Principles of Economics Slides 2024 - Upto Elasticity

PRINCIPLES OF ECONOMICS
Richard K. Kuffour
January, 2024
1
AIM OF THIS COURSE
The aim of this course is to appreciate Economics as a

discipline and how to incorporate economics thinking
into our field of study
2
Objectives of The Course
• Know the fundamental concepts and theoretical principles

of the discipline.
• Identify the economic dimensions of societal problems by

effectively using appropriate economic concepts and
definitions.
• Appreciate the role of economics in dealing with societal as

well as organisational problems.
• Improve student’s understanding of economic issues and

events.
3
Assessment Procedure
o Two forms of assessment

• Continuous Assessment (40%)
Attendance, Quizes and Case Studies
• End of Semester Examination (60%)

Multiple choice
True/False
Short answers (Essay if possible)
4
Texts and Course Materials
• Hoag, Arleen J., and Hoag, John., H. (2006). Introductory

Economics. (4th Ed). World Scientific Publishing Co. Pte. Ltd.
Singapore
• Mankiw, Gregory N. (2005). Principles of Economics. (3rd Ed).

South-Western Cengage Learning, USA
• Lecture notes
5
Schedule of Activities
6
Meaning of Economics
o Diverse definition by people living at different places and times
The following defined Economics as:
• The study into the nature and causes of the wealth of nations. – Adams
Smith (1725-1790)
• The study of mankind in the ordinary business of life. – Alfred Marshall

(1842-1924)
In view of various definitions, an acceptable working definition would be

as below:
• Economics is a social science that studies how society chooses to

allocate its scarce resources, which have alternative uses, to provide
goods and services for present and future consumption.
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• Important Concepts and Ideas from an acceptable definition.
• Social science - it involves the study of human behaviour and uses

scientific methods in explaining economic phenomena.
• Scarcity
Unlimited wants competing for limited resources creates the basic
economic problem of scarcity
We want to use more than there is of our resources, but there are so many
competing uses to which resources can be put to, making them scarce. The
central problem of economics is ,therefore, scarcity.
As soon as someone is willing to pay for a good, or a resource, it is scarce by

the economist’s definition.
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• Choice
This exist because the scarce resources have alternative (
different) uses and that calls for decisions to be made.
Economic units (like firms, governments) need to choose

how to allocate their scarce resources to meet their
needs.
Economics, which deals with scarcity, is often called the

study of choosing
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• Alternative Uses
Society must make choices among the alternatives.
It must decide on what to use resources for by answering the ff:
What should be produce?

How they should be produced ?
For whom should they be produced?
It must decide which goods will be produced, how to allocate (distribute)

resources to produce goods, and how to allocate the goods among the
population.
This will depend on the kind of economic system the society has chosen.
10
• Opportunity Cost
Opportunity costs are everywhere, due to scarcity and the necessity

of choosing.
Opportunity cost is the value of the forgone alternative — what you

gave up when getting something. It is what you did not choose in
making a choice.
For example,
- You buy the brown car instead of the green, or a phone instead of
paying your fees.
- The State uses its limited budget to do free SHS rather than rail
lines.
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• Goods and services
Anything that satisfies a want is a good.
The purpose of production is to provide goods that satisfy wants.
The consumption of the goods satisfies wants.
Goods can be tangible or intangible.
Tangible goods are physical items such as mobile phones or pens.
Intangible goods such as medical care or education are called

services.
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• Present and Future Consumption
Choice also imposes opportunity cost over time as resources used now
means it will not be available for future use.
Decision must be made, an opportunity cost encountered, whether to

allocate for present needs or future needs.
By reducing consumption today, future consumption may be increased So

you can consume even more later.
For example,
A barrel of oil pumped from the ground now is a barrel of oil that will not
be available for consumption any day in the future. So to use the oil today
imposes forgone opportunities in the future.
13
o Resources
They are the inputs used to produce goods and services that meets
human needs and wants.
The satisfaction of wants can only be accomplished by using up

resources .
Also called factors of production or means of production.
These are classified as land, labor, capital, and entrepreneurship.
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• Land refers to the land itself and anything that grows on it or can be taken
from it — the “natural resources.”
• Labour is the human effort (both physical and mental) that is geared towards
the production of a good or service.
• Capital (Capital goods) is not in reference to money but to a resource.

