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 GENERAL CLASS RULES
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ELEMENTS OF
ECONOMICS
BY:Ms MWENDERANI, MA ECONOMICS
INTRODUCTION
THE MEANING OF ECONOMICS

• Economics is a social science that has been in existence

for about two centuries. Various economists have tried
to define it differently. Three types of definition can be
identified.
1) Wealth definition
2) Welfare definition
3) Scarcity definition
 Wealth Definition

• Adam smith and his disciples J.B. Say, Walker, J.S. Mill
defined economics as an inquiry into the nature
and courses of wealth of nations.
Such a definition has been criticized as follows.
i. The definition is very selfish: it restricts economics to
the study of wealth alone. The definition does not
state clearly how man comes into the study.
ii. Since economics is defined in terms of material
commodity, it doesn’t consider service e.g. services
offered by doctors, teachers, etc.
 Welfare Definition

• Alfred Marshall and his disciples, Pigou and Cannon defined

economics as the study of man’s activities in the ordinary
business of life. It tries to study how man acquires and uses his
resources aimed at improving the welfare of mankind.
• In this definition, it can be noted that on the one hand, economics
is the study of wealth and on the other hand, and more important,
a study of man.
Criticism of the definition
i. The definition excludes the study of services, that is, it only takes
human material welfare.
ii. Speaks of study of man’s activities during ordinary business of
life. The question remains, how about during extra ordinary
business life?
 Scarcity Definition
• Leonel Robbin (1933) improved upon the above definition and
explained economics as the study of human behavior (as a
relationship between scarce resources which have
alternative uses)
• The definition has characteristics that are currently addressed in
economics namely
i. Limited/scarce resources
ii. Alternative uses
iii. Unlimited wants
i. Scarcity: when we say that a resource is scarce, it means that
it is there but cannot meet the demand. The scarce productive
resource would include, land, labor, capital, entrepreneurship,
and by extension technology used in the production process.
ii. Alternative uses: some resources may be having more than
one use. For example, milk can make butter, cheese, chocolate
etc.
iii. Unlimited wants: human needs are unlimited, and they are
recurrent in that when you satisfy a need today, the same need
must be satisfied tomorrow. They are also competitive in that
they compete for the limited resources.
• Based on the above definition, economists today agree on a
general working definition of the discipline. They conclusively
define economics as the study of how man can allocate his
scarce resources among competing uses to satisfy his
unlimited needs.
• Thus, we study economics in order to solve economic
problem, which is that of allocating scarce resources
among competing and unlimited wants in such a
manner that greatest satisfaction is derived. To do this,
the society will have to make a choice on what
combination of goods and services to produce and what
therefore to sacrifice.
• The quantity that one foregoes/sacrifices in order to
consume more of another is what is known as
opportunity cost.
The Concept Of Scarcity And
Opportunity Cost
• Here we shall illustrate how two goods would be produced using
the available scarce resources using the production possibility
frontier (PPF).
• The slope of the PPF is marginal rate of transformation (MRT)
• The straight PPF represents constant opportunity cost. This means
that factors of production can be used in production of the two
commodities equally efficiently
• For increasing opportunity Cost, a PPF that is concave to the origin
is used
• For simplicity assume that a country has same resources to enable
her produce only two goods, namely beans and maize. If all
resources are used to produce beans, OA units will be realized
worth zero (0) units of maize. On the other hand, if all resources
are used to produce maize, OB units will be produced with zero (0)
units of beans.
• Thus, the line joining point A and B is the production possibility
frontier (PPF) or curve. The frontier joins together different
combinations of goods (beans and maize) which a country
can produce using all available resources and efficiently.
• All points inside PPF like M are attainable though they reflect under
utilization or inefficiency in the use of resources.
• All points outside PPF like N are unattainable because resources
are scarce.
• Thus, points along AB are attainable and reflect efficient
production.
• Suppose initially production was at point A, then only
beans would be produced, to produce OB, units of
maize would thus require OA units of beans be
sacrificed. Quantity OA, units of beans which has to be
forgone to produce OB units of maize is the opportunity
cost of producing the maize.
• Sacrificing of production of one good for the other is as
a result of scarcity of resources.
The Nature And Scope Of
Economics
• Scope of economics

