Introduction to Economics

Ahmad Riaz Bilal Zai

 Economics
 The English term ‘Economics’ is derived from the Greek
word ‘Oikonomia’. Its meaning is ‘household
management’.
 Economics
 Adam Smith
 Father of economics
 Professor in a Scotland University
 Wrote his book in 1776 entitled Wealth of Nation

 According to Adam Smith, economics is the science of wealth.

 Wealth: wealth refers to those all goods which satisfy human wants or which has
money value.
Production of wealth
Distribution of wealth
Exchange of wealth
Consumption of wealth
 Economics: Lionel Robbins
 Economic is the study of scarcity. Or it is the study of how to
allocate scarce resources, given unlimited wants.
 Resources in Economics are: Factor of production
 Land: any natural resource, including actual land
 Capital: The tools and machinery
 Labor: any human service
 Entrepreneurship: a person who combine these
resources to produce goods and services

 When combined together can produce goods and services.

 The world doesn’t provide the infinite amount of it.
 Economics
 Scarce resources and unlimited wants
 This forces choice to be made to effectively utilize the scarce resources
 Considering the scarcity, there are three fundamental choices that
organizations should make:
What to produce?
 You can not produce all the products because you are constrained with
resources scarcity.
 You have to determine
o what commodity to produce
 Consumer goods
Market need identification
 Capital Goods

 How much to produce Market demand Analysis

 Economics
 For whom to produce?
 Resources are limited you have to decide which class to produce for;

 Male/female
 Kids/Youths
 Poor/ Rich
 How to produce ( Production Technique)
 Generally there are two techniques of production :

 Labor Intensive Technique (Afghanistan)

 Capital Intensive Technique (USA)
Dr. Alfred Marshall’s Definition of Economics
 “Economics is the study of mankind in the business of
life. It examines that part of individual and social action
which is most closely connected with the attainment and
use of the material requisites for well- being.”
 Ordinary business of life
 Material requisites
 Production and consumption of wealth
 Well Being Or welfare of the society
 Branches of Economics
 Micro-economics (Small Components)
 Micro economics studies individual units
 Individual ( Income, Demand, Purchase Behavior, wage….)
 Household( Income, Spending, Demand…)
 Business
 It studies how business combine factors of production and produces output
and how a company distribute products.
 Macro economics
 Macro-Economics: (aggregate)

•Aggregate Demand
•National Income
•Poverty
•GDP
 Some Basic Terms
 Economy
 An economy encompasses all activity related to
production, consumption, and trade of goods and services
in an area.
 Economics
 Economics is a science.
 Economic Model
 Economic model is a model which is a set of variables
(constructs) showing a logical relationships to solve an
economic problem.
Terms…
 Economic Problem
 Economic Problem is the problem of scarcity of resources
in comparison to human wants.

 Economical:-
The economical denotes that something saves money or
resources or is not wasteful of money or resources. 
 
 Statement of Economics

Positive Economics Normative Economics

Based upon real facts Related to individual opinion

Verifiable Non-verifiable

Present /Past Future

There is 40% unemployment in
Afghanistan.
 
High Interest rates discourage investment.
Wages increase cost of production
Unemployment rate in Afghanistan should
be reduce.
Interest rate should be kept low
Wages of labor should not be increase.
 Demand
If you have desire to buy a commodity and if it is backed by;
 Ability to pay
 Willingness to buy Conditions for demand

Demand = Intention + power to purchase

 A Person below poverty line wants to buy a car

 It is only a desire because he doesn’t have purchase power.
 A rich man desire to buy a car
 It is demand; he is willing to pay and is backed by
purchasing power
 Law of Demand
Law of demand states that, other things remaining the
same, when price of one commodity increase its demand
decrease, and when price of commodity decrease its
demand increase.
 Inverse Relationship
 Demand Schedule
 In economics, a demand schedule is a table that shows the
quantity demanded of a good or service at different price
levels
 Demand Curve

The demand curve is a graphical representation of the

relationship between the price of a good or service and the
quantity demanded for a given period of time. In a typical
representation, the price will appear on the left vertical axis, the
quantity demanded on the horizontal axis. 
Demand Curve
The demand curve will move downward from
the left to the right

 (Y) Axis
 Price
Demand Curve
Price: from lower to upper
Demand: from lower to upper

 ( Axis) Quantity Demanded

Assumption for the Law of Demand
Income remain constant
The income of the consumer must remain constant for the
law of demand to hold. If there is a change in his income
the result will be not regarded in accordance with the law
of demand e.g. if the income of the consumer falls and the
price of the good remains constant , the consumer will
purchase less of the good though its price does not
increase.
Fashions Should not change
The consumer must not develop a sudden disliking for the
product Or consumer habits, fashions, should remain
constant.
Price of related goods or Substitutes
Change in price of related good will increase or decrease,
the demand for the product.
No change in future circumstances
The consumer must not consider possible future changes in
purchasing products , e.g. if he feels that in the future the
price of a good A will rise , he purchases a lot of now to
stock up in spite of the fact the price has not change.

