PRINCIPLES OF

ECONOMICS
BACHELOR DEGREE IN PROJECT PLANNING AND
MANAGEMENT.
 OUTLINES OF THE TOPIC

1. Apply concepts , nature and scope of project economies in selecting project

alternatives and project design.
2. Use theories of consumer behaviors, production and costs in
implementation and control of projects.
3. Use theory of the firm and market structure in ensuring acceptability and
relevance of the projects
• 4. use concepts of macro economics, national income accounting and
national income determination and employment to facilitate
implementation and management of projects
• 5. Use concepts of money , banking, foreign exchange , inflation and
international trade in improving the designs and implementation of
projects.
 TOPIC 1. Concepts, nature, and scope of
economics.
• Economics is a social science that studies how individuals, businesses, governments,
and societies allocate scarce resources to satisfy their unlimited wants and needs. The
field of economics is broadly divided into two main branches:
• 1. Microeconomics: Microeconomics focuses on the behavior of individuals and
firms and how they make decisions regarding the allocation of resources. It examines
how individual markets work, how prices are determined, how firms maximize
profits, and how consumers make choices about what to buy and how much to
consume.
 Concept of Economics

• 2. Macroeconomics: Macroeconomics deals with the economy as a whole and focuses on

aggregate measures such as national income, unemployment rates, inflation, and economic
growth. It studies the overall performance of the economy and seeks to understand factors that
influence economic activity on a large scale, such as government policies, international trade,
and monetary policy.
• Economists use various theories, models, and empirical data to analyze economic phenomena,
make predictions about future economic trends, and provide policy recommendations to
address economic issues such as unemployment, inflation, poverty, and economic growth.
Economics plays a crucial role in shaping public policy, business decisions, and individual
choices in the allocation of resources.
 Nature of Economics

• The nature of economics can be understood through several key characteristics:

• 1. Scarcity: Economics is fundamentally concerned with the allocation of scarce
resources to satisfy unlimited wants and needs. Scarcity implies that there are not
enough resources available to satisfy all desires, leading to the need for choices
and trade-offs.
• 2. Choice: Individuals, firms, and governments must make choices about how to
allocate resources efficiently to maximize their well-being or achieve their goals.
Economics analyzes how these choices are made and their implications for society.
 Scope of Economics

• The scope of economics is broad and encompasses a wide range of topics and issues related to the
production, distribution, and consumption of goods and services. Here are some key areas within
the scope of economics:
• 1. Microeconomics: Microeconomics focuses on the behavior of individual consumers, firms, and
industries. It examines how prices are determined in specific markets, how individuals make
choices about consumption and production, and how firms maximize profits.
• 2. Macroeconomics: Macroeconomics deals with the overall performance of the economy as a
whole. It examines aggregate measures such as national income, inflation, unemployment, and
economic growth. Macroeconomics also studies factors such as government policies, international
trade, and monetary and fiscal policy.
 Scope…

• 3. Economic Systems: Economics analyzes different economic systems, such

as capitalism, socialism, and mixed economies. It studies how resources are
allocated, how production is organized, and how goods and services are
distributed in different economic systems.
• 4. Economic Development: Economics examines the processes and policies
that promote economic development in countries. It looks at factors
influencing economic growth, poverty reduction, income distribution, and
sustainable development.
 Scope….

• 5. International Economics: This area of economics focuses on international

trade, finance, and economic relations between countries. It analyzes factors
such as exchange rates, trade policies, multinational corporations, and
globalization.
• 6. Labor Economics: Labor economics studies the labor market, employment
trends, wages, and workforce participation. It examines factors influencing
labor supply and demand, unemployment, and human capital development.
 Scope….

• 7. Public Economics: Public economics deals with the role of government in the
economy. It examines government spending, taxation, public goods, social welfare
programs, and policies to address market failures and promote economic efficiency.
• 8. Environmental Economics: Environmental economics studies the interaction
between the economy and the environment. It analyzes issues such as pollution,
resource depletion, climate change, and sustainable development, and explores
policies to promote environmental conservation and sustainability.
 Scope….

