CHAPTER 1 - THE BASIC ECONIMIC PROBLEM - August 4, 2021

1.1 THE NATURE OF THE ECONOMIC PROBLEM

1.1.1 Finite resources and unlimited wants
Economy – the state of a country or region in terms of the production and
consumption of goods and services and the supply of money.
Needs – it is a good or service essential for survival or living
Want – It is a good or service that people would like to have but is not
essential for survival. Humans have infinite wants

1.1.2 Economic and free goods

Goods – goods are items that satisfy human wants and provide utility, for
example, to a consumer making a purchase of a satisfying product.
There are two types of goods:
1) Economic goods: They are goods that are sold at a price because it is
scares. Any resource used to make an economic good also comes under
economic goods.
2) Free goods: Resources that are supplied at zero cost because there is
more than enough available to supply the demand.

Service – A service is a transaction in which no physical goods are transferred

from the seller to the buyer. The benefits of such a service are held to be
demonstrated by the buyer's willingness to make the exchange.
Resources: Raw materials that we use to make and provide goods and services.
There are 3 types of resources:
1) Natural resources
2) Human resources
3) Manufactured resources
1.2 FACTORS OF PRODUCTION
1.2.1 Definition of the factors of production
Production: It involves using various resources to make and sell goods and
services. People who make goods and services are called Producers.
The raw material used to make any goods or service is called the input, while
the product is the output.
Economic problem: Unlimited wants and limited resources which lead to
scarcity
Scarcity – it is the shortage of a resource. (E.g., Oil or land). The scarcity of
resources can often make products expensive as the demand for the product is
greater than the supply

Consumption: It involves the using up of goods and services to satisfy needs

and wants. People who consume are called consumers.
Consumption expenditure: It is the amount that consumers spend on a good
or service.
Consumer goods: It is an economic good that satisfies a consumer’s immediate
good or want. They can be categorized as:
 Consumer durables: They last a long time
 Consumer non-durables: They perish very fast
 August 5, 2021
Capital goods: They are human made resources that are used in the
production of goods and services.
4 main factors of production that cause major scarcity are:
1) Land: A service is a transaction in which no physical goods are
transferred from the seller to the buyer. All natural resources come
under land.
 2) Labor: It’s the number of people who make products. Physical and
mental members of production.
3) Capital: The initial money to be put in to start a business or raw
materials
4) Enterprise: It is the skill and risk-taking ability of a person who brings
together all the other resources to produce a good or a service
(The owner of a business is called an entrepreneur)

Factor rewards: Every factor of production has a reward. They are different
factors of production require and receive in order to participate in productive
activity.
 Land: Owners of land receive rent to bring the land into productive use
 Labor: Labors get salary and wages based on time period. There can also
be perks and bonuses. Make sure your labor is happy.
 Capital: When a person buys a capital good these are known as
investments. New companies do is look for Investors who lease or buy
the capital good for them. As a return Investors get interest.
 Enterprise: The factor reward for an entrepreneur is profit. They need to
make sure the revenue is higher than the cost.

1.2.2 Mobility of factors of production

Factor mobility: It refers to the ease with which resources or factors of
production can be moved from one productive activity to another without
incurring significant cost or loss of efficiency and output. There are 2 types of
factor mobility:
 Occupational mobility: Also known as task mobility refers to the
ability to move from one productive task to another
 Geographical mobility: is the ability to move factors of production
from one location to another

 Land: It is occupationally mobile but geographically immobile, but there

are some exceptions.
  Labor: It is very mobile both occupationally and geographically. The
exceptions can be because of lack of knowledge, pricing, skill set,
physically disabled, wages, connect, etc.
 Capital: It differs based on the good. But they are very mobile. But very
specific goods are exceptions
 Enterprise: An entrepreneur as well as the enterprise are very mobile
geographically and occupationally. It is the most mobile out of the 4

