‫ص ادة‬

‫‪ECON 107‬‬
‫م‬

‫ا ا د ات‬ ‫صد ة‬ ‫د ة‬ ‫ا ات‬ ‫ا ت صا‬

‫راض ت ار ة‪.‬‬ ‫ا ت دا‬
 Econ107 (Ch 1)
Scarcity: is the inability to satisfy all our wants. It occurs when we want more than
what we can get.
Incentive: is a reward that encourages an action or a penalty that discourages an
action.
Want more than you can get face scarcity make choices depending on
incentives.
Economics
The social science that studies the choices that (individuals, businesses, and government)
make as they cope with scarcity and incentives that influence the choices.

Microeconomics Macroeconomics
is the study of choices that individuals and is the study of the performance of the national and
businesses make. Ex: number of books printed global economics. Ex: number of unemployment.

Goods and services: are the objects that people value and produce to satisfy human
wants.
Factors of production: the production resources and they are grouped into 4 categories:
1- Land: the gifts of nat re (stones, ater, etc. )
2- Labor: the work time and work effort
3- Capital: construction that businesses use (machines, equipment, etc.)
Human capital depends on the quality of labor (knowledge, skills, etc.)
4- Entrepreneurship: human resources

Land Rent, Labor Wages, Capital Interest, Entrepreneurship Profits

Interest: 1- Self-interest: choices you think they are best for you
2- Social interest: choices that are the best for the society as a whole.
And it has 2 dimensions efficiency and equity.

6 key ideas define the economic way of thinking:

1) A choice is a trade-off > which means give something to get another.
2) Make rational choices that compares costs and benefits to achieves the greatest
benefit over cost.
3) Benefit: is what you get from something.
4) Cost: what you give to get something.
5) Choices respond to incentives.
6) Most choices are ho m ch choices made at the margin.

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
Opportunity cost: the highest valued alternative that must be given up to get
something.
Marginal benefit: the benefit from pursuing an incremental increase in an activity.
Marginal cost: the opportunity cost from pursuing an incremental increase in an
activity.
If marginal benefit > marginal cost, your rational choice is to do more of that activity
Positive statement can be tested, while normative statement expresses an opinion and
cannot be tested.
Economic model: is a description of some aspects of the economic world.
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Econ107 (Ch 2)
Production possibilities frontier (PPF): is the boundary between combinations that can
be produced and those that cannot.
We achieve production efficiency if we can't produce more of one good without
producing less from another.
An points on the frontier are (efficient) and (attainable). Ex: D
An points inside the frontier are (inefficient) and (attainable). Ex: Z
An points outside the frontier are (unattainable).
On the inefficient points resources are either (unemployed) or (misallocated).
*Every choice along the PPF involves trade-off.
Q: Why the PPF bows outward? A/ Because resources are not equally productive in all
activities.
*The quantity produced of any good has (+) relationship with its opportunity cost.
Preferences: are a description of a person s likes and dislikes.
Marginal cost: Is the opportunity cost of producing one more unit
of it. Q increase MC increase
Marginal benefit: is the benefit received from consuming one more
unit of it. Q increase MB decrease.
is measured by the amount that a person is willing to pay
for one more unit of something.
*The marginal benefit curve shows the relationship between the marginal benefit of a
good and the quantity of that good consumed.

