What is economics :

Economics deals with scarcity and choice, economics is the study of human behavior and households
using little resources to satisfy unlimited wants.
scarce resources results in a choice to be made between alternatives (substitutes), economics is the
study of how society manages its scare resources.

What is scarcity and choice:

Wants are plentiful but means are scarce, without scarcity it would not be necessary to make choices,
Economics has to do with how to use scare resources to satisfy those unlimited wants and how we best
manage scarce resources.
Relationship between unlimited wants and scarce resources is central to economics.
The Choices that must be made between, individuals, businesses, and governments decisions like:
product expansion, price increase or reduction in attempt to increase sales, where should money be
spent?

 Businesses and governments also must make choices everyday – basic fact of
 economic life (scarcity)
 1. Without scarcity it would not be necessary to make choices.
 Wants are plentiful but means are scarce.
 Relationship between unlimited wants and scarce resources is so central to
 economics that most definitions of economics focus almost exclusively on this
 relationshBusinesses and governments also must make choices everyday – basic fact of
economic life (scarcity)
 Relationship between unlimited wants and scarce resources is so central to economics.
Why choice in economics:
 Decisions are made as we all have wants which are plentiful, but the means are scarce,
therefore choices need to be made.

How we use economics.

 Economics further describes, explains, analysis and predicts phenomena such as economic
growth, unemployment, inflation, trade between counties, pricing, poverty, wealth, interest
rates, exchange rates and business cycles.
 Study the behavior of people in a changing environment.
 Attempt to discover regular patterns & behaviors to explain what is happening and predict what
might happen to assist to choose appropriate policy.
 Economics also explain:
o Economic growth
o Unemployment
o Inflation
o Trade
o The prices of goods and services

What is economics used for.

 informed better decision making, to respond better to changes: ‘’how we, business and
government behaves’’ ‘’scarcity & choice’’
Economics is a social science.
 Economics involves:
o An attempt to discover regular patterns of behavior.
 These patterns are used to explain:
o what is happening,
o to predict what might happen.
o to assist policy makers to devise or choose appropriate economic policies.
important – to
 It studies the understand
behavior of human beings, both individually and as groups.
economic
trends and how it
 Economists cannot discover regular patterns of behavior by conducting laboratory experiments,
works to function

nor can they test their theories in this way.

 Economists study the behavior of people in a constantly changing environment.
Why do economists tend to disagree?
 They might make different value judgements.
  They might not agree on the facts.
 They might be biased.
 They might hold different views about how the economy operates.
 They might have different time perspectives.

Microeconomics and macroeconomics

 Microeconomics–focus is on the individual parts of the economy
 Macroeconomics–focus is on the economy as a whole
Microeconomics:
 Focus is on individual parts of the economy.
 Micro comes from Greek word mikros = small
 individual consumers, households, firms or other organizations are considered in
isolation from the rest of the economy.
 Includes the study of demand and supply and prices of individual goods and services.

Macroeconomics:
 Concerned with two economies as a whole.
 Macro comes from Greek word makro = large
 Focus on the big picture
 Develop an overall view of the economics system and we study total economic behavior
 Emphasis on topics such as total production, income and expenditure, economic growth,
aggregate unemployment, the general price level, inflation and balance of
payments.

Microeconomics

Micro (small) one person, one family vs micro economics (large) entire economy
Socialist system – government has more power, heavy government presence.
Capitalist system- dominated by private sector.
Western world – capitalist ideology
Because of scarcity, choices have to be made.
•Every time a choice is made, opportunity cost is incurred
Opportunity cost–the value to the decision maker of the best alternative that could have
been chosen but was not chosen.
Opportunity cost of a choice is the value of the best forgone opportunity, every time a
choice is made, opportunity costs occur.

-Scarcity must not be confused with poverty. Scarcity affects everyone.

scarcity and choice
 Scarcity is the excess of human wants over what can be produced.
 Our demands are always more than resources available.
 Choices have to be made because all needs cannot be satisfied.

Scarce resources: the factors of production

Factors of production:
 Scarce resources that are used to produce goods and services are called factors of production
 When resources are used to produce a certain good, they are not available to produce other
goods.
 A decision to produce more of one good therefore also means that less of another good can be
produced , Because resources are scarce, the use of resources can never be costless.
 There are always costs involved, even if these costs are not always apparent to the consumer of
the goods or services in question.
 Economists frequently must emphasize scarcity and the need for hard, unpopular decisions,
they are generally not a popular group of people
 There are 4 main factors of production.
Primary factors of production
1. Natural resources or land
2. Labour
Secondary factors of production
3. Capital
4. Entrepreneurship
Another distinction is between human resources and non-human resources (natural resources and
capital)

Goods and services

Most wants are satisfied by goods and services.
Goods are tangible objects like food, clothing, houses, smart phones and motorcars.
Services are intangible things like medical services, legal services, online banking,
the services of an economies lecturer and the services provided by public servants.

