SIU

(HD/MBA-Program)
Principles of ECONOMICS

Dr.Ayoub Taha Sidahmed- part(1)

Associate professor OF ECONOMICS
Feb 2022

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 Course objectives

1-to be familiar with some basics of economics concepts

2-to understand meaning of demand and its determinants
3-to know demand elasticity and its calculations
4-to understand meaning of supply and its determinants
5-to explain equilibrium of demand &supply
6-to discuss the consumer theory
7- to discuss the production and its costs
8-to distinguish between different market shapes
9-to know some concepts at macro level .
Textbooks (1)microeconomics theory &practices-Ellen
Miller
(2)economics Author Leonard Smith

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DEFINITION OF ECONOMICS

Wealth Concept :Adam Smith, who is

generally regarded as father of economics,
defined economics as “ a science which
enquires ) investigate( into the nature and and
determine the cause of wealth of nation”. He
emphasized the production and growth of
wealth as the subject matter of economics

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b. Welfare Concept :According to A. Marshall
“Economics is a study of mankind in the ordinary
business of life; it examines that part of individual
and social action which is most closely connected
with the attainment and with the use of material
requisites (necessity)
( of well being(good condition).
Thus, it is on one side a study of wealth; and on
other; and more important side, a part of the study
of man.
C. Scarcity Concept : According to Lionel
Robbins: “Economics is the science which studies
human behavior as a relationship between ends and
scarce means which have alternate(substitute)
uses”
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D. Growth/Development Concept : According to
Prof. Samuelson “Economics is the study of how
people and society choose with or without the use
of money, to employ the scarce productive
resources which have alternative uses, to produce
various commodities over time and distribute them
for consumption now and in future among
various(different)
various( people and groups of society.
E. Need Oriented Definitions : According to Jacob
Viner “Economics is what economists do”
So economics is asocial science that concern with
the study of how scarce resources (with alternative
uses) should be allocated(put for particular task) to
satisfy the unlimited human wants.
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 Characteristics of human Wants

Human Wants are Unlimited:

When one want is satisfied, another crops up

(emerge, appear) to take its place
Wants are Complementary cars need oil
Wants are Competitive one commodity compete with
the other
Wants are Alternative several ways to satisfy wants if
we feel thirsty we can drink water or tea in summer or hot
Milk in winter
Wants Vary with Time, Place and Person and age.
Wants are recur (happen again ) need to eat food three
times a day (breakfast a meal taken in the beginning of
the day / lunch a meal taken in the middle of the day
/supper at the end of the day) 6
 Need
something you can't do without
example is food. If you don't eat, you won't survive
for long
Wants
A want is something you would like to have. It is not
absolutely necessary, but it would be a good thing to
have. A good example is music. Now, some people
might argue that music is a need because they think
they can't do without it. But you don't need music to
survive. You do need to eat.

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 Microeconomics &macroeconomics

Microeconomics - study of behavior

of individual economic agents.
production consumption …est.)
Micro economists generally conclude
that markets work well to maintain
equilibrium level.
Macroeconomics deals with economy
as a whole aggregate behavior of all
households and firms as well as
general economic phenomena( inflation
recession depression )

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 Economic policy

is combination of procedures adopted by

governments to fulfill the economic goals the society
is seeking to achieve .it consist of the following
policies :-
Monetary policy concern with supply and demand of
money
Fiscal policy concern with taxes and customs.
Price policy concern with how to determine level of
prices.
Trade policy concern with arrangement of trade.

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Economic Goals

Low Unemployment =possible level of

unemployment
Price Stability =to revert (return) to the
original level after disturbance(unrest)
Economic Growth =increase in real GDP
over certain period +increase in real GDP per
capita
Economic efficiency=economy function
with small input but max output

Introduction to Macroeconomics
Branches of economics:

a. Microeconomics: Concerned with the behavior

of individual entities such as markets, firms and
households.

b. Macroeconomics: Concerned with the overall

performance of the economy. This concept came
into being after 1935 when General Theory of
Employment, and Money was published by John
Maynard Keynes. Study macro events like
inflation unemployment etc.