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
The principle of decreasing marginal benefit: the more we have of any good, the
smaller is its marginal benefit and the less we are willing to pay for an additional unit
of it.
Allocative efficiency: is the point on the PPF at which marginal benefit= marginal cost
and their curves intersect each other.
If we produce less MB exceeds MC get more value from resources by
producing more.
If we produce more MC exceeds MB get more value from resources by
producing less.
If we produce efficient quantities MC equal MB can't get more value from
resources.
Economic growth: on increase in the standards of living 2 key factors influence
economic growth:
1) Technological change: Is the development of new goods and better ways of
producing goods and services.
2) Capital accumulation: is the growth of capital resources.
Comparative advantage: person can perform the activity at a lower opportunity cost
than anyone else.
Absolute advantage: person is more productive than others.
*Absolute advantage involves comparing productivities while comparative
advantage involves comparing opportunity cost.
To make coordination work, 4 complementary social institutions have evolved:
1) Firms: economic unit that hires factors of production and organizes those factors to
produce and sell.
2) Markets: Is any arrangement that enables buyers and sellers to get information and
do business with each other.
3) Property right: the social arrangement that govern ownership, use, and disposal of
resources.
4) Money: is any commodity or a token that is generally acceptable as a means of
payment.
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‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
 Econ107 (Ch 3)
First: Demand
Competitive market: is a market that has many buyers and sellers so no single buyer or
seller can influence the prices.
Money prices of a good: the amount of money needed to buy it.
Relative price of a good: is the ratio of its money price to the money price of the next
best alternative good.
Q: What if you demand something? A/ Then you 1 -want it, 2 -can afford it, 3 have
made a definite plan to buy it.
Wants: Are the unlimited desires or wishes people have. Demand reflects our decision
about which wants to satisfy.
Quantity demand: The amount that consumers plan to buy during a particular time,
and at a particular price.
Law of Demand: Other things remaining the same the higher the price of a good,
the smaller is the quantity demanded. And the lower the price of a good, the larger is
the quantity demanded.
Q: Why does a change in the price affects the quantity demanded? A/ two reasons:
1) Substitution effect: When the relative price (opportunity cost) of a good or service
rise, people seek substitutes, so the quantity demanded of that good or services
decrease.
2) Income effect: When the price of a good or service rise relative to income people
cannot afford all things, they previously bought so the quantity demanded of the
goods or services decreased.
* Demand refers to the entire relationship between the price and the quantity
demanded of the good.

DEMAND
Movement = Change in price Shift = Change in Demand

Rise Fall Increase Decrease

QD decrease QD increase Shift rightward Shift leftward
movement upward movement downward

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
 Changing in 6 factors will shift the curve right when increase or left when decrease:
Factor Change in factor Change in demand Shift
Related substitute Increase Increase Rightward
goods complement Decrease Increase Rightward
Expected future prices Increase Increase Rightward
Income Increase Increase Rightward
Expected future income Increase Increase Rightward
Population Increase Increase Rightward
Preferences It can't be determined because it's different from person to another.
The end of MID ONE part

Second: Supply
Q: What if a firm supplies good?
A/ Then: 1- Has the resources and technology to produce it.
2- Can profit from producing it. 3- Has made a definite plan.
Quantity supplied: is the amount that producers plan to sell during a given time at a
particular price.
*Supply reflects a decision about which technologically feasible item to produce.
Law of Supply: other things remaining the same the higher the price the greatest is
the quantity supplied, and the lower the prices the less is the quantity supplied.
As the quantity produced increase the marginal cost of producing a good will also
increase.
The supply curve shows the relationship between the quantity supplied and its price.
It is also a minimum-supply-price curve.

SUPPLY
Movement = Change in price Shift = Change in Supply

Rise Fall Increase Decrease

QS increase QS decrease Shift rightward Shift leftward
movement upward movement downward

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
Changing in 6 factors will shift the curve right when increase or left when decrease:
Change in
Factor Change in factor shift
supply
Prices of factors of a production Increase Decrease Leftward
Prices of related Substitute Increase Decrease Leftward
goods produced Compliment Decrease Decrease Leftward
Expected future prices Increase Decrease Leftward
Number of suppliers Decrease Decrease Leftward
Technology Decrease Decrease Leftward
State of nature Natural disasters Decrease Leftward

