Advanced Economics Notes - Grade 10

June 27, 2024

Contents

Unit 1: Theory of Consumer Behavior 2

Unit 2: Theories of Demand and Supply 4

Unit 3: Theories of Production and Cost 8

Unit 4: Market Structure 11

Unit 5: Banking and Finance 14

Unit 6: Economic Growth 17

Unit 7: The Ethiopian Economy 19

Unit 8: Business Startups and Innovation 22

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Unit 1: Theory of Consumer Behavior

1.1 The Concept of Utility
• Utility: The satisfaction or pleasure a consumer derives from consuming a
good or service.

• Relativity of Utility: Utility is subjective and varies based on individual

needs, preferences, and circumstances. The same good can provide different
levels of satisfaction to different people.

1.2 The Cardinal Utility Theory

1.2.1 Assumptions
• Rational Consumer: Consumers make choices to maximize their satisfac-
tion.

• Cardinal Utility: Utility is measurable and quantifiable. Economists use

a unit called ”utils” to represent satisfaction.

• Diminishing Marginal Utility (DMU): As a consumer consumes more

of a good, the additional utility gained from each additional unit decreases.
For example, the first slice of pizza might be very satisfying, but the fifth
slice might be less so.

• Constant Marginal Utility of Money: The utility derived from each

additional unit of money remains constant. This means that the satisfaction
a consumer gets from an extra birr is the same regardless of how much money
they already have.

1.2.2 Total Utility (TU)

• Definition: The total satisfaction a consumer derives from consuming a
given quantity of a good.

1.2.3 Marginal Utility (MU)

• Definition: The additional utility gained from consuming one more unit of
a good.

• Equation: MU = Change in TU / Change in Quantity

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1.2.4 The Law of Diminishing Marginal Utility (DMU)

• Definition: As consumption of a good increases, the marginal utility derived
from each additional unit tends to decrease.

1.3 The Consumer Maximization Problem

1.3.1 Consumer Budget (Income)
• Definition: The total amount of money a consumer has available to spend
on goods and services.

1.3.2 Consumer Equilibrium (One Commodity)

• Condition: The consumer maximizes utility when the marginal utility of
the good equals its price (MU = P). This means the consumer is getting as
much satisfaction as possible from each birr spent.

1.3.3 Consumer Equilibrium (Multiple Commodities)

• Condition: The consumer maximizes utility when the ratio of the marginal
utility of each good to its price is equal for all goods. This means that the
consumer is getting the same level of satisfaction from the last birr spent on
each good.

• Equation: MUx / Px = MUy / Py = MUz / Pz ... (for goods x, y, z, etc.)

• Budget Equation: Total Income = Px * Qx + Py * Qy + Pz * Qz ... (for

goods x, y, z, etc.)

1.4 Introduction to the Ordinal Utility Theory

• Ordinal Utility: Utility is not measurable in absolute terms, but consumers
can rank different consumption bundles based on their preferences. Instead of
assigning specific numbers, consumers can simply say they prefer one bundle
to another.

1.4.1 Assumptions
• Rationality: Consumers make choices to maximize their satisfaction.

• Ordinal Utility: Utility is not cardinally measurable, but consumers can

rank preferences.

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• Diminishing Marginal Rate of Substitution (DMRS): As a consumer

consumes more of one good, they are willing to give up less of another good
to maintain the same level of satisfaction. For example, if you have a lot of
apples, you might be willing to trade only one apple for two oranges, but if
you have few apples, you might demand three oranges for one apple.

• Consistency and Transitivity of Choices: Consumers make consistent

and logical choices. If a consumer prefers apples to oranges and oranges to
bananas, then they will also prefer apples to bananas.

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Unit 2: Theories of Demand and Supply

2.1 Theory of Demand
• Demand: The quantity of a good that consumers are willing and able to
buy at various prices, during a specific time period.

2.1.1 Law of Demand

• Definition: As the price of a good increases, the quantity demanded de-
creases, assuming other factors remain constant (ceteris paribus).

• Explanation:

– Substitution Effect: Consumers switch to cheaper alternatives.

– Income Effect: As the price rises, consumers have less purchasing
power.

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2.1.2 Demand Schedule and Curve

• Demand Schedule: A table showing the quantity demanded at different
prices.

