Learning unit 1-3:

Everisto Mugocha
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 Learning Content

Learning Unit 1: What is economics all about?

Learning Content:
✓Define the term “economics”
✓Explain the difference between wants, needs and demand
✓Identify the three main elements of the basic economic problem
✓Explain the economic problem by using a production possibilities curve
✓Explain why economics is a social science
✓Distinguish between microeconomics and macroeconomics
✓Distinguish between positive and normative statements
✓Distinguish between levels and rates of change.
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 Learning Unit 2: Economic systems and flows
Learning Content:
✓Describe the three central economic questions
✓Describe the different kinds of goods in the economy
✓Distinguish between the different types of goods by giving examples of each
✓Illustrate, by using a production possibilities curve, the different combinations of
goods and services which can be produced, and distinguish between efficient,
inefficient and unattainable combinations
✓Illustrate by using a production possibilities curve, how a better production
technique or increased resources (or better utilisation of them) affect production
✓Distinguish between the four factors of production and their remuneration
✓Distinguish between two production techniques
✓Distinguish between the different sectors of the economy in which the
production of goods and services occur
✓Describe the main characteristics of a traditional economy, a command economy,
a market economy and a mixed economy
 Learning Unit 3: Demand, Supply and Prices
Learning Content:
✓Construct and interpret simple graphs;
• Explain the concepts ‘ceteris paribus’ and ‘equilibrium’;
• Explain how households and firms represent demand and supply;
• Identify the most important determinants of individual demand and
market demand;
• Define the law of demand;
• Explain the difference between demand and quantity demanded;
• Differentiate between a movement along a demand curve and a shift
of a demand curve;
• Define the law of supply.
• Explain the difference between supply and quantity supplied;
• Differentiate between a movement along the supply curve and a shift
of a supply curve;
• Identify the most important determinants of individual supply and
market supply;
• Explain how the equilibrium price and quantity are determined in the
goods market;
• Explain the functions of prices in a market economy;
• Distinguish between consumer surplus and producer surplus.
 Learning Unit 1: What is economics all about?
Scarcity, choice and opportunity cost
• The word economics is derived from the Greek word oikos,
meaning house, and nemein, meaning manage.
• Economics is a social science and the study of how societies use
scarce resources to produce valuable commodities and distribute
them among different people.
• Without scarcity, making choices could have been irrelevant.
• Individuals, firms and government all want to do many things; but
the means with which these wants can be met are limited.
• Wants are plentiful while the means are scarce, hence the need to
make choices.
• The central elements of economics is scarcity and choice.
• Wants are unlimited but the means with which the wants can be
satisfied are limited.
• Wants are unlimited human desires for goods and services.
• Needs are necessities that are essential for survival e.g. food, water,
shelter, clothing, etc.
• Demand only occurs if those who want to purchase a good or service
have the means (purchasing power) to do so.
• Resources are the limited means through which goods and services
can be produced.
• There are three types of resources, namely: natural resources,
human resources and man-made resources (capital). These
resources in economics are called factors of production.
• There are always costs involved even when a consumer has not paid
for the goods or services.