Third: Equilibrium
Equilibrium: is a situation in which opposing forces balance each other. it occurs in
the market when the price balances the plans of buyers and sellers.
Equilibrium price: is the price at which the quantity demanded = the quantity supplied.
Equilibrium quantity: is the quantity bought and sold at the equilibrium price.
Price as a regulator:
QS exceeds QD There is a surplus Surplus forces the price down.
QD exceeds QS There is a shortage Shortage forces the price up.
QS equal QD No shortage or surplus There is no price adjustments.
Change in equilibrium
Change in demand Change in supply

Demand increase shift rightward Supply increase shift rightward

shortage in original price price surplus in original price price fall
rise and QS increase. and QD increase.
Demand decrease shift leftward Supply decrease shift leftward
surplus in original price price falls shortage in original price price rise
and QS decrease. and QD decrease.

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Econ107 (Ch 4)
Price elasticity of demand: a unit of free measure of the responsiveness of the
quantity demanded of a good to a change in the price when percentage change in QD
P.E.D = percentage change in price
all other influences remain the same.

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
 There are 5 main categories of demand:
1) Inelastic: 2) Elastic: 3) Unit elastic: 4) Perfectly inelastic: 5) Perfectly elastic:
‫طب ر ر‬ ‫طب ر‬ ‫ا ر‬ ‫ا‬ ‫طب‬ ‫طب دما ر‬ ‫ا ر‬ ‫ا‬ ‫طب‬
) ‫( ر ر‬ ) ‫( ر ر ر‬ P.E.D = 1 P.E.D = 0 P.E.D = infinity
P.E.D < 1 P.E.D > 1 %change in QD = QD doe n change percentage change in
%change in QD < % change in QD > %change in price. when price change. QD is infinity when
%change in price. % change in price. price change.

There are 3 factors that influence the elasticity of demand:

1. Closeness of substitutes: the closer the substitutes for a good, the more elastic is the
demand for the good.
2. The proportion of income spent: the greater the proportion of income consumers
spend in goods, the larger is the elasticity.
3. Time elapsed since price change: the more time consumers have to adjust to a price
change; the more elastic is the demand.
Elasticity along a linear demand curve:
Price above the midpoint of the demand curve demand is elastic.
Price at the midpoint of the demand curve demand is unit elastic.
Price below the midpoint of the demand curve demand is inelastic.
Total revenue (TR): is the price of the good multiplied by the quantity sold. TR = P× Qsold
The change in TR due to a change in price depend on the elasticity of demand:
Elastic: 1% price cut, increase Qsold by more than 1% and total revenue increase.
Unit elastic: 1% price cut, increase Qsold by 1% and TR remain unchanged.
Inelastic: 1%price cut, increase Qsold by less than 1% and total revenue decrease.
Total revenue test: is a method of estimating the P.E.D by observing the change in
total revenue that results from price change, when other influences remains the same.
Your Expenditure and your elasticity:
1. If your demand is elastic: a 1% price cut increases the quantity, you buy by more
than 1% and your expenditure increase.
2. If your demand is unit elastic: a 1% price cut increases the quantity, you buy by 1%
and o r e pendit re doesn t change.
3. If your demand is inelastic: a 1% price cut increase the quantity, you buy by less
than 1% and your expenditure decrease.

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
Income elasticity of demand: measures how the QD of a good respond to a change in
income other things remaining the same.
1-Income elastic: I.E.D >1 normal good. 3- I.E.D<0 inferior good.
2-Income inelastic: 0< I.E.D >1 normal good.
Cross elasticity of demand: measures the responsiveness of demand for a good to a
change in the price of a substitute or a compliment, other things remaining the same.
Substitute: Increase in the QD when the price of a substitute rise. (+ relationship)
Compliment: decrease in the QD when the price of a compliment rise. ( relationship)
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Econ107 (Ch 8)
The choices you make as a buyer of goods are influenced by two factors:
1. Consumption possibilities: are all the things that a consumer can afford to buy.
Limited by income and the price of good.
2. Preferences (utility): determine the benefits or satisfaction a person receives
consuming a good.
Total utility: is the total benefit the person gets from the consumption of goods.
Generally, more quantity gives more utility.
Marginal utility: is the change in total utility that results from one unit increase in the
quantity of a good consumed.
Principle of diminishing marginal utility: as the quantity consumed of a good increase
the marginal utility decrease.
*The utility-maximizing combinations is called a consumer equilibrium.
A consumer's total utility is maximized by:
1- Spend all available income.
2- Equalize the marginal utility per dollar for all goods.
Marginal utility per dollar: is the marginal utility from a good divided by its price.
MU MU
Total utility is maximised when .
P
=
P

