is inability to satisfy all wants.

is experienced to everyone: poor and rich and ALL countries
Question: What is the difference between absolute scarcity and relative scarcity?
Scarcity leads to choice. i.e. people must choice because of scarcity.
Choice means using economic resources to satisfy the most important wants and
postpone the others.
1- Economics interested in one of human behavior (what is it?)
Economic resources: can be classified into natural resources and human resources
Or into Labor, land, capital and entrepreneurship
Land is natural resources or is the gift of the nature.
Labor is the human resources. It is work time and work efforts that people devote for
producing goods and services.
Capital is the tools, instrument, machines, and building that are used to produce goods
and services.
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Dr. Hisham Abdelbaki
ECON 140
Chapter ONE
Entrepreneurship is the human resources that perform the functions of organizing,
managing, and assembling the other resources to produce goods and services. Is the
person who responsible for the production process and bears the business risk.
Determine the return of labor, land, capital and entrepreneurship.
Labor earns wage and salary
Land earns rent
Capital earns interest
Entrepreneurship earns profit
Investment in human capital means increase human capital’s knowledge and skills
i.e. increase quality of human capital. This can be done by:
1- Education
2- Training
3- Health care
Examples:
1- Going to college to become an accountant is an example of investment in human
capital.
2- When Bahrain University organizes training for its employees is an example of
investment in human resources.
Example: define:
1- Economic unit
2- Consumer
3- Producer
4- Consumption
5- Production
6- Microeconomics
7- Macroeconomics
Economic unit:
First of all "unit" in general is the smallest part of a thing. Economic unit is the smallest
part in the economy which is divided into: consumer / producer.
1- Consumer (household): is an economic unit that sells and rents factors of
production to get income that is used to buy goods and services to satisfy wants. (think
about the behavior of a family as a consuming unit)
2- Producer (firm): is an economic unit that buys factors of production to
produce goods and services. (think about Bahrain university as a productive unit)
Production means transformation of inputs (resources) into outputs (goods and service)
by firms in order to earn profit.
Consumption means the act of using goods and services to satisfy wants.
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Dr. Hisham Abdelbaki
ECON 140
Chapter ONE
There is slight difference between good and service that good is a visible thing whilst
service is invisible. For instance orange and car are goods whereas, education and
transportation are services.
Welfare means satisfaction. Consumer tries to maximise his/her satisfaction by
consuming goods and service to achieve maximum utility and producer (firm) tries to
maximise his/her satisfaction by producing and selling goods and service to achieve
maximum profits.
Microeconomics and Macroeconomics
Economics divided into two main branches: Microeconomics and Macroeconomics.
Microeconomics
 focuses on the individual economic units in the economy: consumer (households)
as a buyer of goods and services and seller (firms) as a producer and seller of
goods and services. So, the microeconomic variables are related to the economic
units: demand for one good, supply of one good,…etc
 is the branch that is interested in studying the behavior of ONE economic unit
(consumer / producer). For instance, buying ice cream, production of cars by
Toyota Company. The impact of increasing the price of oil on an individual’s
demand.
Macroeconomics
 focuses on economic aggregates and an overview of the economy. So, the
macroeconomic variables are related to the economic aggregates: aggregate
demand, aggregate supply, GNP, inflation…etc

is the branch that is interested in studying the behavior of ALL economic units in
the society. Studying the economy as a whole. For instance, subjects related to
inflation, unemployment, economic growth, standard of living, aggregated
production and aggregate consumption (demand).
Example 1: What is the difference between good and service?
Example 2: Fill in the spaces:
………………. focuses on the individual economic units in the economy: consumer
(households) as buyer of goods and services and seller (firms) as producer and seller of
goods and services. Whereas, …………………. focuses on economic aggregates and an
overview of the economy.
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Dr. Hisham Abdelbaki
ECON 140
Chapter ONE
Two Big Economic Questions:
First: What, how, and for who we produce goods and services?
What to produce? (indicating types of goods and services and its quantities). For
example, decision to produce one good instead of another one, decision to produce more
from one good and fewer from the another one.
How to produce? (indicating production method or technique) A decision related to
method or technique of producing or offering a good. For example, decision to use more
machines with less workers (capital intensive or labor saving method) or to use more
labor with less capital (labor intensive or capital saving method).
For whom? (indicating distribution method(s) of output / income among citizens).
