ECO 1201 FOUNDATIO OF ECONOMICS I What is economics? Economics as a discipline has been defined by various authors in so many ways.

. In fact, some argued there are so many definitions of economics as there are economists. Adam Smith (1776) for instance defined economics as an enquiry into the nature and causes of the wealth of nations. In other words, during his time the major concern is how nation states acquire wealth and why are some nations richer than others. And to Alfred Marshall, economics is the study of mankind in the ordinary business of life. While J. S. Mill defined it as a practical science of the production and distribution of wealth. Thus while J. S. Mill looked at economics as a scientific study, Marshall looked at it as the study of human behaviour. Then a more modern definition is given by Prof Lionel Robbins who looked at economics as a science which studies human behavior as a relationship between ends and scarce means which have alternative uses." This is a more accepted definition of economics. It is based on this definition that modern economics is based upon the theory of scarcity and choice. Economics as a social science: The last definition above looked at economics as a science but a social science simply because it employs scientific methods of enquiry in making its investigations. The scientific methods of enquiry involves five stages; namely, (i) statement of the problem, (ii) formulation of hypothesis, (iii) collection of relevant data, (iv) data analysis and interpretation and (v) verification and conclusion. In the last stage the hypothesis is tasted against the collected data to see whether the hypothesis can be accepted or rejected. If it is accepted then a conclusion can be reached and a fact is established. And if it is the contrary then the analyst goes on to collect more data and see whether a fact can be established. It is these stages of scientific investigation that are employed by economics. And that is why it is regarded as a science but a social science, because it deals human behaviour in allocating scarce resources. Basic Concepts of Economic Goods, Resources, Human Wants, Scarcity, Choice, Scale of Preference and Opportunity Cost: Economic Goods: These are goods and services that we may make use of on daily basis, such as sugar, salt, bread, motor car, wrist watch, handset, etc. These goods have three important characteristics which include: i) ii) iii) Scarcity: Economic goods are scarce. That is they are not available. They are not common such that they not free goods. Utility: Economic goods possess utility. In other words they can give satisfaction to the consumer when consumed. Command a price: Economic goods command a price. That is they can be bought or sold in the market.

Thus, all economic goods possess the above three characteristics. That is, they are scarce, they possess utility and they command a price. Resources: These are the factors of production such as land, labour, capital and raw materials that are used in production. They are combined or organized by the entrepreneur to produce economic goods for the satisfaction of human wants. Human Wants: This refers to the human desire to possess economic goods. This human desire is unlimited according to conventional economics. In other words, human wants are unlimited. Thus, human beings have unlimited wants. Scarcity: Scarcity means limited in supply. In other words, although human wants are unlimited, the resources with which economic goods can be produced to satisfy these human wants are limited. That is, resources are not available or are not enough. Choice: Since human wants are unlimited and resources are scarce, then individuals, business firms and governments must make choices in allocating their resources to satisfy those wants. Scale of Preference: As we have learnt from above, human wants are many but resources with which goods can be produced are scarce, it therefore necessary to make choices. To make choice possible by individual consumers, business firms and government, these economic agents must arrange their wants in order of importance or priority. This arrangement of unsatisfied wants in their order of priority is what is called scale of preference. For instance, a particular student may reveal his scale of preference as: i) ii) iii) iv) v) A house. A car. A job. A wife. A handset.

What the above list is telling us is that according to this student, his most urgent need is to have a house, then secondly a car. His third priority is to have a job. So in that order he listed five of his most urgent needs in their order of importance which is called scale of preference. Opportunity Cost: This is the real cost. It is the cost of the forgone alternative. It is the sacrifice involved in committing resources to use either by an individual, a business firm or by government. If
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for instance, an individual consumer or a particular student has fifty naira with which he has two choices due to limited resources. If this student wishes, he can buy a bottle of soft drink after his lectures or he may reserve it and pay for his transport fair back home. Supposing he chooses to buy a bottle of soft drink with his little money. The cost of that bottle of soft drink in economics is not the fifty naira he paid. Rather he has sacrificed his transport fair and therefore the cost is that he has to trek back home. That is the real cost of that bottle of soft drink. Thus, in economics, the major concern in terms of cost is the opportunity cost not monetary or accounting cost.