Consumer goods and capital goods

Consumer goods
 are goods that are used or consumed by individuals or households to satisfy wants.
 Food, beer, playstation games, shoes, furniture, appliances and motor cars
Capital goods
 are goods that are not consumed in this way but are used in the production of other goods.
 This include all types of machinery, plants and equipment used in manufacturing and
construction, school buildings, university residences, roads, dams and bridges.
 Limited timeframe
 They are subject to wear and tear and may also become obsolete.
 Their value therefore depreciates over time.
 Do not themselves yield direct consumer satisfaction but permit production & satisfaction in
future.

Different categories of consumer goods :

 Non-durable goods
o Used once
o Food, wine, petrol, airtime & meds
 Semi-durable goods
o Used more than once
o Lasts for a limited period
 o Clothing, shoes, sheets, blankets & motorcar tyres
 Durable goods
o Last for a number of years
o Furniture, refrigerator, appliances, dishwashers and cars.
 These apply to services as well.

Final goods and intermediate goods :

 Final goods
o the goods that are used or consumed by individuals, households and firms.
o Loaf of bread
o Flour purchased by household
 Intermediate goods
o are goods that are purchased to be used as inputs in producing other goods.
o Processed further before use
o Flour used by baker to produce bread, cake ect.

Private goods and public goods :

 Private good
o Is a good that is consumed by individuals or households. All typical consumer goods
o Food, clothes, furniture & cars.
o Consumption by others can be excluded.
 Public good
o is a good that is used by the community or society at large.
o Consumption by individuals cannot be excluded.
o Traffic light, national defense, weather forecasts.
Economic goods and free goods :
 Economic good
o good that is produced at a cost from scarce resources.
o Scarce goods

 A free good
o good that is not scarce and therefore has no price (Air, sunshine and sea water)

Homogeneous and heterogeneous goods:

 Homogeneous goods
o goods that are all exactly alike.
o A fine ounce of gold is one example - one fine ounce is exactly the same as another.
 Heterogeneous
o Or differentiated goods
o goods that are available in different varieties, qualities, or brands.
o Most goods are heterogeneous goods - even something like bread, which comes in
different shapes, sizes, and qualities.
o Shoes, clothing , smartphones, appliances ect all things come in different brands and
varieties.

Opportunity cost
 The value of the best alternative that could have been chose but was not in any situation.
 Measuring cost of alternative chose in terms of the alternative not chosen.

Government were all faced with difficult choices between different alternatives : This is what the
economic problem is all about.
When we are faced with such a choice, we can measure the cost of the alternative we have chosen
in terms of the alternatives that we have to sacrifice = opportunity cost.
The opportunity cost of a choice is the value to the decision maker of the best alternative that could
have been chosen but was not chosen.
In other words, the opportunity cost of a choice is the value of the best forgone opportunity.
Every time a choice is made, opportunity costs are incurred.
Opportunity cost is one of the most important concepts in economics, since it captures the
essence of the problems of scarcity and choice
Factors of Production:

Natural resources:
 Natural resources (sometimes called land) consist of all the gifts of nature.
 They include mineral deposits, water, arable land, vegetation, natural forests, marine resources
other animal life, the atmosphere and even sunshine.
 Natural resources are fixed in supply.
 Often possible to exploit more of the natural resources that are available.
 Once they are used, they cannot be replaced. We therefore refer to minerals as non-renewable
or exhaustible assets.
 Both the quality and the quantity of natural resources are important.
 Because natural resources are in fixed supply, the rate at which they are exploited is often a
cause of concern.
Labor:
 Goods and services cannot be produced without human effort.
 Labor can be defined as the exercise of human mental and physical effort in the production of
goods and services.
 The quantity of labor depends on the size of the population and the proportion of the population
that is able and willing to work.
 The pro-portion of children, women and elderly people all affect the available quantity of labor,
which is called the labor force.
 The quality of labor is even more important than the quantity of labor.
 The term human capital is usually used to refer to the quality of labor, and thus to the skill,
knowledge, and health of the workers.
Capital:
 Capital comprises all manufactured resources, such as machines, tools and buildings, which are
used in the production of other goods and services.
 Capital goods are not produced for their own sake but to produce other goods. When we talk
about capital as a factor of production, we are referring to all those tangible things that are used
to produce other things.
 To produce capital goods, current consumption has to be sacrificed in favor of future
consumption.
The more capital goods that are produced in a particular period, the lower the number of
consumer goods that will be produced in that period, but the greater the production capacity will
be in future.
Capital goods do not have an unlimited life.
Equipment can also become outdated or obsolete because of technological progress.
Provision therefore has to be made for the replacement of existing capital goods.