 August, 9 2021
1.2.2 Quantity and Quality of the factors of production

Factor of Increase of Quantity Increase of Quality

Production
1) An increase in rent may
LAND persuade more landowners
to release their land into
productive uses
2) New discoveries of fossil
fuels, minerals and other
natural resources – and new
equipment and techniques –
can improve the amount it’s
possible to extract
3) Making use of other
previously unused natural
resources.
4) Planting and growing more
trees and plants
5) Recycling and re-using used
vegetable oils and engine
oils, metal and wooden parts
durable consumer and
capital goods that we no
longer use or want
1) Fertilizers and better land
management can improve
soil conditions allowing
more crops to be grown
2) New technologies can
improve the resilience of
plants to drought and insect
infestations
3) Reducing the use of
chemicals in farming which
can pollute water courses
4) Using organic and more
humane animal farming
methods can improve the
quality of crops, meat and
milk produced

1) An increase in wages may 1) Training and education

LABOR persuade more people to can improve workforce
 supply their labor to firms skills and the amount,
2) Increase in the population of range and quality of
working age goods and services
3) Improvements in healthcare people can produce
reduces the number of days
people are absent from work
due to sickness and will help
people to live and work
longer

1) A decision by producers to 1) Advance technology has

CAPITAL produce more capital
goods
2) An increase in interest
payments will increase the
amount of capital investors
are willing to supply firms
improved, and continue
to improve, the speed
and accuracy of modern
equipment

1) An increase in the price’s 1) More and better training

ENTERPRIS consumers is willing to pay courses for people
E
for goods and services may wanting to become
increase profits and entrepreneurs
encourage more people to 2) More and better
start firms business advice and
2) A fall in the number of paid support of new
jobs available and a rise in entrepreneurs
unemployment may result
in more people starting up
their own businesses
instead

1.3 Opportunity Cost

1.3.1 Definition of opportunity cost
Opportunity cost - It is the next best alternative for gone while making an
economic decision. Every choice has a value. Only economic goods have
opportunity cost, this is because free goods are unlimited in supply.

Opportunity Cost Formula and Calculation:

Opportunity Cost=FO−CO
where:
FO=Return on best foregone option
CO=Return on chosen option

Value has two parts:

 Benefits
 Cost
To think economically you have to look at a value through benefits and costs.

 August 12, 2021

1.3.2 The influence of opportunity cost on decision making

opportunity costs play a major role in decision-making. If you decide to
purchase a new piece of equipment, your opportunity cost is the money spent
elsewhere. Companies must take both explicit and implicit costs into account
when making rational business decisions
The idea of opportunity costs is a major concept in economics. Because by
definition they are unseen, opportunity costs can be easily overlooked if one is
not careful.
1.4 Production possibility curves (PPC)
1.4.1 Definition of Production possibility curve
Production possibility curve: The PPC shows the maximum possible output
combinations of two goods or services that it can produce with a given set of
inputs consisting of natural resources and other factors of production. It is the
graphical representation of different combinations of two goods that can be
produced using given resources at a given period of time. PPC assumes that all
the resources are used efficiently. As the diagram has only two axes no more
than two goods or services can be compared at a time.

1.4.2 and 1.4.3 point and movements of PPC - August 16, 2021

Example: A person has 16 hours a day

Situation Work Play

A 16 0

B 12 4

C 8 8

D 4 12

E 0 16

(draw graph in nb)

It is a straight line since the oppurtunity cost is constant - Constant PPC (very
rare)
The shape of a production possibility curve (PPC) reveals important
information about the opportunity cost involved in producing two goods.
When the PPC is a straight line, opportunity costs are the same no matter how
far you move along the curve. When the PPC is concave (bowed out),
opportunity costs increase as you move along the curve. When the PPC is
convex (bowed in), opportunity costs are decreasing.
IMPORTANT POINTS

