MODULE CODE: CDT 5109

MODULE NAME: BASIC MICRI ECONOMICS

TOPIC ONE

WHAT IS ECONOMICS

Economics is the social science that studies how individuals, businesses, governments, and
societies make choices about allocating limited resources to satisfy their unlimited wants and
needs. It focuses on understanding how people make decisions, how resources are distributed,
and how these decisions affect the production, distribution, and consumption of goods and
services.

Economics is typically divided into two main branches:

1. Microeconomics:

o Focuses on the behavior of individual consumers, firms, and industries. It

examines how they make decisions based on factors like price, demand, supply,
and competition, and how these decisions affect the allocation of resources and
market outcomes.

2. Macroeconomics:

o Focuses on the broader economy as a whole. It studies aggregate indicators like

GDP (Gross Domestic Product), unemployment, inflation, and national income.
Macroeconomics explores how governments and central banks influence
economic activity through policies such as taxation, government spending, and
monetary policy.

Key Concepts in Economics:

1. Scarcity:

o Refers to the fundamental economic problem that arises because resources (such
as land, labor, and capital) are limited, while human wants and needs are virtually
limitless.

2. Opportunity Cost:

o The value of the next best alternative that must be forgone when making a
decision. It emphasizes that every choice has a trade-off.

3. Supply and Demand:

o The foundational model of how markets work. Demand represents how much
consumers are willing to buy at different prices, while supply represents how
much producers are willing to sell. The interaction of supply and demand
determines prices and quantities in a market.

4. Incentives:
 o Factors that motivate individuals or businesses to make certain decisions.
Economic agents respond to incentives such as profit, wages, prices, or tax rates.

5. Market Equilibrium:

o Occurs when the quantity supplied equals the quantity demanded at a certain
price, leading to stable market conditions.

6. Efficiency:

o Refers to the optimal use of resources to achieve the maximum possible

satisfaction or output. An efficient economy maximizes the production of goods
and services without wasting resources.

7. Economic Systems:

o The way a society organizes its resources and distributes goods and services. The
main types of economic systems are capitalism, socialism, and mixed economies.

8. Externalities:

o Occur when a third party is affected by the economic activities of others. These
can be positive (e.g., education benefits society) or negative (e.g., pollution
harming the environment).

9. Markets and Trade:

o Economics also studies how individuals and countries engage in trade, which can
lead to specialization and comparative advantage, enabling more efficient
production and consumption.

In essence, economics seeks to understand how societies make decisions about the use of scarce
resources, how they distribute those resources, and the outcomes of those decisions. It is a tool to
help people, businesses, and governments make informed choices that contribute to welfare and
prosperity.

DEFINE MICRO ECONOMICS AND ITS RELATED CONCEPTS

Microeconomics is a branch of economics that focuses on the behavior of individual consumers,
firms, and industries, and how they make decisions regarding the allocation of limited resources.
It studies the supply and demand for goods and services, and how this influences prices,
production, and consumption. Microeconomics examines the mechanisms of markets, how prices
are determined, and how individuals and businesses respond to changes in those prices.

Key Concepts Related to Microeconomics:

1. Demand and Supply:

o Demand: Refers to the quantity of a good or service that consumers are willing to
buy at various prices, during a given time period.

o Supply: Refers to the quantity of a good or service that producers are willing to
sell at various prices, during a given time period.

o The interaction between supply and demand determines the equilibrium price and
quantity in the market.

2. Elasticity:

o Refers to the responsiveness of the quantity demanded or supplied of a good or

service to changes in its price or other factors, such as income or the price of
related goods.

o Price elasticity of demand measures how much the quantity demanded changes
when the price of the good changes.

o Price elasticity of supply measures how much the quantity supplied changes
when the price of the good changes.

3. Utility:

o Refers to the satisfaction or pleasure derived from consuming goods and services.

o Total utility is the total satisfaction from all units consumed, while marginal
utility is the additional satisfaction gained from consuming one more unit.

4. Production and Costs:

o Production: Refers to the process of combining resources (land, labor, capital,

and entrepreneurship) to create goods and services.

o Costs: Involves both fixed costs (costs that do not change with output) and
variable costs (costs that change with output). Firms aim to minimize costs while
maximizing production efficiency.
 5. Market Structures:

o Different types of market structures affect how businesses set prices and produce
goods and services. The four main types are:

 Perfect competition: Many firms, homogeneous products, and no barriers

to entry.

 Monopoly: A single firm dominates the market, with significant barriers

to entry.

 Monopolistic competition: Many firms, differentiated products, and some

barriers to entry.

 Oligopoly: A few firms dominate the market, often with interdependent

pricing strategies.

6. Marginal Analysis:

o Involves comparing the additional benefits of an action to the additional costs

incurred. It is used to determine the optimal level of production, consumption, or
investment.

7. Factor Markets:

o Refers to the markets for factors of production (land, labor, capital, and
entrepreneurship) where individuals and firms buy and sell the services of these
factors.

8. Income Distribution:

o Studies how income is distributed among individuals and groups in an economy.

It examines the factors influencing income levels, such as labor productivity,
education, and capital ownership.

Microeconomics helps explain the decision-making processes of individuals and firms, and how
they interact in markets to determine the prices and quantities of goods and services, ultimately
impacting the overall economy.

DESCRIBE ECONOMIC SYSTEM

An economic system refers to the way in which a society organizes the production, distribution,
and consumption of goods and services. It defines how resources (such as labor, land, and
capital) are allocated and who gets to make decisions about what is produced, how it is produced,
and for whom it is produced. Different economic systems reflect different approaches to
managing these processes, often influenced by cultural, political, and historical factors.

There are four main types of economic systems:

1. Market Economy (Capitalism):

 Definition: In a market economy, the production and distribution of goods and services
are guided by the choices of individuals and businesses in markets. Prices are determined
by supply and demand, and there is minimal government intervention.