It is a man-made tool that has been produced for use in the production of other
goods and not for direct consumption.
Examples of capital goods are sewing machine, carpenter’s hammer, and
warehouse.
Some goods may be a consumer good in one use and a capital good in another
use.
Capital gods are produced and that will combine with other resources, such as
land and labor, to produce more output.
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• Entrepreneurship
Entrepreneurship is the organizational force that combines the

other factors of production — land, labor, and capital — and
transforms them into the desired output.
Entrepreneurs are the risk takers who reap the profits or bear the
losses of their undertakings.
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o Microeconomics
This is concerned with the optimising behaviours of individuals

firms, industries and consumers (households) and deals with the
effects of individual taxes and specific public spending
programmes.
A study of the level of output and employment for a particular

factory in Ghana for example, would belong to microeconomics.
The goal of microeconomics is to understand how the actions of

consumers and producers affect price and output.
17
o Macroeconomics
This emphasises the economic interactions in the economy

as a whole. It concerns the aggregate behaviour of
consumers and producers.
Deals with the factors which determine national output and

employment, the general price level, total spending and
saving of the economy, total imports and exports, demand
for and supply of money and other financial assets.
The goal of macroeconomics is to identify the factors that

influence the level of national output and national income.
18
o Positive Economics
It deals with the objective or scientific explanations of the
workings of the economy.
The task is to develop models that accurately predict economic
reality.
It emphasis is on “what is” not on “what ought to be”.
Examples of statements that describe positive economics are :

• The demand model predicts that when the prices of a commodity
increases, the quantity demanded of the commodity decreases.
• When the government imposes a tax on a good, the price of the
good will rise.
•Favourable weather conditions will increase maize output.
• When general price level increases, the value of money falls.
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o Normative Economics
Normative economics offers recommendations based on personal

value judgements.
The task of normative economics is to determine the costs and

benefits of alternative ways of accomplishing desired objectives.
It deals with “what ought to be”.

Examples :
• The government should subsidize health bills of the aged instead
of the rest of the population.
• We ought to extract oil in large quantities from rocks in Ghana.

20
Thank you
21
nd
2 Lecture
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Production Possibility
o The production possibilities model, provides a clearer
understanding of the resource allocation problem.
o The model is designed to tell what combinations of output we

could possibly choose as a society.
o We want to know what potential combinations of output we

could produce with our greatest effort.
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o Assumptions of the Model:
• Two alternative goods

• Full employment of resources
• Fixed amount of resources and technology
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o PPF/PPC shows the existence of the concepts of
• Scarcity
• Choice
• Opportunity cost
– Scarcity is seen on the curve since points on the curve

represent a limited, not an unlimited, output of bread and
wine.
– For example, point P indicate scarcity because the resources of
the country cannot enable it to produce a combination of
point P.
27
- Choice is indicated on PPC by being at one combination of

output rather than another.
- You choose one combination and cannot also choose another.

Eg, You Choose A or F.
- Opportunity cost is also seen in the PPC because as we move

from one point on the curve to another, costs are imposed since
we must give up something to gain something.
That is , Scarcity forces choice, which results in opportunity cost.
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29
BREAD
WINE
30
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o Changing the Assumptions — Resources and Technology
• Shifts in the Production Possibility

- Improvement in technology
- Economic growth (increase in resources)
32
33
Economic System
o All that society wants of each good cannot be produced;
therefore, the society is forced into choice since what its wants
for each good cannot be produced.
o Every society must, therefore, determine which of all the many

possible goods will be produced with the limited resources.
o Once the process is chosen, what do we expect it to do for

us?
o Any process which allocates resources must be able to answer
these basic economic questions:
1. What goods will be produced and in what quantities?

