Chapter two

Economic activities
Inputs or resources (factors of production)
• The economic process begins with a set of inputs. These inputs are
referred to as resources or factors of production. these resources are
labor, capital, land and entrepreneurial ability.
• Inputs are used to produce goods (output) using existing technology.

• 1. land : is a resource that is a gift of Allah. It exists independently of

human activities, such as soil, forest, sand, deposit of oil and rivers.
• The payment for using land is called rent.
• 2. Labor: is the human effort which is used to produce the goods.
• The payment for labor is called wages.

• 3. capital: is the means of production which are used to produce

goods and services, such as tools and machines.
• The payment for capital is interest rate.

• 4. entrepreneur : is the person who manage the project.

• The payment for entrepreneur is called profit.
 Chapter three
Circular flow model
Production possibilities frontier
 Circular flow model
Market for
goods and
services

households firms

circular market for

factors of
production
Circular flow model: is a simple model which explains the
economic transactions that occur between firms and
households.
• In this model, the economy has two sectors (households and firms) and
two markets ( factors of production and goods and services).
• In market for goods and services, firms sell goods to households and
get revenue. Firms are sellers and households are buyers.
• In market for factors of product, households supply these factors to
firms and get income. Households are sellers and firms are buyers.
• The factors of production flow from households to firms, but goods
and services flow from firms to households.
• The outer set of arrows shows the flow of dollars and the inner set of
arrows shows the flow of goods and services.
 Production possibilities frontier (PPF)
• It shows the maximum amounts of production that the economy can
produce, given its technology, knowledge and inputs.
• The PPF represents the list of choices available to society.
• possibilities y x
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
Production possibilities frontier: shows the combinations
of output (x and y) that the economy can produce.
• X

• (15,0) A
• B (14,1) .K
• .U C(12,2)

• F Y
• (0,5)
• The economy can produce any combination on or inside the frontier
but the economy can not produce points outside the frontier.
• Points outside the frontier like K are infeasible.
• Points inside the frontier, such as U, mean that some resources are
unemployed or are not used in the best way (feasible but not
efficient). (Inefficient)
• Points on the frontier like A,B and C are feasible and efficient.
• the economy can produce at any point inside or on the PPF but it can not
produce at points outside the PPF.
Opportunity cost of y in terms of x :
is the decrease in x to increase y by one unit.
• It is the slope of ppf.