General Economics

GENERAL ECONOMICS LEVEL 100: HIGHER INSTITUTE OF ENGINEERING AND
AGRONOMY TCHONANG (ISIAT)
HIGHER INSTITUTE OF ENGINEERING AND AGRONOMY TCHONANG

(INSTITUT SUPERIEUR D’INGENIERIE ET D’AGRONOMIE TCHONANG (ISIAT)
Course: GENERAL ECONOMICS 1 Credits: Timing: 40 Hours
By Mr Manfouo Fountong Namekong Innocent, Master in Agribusiness Management,
DIPES 2 in economics. Contacts: 675050583 / 691433419
PROGRAM
 Nature and scope of economics,
 Methodology of economics
 Positive and normative aspects of economics
 Production possibilities curves
 Economic systems,
 Price theory(demand and supply analysis)
 Demand and supply
 Concepts of elasticity
 Theory of consumer behaviour(cardinal and ordinal approach)
 Indifference curve theory
 Production theory
 Cost of production
 Profit maximisation
 Markets structures
 Factor price determination
General Economics notes for ISIAT Level 100, by Manfouo Fountong Namekong Innocent, Master in Agribusiness 1
Management, DIPES 2 in Economics .Contacts: 675 05 05 83 /691 43 34 19
I. Nature and scope of economics
Economics is a vast subject which can be divided into microeconomics and

macroeconomics. Microeconomics is the study of individual behaviour (for instance, an
economist may study the market for beans, plantains, banana) while, macroeconomics is the
study of the economy as a whole (for example, the study of the nature, causes, consequences
of unemployment, inflation, economic growth and international trade)
The definition of economics is not as simple as many physical sciences because economics
deals with human behaviour whose ideas can change at any time. In fact, the word economics
is derived from the Greek word OIKONOMIA which means the management of a household.
OIKIO means household and NOMIA means management.
i) Some definitions of economics
Many definitions have been given by different economists. Some of these definitions include
the following:
 Adam Smith defined economics as an inquiry into the nature and causes of the wealth
of nations
 Alfred Marshall defined economics as the study of mankind in the ordinary business
of life
 A C Pigou defined economic as a science of material welfare
 Professor Lionnel Robbins ; in his book entitled « an essay on the nature and
significance of economics science (1932), defined economics as a « science which studies
human behaviour as a relationship between ends and scarce means which have alternatives
uses »
ii) Reasons for studying economics
The study of economic is very important both for individuals and the whole society.
 Economics helps consumers to know how to make rational decisions in the use of
scarce resources to satisfy unlimited wants.
 The knowledge of economics helps planers to plan for socio-economic development.
 It helps government to know how to solve economic problems. For example,

unemployment and inflation solutions are usually proposed by economists and these are
implemented by the government.
 It enables us to know the type of economic system in which we are operating and why
we are operating in that system.
 The study of economics is a career, that is ;it enables those who study the subject to
gain employment.
 It helps producers to know the type of goods and services to produce since our
resources are scarce.
iii) The basic economic problems
All societies or economy no matter the form or political systems are faced with some
economic problems which are: what, how and for whom to produce?
 What to produce?
What to produce means the type of goods and services to be produced and in what quantities.
All these will depend on the resources available to that economy and the taste of its citizens.
This refers to the output question.
 How to produce?
This is the question of which method of production should be used. For instance, should it use
more of labour (labour intensive method) and less of machines or should it use more of
machines (capital intensive method) and less of labour. This question is known as the input
question or the problem of factor combinations.
 For whom to produce?
This refers to how the total output produced will be distributed amongst individuals and
families. Should output be produced for men, women, children, etc? So, for production to take
place, the society must be aware of who is to benefit from such output. This is known as the
problem of distribution.
iv) Basic economic concepts
Economics is concerned with the notions of scarcity, choice, opportunity cost ,scale of
preference etc
 Scarcity: it is a situation where resources are insufficient to produce enough

goods to satisfy human wants. It is when something is permanently limited in supply relative
to demand. Scarcity exist in all societies be it developed or less developed, the rich and the
poor and also small or big people. It s a permanent situation in the society.
 Choice means selecting some of our wants amongst many things. Choice arises
because of scarcity .People make a choice because their wants are unlimited and they have
limited resources to satisfy them. The problem of choice affects individuals, firms and
governments.
 Scale of preference refers to list of unsatisfied human wants arrange in order

of importance with the most important wants at the top and the less important at the
bottom .The item found at the top of the scale will give individual, firm or government the
maximum satisfaction.
 Opportunity cost is defined as the next best alternative forgone in order to

consume something or producing something else. The notion of opportunity cost is important
to the individuals, firms and government.
II. Methodology of economics

In order to produce an explanation of observed phenomena, scientific enquiry makes use of
procedures which are common to all sciences. These procedures are called the scientific
method. Economics as a science has its own methods which can be inductive or deductive
i) Inductive method
This is a method of reasoning which starts from the particular observation to a general
conclusion. This begins by collecting facts and classifying them by using quantitative
technique to see if the hypothesis is true or not. For example, Tchinda is from Bamboutos and
she eats too much achu
ii) Deductive method
This is a method of reasoning which starts from the general observation to a particular
conclusion. To obtain this, we have to select or formulate the problem for analysis, specify
some assumptions used, formulate the hypothesis based on the assumptions and test the
hypothesis to see whether ii will be true or not.
Hypothesis is a suggested explanation of phenomenon or reasoned proposal suggesting a

possible correction between multiple phenomena.
iii) Steps of economics methodology
Theories are developed to be used in explaining economic happenings around us. There is a
given methodology that may take the following form:
Steps 1: define the concepts to be used in such a way that they can be measured. The
concepts must be defined in a clearly understood manner.
Step 2: formulation of Hypothesis: this is an untested statement which attempts to explain

how one thing is related to another. For example, why prices of groundnuts vary in bafoussam
market over time might offer the hypothesis that, changes in prices are caused by weather
conditions, war in Ukraine, increased in fertilizers prices. Hypothesis will be based on
observations and upon certain assumptions about the way the world behaves. These
assumptions may themselves be base upon existing theories which have proved to have a high
degree of reliability.
A theory is a framework that helps us to understand the relationships between cause and
effect.
Step 3: testing the hypothesis. Are the predictions of the hypothesis supported by the facts?
This may be done with the aid of an appropriate model. If the hypothesis is supported by the
factual evidence, it becomes a theory which can be used to explain and predict behaviour and
relationship. A successful theory is one which up to now has not been proved false?
Step 4: application of economic theory. An accepted theory or model may be used to

explain or predict economic events. A successful theory is extremely useful because it helps
economists predict with high degree of probability the outcome of certains events.
III. Positive and normative aspects of economics

i) Positive economics or statement
Positive economics deals with facts. It may be right or wrong because the doubt or
disagreement can be proven. It deals with what is will be or can be predicted? Example:
the economic growth of Cameroon will be lower next year.
ii) Normative statement
Normative statement is a statement of opinion or value judgement which cannot be proved

or disproved. This statement deals with what ought to be or should be. For example, the
government should give more subsidies to farmers. Students should study well their
lessons in order to pass their exam.
IV. Production possibilities curves (PPC or PPF)