WAR- Border Closure- Famine

Population should remain constant
Changes in demand due to changes in population are
concerned; we can say that utility of milk rises due to an
increase in the number of consumers even though the price
of milk is constant.
No change in Weather condition
During the winter season, utility of woolen clothes goes up,
even though they might be very expensive.

During summer, socks despite low price never have high

demand.

Shoes, Gloves..
Individual Demand
 Individual demand refers to the demand for a good or a
service by an individual.
Individual Demand Schedule
Market Demand
 It represents the sum of all individual demands for a
particular good or service.
 Market Demand Schedule
Price Individual Demand Market Demand

(Da) (Db) Da+Db=Dm

5 1 2 1+2=3

4 2 3 2+3=5

3 3 4 3+4=7

2 4 5 4+5=9

1 5 6 5+6=10
 Change in Demand
 There are two types of changes in demand:

 Movement in demand curve

 Expansion of demand
 Contraction of demand

 Shift in demand curve

 Rise in demand
 Fall in demand
 Movement in demand curve
 Movement in demand is always due to changes in Price of
the commodity.

 Expansion of demand
When price of a commodity fall its demand increase, this increase
in demand due to price is called expansion of demand curve

Price Demand
Contraction of demand
When price of commodity increase its demand fall, this
decrease in demand due to price is called Contraction of
demand curve.

Price Demand
 Shift in demand curve
 Rise in demand
When there is no change in price and quantity demand of a
good increase its called Rise in demand curve.
 Shift in Demand Curve
 Fall in Demand
 When there is no change in price and quantity demand of
a good decrease its called Fall in demand curve.
Causes of Rise and Fall of demand
Changes in income
 As the income of the consumer rises, he will purchase
more of those products which are still available at the
same price, hence their demand will rise and vice versa.
Changes in taste and fashion
When there is change in fashion and taste demand for that
product may rise or fall.
Changes in weather
During the summer season, the demand for coffee is not
very high because consumers prefer soft drink.
Changes in population
There will be a rise in demand for certain commodities
such as milk , clothing , etc. due to an increase in the
number consumers , as the population increase
Changes in the price of related good
 Consumer in a community usually consume about the
same amount of beef and mutton. However, if the price of
mutton goes up and that of beef remain constant, demand
will fall for mutton and rise for beef.
 Substitute Goods
A product or service that consumers see as essentially the
same or similar-enough to another product. Put simply,
a substitute is a good that can be used in place of another.
 Tea VS Coffee
 Pepsi VS Coke
 Samsung VS I phone
 Cow meat vs. Sheep meat
 Complementary Good
 A Complementary good can be a product or service that is
sold separately that adds value to another. In other words,
they are two or more goods that are used together
 When a fall in the price of one good increases the demand
for another good, the two goods are called Complements
Goods.
 A pair of goods consumed together. As the price of one
goes up, the demand for both goods will fall.
DVD player and DVD disks to play in it.
Tennis balls and tennis rackets.
Mobile phones and mobile phone credit for making calls.
I Phone and Apps to use with an I phone.
Petrol and car.
Supply
 Supply
 It depicts producer behavior
 The amount of goods which is brought to the market at a
specific time.
 It is the quantity of a commodity that sellers are able and
willing to offer for sale at given price.
 As a supplier how much quantity of commodity I am willing to
sell at a certain price is supply.
 If you produce 1000 Cars and are not willing to sell each
at 2K$, it is not considered as supply.

