The Scope and Method of

Economics
Dr. Abdul Ghafoor Al Saidi
 Economics
• Economics The study of how individuals and
societies choose to use the scarce resources
that nature and previous generations have
provided.
• Economics is the study of how people make
choices.
• Scarce resources: The limited nature of society's
resources.
 Economy
• Economy is the system of trade and industry
by which the wealth of country is made and
used. An economy is a system that attampts to
solve the basic economic problem
 Why Study Economics?

There are many reasons to study economics

1. To Learn a Way of Thinking
Economics has three fundamental concepts:
1. Opportunity cost:The best alternative that we forgo, or give
up, when we make a choice or decision.
2. Marginalism: The process of analyzing the additional or
incremental costs or benefits arising from a choice or
decision.
1. The working of efficient markets
2. To understand society .
Past and present economic decisions have an enormous
influence on the character of life in a society.
3. To be an informed citizen.

The study of economics teaches us a way of thinking and helps

us make decisions.
 The study of economics

• The study of economics teaches us a way of

thinking and helps us make decisions

https://www.youtube.com/watch?
v=BsJjQz_52KY
 The scope of economics
There are two major division of economics:
1. Microeconomics The branch of economics that
examines the functioning of individual industries and
the behavior of individual decision-making units—that
is, firms and households.

2. Macroeconomics The branch of economics that

examines the economic behavior of aggregates—
income, employment, output, and so on—on a
national sca
 Economic Policy
1.Efficiency: efficiency In economics, allocative efficiency. An
efficient economy is one that produces what people want at the
least possible cost.

2.Equity: Fairness.

3.Growth: economic growth An increase in the total output of an

economy.

4.Stability: stability A condition in which national output is growing

steadily, with low inflation and full employment of resources.
The Economic Problem: Scarcity
and Choice
Dr. Abdul Ghafoor Al Saidi
 Scarcity, Choice, and Opportunity Cost

The three economic phenomenons are related in with scarce

resources, people are forced to make choices on which wants
to satisfy.
• Scarcity in economic terms means that resources are limited
and cannot satisfy all the human wants.
• A choice is the decision made from the opportunities
presented. When a choice is made, the other best alternative
foregone becomes the opportunity cost.
• opportunity cost The best alternative that we give up, or
forgo, when we make a choice or decision
 Question?
• What Is the Relationship between Scarcity and Opportunity
Cost?
• Scarcity and  opportunity Cost represent two interlinking
concepts in economics as companies must often choose among
scarce resources. In most cases, economic resources are not
completely available at all times in unlimited numbers, so
companies must make a choice about which resources to use
during production. The opportunity cost represents the
alternative given up when choosing one resource over another.
These two concepts have a direct link because, for example,
companies may use a lower quality but more available resource
for producing goods.
 Factors of production (Resources)
Factors of production (or resources or input) The inputs into
the process of production. Another term for resources.
The primary resources that must be allocated are land, labor,
and capital.

1. Land - the natural resources used in the production of a

product such as water, oil, fields or wood.

2. Labour – the people that work in the business such as

teachers, joiners, builders or doctors.
 Factors of production (Resources

3. Capital – the equipment used to produce the

product or service such as machinery or delivery
trucks.

4. Entrepreneurship – having an idea of how to use

the land, labour and capital to make a profit. For
example, Arnold Clark, who founded a business
selling cars, showed great enterprise.
 Production (out put) The process that
transforms scarce resources into useful goods
and services.
• Good: In economics, goods are items that satisfy human 
wants and provide utility, for example, to a consumer making
a purchase of a satisfying product. 
Type of good
Type of good
Services is an economic activity (e.g., labor) offered as a product.
Although a service (i.e., the activity) is a non-material good,
intangibility (cannot be touched) . 
Need vs Want
 The Economic Problem
• The economic problem emerges because our
desire for goods and services to consume is
greater than our ability to produce those
goods and services. The demand for goods
and services arises from human wants. There
are three types of human wants.
The Economic Problem
So satisfaction of humane needs

Good Services
The Economic Problem
The Three Basic Questions
 The Three Basic Questions
• Every society has some system or process that
transforms its scarce resources into useful
goods and services.
• In doing so, it must decide what gets
produced, how it is produced, and to whom it
is distributed.
• A person must decide what to produce and
how and when to produce it.
 The Three Basic Questions
• What to Produce?
In today’s economy what goods are produced is decided by the
consumer rather than the producer himself.

