Wants, Needs managing

opportunity
& Demands Choice Scaricty scarce
costs
resources
Economics :
What is economics:
economics is the study of households will use the little resources they have to satisfy their unlimited wants.

 a study of mankind in the ordinary business life, art of making the most out of life.
 Economics is essentially about making choices.
 the science which studies human behavior as a relationship between ends and scarce means which have alternative uses (substitutes)
 the study how society manages its scare resources.

 Businesses and governments also must make choices everyday – basic fact of
 economic life (scarcity)
 1. Without scarcity it would not be necessary to make choices.
 Wants are plentiful but means are scarce.
 Relationship between unlimited wants and scarce resources is so central to
 economics that most definitions of economics focus almost exclusively on this
 relationship
Businesses and governments also must make choices everyday – basic fact of economic life (scarcity)
1. Without scarcity it would not be necessary to make choices.
2. Wants are plentiful but means are scarce.
Relationship between unlimited wants and scarce resources is so central to economics.
Hence Economics deals with scarcity and choice.
 The Choices that must be made between, individuals, businesses, and governments decisions like: product expansion, price increase or reduction in attempt to increase sales, where should money be
spent?

Why choice in economics:

 Decisions are made as we all have wants which are plentiful, but the means are scarce, therefore choices need to be made.

Central elements of economics: scarcity and choice

Economics has to do with how to use scare resources to satisfy unlimited wants.
 how we best manage scarce resources.

How we use economics.

 Economics further describes, explains, analysis and predicts phenomena such as economic growth, unemployment, inflation, trade between counties, pricing, poverty, wealth, interest rates, exchange
rates and business cycles.
 Study the behavior of people in a changing environment.
 Attempt to discover regular patterns & behaviors to explain what is happening and predict what might happen to assist to choose appropriate policy.
 Economics also explain a variety of phenomena such as:
o Economic growth
o Unemployment
o Inflation
o Trade
o The prices of goods and services
o Poverty
o Wealth
o Money
o Interest rates
o Exchange rates
o Business cycles

What is economics used for.

 informed better decision making, to respond better to changes: ‘’how we, business and government behaves’’ ‘’scarcity & choice’’

An economy is a system
that helps produce goods
and services and enables
how best to manage scarce
resources people to earn a living.

Also studies the decisions of

businesses, governments, and
production & consumption of
goods and services other decision makers in
society.

science of household management

essentially about making and as such is concerned with the
choices
ordinary business of life.

aids better decision making Economics

important – to understand
future predictions economic trends and how it
works to function optically.

Economics is a social science.

 Economics involves:
o An attempt to discover regular patterns of behavior.
 These patterns are used to explain:
o what is happening,
o to predict what might happen.
o to assist policy makers to devise or choose appropriate economic policies.
 Recurrent theme of economics:
o The emphasis on explanation, prediction, and policy.
 It studies the behavior of human beings, both individually and as groups.
 Economists cannot discover regular patterns of behavior by conducting laboratory experiments, nor can they test their theories in this way.
 Economists study the behavior of people in a constantly changing environment.
Why do economists tend to disagree?
 They might make different value judgements.
 They might not agree on the facts.
 They might be biased.
 They might hold different views about how the economy operates.
 They might have different time perspectives.
 Whole Economy Macro
Micro Individual

Microeconomics and macroeconomics

 Microeconomics–focus is on the individual parts of the economy
 Macroeconomics–focus is on the economy as a whole
Microeconomics:
 Focus is on individual parts of the economy.
 Micro comes from Greek word mikros = small
 Decisions and functioning of decision makers such as individual consumers, households, firms or other organizations are considered in isolation from the rest of the economy.
 Includes the study of demand and supply and prices of individual goods and services.

Macroeconomics:
 Concerned with two economies as a whole.
 Macro comes from Greek word makro = large
 Focus on the big picture
 Develop an overall view of the economics system and we study total economic behavior
 Emphasis on topics such as total production, income and expenditure, economic growth, aggregate unemployment, the general price level, inflation and balance of payments.