Entrepreneurship:
 The availability of natural resources, labor and capital is not sufficient to ensure economic
success. These factors of production have to be combined and organized by people who see
opportunities and are willing to take risks by producing goods in the expectation that they will
be sold at a profit. These people are called entrepreneurs. The entrepreneur is the driving force
behind production. Entrepreneurs are the initiators, the people who take the initiative. They are
also the innovators, the people who introduce new products and new techniques on a
commercial basis.
The entrepreneur is more than a manager. The entrepreneur is dynamic, a restless spirit, an
ideal person, a person of action who has the ability to inspire others.
All that can be stated with certainty is that entrepreneurship is an important economic force. In
countries where entrepreneurship is lacking, the government is sometimes forced to act as
entrepreneur in an attempt to stimulate economic development.

Technology:
 Technology is sometimes identified as a fifth factor of production.
 At any given time, a society has a certain amount of knowledge about the ways in which goods
can be produced.
 When new knowledge is discovered and put into practice, more goods and services can be
produced with a given amount of natural resources, labor, capital, and entrepreneurship.
 Discovery of new knowledge is called invention, while the incorporation of this knowledge into
actual production techniques and products is called innovation.
 The application of inventions also requires entrepreneurs to identify the opportunities and
exploit them.

Money is not a factor of production.

 Money is often regarded as the key to everything else. Money is important, but it is not a factor
of production. Goods and services cannot be produced with money.
 Money can be exchanged for goods and services.
 To produce goods and services we need factors of production.

techniques & methods: economic analysis

Theory involves simplification and abstraction, main requirement of analysis; is to identify the most
important elements and relationships that we need to explain and ignore the rest.

Purposes of economic theory;

1. explain or understand how diff things are related in an economic world
2. predict what will happen if something changes
3. serve as a basis for formulation and analysis of decisions on economic policy
economic theory;
1. attempt to explain and analyse economic behaviour
2. can be expressed in words, graphs, , numbers , equations or symbols
advantages;
1. symbols and equations.
a. efficient or shorthand way of expressing a relationship.
b. we can use the rule of algebra to Analyse relationships showing positive relations.
c. A large number of variables can be analyzed
Scarcity , choice and opportunity costs : the Production possibility curve PPC
 Scarcity, choice & opportunity costs can be illustrated with the PPC
 Also known as ‘production possibilities frontier’’
PPC Graph
PPC curve- indicates the combination of any two goods or services attained when resources fully &
efficiently employed.
 Illustrating scarcity, choice, and opportunity cost: the production possibilities curve
 Scarcity, choice and opportunity cost can be illustrated with the aid of a production possibilities
curve.
 Resources must be shifted from one production possibility to produce the other.
 These combinations represent the maximum amounts that can be produced with all the
available resources.
 The community therefore has to choose between more of one product or another. Given the
available resources, it’s impossible to produce more of one good without decreasing the
production of the other good.
 The different alternatives can be illustrated graphically in a production possibility curve
o PPC Graph
 Curve indicates the maximum possible level of outputs with limited resources &
fixed production.
 Doted lines imply other possible combinations
 Various points on the curve shows the Combinations which represents the
maximum amount that can be produced with available resources.
 The difference between products are the Opportunity cost of these products which
are what could have been done with the available resources.
 Opportunity cost of each additional product increases hence the curve bulges
outwards from the origin
  Opportunity costs increases because resources are not equally efficient in
producing 2 goods.
 PPC illustrates that resources are being combined the most efficient way possible.

2. Ceteris paribus
Assuming that all other things remain the same. This is an important assumption in economics
as it allows analysis to consider the impact of individual variables.
Market Structure (9-10)
Firms can take various forms
•Goal of the firm–maximise profits
•Profit–the surplus of revenue over cost
•Total revenue–total value of sales (price x quantity, or P x Q = PQ)
•Average revenue–total revenue divided by quantity sold (PQ/Q)
•Marginal revenue–the additional revenue earned by selling an additional unit of the product.

