CHAPTER-01

All countries have to deal with ‘basic economic problem’. The problem occurs because the
world’s resources are scarce or finite and people’s wants are infinite. We can say also say,
demand for resources is greater than their supply. As a result, decisions have to be made about
how to allocate a nation’s scarce resources between different uses.

PRODUCTION POSSIBILITY CURVE:

Production possibility curve or PPC shows the different combinations of two goods that can be
produced if all resources in a country are fully used. It shows the maximum quantities of goods
that can be produced.

• Point A, B, C, D is obtainable because it is on the PPC. Resources are also fully employed
• Point F is obtainable but not all resources in the country are being used-there are
unemployed resources. This is because point F is inside the PPC.
• Point E is unobtainable because it is outside the PPC. The country does not have the
resources to produce this combination.
When making a choice, individual, firms and government will face a cost once their choice has
been made. This is called ‘opportunity cost’. For example, if there is a movement from B to C in
the PPC, the production of Capital goods will rise from 4 million units to 7 million units.
However, the production of consumer goods will fall from 14 million units to 8 million units.
This 6 million units of consumer goods sacrificed is the opportunity cost to gain another 3
million units of capital goods.

CAUSES OF POSTIVE ECONOMIC GROWTH:

Over a period of time, an economy would expect to raise the production of all goods. This is
called economic growth.
 1. New Technology: New technology can result in economic growth. This is because
new technology is usually faster and more reliable in production. Therefore, more
output can be produced.
2. Improved Efficiency: Improved efficiency can occur economic growth. This is
because resources are allocated more efficiently and wastages are minimized. As a
result, more output can be produced using fewer resources.
3. Education and training: A nation’s productive potential can be boosted through
education and training. This is because educated or trained workers can carry task more
quickly and effectively. So, a country’s economy become more productive as the
proportion of educated workers increases.
4. New resources: If a country find new resources, its economy is likely to grow. This is
because new resources enable a country to produce more and thus its productive
potential raises.

IMPACT ON THE PPC:

If a country produces more, the PPC will shift outwards.

• Before economic growth, the original PPC is PPC1

• After economic growth, the PPC1 has shifted outward to PPC2

CAUSES OF NEGATIVE ECONOMIC GROWTH:

1. Resource depletion: Resource depletion can cause negative economic growth. This
is because the country doesn’t have the resources to produce. So, the productive
potential of that country falls.
2. Working Abroad: Movement of highly skilled and experienced workers to another
country can cause negative economic growth. This is because the country is lacking the
 skilled and experienced workers to produce efficiently. So, the productivity of the
country falls.

IMPACT ON THE PPC:

Negative economic growth can cause the PPC to shift inwards.

PPC1

PPC2

• Before negative economic growth, the original PPC1

• After negative economic growth, the PPC1 has shifted outward to PPC2
 CHAPTER-2
UNDERLYING ASSUMPTIONS IN ECONOMICS:
Economists assume that individuals behave in a rational way. So, they make the following two
assumptions in relation to rationality:

1. Consumers aim to maximise benefit: When making economic decisions,

economists assume that consumer will always choose a course of actions that gives
them the greatest satisfaction. This will help them maximise benefits.
For example, consumer will buy products from supplier that offers the cheapest price and
same quality as other suppliers. But, if all supplier charges the same price for the product,
then the consumer would go for the best quality product.

2. Businesses aim to maximise their profit: When business owners make

decisions, they will always choose a course of action that has the best financial results.
This is because economists assume that business owners will want to make as much
profit as possible.
For example, business owner will always charge the highest possible price when setting a
price for a product. Thus, they will be able to maximise revenue and therefore maximizing
their profits.

