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Copyright © 2004 South-Western/Thomson Learning
Introduction^1
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Some Economic Terms
- Every field of study has its own terminologies
- Mathematics
- Derivatives, Integrals, Algebra, Matrices etc.
- Economics
- Demand, Supply, Consumption, Production, Elasticity etc.
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Microeconomics and Macroeconomics
- Microeconomics focuses on the individual parts of the economy. - How households and firms make decisions and how they interact in specific markets
- Macroeconomics looks at the economy as a whole. - Economy-wide phenomena, including inflation, unemployment, and economic growth
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Economic Systems
- Command or planned economy:
- A command or planned economy is a mode of economic organization in which the key economic functions – for whom, what, how to produce are principally determined by government directive.
- In the past we have seen this system in Russia and China.
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Economic Systems
- Islamic economic system:
- The economic system based on the teachings of Islam. This system is based on Islamic values and Islamic rules i-e zakat, ushr, etc. Islam forbids both the taking and giving of interest.
- Ushr is zakat on agricultural production(one- tenth).
- The Islamic economic system ensures the greater circulation of money. docsity.com
Economic Systems
- In the field of consumption certain items of food are unlawful such as dead animals, blood, swine flesh and animals slaughtered in the name other than that of Allah.
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Economic Models
- Economists use models to simplify reality in order to improve our understanding of the world
- Two of the most basic economic models include: - The Circular Flow Diagram - The Production Possibilities Frontier
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Our First Model: The Circular-Flow Diagram
- The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.
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Flow in an Economy
- The flow of goods, services are shown in circular flow diagram.
- The Households and Firms are two major entities.
- Firms use various economic resources like land, labor and capital, which are provided by households.
- Firms make payment of money to the households for receiving various resources.
- The HH in turn make payments of money to business organizations for receiving consumer goods and services.
- These two entities show interdependence between themselves in a simple economy.
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Our First Model: The Circular-Flow Diagram
- Firms
- Produce and sell goods and services
- Hire and use factors of production
- Households
- Buy and consume goods and services
- Own and sell factors of production
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Our First Model: The Circular-Flow Diagram
- Factors of Production
- Inputs used to produce goods and services
- Land, labor, and capital
- Market is a geographically defined area where buyers and sellers interact to determine the price of a product or a set of products.
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- Land: includes the land used for agriculture or industrial purposes. Further all natural materials such as: water, air, minerals, sunshine, plant and tree growth, as well as the land itself which is applied to the production process.
- Labor: Any mental or physical work done for the sake of reward. The efforts, skills, and knowledge of people which are applied to the production process. (Human capital)
- Capital: Real Capital (Physical Capital )
- Tools, buildings, machinery -- things which have been produced and used in further production
- Financial Capital: Assets and money which are used in the production process
Economics
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Figure 2 The Production Possibilities Frontier
Copyright©2003 Southwestern/Thomson Learning
Production possibilities frontier
A
B
C
Quantity of Cars Produced
2,
600
1,
0 300 700
2,
3,
1,
Quantity of Computers Produced
D
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PPF
- If all the resources are used for the production of cars, then the economy would produce 1000 cars and no computers.
- If all the resources are used for the production of computers, then the economy would produce 3000 computers and no cars.
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