2. How will resources be combined to produce the goods?
3. For whom are the goods produced?
4. How much of each good will each consumer get? 34
Economic System
o The ‘what question’ is about what to produce and in what
amount.
o Every society must determine which of all the many possible
goods will be produced with the limited resources and the
particular quantity of each good as well.
o The ‘how question’ is also about production. How is each good

to be produced? Which resources are to be used up in the
production of the good and which method of production, the
technology, will be employed?
o The for ‘whom question’ is a question of allocation

(distribution). Who will consume the goods created by
answering the two previous questions?
35
Economic System
o There are many potential ways to allocate, ranging from :
• an equal share for everyone; to

• each according to his or her contribution.
o There is no ‘right’ method.
• The allocation method that is selected will reflect the values of

the society.
• The combined answers to these questions is called the

allocation of resources or resource allocation
36
Economic System
o The best use of resources will be evaluated by how well a

process achieves the goals of society.
o Possible Goals of an economy may be :

• Economic growth
• Efficiency
• Economic freedom
• Equitable distribution of income
• Clean environment
• Full employment
• Price stability
37
Economic System
o The process used by each society to answer the basic economic
questions determines the economic system of the society
o One economic system can be distinguished from another by

asking who owns and controls the scarce resources within that
society.
o The ownership of the resources will reflect the degree of

centralization of control.
o The major economic systems are capitalism,

socialism/communism, and mixed.
38
Economic System
o Capitalism (Free Market)
• Individuals own and control scarce resources and consume the

final output.
• “what to produce” question is decided by the individuals.
• Consumer demand for a product will determine if, and how

many, resources will be allocated toward its production.
• Capitalism resolves the “how” question by the profit motive.
• The least expensive resources and the most efficient technology

will be employed
39
Economic System
o The allocation question, the “for whom” is resolved by most
resources and goods being distributed by price.
o Those holding resources valued by society will receive an

income enabling the individual to participate in the
consumption of output.
o Under capitalism, these answers to the economic questions are

resolved in markets.
Eg, USA
40
Economic System
Communism/Socialism
o The public (government ) ownership of resources.
o A system of central planning.
o Under pure communism, the use of land, capital and labour are
for government to allocate through a central committee.
o You might be employed in whatever salt mine or other capacity

these are employed in a capacity the committee believes to be
in the best interest of society.
o Eg, Russia and China
41
Economic System
o In practice, there is no society that has a system of pure capitalism or
communism.
o Each society seems to employ some varying combination of private and

public ownership of the scarce resources
o Mixed economic system

A society that does not clearly emphasize either extreme but favours a
combination of private and public ownership is identified under Mixed
economic system.
Eg. Ghana
42
Circular flow model
It is a capitalist model that illustrates the interrelationships
existing between the sectors and markets in the economy.
The two sectors will be considered for now:

• consumers, which all of us ultimately are, and
• business.
• These two sectors interact through the two markets :
the resource market and the product market.
• The resources flow from their owners, the consumers, through

the resource market to business. Business converts the
resources into final products, which flow to the consumers
through the product market.
43
Circular flow model
Resource and Product Flow
44
Circular flow model
• This adds to the resource and product flow, the opposite flow of money
and income.
• Money is paid to firms by consumers for the products that the firms
produce and business pays the money in turn to the consumers for the
use of resources.
45
Thank You
46
3rd Lecture
47
Theory of Demand
o Meaning of Demand
• Demand is a list or schedule of all alternative (different) quantities of

a particular good that a buyer would be willing and able to buy at
alternative prices and at different period of time.
o Important Observations :
• Demand reflects the willingness and ability (effective demand).

The price is the opportunity cost measured in money terms.
• Demand represents buyer choice, not seller choice. When you think of
demand, think of a buyer.
48
Theory of Demand
Demand schedule is tabular representation of the relationship

between prices of commodities and their associated quantities
demanded.
Demand schedule for Mercury
49
Theory of Demand
• Individual demand scheduled is a demand schedule prepared for a

single individual.
• Market demand schedule is a schedule prepared for a group.
• Demand Curve is a graphical representation of the relationship

between prices of commodities and their associated quantities
demanded.
• We get a demand curve when the demand schedule is plotted.
50
Theory of Demand
51
Theory of Demand
o A linear demand equation.
• Qd = a – b(P)
Qd = quantity demand
a = all factors affecting price other than price (e.g. income, fashion)
b = slope of the demand curve
P = Price of the good.
• Eg, Qd = 20 – 2P
• Inverse demand equation

