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Resources/ Factors of production:
- Land – Natural resources.
- Labour – Human resources.
- Capital – Money.
- Entrepreneurship – The skill to take risks.
The main problem is that we have limited resources but our needs and wants are
unlimited which leads us to make choices. Choices results in opportunity cost which
is the cost of something in terms of the next best alternative forgone.
Fundamental questions of economics:
- For whom to produce?
- What to produce?
- How to produce?
The production possibility curve (PPC/PPF) shows the maximum quantity of
commodities an economy is capable of producing at a particular point in time given
the quantity and quality of resources. The points on the PPC represent the maximum
possible combination of the two goods that can be produced simultaneously. All
points on the PPC reflect productive efficiency. All points inside the PPC can be
produced but the economy will be inefficient because there are some resources that
are being idle. Similarly, all points outside the PPC are unattainable.
By time, the PPC can shift outwards as a result of more resources available. Similarly,
it can shift inwards as a result of a decrease in resources available.
Topic 1: Demand and supply.
Demand.
Demand is the quantity of goods and services that consumers are willing and able to
buy at a given price in a given period of time.
The law of demand states that consumers are prepared to buy more of a commodity
at lower prices than at higher prices, ceteris paribus. (Negative relationship between
price and quantity).
The relationship between price and quantity is negative because of the substitution
effect and income effect.
The demand curve.

The demand curve is downward sloping. When price increases, demand for a good
decreases (contraction). When price decreases, demand for a good increases
(extension). A change in price results into a movement along the demand curve.
Non-price determinants of demand.
Non-price determinants of demand results into a shift of the demand curve. An
outward shift of the demand curve means that consumers are prepared to buy more
for the same price. Similarly, an inward shift means that consumers are prepared to
buy less for the same price.
Non-price determinants of demand.
- Changes in income (Income increases, QD increases).
- Changes in indirect taxes (Taxes increase, QD decreases).
- Changes in distribution of income (Y is distributed more equally, Q D increases).
- Price of complementary goods (Price increases, QD decreases).
- Price of substitute goods (Price increase, QD increases).
- Advertising.
- Change in taste and fashion.
- Expectations (Positive expectations, QD increases).
- Availability of credit (If it possible to buy now and pay later, Q D increases).
- Population (Population increases, QD increases).
- Weather.
Veblen goods (luxuries) and giffen goods (goods that lack substitutes) have an
upward sloping demand function.
Demand Function (The sign always depict the relationship between the two
variables).
QD = a-bP (Negative relationship).
QD = a+bY (Positive relationship).
Supply.
Supply is the willingness and ability of producers to produce goods and services at a
given price at a given period of time.
The law of supply states that producers are prepared to supply more at higher than
at lower prices, ceteris paribus (positive relationship).
The supply curve.
If price increases, quantity supplied increases (extension) and vice versa. An
outward shift of the supply curve means that producers are prepared to supply
more at the same price. Similarly, an inward shift means that producers are
prepared to supply less at the same price.
Non-price determinants of supply.
- Costs of production (Cost of production increase, QS decreases).
- Change in technology (Technology improves, QS increases).
- Changes in taxes/ subsidies.
- Organizational changes.
- Prices of complementary products.
- Nature example: random shocks.
- The aim of producers example: increases sales, increase profits.
- Expectations of future changes.
- Size of the industry example: number of producers.
Supply function.
QS = a+bP (Positive relationship).
The Price and output determination.
- The market is a place where buyers and sellers meet to sell commodities.
- The price and output are determined where the two curves intersect
(equilibrium).
If the market moves out of equilibrium a shortage or a surplus will occur. A
shortage occurs when demand exceeds supply (below equilibrium level). A
shortage is eliminated by increasing the price. Conversely, a surplus occurs when
supply exceeds demand (above equilibrium). A surplus is eliminated by decreasing
the price.
Consumer and producer’s surplus.
Consumer surplus is the difference between how much you are willing to pay and
how much you actually pay. Consumers surplus is shown by the area below the
demand curve but above the market price. The level of consumer’s surplus
changes as the market price for a good or service changes.
Producers surplus is the difference between the actual price producers receive
and the minimum they are willing to accept. Producers’ surplus is depicted by the
area above the supply curve but below the market price.
Government control.
Minimum price (price floor) is set above the equilibrium and is set to protect
producers. An example of a price floor is the minimum wage legislation.
Maximum price (price ceiling) is set below the equilibrium and is set to protect
consumers. A price ceiling can lead to a creation of a black market.
Topic 2: Elasticity.
Elasticity is the responsiveness of a change in a variable to a change in another
variable.
Types of Elasticity:
a) Price elasticity of Demand (PED)- Price elasticity of demand is a numerical
value measuring the responsiveness of quantity demanded of, for example,
Good X to a change in its own price (caused by variations in supply alone). PED
is calculated by dividing the percentage change in quantity demanded by the
percentage change in price. The sign (-) indicate that there is a negative
relationship between the two variables. The magnitude indicates if a good is
inelastic (PED<1) or elastic (PED>1).
b) Price elasticity of Supply (PES)- Price elasticity of supply is a numerical value
measuring the responsiveness of quantity supplied of, for example Good X to a
change in its own price. The sign (+) indicates that there is a positive
relationship between the quantity supplied and the price.
c) Cross elasticity of Demand (XED)- Cross elasticity of demand is a numerical
value measuring the responsiveness of quantity demanded of, for example,
Good X to change in the price of Good Y. XED is calculated by dividing the
percentage change in quantity demanded of Good X by the percentage change
in price of Good Y. If the sign is negative is shows that the two goods are
complements. On the other hand, if the sign is positive, it shows that the two
goods are substitutes.
d) Income elasticity of Demand (YED)- Income elasticity of demand is a numerical
value measuring the responsiveness of quantity demanded of, for example,
Good X to a change in income. YED is calculated by dividing the percentage
change in quantity demanded of Good X by the percentage change in income.
A positive sign indicates that the good is a normal one. On the other hand, a
negative sign indicates that the good is inferior.
Topic 3: Government intervention.
A maximum price (price ceiling) is set below the market price to protect
consumers at times of rising prices. On the other hand, a minimum price (price
floor) is set above the market price to protect suppliers at times of falling prices.