Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana
RE 153: PRINCIPLES OF ECONOMICS
FOR REAL ESTATE
Joseph K. Kidido (Ph.D)
Department of Land Economy
Faculty of Built Environment
CABE
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Lecture Outline
This lecture covers;
◆Overview of economics - Definitions, scope of
economics, economic way of thinking; economic models; the
economic problem; normative & positive positions, and why
we study economics.
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What is Economics?
▪ Adam smith (1723 - 1790) in his Book “An Inquiry into
Nature and Causes of Wealth of Nations” (1776),
defined economics as the practical science of
production and distribution of wealth.
▪ Alfred Marshall (1842 - 1924) in his Book
“Principles of Economics” (1890) also defined “Political
Economy” or Economics as a study of mankind in the
ordinary business of life;….”.
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What is Economics?
▪ Lionel Robbins in his Book: “An Essay on the
Nature and Significance of Economic Science” (1932)
defined as a “a science which studies human
behaviour as a relationship between ends and
scarce means which have alternative uses”.
➢ Ends – human wants.
➢ Means – resources with which wants are fulfilled.
▪ Economics is simply the study of how society
manages its scarce resources
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What is Economics?
▪ Bade and Parkin in their book: “Foundations of
Microeconomics” (2015) also noted: “Economics is
the social science that studies the choices that
individual, businesses, governments, and entire
societies make as they cope with scarcity..”
▪ Scarcity - our inability to satisfy our wants (our
wants exceed the ability of resources to satisfy them).
▪ Everyone, poor and rich faces scarcity
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What is Economics?
Economics explains how the choices that
individuals, businesses (firms) and government make
and the interactions of these choices end up in
determining what, how and for whom goods and
services are produced.
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What is Economics?
The subject Economics has two broad parts:
▪ Microeconomics: The study of choices that
individuals and businesses make and the way these
choices interact and are influenced by government.
▪ Macroeconomics:The study of the aggregate or
total effects on the national economy, and the global
economy of the choices that individuals, businesses,
and governments make.
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Scope of Economics
▪ Two critical questions define the scope of
economics:
1. How do choices determine what, how, and for whom
goods and services get produced?
2. When do choices made in pursuit of self-interest also
promote the social interest?
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Scope of Economics
▪ Goods and Services:
➢ objects (goods) and
➢ the actions (services) that people value and
produce to satisfy human wants.
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Scope of Economics
▪ Goods and services:
▪ What? - determines the quantities of goods and
services that are produced.
▪ How?- how are goods and services produced?
▪ For Whom?- for whom are goods and services
produced?
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Self interest and social interest:
▪ Self-interest- The choices that are best for the
individual who makes them.
✓ When you order pizza from Pizzaman, you do so
because you want to eat not because of the
income of the delivery person or Pizzaman.
▪ Social interest- The choices that are best for
society as a whole.
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Self interest verses social interest:
▪ How can pursuit of self-interest promote social
interest?
▪ Can it be possible that when people make choices that
are in their own best interest i.e self-interest - it turns
out that these choices are also the best choices for the
society as a whole – social interest?
▪ According to Adam Smith, when we pursue our self-
interest, we are led by an invisible hand to promote
social interest. Examples???
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Economics of way of thinking – Making
Choices
▪ Choice
✓ Because we face scarcity, we must make choices.
✓ Everyday we make hundreds of choices.
✓ ‘Choice’ implies that we are not always able to satisfy
our wants: WANTS > RESOURCES
✓ Choice involves selecting from the available alternatives
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Marking Choices
▪ Every choice involves meeting an objective
▪ FIRMS: maximize profits
▪ INDIVIDUALS: maximize satisfaction
▪ STATE: maximizes welfare of society
▪ SCALE OF PREFERENCE: List of most preferred
choices in descending order of satisfaction.
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Economics of way of thinking
Six ideas define the economic way we make Choices:
1. A choice is a tradeoff
2. Cost is what you must give up to get something
3. Benefit is what you gain from something
4. People make rational choices by comparing benefits
and costs
5. Most choices are ‘how much’; choices are made at the
margin
6. Choices respond to incentives
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Economics of way of thinking
1. Choice is a tradeoff - An exchange or giving up one
thing to get something else.
▪ “There is no such thing as a free lunch”. Making decisions
requires trading off one goal against another.
✓ Consider a student who must decide how to allocate
most valuable resource – time (study economics, law or
financial maths?)
✓ Consider parents deciding how to spend their family
income (buy a house, car, food?)
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Economics of way of thinking
Examples of Tradeoffs we face:
▪ When people are grouped into societies, they face
different kinds of trade-offs.
▪ One classic trade-off is between “guns and butter.”
