Introduction to Economics

The Concept of Economics

• Economics is a social science that studies how to manage scarce resources to meet unlimited human needs and wants.
• There are several approaches to define economics:
  • Wealth approach: Economics is the science of wealth, focusing on its accumulation, production, and distribution.
  • Satisfaction of human needs approach: Economics is the science of satisfying human needs, which are diverse and changing.
  • Exchange approach: Economics is the study of exchange, which involves the trade of goods and services.
  • Scarcity approach: Economics is the science of managing scarce resources to meet multiple goals and needs.

Objectives of Economics

• The main objectives of economics are:
  • Efficiency: Optimal use of economic resources.
  • Economic growth: Increase in the amount of goods and services produced by society over time.
  • Economic stability: Price stability and the absence of abnormal fluctuations in the general price level.
  • Economic justice: Equitable distribution of income or output among members of society.

Types of Economic Analysis

• There are two types of economic analysis:
  • Microeconomics: Studies the economy at the level of individual units, such as households and firms.
  • Macroeconomics: Studies the economy as a whole, focusing on aggregate variables like GDP, inflation, and unemployment.

Economics and Other Sciences

• Economics is related to other social sciences, such as sociology, political science, and psychology.
• Economics also draws on natural sciences, such as mathematics and statistics.

The Economic Problem

• The economic problem is the fundamental challenge of satisfying unlimited human needs and wants with limited economic resources.
• The economic problem is characterized by scarcity, choice, sacrifice, and opportunity cost.

Determinants of the Economic Problem

• Economic needs: Essential goods and services that people need for survival.
• Economic resources: Factors of production, such as labor, land, capital, and management.

Solving the Economic Problem

• In a capitalist system, the economic problem is solved through the price mechanism, which balances supply and demand.
• In a socialist system, the economic problem is solved through collective ownership and central planning.

Contemporary Economic Systems

• Capitalist economic system:Characterized by private ownership of the means of production, free markets, and competition.
• Socialist economic system:Characterized by public ownership of the means of production, central planning, and social equality.

Production and Consumption

• Production: The process of transforming economic resources into consumable goods and services.
• Types of production: Industrial, service, and agricultural production.
• Importance of production: Meets needs, creates jobs, increases national income, and leads to economic development.

Savings and Investment

• Savings: The portion of current income not spent on consumption, allocated to building productive capacity.
• Importance of savings: Capital accumulation, economic growth, enhancing future income, and financial strength.
• Factors affecting savings: Income level, interest rates, inflation, economic growth, and psychological and social factors.

Investment

• Investment: The act of using money now to generate more money in the future.
• Types of investment: Domestic, foreign, real, and financial investment.
• Importance of investment: Increased productivity, national income, job creation, and improved infrastructure.

National Income and Its Relationship to GDP, GNP, and NNP

• GDP: Total output inside the country.
• GNP: Total output inside and outside the country by its own residents.
• NNP: GDP minus the depreciation of assets.
• NI: Income received by all country residents inside or outside the country.

Economic Agents and the Mechanism of Income Flow

• Economic agents: Individuals or organizations that make up the economy, such as households, firms, government, and foreigners.

• The economic cycle: The regular ups and downs in economic activity, consisting of depression, recovery, prosperity, and recession phases.### Market and Economics

• A market is an area where supply and demand meet, either directly or indirectly, and can be physical or virtual.

• Types of markets include:

  • Goods and Services Market: where goods and services are bought and sold.
  • Labor Market: where labor is bought and sold.
  • Financial Market: where financial assets, such as stocks, bonds, and securities, are bought and sold.

Money and Banks

• Money is a generally accepted medium of exchange that serves several functions in an economy:
  • Measures the value of goods and services
  • Facilitates exchange
  • Stores value
  • Functions as a medium of payment
• Characteristics of money:
  • Durability
  • Portability
  • Divisibility
  • Fungibility
  • Scarcity
• Banks are financial institutions that deal with money, accepting deposits, making loans, and facilitating various financial transactions.
• Characteristics of banks:
  • Legally recognized
  • Profit-making
  • Central role in the economy
• Types of banks:
  • Central banks: oversee the monetary system and regulate commercial banks.
  • Commercial banks: provide a wide range of services to individuals and businesses.
  • Investment banks: specialize in helping businesses raise capital through investments and financial markets.
  • Islamic banks: adhere to Islamic Sharia principles.
  • Agricultural banks: specialize in providing banking services to farmers.

Unemployment

• Definition of unemployment: a person who is capable of work, willing to work, and actively seeking work but unable to find employment.
• Types of unemployment:
  • Frictional unemployment: a natural result of market processes taking time and information being costly.
  • Cyclical unemployment: occurs as a result of cyclical changes in economic activity.
  • Structural unemployment: occurs as a result of structural changes in the economy, such as technological change or changes in the demand for labor.
  • Hidden unemployment: occurs as a result of non-economic factors, such as lack of job opportunities.
  • Technical unemployment: occurs as a result of technological progress.
  • Seasonal unemployment: occurs as a result of seasonal changes in demand for labor.
  • Part-time unemployment: occurs when a person works less than the hours of work they want or need.
  • Imported unemployment: occurs as a result of international trade.
  • Psychological unemployment: occurs as a result of psychological and emotional factors.
• Causes of unemployment:
  • Recession
  • Technology
  • Trade
  • Government policies
  • Skills mismatch
  • Demographics
  • Labor market rigidities
  • Personal choices
  • Natural disasters
  • Political instability
• Effects of unemployment on the economy:
  • Reduced output and consumption
  • Loss of tax revenue
  • Increased government spending
  • Skill erosion
  • Wage pressures
  • Long-term negative impact
  • Increased crime rates
  • Reduced social mobility
  • Negative psychological impact
• Solutions to unemployment:
  • Encourage youth entrepreneurship
  • Provide accurate information about the labor market
  • Reform the education system
  • Link educational and economic institutions
  • Retrain redundant labor
  • Review wage policy
  • Encourage entrepreneurs to create job opportunities
  • Develop the agricultural sector
  • Benefit from the experiences of other countries

Inflation

• Definition of inflation: a sustained increase in the general price level of goods and services in an economy over a period of time.
• Types of inflation:
  • Creeping inflation: a gradual and slow rise in prices
  • Stagflation: a faster rise in prices, leading to a noticeable erosion of the purchasing power of money
  • Hyperinflation: a rapid and uncontrolled rise in prices, leading to the loss of significant value by the currency
  • Open inflation: occurs in the presence of economic imbalances, such as a shortage of production or an increase in demand
  • Suppressed inflation: occurs in the presence of government controls on the prices of goods and services
  • Hidden inflation: occurs when the government imposes strict controls on prices
• Causes of inflation:
  • Demand-pull inflation: when the total demand for goods and services in an economy exceeds the available supply
  • Cost-push inflation: when the total supply of goods and services in the economy that can be produced falls
  • Wage increases
  • Money issuance
  • Lack of stability
• Impact of inflation:
  • Decreased purchasing power
  • Redistribution of wealth
  • Higher interest rates
  • Reduced investment
• Economic policies to treat inflation:
  • Fiscal policies:
    • Cutting government spending
    • Raising taxes
    • Wage freeze policy
  • Monetary policies:
    • Raising interest rates
    • Open market policy (Selling assets)
    • Reducing the money supply
    • Increasing reserve requirements