 It is stock
 Law of Supply
 It is vice versa of demand.
 It has direct relationship with price.
 Remember: A producer seeks profit.
 Law of Supply
“Other things remaining the same, quantity supplied of a
commodity increases with rise in price and decreases with
fall in price.”
 The law of supply states that there is a direct (positive)
relationship between price and quantity supplied.
 It means that the producer and sellers want to sell more at
higher price and will decrease their sell at a lower price as
shown in the following schedule and diagram.
 Law of Supply
 For example, in the case of rise in a product’s price,
sellers would prefer to increase the production of the
product to earn high profits, which would automatically
lead to an increase in supply.
 Similarly, if the price of the product decreases, the
supplier would decrease the supply of the product in the
market as he/ she would wait for a rise in the price of the
product in the future.
Assumption for the Law of Supply
 Assumption for the law of supply:-
 1 There should no change in the weather or season
 2 It also assumed there should be no change in
technology
 3 There should be no change in raw material
 4 There should be no change in the future prices of goods
 5 There should be no change in cost of production.
 6 There should be no change in political condition.
Market Supply
 Individual Supply

 Individual supply is the supply of an individual producer

at each price.
Changes in supply:
 There are two types of changes in supply
 Expansion and Contraction of supply
 Rise and fall of supply

 Extension or expansion and Contraction of supply:

When there is change in supply due change in price it is
called extension and contraction of supply.
Extension or expansion of supply:-
 When price of commodity increase and its supply also
increase its called Expansion of supply.
  
Contraction of supply :
 When price of commodity Decrease and its supply also
decrease its called contraction of supply.
Rise and fall of supply :
 If there is a change in supply not due to change price but
due to change of other factors it is called rise and fall of
supply
 Rise in supply :-

When there is no change in price and supply increase its

called rise in supply.
Fall in supply :
when due others factors supply are decreasing it is called
fall of supply OR When there is no change in price and
supply decrease its called Fall in supply.
Causes of Rise and Fall in Supply
 When prices of raw material change.
 If price of raw material increase it will lead to fall in supply.
 If price of raw material decrease it will lead to rise in supply.
 When technology change.
 If technology is brought to production process, it will lead to
rise in supply
 If technology is withdrawn from production process, it will lead
to fall in supply.
 Taxation
 If taxes increase it will lead to fall in supply.
 If taxes decrease it will lead to rise in supply.
Causes of Rise and Fall in Supply
 Weather Change
 If weather is getting favorable for certain commodities, it will
lead to fall in supply
 If weather is getting unfavorable for certain commodities, it
will lead to rise in supply.
 Political Condition of a region
 Future expectation of producer.
Exceptions and Limitations of the Law of
Supply
 Auction Sale
The law of supply states that quantity supplied increases with increase in price and vice-versa. But this law
doesn’t hold true in case of auction sale. An auction sale takes place at that time when the seller is in financial
crisis and needs money at any cost.
 Price expectation of seller
 If the seller expects that the price of commodity is going to fall in near future, he will try to sell more even
if the price level is very low. On the other hand, if the seller expects further rise in price of the commodity
he will not sell more even if the price level is high. It is against the law of supply.
 Stock clearance sale
 When a seller wants to clear its old stock in order to store new goods, he may sell large quantity of goods at
heavily discounted price. It is also against the law of supply.
 Fear of being out of fashion
 As we know that quantity supplied of a commodity is affected by fashion, taste and preferences of the
consumer, technology and time. If the seller thinks that the goods are going to be outdated in the near
future, he sells more at a lower price which is also against the law of supply.
 Perishable goods
 Those goods which have very short life-time and they become useless after that are all perishable goods.
Those goods must be made available in the market at its right time whatever be its price. So the seller
becomes ready to sell his goods at any offered price. It is also against the law of supply.
 Elasticity of Demand
 Elasticity of demand is a measure of the change in the
quantity demanded or purchased of a product in relation to
its price change.
 Elasticity Measured by dividing the percentage change in
the quantity demanded of a good by the percentage
change in its price.
 Formula

New demand-old demand

Old demand * 100
New price-old price
Old price *100
Example of elasticity of demand
 Degree of price elasticity of demand
 Unit elastic demand:- E =1
When the percentage change in demand is equal to
percentage change in price is called unitary elastic of
demand.
Degree of price elasticity of demand
 Elastic demand or E > 1:-
When percentage change in demand is greater than
percentage change in price is called elastic demand.
Less elastic demand: Ed < 1

 When percentage change in demand is less than

percentage change in price it is said to be less elasticity of
demand.
Perfectly elastic demand: E= Unlimited
 When there is no change in price but a large change in
demand is called perfectly elastic demand

Price ( X) Quantity Demanded

5 5
5 10

10-5 *100
5 = unlimited
5-5 *100
5
 Perfectly inelastic E=0
 When a quantity demand does not change while there is a
change in price it is called perfectly inelastic demand
 Revenue
 Firm Profit: Total Revenue- Total Cost
 Revenue
 Every firm or producer aims at maximization of its profits.
The maximization of profit is only possible when the cost
of production of a commodity is at its minimum level and
the price is at its maximum level.