Scarcity, choice and opportunity cost can be examined by considering what a country can
produce with its existing resources. Given that economic resources are scarce, every choice
made by an economic agent involves an opportunity cost. The illustration of this idea can
easily be done with the aid of a production possibility curve.
i) Definition
PPC indicates the various combinations of two goods that an economy or other economic unit
is capable of producing when all its resources are fully and efficiently utilised with its present
state of technology. This can also be referred to as an opportunity cost curve, a transformation
curve, a production possibility frontier or a production possibility boundary
ii) Assumptions
- The quantity and quality of economic resources available for use during the year are
fixed
- The economy can produce two types of goods
- Some resources are better adapted to the production of one good than the production of
the other
- Technology is fixed and does not change during the year
iii) Types of PPCs
We have three main types of PPCs namely PPC with increasing costs, constant costs and
decreasing costs. But, we should noted that, PPC with increasing costs would be encountered
for most of the time.
a) PPC with increasing costs
It can be illustrated as follow:
Cocoa(millions
of tonnes
G
B
Y
C
X
0 Cars (millions of units)

A
The figure above show the usual shape of the PPC. It shows that as more of one good is
produced, the opportunity cost rises. The curve is concave to the origin of the graph that is
they are bowed outwards
Points on the PPC such as B C D show the maximum possible combined outputs of the two
goods. Point A shows the maximum amount of cars which can be produced if all resources are
directed to the production of cars. The economy can produce any combination inside the
curve, but this would mean that some resources are unemployed or that inefficient methods of
production are being used. Point X illustrates this type of situation .In this case, the economy
could produce more of both goods by moving to a point such as D. Points outside the
production possibility, such as Y, are not attainable with the economy’s present production
capacity.
- Shifts in production possibility curves
An economy’s production potential is constantly changing. If its capacity to produce goods

and services increases, the PPC will shift outwards to the right as shown in figure below
Cocoa
Cars
A B
An economy will be able to produce more goods and services if the quantity and /or the
quality of its resources increase. So among the causes of a rightward shift are: an increase in
the labour force, an increase in the stock of capital goods (offices, factories, transport
networks, machinery, etc), an increase in technical knowledge and an improvement in training.
The PPC can also shift inwards to the left as shown in figure below if an economy’s
production potential declines .This could occur due to a war or a natural disaster which
reduces a country’s resources
Cocoa
Cars
A B
b) PPC with constant costs
If two products use similar methods of production, there may be a constant opportunity cost.
In this case the PPC will be a straight line as illustrated below:
Wheat (millions
of tonnes
Oil(millions of
tonnes
Here, resources are able to switch easily from producing wheat to producing oil and are
equally good at producing each crop
c) PPC with decreasing costs
If a decreasing opportunity cost is experienced, the PPC will be bowed inwards (convex to the
origin of the graph) as shown below
Clothes (millions of tonnes)
70
60
40
20
10
Food (millions of
tonnes)
20 50 60 80 100
To increase the output of clothes from 10M to 20M tonnes, 20M tonnes of food have to be
forgone. Whereas to increase the output of clothes from 20M to 40M, only 10M tons of food
have to be forgone. This may be because resources initially being used to produce food are
more suited to producing clothes. This situation can be referred to as increasing returns
(decreasing costs) since more resources are devoted to produce clothes.
V. Economic Systems
i) Definitions
An economy refers to a place or an area that may have a given population and where
production of good and services takes place. This area can be of any size and with a number
of people involved .Example of an economy includes local economy such as village, town or
national economy like Cameroon.
Economic system refers to a structure which permits a society to carry out the processes of
production, distribution, exchange and consumption of goods and services.
ii) Agents of an economic system
Each economic system is made up of three components or agents which are:
 Households or consumers who are engaged in the consumption of goods and services.
 Firms or producers who are engaged in the production of goods and services.
 Government, she is engaged in the management, production and consumption of the
goods and services.
iii) Types of Economic systems
Basically, they are four types of economic systems namely: traditional, market, planned and
mixed economic system.
a) The Traditional Economic System (subsistence)
There is a strong belief in customs and traditions here. People follow the production and
distribution methods established by ancestors and pass them over generations. Example; not
going to farm on a certain day (how to produce), he who kills a tiger should bring it to the
palace (for whom to produce)
Characteristics of traditional economic system
- The family or individual produces goods and services just enough for family consumption
and not for sale.
- Specialisation or division of labour is very limited or absent.
- They belief mostly in custom and the tradition of people
- Trade is mostly by barter
- Goods and services are distributed based on the order left by their ancestors
- It leads to low savings and investment
b) The Market Economic System (Capitalist/Free/Laissez faire)
This economic system depends on the Price Mechanism to efficient allocate resources. The
demand and supply forces determine what, how, where, and for whom to produce. Although
it’s a laissez faire economic system, the government intervene to provide public and merit
goods, collect taxes, grant subsides.
 Characteristics of Capitalist Economic Systems.

- There is private ownership of resources.
- Commerce is based on the price mechanism
- There is competition among firms
- There is little or no government intervention.
- There is economic freedom.
 Advantages of a free Economic System
- Competition among producers leads to the provision of quality goods.
- Economic agents enjoy a variety of goods.
- Self-interest promotes hard working and greater profits.
- High rate of economic development due to technological innovations.
- The price mechanism facilitates the allocation of resources.
 Disadvantages of a Market Economic System.
- There is inequality in the distribution of income and wealth as the rich becomes richer
while the poor are poorer.
- Consumers are exploited when monopolies decide to increase prices.
- There is wastage of resources through advertisement.
- Demerit goods like drugs, cocaine, guns are produced because they have high profits.
- It may bring about unbalance regional development as firms will concentrate only in
profitable areas.
The above disadvantages of the market economic system constitute market failures.
Market Failure
 Definition
A market failure is the outcome of the price mechanism in which the optimal allocation of
resources isn’t attained. Or it is a situation defined by an inefficient distribution of goods and
services in the free market
In market failure, the individual incentives for rational behaviour do not lead to rational
outcomes for the group.
 Types of market failure
- Asymmetric of information
- Concentrated market power
- Public goods
- Externalities
Causes of market failure
The leading causes of market failure are:
- Externalities and market power. A positive externality affects the third party positively ,or
example, the provision of public education helps the learners ,but the whole society will
also benefit from that public good.
- Imperfect information
- Market dominance
- Mobility of resources
- Competition
Solutions to market failures
i) Use of legislation: for example, the government can ban car from operating in city
centers, or impose high penalities to businesses that sell alcohol to underage children.
ii) Price mechanism: For products that cause harm to consumers, the government can
discourage their consumption by increasing taxes. For example, taxes on cigarettes and
alcohol are periodically increased to discourage their consumption and reduce their harmful
effects on unrelated third parties.
c) The Planned /Command/Socialist/Communist Economic System.

Here, the state authorities rather than the market forces directly determine prices, output and
production. Private ownership of resources is discouraged.
 Characteristics of the Planned Economic system.
- Central planning of production and distribution.
- Prices and wages are being fixed by the government.
- There is rationing of certain goods when there is shortage
- The state determines the production targets of different sectors.
- There is control of the labour market and workers take jobs assigned to them.
 Advantages of the Command Economic System.
-There is large scale production of goods.
-There is equitable distribution of income and wealth between the rich and the poor.
- Social cost (pollution) and benefits are taken care of by the government.
- There is central planning and collective control of natural resources through the state.
 Disadvantages of the communist Economic System.
- There is inefficiency in the production of goods and services due to lack of interest.
- There is high administrative cost involve in this economy.
- There is lack of consumer’s sovereignty i.e the free will to choose among many varieties
what to consume.
- There is bureaucracy
Mixed Economic System.
This is the combination of both capitalist and communist economic system. It can be
defined as an economy which contains large private and public sector. The government
provide public and merit goods. It also discourages the production and consumption of
demerit goods (like drugs) through taxes
 Characteristics of mixed economy
 Both the government and the private individuals own and control economic
resources or factors of production
 Private firms or individuals produce goods and service to make profit while the
government produces essential goods and services to take care of the welfare of the society
 The government always intervenes to control prices and excesses of goods and
services that cause pollution in the society
 The merit goods are supplied by both sectors
Advantages of mixed economy
- provision of both public and merit goods
- income and wealth may be distributed equally
- consumers protection
- price stability
- high standard of living
Disadvantages of mixed economy
- existence of high taxes
- the presence of competition
- the level of employment will fall
- poor management and inefficiency