• Demand Curve: A graph showing the relationship between price and quan-
tity demanded, typically downward sloping.

2.1.3 Demand Function

• Definition: A mathematical equation representing the relationship between
price and quantity demanded.

2.1.4 Market Demand

• Definition: The total quantity demanded of a good by all consumers in a
market at various prices.

2.2 Theory of Supply

• Supply: The quantity of a good that producers are willing and able to sell
at various prices, during a specific time period.

2.2.1 Law of Supply

• Definition: As the price of a good increases, the quantity supplied increases,
assuming other factors remain constant (ceteris paribus).

• Explanation:

– Profit Incentive: Higher prices mean higher profits, encouraging pro-

ducers to produce more.

2.2.2 Supply Schedule and Curve

• Supply Schedule: A table showing the quantity supplied at different prices.

• Supply Curve: A graph showing the relationship between price and quan-
tity supplied, typically upward sloping.

2.2.3 Supply Function

• Definition: A mathematical equation representing the relationship between
price and quantity supplied.

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2.2.4 Market Supply

• Definition: The total quantity supplied of a good by all producers in a
market at various prices.

2.3 Market Equilibrium

• Equilibrium: A state of balance where opposing forces are equal.

2.3.1 Market Equilibrium

• Definition: The point where the quantity demanded equals the quantity
supplied.

2.3.2 Equilibrium Price and Quantity

• Equilibrium Price: The price at which quantity demanded equals quantity
supplied.

• Equilibrium Quantity: The quantity bought and sold at the equilibrium

price.

2.3.3 Excess Demand and Excess Supply

• Excess Demand: When the quantity demanded is greater than the quan-
tity supplied, leading to a shortage.

• Excess Supply: When the quantity supplied is greater than the quantity
demanded, leading to a surplus.

2.3.4 Changes in Equilibrium

• Shifts in Demand: Changes in factors other than price (like income, tastes,
or the price of related goods) can shift the demand curve, leading to new
equilibrium price and quantity.

• Shifts in Supply: Changes in factors other than price (like input costs or
technology) can shift the supply curve, leading to new equilibrium price and
quantity.

2.4 Elasticities of Demand and Supply

• Elasticity: A measure of the sensitivity of one variable to another.

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2.4.1 Price Elasticity of Demand

• Definition: Measures the responsiveness of quantity demanded to changes
in price.
• Equation: Ed = % Change in Quantity Demanded / % Change in Price
• Interpretation:
– Elastic Demand (Ed > 1): Quantity demanded is very sensitive to
price changes.
– Inelastic Demand (Ed < 1): Quantity demanded is not very sensitive
to price changes.
– Unitary Elasticity (Ed = 1): Quantity demanded changes propor-
tionally to price changes.

2.4.2 Cross-Price Elasticity of Demand

• Definition: Measures the responsiveness of the quantity demanded of one
good to changes in the price of another good.
• Equation: Exy = % Change in Quantity Demanded of X / % Change in
Price of Y
• Interpretation:
– Substitute Goods: Exy is positive. An increase in the price of one
good leads to an increase in demand for the other good.
– Complementary Goods: Exy is negative. An increase in the price
of one good leads to a decrease in demand for the other good.
– Unrelated Goods: Exy is zero. Changes in the price of one good have
no impact on the demand for the other good.

2.4.3 Income Elasticity of Demand

• Definition: Measures the responsiveness of the quantity demanded to changes
in consumer income.
• Equation: Ey = % Change in Quantity Demanded / % Change in Income
• Interpretation:
– Normal Goods: Ey is positive. An increase in income leads to an
increase in demand.

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– Inferior Goods: Ey is negative. An increase in income leads to a

decrease in demand.
– Luxury Goods: Ey is greater than 1. Demand is very sensitive to
income changes.
– Necessity Goods: Ey is less than 1. Demand is less sensitive to
income changes.

2.4.4 Price Elasticity of Supply

• Definition: Measures the responsiveness of quantity supplied to changes in
price.

• Equation: Es = % Change in Quantity Supplied / % Change in Price

• Interpretation:

– Elastic Supply (Es > 1): Quantity supplied is very sensitive to price
changes.
– Inelastic Supply (Es < 1): Quantity supplied is not very sensitive
to price changes.
– Unitary Elasticity (Es = 1): Quantity supplied changes proportion-
ally to price changes.