Output combinations above the PPC are unattainable with existing resources
and technologies.
Output combinations below the PPC occur when there are unemployeed
resources or are used ineffeciently
In a less common situation where resources are equally suited in producing
both types of products, the oppurtunity cost remains constant. In this case
the PPC is shown as a straight line

1.4.4 Shifts in PPC

PPC moves outwards when:

 There is an increase in productive capacity if -
 More natural resources are discovered
 The supply of labor increases due to inward migration or natural
population growth
 The stock of capital equipment is increased
 New technologies create more an advanced materials, equipment
and production processes
 Increase in education and training which increases the skills of the
workers
 Improvements in healthcare
 Investment is modern business infrastructures, including roads
and telecommunication networks, is increased
 Positive growth

PPC will move inward when:

 There is a decrease in productive capacity if -
 Non-renewable resources are depleted
 The supply of labor falls
  Capital equipment wears wears out and is not replaced
 Workforce and enterprise skills decline due to decline of
education and training
 The economy has an ageing and decaying infrastructure due to
lack of new investment networks.
 Negative growth

CHAPTER 2 – THE ALLOCATION OF RESOURCES - August 23, 2021

2.1 Micro and Macro – economics

2.1.1 Microeconomics
Microeconomics studies the economic decisions and actions of individual
consumer, producer and household and how these economic decision makers
interact.
Microeconomics will consider:
 How individual firms organize production and why;
 What determines the wages paid to different groups of workers;
 What affects the purchasing decisions of individual consumers;
 What determines the price of different goods and service;
 What determines the amounts of individual households spend or
save from their incomes;
 How decisions and actions of different consumers, firms or
households affect others;
 How government policies and actions can affect the decisions and
behaviours of individual consumers, producers, and households.

2.1.2 Macroeconomics
In contrast to the study of microeconomics, which divides up a national
economy into smaller parts or sectors. Macroeconomics considers economics
issues and actions that affect the whole economy.
Macro means “big” and the term macroeconomy is often used to refer to a
national economy. The study of macroeconomics therefore considers ‘big’
issues such as:
 What determines the total output of all firms in an economy;
 What is the total or national income of the economy and what
causes it to change over time;
 What determines the overall level of employment and
unemployment;
 What causes inflation in the general level of prices and what impact
does it have;
  What governments can influence total consumer spending, rate of
price inflation, the level of employment and the total output of all
firms in the economy;
 What impacts can change in taxes and government spending have on
an economy;
 What are the reasons for differences in living standards between
countries;
 What affects population growth and how is it affecting different
economies;
 Why do different countries engage in international trade with each
other and what impact can it have on their macroeconomics;

2.2 The role of markets in allocating resource - August 30, 2021

2.2.1 Key resources allocation decisions

Economic system: It constitutes the institutions, organizations and mechanism
that influence economic systems. There are 3 types:
 Planned economic system: It an economic system where the
government makes the crucial decisions, land and capital are state
owned and resources are allocated by directives

The Advantages of Planned Economy

 Less Inequality
 Because the government controls the means of
production in a command economy, it determines
who works where and for how much pay. This power
structure contrasts sharply with a free market
economy, in which private companies control the
means of production and hire workers based on
business needs, paying them wages set by invisible
market forces. In a free market economy, the law of
supply and demand dictates that workers who have
unique skills in high-demand fields receive high wages
for their services, while low-skill individuals in fields
 that are saturated with workers settle for meagre
wages, if they can find work at all.

 Low Unemployment Levels

 Unlike the invisible hand of the free market, which
cannot be manipulated by a single company or
individual, a command economy government can set
wages and job openings to create the unemployment
rate and wage distribution that it sees fit.

 Common Good Versus Profit Priority

 Whereas the motivation for profit drives most
business decisions in a free market economy, it is a
non-factor in a command economy. A command
economy government, therefore, can tailor products
and services to benefit the common good without
regard to profits and losses. For example, most true
command economy governments, such as Cuba, offer
free, universal healthcare coverage to their citizens.

