ECONOMIE GENERALE ET RURALE

COURSE CONTENT
1. Nature and scope of economics

2. The organization of an economics system

3. Theory of demand, supply and price determination

4. The concept of elasticity

5. The theory of consumer behaviour

6. Theory of production and cost

7. Market structure

8. National income and determination

9. Agriculture and problems facing agriculture in developing countries

 1
Nature and scope of Economics
Economics has many definitions it is believe that there are many definitions as there are
Economist.

Adam SMITH who is the father of economics defines it as an inquiry in to the nature and
cause of wealth of nations. His main interest was to investigate the reason for disparity
(difference) between countries in terms of wealth.

J.S.Mills defines it as the science of production and distribution of wealth.

According to A.C.Pigou economics is the science of material welfare, to him economics

should be concern with how to improve the material well-being of humans.

Alfred Marshal sees economics as the study of mankind in the ordinary business of life.

Samuelson defines economics as the study of how man and society choose with or without
money to employed scarce resources with alternative uses to produces various commodities
overtime and distribute them from consumption now and in the future.

On the other hand Lip say and Steiner state that economics is concern by:

 The ways in which the society uses his resources and distribute the follow to the
individual
 The ways in which production and distribution
 The efficiencies of economics system

We can therefore conclude that the keys issues involved in economics are:

a. Human wants which are unlimited

b. Resources which are scarce
c. Technics of production that is the alternative uses

Economics can be study under two approaches: The traditional approach and the modern
approach

 The traditional approach

The traditional approach considers economics as a science of wealth divided in to four

divisions which are: production, consumption, exchange, distribution.

- Production: it involved the process and method use to transform input in to

goods and services
- Consumption: it means the use of wealth to satisfy Human wants
- Exchange: it imply the transfer of goods and services from one person to another
 - Distribution: it refers to sharing of wealth that is produces among the different
factors of productions.
 The Modern approach

It divides the subject of economics in to two divisions:

Macroeconomics and Microeconomics

 Basics concept in economics

1. Human wants
All economics activity is directed toward the satisfaction of human wants. Wants refer to
goods and services which are desired for consumption, they can also be call ‘‘ends’’. Wants
are varied and in the aggregate overtime there are insatiable.

2. Resources

The level of wants satisfaction that an economist can achieve is limited because of the
quality and quantity of resources. Resources refer to the means or basics instruments with
which wants can be satisfy. Resources can be regrouped in four categories:

- Labour: which consist of power and the capacity of human effort used in
producing goods and services
- Capital: which include non-human resources
- Land: which include all free gifs of the nature
- Entrepreneur: which is the management of all the other resources

The characteristic of those resources include:

- They are limited in nature

- They are versatile
- They can be combining in various proportions to produce a given commodity.
3. Scarcity

The most basic concept in economics is scarcity, which means: not having much of
something as we will want to. Resources it set to be scarce if at zero prices, quantity
demanded exceed quantity reply. To an economist all things are scarce relative to the
demand for them.

4. Choice

Since human wants are unlimited and the resources to satisfy them are limited, choice is
constantly made between alternatives wants. The decision to have one commodity in place
of another implies choice. Individual, firms and government make a lot of economics
decision on what to produce to satisfy some wants.

5. Scale of preference
In other for individuals, firm and government to achieve maximum satisfaction with the
limited resources available at disposal, they most arrange their wants in order of
importance. Such a list of unlimited wants arrange in order of importance is call a scale of
preference.

6. Opportunity cost

This is also known as the true cost or the real cost, because economist are sensitive to choice
and scarcity there are much concern by cost. The concept of opportunity cost in economics
is used to express cost in term of forgone alternative. In other to choose something, one
must be forgone or scarify. The real cost of satisfying a want is the next best alternative that
had to be forgone in order to do so. It is a real cost that economist call Opportunity cost.

 Positive economics
This is economics which is descriptive in nature. That is only describing the manner in which
economics unit functioning. His main objective is to inform us how the system is exactly
operating. It deal is “what it is”; positive economics look at issues as there are and describe
it without adding any value judgment.

 Normative economics
This is an economics that is prescriptive in nature and involved statement which have value
judgment .it deal with issue of : “what ought to be”

 Positive economics vs Normative economics

- Positive economics is concern with “what it is” while Normative economics is
concern with “what ought to be”.
- Positive economics describe economics behavior without any value judgment while
normative economics has moral judgment.
- Positive economics is objective or descriptive while normative economics is
subjective or prescriptive.
- The statement “price rise as demand increases” is related to the Positive economics
while the statement “rising price is a social evil” is related to the normative
economics.

Microeconomics and Macroeconomics
 Microeconomics

It is refer to as household economics or price theory it involves the study of economics from
the stand point of individual economics unit. It is the economics analysis of individual
component of the society which focus on price, output and market equilibrium

 Macroeconomics
It is refer to “Economy of aggregates” that it is address the economy as a whole and examine the
function of the economics system as it scopes with various problems (inflation, unemployment,
depletion, growth, international trade, etc). It is concern with the determination of the level of
prices, national income and resources, employment it is also concern with the maintenance of
external equilibrium.

 Why we study economics

1. A study of economics is necessary since it is concern with the use of scarce
resources to satisfy unlimited wants
2. A study of economics help the individual to build up a body of economics principles
and equips him with the tools of economics analysis which will enable him to
understand current issues and problem confronting the society.
3. A study of economics helps us to contribute our quota toward increasing the wealth-
being of the society.
4. A study of economics develop a power of critical thinking
5. A study of economics help to make the individual a practical person, he adopt
practical approaches to world issues and solution of his daily problem.
6. A study of economics help to develop in the individual, this is because economics see
thing as they are.

 Methodology of economics
As it is with other social science, the nature of the subject imposes limitation on the uses of
scientific method in study economics, therefore we will briefly examine the methodology
involve in it study.

1. Measurement

It is usually difficult to get the exact terms available .to the physical science in majors
distance , quantity ; however economics is different .if we want to measure the consumption
of two or more individual we will discover that it all be different; however went measuring
the level of Income ,quantity of export and import ,the data is easy to obtain. Also, many
things which will want to measure in economics are abstract and are difficult to quantify.

2. Experiment

In a physical science experiment are necessary to prove hypotheses and to enable forecast
to be made went outside event follow the patent. However in economy such conditions
really apply, human cannot be expected to behave predictable as gas or liquid nor can their
behavior be separated from previous conduct or current events in the society. Economics
make use of statistical information look for the correlation between data and actual event.

3. Forecasting
Statistical data can be uses to some extend to successfully forecast future economics
behavior. However, because of the complexity of human behavior, economics forecasting
remain fraught with danger. The situation is usually graved with the confusion between the
causes and effects of particular events.

4. Models

There are two purposes for this in economics

a. Their take a place of control experiment which is difficult to control in economics. A

model enable an economics phenomenon to be simplified to and extend not possible
to the real world, it is then possible to isolate important issues so as to make
prediction, which will be relevant in the world.
b. A model may be produce of and abstract situation which are not found in real world
can be used as a benchmark for real life situation, this sort of a model is use to
examine the behavior of firms weather a complicated structure or a simple diagram.
The purpose of any model is to assist to understanding the concept of idea.

2
 The organization of an economics system

Individual and group allover the world are involve I 3 fondamental questions:
 What to produce?
 How to produce?
 For whom to produce?