• Question; how does economics differ from other

subjects? Economics involves the study of the problem of
production, consumption, exchange and distribution of
wealth as well as the determination of the values of goods
and services. Besides, economics makes an inquiry into the
possible causes and remedies of poverty, unemployment,
underdevelopment, inflation etc.
• The subject consists of a body of general principals and
theories which may be applied to the interpretation of
all economic problems, post and present. The
fundamental economic problem of all nations seeks to
address the following issues.
 What goods and services to produce
 How to produce them
 For whom to produce
Methodology Of Economics.
• There are two approaches to the study of economics namely
positive and normative analysis.
• Positive analysis (deductive): is more central to micro-
economics and it is concerned with what is, what was, and what
will be. That is it is more specific and objective. It employs
economic theory in explaining and predicting circumstances. The
economic theories are tested against observations and are used to
construct models from which prediction are made.
• A theory therefore is a reasoned assumption intended to explain
an occurrence or a phenomenon. A model on the other hand is a
mathematical representation based on the economic theory.
• Incase of controversies in positive analysis, we refer to economic
theories that have been proven through empirical observations.
• Normative analysis (inductive): goes beyond
theory to ask questions like “what is best, what ought
to be” etc. it is subjective meaning that it depends on
value judgment on what is desirable.
• Incase of controversies, individual policy choices will
rule. It is concerned with alternative policy actions that
helps in illuminating and sharpening debates.
• Example to help distinguish between positive and
normative.
• Government imposes tax on a good; effect of this would be
• Increase price of commodity
• Good expensive than competing product
• As quantity demanded falls, firms to decrease number of
workers employed.
• (Positive analysis; what is, what will be)

• Normative analysis: For the firm on whom the tax has

been imposed they would ask; what should they do to
improve their sales?
• How should they improve competitiveness (normative –
what ought to be)
Branches Of Economics
• Economics is divided into two main branches:- microeconomics
and macroeconomics.
Microeconomics
• Deals with the behaviors of individual economic units. These units
include consumers, workers, investors, owners of; land, business
firms, infact any individual or entity that plays a role in the
function of our economy.
• Microeconomics explains how and why these units make economic
decisions. For example, it explains how consumers make
purchasing decision and how their choices are affected by
changing prices and income
• It also explains how firms decide how many workers to hire and
how workers decide where to work and how much work to do.
• Another important concern of microeconomics is how economic
units interact to form large units-markets and industries. By
studying the behavior and interaction of individual firm and
consumers, microeconomics reveal how industries and markets
operate and evolve, why they differ from one another, and how
they are affected by government policies and global economic
conditions.
Macroeconomics
• By contrast, macroeconomics, the other major branch of
economics, deals with aggregate economic quantities, such as the
level and growth rate of national output, interest rates,
unemployment and inflation.
• The boundary between macroeconomics has become less and less
distinct in the recent years. The reason is that macroeconomics also
involves the analysis of markets for goods and services and for
labour.
• To understand how these aggregate markets operate,
one must first understand the behavior of the firms,
consumers, workers, and investors who make up these
markets.
• Thus, macroeconomists have become increasingly
concerned with microeconomics foundation of
aggregate economic phenomena and much of
macroeconomics is actually an extension of
microeconomic analysis.
DEMAND AND SUPPLY ANALYSIS