The inverse demand equation can also be written as
P = a -b(Q)
a = intercept where price is 0
b = slope of demand curve 52
Theory of Demand
• We can also have individual demand curve and market demand

curve
o The Law of Demand
• It states that ‘ceteris paribus’, the lower the price at which a

commodity is offered, the greater of it that is demanded and
the higher the price, the smaller the quantity that a consumer
would be willing to buy.
• ‘Ceteris paribus’ means all other factors being constant.
• It establishes an inverse relationship between price of a

commodity and the quantity demanded. 53
Theory of Demand
Determinants of Demand
1. Price Factor:
• Price of good in question
This is seen in the Income effect and Substitution effect channels which
explains why more of a good is bought when its price falls.
2. Ceteris Paribus Factors/Demand Conditions:

• Price of other related commodities (substitutes or complements)
• Income of the consumer: effect of income on the demand is dependent on
nature of good.
• Expectations to future changes in prices of commodities
• Taste and Preference
• Weather conditions
• Level of advertisement
• Number of buyers
54
Theory of Demand
o Change in Demand Versus Change in Quantity Demanded
• A change in quantity demanded of a good refers to a change of

quantity demanded as a result of price change of the good.
• Graphically, the demand curve remains the same.
• The change is only shown by a movement along the demand

curve
55
Theory of Demand
56
Theory of Demand
o A change in demand of a good means a change in the whole
purchase plan.
• It is caused by factors other than the change in the price of the
good.
• Graphically, a change in demand involves a shift of the demand
curve.
• This means greater/smaller quantities demanded than before
the original prices
57
Theory of Demand
58
Theory of Supply
o Meaning of Supply
• Supply refers to the various quantities of goods that sellers or

suppliers will willingly offer for sale at all alternative prices
per unit of time
• Supply Schedule is a tabular representation of the

relationship between prices of commodities and their
associated quantities that sellers are willing and able to offer
for sale.
59
Theory of Supply
The Supply Schedule for Mercury
60
Theory of Supply
o Supply schedule can be Individual supply

schedule or market supply schedule.
o Supply curve is a graphical representation of the

relationship between prices of commodities and
their associated quantities supplied.
• Supply curve can also be individual or market

just as the case of the supply schedule.
61
Theory of Supply
62
Theory of Supply
o Linear Supply curve
• A linear supply equation can be expressed as P= a + bS
• a = plots the starting point of the supply curve on the Y-axis

intercept.
b = slope of the supply curve.
Eg, P = 30+0.5(Qs)
• Inverse supply curve

• This plots the same equation in terms of Qs
• 2(P-30)= Qs
Example of a linear supply curve

• P = 30+ 0.5(QS)
63
Theory of Supply
o The Law of Supply
• The law of supply states that ‘ceteris paribus’, the higher

the price at which a commodity is offered, the greater of it
that is supplied and the lower the price, the smaller the
quantity that a producer would be willing to sell.
• There is thus a positive relationship between price and

quantity supplied
64
Theory of Supply
o Determinants of Supply
• Prices of inputs
• Prices of other goods
• Government policy
• Number of sellers
• Expectations to changes in prices
• Acts of nature
• technology
65
Theory of Supply
o Change in Supply versus Change in Quantity Supplied
• A change in quantity supplied refers to a change in quantity

offered for sale as a result of a change in the price of the
product.
• Graphically, there is no shifting of supply curve
• the change is represented by "a movement along the supply

curve"
66
Theory of Supply
Change in the quantity Supplied
67
Theory of Supply
o Change in supply
• A change in supply is caused by factors other than the
price of the product.
• Graphically, it involves a shift of the supply curve, which

implies greater/smaller quantities supplied than before at
the original prices
68
Theory of Supply
Change in supply
69
Thank You
70
MARKET EQUILIBRIUM
o Market : A place where buyers and sellers meet to
negotiate price and trade.
o It is the meeting of these buyers and sellers that will help
determine:
• the price of the good;
• how much buyers will buy and how much sellers will
produce;
• how resources will be allocated; and
• the success of the economic system in meeting the
objectives of the society.
71
MARKET EQUILIBRIUM
Surplus
72
MARKET EQUILIBRIUM
• Surplus
Price 12 S
11
10 Surplus
9
8
7
6
5
4
3
2
1 D
0
5 10 15 20 25
Quantity
-
73
MARKET EQUILIBRIUM
Shortage
74
MARKET EQUILIBRIUM
• Shortage
Pri
1 ce S
11
2
10
9
8
7
6
5
4
3 Shortag
e
2
1 D
0
5 10 15 20 25
Quantity
75
MARKET EQUILIBRIUM
o Equilibrium
• Equilibrium occurs at the intersection of the market supply
and the market demand curves. This point of intersection is
called the equilibrium point (equilibrium price and
quantity.
76
MARKET EQUILIBRIUM
• A market equilibrium is a situation where for a particular
good supply = demand.
• There is no tendency for prices to change and therefore

