ECONOMICS HANDOUT

SECTION 1 – THE NATURE OF ECONOMICS

Economics as a Social Science

Economics as a Social Science:

i. It is the study of the production, distribution, and consumption of goods and services.
ii. It deals with the behavior and interactions of individuals, businesses, and governments in the context
of resource allocation.
iii. In other words, economics examines how societies use limited resources to fulfill their unlimited
wants and needs.

Branches of Economics

i. Microeconomics - focuses on individual behavior and decision-making units, such as consumers,

firms, and industries, and how they interact within specific economic markets.
ii. Macroeconomics - Studies the overall performance of an economy, including inflation,
unemployment, economic growth, fiscal and monetary policies, and international trade.

Economy

An economy as a mechanism is a complex and dynamic system where various economic agents interact, make
decisions, and exchange goods and services.

The concept of an economy as a mechanism:

i. The organization of RESOURCE for the production of goods and services. It facilitates the
distribution and consumption of goods and services within society
ii. Satisfaction with society's needs and wants

Agents in an economy

In economics, agents refer to the various individuals, groups, and entities that play active roles in the
functioning of an economy.

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Main agents in an economy:

- Households: are individual consumers and families that own and control factors of production, such
as labour and capital. Households make consumption choices based on their preferences and income
levels, and they supply labour to businesses in exchange for wages and salaries.
- Firms (Businesses): are economic entities that produce goods and services for the market. They also
employ workers and generate income through their economic ACTIVITY.
- Government: The government collects taxes, provides public goods and services, enforces
regulations, and implements economic policies.
- International entities: Financial institutions, such as banks, credit unions, and investment firms, play
a critical role in the economy. They facilitate the flow of funds between savers and borrowers,
providing loans and investments to businesses and individuals.

Key elements of the concept of economics

- Scarcity – Resources are limited, and human wants and needs are infinite.
- Choice – is the range of options available to the individual household, firm, or Government when
making a decision.
- Opportunity cost – is the next best alternative foregone.
- Efficiency – Resources in an economy are fully utilized
- Inefficiency – Resources in an economy are underutilized or idle.
- Free good - A free good is a good in abundant Supply that no sacrifice must be made to obtain. There
is no opportunity cost associated with its use.
- Economic good –a good/service that benefits society but is scarce in Supply and can be traded.
Economic goods have an opportunity cost.

Production Possibility Curve/ Frontier

Production possibility frontier (PPF) – is a curve showing the combination of two goods a country can produce
with its given resource.

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Illustration of the Production Possibility Curve

Efficiency – when an economy is producing on its production possibility curve, that economy is said to be
efficient, E.g. points A, B, and C are efficient points

Inefficiency- is when the economy is producing inside the production possibility curve. Thus, this means there
is an idle resource—for example, points D and E.

Factors that cause the Production Possibility Curve to shift Inwards

i. Migration
ii. Unemployment
iii. Brain drain
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Factors that cause the Production Possibility Curve to shift Outwards

i. Economic growth
ii. Discovery of new natural RESOURCE
iii. Growth in population
iv. Technological progress
Improvement in labour productivity

Economics Decisions by Economics Agents

Factors affecting the economic decisions of individuals:

1. Personal choice
2. Size of income
3. Bandwagon effect
4. Type of work
5. Level of education
6. Rate of interest
7. Climate and weather conditions

Factors affecting the economic decisions of Firms:

1. Costs of production
2. Profits
3. RESOURCE base
4. Industrial relations
5. Changing demands

Ways Government influences economic decisions in an economy:

1. Laws and grants

2. Taxes
3. Setting up of industrial zones
4. Provision of infrastructure
5. General laws.

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 SECTION 2 – PRODUCTION, ECONOMIC RESOURCES AND RESOURCES
ALLOCATION

Production - can be defined as the conversion of factors of production into goods and services that consumers
wish to consume

Productivity – is a measure of output per unit of input.

Factors of production are the economic resources that are used to produce goods and services.

Factors of production

i. Land
ii. Labour
iii. Capital
iv. Entrepreneurship

Rewards of Factors of Production

i. Land – rent.
ii. Labour – wages/salaries
iii. capital – interest
iv. entrepreneurship – profit

Factors of Production

Land

Land is defined as all the factor services available naturally, whether on, above or beneath the earth's surface. It
is made up of all the gifts of nature.