- it may lead to inequality in the distribution of income and wealth
The role of the government in the mixed economic system
- Provision of essential goods and services
- Achievement of price stability
- Maintain full employment
- Achievement of a steady rate f economic growth
- The establishment of rules and regulations
VI. Price theory (demand and supply analysis)
A. Price theory
i) Definition
The theory of price is an economic theory states that the price of a specific good or service is
determined by the relationship between its supply and demand at any given point .Prices
should rise if demand exceeds supply and fall if supply exceeds demand. It is concerned with
the study of prices and is regarded as the basis of economic theory. It is concerned with the
economic behaviour of individual consumers, producers and resource owners It explains the
production, allocation and pricing of goods and services
ii) Price
Price is the exchange value of a commodity in terms of money or the amount of money that
has to be given up in order to obtain a good or service or a factor input
C. Demand and supply

i) Definition of demand
Demand refers to the quantity of a commodity which consumers are prepared to buy at a
particular price and period. To differentiate demand from needs or desires, we talk of
effective demand which is the willingness and ability to pay for what we want at a particular
price and time.
ii) Individual and market demand schedule

The demand schedule is a table or list showing the relationship between the quantity of
products a consumer is willing and able to buy and their corresponding prices at a given time.
An individual demand schedule shows the quantity of goods demanded by an individual at
different prices during a particular period of time. A market (composite) demand schedule
shows the quantity of goods demanded by all consumers at different prices during a given
period of time. It is therefore the combination of individual demand schedules. When this
schedule is graphically represented, it gives the demand curve. Consider the table below and
deduce the market demand schedule and draw its curve.
Price per Kg Individual demand schedules

fcfa A B C D Market demand
500 25 15 10 5 55
1000 20 12 8 4 44
1500 15 8 6 3 32
2000 10 6 4 2 22
The demand curve
Definition
The demand curve is a graphical representation of the demand schedule .It is a diagrammatic
way of illustrating the relationship between the price of a commodity and the quantity bought
at each price.
In a typical demand curve, quantity demanded is inversely related to price. The demand
function I given by the equation Qs = a + bP. Where Qs is quantity demanded, b show how
much demand changes when there is a change in price of one unit, P is the price.
The nature of a supply function can be used to have an individual demand schedule when the
values of a and b are given and the price rang are also given.
Given the market or aggregate demand schedule above, we can plot the market or aggregate
demand curve as shown below:
Figure: diagram showing demand curve.
Price
D
2000
1500
1000
500 D
Quantity demanded
22 32 44 55
Shape of a normal demand curve
The demand curve is downward sloping from the left to the right indicating that the higher the
price, the lower the quantity demanded hence, confirming the first law of demand and supply.
iii) The first law of demand and supply

It states that: “everything being equal, the higher the price the lower the quantity
demanded and the lower the price the higher the quantity demanded”. Hence a normal
demand curve slopes downward from left to right.
iv) Reasons for the shape
The reasons why a demand curve slopes downwards from the left to the right can be
explained by 3 reasons; the income effects, the substitution effect and the law of diminishing
marginal utility.
- The law of diminishing marginal utility
The price a consumer pays for a commodity reflects to the marginal utility the consumer
derives. Since the marginal utility falls, people will only be willing to buy more at lower
prices. Hence, more is demanded at lower prices than at higher prices.
- The income effect
When the price of a commodity changes, the real income of consumers will also change. So
when price falls, real income will increase and this will enable consumers to but more. Hence,
the lower the price, the more the quantity purchased.
- The substitution effect
The effect concerns two or more goods that are closed substitutes. There goods which can be
used to satisfy the same desire. When the price of a good changes, the quantity demanded of
its substitutes will be affected. When the price of a good falls, it becomes cheaper compare to
its substitutes and hence more of it will be demanded.
v) Exceptional demand curve
- definition
An exceptional or abnormal demand curve is a demand curve which does not obey the first
law of demand and supply. An abnormal demand curve slopes upwards from the left to the
right indicating that at higher prices, more is demanded than when price is low.
Cases of abnormal demand curves
There are two types of abnormal demand curves, namely regressive demand curve at the
bottom and a regressive demand curve at the top.
i) A regressive demand curve at the bottom
A regressive curve at the bottom occurs under the following conditions:
a) When there is an expectation of future fall in prices. When the price of a good falls and
people expect that prices will further fall in future, less quantity will be bought because they
will be expecting to buy more at lower prices in future.
b) Case of inferior good / Giffen goods. A giffen good is a commodity whose quantity
demanded increases as the price rises due to shortage in the market or famine. A fall in the
price of a giffen good will enable consumers to buy very little. An inferior good is a good
which its demand tends to fall as its price falls.
The diagram below illustrate this situation
Price D
Normal demand curve
P1
Abnormal demand curve

P2
D
Quantity
Q2 Q1
From the diagram above, when the price falls from P1 to P2,the quantity demanded instead
falls from Q1 to Q2.Up to the price P1,the demand curve is a normal demand curve ,but
thereafter it becomes abnormal and less is demanded at a lower price than at a higher price.
ii) Regressive demand curve at the top

It occurs under the following conditions
a) Goods of ostentation (veblen goods or goods of snob appeal/value)
These are goods that are not demanded because of high satisfaction but because of the
prestige attached to them as a result of higher prices. People buy at higher prices to prove to
the others that they are rich. Examples are expensive cars, watches, suits.
b) Expectations of increase in price. When the price of a good increases and consumers
expect it to keep increasing, they will buy more goods at the present even if the prices are
high in order to avoid higher prices in future.
It can be illustrated as follow:
Price
Abnormal demand curve
P2
P1
Normal demand curve