SECTION TWO Demand and Supply Analysis Demand for a commodity: Demand for a commodity refers to the amount of that commodity that consumers are willing and able to buy at a given price and specified period of time. It is want that is backed by the ability to pay. It is also called effective demand. Individual Demand Schedule: This is a table that shows the relationship between price and quantity demanded of a particular commodity by a particular consumer at a given period of time. In the table below, this consumer is Price (N) 5 4 3 2 1 Quantity demanded of milk per week 2 4 6 8 10

willing to buy less at a higher price and buy more at a lower price. In other words, the table shows a negative or an inverse relationship between price and quantity demanded of milk per week by this consumer. This table also indicates what is called the law of demand. The law of demand states that, all things being equal, the higher the price the lower the quantity demanded, and the lower the price the higher the quantity demanded. Individual Demand Curve: This is a graphical representation of the individual demand schedule. The demand curve below slopes downwards from left to right indicating the law of demand.

Market Demand Schedule: A market demand schedule is the summation or addition of individual demand schedules. In the table below an example of a market demand schedule is given. On this table the assumption is that individuals demand schedules for all consumers of milk per week are added together. As this demand schedule shows, all consumers of milk in this particular economy are willing to buy more at a lower price and buy less at a higher price. Price (In Naira) 5 4 3 2 1 Quantity by Consumer A 2 4 6 8 10 Quantity by Consumer B 5 10 15 20 25 Quantity by Consumer C 3 6 9 12 15 Total Quantity By All Consumers 10 20 30 40 50

Market Demand Curve: A market demand curve is the graphical representation of the market demand schedule. In other words, when the market demand schedule is represented on a graph, it will give us a market demand curve.

Factors Affecting the Demand for Commodities: Several factors affect the demand for goods and services in an economy. Economic theory recognizes the following factors: 1. Price of the commodity: The law of demand has shown that, all things being equal, the higher the price the lower the quantity demanded, and the lower the price the
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2.

3.

4.

5.

higher the quantity demanded. In other words, there is an inverse or negative relationship between price and quantity demanded of a particular commodity. Prices of other commodities: A change in price of one commodity may also affect the demand for other commodities. This effect may come in two different forms as the two commodities may be related as either substitute goods or complementary goods. (a) Substitute goods: these are goods that compete for consumers income as they serve the same purpose. A good example is fish and meat, coca-cola and pepsi, fanta and mirinda, etc. An increase in price of meat, without any change in price of fish, will lead to a decrease in quantity demanded of meat and an increase in demand for fish. Also, a decrease in price of meat, price of fish remaining constant, will lead to an increase in quantity demanded of meat and a decrease in demand for fish. (b) Complementary goods: these are goods that are consumed together. You cannot use one without the other. A good example is motor car and petrol, tea and sugar, tube and tire, bed and mattress, paper and biro, etc. An increase in price of motor cars will decrease quantity demanded of motor cars and reduce the demand for petrol without any change in the price of petrol. Similarly, a decrease in price of motor cars will increase quantity demanded of motor cars and also increase the demand for petrol without any change in the price of petrol. Consumers income: A change in consumers income, all things being equal affects the demand for goods and services. And on this basis, commodities are categorized into normal goods and inferior goods. (a) Normal goods: These are goods that have a positive relationship with income of the consumer. In other words, the higher the income the higher the demand for normal goods and the lower the income the lower the demand for normal goods. All things being equal, an increase in consumers income leads to an increase in the demand for normal goods and vice-versa. A good example of normal goods is bread and butter and chicken as breakfast in the morning. (b) Inferior goods: These are goods that have a negative relationship with income of the consumer. In other words, the higher the income the lower the demand for inferior goods and the lower the income the higher the demand for inferior goods. That is, all things being equal, an increase in consumers income leads to a decrease in demand for inferior goods and vice-versa. A good example of inferior goods is garri, amala, bean cake and pap, etc. Taste or preference: A change in taste or preference of the consumer can also bring a change in demand for goods and services. When consumers taste changes in favour of a commodity it will lead to an increase in demand for that commodity. This is the kind of change that most firms try to achieve in managerial economics. Also, a change in taste of the consumer against a particular commodity will lead to a decrease in demand for that commodity without any change in price. Number of consumers in the market: A change in the number of consumers in the market also affects the demand for goods and services. The larger the number of consumers in the market, all things being equal, the higher the demand for goods and
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services. In some economic text books this is seen as population of a country, as population is positively related to the number of consumers in a particular economy. 6. Change in weather condition: A change in weather condition also affects the demand for goods and services. Weather condition may be favourable to the consumption of certain commodities, and at the same time unfavourable to others. When it favours the consumption of a particular commodity, demand for that commodity increases. In case it is unfavourable to consumption of such a commodity, demand will fall. The demand for soft drinks tends to be higher in Nigeria during the hot season of the year. During the cold season of the year, the demand for air conditioners, refrigerators and fans tends to fall. 7. Price and income expectations: Expectations in prices and in incomes also affect the demand for goods and services. When consumers expect their incomes or prices to fall in the near future, they buy less now even if prices fall at the moment. And when they expect their incomes or prices to rise in the near future, they will buy more even if prices rise at the moment. In fact this effect will show that graphically the demand curve becomes an abnormal demand curve, showing a positive relationship with price, such the higher the price the higher the quantity demanded and the lower the price the lower the quantity demanded. These are the effects of price and income expectations. 8. Government policy: A change in government policy with regards to taxes and subsidies also affects the demand for goods and services. Taxes have the effect of raising prices, while subsidies lower them. If government decides to impose taxes on a commodity or withdraw its subsidies, the effect will be an increase in the price of that particular commodity. Giving subsidies and or withdrawing taxes on the other hand has the effect of lowering prices of goods involved. Change in Quantity Demanded versus Change in Demand: a) Change in quantity demanded: this refers to the movement along the same demand curve due to a change in price all other factors held constant.

