LEARNING UNIT 1: What Economics Is All

About

1.1 What is Economics?

 Economics is the study of how scarce productive resources are used to satisfy
human wants.
 It deals with the choices that individuals, businesses, and governments have to
make every day.
 The word comes from Greek oikos (house) and némein (manage) – "household
management".

1.2 Scarcity, Choice and Opportunity Cost

 Scarcity: The basic fact of economic life – unlimited wants but limited
means/resources.
 Wants: Human desires for goods/services (unlimited).
 Needs: Necessities for survival (food, water, shelter).
 Demand: Wants backed by purchasing power.
 Resources (Factors of Production): Natural resources, labour, capital.
 TANSTAAFL Principle: "There ain't no such thing as a free lunch" – all use of
scarce resources has a cost.
 Scarcity ≠ Poverty: Even rich people face scarcity (e.g., time is limited).
 Opportunity Cost: The value of the best alternative forgone when a choice is
made.
o Example: Opportunity cost of studying is the movie tickets you cannot buy
because you have no time/money.

1.3 Production Possibilities Curve (PPC)

 Definition: Shows the maximum attainable combinations of two goods when
resources are fully and efficiently employed.
 Key Points on PPC:
o On the curve (A-F): Attainable and efficient (full employment)
o Inside the curve (H): Attainable but inefficient (unemployment)
o Outside the curve (G): Unattainable (scarce resources)
 Shape: Bowed outwards (concave) due to increasing opportunity cost.
 Negative slope: Shows trade-off – more of one good means less of the other.
 Shifts of PPC:
o Outward shift: Economic growth (more resources, better technology)
o Inward shift: Decline in resources or productivity
1.4 Further Applications of PPC
 Consumer goods vs Capital goods:
o Consumer goods: Satisfy wants now (food, clothes)
o Capital goods: Used to produce other goods (machines, factories)
o Trade-off: More capital goods now = more consumer goods in future
 Types of goods:
o Non-durable: Used once (food, fuel)
o Semi-durable: Last limited time (clothing, shoes)
o Durable: Last years (furniture, cars)
o Final goods: Consumed by end user
o Intermediate goods: Used to produce other goods (flour for bread)
o Private goods: Excludable, rivalrous (food, car)
o Public goods: Non-excludable, non-rivalrous (defence, traffic lights)
o Economic goods: Scarce, have a price
o Free goods: Not scarce, no price (air, sunshine)

1.5 Economics is a Social Science

 Studies human behaviour (like sociology, political science)
 Cannot conduct controlled laboratory experiments → uses ceteris paribus (all
other things being equal)
 Empirical science: Studies actual experiences and measurements

1.6 Microeconomics vs Macroeconomics

Microeconomi Macroeconomi
cs cs

Individual parts Economy as a

of the economy whole

Price of a single Consumer price

product index (inflation)

Demand for Total demand for

maize all goods
Microeconomi Macroeconomi
cs cs

Individual firm's Total supply of

decision labour

1.7 Positive vs Normative Economics

 Positive: Objective statement of fact (can be tested)
o Example: "The inflation rate is 5.7%"
 Normative: Opinion or value judgement (cannot be tested)
o Example: "The inflation rate is too high"

1.8 Common Mistakes in Reasoning

 Blinkered approach: Biased, oversimplified diagnosis based on personal
circumstances
 Fallacy of composition: Assuming what is true for one is true for all (e.g., one
person stands to see better, but if everyone stands, no one sees better)
 Post hoc ergo propter hoc: "After this, therefore because of this" – confusing
correlation with causation
 Correlation vs Causation: Two events occurring together does not mean one
causes the other
 Levels vs rates of change: Confusing the level of a variable with its rate of
change