Demand
• Demand is defined as; the amount of a commodity
people are willing and able to buy at all possible
prices and in a given time.
• There is a difference between demand and wants, in
that demand are human desires that are fully backed
by the ability to pay. On the other hand, wants are
human needs that are not backed by ability to pay.
Factors That Influence Quantity
Demanded
• Price of the commodity itself (Px)
• Price of other commodities which are related to the good in
question (be they substitute or complementary) (Py)
• Consumer income (y)
• Consumer taste and preference for the good (T)
• Advertisement (A)
• Consumer expectation about future prices (E)
• Size of population and its composition (N)
• Credit availability (C )
• Other factors (Z)
The Price of the Commodity
itself
• In order to analyze the effects of price on quantity
demanded of the commodity, we hold all other factors
fixed.
• The relationship between price and demand can be
explained by the help of the law of demand.
According to Alfred Marshall this law is defined as,
“Holding all other factors constant( ceteris
paribus), a fall in price of a commodity increases
its demand and a rise in price of a commodity
decreases its demand
• Demand and price have an inverse relationship
• This law can be explained with
the help of a demand schedule
and diagram.
• Demand Schedule: is a tabular
representation of the quantity
demanded of a good at given
price level and at a given point in
time.
• Demand diagrams on the
other hand is a graphical
representation of the content of
the demand schedule.
• Diagram 1 is the demand
schedule while diagram 2 shows
the demand graph
Reasons for the downward
sloping demand curve.
i. Lowering prices brings in new buyers who were not able
to buy at the previous price.
ii. Reduction of price may coax out some extra purchases by
each of the initial consumers of the goods, while a rise in
price may lead to less purchases. Naturally, consumers will
try to substitute the commodity with another cheaper one.
Note also that a fall in price implies a rise in real income,
hence the ability to purchase more of the same good.
iii. Whenever a commodity becomes expensive its
consumption normally will be left for only very important
uses. For instance, a consumer may opt to use electricity
lighting only, and not for cooking if its prices increase. The
vice versa is also true.
Exception to the law of
demand
• There exists cause where demand may slope upwards instead of
downwards from left to right.
Giffen goods(staple)
In the case of Giffen goods:- Giffen goods (named after the
economist Sir Robert Giffen) are very inferior goods for which
demand increase as price rises and decrease as price falls. This
applies to poor communities and are staple food. e.g. In Asia
people’s staple food is rice. If price of rice was to fall, consumers
may increase their demand for rice or consume the same amount of
rice
Veblen good (goods of ostentation)
• Goods associated with the rich, luxury goods such as jewellery,
luxurious vehicles etc. the value of such goods (quality) is
measured by how much expensive it is. For such goods, the higher
the price, the higher will be the demand
Fear of future rise in price
• Fear of future rise in price makes consumers buy more quantities
of different goods even at higher prices than before because they
know that if they dent buy more now, they will have to pay much
higher prices in future.
• The existence of such goods and factors explain why under
exceptional case the demand curve may be positively sloped as
below.
 Concept of movement along demand
curve
• A movement along a given demand
curve is caused by change in the
price of the commodity. An upwards
movement is caused by an increase
in prices while a downwards
movement is caused by a fall in
prices. This can be shown as below.
• Movement from b to a is caused by
a (rise) change in price prom P1 to
P2
• Movement form a to b is caused by
a fall in prices from P2 to P1.
• Note: as price falls from P2 to P1,
quantity demanded rises from Q1 to
Q2 and vice versa
• Movement along a demand curve is
also known as a change in the
quantity demanded