 Key Features:

o Private Ownership: Individuals and businesses own the factors of production

(land, labor, capital).

o Competition: Numerous firms compete for market share, leading to innovation

and efficiency.

o Profit Motive: Producers are driven by the desire to earn profits, which
encourages efficient resource use.

o Consumer Sovereignty: Consumers' preferences drive the types of goods and

services that are produced.

o Price Mechanism: Prices are determined by supply and demand in the market,
acting as signals for producers and consumers.

 Examples: The United States, most Western European countries, and Japan operate
largely under market economic principles.

2. Command Economy (Planned Economy):

 Definition: In a command economy, the government makes all key decisions regarding
the production and distribution of goods and services. The government owns and controls
most or all of the factors of production.

 Key Features:

o Government Ownership: The government owns and controls land, labor, capital,
and enterprises.

o Central Planning: Economic decisions about what to produce, how to produce,

and for whom to produce are made by a central authority or planning body.

o Lack of Competition: With most industries controlled by the state, competition is

limited.

o Economic Equality: The aim is often to reduce income inequality and ensure
basic needs are met for everyone.
  Examples: The former Soviet Union, North Korea, and Cuba are examples of countries
that have employed command economies, though many have moved toward more mixed
or market-based systems over time.

3. Mixed Economy:

 Definition: A mixed economy combines elements of both market and command

economies. While private businesses operate in most sectors, the government also plays
an important role in regulating or providing certain goods and services, such as
healthcare, education, and infrastructure.

 Key Features:

o Private and Public Ownership: Both private businesses and government-owned

entities coexist. The government may own or regulate industries that are
considered vital, such as energy, transportation, or healthcare.

o Government Intervention: The government enacts policies to correct market

failures, protect the environment, provide public goods, and ensure social welfare.

o Balance of Market and State: Markets determine most prices, but the
government regulates or intervenes in areas like taxation, public spending, and
employment.

 Examples: Most modern economies, including those of Canada, the United Kingdom,
Australia, and most of Europe, are mixed economies, combining elements of capitalism
with government regulation.

4. Traditional Economy:

 Definition: A traditional economy is one where economic decisions are based on

customs, traditions, and cultural beliefs. Production methods and the distribution of goods
are often determined by long-standing practices, and roles are typically assigned based on
family or community.

 Key Features:

o Rural and Agricultural: Traditional economies are often found in rural,

agricultural societies where communities rely on farming, hunting, and fishing for
subsistence.

o Barter System: Instead of using money, goods and services are often exchanged
directly through bartering.

o Stability: There is little change in the economy, as the production methods and
roles are passed down through generations.

o Limited Specialization: Most people produce what they consume, and there is
little specialization or division of labor.
  Examples: Traditional economies are found in many indigenous societies in parts of
Africa, Asia, and Latin America, though they are becoming less common in the modern
world.

Summary of Economic Systems:

Type of
Ownership of Resources Economic Decisions Examples
Economy

Market Market forces (supply & United States, Japan,

Private ownership
Economy demand) Australia

Command North Korea, Cuba, former

Government ownership Central planning
Economy Soviet Union

Combination of market
Mixed Both private and public Canada, UK, most of
forces & government
Economy ownership Europe
intervention

Some rural communities in

Traditional Customary/community
Traditions and customs Africa, Asia, and Latin
Economy ownership
America

The Role of Government in Different Systems:

 In market economies, the government generally provides a legal framework (property

rights, enforcement of contracts) and may intervene to correct market failures (such as
externalities or monopolies), but largely avoids controlling market activities.

 In command economies, the government plays a central role in directing the entire
economy, including determining what goods are produced, how much is produced, and
the prices.

 In mixed economies, the government’s role is a balance between regulation and laissez-
faire policies, stepping in to address market failures, provide public goods, and ensure
social welfare while allowing private markets to function.

 In traditional economies, there is little to no formal government intervention, and

economic activity is organized around social customs and traditions.

In reality, no economy is purely one system; most economies today are mixed economies, where
elements of different systems coexist to meet the needs and goals of the society.

EXPLAIN THE IMPORTANCE OF MICRO ECONIMICS

Microeconomics is crucial because it provides valuable insights into the functioning of

individual markets and the behavior of consumers and businesses. By understanding
microeconomics, policymakers, businesses, and individuals can make informed decisions that
lead to better outcomes in terms of resource allocation, production, and consumption.

Here are several key reasons why microeconomics is important:

1. Resource Allocation and Efficiency:

 Microeconomics helps in understanding how resources (such as labor, capital, and raw
materials) are allocated in the economy. It focuses on how these resources are distributed
across different sectors and industries to maximize efficiency. By analyzing supply and
demand, microeconomics reveals how to allocate resources where they are most valued,
contributing to the optimal production and consumption of goods and services.

 Example: If the demand for electric cars increases, microeconomics helps businesses
understand how to reallocate resources from traditional car manufacturing to meet this
new demand efficiently.

2. Understanding Market Behavior:

 Microeconomics explains how individuals (consumers) and firms (producers) make

decisions based on incentives, preferences, and constraints. By understanding market
behavior, businesses can set prices, design products, and create strategies that match
consumer preferences, leading to profitability.

 Example: A company producing smartphones can use microeconomic principles to

determine the optimal price to charge based on consumer demand and competitor prices.

3. Price Determination:

 Microeconomics plays a central role in explaining how prices are determined in a market
economy. The interaction between supply and demand sets equilibrium prices. These
prices signal to producers how much of a good or service to supply and help consumers
decide how much to purchase. Efficient price setting leads to market stability and ensures
that resources are used effectively.

 Example: When there is a sudden rise in the price of oil, microeconomics can explain
how this price change affects the cost of transportation, consumer behavior, and the
supply of alternative energy sources.

4. Consumer Behavior and Welfare:

 Microeconomics helps understand how consumers make choices based on preferences,

income, and the prices of goods and services. By understanding consumer behavior,
businesses can create products and services that better satisfy consumer needs, enhancing
welfare and satisfaction.