LEARNING UNIT 2: Economic Systems

2.1 Different Economic Systems

 Three central questions:
1. What goods and services should be produced? (Output questions)
2. How should they be produced? (Input questions)
3. For whom are they produced? (Distribution questions)
 Three coordinating mechanisms: Tradition, Command, Market
2.2 Traditional System
 Based on custom and tradition
 Same goods produced the same way generation after generation
 Slow to adapt to change
 Found in isolated, self-sufficient communities

2.3 Command System

 Central authority instructs participants what to produce and how
 Also called centrally planned system
 Examples: North Korea, former Soviet Union
 Characterised by state ownership of factors of production (except labour)

2.4 Market System

 Market: Any contact between potential buyers and sellers (does not require a
physical location)
 Conditions for a market: Buyer, seller, something to sell, means to purchase,
price determined, guarantee by law/tradition
 Market mechanism/prices: Signals of scarcity indicating what consumers must
sacrifice
 Invisible hand (Adam Smith): Selfish actions coordinated to benefit everyone
 Competition: Among sellers protects consumers; among buyers occurs for
scarce goods
 Role of money: Medium of exchange, eliminates barter/double coincidence of
wants

2.5 The Mixed Economy

 No system is purely traditional, command, or market – all are mixed
 Combination of private initiative and government intervention

2.6 South Africa's Mixed Economy

 Private property and market mechanism play important role
 Government owns some enterprises (Eskom, Transnet, SAA, SABC, Post Office)
 Privatisation: Selling state assets to private sector
 Nationalisation: State acquisition of privately owned assets
 Government intervenes through price controls, regulation, employment
2.7 Smith, Marx and Keynes

Economist Key Contribution

Father of market
system/capitalism; Th
Adam e Wealth of
Smith (172 Nations (1776);
3-1790) Division of labour;
Invisible hand; Free
trade

Das Kapital; Predicted

Karl capitalism would be
Marx (1818- replaced by classless
1883) system; Labour theory
of value; Surplus value

The General
Theory (1936); Laid
John foundation for mixed
Maynard economy; Aggregate
Keynes (18 demand determines
83-1946) economic activity;
Justified government
intervention

LEARNING UNIT 3: Production, Income and

Spending

3.1 Introduction
  Macroeconomics requires mental pictures of how the economy fits together
 High degree of interdependence in economic systems

3.2 Production, Income and Spending

 Sequence: Production → Income → Spending (all happen simultaneously)
 Circular flow: Continuous flow of production, income, and spending

Stocks vs Flows

Flow
Stock
(measured
(measured at a
over a
point in time)
period)

Level of water in a Flow of water

dam into a dam

Wealth Income

Capital Investment

Population Births/deaths

Demand for
Unemployment
labour

3.3 Factors of Production (Sources of Production)

Definitio Remunera
Factor
n tion

Natural Gifts of Rent

resources nature
 Definitio Remunera
Factor
n tion

(minerals,
water,
(Land)
arable
land)

Human
mental
Wages and
Labour and
salaries
physical
effort

Manufactu
red
resources
Capital Interest
(machines
, tools,
buildings)

Combining
resources,
Entrepreneu
taking Profit
rship
risks,
innovating

 Human capital: Skill, knowledge, health of workers

 Technology: Knowledge of production methods (sometimes called 5th factor)
 Money is NOT a factor of production
 Capital-intensive production: Dominated by machines
 Labour-intensive production: Emphasis on labour

3.4 Sources of Income

 Total income = Rent + Wages/salaries + Interest + Profit
 Total income ≡ Total production (two sides of same coin)
3.5 Sources of Spending (Four Spending Entities)

Symb
Entity Spending
ol

Househol Consumption
C
ds expenditure

Investment
Firms spending (capital I
formation)

Governme Government
G
nt expenditure

Foreign Exports minus

X-Z
sector imports

 Total spending (A) = C + I + G + (X - Z)

Types of Firms
 Individual (sole) proprietorship
 Partnership
 Private company ((Pty) Ltd)
 Public company (Ltd) – can list on JSE
 Close corporation (cc) – no longer created
 Cooperatives, trusts, public enterprises