Q: What If MU
P
> MU
P
? A/ Then spend less on 2 and more
on 1 MU1 will decrease and MU2 will increase then they will be equalized.
Q: What If MU
P
< MU
P
? A/ Then spend more on 2 and less on 1 MU2 will decrease
and MU1 will increase and then they will be equalized.

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
 A fall in the price of good1: when P1 falls, the QD1 increase The demand curve
slopes downward. Consumer increase the Q of good1 and decrease the quantity of
good2 to restore consumer equilibrium.
A rise in the price of good2: when P2 rises, the QD2 decrease. The demand curve
slopes upward. Consumer decrease the Q of good2 and increase the Q of good1 to
restore consumer equilibrium.
The end of MID TWO part

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Econ107 (Ch 11)
Firm makes decisions to achieve its main objective: profit maximization
Decision time frames:
Short run: Is a time frame in which the quantity of one or more resources used in a
production is fixed. Ex: fixed capital, others can be changed.
Long run: Is a time frame in which the quantities of all resources can be varied.
*The short run decisions are easily reversed, while long run decisions not.
Sunk cost: Is a cost incurred by the firm and cannot be changed. Sunk costs are
irrelevant to current decisions.
To increase output in the short run, firms must increase the amount of Labor
employed. There are 3 concepts describe the relationship between output and the
quantity of Labor employed:
1) Total product (TP): is the total output produced in a given period.
2) Marginal product (MP): is the change in total product that results from a one-unit
increase in the quantity of labor employed.
3) Average product (AP): Is equal to total product divided by the quantity of Labor
employed.
Quantity of Labor employed increase The total product increase. The marginal
product increase initially but eventually decreases, and average product decrease.
Increasing marginal returns: Initially, the marginal product of a worker exceeds the
marginal product of the previous worker. Increasing marginal returns arise from
increased the specialization and division of labor.
Diminishing marginal returns: eventually, the marginal product of a worker is less
than MP of the previous worker. Diminishing marginal returns arise because each
additional worker has less access to capital and less space in which to work.

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
The Law of diminishing returns: as a firm uses more of variable inputs with a given
quantity of fixed inputs, the MP of the variable input eventually diminishes.
To produce more output in the short run the firm must employ more labor which
means that it must increase their costs.
1. Total cost (TC): Is the cost of all resources used. TC= TFC + TVC
a. Total fi ed cost (TFC): is the cost of the firms fi ed inp ts. FC don t change
with output.
b. Total variable cost (TVC): is the cost of the firm's variable inputs. VC do
change with output.
2. Marginal cost (MC): is the increase in TC that results from one-unit increase in TP.
a. Over the output range with increasing marginal returns, MC fall as output
increases. MP MC
b. Over the output range with diminishing marginal returns, MC rise as output
increases. MP MC
3. Average total cost (ATC): is total cost per unit of output. ATC= AFC + AVC
a. Average fixed cost (AFC): is total fixed cost per unit of output.
b. Average variable cost (AVC): is total variable cost per unit of output.
Q: Why AVC and ATC curves are U-shaped?
A/ Initially, MP exceeds AP, which bring rising AP and falling AVC.
eventually, MP falls below AP, which brings falling AP and rising AVC.
Average & marginal product & cost: (see graph on the next page)
The firm's cost curves are linked to its product curves.
MC is at its minimum at the same output level at which MP is at its maximum.
When MP MC.
AVC is at its minimum at the same output level at which AP is at its maximum.
When AP AVC.