b) Change in demand: This refers to the entire shift of the demand curve to a new position caused by changes in factors affecting demand with prices held constant.

Supply of a Commodity: Supply of a commodity refers to the amount of that commodity that producers offer for sale in the market at a given price and a specified period of time. Also like demand, supply is a flow. It is measured per period of time. Individual Supply Schedule: This is a table that shows the relationship between price and quantity offered for sale in the market by a particular producer at a particular time. Price of a commodity (N) 5 4 3 2 1 Quantity of milk supplied by one producer 10 8 6 4 2

In the above supply schedule, this particular producer is willing to offer larger quantities for sale at a higher price and offers lower quantities at a lower price following the law of supply. The law of supply states that, all things being equal, the higher the price the higher the quantity supplied and the lower the price the lower the quantity supplied. Individual Supply Curve: This is the graphical representation of the individual supply schedule. In other words when we transform the above schedule on to a graph it will give us an individual supply curve which is shown below.

Market Supply Schedule: This is the summation or addition of individual supply schedules. In other words, when we add all individual supply schedules of milk in Nigeria for instance, then we arrive at a market supply schedule for milk. Price (In Naira) 5 4 3 2 1 Quantity by Producer A 10 8 6 4 2 Quantity by Producer B 25 20 15 10 5 Quantity by Producer C 15 12 9 6 3 Total Quantity By All Producers 50 40 30 20 10

Market Supply Curve: Market supply curve is the graphical representation of the market supply curve. In other words, when the market supply schedule is represented on a graph, the curve resulting from this representation is called a market supply as shown in the diagram below.