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Unit 3: Theories of Production and Cost

3.1 Theory of Production
• Production: The process of combining inputs to create outputs.

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• Production Function: A mathematical relationship showing the maxi-

mum quantity of output that can be produced with given inputs, using the
best available technology.

3.1.1 Short-Run Production

• Definition: A time period where at least one input is fixed, while others
are variable.

3.1.2 Long-Run Production

• Definition: A time period where all inputs are variable.

3.1.3 Productivity Measures

• Total Product (TP): The total output produced.

• Average Product (AP): Total product per unit of a variable input.

• Marginal Product (MP): The change in total product from using one
additional unit of a variable input.

3.1.4 Law of Diminishing Marginal Returns

• Definition: As more and more units of a variable input are added to a fixed
input, the marginal product of the variable input will eventually decline.

3.1.5 Stages of Production

• Stage I: Increasing marginal returns (MP is rising).

• Stage II: Diminishing marginal returns (MP is falling, but still positive).

• Stage III: Negative marginal returns (MP is negative).

3.1.6 Returns to Scale

• Definition: The relationship between changes in output and changes in all
inputs when a firm increases its scale of operation.

• Types:

– Increasing Returns to Scale: Output increases at a faster rate than

the increase in inputs.

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– Constant Returns to Scale: Output increases at the same rate as

the increase in inputs.
– Decreasing Returns to Scale: Output increases at a slower rate
than the increase in inputs.

3.2 Theory of Cost

3.2.1 Explicit Costs
• Definition: Actual monetary outlays for inputs purchased from outside the
firm.

3.2.2 Implicit Costs

• Definition: The opportunity cost of using the firm’s own resources.

3.2.3 Economic Cost

• Definition: The sum of explicit and implicit costs.

3.2.4 Accounting Cost

• Definition: Only includes explicit costs.

3.2.5 Short-Run Cost Concepts

• Fixed Costs (FC): Costs that do not vary with the level of output.

• Variable Costs (VC): Costs that vary directly with the level of output.

• Total Cost (TC): The sum of fixed costs and variable costs (TC = FC +
VC)

• Average Fixed Cost (AFC): Fixed cost per unit of output (AFC = FC
/ Q)

• Average Variable Cost (AVC): Variable cost per unit of output (AVC =
VC / Q)

• Average Total Cost (ATC): Total cost per unit of output (ATC = TC /
Q)

• Marginal Cost (MC): The additional cost of producing one more unit of
output (MC = Change in TC / Change in Q)

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3.2.6 Long-Run Cost Concepts

• Long-Run Total Cost (LTC): The total cost of production when all inputs
are variable.

• Long-Run Average Cost (LAC): Total cost per unit of output in the
long run.

• Long-Run Marginal Cost (LMC): The additional cost of producing one

more unit of output in the long run.

3.2.7 Relationship Between Production and Cost Curves

• Inverse Relationship: When marginal product (MP) is rising, marginal
cost (MC) is falling. When AP is rising, ATC is falling.

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Unit 4: Market Structure

4.1 Perfectly Competitive Markets
• Definition: A market with a large number of buyers and sellers, all trading
a homogeneous product, with free entry and exit, and perfect information.

• Price Takers: Individual firms have no power to influence the market price;
they must accept the prevailing market price.

4.1.1 Characteristics
• Large Number of Buyers and Sellers: No single buyer or seller can
affect the market price.

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• Homogeneous Product: All firms sell identical products.

• Free Entry and Exit: Firms can enter or leave the market easily.
• Perfect Information: All buyers and sellers have full knowledge of prices
and product characteristics.

4.1.2 Demand and Revenue

• Horizontal Demand Curve: A firm in perfect competition faces a per-
fectly elastic demand curve, meaning they can sell any quantity at the pre-
vailing market price.
• Price = Average Revenue (AR) = Marginal Revenue (MR): In
perfect competition, a firm’s revenue from selling an additional unit is equal
to the market price.

4.2 Pure Monopoly Market

• Definition: A market with only one seller of a product for which there are
no close substitutes.