➢ The more a society spends on national defense (guns) to
protect its shores from foreign aggressors, the less it can
spend on consumer goods (butter) – North & South Korea
➢ What trade-offs do you face as a student?
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Economics of way of thinking
Tradeoffs that we face:
▪ Another trade-off society faces is between
efficiency and equality.
▪ Efficiency means that society is getting the
maximum benefits from its scarce resources.
▪ Equality means that those benefits are
distributed uniformly among society’s members.
▪ Efficiency refers to the size of the economic pie,
and equality refers to how the pie is divided into
individual slices.
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Economics of way of thinking
Cost of our Choices
2. ‘Cost’ : The opportunity cost of something is the best
thing you must give up to get it.
-What is your opportunity cost of being in class today or
going through you university education?
Benefits of our Choices
3. ‘Benefit’: The gain or pleasure we obtain, measured
by what you are willing to give up to get it.
-What benefit do you get for being in school?
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Economics of way of thinking
4. Making Rational Choices (economic assumption of
rationality)
▪ Rational choice: A choice that uses the available
resources to best achieve the objective of the person
making the choice.
How do people make rational choice?
-by comparing the benefits and costs of alternative choices
and choosing the alternatives that make net benefits
Net benefit = Benefit minus cost - as large as possible
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Economics of way of thinking
5. Choosing at the Margin
▪ Making a choice at the margin means comparing the relevant
alternatives systematical and incrementally.
▪ Marginal Cost: The opportunity cost that arises from a one-unit
increase in an activity. What you must give up to get one additional
unit of it.
▪ Marginal benefit: The benefit that arises from a one-unit increase
in an activity. It is measured by what you are willing to give up to
get one additional unit of it.
▪ When the marginal benefit from something is equals (or more) its
marginal cost, the choice is rational.
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Economics of way of thinking
6. Choice Responds to Incentives:
▪ Incentive: A reward or a penalty – a “carrot” or a “stick”-
that encourages or discourages an action. Something that
induces a person to act.
▪ The choices we make depend on the incentives we face.
▪ We respond positively to ‘carrots’ and negatively to ‘sticks’
▪ The carrots are marginal benefits; the sticks are marginal
cost.
▪ A change in marginal benefit or marginal cost changes the
incentives - this also changes our actions.
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Economics as a Social Science
Economists try to predict the effects of economic forces
using the scientific method – common sense way of verifying
what works and what doesn't work.
Economists then;
➢ Observe economic phenomenon
➢ Develop a hypothesis (explain a phenomena)
➢ Test hypothesis using scientific methods
➢ Accept, modify or reject theory after testing
➢ Accepted hypothesis becomes theory → economic principle
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Economic Models
Economists play two roles:
1. Scientists: try to explain the world or economic
phenomenon
2. Policy advisors: try to improve it
▪ Model: a highly simplified representation of a more
complicated reality.
▪ Economists use models to study economic issues.
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Economic Models
Economic model: A description of the economy or a part
of the economy that includes only those features assumed
necessary to explain the observed facts.
E.g. The questions we pose about the price and quantity of
goods bought are answered by an economic model called
“demand and supply model”
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The Circular Flows Model
Circular Flow Model: A model of the economy that shows
the circular flow of expenditures and incomes that result
from decision makers’ choices and the way those choices
interact to determine what, how, and for whom goods
and services are produced.
◆ Two types of “actors” in the circular flow:
➢ Households – individuals or groups of people living
together
➢ Firms - the institutions that organize the production of
goods and services
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The Circular Flows Model
Two markets:
◆Goods markets: the market for goods and services
◆Factor markets: markets in which the services of
“factors of production” are bought and sold
✓ Factors of production: the resources the economy
uses to produce goods & services, including, labour,
land, capital
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The Circular Flows Model
➢ The orange flows are the
services of factors of
production from households
through factor markets to
firms and the goods services
from firms to households
through goods markets -
This is real flows
➢ The blue flow is the income
from factors of production
and
➢ The red flow is the
expenditure on goods and
services. These flows are
money flows.
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Production Possibilities Frontier Model
Production possibilities frontier: the combinations of
goods and services that can possibly be produced, given
the available factors of production and the state of
technology.
ASSUMPTIONS:
➢ Full employment
➢ Fixed resources
➢ Fixed technology
➢ Two goods: consumer goods + capital goods
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Production Possibilities Frontier
Examples;
▪ Two goods: computers and wheat
▪ One resource: labour (measured in hours)
▪ Economy has 50,000 labour hours per month available
for production.
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Production Possibilities Frontier
Examples
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Production Possibilities Frontier
Attainable and Unattainable Combinations:
Point G requires 65,000 hours of labour. The
economy has 50, 000 hours of lavour.
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Efficiency and Inefficient Production-PPF
Production efficiency: A
situation in which the
economy is getting all that it
can from its resources and
cannot produce more of one
good or service without
producing less of something
else.
