EKN 110- Chapter 1

 The economic perspective

o Scarcity and choice
 Limited goods, services and time.
 Economics: The study of how individuals, businesses and institutions make social
choices to optimize their level of satisfaction under conditions of scarcity (lack of
economic resources)..
 Opportunity cost: The value of the next best alternative activity that must be
taken in order to do the activity.
o Examples include: Individuals can choose to buy a car or go on holiday,
companies can choose between which machines to purchase,
government can choose to build a new school or new road. If individuals
choose the car over the holiday, the car becomes the opportunity cost
and if the company chooses machine B over machine A then machine B
becomes opportunity cost and if the government chooses to build a new
road then the road becomes the opportunity cost. Opportunity cost is
everything that you have foregone, the option that you did not choose.
 Rational (purposeful) behavior:
o ‘Rational self-interest’ is an assumption of economics, consumer must
know the wants they want to satisfy when purchasing the item.
o The decisions made are objective and are not free from mistakes,
consumer will think the matter over carefully before choosing the goods/
service on which to spend their income on.
o And it creates the desire to maximize the level of satisfaction, while on a
budget constraint.
o A combination of calculation, negotiation and expenditure should be
used for optimal decision making on costs.

Rational Consumers Rational Producers

Have the greatest possible utility (U) with
unlimited wants/needs and certain
budget constraints, such as salary
earners, owners of businesses, athletes
and film actors. Credit is also limited to
individual budget constraints as there is
only a certain limit an individual can
Must maximizeHave maximum profit of
the business/ company they own with
cost constraints and certain production
techniques that are cost-effective to
maximize profits.
operate with the credit given and the
credit must be paid back.

 Utility is the pleasure, happiness or satisfaction that is gotten when consuming a

good or service.
o Concepts of utility include:
 Cardinal (Measurable) vs. ordinal (comparative)
 Cardinal utility is like giving a score or a number to the
satisfaction or happiness a person gets from consuming
something. It tries to measure the exact amount of
satisfaction, Ordinal utility simply ranks preferences, it
doesn’t assign specific numbers to satisfaction levels but
indicates which option is preferred over others.
 Choosing between options to maximize U
 Allocating time, energy and money
 Marginal analysis
o Marginal = “extra”, “additional” or “a change in analysis” or
“incremental”.
o Law of diminishing marginal utility is as a person consumes more units of
a product or service within a given period, the additional satisfaction or
utility gained from each additional unit decreases
o Ceteris paribus states all other things being equal meaning focusing on
how one thing changes while assuming everything stays the same, e.g. if
there is more supply of money in the economy inflation will happen as
money loses its monetary value due to the surplus of money, however if
there is less money in the economy prices of goods and services will
decrease.
o Most choices and decisions involve changes in the existing state of affairs,
thus because of the scarcity of resources, marginal costs exist, thus in
order to make rational choices, an individual must compare both
amounts.
o The decision to get the marginal benefit is always associated with a
specific option that includes the marginal cost of doing without
something else.
o Opportunity costs are available whenever alternative options are
available and due to scarcity in resources, one has to make decisions
based off these factors.
 o Marginal costs and benefits
o The decision to get the marginal (extra) benefit acquainted with an
option includes the marginal (extra) cost of not getting something else.
 Theories, principals and models
o Scientific methods
o Economic principles and models
 Tools to determine cause and effect
 Generalizations- tendencies of typical/ average consumers,
workers or companies
 Other-Things-equal assumption (ceteris paribus): strong
assumption for a particular analysis
 Graphical expression

Macro- economics Micro- economics

 Examines either the economy as a whole or
the basic subdivisions or aggregates
 Lecture notes: concerned with everything in
the economy.
 Concerned with individual units like a
person, household, firm or a industry.
 Lecture notes: concerned with
individual entities that affect how the
economy will perform, e.g. how much a
household consumes can affect the
economy.