• TANSTAAFL – There ain’t no such thing as a free lunch!
• Don’t confuse scarcity with poverty because even rich people are
subjected to scarcity.
• Opportunity cost of a choice is the value to the decision maker of the
best foregone alternative.
• The production possibilities curve (PPC) or the production
possibilities frontier (PPF) is used to illustrate scarcity, choice and
opportunity cost.
The production possibilities curve
• The production possibilities curve indicates the combinations of
any two goods or services that are attainable when the
community’s resources are fully and efficiently employed.
• All points along the PPC entail efficiency.
• Any point inside the PPC means inefficiency.
• Any point outside the PPC is unattainable.
• The opportunity cost (or trade-off is negative slope of the curve)
of each additional basket of fish increases as we move along the
PPC.
• Economic growth is illustrated by the outward shift of the PPC.
• Negative economic growth is depicted by an inward shift of the
PPC.
 Goods and services
• Most wants are satisfied by goods and services.
• Goods are tangible while services are intangible.
Consumer goods
• Consumer goods are goods that are consumed by individuals or
households to satisfy wants.
• Types of consumer goods:
✓Non-durable goods – used only once e.g. food, petrol, medicine,
etc.
✓Semi-durable goods – can be used more than once but usually last
for a limited period e.g. shoes, clothing, motorcar tyres, etc.
✓Durable goods – normally last for a number of years e.g. furniture,
motorcars, refrigerators, etc.
• Capital goods are goods that are used to produce other goods e.g. plant,
machinery, equipment, etc.
• Final goods are goods that are consumed by individuals, households and
firms.
• Intermediate goods are goods that are purchased to be used as inputs in
producing other goods.
• Private goods are goods that are consumed by individuals and
households.
• Public goods are goods that are used by the community or society at
large.
• Economic (scarce) goods are goods that are produced at a cost from
scarce resources.
• Free goods are goods that are not scarce and therefore have no price.
• Homogenous goods are goods that are all alike.
• Heterogenous or differentiated goods are goods that are available in
different varieties, qualities or brands.
• The decision about what to produce goes together with the decision
about how much of each good and service to produce and what not
to produce.
• Economics is divided into two parts: microeconomics and
macroeconomics.
• Microeconomics focuses on the individual parts of the economy.
• Macroeconomics deals with the economy as a whole (aggregate or
total).
• Ceteris paribus condition, meaning all things being equal is an
essential part of economic reasoning.
• A positive statement is an objective statement of fact.
• A normative statement involves an opinion or value judgement.
 Post hoc fallacy: Correlation and Causation
• If two events occur together or tend to follow one
another, it does not necessarily mean that one is the
cause of the other.
• Correlation does not imply causation.
• Because the sport of bowling experiences more deaths
than any other sports, it may not really be true that
bowling is a dangerous sport.
• Since bowling is usually played by senior citizens, their
ageing frailties stand to be the reason for the deaths.
 Levels and rates of change
• The consumer price index (CPI) measures the level of prices in
the country.
• To determine the inflation rate, we calculate the rate of change
of that level.
• People tend to confuse between high prices (level) and the
rapidly increasing prices (rate of change).
• An example: salary increments of two colleagues
a. Paul 50% of R1000 = R500 (Level=R1000; Rate of change =
50%)
b. Cynthia 1% of R50000 = R500 (Level=R50000; Rate of
change=1%)
 Learning unit 2: Economic systems and flows
The three central questions