To answer this question, we must classify individualin to 3 groups:

- Household
- The firm
- The central authority

1. Households

It involve those who living under the same rooft andare subjected to making join financial
decision.economics make 3 majors assumption about household:

- Each household is assume to make consistent decision as those is were single

individual.
- Each household in making chooses is assumed to be consistently attending to
achieving some goals.
- It is assumed that household are the principale owner of the factor of production and
receive there income from selling these factor of production.We should also note
that the central authority also own land and capital.

2. Firms as decision makers consistent

It is a unit that employes factors of productions to produce commodities that is sell to other
firms,household and the central authority (it is a producer). There 3 majors assumptions
about the firm:

- Each firm make consistent decision as those it where an individual.

- The goal of must firm where decision are made is profit maximization
- Firm as producer are the principal users of the services of factors of production

3. Central authorities

It can be defined as public agencies, government, bodies other organization belonging under
the control of government. There are no basic assumption underlining the behaviour of
central authority, it cannot be said that the government will always act in a consistent
manner.

Firms, households and central authorities make decisions which affect what, how and for
whom to produce. Their actions take place in to individual markets which are categorising in
to two main types:
 - The factor market (where the factor of production is sell or buy)
- The product market (where product is sell or buy)

Economics system of the modern world fall between the pure prived enterprises and the
pure socialist system, we can therefore identified three types of economics system:

1. The free market economy or capitalist system

This is an economy which the decision of households and firms exert the majors influent
over the allocation of scarce resources. The central authority has not say.

 Advantages
- It is easy to estimate the various wants of people within the society
- There is freedom of consumption and production
- There is increase efficiency in production
- The price system which operated under capitalism reduces the need for the use of
many official
- Capitalism remove the tendency for the growth of dictatorship
- Because people are encourage to work hard there are free to own properties
 Disadvantages
2. Command economy or socialist system

Here the central authorities make the majors decision which influence the allocation of
scarce resources. The main aim of production is to maximized public welfare. Households
and firms produce and consume only went there a directed so.

 Advantages
 Disadvantages
- There is little room of satisfaction
- There is difficulty in estimating the sizes of the various wants of different members of
society
- There is wastage in labour
- The large size of the planning unit and the use of state officers give right to
bureaucracy
- There is lake of motivation for efficiencies
- Socialism give right to dictatorship

3. Mixed economy
In the real world no economy applies only either the free market or the command system. A
mixed economy is one in which firms, households, and central authorities interact to make
the decision on what, how and for whom to produce. Central authorities spending part of
their revenue on goods and services produce by firms and individual

 Functions of an economy system

Every economics system most performs five closely related functions.

1. Determination of what to produce

Because resources are scarce all wants cannot be fully satisfied ,therefore the problem is in
choosing what of the unlimited want is important to the economy and all. The economy
most therefore establish a means that us acceptable by various group for limited available
resources. The value of an item to the society is measure by his price

2. Organization of production

To be able to determine which goods and services to produces we have to know which
resources and which technical process will be employed to produce this goods and services.

3. Output distribution

Distribution of output in a prived enterprise economy is accomplished by a price system.

Output distribution depends on personal income distribution. Income distributions depend
on the distribution of resources in the economy and weather is not, individual place such
resources in producing goods and services that they need most.

4. Rationing overtime

Economics systems most make some provisions (space) for rationing commodities overtime,
most especially during period which supplies cannot be change. The economist most rations
the fixed supply in two ways:

- It most allocate the supply among the different consumer

- It most strench the given supply over the time period.

5. Economics maintenance and growth

Every economy is expected to maintain and expand it productive capacity. Maintenance

refer to keeping the productive power of the economy machine intact to provision for
depreciation (repairs).Expansion refer to the continuous increase trough population growth
and trough the development and improvement of skills by means of education and training.
The economics systems in train to responded (answer) the three fundamentals questions
have to make use of choice, that is by deciding which goods and services will be produces in
^lace of the forgone alternative. Society most decides whether to produce consumer’s goods
or capitals goods (infrastructures …). By using scarce resources societies choosing to go
without consumer goods and services in the present to enable their production to be
maintain an increase in the future. Choices must be made as to which combination of factors
of production to be use. As well as home production will be organized, also choices must be
made as the distribution of supply of the goods and services available.

The need of choices can be simply demonstrated by production possibility curve (ppc).For
the purpose of this demonstration, we are going to assume a country like Cameroon that
uses all his resources to produces two commodities: Food and Clothes

Food

W
(PPC)
V

U Z
* *

Cloth

However if Cameroon decide not to utilize it resources efficiencies it will decide to produce at each
point out of PPC (U and Z ). The PPC outline the delema facing many economies in the society, every
choice made involve the sacrified of alternative use of scarces resources. In each case the choice
made result in the cost. The cost of alternative best next use; to which the resources so used could
have input refer to the opportunity cost.

3
 Theory of Demand, Supply and price determination

 Demand theory

In economics demand is the desire to process a commodity supported by the wiliness and
ability to pay for it a particular time. In other words demand means the various quantity of
goods and services that could be purchased or that could be bought at different prices per
unit of time. The three main characteristic of demand in economy are:

- Wiliness and ability to pay

- There is always a price
- Always per unit of time

In economics we have the individual demand for a commodity and the market demand for a
commodity.

- The individual demand for a commodity is the amount of commodity which a

consumer is willing to purchase at any given price over a specific period of time
- The market demand for a commodity is obtain by adding up the total quantities
demanded at various prices by the entire individual over a specific period of time in
the market.
 Demand schedule

This is a tabular representation of a quantities demanded of a commodity at various prices.

prices Consumer A Consumer B Consumer C Market demand

50 4 3 5 12
75 3 2 3 8
100 1 0 2 3

120
100
80
60
Price
40
20
0
2 4 6 8 10 12 14 Market demand curve
Quantity demanded
 The diagram above is a graphical representation of Price - quantity relationship. The
individual demand curve chose the highest price which an individual is willing to pay for
different quantities of the commodity

 Derived demand

This refers to the demand for goods which are needed for other production.it is the demand
for producer goods like other production. It is the demand for producer goods like producer
of raw material, equipment, machinery

 Autonomies demand

This is demand that is independent for other product or the main product; it is not link up
with other goods or services e.g.: Food, Clothes

 Income demand

This refer to the quantity of goods and services that a consumer would be willing to
purchase at different level of income (all others things is equal)

 Crossed demand

It refer to various quantities of goods and services that a consumer will be willing to
purchased not due to changes in the prices of commodities but because of change In the
price of related commodities.

 The law of demand

The law of demand state that: as price increases (decreases) consumer will purchased less
(more) of the specific commodity. Demand varies inversely with price and it is a negative
relationship between price and quantity.
The demand curve have negative slope, the reason for a downward sloping of a demand
curve can be explain as follow:

 Income effect

If the price of commodities fell, the purchasing power of the consumer increases and vice
versa, he can buy the same quantity with less money. This change in purchasing power due
to change in price is known as the Income effect

 Substitution effect

Went price of a commodity fells, it become relatively cheaper compare to other commodity
whose priceless not change, therefore the consumer consume more of the commodity
whose price has fallen.
  Law of diminishing marginal utility
This law state that as an individual consume more and more unit of a particular
commodity, the utility derived on it goes on reducing or decreasing. So to get
maximum satisfaction and individual purchased in such a manner the marginal utility
of the commodity is equal to the price of the commodity. Went the prive fall, a
rational consumer purchases more, changes in the demand for a commodity can be
sown true the demand curve in two ways:
- Movement along the demand curve
- Shift along the demand curve

1. Movement along the demand curve

(extension and contraction)

If only the price of the commodity changes and all other determinant of demand remain
constants a movement along the demand curve occurs. Went there is a change in a price,
quantity demanded increase or decrease and technically it is call extension and contraction
in demand. A movement along a demand curve is defining as a change of quantities
demanded due to change of price.