Microeconomics ‘’small’’ Macro economics ‘’large’’ whole big picture

Microeconomics ‘’small’’ Macro economics ‘’large’’ whole big Price ‘’single product’’ Consumer price index
picture Changes In price of product: tomatoes Inflation (increase in the general level of prices in
Individuals Overall view of the economic system, The production of product: maize country)
Consumers total / aggregate economic behavior Decisions of individual consumers Total output of goods and services in economy
Households (what to do, what to buy) Total production, Decisions of individual firms or businesses; Combined outcome of decisions of all consumers in
Firms (what goods to produce, how to income & expenditure, shop, factory country
produce them, at what price) economic growth, Market for individual goods; apples Combined decisions of all firms in country
Other orgs in isolation from the rest of the aggregate unemployment, Demand for a product Market for all goods and services in country
country general price level, Firms decisions on product expansion Total demand for all goods and services in economy
inflation, Firms’ decision to export product. Changes in total supply of goods and services
balance of payments Firms decision to import product Total exports of goods and services to other countries
Total imports of goods and services from other countries.

Microeconomics

Studies the behavior of an individual economic unit

micreconomics

E.g.,demand of an individual consumer, production of a firm

etc..

Studies the behavior of the economy as a whole

E.g., aggregate demand, national income etc.

Looks at the individual markets that make up the market

system and is concerned with the choices made by small
economic units such as individual consumers, individual firms,
or individual government agencies.

Micro (small) one person, one family vs micro economics (large) entire economy

Socialist system – government has more power, heavy government presence.

Capitalist system- dominated by private sector.

Western world – capitalist ideology

Graphs- demand and supply

horizontal (x-asxis) independent variable rainfall
verticles (y-axis) dependent variable maize production

scarcity, choice, opportunity costs and PPC

 how individuals, societies and orgs cope with the issue of resource insufficiency
 how choices are made due to limitation in resource availability
 and the consequences(opportunity costs ) of these choices
- demand backed by purchasing power, there is a demand for a product only if consumer have the necessary means to purchase the product.
Economics is concerned with scarcity,
The wants are not the same as needs and demand.
•Wants–human desires
•Needs–necessities
•Demand–wants, but backed by necessary means to buy
Wants – human desires for goods and services
Needs – are necessities, the things that are essential for survival such as food, water, shelter and clothing. Needs, unlike wants, are not absolutely unlimited
Demand – differs from wants desires and needs. There is a demand for good or services only if those who want to purchase it have the necessary means to do so.

Because of scarcity, choices have to be made

•Every time a choice is made, opportunity cost is incurred
Opportunity cost–the value to the decision maker of the best alternative that could have been chosen but was not chosen.
Opportunity cost of a choice is the value of the best forgone opportunity, every time a choice is made, opportunity costs occur.

-Scarcity must not be confused with poverty. Scarcity affects everyone.

scarcity and choice
 Scarcity is the excess of human wants over what can be produced.
 Our demands are always more than resources available.
 Choices have to be made because all needs cannot be satisfied.

Scarce resources: the factors of production

Factors of production:
 Scarce resources that are used to produce goods and services are called factors of production
 When resources are used to produce a certain good, they are not available to produce other goods.
 A decision to produce more of one good therefore also means that less of another good can be produced , Because resources are scarce, the use of resources can never be costless.
 There are always costs involved, even if these costs are not always apparent to the consumer of the goods or services in question.
 Economists frequently must emphasize scarcity and the need for hard, unpopular decisions, they are generally not a popular group of people
 There are 4 main factors of production.
Primary factors of production
1. Natural resources or land
2. Labour
Secondary factors of production
3. Capital
4. Entrepreneurship
Another distinction is between human resources and non-human resources (natural resources and capital)

Goods and services

Most wants are satisfied by goods and services.
Goods are tangible objects like food, clothing, houses, smart phones and motorcars.
Services are intangible things like medical services, legal services, online banking,
the services of an economies lecturer and the services provided by public servants.