The following are the three central questions that have to be

solved in every society:
a. What – goods and services should be produced and in what
quantities?
b. How – should each of the goods and services be produced?
c. For whom – are the various goods and services produced?
Factors of production
a. Land – Consists of the “fixed in supply” gifts nature, e.g. mineral
deposits, water, arable land, vegetation, marine resources, animals,
atmosphere, sunshine, etc.
b. Labour – This is the exercise of human mental and physical effort in the
production of goods and services.
c. Capital – Comprises all manufactured resources which are used in the
production of other goods and services, e.g. machines, tools, buildings,
etc.
d. Entrepreneurship – Entrepreneurs are initiators, risk-takers, innovators
and the driving force behind any business endeavour.
e. Technology – Sometimes identified as the fifth factor of production,
technology is key to help in new and faster ways of production at a
larger scale with high quality.
NB: Money is not a factor of production.
 Sources of income for the factors of production
a. Land - is remunerated through rent
b. Labour – is remunerated through salaries and wages
c. Capital – is remunerated through interest
d. Entrepreneurship – is remunerated through profit

• The three main economic activities are production, consumption and

exchange (trade).
• Specialisation refers to a tendency of people, businesses and countries to
concentrate on different activities to which they are best suited.
• Division of labour is the act of assigning individual workers to different
tasks which form part of the production process.
• Capital-intensive production – when the production process is dominated by
machines.
• Labour-intensive production – when the production process is dominated by
human labour.
Different economic systems
• The three central economic questions are what?, how? and for whom?
• A system is a network of parts which interlock to form an overall pattern.
• An economic system is a pattern of organisation which is aimed at solving the
three central questions.
• To solve the central economic problem (what, how and for whom), we consider
the following economic systems:
1. The traditional system
• Methods of production are prescribed by custom and is rigid and slow to adapt
to change.
2. Command system
• The participants are instructed what to produce, how to produce it
and how to distribute it by a central government.
• Command economies are often described as socialist or communist
systems.

3. The market system

• A market is any contact or communication between potential buyers
and potential sellers of a good or service.
• For a market to exist, the following conditions must be met:
a. There must be at least one potential buyer and one potential
seller of a good or service.
b. The seller must have something to sell.
c. The buyer must have the means with which to purchase it.
d. An exchange ratio (the market price) must be determined.
e. The agreement must be guaranteed by law or by tradition.

• A market system is one in which individual decisions and

preferences are communicated and coordinated through the market
mechanism.
• Market systems are often called capitalist systems and is
characterised by private ownership.
• Market capitalism is characterised by individualism, private
freedom, private property, property rights, decentralised decision
making and limited government intervention.
• And economic activity is driven by self-interest.
• Adam Smith (the father of modern economics), in 1776 book
entitled, The Nature and Causes of the Wealth of Nations
stated that the market mechanism works like an invisible
hand which coordinates selfish actions of individuals to
ensure that everyone is better off.
• The three economic questions (reminder):
i. What will be produced?
ii. How will it be produced?
iii. For whom will the goods and services be produced?
• Competition is a vital feature of market capitalism.
• Competition is not negotiation.
• Negotiation occurs between buyers and sellers.
• Competition is among sellers and tends to protect the
consumer from exploitation and promotes efficiency and
growth.
• However, competition is not always fair (imperfect
competition).
• Decisions in the market system are reflected in market prices
which entail an immense signalling system that directs and
controls economic activity.
The mixed economy
• Today, no economic system is based purely on tradition,
command or the market.
• All economic systems are a mixture of traditional behaviour,
central control and market determination.
• No wonder they are called mixed economies.
• South Africa is a mixed economy with a significant measure
of government intervention.
• Pure market capitalism – all factors of production are in
private hands.
• Privatisation is the transfer of state assets into private hands.
• Nationalisation is the transfer of private assets into the
state’s hands.
The key participants, main markets and three
major flows in the economy
• Economics is concerned with what to produce,
how to produce it and how to distribute the
products among the various participants.
• Total production of goods and services is a major
concern for economists in order to ascertain the
consumption of the products to satisfy human
wants.
• Participants in the economy include individual
households, firms, the public sector
(government), the financial sector, and the
foreign sector.
Production, income and spending
• Production creates income; then this income is
spent to purchase the products.
• Therefore, the three major flows in the
economy are production, income and
spending.
• Production, income and spending are all flows.
 Flow and stock variables
• A flow variable is a variable which can only be
measured over a period of time.
• Flow variables include the flow of water into a
dam, production, income, spending, profit, loss,
sales, expenses, speed, investments, number of
births and deaths, etc.
• A stock variable is a variable which can only be
measured at a particular point in time.
• Stock variables include the level of water in the
dam, wealth, assets, liabilities, population,
unemployment, distance, height, weight, etc.
The different components of production, income and spending