Price

20

10

10 25
Quantity demanded
 2. Shift in the demand curve

It refer to change in demand due to any other factors other than price. It will occurs if there
is a change of income level an if there is a change of consumer. Each of this factors shift the
demand curve either to the left or to the right.

D2

D
Price
D1

D2

D
D1
Q1 Q Q2 Quantity demanded

Movement along a demand curve is the result of an increase or decrease in the price of
commodities, while the shifts in demand curve occurs went other determinants other than
price change.

 Determinants of demand.

Various factor affected the quantity of commodities demanded by a consumer, the keys
determinants of demand are:

 Price
 Price of related goods:
If the price of substitute good goes down, then the quantity demanded of that commodity
also goes down and vice versa.
If in the other hand there are complement goods, an increase in price of one leadthe
decrease of other.
 Income
 Individual taste and preferences
 Expectation about future price and income

 Exception in the law of demand

Like other law, the law of demand also has exception that is: there is not inverse relationship
between price and quantity demanded.
Some of this exception includes:
1. Given goods
This is those inferior goods whose quantity demanded decrease with decrease in price. This
can be explaining by using the substitution or income effect.
2. Ostentation
These are commodities which are used to define one statute and display one wealth. This
commodity does not follow the law of demand and quantity demand increases when price
increases.
3. Expectation in the change of price in the future
If the consumer expects the price of commodity to increase in the future he may
accumulated much of the commodity for future consumption even at the price who may be
high and vice versa.

 Theory of supply
Supply is the amount of commodities that producer are willing to sell at it price per unit of
time. In other word, supply is a schedule of an amount of commodities that will be offer for
sell at all possible prices at any period of time.
 Supply schedule
Price Quantity A Quantity B Quantity C Market
10 40 60 80 180
8 30 45 60 135
6 22 33 44 99
4 15 23 30 68
2 10 15 20 45

 Supply curve

Market supply curve

12

10

6
price
4

0
20 40 60 80 100 120 140 160 180 200
Quantity supplied
 The law of supply state that, the quantity of commodities offer by the producer for sale
increases with increases in price, other thing is equal.
 Determinant of supply
Quantity supply of a commodity is affected by a following factor:
1. Price of the product
2. Technological change
Technologic that reduce cost and produces more, this may result in the producer being
willing to supply more quantity of the commodity.
3. Cost of production
Change in cost of production will have an impact in total production and supply. An increase
reduces production as well as supply and vice versa.
4. Tax or subsidy
An increase in tax will reduce supply; also subsidy may increase production and supply.
5. Expectation on price on the future
An expectation that price will fall in the future may lessen the production and thereby
decreasing the supply and vice versa.
6. Price of others goods
If the producer is currently producing one commodity (A) an the price of another commodity
(B) increase, he may switch (change over) to produce B as his would gif it better return.
7. Number of producer in the market
If there are a large number of producer or seller in the market willing to sell their
commodity, supply is bound to increase.

→ Supply functions
It expresses the relationship between supply and the factor affecting the producer and
supplier.QS =f ( productions factors)

→ Movement along the supply curve

A movement along the supply curve occurs went there is a change in price result in change
of quantity supply: An increase in price of a commodity resulted to an increase of quantity
supplied and vice versa. The movement to point A to point B is due to change of price; all
other factors remain the same.
Price
P2 B

A
P1

P3

Quantity supplied
Q3 Q1 Q2
 → Shift along the supply curve
This is some time refers to changes in supply and it occurs went other determinant other
than price change.
Price

Q2 Q Q1 Quantity supplied

The decrease in supply pushes the curve to the left.

Factor which may affect changes in supply includes:
1.Change in factor prices
2.Change of technic of production
3.Improvement of mean of transportation
4.Climatically changes in the case of agricultural products
5.Political change
6.Taxation policies
7.The goals of the firms

 Exception to the law of supply

1. Fixed supply
The following causes make the supply to be fixed
a. Short run supply of agricultural product
In the short run it is not easy to increase the supply of the agricultural product no matter
supply.
b. Long run supply of land
Those it is may possible to increase the supply sometime of land for short run; in the long
run the supply of land is fixed.

2. A supply curve with more than one slope

This is a situation, were as a point the higher her price of the commodity the lower the
supply. Example: case of the labour supply in undeveloped country.

3. An abnormal supply curve could be negatively sloping

This type of supply curve could be brought about by expectation in continuous changing in
price, if seller or producer expects that the price will fall in the future there will prefer to sell
more at lower price now and vice versa.

 Price determination
The intersection of the demand and supply curve indicates the equality of quantity
demanded by consumer and quantity supply by producers. At this point of equilibrium we
have the equilibrium price as well as the equilibrium quantity. Went such conditions exist,
the market said to be in equilibrium because there is neither shortages nor surpluses.
Price Quantity demanded Quantity supplied
70 100 340
60 140 300
50 180 260
40 220 220
60 260 180
20 300 140
10 340 100

Price determination
80

70

60

50
40
Price

40
Quantity
supplied
30
Quantity
demanded
20

10

0
80 100 120 140 160 180 200 220 240 260 280 300 320 340 360
quantity
At point E, quantity demanded it equal to quantity supplied and the market price is
determined. A change in quantity demanded or supplied will also change the equilibrium
point.
- If supply does not change and demand increases the equilibrium price as
well as equilibrium quantity will increase.
- If supply increase while demand remain on changes there will a excess of
supply over demand, this decrease equilibrium price and increase
equilibrium quantity.
- Went there is decrease in supply without any change in demand, equilibrium
price increases while equilibrium quantity will decrease.
- Went there is increase in demand with perishable goods, the supply is limited
by the available quantity on that day.
Suppose there is increase in demand with supply remain constant, this will rise the
equilibrium point

Supply curve
Price

P1

P2 D1
D2 D
Q0 Quantity supplied

Exercise
Consider the following demand and supply functions.

Qd =40−4 P P ≡ price ≡ FCFA

Qs =12 P−24 Qs ≡ quantity supplied

Q d ≡ quantity demanded

1. Determines the equilibrium price as well the equilibrium quantity.

2. If the price is fixed at 6 FCFA, what is magnitude of excess supply?

Solution
1. At equilibrium point we have Q s =Q d ⟹ 40−4 P=12 P−24 then P=4 and
equilibrium quantity ( Eq ) is equal to 24
2. Qd =40−4 ×6 ⟹ Qd =16
Qs =12× 6−24 ⟹Q s=48
magnitude of excess supply=48−16=32
 4
The concept of elasticity

Elasticity is use to describe a degree of responsiveness of demand or supply of a

commodity to a change in the various factors that affect demand and supply.

 Elasticity of demand
This measure a degree of responsiveness of quantity demanded to change in any of the
factors affecting demand while keeping other factors constants, went this is due to a change
in a price, the elasticity is said to be price elasticity of demand.