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Tradeoffs and Free Lunches - PPF
Tradeoff: Remember we said giving up
one thing to get something - an
exchange.
▪ Free lunch: is a gift - getting
something without giving up
something else.
▪ But remember the adage: “There is no
such thing as a free lunch”
▪ When some resources are idle or
inefficiently used, it is possible to
avoid tradeoff and get free lunch.
▪ When resources are efficiently used,
every choice involves a tradeoff.
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Opportunity Cost - PPF
▪ The opportunity cost of an item is what must be given
up to obtain that item.
▪ Moving from one point to another on the PPF involves a
tradeoff - shifting resources (e.g., labour) from the
production of one good to the other.
▪ The slope of the PPF measures the opportunity cost. How
much of one item must be forgone to obtain an additional
unit of another item.
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Opportunity Cost - PPF
▪ Example
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Economic Growth - PPF
▪ Economic growth is the sustained expansion of
production possibilities.
▪ Economy growths through:
➢ Development of new and better technologies of
production
➢ Improve the quality of labour by education
➢ On-the-job training,
➢ Work experience
➢ More machines
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Economic Growth - PPF
Example
▪ Economy growth leads to
the shift of the PPF curve
outwards
▪ Economic growth is not
free
▪ Consumption must
decrease
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Resource Allocation, Efficiency - PPF
Resource Allocation Methods
▪ Market price
▪ Command
▪ Majority rule
▪ Contest
▪ First-come, first-served
▪ Sharing equally
▪ Lottery
▪ Personal characteristics
▪ Force
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Efficiency Allocation - PPF
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Society’s Economic Problem
What Do We Produce?
▪ Two main goods: (Consumption goods & services;
and Capital goods)
➢ Consumption goods and services: goods and
services that individuals and governments buy and use
in the current period. E.g bottled water, cholate
bought by households and security services,
education, waste collection by government.
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Society’s Economic Problem
What Do We Produce?
➢ Capital goods: Goods bought by businesses and
governments to increase productive resources and to
use over future periods to produce other goods and
services e.g. businesses = shopping mall, auto
assembly plants; government = missiles and weapons
, public schools, roads etc.
❖ How much of these goods should be produced?
What proportion of national budget be allocated to
what sector?
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Society’s Economic Problem
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Society’s Economic Problem
Ghana’s Sectorial Distribution of GDP
Source: GSS 2023; MOF, 2023
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Society’s Economic Problem
How Do we Produce?
◆Factors of production:
➢ Land -: the ‘gifts of nature’ or natural resources
➢ Labour: : the work time and work efforts people devote
to produce goods and services-
-Human capital -- the knowledge and skill that people
obtain from education, on-the-job training, work experience
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Society’s Economic Problem
How Do we Produce?
◆Factors of production:
➢ Capital: Tools, instruments, machines, buildings and
other items already produced that are used to produce
goods and services.
Note: money, stocks and bonds are financial capital but
not capital – productive resources.
➢ Entrepreneurship: The human resource that organizes
labour, land, and capital to produce goods and services.
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Society’s Economic Problem
For Whom Do We Produce?
▪ Who gets the goods and services depends on the
incomes.
▪ Services of factors of production produce incomes
➢ Rent for the use of land
➢ Wage is paid for the services of labour
➢ Interest for the use of capital
➢ Profit (or loss) earned by an entrepreneur
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Society’s Economic Problem
For Whom Do We Produce? A Global picture
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Disagreement: Normative verses Positive
▪ Economists sometimes disagree about assumptions, models and
policy pathways
▪ Disagreement that can’t be settled by facts are normative
position or statements – statements about ‘what ought to be’
✓ Deals with the desirability of aspects of the economy
✓ Based on value judgement and opinion that cannot be tested.
✓ E.g. the government should print less money
✓ “We ought to cut back on our use of coal”
✓ Economists as scientists try to steer clear of normative
statements.
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Disagreement: Normative verses Positive
Disagreement that can be settled by facts are Positive
statements – statement about ‘what is’
➢ A positive statement can be right or wrong by using data to
confirm or refute.
➢ It is testable
Examples:
“Prices rise when the government increases the quantity of
money”
“Our planet is warming because of the quantity of coal that we
are burning”. These statements can be tested.
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Why Do We Study Economics?
➢ Understand the economy and society: Free market;
systems, Recessions, Expansions
➢ Understand global economic affairs :Global economic
stability – Russia & Ukraine war, Israel and Harmas Wars and
impact on world economies
✓ Ghanaian Elections – recessions - oil prices - exchange rates
➢ Understand Market: Pricing. Supply Demand, Risk
➢ Rational Thinking: Scarcity and Making Choices,
analyze cost and benefits
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Thank!
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