Positive economics Normative economics

 Focuses on cause and effect relationships.
 Description, theory development and
theory testing (theoretical economics).
 Tries to establish scientific statements
about economic behavior and deals with
what the economy is actually like.
 Incorporates judgement with value on
how the economy should be like
 Offers expressions of support for
specific policies
 Offers opinions on how the economy
should be like or a particular policy
action should be recommended to
achieve a desirable goal based on
personal beliefs or values.
 Desirability of certain aspects of the
economy and underlies expressions of
support for particular economic policies.
 An economist can advise the government on how to spend taxpayers’ money
more efficiently towards the needs of the country, which involves a several
choices between a vast number of opportunities.
 Criteria for selection can be based on availability of funds, cost of projects, time
frames. Skills need to complete tasks, and the results and benefits of the
completed task to the society.
 Economic wants of humans far exceed the capacity of limited resources, thus
goods and services aimed at targeting one’s desires are choices to be made.
 Companies and businesses usually market and advertise their products by selling
one item and giving another item to the customer for free. However, resources
are used to produce both of the items and each of the items have alternative use
as well has the resources used to make them. Therefore, society gives up
something else in order to get the “free” good, (e.g. Dischem buy 2+1
promotion). Further, the product is only free in conjunction with a commitment
from the consumer.
 Economic systems:
o Can be defined as: ownership of factors of production and method used to
motivate, coordinate, and direct economic activity.
o Two polar extremes:

Command systems Market systems

 Government owns most  Private property

property resources
 Central economic plan
 Central planning board
makes decisions.
 Freedom of enterprise and
choice
 Self-interest
 Competition
 Markets and prices
 Technology and capital
goods
 Specialization
 Division of labor
 Geographic specialization
 Use of money
 Active but limited
government.

o Demise of the command systems:

 Two insurmountable problems:
 The coordination problem: Central planners had to coordinate millions of
individual decisions by consumers, resource suppliers and businesses.
  Expansion of economies
 Lack of reliable success indicator
 Difficult to assign quantitave production targets without unintentionally
producing distortions in output.
o Five fundamental questions:
1. What goods and services will be produced?
 Goods and services produced at a continuing profit will be produced
contrary to those at continuing loss
o Profit= Total revenue (TR) – Total cost (TC)
o Consumer sovereignty
o Rand votes
2. How will the goods and services be produce?
 In combinations and ways that minimize the cost per unit of output
 Right mix of labor and capital
 Most efficient production technique depends on availability of
technology and prices of the needed resources.
 Least cost method of production comes into play when thinking of
the factors of production and the least cost to produce a
service/product per unit (shown in table on the left).
3. Who will get the goods and services?
 Whoever has the Ability and willingness to pay its market price
 Market price depended on resource prices
4. How will the system accommodate change?
 Market systems are dynamic
 Through changes in prices and profits – appropriate responses
5. How will they promote the system progress?
 Technological advancement: new and improved methods that reduce
production costs and concept of creative destruction.
 Capital accumulation: Entrepreneurs and business firms
o The market system
 The invisible hand:
 Efficiency
 Incentives
 Freedom
 Utility
o The want-satisfying power of a good or service; the satisfaction or pleasure a
consumer obtains from the consumption of a good or service (or from the
consumption of a collection of goods and services).
o Utility and usefulness are not synonymous. Paintings by Picasso may offer great
utility to art connoisseurs but are useless functionally (other than for hiding a
crack on a wall).
o Utility is subjective. The utility of a specific product may vary widely from person
to person thus, utility is subjective to each person’s perferences. A ‘jacked-up’
4x4 may have great utility to someone who drives off-road but little utility to
someone unable or unwilling to climb into the rig. Eyeglasses have tremendous
utility to someone who has poor eyesight but no utility to a person with 20-20
vision.
o In economic theory, we distinguish between two methodologies when
measuring the level of satisfaction or utility of a consumer. The first option is
where utility is measurable in numerical values referred to as cardinal utility. For
the purposes of illustration, people can measure satisfaction with units called
utils. For example, a particular consumer may get 100 utils of satisfaction from a
smoothie, 10 utils of satisfaction from a chocolate bar and 1 util of satisfaction
from a stick of gum. These imaginary units of satisfaction are convenient for
quantifying consumer behavior for explanatory purposes. Although it is difficult
and almost impractical to quantify utility, it is worthwhile to explore the theory
in more depth because it effectively explains the behavior of consumers. The
second form of utility measurement is captured in the ordinal utility (A form of
utility measurement where consumers’ satisfaction is not quantifiable but the
level of satisfaction is based on comparisons in consumptions expressed in
indifference curves) theory of utility measurement. In ordinal utility
measurement, consumers’ satisfaction is not quantifiable but the level of the
satisfaction is based on comparisons in consumptions expressed in indifference
curves.
 Total utility and marginal utility
o Total utility and marginal utility are related, but different, ideas. Total utility is
the total amount of satisfaction or pleasure a person derives from consuming
some specific quantity. Marginal utility is the extra satisfaction a consumer
 realizes from an additional unity of that product- for example, from the eleventh
unit. Alternatively, marginal utility is the change in total utility that results from
the

consumption of one more unit of a product.