Factors Affecting Supply: a) Price of the commodity: All things being equal, the law of supply has shown that the higher the price the higher the quantity supplied and the lower the price the lower the quantity supplied. This is also depicted by an upward sloping nature of the supply curve. Thus, price of commodity is the first important factor that affects the supply of commodities. b) Prices of other commodities: Prices of other commodities also affects the supply of other related commodities. Especially those commodities that have a joint supply. By joint supply we mean commodities that are produced together with other
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c)

d)

e) f)

g)

h)

commodities. Examples include petroleum refining and kerosene or gasoline. Increase in price of petrol will increase quantity supplied of petrol, and at the same time increase the supply of kerosene, or gasoline without any change in the price of kerosene or gasoline, or any other related commodities that are produced together with petrol. Changes in the prices of factors of production. An increase in the prices of factors of production raises production costs and as a results supply decreases. A decrease in these prices on the other hand increases supply. Changes in weather condition. A change in weather condition favourable to production raises supply, while unfavourable weather lowers supply in the agricultural sector. Discovery of new sources of raw materials. When new sources of raw materials are discovered, production cost tends to fall. As a result supply increases. Government policy. Government policy may come in the form of taxes or subsidies. An imposition of tax or withdrawal of subsidy has the effect of raising production costs, and consequently a decrease in supply. Withdrawal of taxes or giving subsidies on the other hand lower production costs and as a result supply increases. Improvements in technology of production. Technological improvements have the effect of lowering production costs and saving time. When this happens, production increases and thus, supply also increases. Number of producers in the market. The larger the number of producers in the market the higher the supply of goods and services. And a decrease in the number of producers reduces supply.

Changes in Quantity Supplied Versus Change in Supply: a) Change in quantity supplied: This refers to the movement along the same supply curve due to a change in price other factors held constant.

b) Change in supply: This refers to the entire shift of the supply curve to a new position due to changes in factors affecting supply, with price held constant.

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Market Equilibrium: A hypothetical market demand and supply schedules for milk per week: Price (N) 5 4 3 2 1 Quantity Demanded 10 20 30 40 50 Quantity Supplied 50 40 30 20 10

In the schedules above quantities demanded and supplied are given for milk within a particular week. It can be noted that on the above table at a price of N5 per unit, quantity demanded is greater than quantity supplied. As a result there will be excess supply in the market as the market has shown that quantity supplied is greater than quantity demanded. This will force some producers to accept a lower price such as N4 per unit. At N4 quantity demanded has increased to 20 while quantity supplied has declined to 40 all things being equal. Still supply is greater than demand. Some producers will still be willing to accept a lower price such as N3 per unit. At this price, quantity demanded has increased to 30 units and quantity supplied has declined also to 30 units. This is the equilibrium price. Thus, at N3 per unit, quantity demanded and quantity supplied are equal.

Elasticity of Demand: Elasticity of demand refers to the measure of the degree of responsiveness of demand to changes in factors affecting demand, such as price of the commodity, prices of other commodities, consumers income, whether condition, etc. However, out of these factors affecting demand, not all of them can be measured in economic terms. That is why elasticity of demand is restricted to the first three factors mentioned above. And as such we have: a) Price Elasticity of Demand: This is the measure of the degree of responsiveness of quantity demanded due to a small change in price. Normally, when price changes, all things being equal we expect quantity demanded also to change due to that change in price. Price elasticity of demand is measured as
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It can also be written as

or

, where

means change in

quantity and means change in price, while Q stands for initial quantity and P initial price. To show how the coefficient of price elasticity of demand is computed let us take an example. Supposing price of milk rises from N 10 to N 12 per unit and as a result quantity demanded falls from 40 units to 30 units as shown in the table below: Quantity bought of milk (tins) 10 40 12 30 To calculate the coefficient of price elasticity of demand using the first formula we find the % change in quantity as: % in Q = Then, % in P = = 20%. And when we substitute in the formula we have Price of milk (N)

This means that the coefficient of price elasticity of demand is elastic, as it is more than one. While going by the second formula we can be able to show that we will arrive at the same answer. Going by the second formula, Q = 10, we neglect the negative sign, P = 2, P = 10 and Q = 40. Now, substituting these values in the formula we arrive at the following: . Therefore, = 1.25. Also, demand is elastic. This

means that quantity demanded is responding to the change in price by an amount more than the change in price. Thus, price elasticity of demand can be elastic, unitary elastic, inelastic, perfectly elastic or perfectly inelastic. i) Elastic Demand: Demand is said to be elastic when a proportionate change in price leads to a more than proportionate change in quantity demanded. And here as we explain above, the coefficient of price elasticity of demand is greater than one. That is,

ii)