• 9. Behavioral Economics: Behavioral economics combines insights from

psychology and economics to study how individuals make decisions and
behave in economic contexts. It examines biases, heuristics, and other
psychological factors that influence economic choices.
• The scope of economics is continually evolving and expanding to address new
challenges and phenomena in the global economy. Economists use theories,
models, and data analysis to study a wide range of economic issues and provide
insights to inform policy-making, business decisions, and individual choices.
 Demand

• In economics, demand refers to the quantity of a good or service that

consumers are willing and able to purchase at various prices over a specific
period. Demand is one of the key concepts in economics and plays a crucial
role in determining prices and quantities in a market economy.
 Key components of demand

• 1. Price: The relationship between price and quantity demanded is inverse; as

the price of a good or service decreases, the quantity demanded tends to
increase, and vice versa. This inverse relationship is known as the law of
demand.
• 2. Demand curve: The demand curve is a graphical representation of the
relationship between the price of a good or service and the quantity demanded
by consumers. It slopes downward from left to right, illustrating the inverse
relationship between price and quantity demanded.
 Key components of demand….

• 3.. Demand Schedule: A demand schedule is a table that shows the quantity of
a good or service that consumers are willing and able to purchase at different
prices. It illustrates how changes in price affect the quantity demanded,
holding other factors constant.
 Key components of demand…

• 4. Demand elasticity: Demand elasticity measures the responsiveness of quantity

demanded to changes in price. If a small change in price leads to a large change in
quantity demanded, demand is said to be elastic. If quantity demanded changes only
slightly in response to price changes, demand is considered inelastic.
• Understanding demand is essential for businesses, policymakers, and economists to
make informed decisions about production, pricing, resource allocation, and policy
formulation. By analyzing demand patterns and trends, stakeholders can better
predict consumer behavior, market dynamics, and the overall functioning of the
economy.
 Theory of demand

• The theory of demand in economics provides a framework for understanding how

consumers make choices about purchasing goods and services based on their
preferences, income, prices, and other factors. The theory of demand is based on
several key principles:
• 1. Law of Demand: The law of demand states that, ceteris paribus (all other factors
being equal), as the price of a good or service decreases, the quantity demanded of that
good or service will increase, and vice versa. This inverse relationship between price
and quantity demanded is represented by a downward-sloping demand curve.
 Factors affecting demand

• Several factors can influence the level of demand for a good or service, including:
• - Price of the good or service: Changes in the price of a good or service directly
affect the quantity demanded.
• - Income: Changes in consumers' income levels can impact their purchasing power
and, consequently, their demand for goods and services.
• - Prices of related goods: The prices of substitutes (goods that can be used in place of
each other) and complements (goods that are consumed together) can influence
demand.
 Factors affecting demand………

•- Consumer preferences: Changes in consumer tastes, preferences, and

expectations can affect demand for a product.
• - Population demographics: Factors such as population size, age distribution,
and income distribution can influence demand patterns.
 Importance of understanding theory of
demand….

• The theory of demand is a fundamental concept in economics that provides

insights into consumer behavior, market dynamics, pricing strategies, and
policy decisions. By understanding how consumers respond to changes in
prices, income, and other factors, businesses and policymakers can make
more informed decisions to meet consumer needs and optimize resource
allocation.
 Elasticity of demand..

•. Elasticity of demand is a concept in economics that measures how

responsive the quantity demanded of a good or service is to a change in its
price. It quantifies the percentage change in quantity demanded in response to
a one percent change in price. The elasticity of demand helps to understand
how consumers react to changes in market conditions, particularly changes in
price.
 Formular of calculating demand elasticity..