3.6 Simple Diagram

 Production (factors) → Income (rent, wages, interest, profit) → Spending (C + I +
G + X - Z)

3.7 Circular Flows

 Households and firms: Households sell factors → firms produce goods →
households buy goods
 With government: Government spends (injection) and taxes (leakage)
  With foreign sector: Exports (injection), imports (leakage)
 With financial sector: Savings (leakage) flow to financial institutions →
investment (injection)

3.8 Key Concepts

 Specialisation and exchange: Gains from specialisation require trade
 Comparative advantage: Specialise where opportunity cost is lowest
 Five macroeconomic objectives:
1. Economic growth
2. Full employment
3. Price stability (low inflation)
4. Balance of payments stability
5. Equitable distribution of income

LEARNING UNIT 4: Demand, Supply and Prices

4.1 Introductory Overview

 In goods markets: Firms = suppliers, Households = demanders
 Prices and quantities determined by interaction of demand and supply

4.2 Demand
 Demand: Quantities buyers are willing AND able to buy during a period
 Demand ≠ Wants (wants are unlimited, demand requires purchasing power)
 Demand ≠ Needs or Claims

Determinants of Demand
1. Price of the product – Law of Demand: Higher price → Lower quantity
demanded (ceteris paribus)
2. Prices of related goods:
o Substitutes (butter/margarine): Price of substitute ↑ → Demand for product
↑
o Complements (cars/petrol): Price of complement ↑ → Demand for product
↓
3. Income of consumers: Normal goods (income ↑ → demand ↑); Inferior goods
(income ↑ → demand ↓)
4. Taste/preferences
 5. Number of consumers
6. Expected future prices
7. Distribution of income

Law of Demand
 Other things being equal (ceteris paribus), higher price = lower quantity
demanded

Demand Curve
 Slope: Downward (negative/inverse relationship)
 Movement along curve: Change in price causes change in quantity
demanded
 Shift of curve: Change in non-price determinant causes change in demand
o Right shift: Increase in demand
o Left shift: Decrease in demand

4.3 Supply
 Supply: Quantities sellers plan to sell at each price during a period

Determinants of Supply
1. Price of the product – Law of Supply: Higher price → Higher quantity supplied
2. Prices of alternative products (substitutes in production)
3. Prices of factors of production and inputs – Input price ↑ → Supply ↓
4. Expected future prices
5. State of technology – Technology ↑ → Supply ↑
6. Number of firms
7. Government policy (taxes, subsidies)
8. Unexpected events (natural disasters)

Supply Curve
 Slope: Upward (positive/direct relationship)
 Movement along curve: Change in price causes change in quantity supplied
 Shift of curve: Change in non-price determinant causes change in supply
o Right shift: Increase in supply
o Left shift: Decrease in supply
4.4 Market Equilibrium
 Equilibrium: Quantity demanded = Quantity supplied
 Equilibrium price: Price where Qd = Qs
 Excess demand (shortage): Qd > Qs at a price → Price will rise
 Excess supply (surplus): Qs > Qd at a price → Price will fall

4.5 Consumer and Producer Surplus

 Consumer surplus: Difference between what consumers are willing to pay and
what they actually pay (area under demand curve, above price)
 Producer surplus: Difference between what producers are willing to accept and
what they actually receive (area above supply curve, below price)

LEARNING UNIT 5: Demand and Supply in

Action

5.1 Changes in Demand

 Increase in demand (right shift) → Price ↑, Quantity ↑
 Decrease in demand (left shift) → Price ↓, Quantity ↓

5.2 Changes in Supply

 Increase in supply (right shift) → Price ↓, Quantity ↑
 Decrease in supply (left shift) → Price ↑, Quantity ↓