market-clearing price has been achieved.
• The price mechanism refers to how supply and demand

interact to set the market price and amount of goods sold.
• At a state of disequilibrium there is either a shortage or

surplus and firms have an incentive to change the price.
77
MARKET EQUILIBRIUM
o Shifts in demand and supply
• Increase in demand with supply • Decrease in demand with

fixed supply fixed
78
MARKET EQUILIBRIUM
o Shifts in demand and supply
• Increase in Supply with demand • Decrease in supply with

fixed demand fixed
79
MARKET EQUILIBRIUM
80
MARKET EQUILIBRIUM
o Non-Market Forces Price Determination

• Higgling/Haggling is a situation where a buyer and seller
bargain over the price of a good to determine its price.
The one who gains most in the bargaining range is the one who
is able to persuade more. Usually observed in the purchasing of
second-hand clothes.
• An auction is a process of buying and selling goods or services
by offering them up for bid, taking bids, and then selling the
item to the highest bidder. The open ascending price auction is
arguably the most common form of auction in use today.
81
MARKET EQUILIBRIUM
Non-Market Forces Price Determination
o Tender (Sale by Tender ) is like a silent auction. A property is

marketed for sale with or without a guide price and there is a
deadline for all offers.
o Price Control/Legislation is a situation where government

determines the prices of goods and services by fixing prices
either above or below the market equilibrium price
• When prices are fixed above the equilibrium, it is called

minimum price legislation or price floor. On the contrary, when
it is fixed below the equilibrium, it is called maximum price
legislation or price ceiling
82
MARKET EQUILIBRIUM
o Consider a basic linear supply function:
y = mx + b
x: Independent variable , y: Dependent variable, m: Slope, b: y-intercept (line
crosses the y axis)
Demand and supply equation based on the above linear equation:

Demand equation: QD = a – bP
QD: Units demanded, P: Price of each unit
Supply equation: Qs = x + yP
Qs: Units supplied, P: Price of each unit
At equilibrium, supply and demand intersect, pointing to the equilibrium price and
quantity.
At equilibrium price:
Quantity demanded (Qd) = Quantity supplied (Qs)
Substituting the formula for Qs & QD

x + yP = a – bP
Solving the above gives the value of “P,” and applying the value of “P” in the QD or Qs
equation gives the equilibrium quantity. 83
MARKET EQUILIBRIUM
• The demand and supply in the market for birthday cakes
are given by Qd = 90 – 4P and Qs = 10 + P, respectively,
where P is price measured in Ghana Cedis. What is the
equilibrium price for birthday cakes?
o Steps:
• Set Qd = Qs
• 90 – 4P = 10 + P
• 90 – 10 = P + 4P
• 80 = 5P
• Solve for P.
• P = Ghs 16
84
MARKET EQUILIBRIUM
• The demand and supply in the market for birthday cakes
are given by Qd = 90 – 4P and Qs = 10 + P, respectively,
where P is price measured in Ghana Cedis. What is the
equilibrium price and quantity for birthday cakes?
o Steps:
• For Equilibrium quantity
• Qs = 10 + P
• = 10 + 16
• = 26 Units
85
MARKET EQUILIBRIUM
Q2. Suppose two customers exist in the market for bulbs and their
individual demand curves are: Kofi’s demand for bulbs: QD = 12 – P and
Asempa’s demand for bulbs: P = 18 – QD The market supply curve is: QS =
4P – 30. Given the above, what is the market equilibrium price of bulb?
Explanation:
Summing up individual demand, the market demand curve is:
QD = 12 – P +18 – P
QD = 30 – 2P
At equilibrium, QD = QS
30 – 2P = 4P – 30
60 = 6p
10 = p
• Therefore, the equilibrium price is Ghs10
86
MARKET EQUILIBRIUM
• The market for Papa Sekum shirts clears when P = Ghs10 and
Q = 500. Assume the government enforces a price control,
mandating that the shirts must be sold at a maximum of Ghs5
per shirt. This type of price control is _________, and it will
cause a ______ in the market.
• Explanation:
When P is lower than the equilibrium level, Qd > Qs, and a
shortage will emerge.
Ans.) Price Ceiling , Shortage
87
Thank You
88
Effect of Taxation on Equilibrium
• Taxes and subsidies can alter equilibrium situations.
• Taxes are compulsory payments by economic agents