→ Types of elasticity of demand

There are basically three main type of elasticity of demand:

1. Price elasticity of demand

This is the degree of responsiveness of quantity demanded of a commodity to a change in

price. It can be defined as: the ratio of proportionate change in quantity demanded of a
commodity over a given proportionate change in price.

% change∈quantity demanded Q 2−Q 1 P2−P1

Ed = = :
% change∈ price Q1 P1

Q 1 : Original quantity demanded

Q 2: New quantity demanded

P1 : Original price of the commodity

P2 : New price of the commodity

Ed : Price elasticity of demand

Exercise
Calculate the elasticity of demand ( Ed ) as quantity change from 4000 to 8000 and price from 80 Frs
to 60 Frs.
Solution

800−400 60−80
Ed = : ⟹ Ed =−4
4000 80
 2. Income elasticity of demand

It is a degree of change (responsiveness) of a quantity demand of a commodity to a change of income

of the consumer is called income elasticity of demand. It is define as the ratio of percentage change
in quantity demanded per unit of time to a percentage change in income.

% change∈quantity demanded Q 2−Q 1 I 2 −I 1

Ed = = :
% change∈income Q1 I1

Went income elasticity of demand is positive, the commodity is a normal good.

Went it is negative the commodity is an inferior goods.

Exercise
Calculate the income elasticity of demand of bear if consumer income increase from 50 000 FCFA to
60 000 FCFA and permit in consumption to 30 bottles to 40 bottles.

Solution
40−30
30 5
IE= = ⟹ IE=1,666
60000−50000 3
50000

3. Cross elasticity of demand

This is use to measure the responsiveness of quantity demanded to change in price of

related commodities it is therefore the percentage change of the quantity demanded of one
commodity over the percentage change in price of another commodity.

% change∈quantity demanded of commodity X

Ed =
% change∈ price of commodity Y

The value of cross elasticity depends on whether the commodities in question are substitute,
complement and unrelated.

- If cross elasticity of demand (CED) is equal to 0: it mean that X and Y are

unrelated or independent
- If CED> 0 : X and Y are complement
- If CED< 0: X and Y are substitute
 Exercise
Calculate the cross elasticity of demand of coffee and thee, given that the demand of thee
fall from 7000kg to 3000kg as price of coffee drop (fall) from 1000 FCFA to 800 FCFA.

Solution

3000−7000
7000
CED= ⟹ CED=2,85
800−1000
1000

→ Degree of price elasticity of demand

Economists have grouped the various degree of price elasticity of demand in to 5 categories:

- Perfectly inelastic
- Perfectly elastic
- Relatively inelastic
- Relatively elastic
- Unitary inelastic

1. Perfectly inelasticity of demand

Went the quantity demanded of a commodity does not change at all to whatever change in
price the quantity demanded remain constant it said to be perfectly inelastic.
Price
P3 Demand curve

P2

P1

Q0 Quantity demanded

2. Perfectly elasticity of demand

A perfectly elastic demand curve is a horizontal one which indicate that quantity demanded
is extremely responsive to price. That it is even a slight rise in price drop the quantity
demanded to zero. The elasticity demand as such is equal to infinite.

Price Demand curve

P0 ∞
 Q1 Q2 Q3 Quantity demanded

3. Unitary elasticity of demand

Went the quantity demanded of a commodity changes by exactly the same percentage as
price the demand is said to be unitary elastic.

4. Relatively elasticity of demand

If a given proportionate change in price cause relatively a greater change in quantity

demanded, demand it said to be relatively elastic.

5. Relatively inelasticity of demand

Went a given proportionate change in price causes a relatively less proportionate change in
quantity demanded, demand it said to be relatively inelastic

→ Factor determining price elasticity

- The degree of necessity
If the consumption of the commodity is necessary then the demand for that commodity is
relatively inelastic.
- Availability of substitute
If a commodity has a greater number of closed substitutes available in the market, the
demand for the commodity will be greatly elastic.
- Proportion of income spend on commodity
If the proportion of income spend in the commodity is small, the demand for such
commodity will be inelastic.
- Time period (short run or long run)
In the short run went the consumption of the commodity cannot be postponed (shifted to
another time) the time, demand will be less.
- Number of uses of a commodity
If a commodity can be put to a number of uses the demand is more elastic.

→ Practical importance of elasticity of demand

 Important in taxation policies
 Price discrimination by a monopolist
 Important to business-man
 Help to trade union
 Use in international trade
 Determination of rate of foreign exchange
 Guideline to producer
  Elasticity of supply
Elasticity of supply is defined as the degree of responsiveness of supply to changes in the
prices of commodity. That is the extreme to which quantity supply of a commodity changes
with a given change in price. There is five degree of elasticity of supply.

1. Perfectly elastic supply

This occurs went the supply curve is horizontal and supply it said to be infinite.

Price Supply curve

P0 ∞

Q1 Q2 Q3 Quantity supplied

2. Perfectly inelastic supply

This represented a situation in which producer or seller’s sale a fix quantity of commodity
and supply curve is vertical

Price
Supply curve

P2

P1

Q0 Quantity supplied

3. Unitary elastic supply

Went the percentage change in price bring about the same percentage in quantity supplied
of a commodity, we say it is unitary elastic and elasticity of supply it equal to one.

4. Elastic supply
Went the percentage increase in price of a commodity result in a larger percentage increase
in the supply of the commodity, it is known as elasticity supply. The supply curve has a
flatter slope.
 5. Inelastic supply
Went the percentage change in price causes a small percentage changes in quantity
supplied, a supply is said to be inelastic, the supply curve have a steeper slope.

→ Determinant of elasticity of supply

% change∈quantity supplied Q 2−Q1 P2 −P 1

E s= = :
% change∈ price Q1 P1

Q 1 : Original quantity supplied

Q 2: New quantity supplied

P1 : Original price of the commodity

P2 : New price of the commodity

E s: Price elasticity of supply

The main factors which determine the degree of price elasticity of supply are:

1. Time period
If the time period is too short and supply cannot be expanded offer a price increase, the
supply is relatively inelastic.

2. Factors mobility
If the factors of production can easily be move from use to another, it will affect the
elasticity of supply, the higher the mobile the greater the elasticity.

3. Changes in marginal cost of production

If marginal cost increase and marginal return decrease, the price elasticity of supply will be
less elastic to an extent.
4. Excess supply
Went there is excess supply, the supply is more elastic.