D
Quantity
Q1 Q2
From the diagram above, when the price rises from P1 to P2, the quantity demanded increases
from Q1to Q2.Up to the point P1,the demand curve is a normal one, but thereafter, it becomes
an abnormal demand curve because more is demanded at a higher price than at a lower price.
When price increases from P1 to P2, the quantity demanded increases from Q1 to Q2.
vi) The determinants of demand
Many factors are accounted for consumers to change their demand for goods and
services .These include:
 Changes in the price of other goods. When there is an increase in the price of a good
having its close substitute other things being equal, consumers will instead increase the
demand for its substitute and the demand for that good whose price have risen will fall. In
complements goods like cars and petrol, if the price of cars falls, quantity demanded for cars
will increase and since cars must be used with petrol, the demand for petrol will increase and
vice versa.
 Change in incomes: when the income of consumers increase, they are likely to buy
more goods and services than they could buy before the increase. A reduction in income is
also likely to reduce demand. Real incomes may rise due to increase in wages or salaries,
reduction in taxes or a fall in prices.
 Expectations of changes in prices: if people expect that there will be high prices of
commodities in the nearest future, demand will increase as they will want to avoid buying at
higher prices.
 Change in population size: an increase in the size of the population generally
increase the number of consumers and this will lead to an increase in the demand for goods
and services everything being equal, while a decrease in population size caused by either
emigration or deaths will lead to a fall in demand of goods and services.
 Changes in weather conditions: a change in weather conditions and seasonal changes
affect the demand for some products. For example during the rainy season ,the demand for
umbrellas and raincoats are increasing.
vii) Movements in demand
The two main movements in demand are change in quantity demanded and change in demand.
a) Change in quantity demanded
A change in quantity demanded is a movement along the same demand curve caused by a fall
or an increase in the price of that same commodity. This change in price of the commodity
results in extension (expansion) or contraction in quantity demanded.
 Extension in demand is a downward movement along the same demand curve due to a
fall in the price of that good. In this case, when there is a fall in the price of a good, the
quantity demanded will increase.
 Contraction in demand: this is when there is a fall in quantity demand for a good due
to an increase in the price of that good. When there is an increase in the price of a commodity,
the quantity demanded will fall and the demand curve will contract, ie it will move upwards
from right to left.
This change in quantity demanded can be represented below:
Price
A Contraction
30
B Extension or expansion
20
C
10
Demand
0 Quantity demanded
40 50 60
From the diagram above, the original price is 20FCFA and the initial quantity is 50 units.
When the price increases from 20FCFA to 30FCFA, more quantity will be supplied from 50
units to 100 unit which leads to a movement from B to C known as an extension in the supply.
On the other hand ,a fall in the price from 20FCFA to 10FCFA leads to less being supplied by
producers from 50 units to 20 units leading to a downward movement of the supply curve
from B to A ,called contraction in a supply.
b) Change in demand
it is a complete shift of the curve curve from the original one to a new demand curve either to
the right (an increase in demand) or to the left(a fall in demand),caused by other factors that
influence demand but not the price of the commodity.Here,the price of the good remain
constant.
The situation can be shown as follow
D2
Price D
D1
2
400
10 20 30
the initial demand curve from the diagram above is D, an increase in population, increase in
real income of consumers, a successful advertissement, etc will lead to an increase in the
demand from D to D1 at constant price 400FCFA.The quantity demanded will increase from
20 units to 30 units. But when there s a fall in population ,a fall in consumers
income ,unsuccessful advertissement ,etc the demand will fall .This will lead to a complete
shift of the demand curve to the left from the old one of D to a new one D1.Quantity
demanded will decrease from 20 units to 10 units at constant price f 400FCFA.
D. Theory of supply.
i) Definition
Supply refers to the quantity of goods and services offered for sale at a particular price and
time. It should not be confused with effective supply which is the quantity of commodity
suppliers are willing and able to make available in the market at a particular price and time.
Supply shouldn’t be confused with stocks which are the available quantity of goods keep in
the manufacturers’ warehouse, waiting for eventualities. Production is complete when the
good reaches the final consumer.
ii) Individual and market supply schedules

A supply schedule is a table showing the positive relationship between price and quantity
supplied of a goods or services over time. An individual supply schedule is a table showing
the qty of goods supplied at different prices at a particular time by an individual supplier
while the market supply/composite schedule is a table showing the qty of goods supplied at
different prices at a particular time by all suppliers.
Price in fcfa Individual supply schedules Mkt supply schedules

A B C D
500 2 2 3 3 10
1000 3 3 4 5 15
1500 4 5 5 6 20
2000 5 7 6 7 25
2500 6 8 8 8 30
3000 7 9 9 10 35
The market supply schedule is obtained by adding all the individual supply schedules at the
various prices.
iv) The second law of demand and supply

From the supply schedule and curve above, we can deduce the 2nd law of demand and supply
which states that: “the higher the price the higher the quantity supplied and the lower the price
the lower the quantity supplied, other things being equal”. Hence a normal supply curve will
always slope upward from left to right.
THE SUPPLY CURVE
The second law of demand and supply is the law of supply which state that : « the higher the
price of a given commodity ,the higher the quantity of the good supplie and the lower the
price of a good,the lower the quantity of the good supplied,other things being equal. »
Definition
A supply curve is a graphical representation of the supply schedule .It shows the relationship
between the price of a commodity and the quantity supplied at that price.
Plotting of a suply curve
In order to plot a supply curve,we need an individual or aggregate supply schedule. Let’s
consider the individual supply schedule of a given producer of beans ,using the differents
quantities at different prices,the supply curve can be plotted as follow :
Digram showing a supply curve .

Price S
10 000
8000
6000
4000
2000
QT
10 20 30 40 50 Y
The above figure slopes upwars from the left to the right indicating that at higher prices,more
is supplied that at lower prices .This confirms the second law of demand and supply.
Slope of a normal supply curve and reason for the shape
In a typical supply curve,the quantity supplied are positively related to price ?Price and
quantity supplied are positively related,that is ,move in the same direction
Reasons why more commoditties are supplied at a higher price than at a lower price
i) The desire to increase profit :when the price of a good increases,the produccers
know that if they supply more of the goods to the market,they will have an
increase in their profit.They will expand their scale of productionin order to
increase output so as to supply more when the price rises .But when the price
falls,they will not expand their production because they will make losses if they
send more goods to the market and this explains why morre commmodities are
supplied at a higher prices than at a lower prices.
ii) Entry of new firms in the market :when firms make an abnormal profit in the short
run,new firms will be attracted into the market to supply the similar goods and
hence more goods will be produced and supplied when prices are rising and vice
versa.
iii) An increase in wages of a particular labour market :aan increase in wages of a
particular labour market will enable some workers in the industry to work
additional time ,or to shift from other industries to those whose wages are
increasing .Increase in wages may also enable some individual workers who are
not currently working to enter the market.This will lead to an increase in quantity
supplied of labour at higher wage rate and vice versa/
Exceptional supply curves
Exceptional supply curves are supply curves which do not obey the second law of demand
and supply.There are two types of exceptional supply curves.
Types of exceptional supply curve curves
A. Fixed supply curve

This is a situation when the supply of a good is perfectly inelastic.This type of supply curves
arises from a situation whereby the quantity of commodity offered for sale remains constant
irrespective of price increase or decrease.Exaample include the supply of land and the supply
of agricultural produts in the short run
Fig : Fixed supply curve
S
Price
10 000
8000
4000
2000
When the price increases from 4000FCFA to 8000FCFA or decrease from 4000FCFA to 2000
FCFA,the quantity supplied does not change .It remains constant at Q1,thus not obeying the
second law of demand and supply.
B.Backward sloping supply curve
This type of supply curve is true of the supply of labour in underdeveloped countries.As wage
rate increases,labour would at first increase its effort and the length of time they are willing to
work.After a certain wage rate,labour is no longer willing to increase the number of hours
worked.They decrease the numberof hours they will work at higher wages.This is so beause at
higher wage levels,the marginal utility of leisure is greater than the wage rate.
Backward sloping supply curve
Wage rate
S
Leisure is preferred to work
150 000
C
100 000 B Wage level(target income)
Work is preferred to leisure

50 000 A
Supply of labour per hour
10 20 30 40 50
From the diagram above,as wage rate rises from 50 000FCFA to 100 000FCFA,the quantity
supplied of labour will increase from 10 hours to 30 hours becausse some workers may even
work additional hours since substitution effect is greater than income effect.As wages further
rises from 100 000 FCFA to 150 000 FCFA,workers will now prefer leisure because of the
increase in wages which increases their real income.He now offers less hours for work.This
reduces the supply of labour from 30 hours to 20 hours .Thus the quantity instead falls as
wage rate increase.
The determinants and movements in supply

