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ECONOMICS _ LECTURE

02
PREPARED BY: CAMS GANDA 
LAW OF SCARCITY
Goods are scarce because there are
not enough resources to produce all the
goods that the people want to
consume.
SCARCITY
- Refers to the condition that all resources
are available only in limited supply.
PRODUCTION
”The act of MAKING the goods/ services.”
CONSUMPTION
”The act of USING the goods/ services to
satisfy human wants.”

SOCIAL COST
- Total cost to a society
- Opportunity costs borne by individual for their
own decisions plus additional costs borne by
others.
PRODUCTION POSSIBILITIES FRONTIER
(PPF)

SCARCITY - Unlimited human wants


- Limited quantity of goods

- What to produce? And for


CHOICE
whom?

- The cost of something in terms of


OPPORTUNITY OPPORTUNITY FOREGONE
COST
- TRADE OFF – more of one good thing can
be obtained only by giving of another thing
ELEMENTS OF DEMAND
AND SUPPLY
PRICE
- Value of a product or services.
- Expressed by “MONETARY UNIT”

D greater S = prices increases


S greater D = prices decreases
DEMAND
- The number or amount of goods and
services desired by the consumers.

QUANTITY DEMANDED

- The amount of g/s consumers are willing


and able to buy/purchase at a given
price, place at a given period of time.
DETERMINANTS OF DEMAND

PRICE OF RELATED
GOODS/COMMODITIES
PRICE - SUBSTITUTE
- COMPLEMENTARY
CONSUMER’S INCOME
- NORMAL GOOD CONSUMER’S TASTE
- INFERIOR GOOD AND PREFERENCES
CONSUMER’S EXPECTATION
OF FUTURE PRICES POPULATION
DEMAND SCHEDULE
The relationship between the quantity of good
demanded and the price of that good.
Demand Schedule for Shoes
PRICE QUANTITY DEMANDED

1 1000
2 800
3 600
4 400
5 200
DEMAND CURVE
It shows graphically the relationship between the
quantity of a good demanded and its
corresponding price, with other variables held
constant.

• DOWNWARD SLOPING – negative/ inverse


relationship between the price of the good and
the quantity that consumers want to buy at a
given price.
DEMAND SCHEDULE FOR SHOES

PRICE QUANTITY DEMANDED

1 1000

2 800

3 600

4 400

5 200
LAW OF DEMAND
“ as price increases, quantity demanded
decreases; and as price decreases, quantity
demanded increases, if other factors remain
constant.”

JUSTIFICATION FOR THE LAW OF DEMAND

• INCOME EFFECT
• SUBSTITUTION EFFECT
CHANGES INVOLVING DEMAND
CHANGES IN QUANTITY
DEMANDED
- Movement from one point to another point of the
same demand curve.
- Due to change in price.
CHANGES IN
DEMAND
- Shifting from one demand curve to another.
- Due to changes in all determinants except
price.
DEMAND FUNCTION
• It is a mathematical expression of the Law of
Demand or the relationship between price
and quantity demanded.

QD = a - b (P)
SUPPLY
- The maximum units/quantity of goods
and services producers can offer.

QUANTITY SUPPLIED
- The amount or quantity of g/s producers
are willing and able to supply at a given
price, at a given period of time.
DETERMINANTS OF SUPPLY

CHANGE IN CHANGE IN THE PRICE


TECHNOLOGY OF RELATED GOODS
COST OF INPUTS GOVERNMENT TAXES
USED/PRODUCTION AND SUBSIDIES

EXPECTATION OF NUMBER OF FIRMS


FUTURE PRICES IN THE MARKET.
SUPPLY SCHEDULE
The relationship between the quantity of good
supplied and the price of that good.
Supply Schedule for Shoes
PRICE QUANTITY SUPPLIED

1 200
2 400
3 600
4 800
5 1000
SUPPLY CURVE
It shows graphically the quantity of a good
supplied at each price, with other factors that
affect quantity supplied held constant.

• UPWARD SLOPING – positive slope


- As price goes up, producers are willing to
produce more.
LAW OF SUPPLY
“ as price increases, quantity supplied also
increases; and as price decreases, quantity
supplied also decreases, if other factors
remain constant.”
CHANGES INVOLVING SUPPLY
CHANGES IN QUANTITY
SUPPLIED
- Movement from one point to another point of the
same supply curve.
- Due to change in price.

CHANGES IN SUPPLY
- Shifting from one supply curve to another.
- Due to changes in all determinants except
price.
SUPPLY FUNCTION
• It is a mathematical expression of the Law of
Supply or the relationship between price
and quantity supply.

QS = c + d (P)
THE LAW OF SUPPLY AND DEMAND

Quantity
Supplied Price Quantity
Demanded

1 PRODUCERS
1 5
SHORTAGE
2 2 4
3 BUYERS
3 3 EQUILIBRIUM
PRICE
4 4 2
SURPLUS
5 5 1
THE LAW OF SUPPLY AND DEMAND

“ when a supply is greater than


demand, price decreases. When
demand is greater than supply, price
increases. When supply is equal to
demand, price remains constant.”
COMPUTE THE EQUILIBRIUM PRICE
AND EQUILIBRIUM QUANTITY

1. Qd = 150 - 2p Qs = -200 + 2p
2. Qd = 185 - 7p Qs = 80 + 7p
3. Qd = 800 - 5p Qs = 450 + 5p