5. Availability of infrastructure
Went there is infrastructure the supply is inelastic.

6. Agricultural or industrial commodities

The supply of agricultural commodities is failing inelastic.
 5
The consumer theory

The theory of the consumer provides a logical starting point for the systematic
development of microeconomics principles. Consumer satisfaction is always the ultimate
goal, the basic of consumer behaviour is that: people tend to choose those commodities that
are for high value. Base on it, economist developed the notion of utility to describe the
consumption pattern adopt by the consumer. Utility is the power to satisfy the human want.
They are basically 4 kind of utility:
1. Form utility
2. Place utility
3. Time utility
4. Procession utility
There are two approaches use in consumer behaviour:
- The cardinality approaches
- The ordinalistic approaches
In the cardinal approaches, utility is measurable, but in the ordinary approaches it is not
measurable.
a. Cardinal utility approach
This approach is based on the following assumption:
i. The consumer is rational in decision making (it main aim is to satisfy itself)

ii. The utility of it commodity is measurable

iii. The marginal utility of money is assume to be constant (this assumption is necessary
if utility is to measure in monetary unit)

iv. Diminishing marginal utility: addition to the consumer total utility decrease as more
as the commodity in consumer.

v. Total utility: depend on the quantity of individual commodities consume

b. Ordinal utility approach

It has the following assumption:
i. The consumer is rational in decision making
ii. The consumer is able to rank his preferences according to the satisfaction he derived from
it
 iii. At all-time the consumer is consistent and transitive (consistent ≡take a long time to
change his choice. Transitive≡constent in want )
iv. Total utility is assume to depend on the quantity of the various commodities consume.
v. It is assume that commodities consume can to some extend substitute to another and that
there are substitution.
→ Concept of utility
a. Total utility
This refers to the amount of satisfaction derived from all the unit of commodity at a particular time.
b. Marginal utility
It refer to the additional satisfaction derived by a consumer per unit of commodity consume.
c. Average utility
This is the amount of satisfaction derived by a consumer per unit of commodities consume.

Total utility
Average utility=
units of commodity consume

→ Equilibrium of consumer:
If there are many commodities to be consumed by an individual, he will maximize utility by
allocating his expenditure in such a ways that the ratios of the marginal utility of individual
commodity to there are price is equal. If consumer decide to spend it income in two commodities,
the marginal utility of one commodity over the price of that commodity most equal to the marginal
utility of the other commodity divide by the price of that commodity. Went this occur the consumer
it said to be at equilibrium.
Mu X Mu Y
=
PX PY

However if there is a change in price of any commodity, the consumer will no longer be in
equilibrium. To restore the equilibrium, the price of commodity should go back to their
original value. This is call a principle of equimarginal utility, however if the hoe income was
allocated to one commodity, the equilibrium will be attain only went marginal utility will be
equal to the price.

Mu X =P X

→ Deviation of consumer demand curve

The demand of the consumer derives from the cardinal utility schedule and the assumption
of diminishing marginal utility.

Marginal utility (MU) Average utility

Number of unit consume Total utility (TU) ∆ TU TU
( ) ( )
∆ NUC NUC
0 0
1 10 10 10
2 18 8 9
3 24 6 8
 4 28 4 7
5 30 2 6
6 30 0 5
7 28 -2 4
8 24 -4 3

Total utility increase but at a decreasing rate, it reaches maximum went five and six units is
consume. Marginal utility diminishing from ten went the first units is consume and to zero
went the 6th unit is consumes; after that MU is negative. Negative utility is call disutility.

→ The indifference curve

Consumers have a large number of goods and services among which preferences can be
expressed. Consumer preferences are based on this following assumption:

i. The consumer is able to set up preferences, ranking of different combinations

available
ii. The preferences of consumer are consistent or transitive
iii. The consumer prefer more of commodities to less of it

The locus of points which yield (give) the same level of satisfaction or utility to the consumer
is an indifferent curve. Let assume a consumer has to consume just two commodities
X and Y. a set of combination among which the consumer is indifferent form an indifferent
schedule, while the graphical representation is an indifferent curve.

 Indifferent schedule

Number of commodity X use Number of commodity Y use

for one consumption for one consumption
2 7
5 4
6 3
7 2
8 1
 Indifferent curve
 8

5
Comodity Y

0
1 2 3 4 5 6 7 8 9
Commodity X

 Characteristics of an indifferent curve

- An indifferent curve have negative slope
- The further a ways it is from the origin the higher the level of satisfaction
- Indifferent curve do not intersect
- Indifferent curve are convex to the origin which implies decreasing marginal
rate of substitution of one commodity to another.

The marginal rate of substitution X for Y note MRS XY is define as the maximum amount of
one commodity (Y)that the consumer is willing to give up in order to get additional unit of
the other commodity (X)

→ The budget line

The budget line of an individual give the amount of money available to the consumer to
spend in the purchase of goods and services, it set it limit to the amounts of commodities
that a consumer can purchase at given prices and at given taste of the consumer.

E.g. our consumer has 1000F and the price of X and Y is 200F and 100F respectively. If he
decide to spend all his income on X alone he will buy 5 units and if decide to spend all his
income on Y only he will buy 10 units. He budget line therefore will be the line joining 5 units
of X and 10 units of Y.
 Budget Line
12

10

6
Commodity Y
4

0
0 1 2 3 4 5 6
Commodity X

PX
The slope of budget line is determined by the ratio .
PY

I
If all income is spend on X, it is given by
PX
I
If all income is spend on Y, it is given by
PY
Not that:
- Change in consumer income and changes in the price of commodities will
shift the consumer budget line.
- If the price of commodities increases while the income remains constant the
line will shift to the left.
- If the income of the consumer increases while price remain the same, the
budget line will shift to the right parallel to itself.

→ Maximisation of consumer satisfaction

The theory of consumer behaviour is built on the premise that, individual consumer attend
to move toward combination of goods and services that are most prefer, that is the seek to
maximization satisfaction. To demonstrate the condition under the consumer can achieve his
goal. The consumer indifferent map and factors restraining him are bough together, they
most prefer combination most lie on the budget line. The point at which the budget line is
tangent to the indifferent curve is the most prefer combination which yields (give) the
maximum satisfaction. This mean that the rate at which the consumer is willing to give up
one commodity to obtain the other is equal to the rate at which he will require by the
market to give up the commodity to obtain the other that is Marginal rate of substitution.
 PX
MRS XY = , because at the point of tangency the slope of the two is necessary the same. A
PY
graph is plotted of the point which yields (give) the most prefer combination; we will obtain
price consumption.

 Indifferent curve

Budget line


→ The law of diminishing marginal utility

It state that: all other things being equal, the marginal utility derived from successive unit of
a given commodity goes on decrease. Hence the more with consume of a commodity the
less we want of it because every successive unit give less satisfaction.

→ Assumption of the law

i. There should be a single commodity with homogenous unit wanted by an individual
consumer.
ii. They should not be any change in test, custom, habit, and income of the consumer.
iii. They should be continuity in the consumption of the commodity
iv. The commodity should be divisible
v. The consumer should be an economic man who act rationally
vi. The commodity should be normal goods

→ Importance of the law

 The law of diminishing marginal utility is the law of consumption
 The law help in bringing variety in production and consumption
 The law help to explain the phenomenon that a price of a commodity fails went it
supply it increase, this is because with an increase in stock of the commodity it
marginal utility diminishing.
  The principle of progression taxation is based on this law that is as a person
income increase, the rate of tax rises because the marginal utilities of money fall
with the rise in his income.

6
Production and cost theory

Production is the process to transforming input (resources, factor of production) in to output

in a given period of time. The product or output produce depends on the quantity of
resources used in production.