Characteristics of land:

i. The land is a gift of nature/ has no cost for production

ii. The land lacks mobility
iii. The land is limited in the area or fixed in Supply
iv. The land is permanent

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Types of land

i. Land itself on the earth's surface can be used to grow crops or build homes, offices and factories.
ii. the land above ground – for example, gasses in the atmosphere and the climatic conditions
iii. seas and rivers – for example, fish in the seas or rivers and coral reefs for tourists to visit;
iv. resource beneath the earth – for example, mineral deposits such as bauxite and petroleum

Importance of land

- Productivity of land

Labour

Labour is the physical and mental effort of man in production.

Characteristics of labour

i. Human Input
ii. Heterogeneity
iii. Substitutability
iv. Wages and Compensation
v. Mobility
vi. Productivity etc.

Functions of Labor

i. Production of goods and services

ii. Innovation and creativity
iii. to economic growth

Productivity of Labor

- Output per unit of labour input

- determinant of economic efficiency

Efficiency of Labor

- Using labour resources optimally

- Minimizing waste and maximizing output
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Supply of Labor

- The available workforce in the labour market

- Influenced by population, education, and immigration

Division of Labor

- Specialisation of tasks among workers

- Enhances productivity and efficiency

Specialisation

- Focusing on specific tasks or skills

- Increases productivity but may lead to monotony

Advantages of Specialisation:

i. Higher productivity and expertise

ii. Economies of scale
iii. Faster production and efficiency

Disadvantages of Specialisation:

i. Monotony and boredom

ii. Vulnerability to economic changes
iii. Limited skill diversification

Advantages of Division of Labor:

i. Increased productivity and efficiency

ii. Time-saving and improved skills
iii. Better use of resource

Disadvantages of Division of Labor:

i. Reduced skill variety

ii. Dependence on other workers
iii. Potential job dissatisfaction

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Capital

The resource that businesses use to operate, invest, and expand their operations.

Characteristics of Capital

i. Physical Nature: Capital refers to tangible assets, such as machinery, equipment, buildings, and
technology, used in the production of goods and services.
ii. Man-Made: Unlike natural resources (land), capital is human-made and the result of previous
production efforts.
iii. Enhances Productivity: Capital is used alongside labour to increase productivity and efficiency in the
production process.
iv. Depreciation: Capital assets have a limited lifespan and depreciate over time due to wear and tear.
v. Mobile: Capital can be moved and reallocated across industries and regions based on economic
conditions and demand.
vi. Investment: The creation and accumulation of capital involve investments in productive assets with
the expectation of generating future income and profits.

Types of Capital

i. Physical Capital: Refers to tangible assets like machinery, tools, factories, and infrastructure used in
production.
ii. Financial Capital: Represents money and financial instruments used to fund and invest in businesses
and economic ACTIVITY.
iii. Human Capital: Encompasses the skills, knowledge, and expertise of individuals that contribute to
economic productivity.

Accumulation of capital

Accumulation of capital refers to the process of saving and investing in physical, financial, or human capital to
increase the stock of productive assets over time.

Importance of capital as a substitute for labour

The importance of capital as a substitute for labour lies in its ability to enhance productivity, efficiency, and
economic growth.

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Entrepreneurial Talent

Public and Private Enterprises:

Definition of Entrepreneur

An entrepreneur is an individual who initiates and organises a new business venture.

Importance of Entrepreneurs

i. Innovation and Creativity

ii. Job Creation
iii. Economic Growth
iv. Wealth Creation
v. Social Impact

Functions of Entrepreneurs

i. Identifying Opportunities
ii. Risk-taking
iii. Innovation and Creativity
iv. RESOURCE Mobilisation
v. Decision-making and Management
vi. Persistence and Resilience
vii. Networking and Partnerships

Main Sectors in an Economy

Primary Sector:

The primary sector, also known as the agricultural sector, involves the extraction and harvesting of natural
resources directly from the environment. It includes activities related to agriculture, fishing, forestry, mining,
and other forms of raw material extraction.

Secondary Sector:

Also known as the industrial sector, involves the processing and manufacturing of raw materials obtained from
the primary sector. This sector includes activities such as manufacturing, construction, and industrial processing.

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Tertiary Sector:

The tertiary sector, also known as the service sector, is involved in providing services to consumers and
businesses. Eg. retail, education, healthcare, finance, transportation, tourism, entertainment, and professional
services like consulting and legal advice.

Long run – is that period when all factors of production in the production process are variable.

Short run – is when it is impossible to vary the quantities of all the factors of production used in the production
process.

The cost of production refers to the expenses incurred by a business or producer in the process of manufacturing
goods or providing services. It encompasses various components.