Natural resources,
labour, capital,
entrepreneurship

Households (C), Rent, wages

Firms (I), and salaries,
Government (G), interest,
Foreign sector (X-Z) profit
 The interdependence between
households and firms
• Households and firms interact through the goods and factor
markets.
• Households offer their factors of production for sale on the
factor market where these factors are purchased by the firms.
• The firms combine the factors of production and produce
consumer goods and services.
• These goods and services are offered for sale on the goods
market, where they are purchased by households.
• The circular flow of income and spending is usually a monetary
flow and its direction is opposite to the flow of goods and
services.
Factor market Goods market
 Learning unit 3: Demand, supply and prices
• In a market economy, quantities and prices traded are determined by the forces
of supply and demand.
Demand
• Demand is referred to as the quantities of a good or service that the potential
buyers are willing and able to buy.
• The law of demand states that the higher the price of a good, the lower the
quantity demanded, ceteris paribus.
• Demand is a flow concept - it is measured over a period of time.
• The following are the determinants of individual demand: -
a) The price of the product
b) The prices of related products (complements or substitutes)
c) The income of the consumer
d) The taste or preference of the consumer
e) The size of the household
• The quantity of goods demanded (Qd) by an individual or household is given by
the following equation:
Qd = f(Px,Pg,Y,T,N,….)
Where Qd = quantity of goods demanded
Px = price of the good
Pg = prices of related goods
Y = income of households
T = taste or preference of consumers
N = number of people in household concerned
… = allowance for other possible influences
The dependent variable (Qd) is expressed as a function of five independent
variables.
• The law of demand states that all things being equal (ceteris paribus), the
higher the price of a good, the lower the quantity demanded.
• A demand schedule is a table which lists the quantities demanded at
different prices when all other influences on planned purchases are
held constant.
Anne Smith’s demand schedule
Possibility Price of Quantity
tomatoes (R/kg) demanded(kg
per week
A 1 6
B 2 5
C 3 4
D 4 3
E 5 2
• There is a negative (inverse) relationship
between the price and the quantity of goods
demanded, hence the demand curve is downward
sloping.
• Market demand is the combination of all
individual demand schedules.
• Any changes to the price of the good (Px) lead to
a movement along the demand curve.
• Changes in all other factors other than the price
of the good lead to a shift to the demand curve.
Various ways in which individual demand and the
law of demand can be expressed:
a. Using words – Demand refers to the entire
relationship between the quantity demanded
and the price of a good or service, ceteris
paribus.
b. Using numbers – the demand schedule is a
table which shows the quantities of a good
demanded at each possible price, ceteris
paribus.
c. Using graphs – the demand curve refers to
a line which indicates the quantity demanded
of a good at each price, ceteris paribus.
d.Using symbols – the demand equation is a
shorthand method of expressing the relationship
between the quantity of a good demanded and
its price, ceteris paribus (Qd = f(Px,Pg,Y,T,N,….).
Market demand
• Market demand is the sum of all individual
demands in the particular market.
• The market demand curve is generated by adding
the individual demand curves horizontally (i.e. at
each price).
Deriving the market demand schedule from
individual demand schedules.
Price of tomatoes Kilograms of tomatoes demanded weekly by Total quantity
(R/kg) Anne Hellen Purvi demanded per
week (kg)

1 6 4 5 15
2 5 3 4 12
3 4 2 3 9
4 3 1 2 6
5 2 0 1 3
The market demand curve

NB: Figure 4-3 on Page 65

Differentiating between a movement along a
demand curve and a shift of a demand curve

Movement along the demand curve (a change in

Qd)
• There is a movement along the demand curve when
the actual price (Px) of the good changes.
Shift of the demand curve (a change in D)
• Any of the determinants of demand other than
the actual price (Px) of the good changes shifts
the demand curve.
• Figure 4-7 on page 69
• A substitute is a good that can be used in place
of another good to satisfy a certain want e.g.
butter and margarine.
• An increase in the price of butter will increase the
demand for margarine at each price of margarine
than before.
• An increase in the price of a substitute will lead
to a rightward shift of the demand curve for the
product concerned.
• Complements are goods that are jointly used to
satisfy a want.
• An increase in the price of the compliment will
lead to a decrease in the demand for the product.