 Example: A company that understands the concept of marginal utility (the additional
satisfaction gained from consuming one more unit of a good) can adjust its marketing and
pricing strategies to increase sales.

5. Production and Cost Analysis:

 Microeconomics helps businesses understand how to minimize costs and maximize

production efficiency. It examines how firms produce goods and services at the lowest
cost and how changes in input prices affect output.
  Example: A firm may analyze its cost structure (fixed costs vs. variable costs) to
determine whether expanding production will be profitable or if it needs to reduce costs
in certain areas to improve profit margins.

6. Market Structure and Competition:

 Microeconomics studies different market structures (perfect competition, monopolistic

competition, oligopoly, and monopoly) and how they affect prices, output, and efficiency.
Understanding market structures helps businesses and policymakers anticipate the
behavior of competitors and regulate markets to promote competition, innovation, and
consumer welfare.

 Example: In a monopolistic market, microeconomics can help regulators understand how

to prevent price gouging and promote competition by encouraging new entrants or
regulating prices.

7. Income Distribution and Inequality:

 Microeconomics helps explain how income is distributed among different groups in

society. By analyzing wages, labor markets, and capital returns, microeconomics sheds
light on issues related to poverty, income inequality, and the role of education and skill
development in economic outcomes.

 Example: Policymakers can use microeconomic analysis to design policies such as

minimum wage laws, tax codes, and social programs aimed at reducing inequality.

8. Public Policy and Regulation:

 Microeconomics plays an essential role in shaping public policy, especially in areas such
as taxation, subsidies, and regulation. Understanding how markets work helps
governments design policies that improve economic welfare and address market failures
(e.g., externalities like pollution or under-provision of public goods).

 Example: When the government imposes a tax on sugary drinks, microeconomics helps
analyze how this tax will affect demand, prices, and overall consumer behavior, and
whether it achieves the desired health outcomes.

9. International Trade and Globalization:

 Microeconomics also helps understand international trade by analyzing how individuals

and businesses in different countries interact in the global marketplace. It helps explain
concepts such as comparative advantage, which shows how countries can benefit from
specializing in the production of certain goods and trading with others.

 Example: A country with a comparative advantage in producing coffee may focus on

coffee production and trade with other countries that specialize in different goods, leading
to more efficient global resource use.

10. Business Strategy and Planning:

  For firms, microeconomics provides the tools needed to formulate effective business
strategies. It helps businesses identify market opportunities, set pricing strategies, and
decide on investment and production levels to maximize profits.

 Example: A company considering entering a new market can use microeconomic

analysis to study demand patterns, competitor behavior, and cost structures to assess the
profitability and risks of entering that market.

Summary:

Microeconomics is important because it helps individuals, businesses, and governments make

informed decisions that lead to more efficient use of resources, better understanding of market
forces, and improved economic outcomes. By analyzing the behavior of consumers, firms, and
markets, microeconomics provides the foundation for much of the decision-making that drives
economic growth, innovation, and social welfare. It is a vital tool for addressing issues like
pricing, market competition, resource allocation, and income distribution.

TOPIC 2

APPLY THE CONCEPT OF DEMAND IN COMMUNITY DEVELOPMENT

PRACTICES

DEFINE DEMAND

Demand in economics refers to the quantity of a good or service that consumers are willing and
able to purchase at various prices, during a given period of time. It reflects the relationship
between the price of a product and the amount that consumers are willing to buy.

Key characteristics of demand include:

 1. Price and Quantity Demanded: There is typically an inverse relationship between price
and quantity demanded, known as the law of demand. As the price of a good or service
decreases, the quantity demanded increases, and as the price increases, the quantity
demanded decreases (all else being equal).

2. Factors Affecting Demand: In addition to price, several other factors influence demand,
including:

o Income: As consumer income increases, demand for normal goods tends to rise,
while demand for inferior goods may fall.

o Tastes and Preferences: Changes in consumer preferences, such as trends or

fads, can lead to shifts in demand.

o Prices of Related Goods: The demand for a good can be affected by the price of
substitutes (goods that can replace each other) or complements (goods that are
used together). For example, if the price of coffee rises, the demand for tea (a
substitute) might increase.

o Expectations: If consumers expect prices to rise in the future, they may increase
current demand. Conversely, if they expect prices to fall, they may reduce current
demand.

o Population Size: A larger population generally leads to greater overall demand

for goods and services.

3. Demand Curve: The demand for a product is often represented visually by a demand
curve, which shows the quantity demanded at various price levels. The demand curve
typically slopes downward from left to right, reflecting the inverse relationship between
price and quantity demanded.

4. Types of Demand:

o Individual Demand: Refers to the demand for a good or service by a single

consumer.

o Market Demand: Refers to the total demand for a good or service by all
consumers in the market.

Example:

If the price of apples decreases, more consumers may decide to buy apples, leading to an
increase in the quantity demanded. Conversely, if the price of apples increases, fewer consumers
might be willing to purchase them, reducing the quantity demanded.

In summary, demand refers to the desire and ability of consumers to buy goods and services at
different prices, and it is a fundamental concept in understanding how markets work

STATE THE LAW OF DEMEND

The Law of Demand states that, all else being equal, the quantity demanded of a good or
service decreases as its price increases, and increases as its price decreases. In other words, there
is an inverse relationship between the price of a good and the quantity demanded by consumers.

The first law of demand states that, all else being equal, as the price of a good or service
decreases, the quantity demanded increases, and as the price increases, the quantity demanded
decreases.

Key Points of the Law of Demand:

1. Inverse Relationship: When the price of a product rises, consumers tend to buy less of it.
Conversely, when the price falls, consumers tend to buy more of it.

2. Ceteris Paribus: The law holds true when all other factors affecting demand (such as
consumer income, tastes, or prices of related goods) remain constant.

Example:

 If the price of a cup of coffee increases, fewer people may buy it because it becomes
more expensive.

 If the price of a cup of coffee decreases, more people may be willing to buy it because it
becomes more affordable.