Costs associated with the production of goods

i. Fixed cost
ii. Variable cost
iii. Total cost
iv. Average cost
v. Marginal cost

Fixed Costs: Regardless of the level of production the costs remain constant. Examples of fixed costs include:

i. Factory Rent: The cost of leasing or owning the production facility.

ii. Depreciation: The allocation of the initial cost of machinery and equipment over their useful life.
iii. Property Taxes: Taxes incurred on the production facility
iv. Salaries of Permanent Staff: Salaries of employees who are not directly tied to the production
quantity, eg. managers or administrative personnel.

Average Fixed Cost

Average fixed cost (AFC) is the fixed cost per unit of output.

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Total Fixed Cost

Total fixed cost (TFC) is sum of all the fixed cost of production.

Variable Costs:

Costs that vary indirectly proportional to the level of production. Examples of variable costs include:

- Raw Materials: The cost of purchasing materials used in the production process.
- Direct Labor: Wages paid to workers directly involved in the production of goods.
- Utilities: Costs for electricity, water, and other utilities required for production.
- Packaging: The cost of materials used to package the finished goods.

Total Cost = Fixed Cost + Variable Cost

Average Total Cost

The average cost of production/Average Total Cost(ATC) refers to the total cost of producing a certain quantity
of goods or providing a service divided by the quantity produced.

Another formula used in production

Marginal Cost

Marginal cost refers to the additional cost incurred by producing one additional unit of output. In other words, it
represents the cost of producing one more unit of a good or service.

The formula for calculating marginal cost is:

Marginal Cost = Change in Total Cost / Change in Quantity

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Curves associated with the cost of production

Goods and Services

Goods refer to tangible or physical items that have economic value and are capable of satisfying human wants
and needs.

In economics, goods are classified into two main categories:

1. Consumer Goods: These are goods intended for direct use and consumption by individuals and
households. Consumer goods are further divided into durable goods and non-durable goods.
- Durable goods are products that have a long lifespan and are used over an extended period.
Examples include automobiles, appliances, furniture, and electronics.
- Non-durable goods, also known as consumable goods, are products that are used up or consumed
relatively quickly. Examples include food, beverages, toiletries, and clothing.

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 2. Capital goods, also known as producer goods or intermediate goods, are items used by businesses and
industries to produce other goods or provide services. Examples: machinery, equipment, factories, and
tools

Other goods

i. Public good
ii. Private good
iii. Merit good
iv. Demerit good
v. Veblen good
vi. Giffen Good

Public Good

A public good is a type of good or service that is non-excludable and non-rivalrous in consumption. Examples
of public goods include street lighting, national defence, and public parks.

Private Good

This is a type of good or service that is both excludable and rivalrous. Most consumer goods, such as food,
clothing, and electronics, are examples of private goods.

Merit Good

Merit goods refers to a good or service that is believed to have positive benefits for society beyond what
individuals consider when making their consumption choices. Examples of merit goods include education,
healthcare, and vaccinations.

Demerit Good

A demerit good is a good or service that is considered to have negative effects on individuals or society.
Examples of demerit goods include tobacco products, alcohol, and sugary beverages.

Veblen Good

This type is a luxury good for which the demand increases as the price rises. Luxury brands or highend fashion
items are examples of Veblen goods.

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Giffen Good

A Giffen good is a rare type of inferior good where an increase in its price leads to an increase in quantity
demanded. Giffen goods are uncommon and challenging to find in real-world markets.

Services

Services refer to intangible activity or tasks performed by individuals, businesses, or governments to meet the
needs and wants of consumers. Services are actions, efforts, or performances that provide value to customers.

A "free service" typically refers to a service that is provided to consumers without a direct monetary cost. In
other words, consumers do not have to pay any money to access or use the service.

For example, some internet-based services like free email providers or social media platforms offer their
services to users without charging a subscription fee. Instead, they generate revenue through targeted
advertising to their user base.

"Economic service" is a more general term and does not have a specific definition in economics.

Features /characteristics of services:

i. Intangibility
ii. Perishability
iii. Lack of transportability
iv. Lack of standardization
v. Buyer involvement

Resource Allocation

Resource allocation is dividing up the economy's scarce resources to produce different goods and services to
meet the needs and wants of society.

When allocating resources, fundamental questions must be answered:

i. What to produce
ii. How much to produce
iii. For whom to produce

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The economic system determines how a country answers basic economic questions.