The position of a firm's cost curves depends on two factors:

1- Technology: *An increase in productivity shifts the product curves upward and
the cost curve downward.
*If a technological advance result in firms using more capital and
less Labour TFC increase and TVC decrease.
2- Price of factors of a production: *An increase in a fixed cost shift the TC and
ATC curves upward.
*An increase in a variable cost shift that TC,
ATC and MC curves upward.
Long run cost: In the long-run, all inputs are variable and all costs are variable.
The production function: Is the relationship between the maximum output attainable
and the quantities of both capital and labor.

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
Graphs:
Total product: Marginal product: Average product &
marginal product:

Increasing marginal returns -When MP exceed AP, AP increase.

initially, diminishing marginal -When MP below AP, AP decrease.
returns eventually. -When MP = AP, AP is at maximum.

Total cost: The relationship between TVC and TP:

The graph show the TP

curve. We can change it to
TVC when we replace the It's TP with labor X-axis.
And TVC with cost X-axis
labor on the X-axis with the
cost.

- TFC is the same at each It's graphed with cost on X

output level. and output on Y
- TVC & TC increase as the
output increase. ‫ا‬ ‫ا ر رس‬ ‫سا‬

the average cost + marginal cost: Average and marginal

product and cost:
*AFC falls as output increase.

*As output increase AVC

falls to minimum and then
increase.

*MC curve is very special

- AVC MC above AVC

- AVC MC below AVC And similarly,
- AVC min MC = AVC for ATC

- ATC MC above ATC

- ATC MC below ATC
- ATC min MC = ATC

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‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
Econ107 (Ch 12)
Perfect competition is an industry in which:
1. Many firms sell identical products to many buyers.
2. There are no restrictions to enter into the industry.
3. Established firms have no advantage over new ones.
4. Sellers and buyers are well informed about the prices.
Q: How perfect competition arise?
A/ 1- When firms minimum efficient scale is a small relative to market demand.
2- When each firm is perceived to produce a good or service that has no unique
characteristics.
Price taker: is a firm that cannot influence the price of a good or service.
Economic profit (EP) = total revenue (TR) - total cost (TC).

Total cost (TC): is the opportunity cost of production.

Total revenue (TR): is the price × quantity sold.
Marginal revenue (MR): is the change in total revenue
that results from a one unit increase in the quantity sold.
*The demand for a firm s prod ct is perfectl elastic, hile the market demand is not.
Part A shows TR and TC curves.
Part B shows the EP which is TR - TC.
At low output level, the firm incurs an EL.
At intermediate output level the firms make
an EP.
At high output level the firm incurs an EL. A) Revenue and cost B) Economic profit
*Profit is maximized by producing the output at which marginal revenue (MR) =
marginal cost (MC)
- If MR>MC, EP increase - If MR<MC, EL increase.
- If MR=MC, EP decrease if output change, so EP is maximized.
Maximum profit is not always a positive economic profit. the figure below shows the
three possible profit outcomes.
In part MR1, price = ATC, and the firm makes 0 economic profit (breaks even)
In part MR2, price > ATC, and the firm makes a positive economic profit.
In part MR3, price < ATC, and the firm incurs an economic loss, EP is negative.

‫اض ت ا‬ ‫ا ت دا‬ ‫ا د ات‬ ‫ا‬ ‫صد‬ ‫د‬ ‫ا ات‬ ‫ام‬ ‫صا‬ ‫ت‬
Shutdown point: is the price and quantity at which it is indifferent between producing
and shutting down.
This point is where AVC is at its minimum,
it's also the point at which the MC curve
crosses the AVC curve. the figure on the
right shows the shutdown point.

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Done

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