 Diminishing Marginal Utility
o The economic theory makes the assumption that your consumption of a
particular commodity will be in a specific time frame to enable the theory to
obtain useful and comparable measure for the utility derived.
o The law of diminishing marginal utility states that as a consumer increases the
consumption of a good or service, the marginal utility obtained from each
additional unit of the good or service decreases.
o Although consumer wants, in general may be insatiable, wants for particular
items can be satisfied. In a specified span of time over which consumers’ tastes
remain unchanged, consumers can obtain as much of a particular good or service
as they can afford. But the more of that product they obtain, the less they want.
 Marginal Utility and Demand
o The law of diminishing marginal utility explains why the demand curve for a
given product slopes downward. If successive units of a good yield smaller and
smaller amounts of marginal, or extra, utility then the consumer will buy
additional units of a product only if its price falls.
o Diminishing marginal utility supports the idea that price must decrease in order
for quantity demanded to increase. In
other words, consumers behave in ways
that make demand curves downward-
sloping.
o Weighted marginal utility is the per-rand value extra satisfaction (weighted extra
satisfaction) a consumer realizes from an additional unit of that product. E.g., if a
 pen gives 10 utils and it costs R5, then you divide the marginal utility
by the price to get the weighted marginal utility.
 Theory of consumer behavior
o The idea of diminishing marginal utility explains how consumers allocate their
money income among the many goods and services available for purchase.
o Rational behavior: A consumer is a rational person, who tries to use his or her
money income to derive the greatest amount of satisfaction, or utility, from it.
Consumers want to get ‘the most for their money’ or technically to maximize
their total utility. They engage in rational behavior (human behavior based on
comparison of marginal costs and marginal benefits; behavior designed to
maximize total utility).
o Preferences: each consumer has clear-cut preferences for certain of the goods
and services that are available in the market. Buyers also have a good idea of
how much marginal utility they will get from successive units of the various
products they might purchase.
o Budget constraint: At any point in time, the consumer has a fixed, limited
amount of money income. Since each consumer supplies a finite amount of
human and property resources to society, he or she earns only limited income.
Thus, every consumer faces a budget constraint (the limit that the size of a
consumer’s income (and the prices that must be paid for goods and services)
imposes on the ability of that consumer to obtain goods and services), even
consumers who earn millions of rands a year. Of course, this budget limitation is
more severe for a consumer with an average income than for a consumer with
an extraordinary high income.
o Budget management: In all cases, it is assumed that consumers will utilize their
budget fully. Consumers cannot spend more than their available income but they
are also not going to spend less.
o Prices: Goods are scarce relative to the demand for them, so every good carries a
price tag. A assumption is made that the price tags are not affected by the
amounts of specific goods each person buys. After all, each person’s purchase is
a tiny part of total demand. Also, because the consumer has a limited number of
rands, he or she cannot buy everything wanted. This point drives home the
reality of scarcity to each consumer.
 Cardinal Approach- Limited income and unlimited wants
o Most people have virtually unlimited wants. E desire various goods and services
that provide utility. Our wants extend over a wide range of products, from
necessities (e.g. food, shelter and clothing) to luxuries (e.eg perfumes, yachts
and sports cars).
 o Some wants such as basic food, clothing and shelter have biological roots while
others such as specific kinds of food, clothing and shelter arise from the
conventions and customs of society.
o Over time, as new products are introduced, economic wants tend to change and
multiply. Only recently have people wanted internet service, digital cameras or
camera phones as those products did not exist a few decades ago. Also, the
satisfaction of certain wants may trigger others: the acquisition of a bicycle
might whet the appetite for a motorcycle eventually as a means of transport.
o Services, as well as goods, satisfy our wants. Our desires for a particular good or
service can be satisfied; over a short period of time. Because we have only
limited income (usually through our work) but seemingly insatiable wants, it is in
our self-interest to economize – to pick and choose goods and services that
create maximum utility.
 Utility- maximizing rule
o The utility-maximizing rule is a principle that to obtain the greatest utility, the
consumer should allocate money income so that the last rand spend on each
good or service yields the same marginal utility.
o To maximize satisfaction, consumers should allocate their money income so that
the last rand spent on each product yields the same amount of extra (marginal)
utility.
o When the consumer has ‘balanced his or her margins’ using this rule, there is no
incentive to alter the expenditure pattern. The consumer is in equilibrium and
would be worse off- total utility would decline – if there were any alteration in
the bundle of goods purchased, providing there is no change in taste, income,
products or prices.
 Marginal utility per rand
o The rational consumer must compare the extra utility from each product with it’s
added cost (that is, its price).
o A consumer’s choices are influenced not
only by the extra utility that successive units
of product A will yield but also by how many
rands (and therefore how many units of
alternative product B) one must give up to
obtain those added units of A.
o To make the amount of extra utility derived
from differently priced goods comparable,
marginal utilities must be put on a per-rand-
spent basis.
 Decision-making process