This behavior can be represented graphically with a demand curve that typically slopes
downward from left to right, showing the negative relationship between price and quantity
demanded

Assumptions of Law of Demand

The assumptions on which the Law of Demand is based are as follows:

1. The price of substitute goods does not change.

2. The price of complementary goods also remains constant.

3. The income of the consumer does not change.

4. Tastes and preferences of the consumers remain the same.

5. People do not expect the future price of the commodity to change

EXPLANATIONS

These five points are assumptions that help isolate the effect of price changes on the demand for
a good or service, according to the Law of Demand. When economists talk about the Law of
Demand, they assume that several factors other than price remain unchanged, allowing for a
clearer analysis of how price affects demand. Let's break down each of these assumptions:

1. The Price of Substitute Goods Does Not Change

 Explanation: A substitute good is a product or service that can replace another in

consumption (for example, tea and coffee, or butter and margarine). If the price of a
substitute good changes, it can affect the demand for the original good, independent of its
own price.

 Example: If the price of coffee increases, people may switch to tea (a substitute). If the
price of tea is assumed to remain constant, the Law of Demand can analyze how the price
of coffee alone affects its demand. However, if the price of tea also increases, people may
not switch from coffee to tea, altering the demand for coffee.

Why It Matters: If the price of a substitute good changes, it complicates the analysis because
consumers may shift their demand based on the relative price of both goods. By assuming the
price of substitutes remains unchanged; economists can isolate the effect of the price change of
the good in question.

2. The Price of Complementary Goods Also Remains Constant

 Explanation: Complementary goods are products that are consumed together (for
example, cars and gasoline, or printers and ink cartridges). If the price of a
complementary good changes, it can affect the demand for the original good, since they
are often used together.

 Example: If the price of gasoline rises, people may drive less; this can reduce the
demand for cars. However, if the price of gasoline remains constant, the Law of Demand
can focus on how changes in the price of cars themselves affect the demand for cars.

Why It Matters: If the price of complementary goods changes, it could indirectly affect the
demand for the good being analyzed, making it harder to isolate the impact of the price change
on the good itself. Assuming the price of complementary goods remains constant helps in
maintaining a clearer analysis.

3. The Income of the Consumer Does Not Change

 Explanation: Consumers’ income plays a significant role in determining their demand

for goods. If income increases, consumers might be able to afford more of a good, thus
increasing demand, regardless of price changes. Conversely, a decrease in income might
lead to lower demand, even if prices stay the same.

 Example: If the price of a luxury car decreases, demand may increase because it’s now
more affordable. However, if consumers’ incomes also increase at the same time, they
might demand even more cars, which complicates the analysis. To isolate the effect of
price changes on demand, economists assume income remains constant.
Why It Matters: Income changes can have a powerful effect on demand, and if income were to
change, it would alter the results of a study focused on the price of a good. By assuming income
stays constant, economists can study how price alone impacts demand.

4. Tastes and Preferences of Consumers Remain the Same

 Explanation: Consumer preferences are often subject to trends, cultural changes, and
advertising, all of which can shift the demand for certain products. If consumer tastes
change, it could lead to an increase or decrease in demand for a good, independent of its
price.

 Example: If there is a sudden trend for healthier eating, demand for sugary drinks might
decrease, even if their price stays the same. Alternatively, if people suddenly prefer a
certain brand of car, the demand for that car could increase, regardless of price changes.

Why It Matters: If consumer preferences change, demand could shift, making it difficult to
isolate the effect of price on demand. By assuming that tastes and preferences remain constant,
economists can better observe how price influences demand.

5. People Do Not Expect the Future Price of the Commodity to Change

 Explanation: If consumers expect prices to change in the future, this can influence their
current buying behavior. For instance, if consumers expect a price increase in the future,
they might buy more of the product now, increasing current demand, regardless of the
price at the moment.

 Example: If consumers expect the price of gasoline to rise in the next month, they may
purchase more gasoline today, even if the current price is stable. On the other hand, if
they expect prices to fall, they might reduce their current demand in anticipation of a
better deal.

Why It Matters: Expectations about future prices can lead to changes in demand today,
independent of the current price. By assuming that consumers do not expect future price changes,
economists can focus purely on how the current price affects demand.

Summary of Why These Assumptions Matter:

These assumptions are necessary to isolate the effect of price changes on demand without
interference from other factors. When studying the Law of Demand, economists want to ensure
that the relationship between price and quantity demanded is clear. If any of these factors—such
as income, preferences, or expectations—change during the analysis, it can lead to inaccurate
conclusions about how price affects demand.

In real-world markets, these assumptions might not always hold true, and demand could be
influenced by various other factors. However, these assumptions provide a useful framework for
understanding the basic principles of demand and how consumers react to price changes.

EXCEPTIONAL OF THE LAW OF DEMAND

1. Giffen Goods: The special kind of inferior goods on which the consumers spend a big part of
their income are known as Giffen Goods. The demand for these goods increases with an increase
in price and falls with a decrease in price. This phenomenon was initially observed by Sir
Robert Giffen and is popularly known as Giffen’s Paradox.

For example, rice is an inferior good and wheat is a normal good. Hence, if the price of rice
falls, the consumer will spend less on rice and will start buying more wheat.

NOTE: Inferior Good

If you consume less of a product if there is an increase in your income, the product is an inferior
good. If is inferior because it gives you less satisfaction and you switch to better products if your
budget permits.

An inferior good has a negative income elasticity of demand.

Examples of inferior goods include:

 Public transportation: if your income decreases, you switch from taxis to public transport
because it is less expensive.

 McDonalds (when compared to high-end eateries): because fast food outlets are less
heavy on your pocket.

 Education: if you income falls, you might be inclined to pursue further education to
increase your future income

Normal Good
If you consume more of a product if there is an increase in your income, it is called a normal
good. Due to increase in your budget, you forego consumption of a good that gave you less
utility and switch to the new product as it gives you more satisfaction (due to whatever reason
i.e. quality, brand, etc.)