1.Factors affecting supply
i) changes in weather conditions :a favourable weather condition with adequate rainfall and
sunshine ,also temperature will lead to an increase in the supply of goods especially
agricultural products.
ii) change in the cost of production :any increas in the prices of factors of production other
things being equal,will increase the total cost of production which will lead to a fall in the
supply of the commodiity.On the contrary,a fall in the prices of inputs will reduce the total
cost of production and this will lead to an increase in the supply of the good or service.
iii)changes in technology :the introduction of more efficient machines,new and efficient

method of production,introduction of high yielding seeeds etc,will increase output and hence
increase supply.While if old and out-dated machines with crude tools,coupled with old
methods of production are continuously used there ,i twill result in a fall in output and
consequently a fall in supply.
iv) Government policy on taxes and subsidies.An increase in taxes especially indirect
taxes on goods and services increase the cost of production which leads to a fall in
supply.But when there is a reduction of indirect taxes,the cost of production will
reduce and the supply of goods and services will increase.On the other hand when
the government gives subsidies ,the cost of production will fall and supply will
increase but,the absence or a reduction of subsidies will lead to an increase in the
cost of production and the supply of goods and services will fall.
v) The number of producers or sellers :the more the number of producers of a good,the
greater the supply of the good meanwhile,when the number of producers and
sellers of a good or service is smaller,the less will be supplied of a good.
Movements in supply
- Change in quantity supplied
A change in quantity supplied is a movement along the same supply curve cause by a falll or
an increase in the price of that same commodity.This change in the price of the commodity
leads to extension(expansion) or contraction in quantity supplied.
i) Extension in supply is when there is an increase in the quantity supplied of a good

due to an increase in the price of that good.
ii) Contraction in supply is when there is a falll in the quantity supplied of a commodity
due to a fall in the price of the commodity.It can be shown as follow :
Price S
10 000
8000 C
4000
E B Expansion
Contraction
2000 A
QT
10 20 30 40 50 Y
From the figure above,the original price is 4000 FCFA and the initial quantity is 20 units
.When the price increases from 4000FCFA to 8000FCFA,more quantity will be supplied from
20 to 30 units which leads to a movement from B to C known as an extension in the
supply.On the other hand,a fall in the price from 4000FCFA to 2000fcfa leads to less being
supplied by producers from 20 units to 10 units leading to a downward movement of the
supply curve from B to A,called contraction in supply.
Change in supply
It is a complete shift of the supply curve from the original one to a new supply curve either to
the right (an increase in supply) or to the left (a fall in supply),caused by other factors that
influence supply but not the price of the commodity.The situation can be shown as follow :
Price S2
S
10 000
S1
8000
4000
2000
QT
10 20 30 40 50 Y
The initial supply curve from the diagram above is S.An increase in the number of
producers,incrase in the level of technology,a fall in the cost of production ,etc will lead to an
increase in the supply of goods from S to S1 at constant price 4000 FCFA.The quantity of
goods supplied by producers will increase from 20 unuts to 30 units.But when there is a fall in
the number of producers,a fall in the level of technolog,an increase in the stock of
production,the supply of good will decrease and this will lead to a complete shift of the supply
curve to the left from S to S2 .Quantity of good supplied will decrease from 20 units to 10
units at constant price of 4000FCFA.
VII. Concepts of elasticity

A. Elasticity of demand.
i) Definition
Elasticity of demand measures the extent to which the demand for goods and services will
change due to a change in price, income or price of other goods. It is the degree of
responsiveness of quantity demanded as a result of a change in the factors affecting the
demand for the good. There are 3 types of elasticity of demand which are: price elasticity
(PED), income elasticity (YED) and cross elasticity of demand (XED).
a) Price elasticity of demand (PED)

i) Definition
It measures the extent to which quantity demanded of a good will change due to a change in
its price or it is the degree of responsiveness of quantity demanded due to a change in price.
ii) Calculation
PED is calculated using the formula
1st method: %∆ (percentage change)

PED = Percentage Change in Quantity Demanded
Percentage Change in Price
Calculate the %∆ in quantity demanded
ie New quantity – Old quantity X 100
Old quantity
calculate the %∆ in price

ie New price – Old price X 100
old price
2nd method: Proportionate change
PED = Proportionate Change in Quantity Demanded

Proportionate Change in Price
PED = ∆Q/Q ═ ∆Q x P
∆P/P ∆P Q
- Nature of PED
Calculating the PED, it can give many values .These values help us to determine the nature of
PED.
If PED = ∞, demand is perfectly elastic
If PED > 1, demand is fairly elastic
If PED = 1, demand unitary elastic
If PED < 1, demand is fairly inelastic
If PED = 0, demand is perfectly inelastic.
NB: the final answer should always be considered in absolute value. There is no negative
PED
iii) Example
Study the table below and calculate the PED with interpretation at the stated price levels.
Price per unit 1000 800 600 500 450 300

Quantityty demanded 5 7 10 12 15 20
1. Calculate the PED when price reduce from 1000-800.
2. Calculate the PED when price increases from 500-600.
3. Calculate the PED when price changes from 450-300.
Solution
P0 = 1000, P1 = 800 Qo = 5, Q1 = 7.
Method 1
PED = 40% / 20% = 2 (fairly elastic).
Method 2
PED = 2 (fairly elastic).
b) Income elasticity of demand (YED)

Income elasticity of demand (YED) measures by how much quantity demanded of a good
will change due to a change in income. It is calculated using the formula
PED is calculated using the formula
1st method: %∆ (percentage change)

YED = Percentage Change in Quantity Demanded
Percentage Change in income
Calculate the %∆ in quantity demanded
ie New quantity – Old quantity X 100
Old quantity
calculate the %∆ in price

ie New income – Old income X 100
old income
2nd method: Proportionate change
YED = Proportionate Change in Quantity Demanded

Proportionate Change in Price
YED = ∆Q/Q ═ ∆Q x Y
∆Y/Y ∆Y Q
- Interpretation of the income elasticity coefficient
The coefficient of the income elasticity of demand is very important to determine the type of
goods.
The demand for normal goods increases as income increases, and therefore, the value of the
income elasticity of demand is positive but less than or equal to one. For luxury goods, the
value of income elasticity of demand is greater than 1, implying that the percentage increase
in quantity demanded is larger than the percentage increase income. For necessity goods, the
value of income elasticity of demand is less than 1, implying that the percentage increase in
quantity demanded is smaller than the percentage increase income.
With inferior goods, as income rises demand falls and the coefficient of income elasticity of
demand is therefore negative. An exceptional case is that demand will remain constant as
income rises. In this case there is said to be zero income elasticity of demand.
Example: the income of Mr. X rises from 400-600frc and the sales of palm oil increases from
8-10 liters. Calculated the Y.E.D and interpret the results
Exercise: consider the following demand schedule for a good
Year 1 Year 2
Income 50,000 70,000
Demand 200 250
i) Calculate the income elasticity of demand and interpret your result.
c) Cross elasticity of demand (XED)

This is the extent to which quantity of a good will change due to a change in the price of
another good (complement or substitute). For two commodities A and B, cross elasticity of
demand for commodity A with respect to the price of commodity B, as denoted XEDAB can
be calculated as:
XEDAB = Percentage Change in Quantity Demanded of A