5.3 Simultaneous Changes

Change in Change in Change in Change in

Demand Supply Price Quantity

Increase Increase Uncertain Increase

Change in Change in Change in Change in
Demand Supply Price Quantity

Increase Decrease Increase Uncertain

Decrease Increase Decrease Uncertain

Decrease Decrease Uncertain Decrease

5.4 Interaction Between Related Markets

 Substitutes: Price of fish ↓ → Demand for meat ↓ → Price of meat ↓
 Complements: Cost of cars ↑ → Supply of cars ↓ → Price of cars ↑ → Demand for
tyres ↓ → Price of tyres ↓

5.5 Government Intervention

Maximum Prices (Price Ceilings)

 Set below equilibrium
 Results: Shortage, queues, black markets, rationing
 Welfare cost: Deadweight loss (consumer surplus lost)

Minimum Prices (Price Floors)

 Set above equilibrium
 Results: Surplus, government purchases, production quotas
 Common in agriculture

Subsidies
 Shift supply curve right (down)
 Lower price for consumers, higher quantity

Taxes (Specific Excise Tax)

 Shift supply curve left (up)
  Incidence: Burden shared between consumers and producers
 Deadweight loss to society

Quotas
 Limit quantity supplied
 Raise price, lower quantity

5.6 Agricultural Prices

 Supply fluctuates due to weather, disease, perishability
 Fallacy of composition: Individual farmer benefits from producing more, but if
all farmers produce more, total income may fall

5.7 Speculative Behaviour

 Self-fulfilling expectations: If everyone expects price to rise, they buy now
and withhold supply → price rises immediately

LEARNING UNIT 6: Elasticity

6.1 Introduction
 Elasticity: Measure of responsiveness or sensitivity
 Formula: Elasticity = (% change in dependent variable) / (% change in independent variable)

6.2 Price Elasticity of Demand (PED)

Definition and Formula

 PED: % change in quantity demanded / % change in price
 Formula: ep = (ΔQ/ΔP) × (P/Q)
 Arc elasticity: Use averages when changes are large
Categories of PED

Category Value Meaning

Perfectly Q doesn't change

ep = 0
inelastic when P changes

0 < ep
Inelastic %ΔQ < %ΔP
<1

Unitarily
ep = 1 %ΔQ = %ΔP
elastic

1 < ep
Elastic %ΔQ > %ΔP
<∞

Perfectly ep =
Any Q at given P
elastic ∞

Total Revenue (TR) and PED

 Elastic demand (ep > 1): P ↑ → TR ↓; P ↓ → TR ↑
 Inelastic demand (ep < 1): P ↑ → TR ↑; P ↓ → TR ↓
 Unit elastic (ep = 1): TR unchanged

Determinants of PED
1. Availability of substitutes (most important) – more substitutes = more elastic
2. Degree of complementarity – high complementarity = less elastic
3. Type of want (necessity vs luxury) – luxury = more elastic
4. Time period – long run = more elastic
5. Proportion of income spent – high proportion = more elastic
6. Definition of product – broader definition = less elastic
7. Advertising – brand loyalty = less elastic
8. Durability – more durable = more elastic
9. Addiction – addictive = less elastic
6.3 Other Demand Elasticities

Income Elasticity of Demand (YED)

 ey = %ΔQ / %ΔY
 Positive: Normal good (ey > 1 = luxury; 0 < ey < 1 = necessity)
 Negative: Inferior good

Cross Elasticity of Demand (XED)

 ec = %ΔQA / %ΔPB
 Positive: Substitutes
 Negative: Complements
 Zero: Unrelated goods

6.4 Price Elasticity of Supply (PES)

 es = %ΔQ supplied / %ΔP
 Determinants:
o Time period (long run = more elastic)
o Stockpiling ability (stockpiling = more elastic)
o Excess capacity (excess capacity = more elastic)
o Availability of inputs

LEARNING UNIT 7: The Utility Approach

7.1 Utility
 Utility: Satisfaction from consumption
 Cardinal utility: Can be measured (uses "utils")
 Ordinal utility: Can only rank preferences