Other factors that influence
demand
 Price of other commodities which are related to the good
in question
• There are two possible relations between the demand of one
commodity and the price of other commodity.
• A fall in price of one commodity (X) may lower the quantity
demanded of good Y, the two commodities x and y, are said to be
substitutes. When prices of one commodity fall, the household
buys more of it and less of commodities that are substitutes for it.
Example, butter and margarine
• If a fall in price of one commodity raises the quantity demanded of
another commodity the two are said to be complements. When the
price of one commodity falls, more of it is consumed and more of
those commodities that are complementary to it are consumed
also. Example, motor cars and petrol, butter and bread etc.
• Graph 1: curve
sloped upwards
indicating that as price
of a substitute falls,
the quantity
demanded of good x
falls. So good y, and x,
are substitutes.
• Graph 2: curve slopes
downwards, indicating
that when the price of
a complement falls
there is a rise in the
quantity of good x
demanded.
Consumer income
• We would expect a rise in income to be associated with a
rise in the quantity of a good demanded. Goods obeying this
rule are called normal goods. In some cases, a change in
income might leave the quantity demanded completely
unaffected. This will be the case with goods for which desire
is completely satisfied after a level of income is obtained.
• Example: if one used to eat salt, the consumption of it will
not change even though his income rises, unless his income
is very low.
• Incase of other commodities, rise of income beyond a
certain level may lead to a fall in the quantity that the
household demand. If the demand for a commodity falls as
income rises, the good is called inferior good.
• The relation between Income and quantity demanded can be
shown by the use of Engels curve
• The curve shows the relationship
between income and demand,
holding other factors constant.
Engel curve for normal good
slopes upwards, implying that as
income rises, quantity demanded
will also increase. Incase of inferior
good, if Y increases Q decreases.
In this case the Engels curve will
slope downwards from left to right.
• Incase of inferior good, if Y
increases Q decreases. In this case
the Engels curve will slope
downwards from left to right.
Consumers tastes and preferences
• When the tastes for a commodity are favorable, consumers will
prefer more of that commodity to other commodities thereby
increasing the demand for the commodity.
• For example, in the beauty, would the taste of women have moved
towards colored hair products such as ponytail or dyeing of hair.
So, the demand of such products would hike.
Advertisement
• As a producer advertises his product, he creates awareness that
his products exist, and he tries to show the superiority of his
product over others in the market. If we hold other factors
constant, we expect that an increase in advertisement expenditure
will lead to an increase in demand.
• Advertising is
• Informative
• Persuasive on price, availability, performance.
• Consumers expectations about future prices
• If consumers expect the price of a commodity to rise in future,
they will buy more of the commodity now and store it. In this case
quantity demanded increases.
• However, should they expect a fall in price in future they will buy
less on the commodity now hoping to buy more in future after the
price has fallen. In this case quantity demanded becomes less.
• The size of population and its composition.
• The greater the size of population to satisfy, the greater the
quantity consumers will be willing to demand. The fewer the
consumer in the market, the less the quantity demanded will be.
• When we talk of composition of population we are talking of the
sex proportion and age group. Certain commodities are
manufactured for certain age group and sex. For instance,
cosmetics are meant to be used by women, napkins by infants,
shaving cream by men. So, producers consider these factors
before deciding how much to produce. Who shall be his target
market?
 Concept of shift of the demand curve