• The formula for calculating the elasticity of demand is:

• Elasticity of Demand = % Change in Quantity Demanded/% Change in Price
 Types of elasticity of demand

• There are several types of elasticity of demand:

• 1. **Elastic Demand**: If the percentage change in quantity demanded is
greater than the percentage change in price (Elasticity of Demand > 1),
demand is considered elastic. In this case, consumers are highly responsive to
price changes, and the quantity demanded changes proportionally more than
the price change. This indicates that consumers are sensitive to price changes
and may significantly adjust their consumption in response to price changes.
• 2. **Inelastic Demand**: If the percentage change in quantity demanded is less than the
percentage change in price (Elasticity of Demand < 1), demand is considered inelastic. In this
scenario, consumers are not very responsive to price changes, and the quantity demanded
changes proportionally less than the price change. This suggests that consumers are less
sensitive to price changes and may continue to purchase the good or service even if the price
increases.
• 3. **Unitary Elasticity**: If the percentage change in quantity demanded is equal to the
percentage change in price (Elasticity of Demand = 1), demand is said to be unitary elastic.
This means that the percentage change in quantity demanded is exactly equal to the percentage
change in price. In this case, the demand response is proportional to the price change.
 Importance of understanding elasticity of
demand …

• Understanding the elasticity of demand is crucial for businesses,

policymakers, and economists as it helps in predicting how changes in price
will affect the quantity demanded of a good or service. Elasticity of demand
influences pricing strategies, revenue projections, market dynamics, and
consumer behavior analysis.
 Mathematical example of elasticity of
demand..
• let's consider two scenarios: elastic demand and inelastic demand.
• 1. **Elastic Demand*
• *: Suppose the price of a product decreases by 10%, and as a
result, the
quantity demanded increases by 20%. The elasticity of demand for this
product can be calculated as follows:
• Elasticity of Demand} = % Change in Quantity Demanded/% Change in
Price
 Example 1..

• Given:
• - Percentage change in quantity demanded = 20%
• - Percentage change in price = -10% (negative sign indicates a price
decrease)
• Elasticity of Demand} = 20%/-10% = -2 In this case, the elasticity of demand
is -2, which indicates elastic demand. This means that a 1% decrease in price
leads to a 2% increase in quantity demanded.
 Example 2…

• 2. **Inelastic Demand**:
• Now, let's consider a scenario where the price of a product increases by 5%,
and as a result, the quantity demanded decreases by 2%. The elasticity of
demand for this product can be calculated as follows:
• Given:
• - Percentage change in quantity demanded = -2%
• - Percentage change in price = 5%
• Elasticity of Demand} = -2%/5% = -0.4 .
• In this case, the elasticity of demand is -0.4, which indicates inelastic
demand. This means that a 1% increase in price leads to a 0.4% decrease in
quantity demanded.
• These examples illustrate how the concept of elasticity of demand is
calculated and how it helps to quantify the responsiveness of quantity
demanded to changes in price. A negative elasticity value indicates an inverse
relationship between price and quantity demanded, while the magnitude of
the elasticity value determines whether demand is elastic, inelastic, or unitary
elastic.
 Assignment 1 (Presentation work)

• 1.With Illustrations and examples explain the exceptions of the law of

demand.
• 2. With diagrams and vivid examples elaborate the working of the law of
demand ( why the demand curve slopes downwards)
 Supply..

• In economics, supply refers to the quantity of a good or service that producers

are willing and able to sell at various prices over a specific period. Supply
represents the producers' side of the market and plays a crucial role in
determining prices and quantities in a market economy.
 Key component of supply..

• 1. Price: The relationship between price and quantity supplied is generally

direct; as the price of a good or service increases, the quantity supplied tends
to increase as well, and vice versa. This direct relationship is known as the
law of supply.
• 2. Supply Curve: The supply curve is a graphical representation of the
relationship between the price of a good or service and the quantity supplied
by producers. It slopes upward from left to right, illustrating the direct
relationship between price and quantity supplied.
• 3. Supply Schedule: A supply schedule is a table that shows the quantity of a
good or service that producers are willing and able to sell at different prices.
It illustrates how changes in price affect the quantity supplied, holding other
factors constant.
• 4. Shifts in Supply: Changes in factors affecting supply can lead to shifts in
the entire supply curve. An increase in supply shifts the curve to the right,
indicating that producers are willing to supply more at each price level.
Conversely, a decrease in supply shifts the curve to the left.
• 5. Supply Elasticity: Supply elasticity measures the responsiveness of quantity
supplied to changes in price. If a small change in price leads to a large change in
quantity supplied, supply is said to be elastic. If quantity supplied changes only
slightly in response to price changes, supply is considered inelastic.
• Understanding supply is essential for businesses, policymakers, and economists to
make informed decisions about production, pricing, resource allocation, and policy
formulation. By analyzing supply patterns and trends, stakeholders can better predict
producer behavior, market dynamics, and the overall functioning of the economy.
 Theory of supply…