Factors that determine the level of production:

 Availability of infrastructure
 Availability of capital and labour
 Availability of raw material
  Availability of technology
 Man power
 The level of economic development
 Efficiency in the use in the factor of production

 The production function

It is a mathematical relationship, which exists between the output and factors of production
(input), it is usually given by:
Y =f ( X 1 , X 2 X 3 … … … … X n )

X 1 , X 2 Represents variable input, X 3 to X n be the fixed input. The production function

determine how much of the various input will be used in other to produce a given product or
output. The above production function with factor product relationship which are consider
by the agricultural firm in deciding how much to produce in order to maximize profits. The
following production function relationship exists:

1. Factor-product relationship
In this kind of relationship, production is centred on only one product, here only one factor is
varied and the other is constant.
Y =f ( X 1 X 2 … … … … X n)

2. Factor-factor relationship
This is usually considered went decision on how much to produce a given output level is
consider. This state in to account the fact that resources are scarce and have alternative
uses, this kind of relationship is given.
X 1 =f ( X 2 X 3 … … … … X n)
It indicated that X 1 varies with X 2 while the other factors are constant an output remain
constant.

3. Product-product relationship
This is consider went the decision is on what to produce, here one variable input is use to
produce two product and it is expressed as:
Y 1=f (Y 2 )

→ Analysis of production function relationship

 The factor-product relationship Y =f ( X 1 X 2 … … … … X n)
It is based in to the following assumption:
I. Only one product is produce
 II. Only one factor vary while the other are held constant
III. The input as well as output most be divisible
IV. The objective of the producer most be profit maximization
There are 3 possibilities that can exist in the above function; these are constant marginal
return, diminishing marginal returns and decrease marginal return.

- If the level of output is increasing with constant amplitude, we have constant

marginal return.
- If the change in the input is more than proportionate change in output it
increasing proportionate marginal return
- If a change in input result than it less of proportionate change in output, the
result is decreasing marginal return

Amplitude of the Fertilizer Output Amplitude of the

Fertilizer Output increase of output
increase of output
1 10 1 10
2 20 20 - 10 = 10 2 25 25 - 10 = 15
3 30 30 – 20 = 10 3 45 45 – 25 = 20
4 40 40 – 30 = 10 4 75 75 – 25 = 25
5 50 50 – 40 = 10 5 110 110 – 75 = 35
6 60 60 – 50 = 10 6 156 156 – 110 = 46
Constant marginal return Increasing marginal return

Fertilizer Output Amplitude of the

increase of output
1 10
2 25 25 - 10 = 15 →
3 35 35 – 25 = 10 → The generalise
Decreasing marginal return
4 42 42 – 35 = 7 production function
5 47 47 – 42 = 5 - Total product (TP): This is
6 50 50 – 47 = 3 the total output resulting
from the use of factor of
production

- Average product (AP): this is the ratio of the total product to the quantity of
TP
input use in producing that amount of output. AP=
inputs

- Marginal product (MP): this is the addition to total product as a result of an

addition of one unit of variable input. It is a change in a total product due to a
∆ TP
change in a particular variable input. MP=
∆ inputs
 - Marginal rate of factor of substitution (MRFS): the MRFS of one input for
∆ x2
another is a change in one input due to another. MRFS X X = 1 2
∆ x1
∆ x1
MRFS X X =2
∆ x2
1

Since one factor X 1 exchange for another X 2 , the MRFS to X 1 for X 2 is

∆ x2
MRFS X X =
1 2
∆ x1

→ Isoquant
This is a curve which shows all technical efficient input combination for producing a given
level of output.
An isoquant map is a set of isoquant plotted on a single graph such, each isoquant represent
a different level of output. Isoquant has the same properties like and indifferent curve.

→ Elasticity of production
This is the change in output due to a percentage change in input and it is give as :
∆Y
×100
%change∈output Y ∆Y X ∆Y 1 Y
= = × = × with AP=
%change ∈unput ∆ X ∆ X Y ∆ X AP X
× 100
X
Elasticity of production it equal to the marginal product over average product.

Production function is use in deriving basic economic principal for decision making.
Therefore the producer has to decide the best stage to produce.

Marginal product
units of inputs (L) Total product(L) Average product (Y/L) (∆Y∕∆L)
0 0
1 10 10 10
2 28 14 18
3 42 14 14
4 52 13 10
5 60 12 8
6 66 11 6
7 70 10 4
 8 72 9 2
9 72 8 0
10 70 7 -2

80

70

60

50

40
Total product(L)
Average product (Y/L)
30 Marginal product (∆Y∕∆L)

20

10

0
0 2 4 6 8 10 12

-10
units of imputs (L)

This figure shows the three stages of production and has the following characteristic:

 Stage 1: TP is increasing , AVP is increasing, MP is greater than the AVP and the MP
is maximum at the point of inflexion at the boundary of stage 1 MP = AVP that is the
end of stage 1

 Stage 2: MP is less than AVP, MP and AVP are all decreasing at the boundary of
stag2 and stage 3 MP = 0

 Stage 3: AVP is greater than MP.AVP is still positive, MP < 0, both MP and AVP are
decrease.

If the foal of the firm is profit maximization it will operate to stages 1 and 3, there are
irrational stages of production. Irrational production exist if resources can be arrange in any
manner what so ever to give a greater product from the same collection of resources or to
give the same product with a smaller aggregate of resource. Rational production occur in
stage 2 where TP is in increasing, MP is decreasing but positive and less than AVP while AVP
is decrease. This is the region of diminishing return, and it is here that profit can be
maximized. However the exact level of output to be produce in this stage can only be
determine if product prices and other factors are known.

Given the production functions, deciding on how much to produce will depend on factor
product price ratio.

→ Conditions for profit maximization

Went operating in stage 2 the conditions of profit maximization is that, the factor product
price ratio must be equal to the marginal product of the variable input. Since agricultural
firm have no control over right knowledge of the factor product price ratio, is very important
to the decision making in deciding the most profitable level of output.

P X : Input price

PY : Output price

The condition of profit maximization can be state by:

PX ∆ Y
= (1 ) ⟹ P X ∆ X =PY ∆Y (2)
PY ∆ X

This equation implies that the value of the change in the variable input is equal to the value
of change in the output.

If we arrange equation two we will have:

PX ∆ X PX
=PY ⟹ =PY Then, the ratio of input price to MP is equal to output price or the
∆Y MP
product prices.
PX
=¿ Marginal cost
MP

 The cost function

In economics, cost refers to the value of input use in production. Cost function is derived
from production functions. We can derived various cost such as total average and marginal
cost associate, which short run production on the assumption that the firm cannot influence
input.
 1. Total cost (TC)
All cost involved in producing is refer to as total cost and it comprises of fix cost and variable
cost (for variable input).

2. Average cost (AV)

This is total cost divided by the number of unit produce that is cost per unit of output. It
comprise of average fix cost and average variable cost.
TC VC FC
AC= = +
TP TP TP

3. Marginal cost (MC)

This is the increase in total cost resulting from an increase in output.
∆ TC
MC=
∆ TP

L Y FC VC AFC AVC TC TAC MC

0 0 400 0 400 0
1 10 400 20 40 2 420 42 2
14,285714 1,4285714 15,714285
2 28 400 40 3 3 440 7 1,11111111
9,5238095 1,4285714
3 42 400 60 2 3 460 10,952381 1,42857143
7,6923076 1,5384615 9,2307692
4 52 400 80 9 4 480 3 2
6,6666666 1,6666666 8,3333333
5 60 400 100 7 7 500 3 2,5
6,0606060 1,8181818 7,8787878
6 66 400 120 6 2 520 8 3,33333333
5,7142857 7,7142857
7 70 400 140 1 2 540 1 5
5,5555555 2,2222222 7,7777777
8 72 400 160 6 2 560 8 10
5,5555555 8,0555555
9 72 400 180 6 2,5 580 6
5,7142857 2,8571428 8,5714285
10 70 400 200 1 6 600 7 -10

 The firms revenues and profit

→ Firms revenues
The firm is assuming to approach in a perfectly competitive market.
Total revenues is what the producer get from selling his commodities and is express as
PY × Quantity . Marginal revenue is the change in total revenue due to the sale of additional
unit of output.
For a perfect competitive firm average revenue is equal to marginal revenue which is equal
to price and the firm de firm demand curve, the average revenue curve, the marginal
revenue curve coincide in the same horizontal line.