Unitary Elastic Demand:

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Demand is said to be unitary elastic when a proportionate change in price leads to an equal proportionate change in quantity demanded. And in this, the coefficient of price elasticity of demand equals one. That is, .

iii)

Inelastic Demand: Demand is said to be inelastic when a proportionate change in price leads to a less than proportionate change in quantity demanded. The coefficient of price elasticity of demand is less than one. That is,

iv)

Perfectly Elastic Demand: Demand is said to be perfectly elastic when without any change in price, quantity demanded is unlimited. And a small increase in price will move quantity demanded to zero. In this case also, the demand curve is a straight line parallel to the x-axis.

v)

Perfectly Inelastic Supply: Supply is said to be perfectly inelastic when a proportionate change in price leads to no change in quantity supplied. The coefficient of price elasticity of supply equals zero.

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Determinants of Price Elasticity of Demand: 1. Availability of Close Substitutes: The higher the availability of close substitutes the more elastic is the demand for a particular commodity. And alternatively, the lesser the availability of close substitutes the more inelastic is the demand for a commodity. 2. Proportion of Expenditure Spent on a Commodity in Total Income. The larger the proportion of expenditure in total income of the consumer, the more elastic is the demand for a commodity. Alternatively, the smaller the proportion of expenditure on a commodity in total income of the consumer the less elastic is the demand for a commodity. 3. Necessities and Luxury goods. Generally, necessities tend to have inelastic demand due to the pressure of using a particular commodity. These are goods that the consumer cannot live without them. For example, salt, matches, petrol, etc. Luxuries on the other hand tend to have elastic demand. These are goods that consumers can survive without them. Examples are air conditioners, refrigerators, motor cars, etc. 4. Consumption habit. Habits are easy to form but difficult to break. Once a consumption habit is formed for certain commodities, demand tends to be inelastic for such commodities. Examples include cigarettes, kola nuts, coffee and alcohol. Price Elasticity of Demand and Total Revenue: i) Elastic Demand: When demand is elastic, a small increase in price leads to a more than proportionate decrease in quantity demanded, and as a result total revenue falls. A small decrease in price on the other hand, leads to an increase in quantity demanded by a greater proportion, and consequently total revenue increases. Thus, it is advisable to lower price when demand is elastic. This can be shown graphically.

ii)

Unitary Elastic Demand: In the case of a unitary elastic demand, a small increase in price leads to a decrease in quantity demanded by an equal
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proportion and consequently total revenue remain unchanged. Similarly, a small decrease in price leads to an increase in quantity demanded by an equal proportion, and as a result total revenue remain the same. Thus, when demand is unitary elastic, it is advisable to leave prices unchanged. Graphically, it can be shown as follows:

iii)

Inelastic Demand: When demand is inelastic. a small increase in price leads to a decrease in quantity demanded by a smaller proportion and consequently total revenue increases. A small decrease in price on the other hand, leads to an increase in quantity demanded by a smaller proportion and as a result total revenue decreases. It is therefore advisable to raise prices when demand is inelastic.

b) Price-Cross Elasticity of Demand: This is a measure of the degree of responsiveness of quantity demanded of commodity X due to small change in the price of another related commodity, commodity Y. In this, commodities X and Y are related either as substitutes or as complementary goods. It is computed using the following formula: Qx Py . This means that, the coefficient of price-cross elasticity of demand is E xy . Py Qx change in quantity of commodity x divided by a change in price of commodity y, and then multiplied by the initial price of commodity y divided by the initial quantity of commodity x. Here, however, we have to take note of the sign of the coefficient. If the sign is positive, the two commodities involved are said to be complementary. While if the sign of the coefficient is negative, the two commodities are called substitutes.
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c) Income Elasticity of Demand: This is a measure of the degree of responsiveness of quantity demanded due to a small change in income. In other words, it measures how quantity demanded responds to a change in income of the consumer in the market. It Q Y . . That is, change in quantity is computed using the following formula: E y Y Q demanded of a particular commodity divided by a change in income of a particular consumer, then multiplied by initial income of the consumer divided by the initial quantity demanded of the commodity considered.