Income elasticity of demand is defined as percentage change in quantity demanded divided by

percentage change income. If quantity demanded increases with increase in income, the income
elasticity is a positive number. If follows that a normal good should have positive income
elasticity.

Following are a few examples of a normal good:

 Luxury goods such as Lamborghinis, designer perfumes and clothes; because if there is
increase in your income level, you can afford to pay for the upgrade in your social status.
 Vacations and other leisure activities; if your income is high, you can afford to take off
from work, bear the travel and hotel costs, etc.
  Taxis and ride-hailing services like Uber; if you have more income, you can switch from
crowded public transportation to cabs and other dedicated modes of transportation.
 Education; if your income is high, you can afford university degrees (education can also
be an inferior good for some people).
 High-end restaurants; with increase in income, you can afford the luxury of expensive
dine-outs

2. Fear of Shortage: If the consumers expect that a commodity will become scarce in the near
future, they will start buying more of it in the present, even if the price of the commodity rises
because of the fear of its shortage and rise in its price in the future.

For example, in the initial period of COVID, consumers demanded more of the necessity goods
like wheat, pulses, etc., even at a higher price due to their fear of general insecurity and shortage
in the near future.

3. Ignorance: Sometimes consumers are unaware of the prevailing price of a good in the market.
In such cases, they buy more of a commodity, even at a higher price.

4. Necessities of Life: The commodities which are necessary for human life have more demand
no matter whether their price reduces or increases. For example, demand for necessity goods
like medicines, pulses, wheat, etc., will increase, even if their price increases.

5. Change in Weather: When there is a change in the weather, demand for some goods changes,
even if their price increases. For example, demand for raincoats in the rainy season increases,
even if their price increases.

6. Fashion-related goods: The goods related to fashion are demanded more, even when their
price is high. For example, if a specific model of Mobile Phone is in fashion, then consumers
will buy it, even if its price increases.

EXPLAIN FACTORS INFLUENCING DEMAND

The demand for a good or service is influenced by a variety of factors. These factors can either
increase or decrease the quantity of a good or service that consumers are willing and able to buy
at a given price. Understanding these factors is crucial for businesses, governments, and
economists to predict and analyze market behavior. Below are the key factors that influence
demand:

1. Price of the Good or Service (Price Effect)

 Explanation: The price of a good or service is one of the most direct factors influencing
its demand. According to the Law of Demand, when the price of a good increases, the
quantity demanded generally decreases, and when the price decreases, the quantity
demanded increases, ceteris paribus (all else being equal).
  Example: If the price of movie tickets rises, fewer people may go to the movies, leading
to a decrease in the quantity demanded. Conversely, if the price of movie tickets drops,
more people might attend.

2. Income of the Consumer

 Explanation: Consumers' income directly affects their ability to purchase goods and
services. As income increases, people are generally able to purchase more goods, leading
to an increase in demand for normal goods. For inferior goods, demand may decrease as
income increases, because consumers may switch to more expensive alternatives.

 Example:

o Normal Goods: If a person’s income increases, they may demand more of normal
goods like organic food, electronics, or high-quality clothing.

o Inferior Goods: If a person’s income increases, their demand for inferior goods,
like instant noodles or used cars, might decrease as they opt for higher-quality
alternatives.

3. Tastes and Preferences

 Explanation: Consumer preferences—such as tastes, habits, trends, or cultural

influences—affect demand. If something becomes more fashionable or is perceived as
beneficial or trendy, the demand for that good will likely increase. Conversely, if tastes
shift away from a particular product, its demand will fall.

 Example: The demand for smart watches increased as people became more health-
conscious and attracted to new technology trends. Similarly, a decline in popularity of
sugary drinks may reduce demand for soda.

4. Prices of Related Goods

 Explanation: The prices of related goods—both substitute goods and complementary

goods—affect demand:

o Substitute Goods: If the price of a substitute (a good that can replace another)
increases, the demand for the original good may rise, since consumers may switch
to the cheaper option.

o Complementary Goods: If the price of a complementary good (a good used

together with another) increases, the demand for the original good may fall,
because the overall cost of consumption rises.

 Example:

o Substitute Goods: If the price of tea increases, the demand for coffee (a
substitute) may increase as consumers switch to the cheaper alternative.
 o Complementary Goods: If the price of printers increases, the demand for printer
ink (a complementary good) may decrease, as fewer people buy printers.

5. Consumer Expectations

 Explanation: If consumers expect that the price of a good will change in the future, their
current demand can be affected. If consumers expect prices to rise, they may increase
their current demand, anticipating that the good will become more expensive in the
future. If they expect prices to fall, they may reduce current demand and wait for the
price to drop.

 Example: If consumers expect a rise in gasoline prices in the next month, they may
purchase more gasoline now, leading to a short-term increase in demand.

6. Population Size and Demographics

 Explanation: The size and structure of the population directly affect the overall demand
for goods and services. A larger population typically leads to greater demand for most
goods. Changes in demographics—such as the age distribution, urbanization, or shifts in
family structures—can also impact the types of goods demanded.

 Example: A growing population of young adults may increase the demand for
smartphones, while an aging population may increase the demand for healthcare products
and services.

7. Advertising and Marketing

 Explanation: Advertising and promotion can play a significant role in influencing

demand by altering consumer perceptions and preferences. Effective advertising can
increase awareness and perceived desirability, leading to a rise in demand.

 Example: A well-executed advertising campaign for a new brand of sneakers can

increase consumer interest and boost demand for the product, even if the price remains
unchanged.

8. Seasonality and Weather

 Explanation: Certain products experience seasonal demand changes based on the time of
year or weather conditions. For example, demand for warm clothing rises in winter, while
demand for ice cream may increase in summer.

 Example: During the summer, demand for air conditioners increases due to high
temperatures, whereas in winter, demand for winter coats and heaters rises.