 Inferior options
o There are other combinations of A and B in which the marginal utility of the last
rand spent is the same for the same for both A and B. But all such combinations
either are unobtainable with limited money income or do not yield the
maximum utility attainable and there is still money left to spend.
 Algebraic re-statement
o A consumer will maximize their satisfaction when they allocate their money
income so that the last rand spent on product A, the last on product, and so
forth, yield equal amounts of additional, or marginal utility.

o Money income is allocated so that the last rand spent on each product yields the
same extra or marginal utility.
 Utility maximization and the demand curve
o Basic determinants of an individual’s demand for a specific product asre
1. Preferences or tastes
2. Money income
3. Prices of the other goods
o Concentrating on the construction of a simple demand cure for product B, we
assume that the price of A, representing ‘other goods’, is still R1.
 Deriving the demand schedule and curve
o If the marginal-utility-per-rand doubles because the price of a
product/ service has been halved; the new data in column 3(b)
will be identical to those column 3 (a). But the purchase of 2
units of A and 4 of B is no longer an equilibrium combination.
By applying the same reasoning used previously, it is now
found that the utility-maximizing combination is 4 units of A
and 6 units of B. Using the data in the marginal utility table, the
downward-sloping demand curve DB which links the utility
maximizing behavior of a consumer and that person’s demand curve for a
particular product.
 Ordinal Approach
o The notion that utility is measurable is dropped and the focus is on the
preferences of the consumer and how he or she expresses these preferences. In
this theory, indifference curves (a curve showing the different combinations of
two products that yield the same satisfaction or utility to a consumer), which are
used to express consumer preferences, as well as budget constraints via the
budget line (a line that shows the different combinations of two products a
consumer can purchase with a specific money income, given the products’
prices), of the consumer are used to identify a utility-maximizing rule.
 Indifference curve analysis: what is preferred?
o In this more advanced analysis, the consumer must simply rank various
combinations of two goods in terms of preference.
o Indifference curves reflect ‘subjective’ information about consumer
preferences for A and B. and indifference curve shows all the combinations
of two products A and B that will yield the same total satisfaction or total
utility to a consumer. The consumer’s subjective preferences are such that
he or she will realize the same total utility from each combination of A and B
show in the table or on the curve. So the consumer will be indifferent (will
not care) as to which combination is actually obtained because the level of
satisfaction regardless of the combination of A and B selected stays the
same.
o Indifference curves have several important characteristics:
 An indifference curve slopes downward because more of one product
means less of the other if the total utility is to remain unchanged.
Suppose the consumer moves from one combination of A and B to
another say, from j to k, in doing so the consumer obtains more of
product B, increasing his or her total utility. But because total utility is the
same in any combination on the curve, the consumer must give up some
of the other product, A, to reduce total utility by a precisely offsetting
 amount. Thus ‘more of B’ necessitates ‘less of A’, and the quantities of A
and B are inversely related. A curve that reflects inversely related
variables is downward-sloping.
 The slope of an indifference curve at each point measure the marginal
rate of substitution (MRS) (the rate at which a consumer is willing to
substitute one good for another (from a given combination of goods) and
remain equally satisfied (have the same total utility); equal to the slope of
a consumer’s indifference curve at each point on the curve) of the
combination of two goods represented by that point. The slope or MRS
shows the rate at which the consumer who possesses the combination
will substitute one good for the other to remain equally satisfied. The
diminishing slope of the indifference curve means that the willingness to
substitute B for A diminishes as more of B is obtained. The rationale for
this convexity- that is, for diminishing MRS – is that a consumer’s