• Check page 67
 Supply
• Supply is the quantity of a good or service that
producers are willing to sell at each possible price
during a certain period.
• The law of supply states that the higher the price of a
good, the higher the quantity supplied, ceteris paribus.
• The quantity of a good supplied by an individual
producer in a particular period is a function of the
price of the good, the prices of alternative
outputs, the prices of the factors of production,
the expected future prices of the good and the
state of technology (Qs=f(Px, Pg, Pf, Pe, Ty)
• There is a positive relationship between supply and the
price of the good.
Supply recap: Supply can be expressed in four ways:
• Using words – supply refers to the entire relationship
between the quantity supplied of a commodity and the
price of that commodity, ceteris paribus.
• Using numbers – the supply schedule, shows the
quantity of a good supplied at each price, ceteris paribus.
• Using graphs – the supply curve, is the graph which
indicates the quantity supplied of a good at each price,
ceteris paribus.
• Using symbols – the supply equation, shows the
relationship between the quantity supplied of a good and
its price, ceteris paribus (Qs=f(Px, Pg, Pf, Pe, Ty, N…).
 Differentiating between a movement along the supply
curve and a shift of a supply curve
• A change in the actual price (Px) of the good will cause
a movement along the supply curve leading to a
change in the quantity supplied.
• A change in the other determinants of the quantity
supplied shifts the entire supply curve.

• Figure 4-9 on page 74

• Table 4-5 on page 75
Market supply
• The market supply curve is obtained by adding
individual supply curves horizontally.
• The market supply curve is also upward-sloping
because of the positive relationship between quantity
supplied and the price of a good.
• What determines the quantity of a good supplied in the
market at each price?
• Answer: Qs=f(Px, Pg, Pf, Pe, Ty, N,….)
• Other possible determinants include government policy,
natural disasters, joint products and by-products,
productivity, etc.
Market equilibrium
• The market is in equilibrium when the quantity
demanded is equal to the quantity supplied.
• The price at which equilibrium occurs is called the
equilibrium price.
• At any other price, there is disequilibrium.
• When the quantity demanded is greater than the
quantity supplied, there is excess demand (or a market
shortage).
• When the quantity supplied is greater than the quantity
demanded, there is excess supply (or a market
surplus).
Market equilibrium
• The market is in equilibrium when the quantity
demanded is equal to the quantity supplied.
• The price at which equilibrium occurs is called the
equilibrium price.
• At any other price, there is disequilibrium.
• When the quantity demanded is greater than the
quantity supplied, there is excess demand (or a market
shortage).
• When the quantity supplied is greater than the quantity
demanded, there is excess supply (or a market
surplus).
Demand, supply and market equilibrium
The functions of prices in a market economy
• Prices serve two important functions in a market
economy:
a. The rationing function – Prices serve to ration the
scarce resources to those who place the highest value
on them and can afford to pay for them.
b. The allocative function – Prices serve as signals which
direct the factors of production between different uses
in the economy.
Consumer surplus and producer surplus
• The equilibrium or market-clearing price is determined by
the interaction between demand and supply.
• A downward-sloping demand curve and a uniform market
price imply that consumers actually receive more than
their money’s worth.
• The difference between what consumers pay and the value
that they receive, indicated by the maximum amount they
are willing to pay, is called the consumer surplus.
• Producer surplus is the difference between how much a
producer is willing to accept for a given quantity of a good
and how much they receive by selling the good at the
market price.
Consumer surplus and producer surplus
 Microeconomics

• If Adam Smith is
the father of
modern
economics!!
 If economists could manage to get
Don’t you think themselves thought of as humble,
competent people on a level with
you are an dentists, that would be splendid.
Economist in John Maynard Keynes
the making? (The father of Macroeconomics)
 Economics;
The field of
the Genius!!