Consumer goods and capital goods

Consumer goods
 are goods that are used or consumed by individuals or households to satisfy wants.
 Food, beer, playstation games, shoes, furniture, appliances and motor cars
Capital goods
 are goods that are not consumed in this way but are used in the production of other goods.
 This include all types of machinery, plants and equipment used in manufacturing and construction, school buildings, university residences, roads, dams and bridges.
 Limited timeframe
 They are subject to wear and tear and may also become obsolete.
 Their value therefore depreciates over time.
 Do not themselves yield direct consumer satisfaction but permit production & satisfaction in future.

Different categories of consumer goods :

 Non-durable goods
o Used once
o Food, wine, petrol, airtime & meds
 Semi-durable goods
o Used more than once
o Lasts for a limited period
o Clothing, shoes, sheets, blankets & motorcar tyres
 Durable goods
o Last for a number of years
o Furniture, refrigerator, appliances, dishwashers and cars.
 These apply to services as well.

Final goods and intermediate goods :

 Final goods
o the goods that are used or consumed by individuals, households and firms.
o Loaf of bread
o Flour purchased by household
 Intermediate goods
o are goods that are purchased to be used as inputs in producing other goods.
o Processed further before use
o Flour used by baker to produce bread, cake ect.

Private goods and public goods :

 Private good
o Is a good that is consumed by individuals or households. All typical consumer goods
o Food, clothes, furniture & cars.
o Consumption by others can be excluded.
 Public good
o is a good that is used by the community or society at large.
o Consumption by individuals cannot be excluded.
o Traffic light, national defense, weather forecasts.
Economic goods and free goods :
 Economic good
o good that is produced at a cost from scarce resources.
o Scarce goods

 A free good
o good that is not scarce and therefore has no price (Air, sunshine and sea water)
Homogeneous and heterogeneous goods:
 Homogeneous goods
o goods that are all exactly alike.
o A fine ounce of gold is one example - one fine ounce is exactly the same as another.
 Heterogeneous
o Or differentiated goods
o goods that are available in different varieties, qualities, or brands.
o Most goods are heterogeneous goods - even something like bread, which comes in different shapes, sizes, and qualities.
o Shoes, clothing , smartphones, appliances ect all things come in different brands and varieties.

Opportunity cost
 The value of the best alternative that could have been chose but was not in any situation.
 Measuring cost of alternative chose in terms of the alternative not chosen.

Government were all faced with difficult choices between different alternatives : This is what the economic problem is all about.
When we are faced with such a choice, we can measure the cost of the alternative we have chosen in terms of the alternatives that we have to sacrifice = opportunity cost.
The opportunity cost of a choice is the value to the decision maker of the best alternative that could have been chosen but was not chosen.
In other words, the opportunity cost of a choice is the value of the best forgone opportunity.
Every time a choice is made, opportunity costs are incurred.
Opportunity cost is one of the most important concepts in economics, since it captures the essence of the problems of scarcity and choice

Factors of Production:

Natural resources:
 Natural resources (sometimes called land) consist of all the gifts of nature.
 They include mineral deposits, water, arable land, vegetation, natural forests, marine resources other animal life, the atmosphere and even sunshine.
 Natural resources are fixed in supply.
 Often possible to exploit more of the natural resources that are available.
 Once they are used, they cannot be replaced. We therefore refer to minerals as non-renewable or exhaustible assets.
 Both the quality and the quantity of natural resources are important.
 Because natural resources are in fixed supply, the rate at which they are exploited is often a cause of concern.
Labor:
 Goods and services cannot be produced without human effort.
 Labor can be defined as the exercise of human mental and physical effort in the production of goods and services.
 The quantity of labor depends on the size of the population and the proportion of the population that is able and willing to work.
 The pro-portion of children, women and elderly people all affect the available quantity of labor, which is called the labor force.
 The quality of labor is even more important than the quantity of labor.
 The term human capital is usually used to refer to the quality of labor, and thus to the skill, knowledge, and health of the workers.
Capital:
 Capital comprises all manufactured resources, such as machines, tools and buildings, which are used in the production of other goods and services.
 Capital goods are not produced for their own sake but to produce other goods. When we talk about capital as a factor of production, we are referring to all those tangible things that are used to produce
other things.
 To produce capital goods, current consumption has to be sacrificed in favor of future consumption.
The more capital goods that are produced in a particular period, the lower the number of consumer goods that will be produced in that period, but the greater the production capacity will be in future.
Capital goods do not have an unlimited life.
Equipment can also become outdated or obsolete because of technological progress.
Provision therefore has to be made for the replacement of existing capital goods.