4.2.1 Characteristics
• Single Seller: There is only one firm in the market.
• No Close Substitutes: Consumers have no alternatives to the monopolist’s
product.
• Barriers to Entry: Factors that prevent new firms from entering the mar-
ket.
• Price Maker: The monopolist can influence the market price by adjusting
the quantity supplied.

4.2.2 Sources of Monopoly

• Control of a Key Resource: A firm may own or control a necessary input
for production.
• Government-Granted Monopoly: The government may grant a firm
exclusive rights to produce a product or service.
• Economies of Scale: A firm may be able to produce at a lower cost than
any potential competitor.

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• Patents and Copyrights: A firm may have legal protection for its product
or process.

4.2.3 Demand and Revenue

• Downward-Sloping Demand Curve: A monopolist faces the market de-
mand curve, which is downward sloping.

• Marginal Revenue Less Than Price (MR < P): To sell more units, the
monopolist must lower the price, causing marginal revenue to be less than
the price.

4.3 Monopolistically Competitive Market

• Definition: A market with many firms selling differentiated products, with
free entry and exit.

4.3.1 Characteristics
• Product Differentiation: Firms sell products that are slightly different
from each other.

• Many Sellers and Buyers: There are many firms in the market, but not
as many as in perfect competition.

• Free Entry and Exit: Firms can enter or leave the market easily.

• Non-Price Competition: Firms compete using advertising, product qual-

ity, brand names, and customer service.

4.3.2 Demand and Revenue

• Downward-Sloping Demand Curve: A monopolistically competitive
firm faces a downward-sloping demand curve because its product is differen-
tiated.

• Marginal Revenue Less Than Price (MR < P): Like a monopolist, a
monopolistically competitive firm must lower its price to sell more.

4.4 Oligopoly Market

• Definition: A market with a few dominant firms selling either homogeneous
or differentiated products, with barriers to entry.

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4.4.1 Characteristics
• Few Dominant Firms: There are a small number of firms that control a
significant share of the market.

• Barriers to Entry: Factors that prevent new firms from entering the mar-
ket.

• Interdependence: The actions of one firm affect the profits of other firms.

• Homogeneous or Differentiated Products: Products may be identical

(e.g., oil) or slightly different (e.g., automobiles).

4.4.2 Demand and Revenue

• Downward-Sloping Demand Curve: Each firm faces a downward-sloping
demand curve due to the small number of firms in the market.

• Strategic Interactions: Firms must consider how their rivals will react to
their pricing and output decisions.

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Unit 5: Banking and Finance

5.1 Introduction to Financial Intermediaries
• Financial Intermediaries: Institutions that act as middlemen in financial
transactions, channeling funds from savers to borrowers.

• Examples: Banks, credit unions, insurance companies, pension funds, in-

vestment firms.

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5.1.1 Benefits of Financial Intermediaries

• For Savers: Provide safety for deposits, offer interest earnings, and reduce
risk.

• For Borrowers: Provide access to loans, reduce the cost of borrowing, and
increase investment opportunities.

5.2 Introduction to Financial Markets

• Financial Markets: Mechanisms that allow for the buying and selling of
financial assets.

5.2.1 Types of Financial Markets

• Money Market: Trade short-term (less than one year) financial instru-
ments, such as treasury bills, commercial paper, and certificates of deposit.

• Capital Market: Trade long-term (greater than one year) financial instru-
ments, such as stocks, bonds, and mortgages.

5.3 Introduction to Financial Institutions

5.3.1 Types of Financial Institutions
• Depositary Institutions: Accept and manage deposits and make loans
(e.g., banks, credit unions).

• Contractual Institutions: Offer insurance and pension funds (e.g., insur-

ance companies, pension funds).

• Investment Institutions: Provide investment services (e.g., investment

banks, brokerage firms).

5.4 Historical Development of Banks in Ethiopia

• Early Years: The first modern bank in Ethiopia, the Bank of Abyssinia,
was established in 1906.

• State Bank of Ethiopia: Established in 1943, serving as both a commercial

bank and a central bank.

• National Bank of Ethiopia (NBE): Established in 1963 as the central

bank, responsible for monetary policy and financial regulation.

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• Commercial Bank of Ethiopia (CBE): Established in 1963 as a com-

mercial bank.

• Agricultural and Industrial Development Bank (AIDB): Established

in 1970 to provide financing for agricultural and industrial development.