9. Government Policies and Taxes

 Explanation: Government policies, such as taxes, subsidies, or regulations, can directly

influence demand. For example, subsidies on electric cars can make them more
affordable and increase demand, while higher taxes on cigarettes can reduce their
demand.
  Example: A government subsidy on electric vehicles might increase demand for such
cars, whereas higher taxes on cigarettes may decrease their demand.

10. Consumer Credit and Financing

 Explanation: The availability of credit or financing options can increase demand by

allowing consumers to purchase goods even if they do not have the full amount of money
upfront. Easier access to credit can encourage spending, especially on big-ticket items
like cars or homes.

 Example: If banks offer low-interest loans or favorable credit terms, demand for
consumer goods like home appliances, cars, or electronics may increase, as consumers
are able to finance their purchases over time.

Summary of Key Factors Influencing Demand:

Factor Effect on Demand Example

Inverse relationship with demand (higher

Price of movie tickets increasing
Price of the Good price = lower demand, lower price =
= lower demand
higher demand)

Higher income = higher demand for

Increase in income = higher
Income normal goods, lower income = lower
demand for luxury goods
demand for inferior goods

Tastes and Changes in preferences can increase or Popularity of electric cars

Preferences decrease demand increases demand for them

Substitute: higher price of substitute

Increase in tea price = higher
increases demand for the original good.
Prices of Related demand for coffee (substitute);
Complementary: higher price of
Goods Increase in printer price = lower
complement decreases demand for
demand for ink (complement)
original good

Future price expectations can increase or Expecting future price rise of

Expectations
decrease current demand gasoline = higher demand now

Population Size
Larger or changing populations can Increase in young population =
and
increase demand for certain goods higher demand for smartphones
Demographics

Advertising and Effective advertising can increase demand Successful ad campaign for a new
Marketing by shaping consumer preferences product increases demand

Hot weather increases demand for

Seasonality and Seasonal changes and weather conditions
ice cream, cold weather increases
Weather affect demand
demand for coats

Government Taxes or subsidies can increase or Subsidy on electric vehicles =

Factor Effect on Demand Example

Policies and Taxes decrease demand higher demand for EVs

Consumer Credit Easier access to credit increases demand Easy car financing = higher
and Financing by making products affordable demand for automobiles

Understanding these factors is essential for businesses to make strategic decisions about pricing,
production, and marketing, as well as for policymakers to design effective economic policies.

DESCRIBE THE FORMS OF PRESENTING THE RELATIONSHIP BETWEEN THE

VARIABLES OF DEMAND

The relationship between the variables of demand and the quantity demanded can be presented in
several forms. These forms help in visualizing and analyzing how changes in one variable (such
as the price) influence the demand for a good or service. The key methods for presenting the
relationship between demand variables are:

1. Demand Schedule

 Definition: A demand schedule is a table that shows the quantity of a good or service
that consumers are willing to purchase at different prices, holding other factors constant
(ceteris paribus). It provides a numerical representation of the demand for a product at
various price levels.

 Example: A demand schedule for coffee might look like this:

Price per Cup (in $) Quantity Demanded (in cups)

5 10

4 15

3 20

2 30

1 40

Explanation: As the price of coffee decreases, the quantity demanded increases, which reflects
the Law of Demand (an inverse relationship between price and demand).

2. Demand Curve

 Definition: A demand curve is a graphical representation of the demand schedule. It

plots the price of a good on the vertical axis (Y-axis) and the quantity demanded on the
horizontal axis (X-axis). The demand curve typically slopes downward from left to right,
reflecting the inverse relationship between price and quantity demanded.
  Example: Using the demand schedule from above, you would plot the price of coffee on
the Y-axis and the quantity demanded on the X-axis. The result is a downward-sloping
curve, showing that as price decreases, demand increases.

 Graphical Representation:

 Explanation: In this graph, as the price of the good decreases (from P1 to P2), the
quantity demanded increases (from Q1 to Q2). This downward-sloping curve visually
demonstrates the Law of Demand.

3. Market Demand Curve

 Definition: A market demand curve is derived by horizontally summing individual

demand curves of all consumers in the market at each price level. It represents the total
quantity demanded for a good at each price by all consumers in the market.

 Example: If individual consumers demand 10 cups of coffee at $5, 20 cups at $4, and so
on, the market demand curve adds up the quantities demanded by all consumers at each
price level. For instance, if 100 people demand 10 cups at $5, the total quantity demanded
at $5 would be 1,000 cups.

 Graphical Representation:

A market demand curve is a horizontal sum of individual demand curves.

 Explanation: Just as with the individual demand curve, the market demand curve slopes
downward, showing the total quantity demanded by all consumers at each price level.

4. Demand Function (Mathematical Expression)

 Definition: A demand function is a mathematical representation of the relationship

between the quantity demanded of a good and its determining variables, such as price,
income, and the prices of related goods. It is often written as:

Qd=f (P, Y, Ps, Pc, T)

Where:

 Qd = Quantity demanded

 P= Price of the good

 Y = Consumer income

 Ps= Price of substitutes

 Pc = Price of complements

 T = Tastes and preferences

Example: A demand function might express the quantity demanded of coffee (Qd) as a function
of its price (P), income (Y), and the price of tea (PsP, a substitute). The function could look like:

Qd=50−2P+0.5Y−3Ps

In this case:

 As the price of coffee (P) increases, demand decreases (due to the negative coefficient, -
2).

 As income (Y) increases, demand increases (positive coefficient, 0.5).

 As the price of the substitute (tea, PsP) increases, demand for coffee increases (negative
coefficient, -3).

 Explanation: The demand function mathematically quantifies the relationship between

the various demand determinants, allowing economists to predict how changes in factors
such as price or income will affect the quantity demanded.

5. Shift of the Demand Curve (Change in Demand)

 Definition: A shift in the demand curve occurs when a factor other than the price (such
as income, tastes, or the prices of related goods) changes, causing the entire demand
curve to shift either to the right (increase in demand) or to the left (decrease in demand).
This is different from a movement along the curve, which is caused solely by a change
in the price of the good itself.