The Disadvantages of a Command Economy

 Lack of Competition Inhibits Innovation
 Critics argue that the inherent lack of competition in
command economies hinders innovation and keeps
prices from resting at an optimal level for consumers.
Although those who favour government control
criticize private firms that esteem profit above all
else, it is undeniable that profit is a motivator and
drives innovation. At least partly for this reason,
many advancements in medicine and technology
have come from countries with free market
economies, such as the United States and Japan.

 Inefficiency
 Efficiency is also compromised when the government
acts as a monolith, controlling every aspect of a
 country's economy. The nature of competition forces
private companies in a free-market economy to
minimize red tape and keep operating and
administrative costs to a minimum. If they get too
bogged down with these expenses, they earn lower
profits or need to raise prices to meet expenses.
Ultimately, they are driven out of the market by
competitors capable of operating more efficiently.
Production in command economies is notoriously
inefficient as the government feels no pressure from
competitors or price-conscious consumers to cut
costs or streamline operations. They also may be
slower to respond – or even completely
nonresponsive – to consumer needs or changing
tastes.

 Market economic system: It is an economic system where consumers

determine, resources are allocated by the price mechanism, and land
and capital are privately owned.

Advantages of a Market Economy

 Competition leads to efficiency because businesses that have fewer
costs are more competitive and make more money.
 Innovation is encouraged because it provides a competitive edge and
increases the chance for wealth.
 A large variety of goods and services are available as businesses try to
differentiate themselves in the market.
 Economic activity is encouraged because you need money to live and
need to engage in economic activity (through employment or self-
employment) to make money.
 Freedom of individual choice is possible to the extent that the market
provides options for work, developing a business, and purchasing goods
and services (so long as you can afford them).
Disadvantages of a Market Economy
  Disparity in wealth and mobility exists in market economies because
wealth tends to generate wealth. In other words, it's easier for wealthy
individuals to become wealthier than it is for the poor to become
wealthy.
 Environmental damage results with no government regulations because
it's usually more expensive to produce in an environmentally sound
manner, which reduces profits.
 There tends to be a reduced social safety net, including such programs
as unemployment insurance, Social Security, and Medicare, because
these programs are supported through taxation.
 Poor working conditions can result due to a lack of government
regulations because health and safety cost money, thus reducing profits.
 Questionable priorities can result when the overriding decisions
regarding production are profit-motivated rather than serving the needs
of the people in society.

2.2.2 The market system - August 31, 2021

What is a market: It is any organization or person that allows buyers and

sellers to exchange any type of goods, services and information where ever
they are in the world is part of the market for that good or service. The
exchange of goods or services, with or without money, is a transaction. There
are different markets all over the world. Examples: local market, global market
Market outcomes: There are only two possible outcomes in a market;
 Market equilibrium: Equilibrium is the state in which market supply
and demand balance each other, and as a result prices become
stable.
 Market disequilibrium: Disequilibrium is a situation where internal
and/or external forces prevent market equilibrium from being
reached or cause the market to fall out of balance. This can be a
short-term by-product of a change in variable factors or a result of
long-term structural imbalances.

2.2.3 Introduction to price mechanism

Price mechanism: In an economic system, changes in market prices provide

the means by which decisions taken by private firms and consumers interact to
determine how scarce resources are allocated between competing uses. The
price mechanism therefore determines what goods and services are produced,
how they are produced and who they are produced for.

Price signals: A price signal is information conveyed to consumers and

producers, via the price charged for a product or service, which provides a
signal to increase or decrease quantity supplied or quantity demanded. It also
provides potential business opportunities.

2.3 DEMAND - September 06, 2021

2.3.1 Definition of demand

Demand: It is the want, willingness and ability to pay for a certain good or
service at various price levels. There are two types of demand
Demand schedule: It is the tabular presentation of consumers demand at
different price levels
Demand curve: It is the graphical representation of consumers demand at
different price levels. Is normally concave.