Short run vs. long run:

–Short run–the period during which at least one of the inputs is fixed
–Long run–all the inputs are variable
•Difference not calendar time!

BASIC COST AND PROFIT CONCEPTS

Cost
•Opportunity cost–the best alternative sacrificed (or forgone)
•Accounting costs= explicit costs
•Economic costs= explicit costs + implicit costs
economic costs of production
= opportunity costs
= explicit costs + implicit costs

 Defining economics
‘’study of mankind in the ordinary business of life’’ ‘’science of household management’’ ‘’
choice’’ ‘’scarcity’’

 Production: Economics examines how goods and services are produced.

 Distribution: It analyzes how resources are allocated among different uses.
  Consumption: Economics studies how individuals and societies use the goods and
services they produce.

 Techniques & methods for economic analysis

 Economic analysis involves identifying and understanding economic variables. These
variables include quantities like demand, supply, prices, production costs, wages, labor,
and capital. They change based on various determinants and economic activities.

 Scarcity, choice, opportunity cost and PPC

Microeconomics:
 Microeconomics focuses on the behavior of individual economic agents, such as
consumers, firms, and markets.
 It examines how these agents make decisions regarding resource allocation, production,
consumption, and pricing.
 Key topics include supply and demand, elasticity, market structures, and consumer
behavior.

Scarcity:
 Scarcity refers to the fundamental economic problem where resources (such as time,
money, labor, and natural resources) are limited relative to unlimited human wants.
 Because of scarcity, individuals and societies must make choices about how to allocate
these scarce resources efficiently.
 Scarcity drives decision-making and trade-offs.

Choice:
 Choice is the process of selecting one option over another.
 Individuals and businesses face choices daily, whether it’s allocating time, spending
money, or deciding what to produce.
 Rational decision-makers weigh the benefits and costs of different options before making
choices.

Opportunity Cost:
 Opportunity cost represents the value of the next best alternative foregone when a
choice is made.
For example, if you choose to study for an extra hour instead of going out with friends,
the opportunity cost is the enjoyment and socializing you miss out on.
 Opportunity cost helps evaluate trade-offs and assess the true cost of decisions.

Production Possibilities Curve (PPC):

 The PPC illustrates the maximum combination of two goods that an economy can
produce given its resources and technology.
 It shows the trade-off between producing one good versus another.
 Points on the PPC represent efficient resource allocation, while points inside the curve
indicate underutilization, and points outside the curve are unattainable with current
resources.
Remember, these concepts form the foundation of economic analysis and guide decision-
making in both individual and societal contexts.
 Explain the difference between Accounting costs and economic costs
o Accounting costs usually consider explicit costs only. Explicit costs are the monetary
payments for the factors of production and other inputs hired by the firm. An example is
the purchase of a computer.
Indifference curve
basic assumptions of indifference curves;
 Completeness. It is assumed that a consumer is able to rank all possible combinations (or
bundles) of goods and services in order of preference. • Consistency (transitivity). Consumers
are assumed to act consistently. • Non-satiation (non-satiety). Consumers are not yet fully
satisfied and prefer more to less
Explain why an indifference curve is convex to the origin.
 an indifference curve is convex to the origin due to diminishing marginal rate of substitution
(MRS). √ Diminishing MRS means that the number of units of 'Good Y' that a consumer wants to
substitute for one extra unit of 'Good X' goes on decreasing as the consumption of Good X
increases. As consumption of Good X increases, the willingness to pay for it diminishes (due to
the law of diminishing marginal utility). √ This payment is in terms of the units of Good Y
sacrificed
Thus, MRS diminishes along an indifference curve, which makes it convex to the origin.

Economic systems and key flows

Interdependence between major economic sectors

 interdependence between households, firms, and markets plays a crucial role in shaping
economic activities and resource allocation

Demand, supply and their applications.

understanding demand and supply is crucial for analyzing market dynamics and making
informed economic decisions!

Supply is the amount of a specific good or service that's available in the market. Demand is
the amount of the good or service that customers want to buy. Supply and demand are both
influenced by the price of goods and services
Demand:
 Factors affecting demand (income, taste, price of other goods, future expected prices
etc)
 Definition: Demand refers to the amount of a good or service that consumers are willing
and able to purchase at each price.
Factors Influencing Demand:
 Needs and Wants: Demand is based on both needs and wants. If consumers have no
need or want for something, they won’t buy it.
 Ability to Pay: Effective demand requires the ability to pay. If someone cannot afford a
product, their demand is limited.