imposed by government.
• Eg. Specific tax (per unit tax), ad valorem and sales tax.
• Subsidies are price reductions or income received by

economic agents (firms, individuals from governments).
89
• Specific tax (Per unit tax)
• It is a tax levied as a fixed amount per each unit of a good sold.
• It is proportionate to the particular quantity of a good sold
irrespective of its price.
• The new supply function after tax is obtained by replacing the

pre-tax price with the net price (price-tax)
Given the supply function Q = a + bP
Supply function after tax : Qt = a + b (P-t)
i.e. Qt = a + b (P-t)
Qt = (a-bt) + bP
90
• The initial supply function would shift upward (left) by bt,
with the slop coefficient b unaltered.
• Imposition of the tax leads to a reduction in quantity

supplied and an inward parallel shift of the supply curve.
91
• Consumers suffer: they pay higher prices and receive less of the good.
• Taxes raises prices: taxes shift supply to the left, which raises the
equilibrium price of the product –more expensive.
• Taxes reduce ouput: taxes shift supply to the left because of increased
costs – reduced supply leads to less goods/services offered for sale
• Producers suffer: they incur extra costs, produce less and are less likely to
make profit
• Governments gains: taxes collected increase government revenue
• Market size shrinks: reduced output = reduced market size
92
93
94
Question 1
Suppose initial supply function is give as S= 50 + 2P. If a specific tax of Gh¢ 5 per unit is
levied on the commodity. The new after tax function is given as
St = 50+2(P-5)
St = 50-10 + 2P
St = 40 + 2P
The tax shifts the supply function to St by the Gh¢ 5, but the demand function remains
the same.
Suppose the demand function is D= 100- 3P

At equilibrium Qty demanded = Qty Supplied
100- 3P=50 + 2P
50= 5P
P= 10
Where P is the Equilibrium Price before tax was levied
For Equilibrium Quantity before tax
D= 100 -3P
D= 100-3(10)
95
D= 70
Question 1 solution cont…
To know the equilibrium qty after the tax at Price Gh¢ 10

St = 40 + 2P
St = 40 + 2 (10)
St = 60
Since qty demand is 70 units and suppliers are willing to supply 60
Excess demand = 70-60
= 10
For Price and Qty after tax : 100-3P =40 + 2P
60= 5P
P= 12
St = 40 + 2P
St = 40 + 2( 12)
St = 64
96
• Note that the post-tax equilibrium price is higher
than the Pre-tax equilibrium price.
• The extent of increase or change will depend on the

elasticity of demand and supply.
• The post tax quantity is less than the pretax

quantity because of the disincentive to produce as
a result of the increased in cost of production.
97
Effect of Specific tax (Per unit tax)
98
•
99
•
100
•
101
Effect of Taxation and Subsidies on
Equilibrium
Effect of Ad – Valorem Tax
Ad – Valorem Tax is a tax levied as a percentage on
the value of the product. Most sales taxes are
ad-Valorem
Let P be the price and V be the Ad-Valorem tax rate.
Therefore the tax component per unit of the product
is VP
Net Price for seller is: P-VP = (1-V) P
…………. CONTINUE
102
ELASTICITY AND ITS APPLICATIONS
Qd= f ( Px, Py, M, T, A, E)
Where :
Qd is quantity demanded of commodity X
Px is the effect of commodity X
Py is the price of related commodity
M is the income of the consumer
T is the taste and preference
A is expenditure on advertisement
E is the expectation of future prices
103
Qd= f ( Px, Py, M, T, A, E)
Focus on :
Qd is quantity demanded of commodity X
Px is the effect of commodity X