 Example:

o If consumers' income increases, the demand for normal goods like coffee may
increase, shifting the demand curve to the right.

o If the price of a substitute good, like tea, decreases, the demand for coffee may
decrease, shifting the demand curve to the left.

 Graphical Representation:

o Shift to the Right (Increase in Demand): If there is an increase in demand (e.g.,

due to higher income or changing preferences), the entire demand curve moves to
the right.

o Shift to the Left (Decrease in Demand): If there is a decrease in demand (e.g.,

due to lower income or the price of a substitute falling), the demand curve shifts
to the left.

 Explanation: A shift in the demand curve indicates that at the same price, consumers are
now willing to buy a different quantity of the good, either more or less, due to changes in
factors like income or consumer tastes.

6. Elasticity of Demand
  Definition: Elasticity of demand refers to how sensitive the quantity demanded of a
good is to changes in price or other factors. It can be represented using a demand curve
that shows the degree of responsiveness to price changes.

o Price Elasticity of Demand (PED): Measures how quantity demanded changes

in response to a change in the price of the good.

o Income Elasticity of Demand (YED): Measures how quantity demanded

changes in response to a change in consumer income.

o Cross-Price Elasticity of Demand (XED): Measures how the demand for one
good changes in response to a change in the price of a related good (substitute or
complement).

 Example: A steeper demand curve represents inelastic demand (less responsive to price
changes), while a flatter curve represents elastic demand (more responsive to price
changes).

Summary:

The relationship between the variables of demand can be presented in various forms, each
offering a different way to analyze and interpret how demand responds to changes in price and
other factors:

1. Demand Schedule: A table that lists prices and corresponding quantities demanded.

2. Demand Curve: A graphical representation of the demand schedule, typically sloping

downward.

3. Market Demand Curve: The summation of individual demand curves in a market.

4. Demand Function: A mathematical formula expressing the relationship between demand

and its determinants.

5. Shift of the Demand Curve: A change in demand caused by factors other than price.

6. Elasticity of Demand: The responsiveness of quantity demanded to changes in price or

other factors.

These forms of presenting demand data are essential for businesses, economists, and
policymakers to make informed decisions based on how different factors affect the demand for
products or services.

EXPLAIN THE CONCEPT OF INTERRELATED DEMAND

Interrelated demand refers to the relationship between two or more goods or services whose
demand is influenced by each other. When the demand for one product affects the demand for
another, these products are considered to be interrelated. This concept is commonly seen in
complementary and substitute goods.

1. Complementary Goods: These are products that are typically consumed together, such
as printers and ink cartridges, or cars and gasoline. When the demand for one product
 increases, the demand for the complementary product also tends to increase. For
example, if more people buy cars (increasing demand for cars), the demand for gasoline
(a complementary good) is likely to rise as well.

2. Substitute Goods: These are products that can replace each other in use, such as tea and
coffee, or butter and margarine. If the price or demand for one substitute rises, the
demand for the other substitute may increase as consumers switch between the two. For
example, if the price of tea increases, consumers may choose to buy more coffee (its
substitute), leading to an increase in the demand for coffee.

In both cases, changes in the demand for one good lead to changes in the demand for the related
good. This interrelationship is important for businesses and policymakers to understand, as it
helps in forecasting and planning for market changes.

1. Complementary Goods:

Complementary goods are products or services that are typically consumed together, meaning
the demand for one good is directly related to the demand for the other. When the demand for
one complementary good increase, the demand for the other also tends to increase, and vice
versa. These goods are often used together to provide a complete experience or fulfill a particular
need.

Examples of Complementary Goods:

1. Printers and Ink Cartridges: A printer requires ink cartridges to function. If more
people buy printers, the demand for ink cartridges will likely increase as well.

2. Cars and Gasoline: As more people purchase cars, the demand for gasoline tends to rise
because cars need fuel to operate.

3. Smartphones and Phone Cases: A person who buys a smartphone is likely to also
purchase a case to protect it. The demand for phone cases increases when smartphone
sales increase.

4. Peanut Butter and Jelly: These two items are often used together in a sandwich. If
people buy more peanut butter, they are likely to buy more jelly as well.

Economic Impact of Complementary Goods:

 Price Effect: If the price of one complementary good decreases, it can lead to an increase
in the demand for the other. For example, if the price of printers drops, more people may
buy printers, which would lead to an increase in the demand for ink cartridges.

 Joint Demand: The demand for complementary goods is often "joint," meaning both
goods are needed to satisfy the consumer’s desire. This interdependence means that
businesses often market complementary products together or offer bundled deals.

2. Substitute Goods
Substitute goods are products or services that can replace each other in use. When the price or
demand for one good increases, the demand for its substitute tends to increase as well, as
consumers switch from one product to the other

These goods serve a similar function, and consumers may choose one over the other based on
factors like price, quality, or availability.

Examples of Substitute Goods:

1. Tea and Coffee: Both are beverages that people often drink to fulfill a similar need
(caffeine intake). If the price of tea rises, consumers may opt to buy more coffee as a
substitute, and vice versa.

2. Butter and Margarine: Both are used for spreading on bread or for cooking, and they
can often be used interchangeably in recipes. If the price of butter increases, consumers
might choose margarine as a cheaper alternative.

3. Public Transportation and Ride-Sharing Services: If the cost of public transportation

increases, people might switch to using ride-sharing services like Uber or Lyft as a
substitute, especially if it's more convenient or cost-effective.

4. Smartphones and Feature Phones: Smartphones and basic feature phones can serve the
same basic purpose of communication. If smartphones become too expensive, some
consumers might opt for cheaper feature phones as a substitute.

Economic Impact of Substitute Goods:

 Price Effect: The demand for substitute goods is often driven by price changes. If the
price of one good rises, consumers are likely to switch to its substitute. For example, if
the price of coffee increases significantly, some consumers might buy tea instead,
boosting the demand for tea.

