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

2. Lesson 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 2 Dr. Mazharul Islam

3. Lectures (interactive) Class Exercise Text Book ( Parkin, Macroconomics : 10 th edition, Pearson ) Other References ( McConnell and Brue, Economics : Principles, Problems and Policies 16 th edition, McGraw-Hill 2002) Individual and Group assessments – Class participation (10%) – Home work (10%) – Quizzes (15%) – 2 nd Exam. (25%) – Final Exam (40%) http://marz.kau.edu.sa/admin/AdminFiles.aspx 3 Teaching Methods & Assessment Dr. Mazharul Islam

4. 4 Lesson 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 Dr. Mazharul Islam

5. 5 Key Tools & Terms of Economics 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 Microeconomics MICROECONOMICS  Microeconomics is the study that deals with an individual industry, firm or household. It means it talk about individual decision maker. Dr. Mazharul Islam

6. 6 Key Tools & Terms of Economics 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. Dr. Mazharul Islam

7. 7 Key Tools & Terms of Economics ECONOMIC PROBLEM  Basic economic problem is wants are virtually unlimited while the resources available to satisfy these wants are scarce. SCARCITY  Lack 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 Dr. Mazharul Islam

8. 8 Key Tools & Terms of Economics SCARCITY  Since human and property resources are scarce, it follows that the goods and services we produce must also be limited. CHOICE  Due 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. Dr. Mazharul Islam

9. 9 Key Tools & Terms of Economics Dr. Mazharul Islam 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 ?

10. 10 Key Tools & Terms of Economics 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).CIA World Factbook Dr. Mazharul Islam

11. 11 Key Tools & Terms of Economics 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 Dr. Mazharul Islam

12. 12 Key Tools & Terms of Economics LAND It does not refer only a plots of ground but also includes all other natural resources such as crude oil, water, air, and minerals etc. LABOR It 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).CIA World Factbook Dr. Mazharul Islam

13. 13 Key Tools & Terms of Economics 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. Dr. Mazharul Islam

14. 14 Key Tools & Terms of Economics 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. Dr. Mazharul Islam

15. 15 Key Tools & Terms of Economics PAYMENTS FOR RESOURCES Wages  payment for use of labor Interest  payment for the use of capital Rent  payment for use of land Profit  reward for entrepreneur’s effort Dr. Mazharul Islam

16. 16 Key Tools & Terms of Economics FOR WHOM? Who gets the goods and services depends on the incomes that people earn. Dr. Mazharul Islam

17. 17 Key Tools & Terms of Economics 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. Dr. Mazharul Islam

18. 18 Key Tools & Terms of Economics GOODS AND SERVICES Goods – Tangible items – Require scarce resources – Satisfy human wants Services – Intangible items – Require scarce resources – Satisfy human wants Dr. Mazharul Islam

19. 19 Circular-Flow Model The 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. Dr. Mazharul Islam

20. 20 Circular-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 Dr. Mazharul Islam

21. 21 Circular-Flow Model Households  As 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 world  Demand the resources  Supply the goods and services  Rest of the world  foreign households, firms and governments Dr. Mazharul Islam

22. 22 Circular-Flow Model Product/Goods markets  Markets in which goods and services are bought and sold. Resource/Factors Markets  Markets in which the resources are exchanged  Labor, or job market is the most important of the resource markets. Dr. Mazharul Islam

23. 23 Circular-Flow Model MARKET Means 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. Dr. Mazharul Islam

24. 24 Macroeconomic Goals Economic Goals Positive Growth Full Employment Economic Efficiency Price Level Stability Economic Freedom Equitable Distribution Economic Security Balance of Trade Dr. Mazharul Islam

25. 25 Macroeconomic Goals Economic Growth Produce 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 Employment Provide suitable jobs for all citizens who are willing and able to do work. It does not mean zero unemployment. Dr. Mazharul Islam

26. 26 Macroeconomic Goals Economic 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. Dr. Mazharul Islam

27. 27 Macroeconomic Goals Economic Freedom Government’s guarantee to businessman, workers and consumers to have a high degree of freedom in their economic activities. Equitable Distribution Ensure that no group of citizens faces poverty while,most others enjoy large wealth. Dr. Mazharul Islam

28. 28 Macroeconomic Goals Economic Security Provide benefits for those who are chronically ill, disabled, laid off, aged, or otherwise unable to earn minimal levels of income Balance of Trade Seek reasonable overall balance with the rest of the world in international trade and financial transactions. Dr. Mazharul Islam

29. 29 Now it’s over for today. Do you have any question? Dr. Mazharul Islam