1 ECON203 Principles of Macroeconomics Week 2 Topic 1: Introduction Topic 2: Circular Flow Topic 3: Macroeconomic Goals Dr. Mazharul Islam

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ECON203 Principles of Macroeconomics

Week 2Topic 1: IntroductionTopic 2: Circular Flow

Topic 3: Macroeconomic Goals

Lesson PlanLesson Plan

• Introduction – (Me and You)-15 minutes• Overview of the Course – 15 minutes• Introduction to Economics - 50 minutes• Circular Flow – 50 Minutes• Macroeconomic Goals – 20 Minutes

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• Lectures (interactive)• Class Exercise• Text Book (Parkin, Macroconomics : 10th edition,

Pearson)• Other References (McConnell and Brue, Economics :

Principles, Problems and Policies 16th edition, McGraw-Hill 2002)

• Individual and Group assessments– Class participation (10%)– Home work (10%) – Quizzes (15%)– 2nd Exam. (25%)– Final Exam (40%)

• http://marz.kau.edu.sa/admin/AdminFiles.aspx3

Teaching Methods & Teaching Methods & AssessmentAssessment

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Lesson ObjectivesLesson Objectives

To provide you with information about The Topics that we shall cover in this course The learning teaching and assessment arrangements for

this course.

To learn about the key tools and terms of economics that is essential to

know to understand economics clearly. how an economy works –Circular Flow Model Macroeconomic Goals

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

ECONOMICS It is the social science concern. It is a study of how people use their scarce resources to satisfy their unlimited wants. It is categorized mainly into two parts such as Macroeconomics and MicroeconomicsMICROECONOMICSMicroeconomics is the study that deals with an individual industry, firm or household. It means it talk about individual decision maker.

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MACROECONOMICS:It is a study that examine the economy as a whole. It means that it is concerned with the overall performance of the economy Such as it does not discuss about the market for Al Baik but about the market for everything produced in the economy; not about the price of Al Baik but about the average price of all goods and services produced in the economy.

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ECONOMIC PROBLEMBasic economic problem is wants are virtually unlimited while the resources available to satisfy these wants are scarce.

SCARCITYLack of enough resources to satisfy our all desired uses of those resources. Resource are scarce when they are not freely available alternatively we can say when its price exceeds zero

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SCARCITYSince human and property resources are scarce, it follows that the goods and services we produce must also be limited.

CHOICEDue to scarcity, we can’t have all that we want. We must decide what we will have, and what we must forgo. That is why we make choices.

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TWO BIG ECONOMIC QUESTIONS How do choices end up determining what, how, and for whom goods and services get produced?When do choices made in the pursuit of self-interest ?

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• What, How, and For Whom?

– Goods and services are the objects that people value and produce to satisfy human wants.

• What?

– In 2011, Agriculture accounts for 2% of total Saudi Arabian production, Industry goods for 69.1%, and Services for 28.9% (Source: CIA World Factbook 2012).

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How?Goods and services are produced by using productive resources that economists call factors of production.Factors of production are grouped into four categories:

Land Labor Capital Entrepreneurial Ability

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LANDIt does not refer only a plots of ground but also includes all other natural resources such as crude oil, water, air, and minerals etc.LABORIt is not simply the number of human bodies but it refers to the work time and work effort that people devote to producing goods and services. It categorized into two parts– physical and mental (9.56 millions out of 26.53 millions in 2010 where about 80% of the labor force is non-national - Source: CIA World Factbook 2012).

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CAPITAL In economics the term capital refers to final goods produced for use in further production. It also categorized into two parts. These are:

– Physical capital: factories, machines, tools, buildings, airports, highways and other manufactured items employed to produce goods and services.

– Human capital: consists of the knowledge and skill people acquire to enhance their labor productivity.

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ENTREPRENEURIAL ABILITY

– Special kind of human skill

– Talent required to dream up a new product or find a better way to produce an existing one.

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PAYMENTS FOR RESOURCESWages payment for use of labor

Interest payment for the use of capital

Rent payment for use of land

Profit reward for entrepreneur’s effort

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FOR WHOM?Who gets the goods and services depends on the incomes that people earn.

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When is the Pursuit of Self-Interest?Economics assumes that human behavior

reflects “rational self-interest”. It means that people always try to make the best choices they can, given the available information. Moreover, Individuals try to maximize the expected benefit achieved with a given cost or minimize the expected cost of achieving a given benefit. Peoples allocate their time, energy, and money to maximize it.

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GOODS AND SERVICESGoods

– Tangible items– Require scarce resources– Satisfy human wants

Services– Intangible items– Require scarce resources– Satisfy human wants

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Circular-Flow ModelCircular-Flow ModelThe interaction between four decision makers (Households, Firms, Government, and Rest of the world) and two broad markets (Goods/Products, and Resources/Factors) can be conveyed by the circular flow model.

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Circular-Flow ModelCircular-Flow Model

Households supply resources in the resource market and demand goods and services in the product market

Firms supply goods and services in product market and demand resources in the resource market

Money flows in resource market determine wages, interest, rents, and profits which flow as income to households

Product markets determine the prices for goods and services which flow as revenue to firms

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Circular-Flow ModelCircular-Flow ModelHouseholdsAs consumer, households demand the goods and services produced.As resource owners they supply labor, capital, land, and entrepreneurial ability to firms, governments, and the rest of the world

Firms, governments, and the rest of the worldDemand the resourcesSupply the goods and servicesRest of the world foreign households, firms and governments

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Circular-Flow ModelCircular-Flow ModelProduct/Goods marketsMarkets in which goods and services are bought and sold.Resource/Factors MarketsMarkets in which the resources are exchangedLabor, or job market is the most important of the resource markets.

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Circular-Flow ModelCircular-Flow ModelMARKETMeans by which buyers and sellers carry out exchanges

– Bring together the two sides of exchange to determine price and quantity by providing information about the quantity, quality, and price of products offered for sale.

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Macroeconomic GoalsMacroeconomic GoalsEconomic Goals

Positive Growth

Full Employment

Economic Efficiency

Price Level Stability

Economic Freedom

Equitable Distribution

Economic Security

Balance of Trade

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Macroeconomic GoalsMacroeconomic GoalsEconomic GrowthProduce more and better goods and services. It could be positive or negative. If the output deference between last year and current year is positive it means positive growth if negative means negative growth. Full EmploymentProvide suitable jobs for all citizens who are willing and able to do work. It does not mean zero unemployment.

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Macroeconomic GoalsMacroeconomic GoalsEconomic Efficiency

Achieve maximum output by using limited available resources.

Price-Level Stability

Avoid upswings and downswings in the general price level; that is avoid inflation and deflation.

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Macroeconomic GoalsMacroeconomic GoalsEconomic FreedomGovernment’s guarantee to businessman, workers and consumers to have a high degree of freedom in their economic activities.Equitable DistributionEnsure that no group of citizens faces poverty while ,most others enjoy large wealth.

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Macroeconomic GoalsMacroeconomic GoalsEconomic SecurityProvide benefits for those who are chronically ill, disabled, laid off, aged, or otherwise unable to earn minimal levels of income Balance of TradeSeek reasonable overall balance with the rest of the world in international trade and financial transactions.

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Now it’s over for Now it’s over for today. Do you have today. Do you have any question?any question?

Documents

1 ECON203 Principles of Macroeconomics Week 2 Topic 1: Introduction Topic 2: Circular Flow Topic 3: Macroeconomic Goals Dr. Mazharul Islam