• The theory of supply in economics provides a framework for understanding how

producers make decisions about supplying goods and services to the market based
on factors such as input costs, technology, prices, and other influences. The theory
of supply is based on several key principles:
• 1. Law of Supply: The law of supply states that, ceteris paribus (all other factors
being equal), as the price of a good or service increases, the quantity supplied of
that good or service will increase, and vice versa. This direct relationship between
price and quantity supplied is represented by an upward sloping supply curve.
 Factors affecting supply..

• Several factors can influence the level of supply for a good or service, including:
• - Production costs: Changes in input prices, technology, labor costs, and other
production expenses can impact the profitability of producing goods and services.
• - Prices of related goods: Changes in the prices of related goods or inputs can
affect production decisions.
• - Technology: Advances in technology can improve production efficiency and
reduce costs, leading to an increase in supply.
 Factors affecting supply..

• - Government policies: Regulations, subsidies, taxes, and other government

interventions can influence production decisions and supply levels.
• - Producer expectations: Expectations about future prices, input costs, and
market conditions can influence current supply decisions.
 Importance of the theory of supply.

• The theory of supply is a fundamental concept in economics that provides

insights into producer behavior, market dynamics, pricing strategies, and
policy decisions. By understanding how producers respond to changes in
prices, costs, and other factors, businesses and policymakers can make more
informed decisions to optimize production, meet market demand, and allocate
resources efficiently.
 Elasticity of supply..

• Elasticity of supply is a concept used in economics to measure how

responsive the quantity supplied of a good or service is to a change in its
price. It is calculated by dividing the percentage change in quantity supplied
by the percentage change in price.
 Formular of elasticity of supply….

• Price Elasticity of Supply = %Change in Quantity Supplied/%Change in Price

 Types of price elasticity of supply.

• 1.Elastic supply: When the percentage change in quantity supplied is greater

than the percentage change in price, elasticity is greater than 1. This means
that suppliers are very responsive to price changes, and the quantity supplied
changes significantly in response to a change in price.
• 2. Inelastic supply: When the percentage change in quantity supplied is less
than the percentage change in price, elasticity is less than 1. This indicates
that suppliers are not very responsive to price changes, and the quantity
supplied changes relatively less in response to a change in price.
• 3. Unitary elastic supply: When the percentage change in quantity supplied is
equal to the percentage change in price, elasticity is equal to 1. This means
that the percentage change in quantity supplied is exactly proportional to the
percentage change in price.
• Understanding the elasticity of supply is important for businesses and
policymakers to predict how changes in price will affect the quantity supplied
of goods and services in the market.
 Mathematical Example of elasticity of supply

• Let's consider two scenarios to provide mathematical examples of elasticity

of supply: elastic supply and inelastic supply.
• 1. **Elastic Supply**:
• Suppose the price of a product increases by 15%, and as a result, the quantity
supplied of the product increases by 30%. The elasticity of supply for this
product can be calculated as follows:
• Elasticity of Supply = % Change in Quantity Supplied/% Change in Price.
• Given: - Percentage change in quantity supplied = 30%
• - Percentage change in price = 15%
• Elasticity of Supply = 30%/15% = 2 .
• In this case, the elasticity of supply is 2, indicating elastic supply. This means
that a 1% increase in price leads to a 2% increase in quantity supplied.
• Inelastic Supply
• Now, let's consider a scenario where the price of a product decreases by 10%,
and as a result, the quantity supplied decreases by 5%. The elasticity of
supply for this product can be calculated as follows:
• Given: - Percentage change in quantity supplied = -5%
• - Percentage change in price = -10% (negative sign indicates a price decrease)
• Elasticity of Supply = -5%/-10% = 0.5
• In this case, the elasticity of supply is 0.5, indicating inelastic supply. This
means that a 1% decrease in price leads to a 0.5% decrease in quantity
supplied.
• These examples demonstrate how the concept of elasticity of supply is
calculated and how it helps to quantify the responsiveness of quantity
supplied to changes in price. A positive elasticity value indicates a direct
relationship between price and quantity supplied, while the magnitude of the
elasticity value determines whether supply is elastic or inelastic.
 Assignment1 (Presentation Work )