Demand is the quantity of a good that consumers are willing and able to purchase at
various prices at a given time.
Consumer's desire and willingness to buy a product or service at a given period or over time.
Law of Demand:
 As the price increases, the quantity demanded decreases, and vice versa. This inverse
relationship is fundamental in economics.

Demand Curve:
 A demand curve shows the relationship between price and quantity demanded. It slopes
downward from left to right
Change in demand.
 Change in other variables leads to a shift of demand curve.
Equilibrium moves from point A to point B and equilibrium price and quantity change.
Supply:
 Definition: Supply represents the quantity of a good or service that producers are willing
and able to offer for sale at each price.

Factors Influencing Supply: (input costs, tech, price of other goods etc)
 Production Costs: Higher costs may reduce supply.
 Technology and Efficiency: Improved technology can increase supply.
 Resource Availability: Access to resources affects production.
Law of Supply:
 As the price increases, the quantity supplied increases, and vice versa. This positive
relationship reflects the law of supply.
Supply Curve:
 A supply curve shows the relationship between price and quantity supplied. It slopes
upward from left to right.
Change in supply.
 Changes in variables besides the price leads to shift of supply curve
 New equilibrium quantity and price established.
Equilibrium:
 Equilibrium occurs when demand equals supply in a market.
 The equilibrium price and quantity are where the demand and supply curves intersect.
 Change in price leads to change in quality demanded /supplied- movement along same
curve.

 Demonstrate and explain, using a clearly labelled diagram, the effect of this decommissioning
move by Eskom on the equilibrium price and equilibrium quantity of electricity, as stated in
the scenario above

There will be a decrease in the supply of electricity as Eskom decommissions the power stations. The
decrease in supply is illustrated by a leftward shift of the supply curve from S to S2. As a result, the
price of electricity (tariffs paid) will increase from P0 to P2 and the quantity will decrease from Q0 to
Q2.
  advise to the Minister of Energy as to how the price of electricity can be reduced
minister to encourage more players or liberalise the energy sector so that there are more
suppliers in the industry. An increase in supply will result in a decrease in the price of
electricity. minister should also give priority power producers who are focusing on green
technology.
The inverse of the demand and supply functions for shirts is given by the following equations

Demand: 𝑃 = 400 − 2𝑄𝑑

respectively:

Supply: 𝑃 = 300 + 3𝑄𝑠

 Calculate the equilibrium price and quantity of shirts
At equilibrium Pd = Ps
400 − 2𝑄 = 300 + 3𝑄
100 = 5𝑄

20 = 𝑄
100/5=20

𝑃 = 400 − 2(20)
To get price, substitute into any of the equations above:

𝑃 = 360
400 - 40

 Assume that the price of shirts is R200 per shirt. Use your answer in 3.1 to explain the
resulting situation in the market for shirts, and how equilibrium will be restored without
government intervention, ceteris paribus.

A price of R200 is below the equilibrium price. This means that there will be an excess demand of shirts
in the market, ceteris paribus. The excess demand will put an upward pressure in price. As the price
increases, the quantity demanded will decrease and the quantity supplied will increase until equilibrium
is attained.

 differences between the following: Short run and long run period
o The short run period is a period in which at least one of the factors remains fixed whilst
others a variable. In the long run, every factor is variable, and this can include a change
the methods of production.

 Distinguish between cardinal utility and ordinal utility and illustrate with examples.
o Cardinal utility is the assignment of a numerical value to utility. √ Models that incorporate
cardinal utility use the theoretical unit of utility, the util, in the same way that any other
measurable quantity is used. √In other words, a basket of bananas might give a
consumer a utility of 10, while a basket of mangoes might give a utility of 20. √ In ordinal
utility, the consumer only ranks√ choices in terms of preference√ but we do not give
exact numerical figures for utility. √ For example, we prefer a BMW car to a Nissan car,
but we don’t say by how much.

Topic 6: Market structures.

 Markets and general equilibrium conditions
 General equilibrium shows how supply and demand interact and tend toward a balance in an
economy of multiple markets working at once. The balance of competing levels of supply and
demand in different markets ultimately creates a price equilibrium.
 The general equilibrium theory assumes there is perfect competition in goods and services, the
income of consumers is constant and given, production techniques have no change, all firms
operate under the same cost conditions, and full employment.