Types of economic systems:

i. Traditional (subsistence farming, bartering)

ii. command or planned (socialist)
iii. free or capitalist (market)
iv. mixed (public and private sectors)

Traditional Economy:

Economic decisions are based on customs, traditions, and historical practices. Production methods, resource
allocation, and distribution of goods and services are determined by cultural norms. This system is often found
in rural and less developed regions.

Command Economy (Planned Economy):

The government or a central authority has significant control over economic activity. The government owns and
controls the means of production and makes decisions about what to produce, how to produce, and who gets the
goods and services. Prices are often set by the government.

Market Economy (Capitalist Economy):

In a market economy, economic decisions are driven by the forces of Supply and demand.

Mixed Economy:

This economy includes private enterprise and government intervention to address market failure. Governments
provide public goods and services.

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Types of Business Organisations in a Free Market:

Sole Proprietorship:

- Business owned and operated by one individual

- Unlimited personal liability

Partnership:

- Business owned and operated by two or more individuals

- Shared profits and liabilities

Private Joint Stock Company:

- Company with privately held shares

- Limited liability for shareholders

Public Joint Stock Company:

- Company with publicly traded shares

- Allows for broader ownership

Cooperative:

- Business owned and controlled by its members

- Operates for mutual benefit

Multinational Corporation:

- Company with operations in multiple countries

- Global presence and diverse markets

Economies of Scale and Diseconomies of Scale

Economies of scale are the cost advantages that accrue to a firm as the firm increases in size.

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Types of economies of scale

- Technical Economies of Scale: Occur when increased production leads to more efficient use of
technology and specialized equipment, resulting in lower average costs per unit.
- Marketing Economies of Scale: Arise when larger production allows for better marketing and
distribution efficiency, leading to reduced promotional and distribution costs.
- Financial Economies of Scale: Refer to cost savings gained through access to lower cost capital and
financial resources, often available to larger firms.
- Managerial Economies of Scale: Result from the specialization and division of labor within a larger
organization, leading to better management practices and reduced administrative costs.
- Risk-bearing Economies of Scale: Occur when larger firms can spread the cost of managing risk
over a broader base, reducing the impact of uncertain events on their operations.

Diseconomies of Scale arise when a firm becomes too large, and the production of additional units increases
costs. A firm may face many problems as a result of growing too large.

Typical problems include:

- Communication – decisions that managers and other decision-makers try to make may be poorly
understood, leading to mistakes and errors with a negative impact on productivity
- Control – as businesses expand, it may be difficult for managers and supervisors to control what is
happening in the organization.
- Industrial – in larger companies, there may be poorer relationships between managers, supervisors,
and employees, leading to more disputes, strikes by workers, and other actions that reduce
productivity

Diminishing returns implies that if more units of labour are employed along with a fixed amount of capital, the
marginal product will, after some time, decrease.

Economic and social benefits of large-scale production

i. Producing a larger output will enable small Island economies to reap economies of scale.
ii. There will be a reduction in unemployment.
iii. There is open competition throughout the world

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 SECTION 3 – MARKET AND PRICES

Concepts of the market:

(a) a situation where buyers and sellers communicate for the of exchanging goods and services
(b) The elements of a market: buyer, seller, goods and services, and price.

Take into consideration Traditional and Modern Markets

Traditional markets are more focused on local communities and have a distinct cultural aspect, while modern
markets are characterised by their scale, technology integration, and involvement in the formal economy.

Market forces are the conditions of demand and Supply that affect demand and Supply in the market.

Demand

Demand is the desire and willingness to buy a product, backed by the ability to pay for the good or service.

*Demand has a negative relationship with price.

The law of demand states that as price increases, ceteris paribus, the quantity demanded of a product will fall.
But conversely, when the price decreases, the quantity demanded of the product will rise.

Ceteris paribus – means holding all other things the same. Thus, this makes it possible to identify the
relationship between two factors while holding all other factors constant.

Demand curve: shows the quantities demanded at different prices – it slopes from left to right. Hence, the
changes in price cause movements along the demand curve. The curve illustrates the lower the price for the
product, the higher the demand.

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Changes in quantity demanded: this describes an increase or a decrease in the quantity demanded. (Extension
and contraction)

The law of demand (Changes in demand) describes the movement of the demand curve. (Shifts to the right or
the left)

A shift in the demand curve refers to a change in the quantity demanded at each price level caused by factors
other than the price of the good or service itself. It results in the entire demand curve moving either to the left
(decrease in demand) or to the right (increase in demand).

