ECONOMICS NOTES – Chapter 1
Economics is a social science which deals with how individuals, societies,
firms, and government make optimal economic decisions based on scarce
resources.
Scarcity is the situation of having unlimited wants in a world of limited
resources. This is because human wants are unlimited while the resources
available to satisfy these wants are limited. It states that society has limited
resources to fulfill all the human wants and needs.
• Due to scarce resources, we must make choices & choices involve
sacrifice which is called opportunity cost.
• Opportunity cost is the cost of the best alternative forego.
Microeconomics is the study of individual parts of the economy. It deals with
how households and firms make decisions and how they interact in a specific
market. While Macroeconomics deals with the economy on a whole. This
includes inflation, unemployment, and GDP.
Economists use two types of statements for analysis:
Positive statements are statements that attempt to describe the world
what it is. Called descriptive analysis.
Normative statements are about what it should be. It is when there is a
value judgment. - Called prescriptive analysis.
There are three fundamental questions in economics:
(1) What is it to be produced?
(2) How is it produced?
(3) For whom is it produced?
One of the most basic economic models include the Production
Possibilities Frontier (PPF). Definition: It is the production of points of
output a country can produce with its resources and the resources are
fully utilized. It was introduced by Prof. Paul A. Samuelson.
Efficient points: on PPF (resources are fully utilized).
Inefficient points: inside the PPF (resources are not fully utilized).
Unattainable points: beyond/outside the PPF.
Assumptions of PPF:
Full employment and full production.
Available supply of factors of production such as Land, Labor, Capital
and entrepreneurship are fixed but can be shifted.
State of technology does not change.
Causes of Shifts in PPF:
Advanced technology.
Changes in resources (such as labor, capital, land, etc.)
More educational training - Human capital.
Changes in the labor force.
Topic 2
Supply and Demand I: How Markets Work
Market is the place where producers and consumers interact to buy and
sell goods.
– Buyers determine demand...
– Sellers determine supply…
Quantity demanded refers to the amount of goods that buyers are
willing and able to pay at possible prices within a given period, other
things being equal.
There are five determinants of demand:
1) Income
2) Price of related goods
3) Taste / preferences.
4) Weather
5) Number of buyers
(1) Income: As income increases the demand for a normal good will
increase but the demand for an inferior good will decrease.
(2) Price of related goods:
When an increase in the price of one good increase the demand
for another good, they are called substitutes. E.g. rice and
wheat. When price of rice is increased, demand for wheat will be
increased.
When an increase in the price of one good reduced the demand
for another good, they are called complements. For example,
increase in the price of petrol will lead to decrease in demand of
car.
The demand schedule is a table that shows the relationship between
the price of the good and the quantity demanded.
The demand curve is a graph that shows the relationship between the
price of a good and the quantity demanded. It is downward sloping
(negative).
The supply curve is a graph that shows the relationship between the price
of a good and the quantity supplied. It is upward sloping (positive).
Demand law: when the price of goods increase, there will be less
demand in the market, other things being equal.
Market demand is the sum of all individual demands at each possible
price.
Market supply is the sum of all individual supplies at each possible
price.
For price, there will be movement along the demand curve, whereas for
the rest of the determinants there will be a shift in the demand curve.
Quantity supplied refers to the amount of goods that sellers are willing
to make available for sale at possible prices for a given period, other
things being equal.
The law of supply states that when the price of the good rises, there will
be more supply in the market, other things equal.
The supply schedule is a table that shows the relationship between the
price of the good and the quantity supplied.
Equilibrium refers to a situation when quantity demanded is equal to
supplied.
– Equilibrium price is the price that balances quantity supplied, and
quantity demanded. Also called market clearing price.
– On a graph, it is the price at which the supply and demand curves
intersect.
• Equilibrium Quantity is the quantity supplied and the quantity
demanded at the equilibrium price. On a graph it is the quantity at
which the supply and demand curves intersect.
When price > equilibrium price, then quantity supplied >
quantity demanded. There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby moving
toward equilibrium.
When price < equilibrium price, then quantity demanded >
quantity supplied. There is excess demand or a shortage. Suppliers
will try to increase the price due to too many buyers chasing few
goods, moving towards equilibrium.