REASONS WHY CONSUMER MAY NOT ALWAYS MAXIMISE THEIR BENEFIT:

• Consumers may face difficulty when they try to calculate benefits from consuming a
product. This is because measuring the satisfaction gained from consuming a product is
often very difficult. Therefore, it is hard to quantify the satisfaction gained from
consumption.
• Some consumers develop buying habits which affect their ability to make rational
choices. This is because, these consumers continually buy products from a particular
brand even when other brands offer better value for the same product. As a result, they
are not able to maximise their benefit.
• Influenced by the behavior of others sometimes hinders a consumer from maximizing
benefits. This is because, these consumers are making decisions based on other’s
thought, not their own. So, they may make irrational decisions in some circumstances.
REASONS WHY PRODUCERS MAY NOT ALWAYS MAXIMISE THEIR
PROFIT:
• Business performance can be influenced by the behaviour of other people in the
organization. This is because, business owner somethings delegate decision making to
others. Individual who is now responsible for taking decision, on behalf of the owner,
may have different objectives to those of the owners.
• Alternative business objective can also hinder producers from maximizing profit. This is
because, even though profit is important, other issues may also be important.
Consequently, by focusing on other objectives, it may not be possible for the producer
to maximize their profit.
• Some commercial enterprise operates as ‘not-for-profit’ organization. Their aim is to
raise awareness and money for a particular cause. Therefore, they don’t seek to
maximise profit since they have other aims.

➢ Both consumers and producers will be prevented from maximizing their benefit and
profit respectively if they don’t have access to all the information available.
 CHAPTER-3 & 4
Demand can be expressed graphically. This means that the relationship between price and
quantity demanded can be shown on a graph. We call this ‘demand curve’

The demand curve slopes down from left to right. This is important because it shows the
inverse relationship between price and quantity demanded. This means:

• When price go up, demand will fall

• When price go down, demand will rise

SHIT IN THE DEMAND CURVE:

Price is the main factor that affects quantity demanded. However, a change in other factors,
except price, will result in a shift in the demand curve.

FACTORS THAT MAY SHIFT THE DEMAND CURVE:

• Advertising: Business may try to influence the demand for their products through
advertising and other forms of promotion. Spending in advertising products may help to
increase the demand for their products. So, an increase in advertising expenditure is
likely to shift the demand curve to the right-from D1 to D2.

• Income: When disposable income rises, demand for normal goods also rises. This will
result a shift in the demand curve to the right from D1 to D2.
However, demand for inferior goods falls when income rises. So, this will cause a shift in
the demand curve to the left from D1 to D3.
• Fashion and Tastes: Over a period of time, demand pattern change because there are
changes in consumer tastes and fashion. A new fashion will result in the rise of demand
of those products that are related to that new fashion. Therefore, this will cause a shift
to the right from D1 to D2 in the demand curve for that product.
• Price of substitutes: The price of substitutes will affect the demand of a good. This is
because, if price of substitutes is lowered, for example, demand for a good will fall as
most consumer would consider the substitute as a ‘good’ substitute. Therefore, there
will be a shift to the left in the demand curve for that good- from D1 to D3.
• Price of complements: Price of complementary goods can also affect the demand of a
product. This is because, if the price of complementary goods rises, the demand for a
product is likely to decrease since both goods are used together. So, it would cause a
shift to the left in the demand curve- from D1 to D3.
• Demographic changes: As the population of a country grows, there will be an increase
in demand for goods and services too. This is because more people will now consume
goods and services.
However, other factors such as, age distribution, gender distribution, geographical
distribution and ethnicity can also affect the demand of goods and services of a country.
 CHAPTER-5 & 6
Supply can be expressed graphically. This means that the relationship between price and
quantity supplied can be shown on a graph. We call this ‘supply curve’.

The supply curve slopes up from left to right, which means there is a proportionate relationship
between price and quantity supplied. This means:

• When price go up, supply will also go up

• When price go down, supply will also go down

SHIT IN THE SUPPLY CURVE:

Price is the main factor that affects supply. However, a change in other factors, except price,
will result in a shift in the supply curve.

FACTORS THAT MAY SHIFT THE SUPPLY CURVE:

• Costs of production: The quantity supplied of any product is influenced by the costs of
production. This is because, if production costs fall, for example, the quantity supplied
would increase as production becomes more profitable. As a result, the supply curve will
shift to the right- from S1 to S3
.