7.2 Marginal Utility and Total Utility

 Marginal Utility (MU): Extra utility from one additional unit
 Total Utility (TU): Sum of all marginal utilities
 Law of Diminishing Marginal Utility (Gossen's First Law): MU eventually
declines as more is consumed
Relationship between Total, Marginal, and Average
 When total is rising, marginal is positive
 When total is maximum, marginal is zero
 When total is falling, marginal is negative
 When marginal > average, average rises
 When marginal < average, average falls
 When marginal = average, average constant

7.3 Consumer Equilibrium (Utility Approach)

 Goal: Maximise total utility given income and prices
 Equilibrium condition: MUx / Px = MUy / Py = MUz / Pz = ...
 Meaning: Last rand spent on each good yields same satisfaction
 Also called law of equalising weighted marginal utilities (Gossen's Second
Law)

7.4 Derivation of Demand Curve

 When price of a good falls, MUx/Px > MUy/Py
 Consumer buys more of X until MU falls enough to restore equality
 Results in downward-sloping demand curve

LEARNING UNIT 8: The Indifference Approach

8.1 Ordinal vs Cardinal Utility

 Indifference approach uses ordinal utility (ranking only, no measurement)

8.2 Indifference Curves

 Definition: Shows combinations of two goods giving equal satisfaction
 Assumptions:
1. Completeness – can rank all combinations
2. Consistency (transitivity) – if A > B and B > C, then A > C
3. Non-satiation – more is preferred to less
Properties of Indifference Curves
1. Downward sloping (to keep utility constant, if one good increases, other must
decrease)
2. Convex to origin (diminishing MRS)
3. Cannot intersect or touch
4. Higher curves = higher satisfaction
 Marginal Rate of Substitution (MRS): Slope of indifference curve (rate willing
to trade Y for X)

8.3 Budget Line

 Definition: Shows affordable combinations given income and prices
 Slope = Px / Py (negative)
 Changes in income → parallel shift
 Changes in price → pivot

8.4 Consumer Equilibrium

 Condition: Slope of indifference curve = Slope of budget line
 MRS = Px / Py (which equals MUx / MUy)
 Same result as utility approach: MUx/Px = MUy/Py

8.5 Changes in Equilibrium

 Income-consumption curve: Joins equilibrium points as income changes
 Price-consumption curve: Joins equilibrium points as price changes
 Deriving demand curve: Plot price-quantity combinations from price-
consumption curve

Income and Substitution Effects

 Substitution effect: Price ↓ → Good relatively cheaper → Buy more
 Income effect: Price ↓ → Real income ↑ → Buy more (normal goods)
 For normal goods, both effects work together → demand curve slopes down
LEARNING UNIT 9: Production and Cost

9.1 Introduction
 Theory of the firm: Explains firm behaviour, supply decisions
 Assumption: Firms maximise profit

9.2 Basic Cost and Profit Concepts

Cost Concepts

Concept Definition

Opportunit Value of best

y cost alternative forgone

Explicit Monetary payments

costs for inputs

Opportunity costs not

Implicit
reflected in money
costs
payments

Economic
Explicit + Implicit
costs

Past costs that cannot

Sunk costs
be recovered
Profit Concepts

Concept Formula

Accountin Total revenue – Explicit

g profit costs

Minimum return
Normal required to keep
profit resources in current use
(part of economic costs)

Economic Total revenue – (Explicit

profit + Implicit costs)

Revenue Concepts
 Total Revenue (TR) = P × Q
 Average Revenue (AR) = TR / Q = P (when all units sold at same price)
 Marginal Revenue (MR) = ΔTR / ΔQ

9.3 Production in the Short Run

 Short run: At least one input fixed
 Long run: All inputs variable
 Production function: Relationship between inputs and maximum output

Total, Average, and Marginal Product

Concept Formula

Total Product
Total output
(TP)
Concept Formula

Average TP / Quantity of
Product (AP) variable input

Marginal ΔTP / ΔQuantity of

Product (MP) variable input

Law of Diminishing Returns

 As variable input increases with fixed inputs:
o First MP declines
o Then AP declines
o Then TP declines

