College of Business Administration
ECON 1311: Inroduction to Macroeconomics
Group Project: Introduction of Basic Economics (10%)
Zakia Al Asaad
201100622
Mona Hilal
201001611
Hanan Al Muraikhy
201001870
Bashayer Al Dossary
201001284
Deema Qubori
201002594
Instructor: Dr. Mahmood O. E. Hamad
Fall 2012
November 24, 2012
Introduction
Economy plays an important part in our life. Every day, people make economic decisions without
even noticing. Choosing school major or a life occupation is an economic decision. Choosing
between mobile brands whether an individual want to have a blackberry or IPhone is an
economics decision. Due to that, people need to have the knowledge about the basics of economy
and how to choose goods and services and how to allocate their resources and spend their
incomes.
In this report, we will discuss the meaning of economics, what is scarcity and efficiency and why
they terms are important in economics. We will also discuss the difference between
microeconomics and macroeconomics, various economy systems, and normative and positive
economies. We will study the production and consumption of goods and services in Saudi Arabia
and what do we mean by opportunity cost.
What is Economy?
Economics is the study of how individuals and society use to deal with scarce resources to get the
maximum benefits of it. Everyone applies economics in every single purchase in daily life,
economics has been exist a long time but it has not been recognized until Adam Smith, the father
of modern economics, studied and identify the philosophy of economics (Samuelson &Nordhous,
2010).
The ultimate purpose of economic science is to understand the logic of economics, how to
allocate scarce resources, how to produce efficiently and effectively, and how to reduce the
common problems that might face nations’ economics. By achieving this ultimate goal, economy
1
will contribute in the development of those nations, raise the standards of living and satisfy
individuals’ needs and desires.
Macroeconomics vs. Microeconomics
Economics is divided in two parts: microeconomics and macroeconomics, depending on way
economy function within a whole nation or as a single market. It is clearly known from the Latin
prefix "micro-" which means small, refer to the study of the behavior of small units in the
economy such as households, firms and markets. It is concerned with demand and supply,
allocation of resources and factors of production of single markets. These are individual entities
that determine and contribute to the economic strengths and weaknesses of a nation (Rodrigo,
2012).
On the other hand, the prefix "macro-" means large or wide, which is the study of overall
production and consumption of economy. Basically, it studies how all markets interact to
generate aggregate demand and supply of a nation. It answers the questions of inflation and
unemployment, how banks manage money and interest and what are the causes of financial crises
like the ones happening in the United States. It also studies gross domestic product (GDP) of
nations. However, there is a relationship between microeconomics and macroeconomics in that
total production and consumption levels are the result of choices made by individuals (Rodrigo,
2012).
2
Scarcity and Efficiency
In Economics, there are two important ideas that run the world: goods are scared and societies
must use its resources efficiently in order to produce those goods. The fact of scarcity and the
desire of efficiency are the real concerns in economic. Without managing the scarce resources
first in order to get the efficiency desired, the economy of any society will be a mess. The term
“Scarcity” simply means shortage. Having scarce resources means having a limited amount of
what individuals demand and desire. On the other hand, efficiency means making the best use of
a society’s limited or scares resources to satisfy the wants and needs of people within that society.
This can be implemented by having an advanced technology and a great management in
production (Samuelson & Nordhous, 2010).
In Saudi Arabia, water is a scarce resource due to the nature or the land. It is a huge desert with
no permanent rivers or lakes and very little rainfall and saltwater seas. Therefore, it has used
many innovative ways and techniques to provide enough water to support its development and
satisfy its population. The first technique is by digging the ground to get water for aquifers.
Another technique is the desalination of sea water. In fact Saudi Arabia now is the world’s largest
producer of desalinated water (Royal Embassy of Saudi Arabia, n.d.).
Production and Consumption of Goods and Services in Saudi Arabia
Before starting the production of any good or service, there are some questions that should be
answered about the input, the process, the techniques of production and the output. How much
output can be produced from a specific amount of input? By using which process or technique of
production? And for whom are these goods produced? (Samuelson & Nordhous, 2010).
3
Production is the process of getting the maximum output that can be produced from a given
amount of input for a given level of technology and that can benefit a firm or a whole country as
an aggregate production. Input used in production are called factors of production and they fall
into three categories: Land or generally, natural resources, labor, and capital resources. Natural
resources are the gif of nature to our land and in Saudi Arabia, the most valuable natural resource
is oil. Moreover, its revenues can be used as a capital or in acquiring capital in case of machines,
buildings and automobiles. It is used in manufacturing, Production of gasoline and diesel fuel,
and so on.
On the other hand, consumption is related to GDP. Actually, it is one of the major component of
GDP. Consumption is the total amount of spending by individuals and nations on goods and
services.
In Saudi Arabia, people consume food, clothing, motor vehicles, transportation,
housing furniture and equipment, education, and medical care. However, consumption can vary
from a group to group and from social class to another. Depending on this idea of consumption,
producers should decide whether to produce necessities or luxuries. Poor families tend to spend
their incomes on necessities of life like food and shelter while other people with a higher social
class will spend their incomes in luxuries and fancy things (Samuelson & Nordhous, 2010).
Economy Systems: Market, Command and Mixed Economy
In economics, there are many different ways to deal with production and consumption and to
answer the questions what, how and for whom. There is many mechanisms that societies might
use to allocate their resources and make economic decisions. Generally, we have three types of
economic systems: market, command and mixed economy. Each of those systems has an extreme
case. First, the command economy where the government of the nation make all the decisions
4
about production and distribution of goods and services. A good example is Soviet Union where
government own every single thing in that part of the world including land and capital
(Samuelson & Nordhous, 2010).