• 3. Explain the exceptions of the law of supply with illustration and examples.
• 4. Discuss the working of the theory of supply (explain why the supply curve
slopes upwards)
 Market Equilibrium

• Market equilibrium is a fundamental concept in economics that refers to the

point at which the quantity of a good or service supplied by producers equals
the quantity demanded by consumers. At this point, there is no shortage or
surplus of the product in the market, and the price is considered stable.
• **Equilibrium **: The equilibrium point is where the demand curve
intersects the supply curve. At this point, the quantity demanded equals the
quantity supplied, leading to a stable market price. This is the point where
buyers are willing to purchase exactly the quantity that sellers are willing to
sell, leading to an efficient allocation of resources in the market.
• **Impact of Changes**: If there is a shift in either the demand or supply
curve, the market will adjust to reach a new equilibrium. For example, if
there is an increase in demand for a product, the price and quantity sold will
increase until a new equilibrium is reached. Similarly, if there is a decrease in
supply, the price will increase, and the quantity sold will decrease until a new
equilibrium is reached.
• . **Price Mechanism**: The price mechanism plays a crucial role in reaching
equilibrium in a market economy. Prices act as signals that convey
information about scarcity and preferences. When there is excess demand
(shortage), prices tend to rise, encouraging producers to increase supply and
consumers to reduce demand. Conversely, when there is excess supply
(surplus), prices tend to fall, leading to adjustments in production and
consumption.
• The equilibrium price is the price at which the quantity of a good or service
supplied by producers equals the quantity demanded by consumers in a market. It is
the price at which the market clears, meaning there is neither a surplus nor a
shortage of the product.
• In graphical terms, the equilibrium price is the price at which the demand curve and
the supply curve intersect. At this price, the quantity that consumers are willing to
buy at that price matches the quantity that producers are willing to sell at that price.
This intersection point represents the equilibrium price and quantity in the market.
• The concept of equilibrium price is important because it represents a point of
balance in the market where there is efficiency in the allocation of resources.
At the equilibrium price, the market is said to be in a state of equilibrium,
where there is no incentive for producers to produce more or less and for
consumers to buy more or less.
• The equilibrium quantity is the quantity of a good or service that is bought
and sold in a market when the market is in a state of equilibrium. It is the
quantity at which the quantity demanded by consumers equals the quantity
supplied by producers, resulting in a balance between supply and demand.
• In graphical terms, the equilibrium quantity is the quantity at which the
demand curve and the supply curve intersect. At this point, the market clears,
and there is neither a shortage nor a surplus of the product. The intersection of
the supply and demand curves determines the equilibrium quantity in a market.
• Understanding the equilibrium quantity is important for businesses,
policymakers, and consumers as it helps in analyzing market trends, making
informed decisions, and predicting how changes in supply and demand will
impact the quantity of goods and services bought and sold in the market.
 Price Floor

• A price floor is a government-imposed minimum price that is set above the

equilibrium price in a market. The purpose of a price floor is to prevent the
price of a good or service from falling below a certain level, ensuring that
producers receive a minimum acceptable price for their products.
• When a price floor is set above the equilibrium price, it creates a situation
where the quantity supplied exceeds the quantity demanded at that higher
price. This leads to a surplus in the market because producers are producing
more than consumers are willing to buy at the higher price.
 Impacts of Price Floor