Non-price determinants/factors that cause a change in demand:

i. Prices of other goods

ii. Changes in the income of the individual
iii. Advertising.
iv. The population of the country.
v. Fashion and taste.
vi. Government influences.
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Supply

Supply: is defined as the quantity of a commodity that is supplied at any given price over some given period.

The law of Supply (movement along the supply curve): states that all else being equal, a greater quantity will be
supplied at a higher price.

Supply curve: shows the quantities offered for sale at different prices. Depicting as supply increases, price
increases.

The changes in price cause movements along the supply curve.

Changes in quantity supplied describe an increase or decrease in the quantity supplied. (Extension and
contraction)

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Law of Supply (Changes in Supply): this describes the movement of the supply curve. (Shifts to the right or the
left)

A shift in the supply curve refers to a change in the quantity supplied at each price level due to factors other
than the price of the good or service.

Non-price determinants/ factors that cause a change in Supply:

i. Improvements in technology
ii. Costs of production
iii. Climatic condition
iv. A number of firms in the industry
v. Taxes and subsidies

Market equilibrium/market price - In the market, equilibrium occurs at the intersection of the demand and
supply curves. It is where the quantity demanded is equal to the quantity supplied.

i. Equilibrium point –is the point where the demand and supply curves intersect.
ii. Equilibrium price/ market clearing price – the price where the quantity demanded is equal to the
quantity supplied
iii. Equilibrium quantities – consumer and supplier quantities are equal. No surplus, no shortage.

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Market disequilibrium – is an imbalance between demand and Supply, i.e. demand is unequal to supply

(Disequilibrium occurs when there is a shortage or surplus in the market)

Types of market disequilibrium:

A shortage occurs when there is a need for more products or services to satisfy demand. It occurs when the
price is below equilibrium, and the quantity demanded exceeds the quantity supplied.

A surplus occurs when there is an excess of product or service compared to demand. It occurs when the price is
above equilibrium, and the quantity supplied is greater than the quantity demanded

The effects of shortages and surpluses – price will rise or fall towards equilibrium.

Possibilities in which market price and quantity respond to a change in demand or Supply:

i. An increase in demand with Supply remaining unchanged – both market price and quantity will
increase

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 ii. A fall in demand with Supply remaining unchanged – both market price and quantity will
decrease
iii. An increase in Supply with demand remaining unchanged – market price will decrease, and the
quantity will increase
iv. A fall in Supply with demand remaining unchanged – the market price will increase, but the
market quantity will fall

Simultaneous increases in both demand and Supply:

When simultaneous shifts in demand and supply curves are considered, the effect on price can only be
determined if the size of the changes is known.

i. Supply increases by a larger percentage than the percentage increase in demand – this leads to a fall
in price but causes an increase in the market output.
ii. Demand increases more than the supply increases – both price and quantity increase. Both demand
and supply increase by the same magnitude – price unchanged, but quantity increased.

Elasticity

Elasticity – is a measure of how much the quantity demanded will be affected by a change in price, income or
the price of related goods.

There are three main types of elasticities:

i. Price elasticity of demand

ii. Income elasticity of demand
iii. Cross elasticity of demand
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Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of a change in quantity demanded of a good or service
to a change in its price

Formula: PED = % ∆ in Qd
% ∆ in price

* ∆ means a change.

Categories/degrees of price elasticity of demand:

Perfectly Inelastic: Quantity demanded or supplied does not change with any price change. The demand or
supply curve is a vertical line.

Relatively Inelastic: Quantity demanded or supplied shows a smaller percentage change compared to the
percentage change in price.

Unitary Elastic: Quantity demanded or supplied changes by the same percentage as the percentage change in
price.

Relatively Elastic: Quantity demanded or supplied shows a larger percentage change compared to the
percentage change in price.

Perfectly Elastic: Quantity demanded or supplied becomes infinite (infinite quantity demanded or supplied) at a
specific price. The demand or supply curve is a horizontal line.

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Determinants/factors affecting price elasticity of demand:

i. The number of substitutes is immediately available.

ii. Necessity vs luxury
iii. Percentage of income spent on the good
iv. Habitual consumption
v. Time lags

Income Elasticity of Demand

Income elasticity of demand measures the responsiveness of quantity demanded to change in consumers' real
income.

Formula:

YED = % ∆ in Qd

% ∆ in income

Interpretation of coefficient:

i. Negative coefficient – inferior good

ii. Positive coefficient – normal good

Determinants of income elasticity:

i. The degree of necessity

ii. The rate at which the desire for good is satisfied as consumption increases
iii. The level of income of consumers

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Cross Elasticity of Demand

Cross elasticity of demand measures the responsiveness of quantity demanded of one commodity to changes in
the price of another commodity.