• Indirect taxes: Indirect taxes have an effect on supply. Indirect taxes represent a cost to
firms. So, the imposition of a tax would shift the supply curve to the left from S 1 to S2.

• Subsidies: If the government grants a subsidy on a good, the effect is to increase its
supply. This is because subsidies help to reduce production costs. As a result, the supply
curve will shift to the right, from S1 to S3.

• Changes in technology: Advancement in technology can also affect supply. Since new
technology are efficient and help to reduce production costs, so firms are likely to offer
more for sales. As a result, there will be a shift in the supply curve to the left, from S 1 to
S 3.

• Natural factors: The production of goods, like agricultural products, is influenced by

natural factors. For example, good growing condition can help to improve crop yields,
which will increase the supply. This will shift the supply curve from S 1 to S3.
Nature factors includes: weather, natural disasters, temperature, presence of pests, etc.
 CHAPTER-7
Equilibrium price is where supply and demand are equal. The equilibrium price is also known as
the ‘market clearing price’. This is because the amount supplied in the market is completely
bought up by consumers. So, there are no buyers left without goods and there are no sellers
left with unsold stock.

Total revenue is the amount of money generated from the sale of output. It is calculated by
multiplying price and quantity.

TOTAL REVENUE= PRICE X QUANTITY

SHIT IN THE DEMAND:

The equilibrium price will change if there are changes in demand.

An increase in demand for a product is shown by a shift in the demand curve to the right from
D1 to D2. This changes the equilibrium price because supply and demand are now equal but at
different point. The price is forced up from p1 to p2 and the amount sold in the market has gone
up from q1 to q2.

SHIT IN THE SUPPLY:

Changes in supply also affect equilibrium price.

If there is an increase supply for a product, the supply curve will shift to the right, from S1 to S2.
This changes the equilibrium price because supply and demand area now equal at a different
point. The price is forced to down from p1 to p2 and the amount sold on the market has gone up
from q1 to q2.

SHIT IN THE DEMAND AND SUPPLY AT THE SAMAE TIME:

It is possible for both supply and demand to change at the same time in a market.

In the diagram, the original equilibrium price is p1, where S1=D1. The increase in demand is
represented by a shift to the right from D1 to D2. The decrease in supply is represented by a
shift to the left from S1 to S2. The new equilibrium price, where D2=S2. is p2. The price is higher
and the amount sold in the market has fallen from q1 to q2.
EXCESS DEMAND:
If the price charged in a market is below the equilibrium price, supply and demand will not be
equal. The demand will be greater than supply and there are shortages in the market. We call it
‘excess demand’.

EXCESS SUPPLY:
If the price charged is set above the equilibrium price, supply and demand will not be equal.
The supply will be greater than demand and there are unsold goods in the market. We call it’
excess supply’.

REMOVING EXCESS SUPPLY AND EXCESS DEMAND:

If there is disequilibrium in a market, producers can restore equilibrium by changing the price
or adjusting supply. For example:

• Producers could raise the price if there is excess demand in the market.
• Producers could lower the price if there is excess supply in the market.
 CHAPTER-8
Price elasticity of demand is the responsiveness of demand to a change in price.

• Product A is inelastic because the change in price results in a proportionately smaller change in
the quantity demanded.
• Product B is elastic because the change in price results in a greater change in the quantity
demanded.

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

PED= 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

VALUE OF PED DEMAND

Less than 1 Inelastic
Greater than 1 Elastic
Zero Perfectly Inelastic
Infinity (∞) Perfectly Elastic
-1 Unitary Elasticity

PRICE ELASTICITY AND THE SLOPE OF THE DEMAND CURVE:

• The vertical demand curve shows the demand curve for a good that has perfectly inelastic
demand. This means that a price change will not affect the quantity demanded. The value of
price elasticity in this case is zero.
 • The horizontal demand curve shows the demand curve for a product that has perfectly
elastic demand (PED=infinite). This means that buyers purchase as much goods as they
possibly can at price p1. However, the quantity demanded will fall to zero if the price
rises above p1.