Percentage Change in price of B
The value of XED is negative for complementary goods and positive for substitutes goods. If
it is 0, it means the goods have no link. Hence XED helps in the classification of goods.
Example: the price of butter rises from 60-70 and the quantity demanded for margarine
increases from 3-4 gram. What is the XED of butter in respond to margarine? (XED=2).
Exercise: consider the following data on good A and B
GOOD A GOOD B
Price (fcfa) Quantity demanded Price (fcfa) Quantity demanded
20 300 50 100
30 200 60 80
ii) Calculate cross elasticity of demand for commodity A with respect to the
price of commodity B.
iii) State the relationship between commodities A and B using your result in i)
VIII. Theory of consumer behaviour(cardinal and ordinal approach)

i) Definition
A consumer is either an individual who uses goods and services to satisfy his wants, a
household or government. A consumer is said to be rational ie whose major aims is to
maximise utility
ii) Basic approaches to consumer behaviour
a) Cardinal utility theory
Utility is the satisfaction or pleasure derived from consumption of goods or services. It is

assumed that, a consumer can know exactly how much satisfaction is derived from
consumption of a good and such satisfaction is measured subjectively in units known as utils
1. Assumptions of cardinal utility
- it assumes that a consumer is a rational being who calculates and measures, chooses
and compares utilities of different units of goods thus maximizing utility
- It assumes that a consumer possesses perfect knowledge of the choices open to him
- It assumes that all commodities available to a consumer are perfectly divisible into
smaller units
- it assumes that as more a single commodity is consumed, total utility increases,

reaches maximum level and the falls
- it assumes that there are no perfect substitutes, and that utilities are measurable in
terms of money
2. Categories of utility
i) Total utility: it is the total satisfaction derived from consuming all different units of a given
commodity in a particular period of time . For example, when a consumer buys mambo, he
receives them in units of 1,2,3, and 4 .Two mambo have more utility than one mambo, three
mambo have more utility than two mambo, and four mambo have more utility than three
mambo
ii) Marginal utility: it is the additional satisfaction derived from consumption of an extra
unit of a commodity in a particular period of time. For example, the total utility of two
mambo is 35 utils, and when a consumer consumes the third mambo, total utility becomes 45
utils : Therefore, the marginal utility of the third apple is 10 utils (45-35 =10) Marginal utility
is given as : Marginal utility = change in total utility / change in quantity of a good
iii) Marginal utility of income, is the additional satisfaction derived from expenditure of an
extra unit of income on goods and services
iv) Marginal utility of money: this is the change in total satisfaction derived from money that
results from one unit of change in the quantity of money
3. Table showing the relationship between total utility and marginal utility
Units of mambo Total utility Marginal utility

0 0 -
1 20 20
2 35 15
3 45 10
4 50 5
5 50 0
6 45 -5
7 35 -10
The units of mambo which a consumer chooses are in descending order of their utilities .The
first mambo is the best out of the tot available to him and hence give him the highest
satisfaction measured as 20 utils .The second mambo is naturally the second best with lesser
amount of utility than the first and has 15 utils.
4. Diagram showing the relationship between total utility and marginal utility
TU/MU
X
50
45
TU
40
35
30
25
20
15
10
5 Y
0 Units of mambo
1
7
-5
-10 MU
- When total utility is increasing, marginal utility is decreasing
- When total utility is at maximum ie point X (satiety point), marginal utility is at zero
ie point Y (Point of saturation)
- When total utility starts falling but still positive, marginal utility goes into
negative(disutility)
5. The law of diminishing marginal utility
The law of diminishing marginal utility states that as more and more units of a commodity
are consumed, the satisfaction derived from each additional unit diminishes
b) Ordinary theory(Indifference curve theory/approach)
1) Definitions
An indifference curve is on joining all those combinations of two goods that give equal
satisfaction to a consumer or an indifference curve is a graph showing combination of two
goods that give the consumer equal satisfaction and utility. Each point on an indifference
curve indicates that a consumer is indifferent between the two and all points give him the
same utility.
The curve explains consumers behaviour in term of his/her preferences for different
combinations of two goods eg X and Y
An indifference curve is drawn from an indifference schedule
An indifference schedule is a list of combinations of two goods such that a consumer is

indifferent (having no particular interest in one of the said goods) to those commodities
2) A table showing indifference schedule of goods X and Y
COMBINATIONS X Y
1 1 18
2 2 13
3 3 9
4 4 6
5 5 4
6 6 3
The consumer is indifferent whether to buy the first combination of units 18Y and 1X, or the
fifth combination of 4Y and 5X or any other combination .All combinations give equal
satisfaction to a consumer. When various combinations are plotted on a diagram and joined by
a line, they form an indifference curve
3. An illustration of an indifference curve
The data the table above showing indifference schedule of goods X and Y can be use to
illustrate an indifference curve. This can be shown on the figure below:
Good Y
20
18
16 Indifference
14 curve
12
10
0 Good X
1
4. Assumptions of indifference curve theory
i) It assumes that there are two goods X and Y with their prices being known an given
ii) It assumes that the consumer acts rationally so as to maximise utility
iii) It assumes that a consumer has perfect knowledge about prices of goods in the market
iv) It assumes that consumer’s tastes, habits and income remain constant throughout the
analysis
v) It assumes that utility is ordinal ie the consumer ranks his preferences according to
satisfaction
vi) It assumes that a consumer prefers more of x to less of Y, which implies a negatively
downward sloping indifference curve that is convex in nature
vii) The indifference curve can move to the right or to the left which means that there is an
increase or decrease in both commodities X and Y respectively
viii) The indifference curve never touches either axes
ix) It assumes that two indifference curves can never intersect/meet
NB: where there are several indifference curves on the same graph we have indifference map
A graph showing an indifference map can be shown as follow
Good Y
20
18
16
14
12
10
8 IC4
6
IC3
4
IC2
2
IC1
0 Good X
1
Characteristics
The very important features of the indifference curves that describe most of them are as
follow:
i) They are downward sloping
i) Higher indifference curves are preferred to lower ones
ii) They cannot intersect
iii) Indifference curves are convex (ie bowed inward)
iv) Indifference map and illustration
The indifference map is the graphical representation of two or more indifference curves
showing the several combinations of indifferent quantities of commodities, which consumer
consumes, given his income and the market price of goods and services.
The consumer preferences give rise to several combinations of commodities, each yielding the
same level of satisfaction. Hence, it is critical to understand the preferences of the consumer
as these vary from individual to individual, and market to market. The concept of the
indifference map can be further understood through a figure given below:
Good Y
20
18
16
14
12
10
8 IC4
6
IC3
4
IC2
2
IC1
0 Good X
1
The space between axis X and Y is called as the indifference plane or commodity plane.
This plane is comprised of finite points, each point representing the different combinations of
goods X and Y .It is possible to identify two or more points on the indifference plane, which
shows different combinations of goods X and Y, yielding the same level of utility. Thus, it is
always possible to draw a number of indifference curves without intersecting or being tangent
to each other. These indifference curves IC1 IC2 IC3 IC4, drawn graphically represents the
indifference map .Thus, an indifference map may contain several IC curves positioned on the
basis of the consumer’s preferences.
IX. Production theory
1) Definition
Production is defined as “the creation of goods and services to satisfy human wants”.
It could also be defined as “the transformation of resources (inputs or factors of production) in
to goods and services to satisfy human wants”. It refers to all those activities which provide
goods and services which people want and for which the are prepared to pay a price. The
main aim of production is to satisfy human wants. The following are examples of production;
driving, preaching, teaching, pounding of achu ( cooking of achu ) nursing, creation of palm
oil, cultivation and milling of rice, creation of furniture, building of a house, manufacture of
cars, motor bikes, phones etc. Production is said to be complete when the goods or services
has reach the final consumer.
2) Types of production
There are two types of production namely direct and indirect production.
i) Direct production
It is the creation of goods and services that satisfy human wants immediately. Here, the
producer produces for himself all he wants. Direct production is common in subsistence
economies. Examples of direct production include; a house wife who cooks food for her
family, a tailor who sews her own dress, a woman to washes her own dresses, a builder who
build his own house etc.
ii) Indirect production
It is the creation of goods and services that satisfy human wants indirectly ie the production
of goods that are to be used for the creation of other goods. Here, the producer produces in
order to satisfy other peoples wants. Ie he produces for the market. Indirect production is
mostly practiced in the market economies. Examples of indirect production include;
production of capital goods (raw materials, machines etc), a baker producing bread for sale,
etc
3) Stages of production
Given that production is a process and given that it is complete only when the final goods
reach the final consumer, it implies that production undergoes various stages. These stages
also known as structure of production are the primary, secondary and the tertiary stage.
i) Primary stage of production (the extractive stage)
This stage involves the extraction of natural resources or raw materials from the earth surface
or crust. Extractive occupations can be found mostly in farming, mining, fishing, cattle
rearing, forestry, hunting, quarrying, etc. for example, the exploitation of timber, mining of
gold, the cultivation of cocoa, coffee, rice, rubber, etc. primary production means the first
stage of production. The output produced at this stage by the extractive industries form raw
materials for the secondary stage.
ii) Secondary stage of production (manufacturing stage)
This stage refers to the transformation or changing or processing of raw materials in to semi-
finished or finished goods. For example the transformation of timber in to planks and then in
to furniture by a carpenter, the transformation of cocoa beans in to chocolate by
CHOCOCAM, the transformation of sugar cane in to sugar by SOSUCAM, building of
houses or roads (by contractive industries)
Tertiary stage of production (distributive stage)