Py is the price of related commodity
M is the income of the consumer
104
o Elasticity of demand refers to the responsiveness of
a change in quantity demanded of a good as a
result of a change in the price of the good itself,
price of other related goods and the income of the
consumer.
o It measures the sensitivity of Quantity demanded

to changes in price, income or price of related
goods.
105
Three Elasticities
• Price elasticity of demand or own price
elasticity of demand
• Income elasticity of demand
• Cross price elasticity of demand
106
o Own-Price Elasticity of Demand: Is defined as the
responsiveness of the quantity demanded to a change
in price, in a given market, during a given period of
time, ceteris paribus.
107
•
108
o Price elasticity of demand is negative due to the
price and quantity demanded normally vary
inversely.
o But the absolute value of the coefficient is used
as a measure of elasticity.
109
o Three possible results of elasticity.
• The coefficient may be > 1, = 1, or ,< 1
• If >1, then demand for the good is elastic. This is because the
percentage change in quantity demanded (QD) is larger than the
percentage change in price (P).
• Eg, % change QD / % change P 4 = 20 /4 = 5
• Elastic demand shows that buyers are relatively responsive to a

change in price
110
• This means that with a one percent increase in price of the
good, the quantity demanded will fall by 5 percent.
• Showing that for some reason buyers are relatively sensitive

to a change in the price of this particular good.
% change QD = BIGGER number = coefficient more than 1

% change P SMALLER number
111
112
Vertical and Horizontal Demand
Perfectly Inelastic Demand: The number of units demanded remains the same
regardless of the price.
Since quantity demanded never changes, the percentage change in quantity is always zero.
Thus the coefficient of elasticity is zero. Closest eg. is heroine , insulin
113
Perfectly elastic demand: the demand curve is horizontal or flat.
No matter how many units are bought, the price stays the same (does not change),
the percentage change in price is zero. Thus the coefficient is some number divided
by zero, which we will assume is infinite, surely greater than 1.
Examples are rare.
Price
114
Determinants of Own-Price Elasticity of Demand
• Nature of the commodity: The demand for necessities of life
is generally inelastic. For example, demand for salt and
commodities needed at death ceremonies. The demand for
luxury is more elastic because with a small change in their
prices there is a large change in their demand.
• Availability of Substitutes: Where good substitutes are

available the demand for a commodity will tend to be elastic.
But the demand for commodities having no good substitute is
inelastic, for example, petroleum products.
115
Determinants of Own-Price Elasticity of Demand
• Proportion of Income spent on the good: Demand for goods that
take only a small proportion of a person’s income tends to be
inelastic as no effort is made to look for substitutes. For those that
take high proportion of consumer’s income, it is likely to be elastic.
Eg. fridges and other household electrical appliances.
• Time Frame: Elasticity of demand can vary over time. The

immediate reaction to a price change could be large so that demand
appears to be elastic. For example, higher taxes on cigarettes leading
to higher prices may cause a lot of people to give up smoking.
However, the habit may prove too strong to give up and after some
time will resume smoking.
116
Applications of Price Elasticity of Demand
• Pricing policy of a producer or a trader

• Government tax policy
• Determines the expenditure of the consumer
• Controlling the consumption of harmful goods
• Wage bargaining
• Devaluation policy
117
Question 3:
Assume a demand function of Qd = 100 -2P. What is the price elasticity
of demand at P=20?
Solution
If P= 20, then Qd= 60

If P increses by 1 unit, then Qd = 58
Elasticity = % change in qty. demanded = - (2/60 ) / (1/20)
% change in price
The price elasticity of demand when P= 20 is -0.667 using the absolute
value, it is 0.667
118
Question 4:
Again using the demand function of Qd = 100 -2P. What is the price
elasticity of demand at P=40?
Solution
If P= 40, then Qd= 20

If P increses by 1 unit, then Qd = 18
Elasticity = % change in qty. demanded = - (2/20 ) / (1/40)
% change in price
The price elasticity of demand when P= 40 is - 4 using the absolute
value it is 4.
119
Question 5:
If the quantity demanded when the price of MR chocolate was GH¢ 1.00 were 20 bars of MR chocolate and it fell to
15 bars when the price rose to GH¢1.10, Calculate the price elasticity of demand.
Solution
𝐸𝑝 = 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑋

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑋
In algebraic form, 𝐸𝑝 =(∆𝑄⁄𝑄0 ) ÷(∆𝑃⁄𝑃0)
𝐸𝑝 = ∆𝑄 X 𝑃0
∆𝑃 𝑄0
Where ∆𝑄 is the change in quantity demanded