Second type is market economy where individuals or firms make the major economic decisions
of production and consumptions such as in China. Basically, individuals and firms control the
whole market including the price system, profits and losses. In this type of economy, the role of
government polices is really limited. An extreme case of this type of economy is laissez-faire
where the government keep its hands off completely and this is what was happening in North
Korea (Samuelson &Nordhous, 2010).
Nowadays, most of the contemporary societies have a mixed economy which is a combination of
both command and market. An examples of this type is the United States of America Arabia
where government and firms work together in making economic decisions (Samuelson
&Nordhous, 2010).
Why Economy Fluctuates?
Every country is facing a fluctuation in business cycle during time between boom and slump in
economic activities and this depends on the demand and supply. When the demand exceeds
supply, the economy will move to expansion and booming this will increase the cost of
production by increasing the prices of inputs. Then, the prices of output will increase which will
result a decrease in the demand to be less than supply and moving the economy to recession
(slump).
5
The government plays an important role in this fluctuation by the economic policies monetary
such as money supply and interest rate. Both used to change the economy from booming to slump
or from slump to boom and fiscal policy by changing the government expenditures and tax
revenues to control the economy and stabilize it. As a result, this will fluctuate the economy. An
example is the recession in USA and most of high income countries between 2007 and 2009 and
with government policies, the economy start improving and growing in the years 2010 and 2011
(Samuelson &Nordhous, 2010).
Positive Economics vs. Normative Economics
Positive economics is a branch of economics that is free of emotions, value judgments and
predictions about economics relationships. It usually deals with "what is", not with "what ought
to be". The statement "A poor coffee harvest will raise coffee prices and people will drink more
tea", is a good example of positive economic statement. On the other hand, positive statements
might be either right or wrong. For example, the positive scientific statement that "The moon is
made up of green cheese" is clearly wrong (Byms, n.d).
Moreover, positive economics describe equilibrium levels at certain prices and quantities but has
no interference on whether it is an appropriate price of quantity or not. It also examines the
quantity theory of money and the interest rate regarding of whether the interest rate is good or
bad. That’s why, if there is disagreement between two different views on something, they can
learn from whether their disagreement stems from different normative views or from different
positive views. If it is on normative grounds, they know that their disagreement lies outside the
area of economics, so the economic theory and any evidence will not bring them together.
6
However, if their disagreement is on positive grounds, then further discussion, study, and testing
may bring them closer together (Cyber Economics, n.d.).
As we defined positive economic as accurate ideas that are free of values that need to be tested
normative economic is 90% counteractive with positive economic in that normative economic is
concerned more about values and predictions of economies future. Normative economic usually
using statements like "should" or "ought". For example, you might agree with the army of
economists who think that government regulations "should" be reformed if specific policies are
unarguably inefficient, but even this view is intrinsically normative (Byms,n.d.).
However, there is only few normative issues that settled by looking at verification because we
need to have faith and a good argument in order to judge on values, not scientific proof.
Regarding for positive economics that can immediately be settled by verification, but some areas
are not. For example, almost everyone favors high employment and stable price-level, but
economists may have concerns about how to cure economic twists because it is hard to find the
right verification and then accuracy in changing conditions (Byms, n.d).
The Opportunity Cost
Because of scarcity in economic resources, making choices can affect the opportunity to do
something else. There are always some alternatives that people will let go when they decide. This
is called “opportunity cost”. It is the value of goods and services that people give up in order to
get what they really want and need (Samuelson &Nordhous, 2010). A good example the
opportunity cost of studying at Prince Mohammed University. If I decided to study at PMU, I
7
gave up a job that I can get without studying or a free time and money that I can spend on
something else.
Conclusion
Economics became as an important part in everyone's life. Every single decision we make is part
of economy without realizing. It is simply the study of how societies use their resources
efficiently to produce valuable goods and services to distribute them among individuals. In this
paper, we have discussed the overall meaning of economics and how it is affect our life if we did
not deal with it efficiently, the difference between macroeconomics and microeconomics, scarcity
and efficiency, we also have discussed the production of goods and services specifically in Saudi
Arabia and what are the factors that production rely on, economy system and it's three parts,
command, market, and mixed economy. What do we mean by economy fluctuating and why it
happens, the positive and normative economics, and finally the opportunity cost.
8
References
Byrns, R. (n.d.). Positive vs. Normative Economics. Retrieved November 23, 2012 from
http://www.unc.edu/depts/econ/byrns_web/Economicae/Figures/Positive-Normative.htm
Cyber Economics. (n.d.). Positive vs. normative economics. Retrieved November 23, 2012 from
http://ingrimayne.com/econ/Introduction/Normativ.html
Rodrigo, G. ( March 28, 2012). Micro and Macro: The Economic Divide. Retrieved November
23, 2012 from http://www.imf.org/external/pubs/ft/fandd/basics/bigsmall.htm
Royal Embassy of Saudi Arabia in Washington D.C. (n.d.). Water Resources. Retrieved
November 20, 2012 from http://www.saudiembassy.net/about/countryinformation/agriculture_water/Water_Resources.aspx
Samuelson, P., &Nordhous, W. (2010). Economics. New York, US: McGraw-Hill.
9