→ Firm profit
Profit is the difference between total value of output and total value of input that is profit
equal to total revenue – total cost.
Assuming that total price was 40F, therefore given product prices, we can able to establish
the perfectly competitive firm in the short run; the perfectly competitive firm is in
equilibrium went marginal cost is equal to marginal revenue is equal to price.

→ The rate of product transformation

It measure the rate at which one product is transformed to another or the rate at which one
product is given up to produce the other, given a particular level of variable input use the
curve that describe the various levels of the two output that can be produce using the same
level of variable input (isoquant).
 7 Market structure
A market is a place where the sellers of particular commodities can meet with the buyers of
that commodities or services where a potential for transaction can take place. The buyer
most have something that they can offer for exchange for their to be a transaction. A market
is a sphere within which price determination forces operate. Also market is area within
which the forces of demand and supply interact to establish a single price. A market place
can be described as an area was thing abort and so.

Essential of a market:
 Sellers and buyers most exist
 Commodities most exist
 Exchange between buyers and sellers
 Area of the market most exist

→ Market structure
This refer to the size and design of the market, it is related to those those organisational
characteristic of a market which influence the nature of competition and pricing as well as
influence the conduct of business firm.

 Types of market
In relation to price determination market can be classify in to perfect and imperfect market.

1. Perfect market or perfect competition

A market it said to be perfect went all potential buyers and sellers are aware (have a
knowledge) of the price at which transaction take place and the offers made by the other
buyers and sellers, under such a condition. The price of commodities will tend to be the
same all over the market. A perfect competition market is the world of price-takers.
Perfectly competitive firm sell homogenous product.
 Characteristic of a perfect competitive market
- For perfect market to exist, there must be large number of buyers and sellers
(a single sellers cannot influence price)
- The commodities bought and sold in the market most be homogenous
- There should be no restriction on entry or exit from the market
- Another characteristic of perfect competition is the buyers and sellers should
be fully aware of the prices that are being offer and accepted in the market.
- They should be no transport cost (they should be perfectly mobility of the
resources that are found in the market) each firms and industry are exposed
to the same conditions to obtain resources therefore, they should be perfect
resources in and out of the market
 2. Imperfect market competition
A market it said to be imperfect went some buyers or sellers or both are not aware of the
offers being made in the market. The different types of imperfect market include:
- Oligopoly
- Monopolistic competition
- Duopoly
- Monopsony (one buyer)
- Oligopoly (few buyers)

 Characteristics of monopolistic competition

- Here is a large number of firm operating under this market system.
- The firm produce very closed substitute
- Firms under monopolistic competition form a group; they cannot be calling
an industry because there are product is dissimilar.
- Under monopolistic, product is differentiated through trade name or brand
name.
 Characteristics of oligopoly
The refer to a market characteristic by a small number of producer who often act
together to control the supply of a particular commodities as well as it market price. It is
dominated by few large supplier who interdependent on each other. The keys
characteristic include:
- It is dominated by small number of participant
- Firms sell branded product which are close substitute to each other
- Entry in to the market is restricted
- The firm are interdependent for decision making
- Their product can be homogenous or differentiated
- The sellers are price makers
- The sellers can achieve supernormal profit in the long run

 Characteristics monopoly
Monopoly is a traditional form of market, it is an extreme form oppose to a competitive
market structure. It is a market situation in which an individual or a group of person acting as
a unit controlled the supply of a commodity or services which has not closed substitute. A
monopolist is only producer of the particular goods or services in the market. In real world
monopoly do not exist. Other characteristic of monopoly include:
- There is only one producer of the commodity which has no close substitute
- There are many buyers of the commodity
- The monopolist is the price makers who determine a price of commodity to
his maximum advantage.
- The rate of output level is determine by the monopolist
 - Since there is only one firm in the market, his demand curve is also the
market demand curve and it is downward sloppy

→ Short run equilibrium of the perfectly competitive market

A firm it said to be in equilibrium when at a specific output level, profit is maximise and cost
is minimize. For profit maximization to be achieved, the firm most produce at that output
level when marginal revenue is equal to marginal cost. Since for a perfect competitive firm,
price and marginal revenue are equal, the profit maximization is define as the output level
went MC = MC = P.

Price MC

A MR=MC=P
P

0
Q Output
The above curve shows the short run profit maximization for a perfect competitive firm. The
firm maximize it profit by producing output where MR=MC=P. in the diagram, total revenue
is represented by the area OP, OQ.

 Advantage of perfect competitive market

- Consumer pay the lowest possible price as the extend of positive economics,
profit attract few firm in to the industry to force down the price.
- Resources are more efficient utilise. Since each firm is conscious of the fact
that, they cannot charge higher prices, there tend to make the best use of
their productive resources; this enables them to minimize cost.
- Minimal cost is incurred on sale promotion, this because advertisement or
sale promotion strategies have little or no influent in the consumer.

 Disadvantage
- The firms make little or no profit; the perfect competitive firm is generally
small and make little profit in the short run. In the long run the firm each only
normal return on his investment.
- Innovation and invention are rare as they will increase production cost and
bring losses to the firm.
- Social cost is disregarded; in perfect competition the firm equals his private
cost to his marginal cost in determining his best level of cost. This implies
that social cost is not considered in determining the actual benefit of output
to the society.
 8
National income and it determinants

→ National income

In any economy it citizen are involved In productive activity where the earn income and
spend their income on goods and services to satisfy their wants, they health and progresses
of any economy can be judge from how much there are able to produce and spend that is
the counter total output, income and expenditure. These aggregate of the economy form
the different aspect of it national income.

The circular flow of national income is a highly simplify model of a private enterprise
economics system in this flow, economics unit are classify in to two groups: household and
business firm.

Households

Expenditure Supply of
Supply of resources Wages, rents,
on goods goods and
(land, labour, capital, profit, interest
and services services
entrepreneur)

Firms
The circular flow of national income

In this circular flow, the household and the firms interact in two kinds of market, the
resources market and for goods and services. Money circulates continuously from household
to business firms and back to the households.

The function of the households is to consume for the satisfaction of the want of the
household. In the circular flow of income firms pay income to the households in forms of
wages, rents, interest and profit. In return their use factor of productions which are supply
by households to produce goods and services which is need by households.
The circular flows of income shown above is a simplify model as it assume a closed economy,
in which influence is only between households and firms, with no foreign trade it also
assume no government economics activities. In the circular flow incomes is losses in the
form of withdrawal and enter the flow from outside the system in the form of injection
(investment, government expenditure, export).