• How to Produce?
This refers to the technology used to produce a particular good,
this is normally determined by the firm’s management.

• Whom to Produce for? Consumers

These are those people who are willing to shell out money for the
goods and services that are produced and are the direct
beneficiaries of the production process.
 How to solve the economic problem
Economic Systems and the Role of Government
1. Command Economies: An economy in which a central
government either directly or indirectly sets output
targets, incomes, and prices.
Since the government is such a central feature of the
economy, it is often involved in everything from
planning to redistributing resources. A command
economy is capable of creating a healthy supply of its
resources, and it rewards its people with affordable
prices.
 Economic Systems and the Role of
Government
2. Free market (laissez-faire economy): Literally from the French:
“allow [them] to do.” An economy in which individual people and
firms pursue their own self-interest without any central direction or
regulation.

• In a free market system, the basic economic questions are

answered without the help of a central government plan or
directives.
• This is what the “free” in free market means—the system is left to
operate on its own, with no outside interference. Individuals
pursuing their own self-interest will go into business and produce
the products and services that people want.
 Economic Systems and the Role of
Government
3.  Mixed Economic System
• A mixed economy is a combination of different
types of economic systems. This economic
system is a cross between a market economy
and command economy. In the most common
types of mixed economies, the market is more
or less free of government ownership except
for a few key areas like transportation or
sensitive industries like defense and railroad.
 Questions?
1. Organizations that transform resources into products are
known as
A) firms. B) entrepreneurs. C) households.
D) factors. E) None of these
2. Economics is
a. the study of the markets for stocks and bonds
b. the study of choice under conditions of scarcity
c. exclusively the study of business firms
d. fundamentally the same as sociology
e. applicable only when scarcity is not a problem
 Questions?
3.People and organizations have to make choices about how to
allocate time and money because of
a. government rules and regulations
b. corporate control of our lives c. scarcity of time and money
d. religious values e. unlimited resources
4.Land, labor, and money are the three categories of economic
resources
a. True b. False
5.Resources are unlimited in a wealthy society.
a. True b. False
 Questions?
6. Due to a scarcity of resources
a. every society must undertake central planning
b. the government must decide how to allocate available resources
c. some members of each society must live in poverty
d. every society must choose among competing uses of available
resources
e. resource availability exceeds the possible uses for available
resources.
7. Macroeconomics focuses on the behavior of economic agents
such as the consumer, a business firm, or a specific market.
a. True b. False
 Questions?
8.The four criteria that are frequently used in judging the outcome of
economic policy are
A) efficiency, equity, stability, and economic growth.
B) efficiency, equality, stability, and economic growth.
C) efficiency, equality, profitability, and stability.
D) efficiency, equity, profitability, and stability.
9. Scarce resources give rise to the concept of
A) efficient markets. B) opportunity costs.
C) laissez‐faire. D) positive economics
10. A command economy is one in which a central government sets
output targets, incomes, and prices.
a. True b. False
The Circular Flow of Economic
Activity &Demand & Supply
Dr. Abdul Ghafoor Al Saidi
 The Circular Flow of Economic Activity
• The circular flow of economic activity is a model showing
the basic economic relationships within a market economy.
• The circular flow of economic
is a way of representing the flows of money between the tw
o main groups in society - producers (firms) and consumers (
households). These flows are part of the fundamental proce
ss of satisfying human wants.
• All market economies are characterized by a circular flow of
economic activity. This means that money and products
(including the products businesses need to operate) move in
a circular fashion between businesses and households. This
situation is often illustrated using a diagram that allows us
to visualize the basic workings of the overall economy.
 Households :The consuming units in an economy. Households
own and control resources and sell them to firm.
product or output markets The markets in which goods and
services are exchanged.
H
O Capita
U
l Natural
S F
E I
H R
O Human M
L
D
S
 Firm An organization that transforms resources (inputs) into products
(outputs). Firms are the primary producing units in a market economy.

input or factor markets The markets in which the resources

used to produce goods and services are exchanged.