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 Tools of economic Analysis
A. Deductive method (Method of logical reasoning) :
According to Wilson Gee : “By deductive method is
meant the reasoning from general to particular or
from universal to individual examples personal
income is limited+ income not consumed saved)
B. B. Inductive method Analytical/Realistic method :
According to Wilson Gee : “Inductive method is the
process of reasoning from particular to general or
from individual to universal. "example there is a
direct relation between prices levels and supply of
money .
C.Mathematical depends on using mathematical
equations and tools to formulate economic theory
Q d=f(p)
D-Statistical method used as experimental tool to check
validity of economic theory example there is direct
relation bet wages and productivity also measure
quantitative side example if (W) increase by (%) then
(LP) will increase by (%) 12
  Economics as Science and Art

 Science is the relationship between causes and

effects.
 Classification of Science :
a. Positive Science (What is? ) – actual happenings.
Example( relation between QD and its price)
b. Normative Science (What should be ?)

Example (The State should devote more concern

to the agricultural sector in Sudan)

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ECONOMICS as an a science and Art

Science is a theoretical aspect whereas Art is a

practical aspect. In economics we study
consumption, production, public finance etc, which
provide practical solutions for daily economic
problems.
 Study of cause and effect of inflation or deflation
falls within the purview(range) of science but
framing(managing) appropriate and suitable
monetary and fiscal policies
to control inflation and deflation is an art.
So Economics is an art and science

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  Economic Laws

Characteristics of Economic Laws :

-Economic laws are statements(expressions) of
economic tendency(idication).
-Economic laws are hypothetical.
-Economic laws are relative.
-Economic laws are human laws.
-Certain universal laws.
Assumptions of Economic Laws :
-Other things remaining the same.
-Rationality of human laws.

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Economic Problems

The problem of choice making arising out of

limited means and unlimited wants is called
economic problem.

Why do economic problems arise?

-Unlimited wants
-Different priorities
-Limited means
-Means having alternative uses.
Multiplicity of want
So problem of choice arise

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Basic or Central Problems

Three Basic or Central Problems of Economy

Allocation Efficient use & utilization of Growth of

 of Resource Resources Resources

What to produce? How to produce? For whom to

produce?

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 The Economic Problem
 Economics examines how people use their scarce
resources to satisfy their unlimited wants

 Scarce resource
 Not freely available  when its price exceeds zero
 Economic Resources (scarce/expensive/need
effort) like
 Inputs
 Factors of production
 Used to produce goods and services

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 Resources
 Goods and services are scarce because resources
are scarce.

Four general categories(factors of production) 

 Labor
 Capital
 Land
 Entrepreneurial Ability

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 Labor and Capital

 Labor: broad category of human effort

 Physical and mental
 Time
 Scarcity of time  scarcity of labor

 Capital: Human creations used to produce

goods and services
 Physical capital: factories, machines, tools,
buildings, airports, highways and other
manufactured items employed to produce goods and
services
 Human capital: consists of the knowledge and skill
people acquire to enhance their labor productivity
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 Land &Entrepreneurial Ability
 Land
 Land and other natural resources
 Gifts of nature including bodies of water,
trees, oil reserves, etc.
Entrepreneurial Ability
 Specialkind of human skill
 Talent& skills)required to dream up(invent)
a new product or find a better way to
produce an existing one.