This stage is concerned with the provision of all kind of services, distribution and exchange.
These services enable the goods produced in the primary and secondary stages to reach the
final consumer. The distribution channels will include wholesaling, retailing and
transportation etc. other services will include insurances services, banking, etc. other personal
services are offered by tailors, hair dressers, medical doctors, lawyers, accountants etc.
X. Cost of production
1) Definition
Cost of production can be defined as the total payment made to the factors of production
engaged in the production of a good or a service. For example, the cost of producing a school
uniform refers to the total expenditure in cloth (material), button, transport, labour, etc
involved.
2. Types of cost
i) Implicit cost (opportunity cost):it refers to the alternative forgone in order to get
something.
ii) Explicit cost: it refers to what the producer pays to the factors of production for using
their services.
iii) private cost : private cost refers to the cost which is incurred by the society as a whole
but which is not included in the monetary cost of the firm producing the good or service.eg
cost of air pollution, noise ,water pollution…etc.
3. Classification of costs
The cost of production is classified in to long-run cost of production and short-run cost of
production which is divided in two: short-run total cost and unit cost of production.
a) Short-run total cost of production
i) Total Fixed Cost (overhead cost, supplementary cost). Total Fixed cost (FC) is a
cost of production which do not vary with changes in output in the short run. Examples of
fixed cost include rent for land and factory buildings, interest of loans, cost of machine, etc.
also at output zero, TFC is TC.ie TFC = TC - TVC
ii) Total Variable Cost (VC) (prime cost, operating cost).Total variable cost is a cost
which varies with changes in output both in the short run and long run. examples of variable
cost include the cost of raw materials, cost of fuel, cost of labour .it is calculated as follow:
TVC = TC - TFC
iii) Total Cost (TC).Total cost is made up of Fixed Cost (FC) plus Variable Cost
(VC).total cost is made up of total fixed cost (TFC) plus Total Variable Cost (TVC).when
output is zero, fixed cost equal to total cost. Total cost increases with output.
Formula of TC = FC + VC or TC = TFC + TVC.
b) Short-run unit cost of production
The short-run costs of production are as follow:
i) Average Fixed Cost (AFC).Average fixed cost is fixed cost per unit of output.
formula of average fixed cost(AFC) can be calculated as follow:
Average Fixed Cost (AFC) = ATC - AVC or AFC = TFC

Q
ii) Average Variable Cost (AVC).Average Variable Cost is total variable cost divided
by output. Average variable cost is also the variable cost per unit of output. formula: average
variable cost is calculated as follows:
Average variable cost = ATC - AFC or AVC = TVC

Q
iii) Average Cost (AC) or Average Total Cost (ATC). Average cost or average
total cost is total cost per unit of output.
Formula: average cost is calculated as follows
Average Cost = TC
Q or ATC = AFC + AVC
iv) Marginal Cost (MC). Marginal Cost is the cost of producing an additional (extra)
unit of output. formula: marginal cost is calculated as follows:
Marginal cost (MC) = Change in TC

Change in Q
4) Illustration.
Given the information in the table below, calculate the following costs: total cost, average
fixed cost, average variable cost, average cost and marginal cost.
Output(units) TFC(Fcfa) TVC(Fcfa) TC AFC AVC AC MC

0 600 00 600 ∞ 0 ∞ ∞
1 600 300 900 600 300 900 300
2 600 400 1000 300 200 500 100
3 600 450 1050 200 150 350 50
4 600 550 1150 150 137.5 287.5 100
5 600 750 1350 120 150 270 200
6 600 1200 1800 100 200 300 450
Exercise: using the informations of TFC and TVC on the table below, calculate
TC, AFC, AVC, AC
Output(units) TFC TVC TC AFC AVC AC MC

0 200 0 200 ∞ ∞ ∞ /
1 200 50 250 200 50 250 50
2 200 90 290 100 45 145 40
3 200 120 320 66.66 40 106.66 30
4 200 160 360 50 40 90 40
5 200 220 420 40 44 84 60
5) Graphical illustration of TC, TFC and TVC Curves.
TFC,TVC,TC
TC
1800
TVC
1500
1200
900
600
TFC
300
0 Output
1
The figure above shows the TC, TVC and TFC curves .As output increases FC does not
change. It remains constant at 200.The total cost (TC) increases as output changes because of
the changes in variable cost.
Graphical illustration of AFC.AVC, AC ad MC curves.
AFC, AVC, AC ,MC
1000
900
MC
800
700
600
500
AC
400
AVC
300
200
100
AFC
0 Output
1
7
From the figure above, as output increasing, MC, ATC and AVC start falling, but MC falls
faster than AVC, and AVC falls faster than ATC. MC curve cuts the AVC and ATC at their
lowest point. The lowest point of the AVC indicates the most efficient level of production
XIV. Profit maximisation

Profit maximisation can be achieved in a variety of ways, but usually requires a high level of
specialization and knowledge because minimizing cost and maximizing revenues are two key
concepts that must be addressed for this to occur.
i) Definition
Profit maximisation can de defined as the act of achieving the highest revenue or profit or, it
refers to the sales level where profits are high
ii) Profit maximization formula
In order for firms to maximize profits, the marginal cost must equal marginal revenue for all
goods or services offered in a marketplace i.e. The calculation for profit maximization is the
number of units where MR = MC.
iii) Profit maximisation graph
Profit maximisation takes into consideration many aspects .Initially, the profit becomes equal
to the cost subtracted by revenue (P=TR-TC) which can be plotted graphically. Then, the
graph can be constructed using the revenue and cost as variables plotted against the function
of output, as shown below in the supply and demand graph:
Figure 1: profit maximization graph
MC
P1 Profit
TOTAL REVENU & Maximization
TOTAL COST MR-MC
MR
Q1
Output Q
iv) Profit maximization in monopoly

The profit maximization for monopoly depends upon profit maximization pricing and profit
maximizing quantity or level of output. It means that the marginal revenue decreases with an
increase in the production of goods by an extra amount. MC > MR if the firm produces a
higher quantity. In monopoly, the curve of marginal cost is upward sloping. Hence as per the
profit maximization rule, the best option for profit maximization for monopoly is to
produce that quantity of goods which makes the marginal cost equal to marginal
revenue .Ie MR= MC
Figure 2: Profit maximization in monopoly
MC
Maximum
possible profit
Total Revenue &

