CHAPTER

Economics and Economic

Reasoning
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 Chapter Goals
• Define economics and identify its components.
• The main difference Microeconomics and
Macroeconomics
• What is the Economic Problem?
• Difference between economic resources and
free resources
• What are the main three economic
questions?

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 What is Economics?

Economics is a social science that study how the

society allocates scarce recourses among
alternative needs and wants.

Economic theory is divided into two main

branches:
1- Microeconomics

2- Macroeconomics
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 Microeconomics and Macroeconomics
Economic theory is divided into two parts:
1. Microeconomics is the study of individual
choice, and how that choice is influenced by
economic forces.

2. Macroeconomics is the study of the economy as

a whole.

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Microeconomics and Macroeconomics: some examples

Microeconomics studies things such as:

• Consumers and Producers (buyers and sellers).
• Markets and Equilibrium.
• Elasticity.

Macroeconomics studies such things as:

• Inflation
• Unemployment
• Economic growth

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 What is the Economic Problem?

The Economic Problem:

As,

• Human needs and unlimited wants.

• Resources are limit (Scarce).

So,

• The economic problem is the problem of having needs and

unlimited wants, but scarce resources to satisfy them.

• Needs: the essentials of life, such as food and shelter

• Wants: desires for non-essential items

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 Scarcity
Scarcity exists because individuals want more than
can be produced.

Scarcity means the resources (goods and services)

available are too few to satisfy individuals’ desires.

The degree of scarcity is constantly changing.

Scarce resources: the limited nature of resources, which

underlies the basic economic problem.

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Types of resources:

Economists divided the resources into two types, which are:

1- Free resources 2- Economic Resources

1-Free resources: resources are free if it can produce all of the

goods people want or need it to produce... and then some. Being
free, however, doesn't mean a resource is not limited. Resources
are free because the available quantity exceeds the desired use.
Examples: air
Does this mean that air (Free resource) is NOT valuable?
Air is extremely valuable. It provides one of the most important
inputs into human life. It's a free resource because there's
enough to go around.
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2- Economic Resources:
Economic resources are resources that are used in all
types of production. The economic resources that are
available to a society are the factors of production.
They include:
• Land ( land is paid rent)
• Labor ( labor is paid salary or wage)
• Capital ( Capital is paid interest)
• Entrepreneur ( Entrepreneur is paid profits)
These factors of production receive returns (rent,
salary or wage, interest and profit) .
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Factors of Production (Economic resources):

The factors of production are the resources that the economy

uses to produce goods & services.

Factors of production include:

labor
land
Capital

entrepreneur

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What are the main three economic questions?
It is important to know that all countries suffer from the
economic problem. There are three basic economic questions
you should ask when deciding how to use scarce resources.
These three questions questions are:

1. What, and how much, to produce

2. How to produce it

3. For whom to produce it

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1-What goods and services should an economy produce?
Should the economic resources be directed towards agriculture,
manufacturing or services?
2-How should goods and services be produced?
Should we apply:
• labour intensive
• Or land intensive.
• Or capital intensive?

3-Who should get the goods and services produced?

The feature of the distribution. Should the production directed
more for the rich? for those who work hard?

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