H
O
F U
I S
R E
M H
O
L
D
S
The Circular Flow of Economic Activity
The Circular Flow of Economic Activity
• Households and firms interact in the markets
for goods and services(where house holds are
buyers and firm are sellers)
• And in the market of the factors of production
(where firms are buyers and households are
sellers)
• The outer set of arrows shows the flow of mony
and inner set of arrows shows corresponding
flow of inputs and outputs.
 Demand
• Demand: indicate how much of good and services consumers
are willing and able to buy at each possible price during a given
time period, other things constant(unchange or all else equal)

Demand schedule Shows how

Much of a given product a
household would be willing to buy at
different prices for a given time
period.
 Demand
Demand curve A graph illustrating FIGURE 3.2 Alex’s Demand Curve

how much of a given product a

household would be willing to
buy at different prices.
• straight line demand curve

• The demand curve will generally be downward sloping

 Question
Q Draw a demand curve with the help of a hypothetical
individual demand schedule.
 law of demand
• law of demand The negative relationship between
price and quantity demanded: Ceteris paribus, as
price rises, quantity demanded decreases; as price
falls, quantity demanded increases during a given
period of time, all other things remaining constant.
• It is reasonable to expect quantity demanded to fall
when price rises, ceteris paribus, and to expect
quantity demanded to rise when price falls, ceteris
paribus.
• A demand curve has a negative slope.
 Individual Demand Vs Market Demand

• The demand of one person is called individual demand

 Individual Demand Vs Market Demand

• The market demand schedule of all individuals can be added

up to find out market demand schedule.
The transaction from an individual to a market demand
schedule is accomplished by summing individual quantities at
various price levels.
so
Individual Demand Vs Market Demand
 Determinants of Demand
(Shift in the Demand Curve)
Determinants of Demand (Shift in the Demand Curve)
As we know a change in quantity demanded must be caused by a
change in market price, but a change in demand is caused by some
other factors than a change in price. (other things
constant(unchanged or all else equal)

So Shifts in the demand curve are strictly affected by consumer

interest. Several factors can lead to a shift in the curve, for
example:
 Determinants of Demand
1- Number of Buyers in the Market
The number of buyers has a major effect on the total or net
demand. As the number increases, the demand rises. And if
the number decreases, the demand fall.
 so

• An increase in the number of buyers in

a market is likely to increase demand

• Number of Buyers
in the Market

a decrease in the number of buyers

will probably decrease demand
1- Number of Buyers in the Market
 Determinants of Demand
2- Changes in income levels
• When income is increased, the demand for normal goods or
services will increase and less of inferior good.
• When income is decreased, the demand for inferior goods or
services will increase and less of normal good.
• If the good is a normal good, higher income levels lead to an
outward shift of the demand curve while lower income levels
lead to an inward shift.
 so
Arise in income cause an increase in
demand for normal goods and less of
inferior goods

• Income
A falls in income cause an decrease in
demand for normal goods and increase in
demand for inferior goods
Determinants of Demand
When income increases, the demand for inferior goods
shifts to the left, and the demand for normal goods shifts
to the right.
 Determinants of Demand
3- Prices of Other Goods and Services
• substitutes Goods that can serve as
replacements for one another; when the price of
one increases, demand for the other increases.
Ex.: Pepsi and Coca Cola
• complementary goods: Goods that “go
together”; a decrease in the price of one results in
an increase in demand for the other and vice
versa. Ex.: Car and Benzene
Prices of Other Goods and Services
Prices of Other Goods and Services
Prices of Other Goods and Services
 Determinants of Demand
4-Tastes and Preferences
• Changes in preferences can and do manifest
themselves in market behavior.
Favorable lead an increase in
demand
• Tastes
Unfavorable lead to decrease in
demand
 Determinants of Demand

5- Expectations
• What you decide to buy today certainly depends
on today’s prices and your current income and
wealth.
• Expecting an increase in prices of goods will lead
to an increase the quantity demanded. Similarly,
expectations of a reduced income or a lowering
in prices of goods will decrease the quantity
demanded.
 so
Consumers current demand will
increase if they expect higher
future price

Expectation

Consumers current demand will

decrease if they expect lower
future price
 Determinants of Demand

Shift in the Demand Curve

The demand curve will shift, move either inward or outward as a
result of non-price factors. A shift in demand can be related to
the many factors (non-price determinants). The position of the
demand curve will shift to the left or right following a change
in an underlying determinant of demand.
 