subjective willingness to substitute B for A (or A for B) will depend on the
amounts of B and A he or she has to begin with.
 Due to the fact that the utility with different combinations of two
commodities on one indifference curve stays the same, it
is not possible that any two indifference curves can cross
or even form a tangent. If indifference curves crossed,
then in theory they should also reveal the same total
utility and that is not possible given the assumption that
indifference curves further away from the origin (or then
high indifference curves) will reveal high total utility.
 The single indifference curve reflects some constant (but
unspecified) level of total utility of satisfaction. It is
possible and useful to sketch a whole series of indifference curves or an
indifference map. Each curve reflects a different level of total utility and
therefore never crosses another indifference curve. As we move out from
the origin, each successive indifference curve
represents a high level of utility.
o The budget line
 A schedule or curve that shows various
combinations of two products a consumer can
purchase with a specific income. The analysis
generalizes to the full range of products available
to consumers.
 All combinations within the budget line are attainable and all
combinations beyond the budget line are unattainable.
  Budget lines illustrate the idea of trade-offs arising from limited income,
thus the straight-line budget constraint, with its constant slope, indicate
constant opportunity cost.
o Limited income forces people to choose what to buy and what to forgo. People
have to evaluate the marginal benefits and marginal costs to make choices that
maximize their satisfaction.
o The budget line varies with income. And increase in income shifts the budget line
to the right, a decrease in money income shifts it to the left.
o If the axes are identical, a superimposed budget line can be implemented on the
consumer’s indifference map. Specifically, the utility-maximizing combination
on the indifference curve will be the combination lying on the highest
attainable indifference curve which is called the consumer’s equilibrium
position (the combination of two goods at which a consumer maximizes his or
her utility (reaches the highest attainable indifference curve), given a limited
amount to spend (a budget constraint)).
o Because the slope of the indifference curve reflects the MRS (marginal
rate of substitution) and the slope of the budget line is P B /PA, the consumer’s
optimal or equilibrium position is the point where:
o Vertical reference lines can be dropped down to the horizontal axis of the
demand curve, if the horizontal axes are identical and measure the same
quantity of a product/ service. By locating two prices on the curve and knowing
that the prices will yield the relevant quantities demanded, two points can be
located on the demand curve. Thus through simple manipulation of the price in
an indifference curve-budget line context, a downward-sloping demand has
been obtained. Therefore, the law of demand assuming ‘all things equal’, but in
this case the demand curve has been derived without resorting to the
questionable assumption that consumers can measure utility in units called
‘utils’, rather consumers simply compare combinations of products and
determine which combination they prefer, given their incomes and the prices of
the two products.
o An important difference exists between the marginal-utility theory of consumer
demand and the indifference curve theory. The marginal-utility theory assumes
that utility is numerically measurable, i.e. the consumer can say how much extra
utility the derive from each extra unit of A or B. the consumer needs that
information to realize the utility-maximizing (equilibrium) position:
 o The indifference curve approach imposes a less stringent requirement on the
consumer. He or she only specify whether a particular combination of A and B
will yield more than, less than or the same amount of utility as some other
combination of A and B will yield. Indifference curve theory does not require that
the consumer specify how much more (or less) satisfaction will be realized.
o When the equilibrium situations in the two theories are compared, indifference
curves show that the MRS equals PB / PA at equilibrium. However, in the marginal-
utility approach, the ratio of marginal utilities equals PB / PA. Therefore, the
deduction is made that at equilibrium the MRS is equivalent to the ratio of the
marginal utilities of the last purchased units of the two products.