Formula:

XED = % ∆ in Qd of good X

% ∆ in the price of good Y

Interpretation of coefficient:

- Positive coefficient – substitutes

- Negative coefficient – complements

Determinant of income elasticity: the closeness of substitutes

Price Elasticity of Supply

Price elasticity of Supply – measures the responsiveness of quantity supplied of a commodity to changes in its
price. Formula:

PES = % ∆ in Qs

% ∆ in price

Degrees/categories of Price Elasticity of Supply

i. price elastic supply,

ii. perfectly elastic Supply
iii. price inelastic Supply
iv. perfectly inelastic Supply
v. unit elasticity of Supply

Determinants/ factors affecting Price Elasticity of Supply:

i. time period
ii. the number of firms in the industry,
iii. the existence of spare production capacity,
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 iv. the length of the production period,
v. the ease of substitution factors
vi. natural constraints.

Market Structure

Market structures refer to the type of competition that exists among firms in a particular industry market
structure.

Market structure: behaviour and performance of firms in a variety of situations:

i. A number of buyers and sellers

ii. Types of goods
iii. Freedom of entry and exit
iv. Control of price

Main types of market structures:

i. Perfect competition
ii. Monopoly
iii. Oligopoly
iv. Monopolistic competition

Perfect competition is a market structure in which many sellers and buyers produce a homogeneous product.

Characteristics of perfect competition

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Advantages of Perfect Competition:

i. Very low barriers to entry & exit

ii. The chance of customer exploitation is low
iii. Availability of high-quality products with low prices
iv. Decrease room for monopoly with a large number of producer availability

Disadvantages of Perfect Competition:

i. Heavy competition results in more producer's exit

ii. Risk of predatory pricing
iii. Less production efficiency of individual firms
iv. Excess resource waste

Monopoly can be defined as having only one seller who sells a product or service not offered by anyone else.

Characteristics of Monopoly

Conditions necessary for forming Monopolies:

i. By law
ii. By competition
iii. Merger and amalgamations
iv. By forming a cartel
v. By ownership of scarce resources

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Advantages of a monopoly market:

i. Achieving Economies of scale with lower cost.

ii. Have the ability to purchase new technology.
iii. Capable of undertaking research and development to stimulate innovation and invention.

Disadvantages of a monopoly market:

i. Charging higher prices since it's the only producer of the product.
ii. There is greater inequality of income.
iii. There is an absence of consumer sovereignty.

Ways to control a monopoly market:

i. Nationalization.
ii. Imposing taxes
iii. Setting up a maximum price (price ceiling)

Monopolistic competition emerged in the 1920s and 1930s from an understanding that the existing industries
were not fitting the perfect competition or the monopolistic model. As a result, it's a combination of the two
markets.

Characteristics of Monopolistic Competition

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Advantages of Monopolistic Competition:

i. Firms try to do innovative things and uplift their product/service offering.

ii. Few barriers to entry
iii. The consumer has more information

Disadvantages of Monopolistic Competition:

i. Less production efficiency of individual firms

ii. Focus more on advertising than product quality
iii. More product alternatives for consumers

Oligopolistic Market is a market structure where only a few large firms operate.

Characteristics of an Oligopolistic Market:

Collusive Behaviour: market share, the quantity sold, deciding on a specific price level and advertising outlay.

Non-collusive behaviours involve competition based on branding, advertising, research and development, and
packaging.

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Advantages of an Oligopolistic Market:

i. More research and development space for firms

ii. Consumers experience a simplified market
iii. Price stability due to competitiveness

Disadvantages of an Oligopolistic Market:

i. Fewer choices in the market for consumers

ii. Excess profits are not shared with employees.
iii. Firms cannot make their own decisions

Market Failure

Market Failure can be defined as a situation where the price and quantity as determined by the price mechanism
are not allocative efficient.

The cost associated with market failure: Causes of market failure:

i. Private costs i. Negative or positive externalities

ii. Social costs ii. Monopoly
iii. External costs iii. Merit goods and public goods

Benefits associated with market failure: Consequences of market failure:

i. Private benefits i. Retrenchment

ii. Social benefits ii. Unemployment
iii. External benefits iii. Economic depression
iv. Rise in levels of poverty
v. A decline in provisions for societal
welfare

Micro consequences such as over or under-pricing, inefficiency in production in terms of over or

underproduction, and inefficient use of resource

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 SECTION 4 – THE FINANCIAL SECTOR

The Financial Sector

The financial sector is the complex mix or network of markets, households, businesses, governments, laws and
institutions interacting with one another.