Total Cost Demand
Quantity
MR
v) Profit maximization in perfect competition

In perfect competition, many producers create and sell homogeneous goods and the buyers
have perfect information about the market. As a result, firms cannot influence the price of the
goods and services, so they are the price taker. As demand is perfectly elastic, D=MR
(Marginal Revenue) =AR (Average Revenue). So, the objective of these firms is to maximize
profits. Hence, the sole determinant of the profit maximizer is point P. At point P, the revenue
received on selling the only left product equals that of the marginal cost involved in producing
the one final product. This can be shown on the graph below:
Figure3: profit maximization in perfect competition
Price MC
ATC
P D=AR=MR
Quantity
NB: The common benchmark (reference point) for profit maximization is called breakeven
point, which means that if a company can increase sales above this point, then they will not
just maximize profits but also create an opportunity to grow in the future.
XV. Markets structures

i) Definition
A market is any arrangement that bring the buyer and seller into contact for the
exchange of goods and services. A market is not restricted to an area but it takes place in
different ways like on phone, telefaxing, internet, etc
ii) Characteristics of market
A market has the following characteristics:
 There should be buyers and sellers who participate in the exchange of a

commodity
 There should be commodity to exchange
 There should be a medium of exchange agreed upon and acceptable to all

participants
 There should be a price at which commodities are exchanged
iii) Types of markets
Many types of market exist and among them, we have:
1. Product/commodity markets : these are markets in which goods or services

are traded
2. Resources/factor markets, these are market in which production

resources/factors of production especially labour and capital are traded
3. Spot markets, these are markets where a commodity or a currency is traded

for immediate delivery
4. Forward/future market : these are markets where buyers and sellers make a
contract to buy or sell commodities at a fixed date at the price agreed upon in the
contract/agreement
5. Capital market: This is the market for short and long-term securities and loans.
It issues new shares and also exchange existing securities.
6. The labour market: This is a market where the services of labour are bought
and sold.
7. Perfect market : this is the market where none of the buyers or sellers have
the power to influence prices in the market by either influencing demand and supply
8. Imperfect markets : this is where the buyer or seller has the power to
influence the price in the market by either influencing demand and supply
9. Organised markets : these are formal markets, such as a commodity market

each dealing in a worldwide commodity, eg coffee, sugar, cocoa, rubber, etc
iv) Different market structures.

A market structure refers to the number and type of firms in a particular industry. The price
and output decisions of a firm depend on the market structure. They are of 2 types: pure and
perfect competition market and imperfect market.
a) Perfect competition
This is a market consisting of many firms selling homogeneous products with free entry and
exit of firms. This is however a theoretical market as it can’t be found in real world.
- Characteristics of perfect competition.

 Homogeneous products: The products bought and sold are identical to each other.
 Atomicity (many buyers and sellers): There are so many buyer and sellers that no one
can influence or modify the price or quantity sold.
 There is freedom of entry and exit in the market.
 There is no preferential treatment as all buyers receive the same treatment.
 There is perfect knowledge of the market since both buyers and sellers are aware of
what happens everywhere in the market.
 There is perfect mobility of factors of production.
- Price and output determination under perfect competition.
The price and output are determined in a perfect competitive market by the intersection of
demand and supply curves.
b) Imperfect competition.
Imperfect market is made up of monopoly, monopolistic competition, oligopoly, duopoly and
bilateral monopoly.
i) Monopolistic competition.
This is a market structure with a large number of firms producing differentiated products e.g.
Retailers and manufacturers of cloths. The features are as follow:
Characteristics of monopolistic competition
- There are many buyers and many sellers.
- Firms sell differentiated products. The products are similar but the difference lies in
the brand name, decorative packaging, business style, honesty e.g. Firms producing and
selling soap, beers etc.
- There is freedom of entry and exit in the market. Only technical barriers like
economics of scale can limit the entry of new firms.
- Firms use non-price competition like persuasive and informative advertisement to

have more customers.
ii) Oligopoly
This is a market dominated by few large(giants) firms. Pure or perfect oligopoly is a market
situation where the few firm’s identical products and sell at a unique price. Imperfect
oligopoly is therefore when the few firms sell differentiated products.
Duopoly is a special case of oligopoly where there are only 2 sellers.
Examples of oligopoly include; the CDC and socapalm in the palm oil sector. They have the
following features;
- There are few firms in the market.
- There are barriers to entry and exit.
- Abnormal profit is likely to be earned in the long run.
- Prices are stable due to non-price competition and collusion.
- The behaviour of one firm is influence by another so they are interdependent.
iii) Monopsony: This is a market situation where there is only one buyer.
iv) Bilateral monopoly: This is a market structure where one buyer is facing one seller.
v) Monopoly. This is a market situation with a sole supplier of goods or services with no
substitute (pure monopoly). A monopoly can influence the price of its products hence, it is a
price maker. E.g. Camwater, eneo, camairco etc
XVI. Factor price determination

In the factor market, price of factors of production are determined by the interaction of
demand and supply forces

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General Economics

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GENERAL ECONOMICS LEVEL 100: HIGHER INSTITUTE OF ENGINEERING AND

AGRONOMY TCHONANG (ISIAT)

HIGHER INSTITUTE OF ENGINEERING AND AGRONOMY TCHONANG

 Nature and scope of economics,

 Positive and normative aspects of economics

 Production possibilities curves

 Price theory(demand and supply analysis)

 Demand and supply

 Theory of consumer behaviour(cardinal and ordinal approach)

 Indifference curve theory

 Factor price determination

I. Nature and scope of economics

Economics is a vast subject which can be divided into microeconomics and

i) Some definitions of economics

 A C Pigou defined economic as a science of material welfare

ii) Reasons for studying economics

 The knowledge of economics helps planers to plan for socio-economic development.

 It helps government to know how to solve economic problems. For example,

iii) The basic economic problems

 For whom to produce?

iv) Basic economic concepts

 Scarcity: it is a situation where resources are insufficient to produce enough

 Scale of preference refers to list of unsatisfied human wants arrange in order

 Opportunity cost is defined as the next best alternative forgone in order to

II. Methodology of economics

ii) Deductive method

Hypothesis is a suggested explanation of phenomenon or reasoned proposal suggesting a

iii) Steps of economics methodology

Step 2: formulation of Hypothesis: this is an untested statement which attempts to explain

Step 4: application of economic theory. An accepted theory or model may be used to

III. Positive and normative aspects of economics

ii) Normative statement

Normative statement is a statement of opinion or value judgement which cannot be proved

IV. Production possibilities curves (PPC or PPF)

- The economy can produce two types of goods

- Technology is fixed and does not change during the year

iii) Types of PPCs

a) PPC with increasing costs

It can be illustrated as follow:

0 Cars (millions of units)

- Shifts in production possibility curves

An economy’s production potential is constantly changing. If its capacity to produce goods

b) PPC with constant costs

c) PPC with decreasing costs

Clothes (millions of tonnes)

 Characteristics of Capitalist Economic Systems.

c) The Planned /Command/Socialist/Communist Economic System.

- poor management and inefficiency

C. Demand and supply

ii) Individual and market demand schedule

Price per Kg Individual demand schedules

The demand curve

Figure: diagram showing demand curve.

Shape of a normal demand curve

iii) The first law of demand and supply

Normal demand curve

Abnormal demand curve

ii) Regressive demand curve at the top

Abnormal demand curve

Normal demand curve

ii) Individual and market supply schedules

Price in fcfa Individual supply schedules Mkt supply schedules

iv) The second law of demand and supply