  Revenue, refers to the total amount of money your

business makes during a certain period of time by selling
your products or services. For example, if you sell a drink
for $2 but it only costs you $1 to make that drink, your
revenue is $2
 Calculating Revenue

R= Q*P

Q: 500 Product Price: 10

R= 500* 10= 5000

 Revenue VS Profit
 Revenue is the total amount received from selling
products or service.
 Profit is the amount after deducting the expenses of a firm.
 Total Revenue Method :-

 When a firm increase or decrease the prices of goods and

services , it will affect the total revenue and the effects can
show different types of elasticity of demand.
 Total revenue may increase, decrease or remain constant.
Elastic Demand
 When price of a good increase its demand fall and due to
rise in price Total revenue fall. It’s called elastic demand
or E > 1.
Inelastic demand
 When price of a good increase its demand fall and due to
rise in price Total revenue increase. It’s called inelastic
demand or E < 1.
Unit elastic demand:-
 In this case a fall and rise in price will have no effect on
total revenue.

Price Demand Total revenue

5 60 300

10 30 300
 Consumer Behavior
 Consumer Behavior is the Process Involved When
Individuals or Groups Select, Use of Products, to Satisfy
Needs and Desires.
 Utility
 Utility introduce by Jevons. According to Jevons:
 Utility is total satisfaction received from consuming a
product/service
 Utility is the power of a commodity or services to satisfy
human wants or utility is that things which can satisfy or
fulfilled human wants.
 Utility refers to the amount of satisfaction a person gets
from consumption of a certain item.
For Example
 if a person is thirsty and he drinks some water after
drinking the water the desire of the person is fulfilled and
he has no desire for water so the thing which has fulfilled
his wants is called utility.
 Different concepts of Utility:-

 Initial utility :
It is the amount of utility which we get from the very first
unit of consumption e.g. we consume six apples and the
amount of utility derive from the first apple is known as
initial utility.
 Positive utility :-
 The amount of utility that gives positive satisfaction.
Negative utility :-
 The utility that gives negative satisfaction is known as
negative utility.
Marginal Utility
 Marginal utility refers to the satisfaction gained from an
extra unit consumed
Total utility
 Total utility refers to the complete amount of satisfaction
gained.
Saturation point
 When the marginal utility is zero and the total utility is the
maximum that is known as saturation point
 Example
Units Consumed (Apples) Marginal Utility (Utils) Total utility (Utils)  

1 8 8 Initial utility

2 6 14 Marginal utility

3 4 18 Positive utility

4 2 20 --------------------

5 0 20 Point of satiety

6 -2 18 Negative Utility

Total 18 ------- Total Utility

 Law of Marginal Utility
 This law state that as the amount consumed of a
commodity increases, the utility derived by the consumer
from the additional units, i.e marginal utility goes on
decreasing.
 In other words The law of diminishing marginal utility
state that if other thing remain constant when the
consumer are consuming more and more unite of a
commodity the additional utility or marginal utility which
he derived from the additional unit of a commodity will
go on diminishing.
Assumptions
 All the units of a commodity must be same in all respects
 The unit of the good must be standard

 There should be no change in taste during the process of

consumption

 There must be continuity in consumption

Unit Utility
1 20
2 15
3 10
4 5
5 0

Utility

Unit
 Market and Its types
 A set up where two or more parties engage in exchange
of goods and services is called a market. Ideally a
market is a place where two or more parties are involved
in buying and selling.

 The essentials of a market:

 Presence of goods and services to be exchanged.
 The existence of one or more buyers and sellers.
 A place or a region where buyers and sellers of a goods get in
close touch with each other.
The Imperativeness of Market
 Markets provide places for firms to sell their goods and
gain revenue.
 Markets provide places for consumers to buy the goods
and services that they need.
 Market Conditions
 Monopoly
o Monopoly is a condition where there is a single seller and
many buyers at the market place. In such a condition, the
seller has a monopoly with no competition from others
and has complete control over the products and
services.
o In a monopoly market, the seller decides the price of the
product or service and can change it on his own.
 Market Conditions
 Duopoly
o Duopoly is a market condition in which only two sellers
(producers) operate.
o A duopoly can have the same impact on the market as a
monopoly if the two players collude on prices.
o MasterCard and Visa.
o Netflix and Hulu
o Uber and Careem
 Market Conditions
 Oligopoly
There is no precise upper limit to the number of firms in an
oligopoly, but the number must be low enough that the
actions of one firm significantly influence the others.
Features
 A Few Firms with Large Market Share.
 High Barriers to Entry.
 Interdependence.
 Telecommunication
 Private Higher Education
 Market Conditions
 Monopolistic Competition
 Monopolistic competition is a type of market condition
where many companies are present in an industry, and
they produce similar but differentiated products. None of
the companies enjoy a monopoly, and each company
operates independently without regard to the actions of
other companies.
 Restaurants
 Private School in Afghanistan
 TV Channels
 Market Types
 Market types based on location:
 Local Market
 Local Markets: In such a market the buyers and sellers are
limited to the local region or area. They usually sell perishable
goods of daily use since the transport of such goods can be
expensive.

 Local market is the most important market for fresh products as well
as perishable products.
 Local Market means the geographic area within fifty (50) miles of a
destination.
 Restaurants
 Medical Offices
 Market Types
 National Market
o This is when the demand for the goods is limited to one
specific country.
o This market extend to the whole of a country it consist on
those goods and services which are demanded in all parts
of country
 Market Types
 International Market
 An international market is a system of selling goods and
services outside of the seller's home country.
 This market extent to the whole world the goods which
demanded internationally and can be exchanged in this
market
 Market Types
 Physical Market
Physical market is a set up where buyers can physically
meet the sellers and purchase the desired merchandise
from them in exchange of money

 Online Market:
 No physical meeting between buyer and seller
 Transactions are conducted through virtual means
 Market Types
 Underground Market
An underground market refers to an illegal market where
transactions occur without the knowledge of the government
or other regulatory agencies.
 Regulating Markets

Other than underground markets, most markets are subject

to rules and regulations set by a regional or governing body
that determines the market’s nature. 
 Factors of Production
 In economics, factors of production are the resources
people use to produce goods and services; they are the
building blocks of the economy. Economists divide the
factors of production into four categories: land, labor,
capital, and entrepreneurship.
Land- Factor of Production
 Includes any natural resource used to produce goods and
services.
 Anything that comes from the land. 
 Some common land or natural resources are water, oil,
copper, natural gas, coal, and forests.
 Land resources are the raw materials in the production
process.
 These resources can be renewable, such as forests, or
nonrenewable such as oil or natural gas.
Labor- Factor of Production
 Labor is the effort that people contribute to the production
of goods and services.
 Labor include the skills and experience
 Labor is imperative for quality
 Labor Management
Capital- Factor of Production
 Think of capital as the machinery, tools and buildings
humans use to produce goods and services.
 Capital differs based on the worker and the type of work
being done. 
Entrepreneurship- Factor of Production
 An entrepreneur is a person who combines the other
factors of production - land, labor, and capital - to earn a
profit.
 The most successful entrepreneurs are innovators who
find new ways produce goods and services 
 Entrepreneurs are a vital engine of economic growth
helping to build some of the largest firms in the world as
well as some of the small businesses in your
neighborhood.
 Law of Equi-Marginal Utility
Law of Maximum Satisfaction
 This law points out how a consumer get maximum
satisfaction out of his given expenses/ budget on different
goods.
 This law state that in order to get maximum satisfaction a
consumer should spend his limited income in such a way
that the last rupee/money on each/both commodity yield
him equal marginal utility.
Assumption
 Consumer is rational
 Budget should be consumed fully.
 Consumer is willing to spend his money on the product he has
less amount of it
Example: Consumer income is=5

Marginal Utility Marginal Utility

Money Spent
Of Coffee (Utils) Of Bananas (Utils)

1st Dollar 10 8

2nd Dollars 8 6

3rd Dollars 6 4

4th Dollars 4 2

5th Dollars 3 1
 Indifference Curve
 The indifference analysis approach was first introduces by
Slustsky a Russian economist in 1915. Later on it was
developed by J.R. Hicks in the year 1928.
 They thought utility can not be measured it is purely a
subjective and is immeasurable.
 The aim of indifference curve analysis is to analyze how a
rational consumer chooses between two goods.
 An indifference curve is a graph showing combination
of two goods that give the consumer equal satisfaction.
Example
 Pretend you have 2000 AF to spend on two commodities (
Meat and Vegetable)

M V Combination

8 1 A

4 2 B

2 4 C

1 8 D