The role of the Financial Sector in mobilizing and making loanable funds available from savers to spenders for
consumption and investment purposes.

Functions of the financial sector:

i. Promote a haven for savings

ii. Facilitating purchasing power and the storing of wealth
iii. Providing liquidity in the economy
iv. Making credit available
v. Creating a mechanism for payments for goods and services
vi. Reducing risk in economic life by providing insurance protection
vii. Assisting the Government in stabilizing the economy

Money is an acceptable item to pay for goods and services and settle debts.

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The qualities of money: Four main functions of money

i. Acceptability i. As a medium of exchange

ii. Scarcity or limited Supply ii. As a store of value.

iii. Homogeneity iii. as a measure of value

iv. Divisibility iv. as a standard of deferred payment

v. Portability
Demand for money:
vi. Durability
i. transactional
ii. precautionary
iii. speculative motives.

Money supply: the total stock of money in the economy at any moment.

Supply of money in terms of M0, M1 and M2.

Financial Institutions found in the economy:

i. Central bank vii. Mutual Fund

ii. Commercial Bank viii. Building Society
iii. Stock Exchange ix. Investment Trust Company
iv. Credit Union x. Informal credit institutions (Sou Sou,
v. Development Bank Box,Partner, Sindicatos, Meeting Turns)
vi. Insurance Company

Central Bank

The central bank is the head of the financial sector in any economy. The central bank is not involved in the
ordinary banking business. Its twofold purpose is;

i. to oversee the operations of all financial institutions in the economy

ii. to implement monetary policy on behalf of the Government

Roles of the central bank, including its role in;

a. Monetary policies:

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 i. Interest rate - A central bank can influence interest rates by changing the discount rate. The discount
rate (base rate) is an interest rate a central bank charges banks for short-term loans. For example, if a
central bank increases the discount rate, the cost of borrowing for the banks increases
ii. Reserve requirement - The reserve requirement refers to the money banks must keep on hand
overnight. They can keep the reserve in their vaults or at the central bank. A low reserve requirement
allows banks to lend more of their deposits. It's expansionary because it creates credit. A high
reserve requirement is contractionary. It gives banks less money to lend.
iii. Open market operations are when central banks buy or sell securities - These are bought from or
sold to the country's private banks. When the central bank buys securities, it adds cash to the banks'
reserves. That gives them more money to lend. When the central bank sells the securities, it places
them on the banks' balance sheets and reduces its cash holdings. The bank now has less to lend. A
central bank buys securities when it wants an expansionary monetary policy. It sells them when it
executes tight monetary policy
iv. Moral suasion - a request by the central bank to the commercial banks to take specific measures as
per the economy's trends. For instance, the central bank may direct banks not to give out certain
loans. It includes psychological means and informal means of selective credit control.

b. Supervising other financial institutions – the central bank supervises the operations of other financial
institutions – such as insurance companies, pension funds, and investment trusts

The Central Bank has three essential tasks when supervising other financial institutions:

i. Verify compliance with banking laws and regulations, and punish any breaches.
ii. examine the terms on which banks conduct their business and make sure that their financial situation
remains satisfactory.
iii. ensure that the rules of good professional conduct are followed

Commercial Banks

Commercial banks are financial institutions engaged in everyday banking activity or money transmission
services.

Functions of commercial banks:

i. Provide a safe place for your spare cash.

ii. Collects payments on the customer's behalf from those instructed to lodge money to that account.

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 iii. Makes payments on its customer's behalf when instructed by them to do so
iv. Makes loans to customers.
v. Mobilise savings for capital formation.

Additional Activities and services of commercial banks: Night safe facilities, safety deposit boxes, Automatic
Teller machines, letters of credit, etc.

Credit creation refers to expanding the availability of money through the advancement of loans and credit by
banks and financial institutions. These institutions use their demand deposits to provide loans to their
customers, giving borrowers higher purchasing power and competitive interest rates.

Commercial banks are often limited in their credit creation by the following factors:

i. Reserve requirement
ii. Cash leakages
iii. Special deposits
iv. Government monetary policies

Stock exchanges: are established to make transfers or purchases and sell stocks or shares in public companies.

Securities traded on the stock exchanges:

Preference shares, Ordinary shares, and Gilt-edged securities.