→ Element of national income accounting

1. Personal income
This is the sum of all income, actually receive by all individuals during a given years for taking
part in the production of goods and services or for services offer by him or for property. It
include wages, interest receive on capital owner, profit receive by an entrepreneur, rent paid
on land.
In national income there are some income which are earn but no actually receive by the
household such as social security contribution, corporate income taxes and undistributed
profit. In the other hand there are income which are receive but not currently earn and it is
call transfer payment (retirement benefit)

2. Disposable income
It is the amount of money available to individual to spend after taxes have been deducted.
Disposable income = personal income – taxes

3. Growth domestic product

This is the total market value of all finite goods and services currently produce within the
domestic territory of a country in a year. It excludes the earning of citizen at their
investment abroad. The goods and services produce in any given years must be counted only
once so as to avoid double counting.

4. Growth national product

This is the total market value of goods and services produce by citizen of a country, both at
home and abroad in a given year. It includes the earning of citizen or their investment in
other country and excludes the earning of the foreign and their investment in the country.

5. Net domestic product

This is the growth domestic product less depreciation. It can be said as the total money value
of goods and services produces by all resident of the country after allows have been made
for depreciation.

6. Net national product

It is the market value of all goods and services produce by all citizen of the country after
allowance have been made for depreciation.
 7. National income
This is the estimate money value of all goods and services produce in the country during a
specific period of time, usually one year. It is equal to the total of income gotten from all the
four factors of production.

8. Income per capital

It is income per head of population, it is national income divided by the total population of a
country.

→ Measurement of national income

There most commonly measure aspect of national income is the GDP. This is because it is
usually difficult to calculate the value of output generated by citizen abroad. It is also difficult
to know the output attributable to foreign factors of production. However national income
can be measure using three approaches:

 The income approach

Which taken in to account all the income receive by individual firm and government for their
participation in production,
 the output approach
Which measure the monetary value of goods and services produces by firms, government
and individual in a year.
 the expenditure approach
Which measure the total expenditure of goods and services by individuals, firms and
government in a given year? To avoid double counting expenditure is usually consider that
only expenditure on final goods and services is included.

→ Determinant of national income

The size of national income is determined by the factors that affect the level of production in
a country, this factors include:
 The stock of productive input available in term both their quality and quantity
 The state of technical knowledge
 The extend of political and social stability
 The level of infrastructural development
 The level of economics stability

→ Uses of national income statistic

National income statistics are use in the following ways:
- To measure the total wealth of the country and therefore the standard of
living.
- To measure rate of economic growth of the country
- To assist in the process of government planning for economy
 - To compare rate of economics changes and living standard of different
country

→ Sources of national income statistics

Statistics use for national income estimate is derived from the following sources:
- Foreign trade figure
- Pay-rolls of various establishments
- Income taxes return
- Economics survey

→ Difficulty in measuring national income

- Unavailability of data
- Double county of some commodities
- The problem of transfer-payment
- Predominant of subsistence production
- Effect of depreciation
- Changes in the value of money
- Services not paid for (send some person)
- Payment in kind (other than money)
- Abundance of owner occupy houses
- The black economy or illegal trading

→ Standard of living and cost of living

 Standard of living
It refer to the level of welfare attain by individual in a country at particular time. It is usually
measure in terms of quantity and quality of goods and services consume within a period of
time. The standard of living in the country is partly determined by income per head and
distribution of income. It is also depend on the prices of goods and services.

 Cost of living
It refer to the total amount of money spend to obtain goods and services which enable one
person to exist at particular time. It refers to money for clothes, food…
It depend the price of goods and services which is individual consume. From the above we
can say a rise in the cost of living reduces a standard of living, while a reduction in the cost of
living increases the standard of living.
 → Concepts of saving, investment and consumption
 Saving
It is parts of disposable income which are not spend in consumer goods and services. It
involved forgoing some consumption in a present. Money which is saved constitutes a
withdrawal from the circular flow of income. However parts of saving may come back in to
the circular income flow through investment.
Reason of saving:
- Rise capital
- Security purposes
- For speculation
- To enjoy a higher standard of living
- To acquire assets

 Investment
This involved expenditure on capital; it entails the production of goods and making addition
to existing capital stock and inventory for the purpose of further production. It is an injection
in to the circular low of income.
Types of investment include:
- Individual investment
- Investment by firm
- Government investment in social capital (school, hospital…)
- Government investment in public corporation to render essentials services,
created jobs (police…)

Factors that determine investment include:

- The amount of income earn
- The saving
- Profit made by business
- Amount paid on taxes
- The rate of interest in the economy
- Future expectation
- Business atmosphere

 Consumption
This means making use of resources to satisfy wants in relation to national income,
consumption means all expenditure on goods and services, which are meant for current use
in direct satisfaction of want.
Factors that determine the level of consumption:
- Level of income
- Amount saving
- Expectation of change of prices (increase and decrease)
 - The rate of taxes policy
- The amount of asset
- Amount of business profit
- The rate of interest receive

→ Relationship between income, consumption, saving and investment

Income, consumption and saving are related and can be written as such:
Y = C + S with Y= income, C = consumption, S = saving
The amount of income earn determine to a large extend a level of consumption as well as
the amount that can be save.
Income, investment and consumption are related and can write as such: Y = C + I
The above relationship is based on the fact that all expenditure in the economy can be
regarded as either consumption expenditure or investment expenditure.
If Y = C + S and Y = C + I ⟹ S = I
the above relationship between saving and investment stand from the fact that all
investment come from saving which have been made in one ways or the other by
individuals, firms or government.

→ Average propensities to consume and to save

The average propensity to consume (APC) is a measure of the proportion of income spends
on goods and services it is calculated as:

C
APC= As income increase APC decrease
Y

The average propensity to save (APS) is a measure of the proportion of income which is
saved and it is calculated as:

S
APS= As income increase APS increase
Y

We should not that APS+ APC =1

Exercise
If an individual earn an annual income of 40 000F and spend 15 000F on consumption of
goods and services; calculate APC and APS.

→ Marginal propensities to save and to consume

The marginal propensity to consume (MPC) measure the relationship between changes in
income and changes in consumption it shows the proportion of any addition to income
which is for consumption.

∆C
MPC=
∆Y
The marginal propensity to save (MPS) measure the relationship between change in the
level of income and change in the level of saving, it shows the proportion of any addition to
income which is save.

∆S
MPS= Remark: MPC+ MPS=1
∆Y
Exercise

If the monthly income of an individual increase from 50 000F to 80 000F and he increases his
consumption by 12 000F. Calculate the MPC and the MPS

→ Concept of multiplier
The multiplier is the ratio of changes in income to a change in any of the components of total
spending, it measure the effect of a changes in any of the component of aggregate demand,
such as consumption, investment, government expenditure, export and import and national
income.
If for example the total investment changes by a stated amount, the extent to which income
will change can be determine by the multiplier. The multiplier works in two directions:
Increasing or decreasing income, rate than the change in expenditure. Increase in
consumption expenditure leads to higher increase on national income.
1 1 ∆Y
The multiplier= = =
1−MPC MPS ∆ S
The higher the MPC the higher the multiplier effect.
The higher the MPS the lower the multiplier effect.
Therefore a higher MPC increase national income while higher MPS decrease it.
Exercise
3
If the MPC = calculate the multiplier. By how much most consumption expenditure
4
increase to increase income by 20 000F

∆Y
Consumption Multiplier=
∆C
∆Y
Investment Multiplier=
∆I
∆Y
Government Multiplier=
∆G
9 Relationship between growth and development and
problems facing agriculture in developing countries and
possible solution