Chapter 4
 Economic costs/ opportunity cost
o Costs exist because resources are scarce, productive and have alternative uses
o When society uses a combination of resources to produce a particular product, it
forgoes all alternative opportunities to use those resources for other purposes.
 Explicit costs: the monetary payments (or cash expenditures) it makes to
those who supply labor services, materials, fuel, transportation services
etc. such money payments are for the use of resources by others.
 Implicit costs: Opportunity costs of using its self-owned, self-employed
resources. To the firm, implicit costs are the monetary payments that
self-employed resources could have earned in their best alternative use.
 Normal profit: the payment made by a firm to obtain and retain
entrepreneurial ability.
 Economic or pure profit: total revenue minus total cost (both explicit and
implicit, the latter including normal profit to the entrepreneur).
 Short run and long run
o Short run: period too brief for a firm to alter its plant capacity, yet long enough
to permit a change in the degree to which the fixed
plant is used.
o Long run: period long enough for the firm to adjust
the quantities of all the resources that it employs,
including plant capacity.
 Short-run production relationships
o Total product (TP): Total quantity or total output of
a particular good or service produce.
o Marginal product (MP): The extra output or added
product associated with adding a unit of variable
resource to the production process.
 o Average product (AP): Total Output per unit of input, thus total
output divided by units of labor.
 Law of diminishing returns:
o As successive units of a variable resource are added to a fixed resource, beyond
some point the extra, or marginal product that can be attributed to each
additional unit of the variable resource decline.

 Short-run production costs

o Fixed costs (FC): costs that in total do not vary with changes in output. They are
associated with the firm’s existence and have to be paid even if its output is zero
(rent, insurance, car premium, etc.)
o Variable Casts (VC): Costs that change with level of output. They are associated
with payments for inputs to the production process (materials, petrol, wages,
water electricity, etc.)
o Total costs (TC): Sum of fixed costs and variable cost at each level of output
TC=TFC+TVC
o Average fixed costs (AFC): It is calculated by dividing total fixed costs (TFC) by
each level of output AFC=TFC/Q(Output)
o Average variable cost (AVC): It is calculated by dividing total variable cost (TVC)
by each level of output AVC=TVC/Q(Output)
o Average total cost (ATC): It is calculated by dividing total (TFC) by each level of
output ATC=TC/Q
 Also ATC=TC/Qd= (TFC+ TVC)/Q=TFC/Q+TVC/Q=AFC+AVC
 o Marginal costs (MC): Extra cost of producing 1 more unit of output

 Long-run production costs

o Reminder: in the long run, an industry and individual firms can undertake all
desired resource adjustments: they can change all amounts of input used.
o Also, enough time for new firms to enter and old firms to leave an industry.
o Analysis only in ATC: no distinction between AVC and AFC since all costs are
variable.
o Firm size and costs: A single plant manufacture may start
on a small scale and due to successful operations, may
expand to successively larger plant sizes with larger output
capacities. So larger plants will lower ATC but eventually a
still larger plant may cause ATC to rise.
o Long-run cost curve: vertical lines perpendicular to the
output axis indicate the level of output at which the firm should change plant
size to realize the lowest attainable ATC.
o LONG-run ATC is made up of segments of short-run ATC curves for
the various plant sizes.
o Long-run ATC shows the lowest ATC at which any output level can
be produced after the firm has time to make appropriate adjustments.
 Returns to scale:
 o The term refers to the LR relationship between inputs outputs. As all inputs
change by a certain percentage, the following changes in

 Economies and diseconomies of scale

o Economies of scale: They explain the down sloping part of long-run ATC: As
plant increases, a number of factors will for a time lead to lower average costs of
production:
 Labor specialization
 Managerial specialization
 Efficient capital
 Others
o Diseconomies of scale
 They explain the up sloping part of long-run ATC: As plant keeps
increasing, a number of factors will lead eventually to a higher average
costs of production.
 Difficulty of efficiently controlling and coordinating a firm’s operations as
it becomes a large-scale producer.
 Only encountered at considerably large scale of output.

 Minimum efficient scale and industry structure

o Minimum efficient scale (MES): The lowest level of output at which a firm can
minimize long-run average costs.
  Given demand, efficient production will be achieved with a few large-
scale producers.
 Small firms cannot realize MES and will not be able to compete.
 Economies of scale might extend beyond the market’s size.
 Natural monopoly: a relatively rare market situation in which ATC is min
when only one firm produces the particular good or services.