 Question
• Example, if drinking cola becomes more fashionable demand
will increase at every price. Draw the new demand curve?
 Question
For example, if the price of a substitute, such as fizzy
orange, falls, then less cola is demanded at each price, as
consumers switch to the substitute. Draw the new demand
curve?
Determinants of Demand
 Shift in the Demand Curve &
Movement along the Demand Curve
• Movement along the Demand Curve
• If the income of the consumer, prices of the related goods,
and preferences of the consumer remain unchanged, then the
change in quantity of good demanded by the consumer will
be negatively correlated to the change in the price of the
good or service. The change in price will be reflected as a
move along the demand curve.
 Shift in the Demand Curve &
Movement along the Demand Curve
If the price of hamburger rises, the quantity of hamburger demanded declines; this is
a movement along the demand curve.
The same price rise for hamburger would shift the demand for chicken (a substitute
for hamburger) to the right and the demand for ketchup (a complement to
hamburger) to the left.
 Question
• What is the difference between movement
along demand curve and shift in the demand
curve?
 supply
Supply means the quantities that a seller is willing and able to
sell at different prices during a given time period, other
things constant(unchanged or all else equal).
Supply schedule Shows how much of a product firms will sell at
alternative prices
supply curve A graph
illustrating how much
of a product a firm will
sell at different prices
 Supply curve,
• Supply curve, in economics, graphic representation of the
relationship between product price and quantity of product
that a seller is willing and able to supply. Product price is
measured on the vertical axis of the graph and quantity of
product supplied on the horizontal axis.

The supply curve is

drawn as a slope rising upward from
left to right, since product price and
quantity supplied are directly related 
 Question
Q. Use the following data to draw supply curve.
supply
 law of supply
law of supply The positive relationship between price and
quantity of a good supplied: An increase in market price,
ceteris paribus, will lead to an increase in quantity
supplied, and a decrease in market price will lead to a
decrease in quantity supplied.
so
law of supply
supply
 Difference between Individual and Market Supply

Individual supply is the supply of an individual producer at each

price .
Market supply The sum of all that is supplied each period by all
producers of a single product. Or market supply of the
individual supply schedules of all producers in the industry.
so
Market supply
Difference between Individual and Market Supply
supply
 Determinants of Supply

• Supply levels are determined by price, which increases or

decreases supply along the price curve, and non-price factors,
which shifts the entire curve.
1.Cost of resources (input)
 so
A fall in resource prices would lower the
production cost, leading to
an increase in supply

Cost of recourse

A rise in resource prices would higher

the production cost, leading to
decrease in supply
 2.Production Technology
• On advance in technology means producer can sell more of
goods.
• a decline in technology means producer can sell less of goods.
 so
An advance in technology
means producer can sell
more of a good.

Production technology

A decline in technology
means producer can sell
less of goods
3. expectation
4. Change in the number of sellers (producers)
 With more sellers, there is more supply

• Number of sellers

With fewer sellers, there is less supply

 5. Taxes
With increase in taxes (increase the cost)
there is less supply

Taxes

With decrease in taxes (decrease the cost)

there is more supply
 6. Subsidies

With increase in subsidies (decrease the cost)

There is more supply

Subsidies

With decrease in subsidies (increase the cost)

There is less supply
Determinants of Supply
Shift of Supply versus Movement along a Supply Curve

• movement along a supply curve The change

in quantity supplied brought about by a
change in price.
• shift of a supply curve The change that takes
place in a supply curve corresponding to a new
relationship between quantity supplied of a
good and the price of that good. The shift is
brought about by a change in the original
conditions.
 Movement along a Supply Curve
• When the price of a product changes, we move along the
supply curve for that product; the quantity supplied rises or
falls.
 Shift of Supply Curve
• When any other factor affecting supply
changes, the supply curve shifts.
So