Introduction to Eco Mba Eng

8/16/2019 Introduction to Eco Mba Eng

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Introduction to Economics

Introduction

Instructor: Dr

Alamedin Bannaga


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Course outlines

IntroductionPart one: microeconomics

-

- Elasticity

- Production and consumption

- Cost, revenue, profit

- Market structure


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Part two: macroeconomics- Objectives

-

Course outlines

- Fiscal and monetary policy

- Economic growth and Unemployment

- Inflation

- Exchange rate and balance of payments


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Introduction


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Microeconomics andMacroeconomics

Microeconomics: is about individualbehavior: firms (production unit),

households (consumption unit).

Macroeconomics: is about overall

performance: employment, economic

growth, inflation


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What is economics?

Is it about:Financial markets?

Inflation and employment? Growth of LDCs (Less

Why some people are poor and other are rich?

What are the causes of development andunderdevelopment?

Definition: “Economics is the study of how societies use their scarce resources to produce their valuable commodities and distribute them among different people” .


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Scarcity and efficiency

Scarcity: means limited relative to desire.Scarce resources are limited in supply i.e. not

sufficient to satisfy all human desires.

Scarcity involves choice and sacrificeEfficiency: is the most effective use of resources

Producing efficiently: when the economy cannot

make anyone better off without making someoneelse worse off.


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Opportunity cost

In a world of scarcity, choosing one thing meansgiving up something else. The opportunity cost

of a decision is the value of the good or service

orgone.


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The three problems of

economic organization:what to produce?

ow o pro uceFor whom to produce?


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What? how? For whom?

What commodity? Quantity?

How: means of production: by whom to produce,by what technique?

For whom: distribution of oods and services

distribution of income and wealthDifferent economic systems answer these question

differently

Four economic system: capitalist, socialist, mixed,Islamic. These are called:

Market mechanism, command economy, mixedeconomy and Islamic economy.


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1. In the capitalist system, these questions areanswered through the market mechanism(discussed in details later).

2. In the socialist system, it is the government that

What? how? For whom?

eterm ne w at to pro uce an ow to pro uceand then distribute the production through quotasystem or rationing.

3. In Islamic system, what? How? And for whom

to produce? are determined by free marketguided by Islamic moral and monopolyprohibition.


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Market mechanism

Market is a mechanism through which buyers andsellers interact to set prices and exchange goods

and services.

r ces represent t e terms on w c peop e anfirms voluntarily exchange commodities

When prices fall, customers will consume more.

When prices rise producers will produce more tomake more profit.


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How market mechanism solves the threequestions: (what, how and for whom)

1. What to roduce:

Market mechanism

- Producers produce the products that

consumers want to purchase i.e. they are

willing to pay their money for.- Price can be used as a signal to determine

how much to produce.


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How to produce?

- This determined by competition among producers.

- Producers want to maximise their profits, givenmarket rice.

Market mechanism

- Producers will adopt the most efficient method ofproduction in order to reduce their cost.

- To gain competitive advantage in a competitivemarket, producers use modern technology toimprove the quality of their products

- This means, market mechanism will lead toefficient and high quality production.


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3- For whom to produce?i.e., distribution question

- Prices can be used as signal for distribution as

Market mechanism

1. Distribution of goods and services: Goods andservices will be distributed to the person who isprepared to pay the price for them

2. Distribution of factors of production: these canbe distributed according to their prices (e.g. land→ rent; labour → wages and salaries, etc).


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Adam Smith is the founding father of economics. In 1776,he wrote his book “The Wealth of Nation” in which hecalled for free market and competition.

For him, government intervention in the market and

Adam Smith and the invisible

hand of the market

monopo y s or e mar e mec an sm an s ou eremoved.

Free market will distribute goods and services efficientlyand effectively. This allocation process is called the

invisible hand of the market. To increase the wealth of nations, Adam Smith called for

division of labour and free trade.

Example: division of labour in table manufacturing.


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Adam Smith called for internationaldivision of labour to increase the welfare of

the world.

Adam Smith and the invisible

hand of the market

Nowadays: Globalisation is a popular termthat is used to denote an increase in

economic integration particularly increase

in international trade.


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Example for solving the three

economic problems: the oil priceshocks

When oil price increases sixfold or tenfold

What to produce:

- Both household and firms will adapt themselves to

- Production and consumption will shift away fromoil-intensive products by using small cars, usinggas and not oil, individuals will move closer to

city centre.- Substitutes for oil-intensive product will be

created.


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How to produce?

Artificial substitutes for petroleum inputs will bedeveloped. Airlines will use more fuel-efficient

-

Example for solving the three

economic problems: the oil priceshocks

,

fired generators and solar energy will be used.

For whom to produce?

- For the person who is prepared to pay the price.

More and more of luxury goods will be allocatedto oil-producing countries, necessary goods willbe allocated to poor oil-importing countries.


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Inputs: are used to produce output utilisingexisting technology.

In uts are called factors of roduction: land

Inputs and outputs

labour, capital

Land is: natural resources

Labour is: human time spent in productionCapital is: goods produced to produce an

other good. E.g. machines

Introduction to Eco Mba Eng

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