∆𝑃 is the change in price
𝑄0 is the original quantity demanded
𝑃0 is the original price
𝐸𝑝 = 15- 20 x 1
1.1 -1 20
= -5 X 1
0.1 20
= - 50 X 0.05
= -2.5 = 2.5
120
Equilibrium
•
121
Equilibrium
•
122
Equilibrium
•
123
Note Given
Qd = 120 – 6P
Ep = (dq\ dp) x (p/q)
but (dq\ dp) = - 6 and q = 120 – 6p

Therefore expression of Ep in terms of p = - 6 X (p/120- 6P)
Assignement
Question 1.
Suppose the demand curve for LA shoes is given by q = 500 − 10p.
(a) Find an expression in terms of P for the price elasticity of this demand function.
(b) What is the price elasticity of demand when the price is Gh¢ 30?
C) Using our result from (b), what will be your advise to management LA shoes to raise revenue.
124
Question 2
The demand and supply for an economic text books are given by Q =
20 – P and Q = 3P, respectively.
a) What are the equilibrium price and quantity.
Imagine that government imposes a per-unit tax of GH¢4 on the
sellers.
b) Solve for the new quantity, net price sellers received, and price
consumers paid.
d). Calculate the government revenue from the taxation.
e). Indicate your results from a) to d) above on a graph.
125
126
Thank You
127

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PRINCIPLES OF ECONOMICS

The aim of this course is to appreciate Economics as a

• Know the fundamental concepts and theoretical principles

• Identify the economic dimensions of societal problems by

• Appreciate the role of economics in dealing with societal as

• Improve student’s understanding of economic issues and

o Two forms of assessment

• End of Semester Examination (60%)

• Hoag, Arleen J., and Hoag, John., H. (2006). Introductory

• Mankiw, Gregory N. (2005). Principles of Economics. (3rd Ed).

• The study of mankind in the ordinary business of life. – Alfred Marshall

In view of various definitions, an acceptable working definition would be

• Economics is a social science that studies how society chooses to

• Social science - it involves the study of human behaviour and uses

As soon as someone is willing to pay for a good, or a resource, it is scarce by

Economic units (like firms, governments) need to choose

Economics, which deals with scarcity, is often called the

Society must make choices among the alternatives.

It must decide on what to use resources for by answering the ff:

What should be produce?

It must decide which goods will be produced, how to allocate (distribute)

Opportunity costs are everywhere, due to scarcity and the necessity

Opportunity cost is the value of the forgone alternative — what you

Anything that satisfies a want is a good.

The purpose of production is to provide goods that satisfy wants.

The consumption of the goods satisfies wants.

Goods can be tangible or intangible.

Tangible goods are physical items such as mobile phones or pens.

Intangible goods such as medical care or education are called

Decision must be made, an opportunity cost encountered, whether to

By reducing consumption today, future consumption may be increased So

The satisfaction of wants can only be accomplished by using up

Also called factors of production or means of production.

These are classified as land, labor, capital, and entrepreneurship.

• Capital (Capital goods) is not in reference to money but to a resource.

Entrepreneurship is the organizational force that combines the

This is concerned with the optimising behaviours of individuals

A study of the level of output and employment for a particular

The goal of microeconomics is to understand how the actions of

This emphasises the economic interactions in the economy

Deals with the factors which determine national output and

The goal of macroeconomics is to identify the factors that

Examples of statements that describe positive economics are :

Normative economics offers recommendations based on personal

The task of normative economics is to determine the costs and

It deals with “what ought to be”.

• We ought to extract oil in large quantities from rocks in Ghana.

o The model is designed to tell what combinations of output we

o We want to know what potential combinations of output we

o Assumptions of the Model:

• Two alternative goods

– Scarcity is seen on the curve since points on the curve

- Choice is indicated on PPC by being at one combination of

- You choose one combination and cannot also choose another.

- Opportunity cost is also seen in the PPC because as we move

That is , Scarcity forces choice, which results in opportunity cost.

• Shifts in the Production Possibility

o Every society must, therefore, determine which of all the many

o Once the process is chosen, what do we expect it to do for

1. What goods will be produced and in what quantities?

o The ‘how question’ is also about production. How is each good

o The for ‘whom question’ is a question of allocation

• an equal share for everyone; to