• Financial Liberalization: Since the early 1990s, the Ethiopian government

has implemented financial reforms, leading to the establishment of private
commercial banks.

5.5 Microfinance Institutions

• Definition: Financial institutions that provide financial services (such as
loans, savings, and insurance) to low-income individuals and communities.

• Microcredit: Small loans provided to individuals or groups, often without

collateral.

5.5.1 Importance of Microfinance

• Financial Inclusion: Provides access to financial services for people who
are excluded from traditional banking.

• Economic Empowerment: Helps low-income individuals start businesses

and improve their livelihoods.

5.6 Electronic Banking (e-banking)

• Definition: The use of electronic technologies for banking transactions.

5.6.1 Types of e-banking

• Automated Teller Machines (ATMs): Allow customers to withdraw
cash, transfer funds, and make deposits.

• Direct Deposit: Electronic transfer of funds into a bank account.

• Debit Card Purchases: Use a card linked to a bank account to make

purchases.

• Mobile Banking: Use mobile devices to access bank accounts.

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5.7 Indigenous Financial Institutions

• Definition: Traditional financial institutions that exist within communities.

5.7.1 Common Types in Ethiopia

• Iqub: Rotating savings and credit associations (informal savings groups).

• Iddir: Mutual assistance groups, often focused on funeral expenses.

• Savings and Credit Cooperatives (SACCos): Formal financial cooper-

atives that offer savings and lending services.

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Unit 6: Economic Growth

6.1 Review of Macroeconomic Variables
• Macroeconomic Variables: Economy-wide variables, such as GDP, infla-
tion, unemployment, and the balance of payments.

6.2 Definition and Measurement of Economic Growth

• Economic Growth: A sustained increase in a country’s real GDP over
time.

• Real GDP: GDP adjusted for inflation, reflecting changes in the actual
quantity of goods and services produced.

• GDP per Capita: Real GDP divided by the population, indicating the
average income per person in a country.

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6.3 Sources of Economic Growth

• Factors of Production: Increases in the quantity or quality of labor, cap-
ital, land, or entrepreneurship.

• Technological Progress: Advancements in technology can increase pro-

ductivity.

• Human Capital: Improved education, training, and skills of the workforce.

• Natural Resources: Availability and use of natural resources.

6.4 The Weaknesses of Using GDP/GDP Per Capita

• Excludes Non-Market Activities: Doesn’t account for household pro-
duction or volunteer work.

• Ignores Environmental Quality: Doesn’t reflect the impact of economic

activity on the environment.

• Doesn’t Address Income Inequality: Doesn’t show how economic growth

is distributed among different people.

• Black Market Transactions: Illegal activities are not included in GDP.

6.5 The Business Cycle and Its Phases

• Business Cycle: Fluctuations in a country’s real GDP over time, marked
by periods of expansion (growth) and contraction (recession).

6.5.1 Phases of the Business Cycle

• Expansion: A period of economic growth.

• Peak: The highest point of economic activity in a business cycle.

• Contraction (Recession): A period of economic decline.

• Trough: The lowest point of economic activity in a business cycle.

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Unit 7: The Ethiopian Economy

7.1 Components of the Gross Domestic Product (GDP)
• Consumption (C): Household spending on goods and services.

• Investment (I): Business spending on capital goods, inventories, and new

housing.

• Government Purchases (G): Government spending on goods and ser-

vices.

• Net Exports (NX): Exports minus imports.

7.2 Real GDP Vs Nominal GDP

• Nominal GDP: GDP measured using current-year prices.

• Real GDP: GDP adjusted for inflation, using prices from a base year.

7.2.1 GDP Deflator

• Definition: A measure of the price level of all goods and services produced
in an economy.

7.3 The Agricultural Sector in the Ethiopian Economy

• Role of Agriculture: Dominant sector in the Ethiopian economy, con-
tributing to GDP, employment, and export earnings.

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7.3.1 Challenges
• Drought: Recurring droughts impact agricultural production.

• Soil Degradation: Erosion and depletion of soil fertility.

• Land Fragmentation: Small, fragmented landholdings can limit produc-

tivity.

• Limited Access to Technology: Traditional farming methods are still

prevalent, limiting productivity.