Functions of the stock exchange:

i. Public companies can raise new capital on the stock exchange.

ii. Acts as a link between the primary and secondary markets.
iii. They provide a certain level of protection for investors since companies listed on the stock
exchange are expected to carry a high reputation.
iv. Public companies already on the stock exchange can raise additional capital. Stock exchange:

Speculation – a person's ability to speculate and forecast the trend of share prices of the companies trading on a
stock exchange

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Types of speculators:

i. Bull
ii. Bear
iii. Stag

Stockbrokers and jobbers

A credit union is a member-owned financial cooperative democratically controlled by its members. Credit
unions are not-for-profit organizations because their purpose is to serve their members rather than maximize
profits.

The role and function of credit unions include

i. Promoting thrift
ii. Providing loans
iii. Supporting community development

Development banks provide capital to companies and organisations when raising money for projects is
difficult. Thus, this is particularly so in countries where investment capital tends to be scarce, particularly in
developing countries.

The primary role of development banks includes:

i. Lending money for the construction of new buildings and public projects as well as to companies
that are seeking external sources to fund a new venture or business initiative
ii. Assisting with improving a country's physical infrastructure and economic development

Insurance companies provide insurance which is a method of transferring risks or pooling risk where people
pay a fee(premium) to insure life and property. Insurance involves pooling funds from many insured entities to
pay for the losses that some may incur. To be an insurable risk, the risk insured must meet specific
characteristics.

The role and function of insurance include

i. Protection against losses that economic agents may experience

ii. Providing liquidity in the economy

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A mutual fund is a professionally- managed trust that pools the savings of many investors and invests them in
securities like stocks, bonds, and short-term money market instruments.

i. Investors in a mutual fund have a common financial goal, and their money is invested in different
asset classes in accordance with the fund's investment objectives.
ii. Investments in mutual funds entail comparatively small amounts, giving retail investors the
advantage of having finance professionals control their money.
iii. Mutual funds are considered safe because they are diversified, and investors can invest in equity
indirectly. Thus, this is safer because it is an indirect way of involvement in the equity market.

Benefits of investing in mutual funds:

i. Professional management
ii. Diversification
iii. Liquidity
iv. Low transaction cost

A building society is a mutual institution established to provide low-cost loans to its members.

The role of building societies includes;

i. Mortgage Lending- provides mortgage loans to individuals and families to finance the purchase of
homes or properties.
ii. Savings Accounts- accept deposits from members to encourage savings
iii. Homeownership Support- promoting homeownership by providing accessible and competitive
mortgage options to potential homebuyers.
iv. Community-Focused- they often have a local or community focus, serving the needs of people
within specific regions or localities.
v. Mutual Ownership - their members have a say in decision-making and share in any profits made by
the institution.

Investment trust is a form of collective investment. Investors' money is pooled together from selling a fixed
number of shares which the trust issues when it launches. The Board will typically delegate responsibility to a
professional fund manager to invest in the stocks and shares of a wide range of companies.

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Informal credit institutions

i. Sou sou/Box/Syndicate/Partner - is an informal arrangement where a small group of people

contributes an equally fixed sum each week or month on payday to a common fund called a
pot. The total amount paid by all participants goes to one group member each week or month.
This sum is called a hand.
ii. Money lenders - The moneylenders/ usurers usually lend money at very high interest rates to
borrowers. However, the borrower might not have to provide any security (collateral) to
obtain the loan.

Financial instruments

These are tradable assets or contracts that represent a legally binding agreement between parties to engage in
specific financial transactions. These instruments serve as a means to raise capital, transfer risk, or invest in
various financial markets.

Types of Financial Instruments

i. Treasury bills, notes, and bonds: Government-issued debt securities with varying maturities.
ii. Corporate bonds: Debt securities issued by companies to raise capital from investors.
iii. Municipal bonds: Debt instruments issued by local governments to finance public projects.
iv. Equity securities: Ownership stakes in a company, represented by stocks or shares.
v. Share and stock certificates: Physical or electronic evidence of ownership in a company.
vi. Certificates of deposit: Time deposits offered by banks with fixed interest rates and maturity dates.

Taken from:

NATIONAL SCHEME FOR SECONDARY SCHOOLS SCHOOLS NATIONAL SCHEME FOR

SECONDARY SCHOOLS. (2023). Retrieved July 4, 2024, from
https://www.education.gov.gy/web2/index.php/students-resources/secondary-school-resources/national-
schemes/economics/7516-economics-national-scheme-g-10/file

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