Price Elasticity of Supply: This is the measure of the degree of responsiveness of quantity supplied due to a small change in price. It is measured as a percentage change in quantity supplied divided by a percentage change in price.
Q P %inQ . , where Q is change in . Alternatively, it can be calculated as: E s P Q %inP quantity supplied, P is change in price, P is initial price and Q initial quantity. Then, the coefficient of price elasticity of supply can be elastic, inelastic, unitary elastic, perfectly elastic or perfectly inelastic.
Es

Elastic Supply: Supply is said to be elastic when a proportionate change in price leads to a more than proportionate change in quantity supplied. And the coefficient of price elasticity of supply is greater than one. That is, Es > 1. This can be shown graphically.

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Unitary Elastic Supply: Supply is said to be unitary elastic when a proportionate change in price leads to an equal proportionate change in quantity supplied. And the coefficient of price elasticity of supply equals one. That is, Es = 1. It can be shown graphically as follows:

Inelastic Supply: Supply is said to inelastic when a proportionate change in price leads to less than proportionate change in quantity supplied. And here, the coefficient of price elasticity of supply is less than one. That is, Es < 1.

Perfectly Elastic Supply: Supply is said to be perfectly elastic when without any change in price, quantity supplied is unlimited. The supply curve here is a horizontal line which indicates that at a particular price any quantity can be sold. And here, the coefficient of price elasticity of supply approaches infinity. That is, Es = .

Perfectly Inelastic Supply: Supply is said to be perfectly inelastic when with a proportionate change in price quantity supplied remain the same. In other words, the supply curve is a vertical line, indicating that at all prices, quantity supplied remain the same. Here, the coefficient of price elasticity of supply is equals to zero. That is, Es = 0.

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SECTION THREE THEORY OF MARGINAL UTILITY What is utility? Utility refers to the satisfaction derived from consuming a commodity or service. According to this theory, the satisfaction derived from consuming a commodity can be measured either through the use of money or what is called utils as units of measuring utility. The theory is formed upon certain assumptions. The Assumptions: The theory of marginal utility explains how the consumer behaves in the market given his income and prices of all commodities and other relevant information about the market. These assumptions include: 1. Rationality: It is assumed that the consumer is rational. He knows what is good to him and what is bad. And given his limited income and unlimited wants for goods and services, he tries to maximize utility using his limited income. 2. Utility is measurable: The satisfaction derived from a commodity can be measured. Thus, utility is cardinal. Some suggested the use of money to measure utility, while other argued that utility can be measured using its own units of measurement called utils. 3. There is constant marginal utility of money. This theory assumes that marginal utility of money is constant over the study period. The implication of this assumption is that the additional utility derived from an additional unit of money is the same both for the rich and a poor person. This is not so in real life situation. 4. There is the existence of the law of diminishing marginal utility. The law of diminishing marginal utility states that utility derived from successive units of a commodity consumed diminishes. This law is expected to hold under this theory over the study period.. 5. Utility derived depends on the units of the commodity consumed. This assumption means that u = f(q1, q2, q3, q4 .......... qn). Given the above assumptions, we can be able to show how the law of diminishing marginal utility works. This law is assumed to work under three important assumptions: a) Units of the commodity consumed are homogenous. b) Taste of the consumer remains the same over the study period. c) There is no time interval between taking one unit of the commodity and the other. An example of the above law can be depicted in the table below. On this table, units of commodity X consumed over the study period are represented on the first column. In column two, total utility derived, that is total satisfaction are represented. While column three represents the marginal utility. The marginal utility is derived on this table by dividing change in TU by a change in X. And mathematically this can be written as
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That is,

change in total utility divided by a change in units of commodity X consumed by the consumer and assuming that the above three assumptions hold.

Units of Commodity X 0 1 2 3 4 5 6

Total Utility (TU) 0 10 17 21 24 24 22

Marginal Utility (MU) 10 7 4 3 0 -2

Graphical Representation of the TU and MU Schedules:

Equilibrium of the Consumer: Given the earlier assumptions we have stated guiding this theory, the consumer tries to maximize his utility using his limited income in the market. And being rational, if MUx is greater than Px, the consumer will buy more of commodity X. And if MUx is less than Px, the consumer will buy less of commodity X. Therefore, the consumer will by an exact quantity of commodity X only when MUx = Px.