Relationships between Product Curves

 MP > AP → AP rising
 MP < AP → AP falling
 MP = AP at maximum AP

9.4 Costs in the Short Run

Total Costs

Concept Formula

Total Fixed Constant, doesn't

Cost (TFC) change with output

Total
Variable Cost Changes with output
(TVC)

Total Cost TFC + TVC

Concept Formula

(TC)

Unit Costs

Concept Formula

Average TFC / Q (always

Fixed Cost falling as Q
(AFC) increases)

Average
Variable Cost TVC / Q
(AVC)

Average Cost
TC / Q = AFC + AVC
(AC)

Marginal Cost
ΔTC / ΔQ
(MC)

Shape of Cost Curves (U-shaped)

 MC reaches minimum before AVC
 AVC reaches minimum before AC
 MC = AVC at minimum AVC
 MC = AC at minimum AC
 When MC < AVC/AC, they fall; when MC > AVC/AC, they rise

Relationship between Production and Cost

 MP rising → MC falling
 MP falling → MC rising
 MP maximum → MC minimum
 AP maximum → AVC minimum
9.5 Production and Costs in the Long Run

Returns to Scale (all inputs change proportionally)

 Increasing returns to scale: Output increases more than inputs
 Constant returns to scale: Output increases same as inputs
 Decreasing returns to scale: Output increases less than inputs

Economies of Scale
 Definition: Unit costs fall as output increases
 Internal economies: Within firm control
 External economies: Industry-wide benefits
 Diseconomies of scale: Unit costs rise as output increases

Long-Run Average Cost (LRAC) Curve

 Usually saucer-shaped (falls, then constant, then rises)
 Envelope curve: Joins lowest points of all SRAC curves

LEARNING UNIT 10: Perfect Competition

10.1 Market Structure Overview

Four market structures (from most to least competitive):

1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly

10.2 Equilibrium Conditions for Any Firm

Profit-Maximising Rule
 Produce where MR = MC
 If MR > MC → expand output
  If MR < MC → reduce output

Shut-Down Rule
 Produce only if TR ≥ TVC (or P ≥ AVC)
 In long run: Produce only if TR ≥ TC (or P ≥ AC)

10.3 Perfect Competition

Conditions for Perfect Competition

1. Large number of buyers and sellers (price takers)
2. No collusion between sellers
3. Homogeneous product (identical)
4. Free entry and exit
5. Perfect knowledge of market conditions
6. No government intervention
7. Perfect mobility of factors of production

Demand Curve for the Firm

 Perfectly elastic (horizontal) at market price
 P = MR = AR

10.4 Equilibrium of the Firm

Short-Run Equilibrium
 Produce where P = MC (since P = MR)
 Three possibilities:
o P > AC: Economic profit (supernormal profit)
o P = AC: Normal profit (break-even)
o AVC < P < AC: Loss-minimising (produce to cover some fixed costs)
o P < AVC: Shut down

Supply Curve of the Firm

 Rising portion of MC curve above minimum AVC
Market Supply Curve
 Horizontal summation of individual firms' supply curves

10.5 Long-Run Equilibrium

Process
 Economic profits → new firms enter → supply increases → price falls → profits
disappear
 Economic losses → firms exit → supply decreases → price rises → losses
disappear

Long-Run Equilibrium Condition

 P = MR = MC = minimum AC
 Firms earn only normal profit (zero economic profit)

10.6 Perfect Competition as a Benchmark

Allocative Efficiency
 Condition: P = MC
 Society's welfare maximised when price (value to consumer) = marginal cost
(opportunity cost)

Productive Efficiency
 Condition: P = minimum AC
 Firms produce at lowest possible cost per unit

Limitations
 Efficient but may not be equitable
 Only money votes count → inequality is maintained