 Short run equilibrium under perfect competition

 Monopoly
o an enterprise that is the only seller of a good or service. In the absence of government
intervention, a monopoly is free to set any price it chooses and will usually set the price
that yields the largest possible profit.
o Public utilities: gas, electric, water, cable TV, and local telephone service companies, are
often pure monopolies.
  Monopolistic competition
o type of market structure where many companies are present in an industry, and they
produce similar but differentiated products. None of the companies enjoy a monopoly,
and each company operates independently without regard to the actions of other
companies.
o exists when many companies offer competitive products or services that are similar, but
not exact substitutes. Hair salons and clothing are examples of industries with
monopolistic competition.

 Oligopoly
o a market structure with a small number of firms, none of which can keep the others from
having significant influence.
o 'Competition among the few'. An oligopoly is an industry which is dominated by a few
firms.
o a form of imperfect competition and is usually described as the competition among a few.
o exists when there are two to ten sellers in a market selling homogeneous or
differentiated products.
o cold drinks industry.

A start-up company in Gauteng has the following information about labour, costs and output. You are
required to use your knowledge in microeconomics theory to find the Total Fixed Cost (TFC), Total
Variable Cost (TVC), Marginal Product (MP) and Marginal Cost (MC) by filling in the table below.

Fixed costs remain the same, TC-TFC=TVC MP (previous output – current output) MC (previous TVC-
Current TVC /MP)
Topic 3: elasticity.
Elasticity (calculate by how much prices changes will affect the demand of the product) (by
how much)
Price elasticity of demand (calculate how much demand will be affected by)
Factors affecting price elasticity of demand.
Degrees of elasticity of demand
Calculation using general formula.
Factors affecting price elasticity of demand.
Available substitutes
Time
Expenditure share
Addictive goods

Price Elasticity of demand:

Price Elasticity of Demand (PED) measures how the quantity demanded of a product changes in
response to fluctuations/changes in its price.
Factors effecting price elasticity of demand:
 substitute goods available:
o consumers can easily substitute the good with other available goods similar, the price
elasticity of demand tends to be elastic. In contrast, if substitutes are scarce, demand
becomes less sensitive to price changes.
 Time:
o The elasticity of demand can vary over time. In the short term, demand may be inelastic,
but over a longer period, consumers may adjust their behavior and find substitutes,
making demand more elastic2.
 Nature of goods:
o Goods can be a necessity of one while a comfort or luxury for the other.
o Perishable goods like fresh produce have more elastic demand, consumers are more
responsive to changes as the products have a limited life span.
 Consumers income availible to spend on goods:
o The price elasticity of demand is lower when consumers spend a small portion of their
income on a product. Therefore, a change in the price of a good has little impact on the
consumer's ability or willingness to purchase the good.

Possible reasons for a product having an elastic demand

• The good has close substitutes. • The good is a luxury. • The time period under consideration is
in the long run • Large proportion of income is spent on the product • The good is durable • The
product is not a necessity or addictive.

Possible reasons for a product having an Inelastic demand

  Consumers income & budget/competitors or substitutes, where the product is a need, necessity,
or luxury,
Elasticity of demand is generally lower in a short run because consumers haven't had time to
react or get locked into their current choice. the cost of switching between products. In the long
run, however, with time, they have a better chance of finding substitute goods. demand is more
inelastic in the short run than in the long run.

if price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic. If a good's price
elasticity is 0 (no amount of price change produces a change in demand), it is perfectly inelastic.

Relatively inelastic less than 1 Relatively elastic: greater than 1 Perfectly inelastic (Ep
=0) Perfectly elastic demand (Ep=00)

Inelastic Demand: (steeper)price elasticity of demand is less than 1, consumers are less sensitive to
price changes. Even if prices rise, the quantity demanded doesn’t decrease significantly. Essential
goods like food, medicine, and utilities often exhibit inelastic demand. Low price elasticity of demand,
changes in price leads to smaller change in quantity demanded.

Elastic Demand: (flatten)price elasticity of demand is greater than 1, the good is considered elastic.
consumers are responsive to price changes. If the price decreases, demand increases significantly. they
are not essential items people need to survive. Common examples include luxury items, vacations, and
non-essential goods. High price elasticity of demand- changes in price leades to bigger changes in
quantity demanded.

