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Introduction to Economics
1. Scarcity
The fundamental economic problem that any human society faces is
the problem of scarcity.
Scarcity refers to the fact that all economic resources that a society
needs to produce goods and services are finite or limited in supply.
But their being limited should be expressed in relation to human
wants. Thus, the term scarcity reflects the imbalance between our
wants and the means to satisfy those wants.
Land: refers to the natural resources or all the free gifts of nature
usable in the production of goods and services.
The reward for the services of land is known as rent.
Capital: refers to all the manufactured inputs that can be used to
produce other goods and services. Example: equipment, machinery,
transport and communication facilities, etc.
The reward for the services of capital is called interest.
Definition:
Opportunity cost is the amount or value of the next best
alternative that must be sacrificed (forgone) in order to
obtain one more unit of a product.
For example, suppose the country spends all of its limited
22 resources on the production of cloth
WSU, CBE, Department of Economics
by Afework or computer.
B (assistant professor) 04/08/2024
o If a given amount of resources can produce either one
meter of cloth or 20 units of computer, then the cost of
one meter of cloth is the 20 units of computer that
must be sacrificed in order to produce a meter of cloth.
When we say opportunity cost, we mean that:
It is measured in goods & services but not in money
costs
It should be in line with the principle of
substitution.
In conclusion, when opportunity cost of an activity
increases people substitute other activities in its place.
Example:
Let the demand function be Q = a+ bP
Changes in determinants of
demand, other than price,
cause a change in demand,
or a shift of the entire
demand curve, from DA to
D B.
WSU, CBE, Department of Economics by Afework B (assistant professor)
Factors that shift the demand curve include:
1. Income
As income changes (increases or decreases), demand
for a particular good may rise, fall, or remain constant.
For a normal good,
ﺤ X is a normal good: as income↑ , DX ↑
as income↓ , DX ↓
For an inferior good,
ﺣ Y is an inferior good: as income↑, Dy ↓
as income↓, Dy ↑
→ But, for a neutral good, as income rises or falls,
the demand for the good does not change.
Change in demand
(Shift of curve).
54 WSU, CBE, Department of Economics by Afew 04/08/2024
ork B (assistant professor)
The Impact of a Change in Income
57
percentage change in price. 04/08/2024
WSU, CBE, Department of Economics by Afework B (assistant professor)
Demand for commodities like clothes, fruit etc.
changes when there is even a small change in their
price,
Whereas demand for commodities which are basic
necessities of life,
like salt, food grains etc., may not change even if price
changes,
or it may change, but not in proportion to the change
in price.
Price elasticity demand can be measured in two ways.
point and
arc elasticity.
Note that:
Elasticity of demand is unit free because it is a ratio of percentage
change.
Elasticity of demand is usually a negative number because of the law
of demand.
If the price elasticity of demand is positive the product is inferior
62 WSU, CBE, Department of Economics 04/08/2024
by Afework B (assistant professor)
63 WSU, CBE, Department of Economics by Afework B (assistant professor) 04/08/2024
Determinants of price Elasticity of Demand
The following factors make price elasticity of demand
elastic or inelastic other than changes in the price of the product.