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SECTION FOUR PRODUCTION AND THEORY OF COST What is production? Production refers to the transformation of inputs into output. It involves the creation of both tangible and intangible goods for the satisfaction of human wants. Tangible goods production involves the production of both consumer durable and non-durable goods such as handsets, laptops, rice, bread, tomatoes, biscuits and eggs. Producer durable goods such as machines, tractors and caterpillars are also part of tangible goods. While intangible goods include transport services, legal services by a lawyer, medical services by a doctor, construction works by labourers, as well as internet and other communication services rendered in an economy for the satisfaction of human wants. Factors of production: Inputs that are combined, such as land, labour, capital and other raw materials are called factors of production or agents of production. These inputs are combined to undertake the production of goods and services by business firms. a) Land: Land as a factor of production refers to all free gifts of nature obtainable from the earth surface. It consists of plots of land, farm lands, seas and rivers, forest and forest reserves as well the atmosphere. Land as a factor of production has three important characteristics that make it distinct from all other factors such as labour and capital. One, it is a free gift of nature and there was no any human effort involve in making it what it is. Two, it is fixed in supply. In other words, the quantity of land in a particular place remain fixed, as it cannot be increased. Three, land is immobile as a factor of production, unlike labour and capital. It cannot be moved from one place to another. That is, it is geographically immobile. b) Labour: Labour refers to human mental and physical effort that is involved in the production of goods and services for the satisfaction of human wants. c) Capital: Capital refers to wealth that is used in the production of other wealth. It is divided into circulating capital and fixed capital. Circulating is simply the monetary capital that is used in production for the purchase of factor inputs. In a bakery firm for instance, money is reserved for the purchase of yeast, flour, sugar, oil, salt, firewood and diesel. Then bread is produced and sold by the firm. The money realised from the sale of bread produced is then used to pay for labour services and the purchase of more raw materials to produce bread. Money therefore, keeps turning from money to raw materials, from raw materials to bread, and then from bread to money again. Thus, money keeps circulating. Fixed capital on the other hand consist of fixed factor inputs such as machines, motor cars, shops and other buildings. d) Entrepreneurship: This is the organizer of production. He organizes the factors of land, labour and capital to undertake the production of goods and services for the satisfaction of human wants. He takes all major decisions concerning production. Decisions dealing with what to produce, the production method to be followed as well
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as where to locate an industry are all taken by the entrepreneur. He bears the consequences of all investment decisions. Short-Run/long-Run: Short-run is the production period within which some factor inputs are fixed while others are variable. This period coincides with period when a firm is already in operation. Long-run on the other hand refers to that production period within which all factor inputs are variable. This period coincides with the planning stage in a particular firm. Within the planning stage, that is a period or stage when a firm is planning to go into business, all factor inputs are variable. Land can be increased and can be reduced. Likewise all other factors of production can increased or reduced. Law of Diminishing Returns: The law of diminishing returns is a short-run law of production. It is also called the law of variable proportions. The law states that, successive addition of variable inputs into a fixed amount of other inputs may increase output initially, but after a certain point it gives less and less output. Variable Factor (L) 0 1 2 3 4 5 6 7 8 9 10 11 Total Product (TP) 0 100 210 330 430 520 600 670 720 750 760 740 Average Product (AP) --100.0 105.0 110.0 107.5 104.0 100.0 95.7 90.0 83.3 76.0 67.2 Marginal Product (MP) --100 110 120 100 90 80 70 50 30 10 -20

TP, AP & MP CURVES.

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Supply of Labour: The supply of labour in a particular country refers to the number of able bodied men and women that are willing to work at the current wage rate at a particular time. The supply of labour curve is an upward sloping curve just like the normal supply curve, but it relates quantity of labour available for employment at a particular time to a given wage rate. Thus, workers been rational, they supply more of their labour services at a higher wage rate than at a lower wage rate. In other words, there is a positive relationship between the supply of labour and the going wage rate. Therefore, all things been equal, the higher the wage rate the higher the supply of labour and the lower the wage rate the lower the supply of labour.

