Introduction to economics

Dr. shereen adel

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 Course Outline
Days Lectures Subjects Topics
Sunday Lecture 1 What is economics?
25/10/2015
Basic Principles The Economic problem
The PPC
Lecture 2 The Demand Theory
Market
The Supply Theory
Monday Lecture 3 Market Equilibrium Market Equilibrium and its Applications
26/10/2015
Elasticities Price Elasticity of Demand

Lecture 4 Production and Costs in The production

the short run The costs of production
Tuesday Lecture 6 Macroeconomics GDP, GNP, Unemployment, and
27/10/2015 Concerns Inflation
Lecture 7 Evaluation Written exam

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 BASIC PRINCIPLES
ECONOMICS & THE ECONOMIC PROBLEM
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CHAPTER OUTLINE

Definition of Economics

The economic problem

The main causes of the

economic problem

The Production Possibility

Curve (PPC)

The scope of Economics 3

 1 Economics Definition

Economics is the study of how individuals

and societies choose to use the limited
and scarce resources to satisfy the
unlimited human wants.

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 Resources
• Resources are the factors of production or inputs used
into the process of production to produce goods and
services.

It consists of:
• Natural resources: land, forest, minerals, timber,
energy, rain, wind.
• Human resources: labor.
• Capital resources: tools, equipments, buildings, desks,
chairs, software, roads, bridges, factories.

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 Human Wants (Needs)
Human wants: consists of all goods and services
that people (households) would like to consume.

• Wants are unlimited, why?

Because of :
1. The increasing population.
2. The technological progress.

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 2 Economic Problem !!

Scarce resources Production Unlimited wants

All the societies face the economic problem (the

rich and poor) but at different degrees; poor
countries suffer more.

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 3 The main causes of the economic
problem

1- Relative Scarcity: the available resources are not

enough to satisfy all human wants.

2- Unlimited human wants

3- Choice: resources are scarce, so all societies face the

problem of deciding what to produce and how much
each person will consume.
The choice implies the existence of opportunity cost.

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 The Opportunity Cost
• The opportunity cost of something is measured
by the best alternative that we give up, when we
make a choice or a decision.

• The opportunity cost of producing a unit of a

certain good is measured by the number of
given up units of another good.

Opp. cost of (X) = number of given up units from

(Y)/number of received units of (X) = Y/ X
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 4 The Production Possibility Curve
(PPC)
 Definition: A graph that shows all the combinations of
two goods or two groups of goods that can be produced
in the economy if all resources are used fully & efficiently
given the existing level of technology (in the short run).

 The PPC is based on the following assumptions:

• Only two goods are produced.
• A limited amount of resources.
• Full & efficient use of resources.
• A given level of technology.

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Suppose that the limited resources of an economy directed fully
and efficiently to produce two groups of goods, and the economy
works in the short run (the level of technology is constant). The
maximum quantities of both goods, which the economy is able to
produce, are illustrated in different combinations as follows.
Goods Military goods Civilian goods Opportunity cost of
combinations (X) (Y) producing one more unit of
military goods in terms of
civilian goods (Y/ X)

A 0 200 -

B 2 180 20/2= 10 civilian good

C 4 140 40/2= 20

D 6 80 60/2= 30

E 8 0 80/2= 40
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FIGURE 1:
the PPC
The PPC Graph
Civilian goods
200 A
180 B
160
140 C
120
100
80 D
60
40
20
0 E
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Military goods
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Note that:
• All Points on the PPF are points of both full resource employment
and production efficiency. These points are attainable and efficient
combinations of military goods and civilian goods.
• Point A on the curve means that the economy uses all its
resources for the production of civilian goods and no military goods
at all.
• Point E means that the economy produces only military goods and
no civilian goods.

• All points above the PPF are unattainable given the available
resources and existing technology.

• All Points below the PPF are attainable but inefficient, represent
either unemployment of resources or production inefficiency.

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Characteristics of the PPC

1. The PPC must be negatively sloped because resources

are scarce, so having more of one good requires having
less of the other good given the resources available and
existing technology.

2. The PPC is concave from the origin because of

increasing opportunity cost (to obtain more of one good
we should forgo more and more from the other).

What if the opportunity cost is decreasing or constant?

What is the effect of this on the PPC?
The PPC can illustrate a number of economic concepts, such as:

• Unemployment
• Inefficiency
• Scarcity
• Choice
• Opportunity Cost
• Economic Growth

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• Scarcity is represented by the unattainable combinations
above the curve, such as G. The fact that scarcity exists is
illustrated by the negative slope of the PPC.

• Choice is represented by the need to choose among the

alternative attainable points along the curve such as A, F, E,
and B.

• Opportunity cost is represented by moving from one good

combination to another because the opportunity cost of
producing more from one good is producing fewer from the
other. The PPC is concave from the origin because the
opportunity cost is increasing.

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The effect of economic growth on
the PPC
Economic growth: An increase in the total output of
an economy. It occurs when a society obtains new
resources or when it learns to produce more using
existing resources.

Therefore, the society can increase the production of

both goods and move to higher PPC as a result of
economic growth.
As a Result of the Economic Growth:

1. The productivity of resources increases

and enhances the ability to produce both
corn and wheat. Therefore, the PPC shifts
up and to the right.

2. The amount of land or labor in corn and

wheat production more likely to increase
over time. Therefore the PPC shifts
upwards.
 The effect of economic growth on the PPC

As a result of
corn the economic
growth, the
PPC shifts
C outwards and
Y1
A to the right.
Yo

FIGURE 2:
Economic
growth shifts
the PPC up
and to the
right

Xo X1 wheat
True or false, explain briefly using graphs

1. The production possibility curve is always negatively

sloping straight line (2011).

2. The opportunity cost is decreasing when PPF is

concave toward the origin (final 2014).

3. If an economy is using all its resources efficiently to

produce one of three combinations of two goods X
and Y, combination A contains (20X and 100Y), B
contains (30X and 80Y) and C contains (40X and
40Y), the opportunity cost of producing good X is
declining.
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Show graphically

1. A PPF for an economy, with the axes labeled ‘consumer

goods’ and producer goods’. Indicate the region that is
attainable and the region that is not. Explain the shape of
the curve-what assumptions did you make in drawing it?
(2009/2010).

2. A PPF assuming increasing opportunity cost.

• Plot a point (m) to show inefficient use of resources.
• Plot a point (n) to show scarcity.
• What do the points on the PPF represent? (Mid-term 2005).

3. The effect of economic growth on the PPF. (2013)

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