• 1**Impact on Market**: Price floors create a situation where there is excess

supply in the market, leading to a surplus. This surplus can result in inefficiencies
as producers are unable to sell all their products at the higher price, which can lead
to wastage or the need for government intervention to purchase the excess supply.
• 2. **Impact on Consumers**: Price floors can result in higher prices for
consumers, as they are forced to pay more for the product than they would in a free
market. This can lead to reduced consumer surplus and potentially lower levels of
consumption.
3.**Impact on Producers**: Price floors benefit producers by ensuring that they
receive a higher price for their products. This can help to stabilize incomes for
producers and encourage production, especially in industries where prices are
typically volatile.
• *Examples of Price Floors**: Examples of price floors include minimum
wage laws, agricultural price supports, and tariffs on imported goods.
Minimum wage laws, for example, set a price floor on labor, ensuring that
workers are paid no less than the specified minimum wage.
• Overall, price floors can have both positive and negative effects on the market,
depending on the specific circumstances and the goals of the policy. While
they can protect producers and ensure a minimum income level, they can also
lead to market distortions, inefficiencies, and reduced consumer welfare.
 Price Ceiling

• A price ceiling is a government-imposed maximum price that is set below the

equilibrium price in a market. The purpose of a price ceiling is to prevent the
price of a good or service from rising above a certain level, making the product
more affordable for consumers.
• When a price ceiling is set below the equilibrium price, it creates a situation
where the quantity demanded exceeds the quantity supplied at that lower price.
This leads to a shortage in the market because consumers are willing to buy
more of the product at the lower price than producers are willing to supply.
 Impact of Price Ceiling

• 1.**Impact on Market**: Price ceilings create a situation where there is

excess demand in the market, leading to a shortage. This shortage can result
in inefficiencies as producers are unable to supply enough of the product at
the lower price, leading to rationing or black markets.
• 2. **Impact on Consumers**: Price ceilings benefit consumers by ensuring
that they can purchase the product at a lower price than they would in a free
market. This can lead to increased consumer surplus and make the product
more affordable for a wider range of consumers.
• 3. **Impact on Producers**: Price ceilings can have negative effects on
producers by limiting their ability to earn a fair market price for their
products. Producers may be less willing to supply the product at the lower
price, leading to potential quality issues or reduced availability.
• **Examples of Price Ceilings**: Examples of price ceilings include rent control policies,
price controls on essential goods during times of emergency or crisis, and maximum price
limits on certain goods and services. Rent control, for example, sets a maximum price that
landlords can charge for rental properties in an effort to make housing more affordable for
tenants.
• Overall, price ceilings can have both positive and negative effects on the market,
depending on the specific circumstances and the goals of the policy. While they can
benefit consumers by making goods and services more affordable, they can also lead to
market distortions, shortages, and reduced incentives for producers to supply the product.
 Mathematical examples of calculating
equilibrium price and quantity.

• *Example 1:** Suppose the demand and supply functions for a product are
given by:
• Demand function is Qd = 100 - 2P
• Supply function is Qs = 50 + P.
• To find the equilibrium price and quantity, we need to set the quantity
demanded equal to the quantity supplied:
Qd = Qs
100 - 2P = 50 + P.
Solving for P: 100 - 2P = 50 + P
100 - 50 = 2P + P
50 = 3P
P = 50/3 =
P= 16.67
• Now that we have the equilibrium price, we can plug it back into either the
demand or supply function to find the equilibrium quantity:
• Qd = 100 - 2(16.67) =
• 100 - 33.34 = 66.66.
• Therefore, the equilibrium price is $16.67 and the equilibrium quantity is
66.66 units.
 Example 2.

• Suppose the demand and supply equations for a product are given by:
Demand function is Qd = 120 - 3P
• Supply function is Qs = 40 + 2P
• i) Find the equilibrium price and quantity.
• ii) Illustrate your answers in roman (i) above.
• Iii) Suppose the government has introduced a price floor of 20$ find the new
quantity demand and quantity supply of a product
• Iv) Suppose the government introduced a tax ceiling of 10$ find the new3
quantity demand and quantity supply of a product.
 Assignment1 (Presentation Work)

• 5. With Illustration explain effect of shift of the demand curve basing on the
concept of market equilibrium.
• 6. With Illustration explain impact of shift in the supply curve using the concept of
market equilibrium.
• 7. Discuss the concept of Price Discrimination.
• 8. Price Controls such as price floors and price ceiling can impact market
equilibrium, analyze the effects of these controls on the market by looking at the
intersection of supply and demand curve.
Thank you for Listening
END OF TOPIC 1.