Tell me and I forget.

Teach
me and I remember. Involve
me and I learn.
Benjamin Franklin

1
 Economics,
Arab World Edition
R. Glenn Hubbard, Anthony Patrick OBrien,
Ashraf Eid, Amany El Anshasy,

Chapter 1
Economics: Foundations and
Models

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 Economics: Foundations and Models

We use economics to answer questions such as the following:

How are the prices of goods and services determined?
Chapter 1: Economics: Foundations and Models

How to spur economic growth?

How does pollution affect the economy, and how should

government policy deal with these effects?

Why do firms engage in international trade, and how do

government policies affect international trade?

What role central bank play to stabilize the economy?

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 Economics: Foundations and Models 4.1

Scarcity The situation in which unlimited

wants exceed the limited resources available
Chapter 1: Economics: Foundations and Models

to fulfill those wants.

Economics The study of the choices people

make to attain their goals, given their scarce
resources.

Economic model A simplified version of

reality used to analyze real-world economic
situations.

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 Three Key Economic Ideas 4.1

Market A group of buyers and sellers of a

good or service and the institution or
arrangement by which they come together to
Chapter 1: Economics: Foundations and Models

trade.

Throughout this book, as we study how people make choices

and interact in markets, we will return to three important ideas:

1 People are rational.

2 People respond to economic incentives.

3 Optimal decisions are made at the margin.

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 Making Will Women Have Less or More Babies
the if the Government Pays Them To?
Connection
Chapter 1: Economics: Foundations and Models

The Estonian government is

providing economic
incentives and is looking for
ways to provide additional
incentives to raise the
birthrate further. Did they
succeed?

Some Arab governments

are trying to discourage
women from having more
babies? Did this work?

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 The Economic Problem That Every Society Must Solve

Trade-off The idea that because of scarcity, producing

more of one good or service means producing less of
Chapter 1: Economics: Foundations and Models

another good or service.

Opportunity cost The highest-valued alternative that

must be given up to engage in an activity.

Trade-offs force society to make choices, particularly when

answering the following three fundamental questions:

1 What goods and services will be produced?

2 How will the goods and services be produced?
3 Who will receive the goods and services produced?

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 The Economic Problem That Every Society Must Solve
Centrally Planned Economies versus Market Economies

Centrally planned economy An

Chapter 1: Economics: Foundations and Models

economy in which the government

decides how economic resources will
be allocated.

Market economy An economy in

which the decisions of households
and firms interacting in markets
allocate economic resources.

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 The Economic Problem That Every Society Must Solve
The Modern Mixed Economy

Mixed economy An economy in

Chapter 1: Economics: Foundations and Models

which most economic decisions result

from the interaction of buyers and
sellers in markets but in which the
government plays a significant role in
the allocation of resources.

Where does the Arab World Stand?

Most Arab economies are today
believed to be mixed economies

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 The Economic Problem That Every Society Must Solve
Efficiency and Equity

Productive efficiency
Chapter 1: Economics: Foundations and Models

Allocative efficiency

Equity The fair distribution of

economic benefits.

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 Economic Models
Normative and Positive Analysis
Chapter 1: Economics: Foundations and Models

Positive analysis Analysis

concerned with what is.

Normative analysis Analysis

concerned with what ought to
be.

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 Economics as a Social Science

Study the actions of individuals

Similarities to Psychology, Political Science, Sociology
Chapter 1: Economics: Foundations and Models

Plays an important role in formulating policies in

environment, health care, poverty, etc.

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 Microeconomics and Macroeconomics

Microeconomics The study of how

households and firms make choices,
Chapter 1: Economics: Foundations and Models

how they interact in markets, and how

the government attempts to influence
their choices.

Macroeconomics The study of the

economy as a whole, including topics
such as inflation, unemployment, and
economic growth.

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 Appendix
Using Graphs and Formulas

A graph is like a street mapit is a simplified version of reality.

Graphs of One Variable

Chapter 1: Economics: Foundations and Models

Graphs of Two Variables

Slopes of Lines
Taking into Account More Than Two Variables on a Graph
Positive and Negative Relationships

Are Graphs of Economic Relationships Always Straight Lines?

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 Appendix
Formulas
Formula for a Percentage Change

One important formula is the percentage change.

Chapter 1: Economics: Foundations and Models

The percentage change is the change in some

economic variable, usually from one period to the next,
expressed as a percentage.

GDP2007 GDP2006
x 100
GDP2006

Value in the second period - Value in the first period

Percentage change x 100
Value in the first period

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