Perfectly Inelastic Demand: (vertical)quantity demanded remains unchanged regardless of price

variations. Even if the price increases consumers continue to buy the same amount. An example could
be life-saving medications and fresh water in a time of drought – people will pay any price to obtain
them. The demand curve for perfectly inelastic demand is a vertical straight line.
Regardless of prices product remains in demand. a demand curve is perfectly vertical (up and down)
then we say it is perfectly inelastic. Changes in price causes no change in quantity demanded. Demand
is inelastic to price.

Perfectly Elastic Demand: rare, a small change in price leads to an infinite change in quantity
demanded, consumers are extremely sensitive to price fluctuations. if the price of a specific brand
increases slightly, consumers might switch to a different brand or stop buying altogether. The demand
curve for perfectly elastic demand is a horizontal straight line.
Eg ; generic meds consumers can switch to original branded meds, commodities like wheat, rice oil
consumers can switch to alternative. seasonal airline tickets, price increases consumers look for
another airline.

Price elasticity of supply (PES)

Definition: measure of how sensitive the quantity supplied of a good is to changes in price. how
quickly producers shift production levels in response to price changes. when prices rise, producers will
want to increase the quantity supplied to sell more at higher prices.
Price elasticity of supply is a measurement of what happens to the supply of a good with regards to a
price change. what happens to the available quantity of a good when the price changes.

main types of supply elasticity: Relatively Elastic Supply, Relatively Inelastic Supply, Perfectly
Elastic Supply, Perfectly Inelastic Supply, and Unitary Elastic Supply.
Formula: Percent Change in Supply/Percent Change in Price = Supply Elasticity Value
Perfectly Elastic (PES = ∞):
even a slight price change results in an infinite change in quantity supplied.
Agricultural goods with perishable crops may exhibit near-perfect elasticity in the short run, as farmers
can quickly adjust supply in response to price changes.

Perfectly Inelastic (PES = 0):

quantity supplied does not respond to price changes.
Producers are unable or unwilling to adjust supply in response to price fluctuations.
Life-saving medications may have perfectly inelastic supply; their production cannot be immediately
increased, regardless of price changes.

Relatively Elastic (PES > 1):

a percentage change in price results in a larger percentage change in quantity supplied.
Producers can respond to price changes by adjusting production.
supply of luxury cars may be relatively elastic, as manufacturers can increase production in response to
higher prices.
Relatively Inelastic (0 < PES < 1):
a percentage change in price results in a smaller percentage change in quantity supplied.
Producers have limited flexibility to adjust supply quickly.
The supply of antique collectibles may be relatively inelastic, as it is difficult to increase production
quickly in response to price changes.

Factors Influencing Price Elasticity of Supply

 Time Horizon: In the short run, supply may be less elastic as it takes time to adjust production
capacity. In the long run, supply can be more elastic as firms can make capital investments to
expand capacity.
 Resource Availability: The availability of resources, such as skilled labor or raw materials, can
influence supply elasticity. Limited resources may result in less elastic supply.
 Production Technology: The ease with which production can be scaled up or down influences
elasticity. Advanced technology can make supply more elastic.
 Perishability: Goods with short shelf lives tend to have more elastic supply in the short run, as
producers can quickly adjust to changing demand.

The Distinction Between Short Run and Long Run

 Short Run: The short run refers to a period during which some factors of production, such as
plant capacity or labor, are fixed and cannot be adjusted. Supply may be less elastic in the short
run.
 Long Run: The long run is a period during which all factors of production can be adjusted. Firms
can expand or contract production capacity. Supply can be more elastic in the long run.

Significance for Elasticity of Supply:

In the short run, supply may be less responsive to price changes due to limited flexibility in adjusting
production levels.
In the long run, firms have more options to adjust production capacity, making supply more responsive
to price changes.

Factors Affecting Price Elasticity Of Supply:

Gestation Period:
Gestation period is the time period needed in which goods and services can be produced.
Longer gestation period(e.g. wheat) Inelastic PES
Shorter gestation period(e.g. bread) Elastic PES
Nature of The Product:
Perishable (can’t be stored for a longer period) Inelastic PES
Durable (can be stored for a longer period) Elastic PES
Availability of Raw Materials:
Not easily available (wood for wooden furniture) Inelastic PES
Easily available (plastic for plastic furniture) Elastic PES
Substitute goods
goods that satisfies similar needs and may be consumed as an alternative to another good
e.g. olive oil spread instead of butter.
if there are price changes this will affect the demand of both products.
If Good B's price rises this causes consumers to switch towards the cheaper product i.e. Good A. an
outwards shift in Good A's demand curve at any given price.