Figure 4.1 Labour Supply Curve. Factors Affecting the Supply of Labour in a Country: a) The Wage Rate. All things being equal, there is a direct relationship between the wage rate and the supply of labour at a particular time. This means that the higher the wage rate the higher the supply of labour and vice-versa. b) The School Leaving Age: The higher the school leaving age the lower the supply of labour in a particular country. And the lower the school leaving age the higher the supply of labour. c) Age, Sex and Culture: Age, sex and culture affects the supply of labour in a particular country. In terms of age, young people are more willing to supply their labour services than old people. In fact, those who fall within the age of 0 14 years and 65 years and above are considered as dependent population. Whereas, those within the age of 15 64 years are the active part of the population. Also, male workers are more willing to supply their labour services than females. Due to culture also, male workers supply more of their services than female workers. d) Education and Training: Level of education and training acquired by workers also affect the supply of labour in a particular country. This is because education and training also affect the level of wage earn by a particular category of labour. In other words, there is a direct relationship between the level of education and the level of wage or income that goes to labour. Mobility of Labour: Labour mobility refers to the ease with which labour moves from one occupation to another or from one location to another. It is the movement of labour both geographically and occupationally. Geographical mobility deals with movement of labour from one location to
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another, whereas occupational mobility is concerned with movement of labour between occupations. Different factors affect mobility of labour in a particular country. Such factors include age, sex, culture and education, particularly geographical mobility. In other words male workers are more mobile than female workers, and in terms of age, young people are more mobile than old people geographically. Occupationally on the other hand, unskilled labour is more mobile than skilled labour. Theory of Cost: Cost refers to the entire expenses involved in the production of goods and services by producers in a particular firm. These are monetary costs or accounting costs as economists are mainly concerned with real costs or opportunity costs. The major cost concepts to be treated here include Total Variable Cost, Total fixed Cost and Total Cost. Others are Average Variable Cost, Average Fixed Cost, Average Total Cost and marginal Cost. a) Total Variable Cost: These are costs that arise from the use of variable factors in production and in the short run. It is the cost of that arises from the use of raw materials, stationeries, fuel, firewood in bakeries, etc. b) Total fixed Cost: These are costs that arise from the use of fixed factors in production, particularly in the short-run. c) Total Cost: This is the entire cost incurred in the production of a given quantity of output. It is obtained by adding total fixed cost and total variable cost. Thus, TC = TFC + TVC. d) Average Fixed Cost: This is e) Average Variable Cost: f) Average Total Cost: g) Marginal Cost: This refers to an additional cost that arises from the production of one more unit of output. HYPOTHETICAL SHORT-RUN COST SCHEDULE FOR A FIRM Output 0 1 2 3 4 5 6 7 8 9 10 FC 30 30 30 30 30 30 30 30 30 30 30 VC 0 22 38 48 61 79 102 131 166 207 255 TC 30 52 68 78 91 109 132 161 196 237 285 AFC AVC ATC MC

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CHAPTER FIVE THEORY OF THE FIRM AND MARKETS What is a firm? A firm refers to a single unit of production. For example, Gaskiya Textile in Kano is a textile firm. An industry on the other hand refers to a group of firms that produce similar products. All textile firms in Nigeria for instance make up the textile industry.

CHAPTER SIX BUSINESS ORGANIZATIONS

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Types of Business Organizations Business organizations are generally categorized into three different forms. These are the sole proprietorship, the partnership and the joint stock company. The Sole Proprietorship: This is the earliest and the oldest form of business organization. It is simply called one-man business. It is that type of business that is owned, controlled and run by one person. He provides the initial capital either from past savings, friends or relatives as the capital requirement is usually small. He also decides on what should be produced, how and where it should be produced. Thus, all major business decisions are carried out by the owner of the business. The Partnership This is a type of business organization in which two or more persons join hands to form a particular business entity. Joint Stock Company

REFERENCES
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Smith, Adam (1776), The Wealth of Nations.

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