• The demand curve for a product that has unitary elasticity (PED=-1) is called rectangular
hyperbola. This is unique because a price change will result in no change in total
revenue.

(i)10x50=500

(ii)5x100=500

FACTORS AFFECTING PRICE ELASTICITY OF DEMAND:

• Degree of necessity: If a product is essential, then the demand is said to be price
inelastic. This is because if the price of essentials rises, consumer cannot reduce the
amount they purchase.
 • Availability of substitutes: A good with a high number of substitutes is tend to be price
elastic. So, there will be a massive reduction if price increase since consumer can switch
easily from one product to another.
• Proportion of income spent on a product: High proportion of income spent on a product
would make it price elastic because it will be using up a significant proportion of the
monthly income.
• Time: Long periods of time can make a product price elastic because consumer can
search for alternatives and are more prepared to switch.

THE RELATIONSHIP BETWEEN PED AND TOTAL REVENUE:

 CHAPTER-9
Price elasticity of supply is the responsiveness of supply to change in price.

• Product A is inelastic because the change in price results in a proportionately smaller change in
the quantity supplied.
• Product B is elastic because the change in price results in a greater change in the quantity
supplied.

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑

PES= 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

VALUE OF PES SUPPLY

Less than 1 Inelastic
Greater than 1 Elastic
Zero Perfectly Inelastic
Infinity (∞) Perfectly Elastic
1 Unitary Elasticity

PRICE ELASTICITY AND THE SLOPE OF THE SUPPLY CURVE:

• S1= The vertical supply curve shows the supply curve for a good that has perfectly inelastic
demand. This means that a price change will not affect the quantity supplied. The value of price
elasticity in this case is zero.
• S2= The horizontal supply curve shows the supply curve for a product that has perfectly
elastic demand (PES=infinite). This means the supplier are prepared to supply any
amount at a given price.
 • S3= Any straight-line supply curve passes through the origin has a price elasticity equal
to 1. This means percentage change in price is always the same as the percentage
change in the quantity supplied.

FACTORS AFFECTING PRICE ELASTICITY OF SUPPLY:

• Factors of production: If the factors of production are flexible and adoptable, then an
increase in price would allow the suppliers to boost their production. This means supply
will be elastic.
• Availability of Stocks: High availability of stocks would allow the producers to increase
supply if the price increases. This means supply will be elastic.
• Spare Capacity: High spare capacity would allow the business to increase supply if the
price increases. So, the supply will be price elastic.
• Time: Longer time period would allow businesses to increase supply if price increases.
The more time producers have to react the price changes, the more elastic supply will
be.
 CHAPTER-10
Income elasticity of demand is the responsiveness of demand due to change in income.

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑

PES= 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

VALUES OF IED:
POSITVE NORMAL GOODS
NEGATIVE INFERIOR GOODS
GREATER THAN 1 OR LESS THAN -1 ELASTIC
BETWEEN +1 AND -1 INELASTIC
1 UNITARY ELASTICITY
ZERO PERFECTLY INELASTIC

• ‘Normal goods’ are those goods for which demand rises if income rises.
• ‘Inferior goods’ are those goods whose demand falls if income rises.
• ‘Luxury goods’ are goods that consumers like to buy if they can afford them. Luxury
goods have a positive IED which is greater than 1
• ‘Necessities’ are basic goods that consumers need to buy. Necessities have an IED of less
than 1 but positive.

INCOME ELASTICITY AND BUSINESS:

Many firms will be interested in income elasticity of demand. This is because changes in income
in the economy may affect the demand for their product. If firms know the income elasticity of
demand for their product, they can respond to predicted changes in income.
For example, if income is expected to rise in the future, firms will plan ahead and make sure
that they have enough capacity for the upcoming rise of the demand for their product.