• A shift of the demand curve is

caused by change in other
factors influencing demand other
than price of the commodity. The
impact of these other factors
shall be observed later.
• A shift of the demand curve can
either be to the right or left
depending on the direction on
which a change has taken
place. A shift to the right shows
an increase in demand while a
shift to the left shows a decline in
demand.
• In the diagram above D1
represents an increase in
demand while D2 represents a
decline in demand from the
original demand curve D.
SUPPLY
• Supply of a commodity is defined as the quantity of that
commodity sellers are willing and able to put in the market at a
given price and at a given time.
• Supply should be distinguished from stock, whereas stock is the
total quantity of a commodity which is available at any specific
time, supply is that part of stock which is offered for sale at any
price.
• For example, the supply of oil is not the estimated resources of all
the world’s oil fields, but only that amount which particular price
will bring into the market.
• Supply will always change with price changes. This relationship
between supply and price is called the law of supply.
• The Law states that other factors remaining constant, when price
rises, supply increases and when price falls, supply decreases.
• Supply schedule.
• Is defined as table showing
quantities sellers are willing to put in
the market at all possible prices.
This is shown below
• From a supply schedule a supply
curve can be drawn as shown below.
• From the diagram, the supply curve
slopes upwards from left to right
showing that sellers are willing to
supply more at higher prices and to
supply less at lower prices. It follows
therefore that the supply curve for a
normal good slopes upwards from
left to right.
Factors that influence supply
i. The price of the commodity
ii. Objectives of the firm
iii. The technology used
iv. The cost of production incurred by producers
v. Taxation policies of the government
vi. Weather condition
vii. Subsidies
viii. Price of competing products
ix. Peace and stability
x. Infrastructure
The price of commodity
• At higher prices producers are motivated to produce more thereby
increasing the supply of the commodity under consideration. At
lower prices less is supplied because producers see no reason why
they should produce more because profitability will be negatively
affected.
Objective of the firm
• A firm can have various objectives. For example, profit
maximization; to maximize profit will require that more be supplied
at higher price. However, some welfare organization doesn’t follow
this law. For example, the supply of drugs; supply of drugs may
rise depending on the prevailing situation even though prices are
low.
Technology used
• If better methods of production are used, we again expect output
to be economically produced and so the supply of the commodity
in question will increase. More can be supplied at some price
because per unit cost of production would be lower than in the
case where worse methods of production are used.
Cost of production
• Increase in the cost of production will lower quantity supplied
because producers will find it very expensive to increase output.
However, with low cost of production more is likely to be supplied
since the producer will find easy and cheaper ways of producing
more of the commodity in question.
Taxation policies of the government
• The taxation policies of the government also influence quantity
supplied because if the government raises taxes, the cost of
production goes up thereby reducing quantity supplied. Taxes
make commodities be more expensive than competing products
e.g., East African breweries has been urging the government to
lower taxes on its products so that they could compete well
against the south African Breweries products.
Subsidies
• When the government subsidizes the production of a given good,
the supply of that good also increases because the cost of
production is reduced by the subsidies given.
• Government may decide to incur part of the overall cost of
production as a way of motivating production of certain goods
which otherwise would have been very expensive to produce. Why
South Africa goods compete effectively against other counties’
goods is because of support in the form of subsidies the producers
receive from South Africa government.
Weather condition
• This commonly affect agricultural produce. When weather
condition are good, more is produced and hence supplied and vice
versa.
Price of competing products
• For example Kenyan beer Vs South African beer or Aerial soap Vs
Omo
• Manufacturers of the products from Kenya have been complaining
of unfair competition that has been posed by such imported
products. Such imported products have led to the collapse of many
local industries. For example, Mitumba (secondhand cloths) whose
prices are much lower than locally produced cloths have led to
many textile industries closing down.
• This is a clear example of how prices of competing products would
affect supply.
Peace And Security
Development of infrastructure particularly transport
and communication.
 Movement along a given supply curve and
shift of a supply curve
• A movement along a given supply
curve is caused by changes in the
prices of the commodity. An upward
movement is caused by an increase in
price while a downward movement is
caused by a fall in prices.
• A movement from A to B is caused by
a rise in price from Po to P1 and vice
versa
• A shift of the supply curve is caused
by change in other factors influencing
supply other than price of the
commodity. A shift of the supply curve
can either be to the right or left
depending on the direction on which a
change has taken place. A shift to the
right shows an increase in supply while
a shift to the left shows a decline in
supply
Abnormal supply curves
• There are cases where the law of supply may fail to be
obeyed, and more may be supplied as prices fall and
less as prices rises. A case at hand is the one of target
workers. The supply curve of labor for target workers is
a downward sloping curve showing that at higher
wages rates, target workers are willing to work for less
hours while at low wage rates target workers are willing
to work are willing to work for more hours.
• This is because target workers normally set for
themselves a target and after achieving that target they
don’t bother to go ahead with work. This is shown
below.
• Here it is assumed that out target workers has
set themselves a target of sh. 20 everyday. At
wage rate of sh. 2 per hour. He shall be willing
to work for 10 hours in order to get sh. 20 per
day. When the wage rate is increased to sh. 4
per hour, he is willing only to work for 5 hours
in order to sustain his income of sh. 20 per
day. As the wage rate is increased further to
sh. 10 per hour he reduces his working hours
further to 2 hours only.
• This gives us a downwards sloping supply
curve of labor. The higher the wage rate, the
lesser will be the labor supplied and vice
versa.
• One reason why this would be possible is that
as wage rate increases, the laborer is able to
realize his target within a short time and the
rest of his time is spent on leisure