Entrepreneurship:
 The availability of natural resources, labor and capital is not sufficient to ensure economic success. These factors of production have to be combined and organized by people who see opportunities and
are willing to take risks by producing goods in the expectation that they will be sold at a profit. These people are called entrepreneurs. The entrepreneur is the driving force behind production.
Entrepreneurs are the initiators, the people who take the initiative. They are also the innovators, the people who introduce new products and new techniques on a commercial basis.
The entrepreneur is more than a manager. The entrepreneur is dynamic, a restless spirit, an ideal person, a person of action who has the ability to inspire others.
All that can be stated with certainty is that entrepreneurship is an important economic force. In countries where entrepreneurship is lacking, the government is sometimes forced to act as entrepreneur in
an attempt to stimulate economic development.

Technology:
 Technology is sometimes identified as a fifth factor of production.
 At any given time, a society has a certain amount of knowledge about the ways in which goods can be produced.
 When new knowledge is discovered and put into practice, more goods and services can be produced with a given amount of natural resources, labor, capital, and entrepreneurship. Discovery of new
knowledge is called invention, while the incorporation of this knowledge into actual production techniques and products is called innovation.
 The application of inventions also requires entrepreneurs to identify the opportunities and exploit them.

Money is not a factor of production.

 Money is often regarded as the key to everything else. Money is important, but it is not a factor of production. Goods and services cannot be produced with money.
 Money can be exchanged for goods and services.
 To produce goods and services we need factors of production.

techniques & methods: economic analysis

Theory involves simplification and abstraction, main requirement of analysis; is to identify the most important elements and relationships that we need to explain and ignore the rest.

Theories are called;

1. models,
2. laws,
3. principles,
4. explanations or
5. hypotheses.
All refers to the ideas or stories of how the world works

Purposes of economic theory;

1. explain or understand how diff things are related in an economic world
2. predict what will happen if something changes
3. serve as a basis for formulation and analysis of decisions on economic policy

economic theory;
1. attempt to explain and analyse economic behaviour
2. can be expressed in words, graphs, , numbers , equations or symbols
advantages;
1. symbols and equations.
a. efficient or shorthand way of expressing a relationship.
b. we can use the rule of algebra to Analyse relationships showing positive relations.
c. A large number of variables can be analyzed

Scarcity , choice and opportunity costs : the Production possibility curve PPC
 Scarcity, choice & opportunity costs can be illustrated with the PPC
 Also known as ‘production possibilities frontier’’
PPC Graph
PPC curve- indicates the combination of any two goods or services attained when resources fully & efficiently employed.
  Illustrating scarcity, choice, and opportunity cost: the production possibilities curve
 Scarcity, choice and opportunity cost can be illustrated with the aid of a production possibilities curve.
 Resources must be shifted from one production possibility to produce the other.
 These combinations represent the maximum amounts that can be produced with all the available resources.
 The community therefore has to choose between more of one product or another. Given the available resources, it’s impossible to produce more of one good without decreasing the production of the
other good.
 The different alternatives can be illustrated graphically in a production possibility curve
o PPC Graph
 Curve indicates the maximum possible level of outputs with limited resources & fixed production.
 Doted lines imply other possible combinations
 Various points on the curve shows the Combinations which represents the maximum amount that can be produced with available resources.
 The difference between products are the Opportunity cost of these products which are what could have been done with the available resources.
 Opportunity cost of each additional product increases hence the curve bulges outwards from the origin