Chapter 5
 Demand: Demand is the various amounts of a product that consumers are willing to
purchase at each of a series of possible prices during a specified period of time. Dead
shows the quantities of a product that will be purchased at various possible prices, other
things equal.
o Demand schedule: Demand can be easily shown in table
form, it reveals the relationship between the various prices of
the product and the quantity of the product a particular
consumer would be willing and able to purchase at each of
these prices.
o Law of demand: Ceteris paribus, as price falls, the quantity
demanded rises, and as price rise, the quatity demanded falls:
there is a negative/ inverse relationship between quantity
demanded and price.
 The law of demand is consistent with common sense. People ordinarily
do buy more of a product at a low price than at a high price. Price is an
obstacle that deters consumers from buying. The higher that obstacle,
the less of a product they will buy; the lower the price obstacle, the more
they will buy. The fact that businesses have ‘sales’ is evidence of their
belief in the law of demand.
 In any specific time period, each buyer of a product will derive less
satisfaction (or benefit, or utility) from each successive unit of the
product consumed. That is, consumption is subject to diminishing
marginal utility, and because successive units of a particular product yield
less and less marginal utility, consumers will buy additional units only if
the price of those units is progressively reduced.
 The income effect indicates that a lower price increases the purchasing
power of a buyer’s money income, enabling the buyer to purchase more
of the product than before. A higher price has the opposite effect. The
substitution effect suggesrs that lower-price buyers have the incentive to
substititue what is a now less expsenive product for similar products that
are now relatively more expensive. The product whose price has fallen is
now ‘a better deal’ relative to the other products.
o Market Demand: Competition requires more than one buyer to be present in
each market, by adding the quantites demanded by all consumers at each of the
various possible prices, market demand can be derived from individual demand.
Compettition, of course, ordinarily entails many more than three buyers of a
product. To avoid hundreds or thousands or millions of additions, it is supposed
that all the buyers in a market are willing to buy the same amounts at each of
the possible prices. Then the amounts will be multiplied by the number of buyers
to obtain the market demand.
o Change in Demand: A change in one or more of the determinants of demand will
change the demand data (the demand schedule) and therefore the location of
the demand curve. A change in the demand schedule or, graphically, a shift in
the demand curve is called a change in demand. In constructing a demand curve,
economists assume that price is the most important influence on the amount of
the any product purchased. But economists know that other factors can and do
affect purchases, such as determinants of demand, which are assumed to be
constant when a demand curve is drawn. They are the ‘other things equal’ in the
relationship between prices and quantity demanded. When any of these
determinants changes, the demand curve will shift to the right or left. For this
reason, determinants of demand are referred to as demand shifters. The basic
determinants of demand are:
 Consumers’ tastes (preference): A favorable change in consumer tastes
(preferences) for a product- a change that makes the product more
desirable - means that more of it will be demanded at each price.
Demand will increase; the demand curve will shift rightward. A
unfavorable change in consumer preferences will decrease demand,
shifting the demand curve to the left.
 Number of buyers and population growth: An increase in the number of
buyers in a market, which can be due to an increase in population size, is
likely to increase product demand; a decrease in the number of buyers
will probably decrease demand.
 Income: Products whose demand varies directly with money income are
called superior goods, or normal goods (a good or service whose
consumption increases when income increases and falls when income
decreases, price remaining constant). Although most products are normal
goods, there are some exceptions. As income increases beyond some
point, the demand may decrease, because the high incomes enable
consumers to buy new versions of those products. Goods whose demand
varies inversely with money income are called inferior goods (a good or
service whose consumption declines as income rises (and conversely),
price remaining constant).
 Prices of related goods: A change in the price of a related good may
either increase or decrease the demand for a product, depending on
whether the related good is a substitute or a complement:
 Substitute good: Products or services that can be used in place of
each other. When the price of one falls, the demand for the other
prodcut falls; conversely, the price of one product rises, the
demand for the other product rises.
 Complementary goods: Products and services that are used
together. When the price of one falls, the demand for the other
increase (and controversially).
 Consumer expectations: A newly formed expectation of a higher future
prices may cause consumers to buy now in order to ‘beat’ the anticipated
price rises, and thus increases current demand. Similarly, a change in
expectations concerning future income may prompt consumers to
change their current spending.
 Changes in Quantity Demanded: A change in demand must not be
confused with a change in quantity demanded. A change in demand is a
change in the quantity demanded of a good or service at every price; a
shift of the demand curve to the left (decrease in demand) or right
(increase in demand). It occurs because the consumer’s state of mind
about purchasing the product has been altered in response to a change in
one or more of the determinants of demand. In contrast, a change in
quantity demanded, is a change in the amount of the product that
consumers are willing and able to purchase because of a change in the
product’s price.