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 Payments for Resources

 Wages  payment for use of labor

 Interest  payment for the use of capital

 Rent  payment for the use of land

 Profit  reward for entrepreneur’s reward

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 Goods and Services
 Goods & commodities
 Tangible items with the following perquisites (human
need) ( its properties capable for causal connection
with need) (human knowledge of this causal connection)
(order of thing direct it to satisfy this need) like
consumer goods.
 where commodities are standardized good traded in
bulk like the output of primary sector ( example
agriculture).
 Services Intangible items
 Good or service is scarce if the amount people desire
exceeds the amount that is available at a zero price  we
must continually choose among them ) Choices in a world of
scarcity implies we must pass up some goods and services(
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 Free Goods

Goods that are available at a zero price

Even these goods may come with strings

attached (tied)

For example, while air and seawater may

appear to be free, clean air and seawater
have become scarce.
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 Demand
Prices are the Demand means the
willingness and capacity to pay.
tools by which the market coordinates
individual desires.

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 Demand vs. Quantity demanded

Demand is the amount of a product that

people are willing and able to purchase at
each possible price during a given period of
time.

The quantity demand is the amount of a

product that people are willing and able to
purchase at one, specific price.

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 The Law of Demand

Law of demand – there is an inverse

relationship between price and quantity
demanded.
Quantity demanded rises as price
falls, other things constant.
Quantity demanded falls as prices
rise, other things constant.

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What accounts for the law of demand?
**People tend to substitute for goods whose price
has gone up.(substitute effect) * *real income
equals )income/price( so whenever price rise real
income decline so ability of individual to obtain
goods affected negatively (income effect) Demand
curve( DC)

Prices (p)

 Qd
DC negatively slope show inverse relation bet( Qd)
& (p)
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From a Demand Table to a Demand Curve

Price /unit Qd POINTS A Demand Table

0.5 9 A & Demand Curve(DC)
1 8 B
2 6 C
3 4 D P
4 2 E
 Demand Curve is a graphical
presentation of demand table E
When (p) decrease (Q d) increase D
then we go down(DC)from( E D C B A)
C
 When (p)increase(Q d) decrease we
move up along( D C) B
A Qd
From ( ABCDE)

) (D C) NOT SHIFT
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Factors(DETERMINANTS) that
Shift (D C)
Number
Of
Buyers
Consumer Price of
Income Related Goods

Demand
Tastes
And Expectations
Preferences

Demographics
Shift in Demand curve

Upward downward Shift in

Price (per unit)

demand

 D1
(a shift of the curve)

A B
$15

D0
1,250 1,500
Quantity demanded (per unit of time)
Shift in Demand curve (D C)

 Upward shift Downward shift

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 Demand types
1-Effective Demand :- define as the quantity the
Consumer desire to obtain and has the ability to
purchase it. All the decisions depend on this type.
2-Alternate Demand :- is the demand on alternative
commodities ( tea instead of coffee )increase of the
price of coffee leads to increase quantity demanded
from tea.
3-Joint Demand (complementary) :- to satisfy one
need it should be in presence of other (car & fuel).
4-Multiple demand reflects the demand on certain
commodity or service with different use (demand on
Electricity is multiple demand because electricity use
for warming , cooling &lighting & turn on devices..)
Increase demand of certain use will reduce supply
offer for other uses .so its prices increase in all uses.
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5-Derived Demand:- demand for cement is derived
from demand on construction .
6-Final demand :-reflect demand on commodities
use directly to satisfy needs i.e. demand on
consumptive commodities .
7- intermediate demand : demand on commodities
use in production of other commodities. Example
demand on rawmaterial.

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 Elasticity

A general definition:
“Elasticity” is a (standard) measure of the degree
of sensitivity ( or responsiveness) of one variable to
changes in another variable.
The price elasticity of Demand
The (self) price elasticity of demand is a measure
of the degree of sensitivity of demand to changes in
the (self) price, ceteris paribus.)other things remain
equal ) What does the elasticity “measure” really
measure? The elasticity measure is a ratio between
two percentage measures: the percentage change in
one variable over the percentage change in another
variable
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 Determining Price Elasticity

Percentage Change in Quantity

Ep =
Percentage Change in Price

%ΔQd/ Δ%p
EXAMPLE
Price 10 11 10 12 10 11
Qd 100 90 100 90 100 80
case
(B) (C)
(A)

