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Notes on Chapter One
Dr. Ibrahem Hasan AI-ezee
Definition of Economics
A- Economic questions arise because we face scarci~- we all want more we can
get. In other words, scarcity exists when people wants exceed their ability to
satisfy their wants.
I.
II.
Because we are unable to satisfy all of our wants, we must make choices.
Incentives are the rewards that encourage us, or the penalties that discourage
us from taking an action. The incentives that we face will influence the
choices that we make when dealing with scarcity
B- Economics is a social science that studies the choices that individuals, businesses,
government, entire society that make as the y cope with scarcity. It can be divided into
two areas of studies:
1. Microeconomics is the study of choices that individuals and businesses make; these
choices interact in the markets, and the influence of governments.
Examples:
 Why are people buying more from (x) good and fewer from (y)?
 How tax imposed on costumers affect demand of particular good.
2. Macroeconomics: is the study of the performance of the national economy and the
global economy.
Examples:
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Fluctuations in the national economy
The inflation rate.
The unemployed rate.
Productivity.
The interest rate.
The government budget deficit.
The foreign trade deftest.
Two Big Economic Questions
Two big questions summarize the scope of economics:
First: How do choices end up determining?
 What,
 How, and
 For whom goods and services get produced
The three questions are explained briefly;
I.
What to produce: Producing some kind of goods and services will be
changed over time, depending on the needs of the society and the
scarcity of the available resources.
II.
What to produce: This question is related to how goods and services
are produced by using productive resources. Productive resources are
grouped into four categories:
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Land: It is a gift of God (nature) to produce goods and services.
Labour: It is the work time and effort devoted by people to
producing goods and services.
Capital: It is the tools, instruments, machines, building, etc. that
businesses use to produce goods and services. Note: Financial
capital such as money, bonds, and stocks are not capital because
they are not productive resources.
Entrepreneurship: It is the human resource that organize factors of
production (land, labour, and capital): It comes up with:
I.
New ideas about what and how to produce,
II.
Make business decisions, and
III.
Bear the risks that arise from these business decisions.
3. For whom to produce:
Who gets the goods and services that are produced; depend actually on the income that
people earn. A large income enables a person to buy large quantities of goods and
services. A small income leaves a person with few options and small quantities of goods
and services.
People earn their incomes by selling the services of the factors of production they own:
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 Land earns rent.
 Labour earns wages.
 Capital earns interest.
 Entrepreneurship earns profit.
Second: When do choices made in the pursuit of self- interest, also
promote the social interest?
This is related to answer the following questions:
4. Are goods and services produced, and the quantities in which they are produced, the
right ones? Always people make choices in their own self-self interest. They make
choices they think are the best for their own well-being.
5. Do the factors of production employed get used in the best possible way?
6. Do the goods and services that we produce go the people who benefit most from them?
Note: When people make self-interested choices that are the best for society, they make
choices that are considered in the social-interest.
The Economic Way of Thinking
This subject is concerned with the economists thinking about the questions we just
reviewed and go about seeking answers to them.
Choices and tradeoffs
A: Because we face scarcity .we must make choices. And when we make a choice, we
select from available alternatives, which create a tradeoff. Tradeoffs include the 'what,
how, and for whom tradeoffs'.
Tradeoff is an exchange- giving up thing to get something else. And it means exchange
more of something for less of something else.
A classic tradeoff could be explained by the terminology Guns versus Butter. Which
means that every country faces such tradeoff when deciding how much of its factors of
production should go toward producing National Security versus goods and services like
foods and shelter.
B. What, How. and for Whom 'tradeoffs'
I. 'What' Tradeoffs arise when people choose how to spend their incomes, when
governments choose how much to spend their tax revenues, and
when businesses choose what to produce with their factors of
production.
2. 'How' tradeoffs arise when businesses and government choose among alternative
technologies. For example businesses might switch to using robots
rather than labour in assembly lines, thereby effectively trading off
labour for capital.
3. 'For Whom' Tradeoffs arise when choices change the distribution of goods and
services produced across individuals. Government redistribution of
income from the rich to the poor changes the incentives facing
owners of productive resources, creating a Big Tradeoff: the
tradeoff between efficiency and equity.
C. Choice Bring Changes: The results arising from all the choices made in the
society will influence the incentives surrounding the future choices by other
people, businesses and government. For example;
1. Consuming decisions to consume less and save more increase the funds that
are available for business to borrow and invest, increasing output.
2. Workers ' decision to decrease leisure time to acquire human capital to
increase their income as well as government tax revenues, increasing how
much public services the government chooses to offer.
3. iii. Businesses decisions to increase Research and Development (R&D) for
innovative products rather than to increase current production improve
investors expectations, increase saving.
D. Opportunity Cost: Thinking about a choice as a tradeoff emphases how cost is
an opportunity forgone:
The opportunity cost is highest- valued alternative that we give up to get something. For
example, the opportunity cost of attending college include not only the money cost of
books, tuition and (perhaps} room and board, but also the money income forgone from
not being able to work full time, as well as the leisure time lost from studying nights and
weekends.
E. People make choices at the margin. Making choices at the margin means
people look at tradeoffs that arise from making small changes in an activity .
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Marginal Benefit is the benefit arises from an increase in an activity .For example,
if you are studying four nights a week your grade in economics is 3.0. Increasing
your study by extra one night your grade is 3.5. The marginal benefit is 0.5.
Marginal Cost is the cost arises from an increase in an activity .For example, the
cost of increasing your study time by one night a week is the cost of the additional
night not spent with your friends (if that is your best alternative use of the time}.
Economics is a Social Science
A. Economists try to discover how the economic world works, and in pursuit of this
goal, they distinguish between two type of statements
Positive statements make a claim about 'what is' and can be tested to determine
whether they are valid.
Normative statements make a claim of 'what ought to be.' Such a statement is an
opinion and cannot be tested for validity.
Health-care reform provides example of the distinction. ' Universal health care
will cut the amount of work time lost to illness' is a positive statement. Every
Bahraini should have equal access to health care is a normative statement.
Demand law is a positive statement, but questions about unemployment and
inflation are normative statements.
B. Economists build Models:
Economists observe and measure economic activity, build economic models, and test
their models.
An Economic Model is a description of some aspect of the economic world that includes
only those features of the world that are needed for the purpose at hand.
C. Economists test their models
An economic theory is a generalization that summarizes what we think we understand
about the economic choices that people make and the performances.
of industries and entire economies.