2.3.2 Price and demand

Movements on a demand curve:

 Extension in demand: As the price of a product falls, quantity
demanded rises or extends
 Contraction in demand: As the price of a product increases, quantity
demanded falls or contracts.

Demand schedule (market)

Price of chocolate bars Quantity demanded per week (units)

100 1000

70 1800

50 2400

25 2900

10 3500
(Draw demand curve in notebook)
2.3.3 Individual and market demand

 Individual demand is the demand of just one consumer

 Market demand is the sum of individual demand of all the
consumers for a good or service
2.3.4 Conditions of demand

Shifts in the demand curve:

 Increase in demand: An increase in demand means that consumers
now demand more of a product at every price than they did before.
The market demand curve will shift out to the right
 Fall in demand: A fall in demand means that consumers now demand
less of a product at every price than they did before. The market
demand curve moves in towards the left.
The following factors are likely to result in changes in demand conditions and
shifts in market demand curves:
1) Changes in consumers’ income:
a. Consumers must not only want a product but must also be able to
purchase it for their demand to be effective
b. A rise in consumers’ income will increase their ability to pay and
therefore likely to increase their demand in many goods and
services.
c. However, the precise nature of the relationship between income
and demand will depend on the type of product considered.

2) Changes in taxes on income:

a. Disposable income refers to the amount of income people have
left to spend or save after any taxes on their income have been
deducted.
b. Any change in the level of income tax rates and allowances are
therefore likely to result in a change in the quantity of goods and
services demanded.

3) The prices and availability of other goods and services:

a. Some of the goods and services we buy need other things, or
accessories, to go with them. These Complimentary goods are
said to be in Joint demand.
b. Some goods and services are substitutes. A product is a substitute
when its purchase can replace the wants for another good or
 service. A rise in the price of one good or service may result in
consumers switching their demand to the substitute.

4) Changes in tastes, habits and fashion:

a. The demand for goods and services can change dramatically
because of changing fashions and the tastes of consumers.
i. For example, people all over the word are demanding goods
that are kinder to the environment and animals, and foods
that are healthier
b. Carefully planned advertising campaigns based on market
research information about consumers can also help to influence
tastes and shifts in demand curves for advertised products out to
the right

5) Population change:
a. An increase in population will tend to increase the demand for
many goods and services in a country.

6) Other factors:
a. There are many other factors as well like:
i. The change in weather can affect clothing and foods
ii. Changes in law

Law of demand: Other things being constant, as price of a product falls the
quantity demanded increases. As the price rises, the quantity demanded
decreases

2.4 SUPPLY - September 13, 2021

2.4.1 Definition of supply

Supply: it is the amount of a good or service firms or producers are willing to

make and sell and different prices.
 Quantity demanded: It is the amount of a good or service producers and able
to make and sell to consumers in a market.
Supply schedule: it is the tabular presentation of producer’s supply at different
price levels
Supply curve: It is the graphical representation of producers suppy at different
price levels. Is normally concave.

2.4.2 Price and supply

Movement along the supply curve:

An extension in supply: As the price of a product rises, quantity supplied rises
or extends
A contraction in supply: As the price of a product falls, quantity supplied falls
or contracts

Supply schedule (individual)

Price ( dollars per unit) Quantity supplied of matchboxes per
week (units)

1 1000

2 1500

3 2000

4 2500

5 3000
Supply schedule (market)

( draw graphs in the nb )

2.4.3 Individual and market supply

Individual supply: Supply of just one producer

Market supply: is the sum of all individual supply of all producers of a good or
service

2.4.4 Conditions of supply

Shifts in the demand curve:

 Increase in supply: This means that producers are now more willing and
able to supply a product than they were before at all possible prices. The
market supply curve shifts out to the right.

 Decrease in supply: This means that producers are now less willing and
able to supply a product at each and every price than they were before
at all possible prices. The curve shifts in to the left.