• Poor Infrastructure: Limited access to roads, irrigation, and markets.

• Price Volatility: Fluctuations in agricultural prices can negatively affect

farmers’ incomes.

7.3.2 Forward and Backward Linkages

• Forward Linkages: Agriculture provides raw materials for other sectors,
like food processing and manufacturing.

• Backward Linkages: The agricultural sector relies on inputs from other

sectors, such as fertilizers, machinery, and transportation.

7.4 The Industrial Sector in the Ethiopian Economy

• Role of Industry: Contributing to GDP, employment, and export earnings.

7.4.1 Challenges
• Limited Industrial Base: The industrial sector is relatively small com-
pared to agriculture and services.

• Low Productivity: Limited use of modern technology and skilled labor.

• Underutilization of Capacity: Many factories operate below their full

potential.

• Shortages: Limited access to foreign exchange, investment capital, raw

materials, and spare parts.

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7.4.2 Sub-Sectors
• Manufacturing: Production of goods, such as textiles, foodstuffs, and bev-
erages.

• Construction: Building and infrastructure development.

• Mining and Quarrying: Extraction of minerals and other resources.

• Electricity and Water Supply: Generation and distribution of electricity

and water.

7.5 The Service Sector in the Ethiopian Economy

• Role of Services: Contributing to GDP, employment, and foreign exchange
earnings.

7.5.1 Sub-Sectors
• Wholesale and Retail Trade: Buying and selling goods.

• Hotels and Restaurants: Accommodation and food services.

• Transport and Communication: Movement of goods and people, com-

munication services.

• Banking and Insurance: Financial services.

• Public Administration and Defense: Government services.

• Education: Formal and informal learning.

• Health: Healthcare services.

7.6 Agriculture versus Industrial Development

• Agricultural Development-Led Industrialization (ADLI): A strat-
egy that emphasizes agricultural development as a foundation for industrial
growth.

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7.6.1 Arguments for ADLI

• Increased Food Security: A strong agricultural sector ensures a stable
food supply.
• Rural Income Growth: Improved agricultural productivity raises rural
incomes.
• Raw Material Supply: Agriculture provides inputs for industrial process-
ing.
• Labor Availability: A more productive agricultural sector releases labor
for industrial work.

7.6.2 Challenges for ADLI

• Technological Gaps: Addressing the gap between traditional agriculture
and modern techniques.
• Investment Needs: Large investments are required in infrastructure, tech-
nology, and research and development.
• Market Access: Ensuring that agricultural products can reach markets
efficiently.

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Unit 8: Business Startups and Innovation

8.1 Innovation
• Definition: The introduction of new or improved products, processes, or
methods of doing business.

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8.1.1 Types of Innovation

• Product Innovation: Creating a new or improved product (e.g., a new
smartphone).

• Process Innovation: Developing a new or improved production or delivery

method (e.g., using 3D printing).

• Marketing Innovation: Introducing a new marketing strategy or approach

(e.g., social media marketing).

• Organizational Innovation: Implementing changes in business structure

or management (e.g., adopting a flat organizational structure).

• Eco Innovation: Developing sustainable products or processes that have a

positive impact on the environment.

8.1.2 Creative Destruction

• Concept: The process of innovation disrupting existing industries and mar-
kets, leading to new products and businesses.

8.2 Business Startups

• Definition: Newly established businesses, often focused on growth and in-
novation.

8.2.1 Differences from Small Businesses

• Growth Focus: Startups prioritize rapid growth and expansion.

• Profitability: Startups may not be profitable in the early stages, as they

invest in development.

• Funding: Startups often require significant capital, obtained through angel

investors or venture capitalists.

8.3 Types of Business Organizations

8.3.1 Sole Proprietorship
• Definition: A business owned and operated by one person.

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8.3.2 Partnership
• Definition: A business owned and operated by two or more people.

8.3.3 Corporation
• Definition: A legal entity separate from its owners, with limited liability
for its owners.

8.4 Business Feasibility Analysis

8.4.1 Feasibility Studies
• Purpose: To determine the viability of a business idea.

8.4.2 Business Plans

• Purpose: A detailed road map for starting and managing a business.

8.4.3 Cost-Benefit Analysis

• Definition: A technique for evaluating the financial viability of a project
by comparing its costs and benefits.

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