Who gets the goods and services that are produced? A decision to distribute income or
indicate income for individual. For example, some people can afford to live in beautiful
homes while others are homeless. More earning (income) leads more ability to buy more
goods and services and vice versa.
Second: Self interest Vs social interest
Self interest: choices those are best for a person who makes them without thinking about
others.
Social interest: choices those are best for society as a whole.
Example: True or false
Choices made in self interest sometimes advance the social interest.
Choice and Trade off
Trade off is exchange i.e. giving up one thing to get one something else.
Examples:
 Individual:
1- Consumer: comparing between attending a lecture and sleeping
2- Firm: comparing between using labor intensive method or capital intensive.
Comparing between offering home delivery or not.
 Society: comparing between more expenditure in education or in war products.
Big trade off: is the exchange between equality and efficiency. Equality means taxing
productive activities but this leads to less production and less efficiency.
Choices bring change
Examples:
1- More savings (less current consumption) more investment
level of standard
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more production
high
Dr. Hisham Abdelbaki
ECON 140
Chapter ONE
2- more expenditure on R & D leads to innovation improvement in production high
level of standard
Opportunity Cost
Choice involves sacrifice. The more food you choose to buy, the less money you
will have to spend on other goods. The more food a nation produces, the less resources
will there be for producing other products. In other words, the production and
consumption of one thing involves the sacrifice of alternatives. This sacrifice of
alternatives in the production or consumption of a good is known as its opportunity cost.
To be clearer, if the workers on a farm can produce either 1000 tones of wheat or 2000
tones of rice, then the opportunity cost of producing 1 tones of wheat is the 2 tones of rice
forgone. The opportunity cost of buying a new machine is the interest rate (as a return of
his own money if he put it in a bank as deposit) the producer has sacrificed.
Definition of OC:
OC of an action is the (single) highest – value alternative that give up to get something
else.
Examples:
1- After finishing your study, you may have more than one option (choice) to start
your work.
2- Comparing between attending a lecture and sleeping.
3- Comparing between going on a trip and staying at work. (both the trip's costs and
losing work's salary should be added).
Choosing at the margin (Marginal cost and marginal benefit)
Decisions are made by comparing between the cost and benefit of the last unit. i.e.
marginal benefit and marginal cost.
Marginal cost (MC): is the cost of the last activity.
MC = change in total cost / change in quantity
Marginal benefit (MB): is the benefit from the last activity.
MB = change in total benefit / change in quantity
Net Benefit = Benefit - Cost
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Dr. Hisham Abdelbaki
ECON 140
Chapter ONE
Exercise 1:
Suppose the cost of 6 pencils is BD 1.80. the cost of 7 pencils is BD 2.00. so the marginal
cost of the seventh pencil is:
a- BD 0.20
b- BD 1.50
c- BD 1.80
d- BD 3.80
Exercise 2:
Quantity
1
2
3
4
5
6
7
8
Total Benefit (TB)
Total Cost
(TC)
Marginal
Benefit (MB)
Marginal Cost
(MC)
Net Benefit*
10
6
18
8
25
12
31
18
36
26
40
36
43
48
45
64
*Net benefit = MB - MC
Please:
1- Complete the above table.
2- Draw marginal benefit and marginal cost curves with the quantity in the same
diagram.
3- What does the intersection point MB and MC mean?
Positive statement Vs Normative statement
Positive statement:
It is about what is and can be tested to determine if it is true or false. It explains how the
world actually works.
Normative statement:
It is about ought to be and CANNOT be tested. It is related what should be or opinions.
Example: determine the positive statement from the following:
1- Hot weather leads to more buying ice cream.
2- Government should reduce using cars inside big cities.
3- More studying leads to higher grades.
What is the task of economic science?
The task of economic science is to discover positive statements that are consistent with
what we observe and that help us to understand the economic world.
This task can be broken into 3 steps:
1- observations and measurement
2- model building
3- testing models
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Dr. Hisham Abdelbaki
ECON 140
Chapter ONE
Ceteris paribus: is a Latin term means “other things being equal” , “if all other relevant
things remain the same” or "other effected factors are remain the same"
Example 1:
Would you think about factors affect the buying ice Cream!!. There are many effected
factors (for example income). Simply, we will use "ceteris Paribus" assumption to find
out the relationship between one of the effected variables and quantity demanded for ice
cream.
Example 2:
Can you mention another example of using "ceteris Paribus" assumption.
Best Wishes
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