If Good B's pricefalls this causes consumers to switch expenditure away from Good A as that is more
expensive compared to Good B. represented by an inwards shift in Good A's demand curve at
any given price.

Complementary goods
goods which is purchased alongside another good as they need to be consumed together to satisfy a
want or desire.
complementary goods in a demand and supply framework.
Pasta and pasta sauce are two goods which need to be consumed together and therefore are
complementary goods.
an increase in supply of pasta leads to a fall in the price due to excess supply.
If the price of pasta falls, demand increases for pasta but this will also cause the demand for pasta
sauce to increase as they are complementary goods. Hence why the demand curve for pasta sauce
shifts outwards.
Government intervention
When a Government introduces a regulation, indirect tax or subsidy that is designed to overcome a
specific market failure e.g taxes to discourage consumption of alcohol and petrol, subsidies to
encourage installation of solar panels or state provision of education to correct insufficient supply.
In this instance, there is a presence of a negative externality that causes a divergence between the
marginal social cost and the marginal private cost curves. Therefore the only way this externality can
be removed is if the government introduces a tax equidistant to the distance between the marginal
social and marginal private cost curves. In this case the government has successfully imposed a tax of
the correct level and this makes the marginal social and private cost curves equal to each other and
therefore firms now realise the negative externality they were producing and therefore the quantity
being produced is at the socially optimal level. As a result the dead weight loss triangle has been
removed and the welfare for society has increased.
Which of the following shifts the supply curve An anticipated drought that will
leftward? make inputs more expensive.

Diminishing marginal rate of substitution falls as one travels down

necessarily implies that the marginal rate of (eastward) along an indifference
substitution curve.
Perfect complements will have indifference L-shaped.
curves that are
After graduating from high school, Steve had the income he could have earned
three choices, listed in order of preference: at the factory plus the direct cost
(1) matriculate at our campus, (2) work in a of attending college here (tuition,
printed circuit board factory, or (3) attend a textbooks, etc.)
rival college. His opportunity cost of going to
college here includes which of the following?
The income effect is could be in the same or in the
opposite direction from the
substitution effect.
f markets for some addictive drugs are found the income effect is larger than
to have a higher price-elasticity of demand expected.
than was often thought, and if many addicts
have difficulty holding down steady, well-
paying jobs, we might speculate that the
most likely reason for the surprising elasticity
estimates is that
What is a flow variable Variable that can be measured
 over a period of time
Increase in adverts showing dangers of A decrease in both equilibrium
sweeteners price and equilibrium traded.
What is the impact of equilibrium price and
equilibrium quantity of sweeteners traded
Government sets a min price for maize above An excess supply of maize
equilibrium price in a competitive market
what will happen to the maize market
Beef and leather compliment products, what The supply curve of leather will
will happen to demand and supply curve of shift
leather if beef falls , ceteris paribus?
What relationship is shown between 2 Negatively sloped
variables that move in opposite directions on
graph
A and B are substitutes, what is the impact of An upward movement along the
an increase in the price of A demand curve for A
Shape of an indifference curve for meat and L shaped
salt if complement products
Describe marginal utility price ratio Satisfaction a consumer gets per
rand spend on commodity
Given the weight of marginal utility what A rise in marginal utility
would be the impact of a fall in price
Income elasticity of demand -0,5 what could Increase by 5%
be an impact of 10% decrease in income to
quantity for oranges demanded
Marginal rate of substitution for cappacino He will give up four units of tea to
and tea is 4 what would the subsequent get an extra unit of cuppachino
action of consumer be
Utility function that describes consumer Cardinal utility function
preference in terms of available commodity
choices
the change in utility, or satisfaction, resulting Income utility function
from a change in an individual's income
representing the preferences of an agent on Ordinal utility function
an ordinal scale. Ordinal utility theory claims
that it is only meaningful to ask which option
is better than the other, but it is meaningless
to ask how much better it is or how good it
is.
Perfect substitutes have indifference curves Consumers would get the same
as a straight line sloping downwards from left satisfaction from any unit of
to right commodities
Why does monopolist not operate along the Monopolist can increase total rev
inelastic portion of the demand curve by lowering the prices
At which point will a firm break even When average costs is equal to
average revenue
Short run production function, at what point When marginal product starts
does the firm start experiencing diminishing decreasing
returns
Assuming the firms total sales rev exceeds An abnormal profit
total economic costs what is the firm said to
be making