 Opportunity costs increases :because resources are not equally efficient in producing 2 goods
 PPC illustrates that resources are being combinedin the most efficient way possible

Demand Graph
 Demand and Law of demand
 Factors affecting demand (income, taste, price of other goods, future expected prices etc)

Supply Graph
 Supply of law of supply
 Factors affecting supply (input costs, tech, price of other goods etc)

Market equilibrium
 Change in proce leads to change in quality demanded /supplied- movement along same curve

Change in demand.
 Change in other variables leads to a shift of demand curve.
 Equilibrium moves from point A to point B and equilibrium price and quantity change.

Change in supply.
 Changes in variables besides the price leads to shift of supply curve
 New equilibrium quantity and price established.

Elasticity (calculate by how much prices changes will affect the demand of the product) (by how much)
 Price elasticity of demand (calculate how much demand will be affected by)
o Factors affecting price elasticity of demand.
o Degrees of elasticity of demand
o Calculation using general formula.
 Factors affecting price elasticity of demand.
o Available substitutes
o Time
o Expenditure share
o Addictive goods
Types or degrees of price elasticity of demand
2. Perfectly elastic demand (Ep=00) shoprite, pick n pay, retailer increases price ppl substitute to go to another retailer.
3. Perfectly inelastic demand (Ep =0) rare, no other option have to buy it, 1 supplier
4. Relatively elastic demand (Ep>1) smaller than 1
5. Relatively inelastic demand (Ep<1) bigger than 1
6. Unitary elastic demand (Ep=1)

Elasticity calculation.

Essential elements of economics;

7. Equilibrium

8. Ceteris paribus

Graphs demonstrate the relationship between variables.

Graphs provide a simplified version of reality in a picture format.

 Economic systems & key flows

 Interdependence between major economic sectors
Demand, Supply and Applications (1-4)
Factors that affect demand and supply curve.

Change in demand- normal goods

Changes in demand
An increase in demand
 Increase in the price of the product.
 Increase in the quantity of the product.
o 1st : theres a shift: left or right?
o

Elasticity (5)

Utility (6)

Production and cost (8)

Market Structure (9-10)

Firms can take various forms

•Goal of the firm–maximise profits
•Profit–the surplus of revenue over cost
•Total revenue–total value of sales (price x quantity, or P x Q = PQ)
•Average revenue–total revenue divided by quantity sold (PQ/Q)
•Marginal revenue–the additional revenue earned by selling an additional unit of the product.

Short run vs. long run:

–Short run–the period during which at least one of the inputs is fixed
–Long run–all the inputs are variable
•Difference not calendar time!

BASIC COST AND PROFIT CONCEPTS

Cost
•Opportunity cost–the best alternative sacrificed (or forgone)
•Accounting costs= explicit costs
•Economic costs= explicit costs + implicit costs
economic costs of production
= opportunity costs
= explicit costs + implicit costs

Summary

Topic 1: Introduction
 Defining economics
‘’study of mankind in the ordinary business of life’’ ‘’science of household management’’ ‘’ choice’’ ‘’scarcity’’
 Techniques & methods for economic analysis
 Scarcity, choice , opportunity cost and PPC
 Economic systems and key flows
 Interpedence between major economic sectors
Topic 2: demand, supply and their applications
 Demand and supply
 Changes in demand and supply
 Interaction between related markets
 Government intervention
Topic 3: elasticity
 Price elasticity of demand
 Other elasticities of demand
 Price elasticity of supply
Topic 4: theory of demand
 Consumer equilibrium using the utility approach
 Consumer equilibrium using the indifference approach
Topic 5: theory of supply
 The firm, revenue , cost & profit concepts
 Production in the short run
 Short run costs
 Production and costs in the long run
Topic 6: Market structures
 Markets and general equilibrium conditions
 Short run equilibrium under perfect competition
 Monopoly
 Monopolistic competition
 Oligopoly