Calculate EP for each case

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 Solution
Case (1)
100-90/100 ⁄ 10-11/10 =1/-1⁄1/1 =1(negative sign
denotes to the slope of the demand curve)then the
absolute value =1 the demand curve is unitary elastic
Case (2) 100-90/100 ⁄ 10-12/10 = 0.5 < 1 the demand
curve is inelastric.
Case (3) 100-80/100 ⁄ 10-11/10 = 2> 1 the demand
curve is elastic .
***
When EP=0 demand curve is zero elastic
When EP= ∞demand curve is infinite elastic

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 Shapes of demand curve

Elastic
%∆QD>%∆P

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UNITARY ELASTIC EP =1

EP =0 Zero elastic

demand curve

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 EP = ∞ infinite elastic
demand curve

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Income elasticity
= % ΔQd / % Δ I
If the result is positive (˃0)the commodity is normal
(elastic with income) ie increase
In income leads to increase of Qd .
If the result negative(˂0) the commodity is inferior i.e.
Increase
Income leads to decrease of the Qd .(inelastic with income )
Cross elasticity of Demand
= %Δ Qx /%Δ py
1-If elasticity between (X&y) is positive(increase in Q of one
commodity leads to decrease of other)inverse relation
Then (x,y) are substitute
2-But if the elasticity is negative (increase in price of one
commodity leads to decrease of quantity of other)
Then (x ,y) are complementary 41
42
 Examples

3-if the result =0 the commodities are independent

Examples

(1) A family purchase (8)units of X when price of (y)

(100) & purchase (6) when the price of (y) drop to (80)
Calculate the cross elasticity and comment on the result
Solution
Percentage change in Qx = 6-8/8 Х100=25%
Percentage change in Py =100-80/100x100=20%
Cross elasticity =25/20=1.25
The result positive (˃1) the (X,Y) are substitute commodities

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2-if sales of company (A) =100 units of (x) within a
month
But the sales drop to (80) when price of input(y)
increase from 4 pounds to 6 pounds .calculate
elasticity & comment on the result ?
Solution
80-100/100 x 100 =.20
6-4/6x100=.50
Cross elasticity = .20/.50=0.4(˂1) both commodities are
complementary .
3-refrence to the below demand function
Qx=100-2p
Calculate elasticity at px =40 & comment on the
result and calculate the total spending
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Once elasticity in this case = slope of the function
x (p/q)
Then
Slope =dQx/dPx=0-2x1=-2
Qantity of (x) at 40 =100-2x40=20
Then elasticity =2(40/20)=4
Once 4˃1 the demand is elastic
The total spending
Pxq = 40x20=800

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Elasticity & Revenue ( R) sales

When demand is elastic, a decrease in

price will result is an increase in the
revenue (sales).R=QXP
When demand is inelastic, a decrease
in price will result is a decrease in the
revenue (sales).R= QXP
When demand is unitary elastic, an
increase (or a decrease) in price will not
change the revenue (sales). 46
What Determines Elasticity
Goods with multi –uses has elastic
demand
Availability of substitutes
goods which has substitute it has elastic
demand
How much of our income a good
takes :such good has elastic demand
Salt versus Meat
The passage of time : demand be elastic
at long run

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 Other Elasticity Measures

.Income Elasticity(Ei): a measure of the degree of

sensitivity of demand for a good (or service) to
changes in consumers’ (buyers’) income.
• When Ei> 1 commodity is luxury when I.e. <1 is
necessary
• Cross Price Elasticity(Ec): a measure of the degree
of sensitivity of demand for a good (or service) to
changes in the price of another good or service.
(%ΔQ d x/ Δ% p y)
When (Ec (+)>0 commodities are substitute
When (Ec(-)<0 commodities are complementary.
When E c=0 commodities independent
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