 Cross-Elasticity of Demand: Substitute goods exhibit a positive cross-elasticity of

demand, meaning that when the price of one good increases, the demand for its substitute
rises as well. If the price of one good falls, the demand for its substitute tends to decrease.

Key Characteristics:

 Interchangeability: Substitute goods serve the same basic function but might differ in
features, taste, or price.

 Consumer Choice: Consumers can easily switch between substitutes depending on

factors like price, quality, and availability.

DESCRIBE COMMUNITY DEVELOPMENT PRACTICE

Community development practice involves a collaborative, participatory process that aims to
improve the well-being and quality of life for communities. It focuses on empowering
individuals and groups to actively participate in decisions and actions that impact their lives. The
goal is to create positive, sustainable change by addressing social, economic, environmental, and
cultural issues at the local level.

Key elements of community development practice include:

1. Empowerment: The process emphasizes giving community members the tools,

resources, and opportunities to make decisions and take action on issues that matter to
them. Empowerment involves building confidence, skills, and leadership within the
community.

2. Participation: Community development is often rooted in democratic principles,

encouraging active participation from all members, especially those who are marginalized
or disadvantaged. This ensures that development reflects the needs and aspirations of the
community as a whole.

3. Collaboration and Partnership: Successful community development involves

collaboration between various stakeholders, including local residents, community
organizations, government agencies, and other partners. By working together, these
groups can combine resources, expertise, and perspectives to achieve shared goals.

4. Social Justice and Equity: Community development practice seeks to reduce inequality
and promote social justice by addressing disparities in access to resources, opportunities,
and decision-making power. It strives to create more inclusive and fair communities.

5. Sustainability: The practice aims to create lasting change by ensuring that community
development initiatives are environmentally, socially, and economically sustainable. This
means considering long-term impacts and focusing on building capacity for continued
growth and resilience.

6. Asset-Based Approach: Rather than focusing solely on problems or deficiencies,

community development often adopts an asset-based approach, which identifies and
builds upon the strengths, skills, and resources that already exist within the community.

7. Capacity Building: Community development seeks to strengthen the skills, knowledge,

and infrastructure of the community to enable self-sufficiency. This can involve training
programs, leadership development, and creating networks of support.

The practice can take many forms, such as urban or rural development, poverty alleviation,
educational initiatives, health promotion, and cultural revitalization. Ultimately, community
development practice is about fostering connected, resilient, and equitable communities that can
navigate challenges and create positive change for future generations
 RELATE THE LAW OF DEMAND TO THE COMMUNITY DEVELOPMENT
PRACTICE

The Law of Demand states that, all else being equal, as the price of a good or service increases,
the quantity demanded decreases, and vice versa. This principle can be applied to community
development practice in several ways, as the "demand" in community development often refers
to the need or desire for resources, services, or infrastructure that support social, economic, and
environmental well-being.

Here’s how the Law of Demand can relate to community development:

1. Access to Affordable Housing

 In the context of housing, the "price" could refer to housing costs, including rent or
property prices. As housing prices increase in a community, the demand for affordable
housing often decreases, especially among lower-income individuals or families.

 Community development implications: If housing becomes too expensive, it can push

vulnerable populations out of the area, leading to displacement or gentrification.
Community developers must work to balance the demand for affordable housing by
advocating for policies, subsidies, or initiatives that reduce the cost of housing or increase
access to lower-cost options.

2. Healthcare Services

 The demand for healthcare services can be influenced by both price (e.g., out-of-pocket
costs for medical services) and the availability of services in the community.

 Community development implications: If the price of healthcare services (e.g., co-pays,

insurance premiums) rises, the demand for these services might decrease, particularly
among low-income households. This could lead to unmet health needs in the community.
Community developers might work to create more affordable healthcare options or
advocate for policies that reduce healthcare costs, thereby increasing demand for essential
health services.

3. Public Transportation

 Public transportation in a community is another example. If the cost of using public

transport (e.g., bus fares, ticket prices) increases, the demand for public transportation
might decrease, especially for low-income residents who rely on it.

 Community development implications: High transportation costs can restrict access to

jobs, education, and other essential services. Community development practitioners may
push for reduced fares, subsidized programs, or the expansion of public transportation to
ensure all residents, regardless of income, can access opportunities.

4. Community Engagement and Participation

 In some cases, the "price" of participation in community programs or engagement efforts

might refer to factors like time, effort, or financial resources required.
  Community development implications: If the "cost" of participating in community
development initiatives is perceived as too high—such as time commitments for
volunteer work, registration fees, or transportation costs—fewer community members
may engage. Reducing these barriers to participation (e.g., providing transportation,
offering child care, or scheduling meetings at convenient times) can increase the demand
for community involvement, which can lead to more inclusive and successful
development initiatives.

5. Job Training and Education Programs

 Demand for job training and education programs may also be influenced by the "cost" in
terms of time, money, or effort required. As these costs increase (e.g., higher tuition fees
or longer commitments), fewer people may be able to access them.

 Community development implications: If the price of education or job training

increases, the demand for these services may decrease, particularly among low-income
individuals. This can limit upward mobility and economic development. Community
developers can advocate for more accessible and affordable education and training
programs to increase demand and improve economic opportunities in the community.

6. Social Services and Support Programs

 Many community development initiatives focus on providing social services (e.g., food
assistance, mental health support, child care services). As the cost of delivering these
services rises (due to inflation, increased demand, or cuts to funding), the availability of
services may shrink, which in turn can reduce their usage.

 Community development implications: A decrease in the availability or affordability of

social services can lead to greater hardship for the community's most vulnerable
populations. By addressing issues such as funding, resource allocation, and service
access, community developers can help maintain or increase demand for these essential
services.

Conclusion:

The Law of Demand can help community developers understand how economic factors such as
price, availability, and access impact the demand for various services and resources within a
community. By recognizing that increasing "costs" (whether financial, time-based, or effort-
based) often reduce demand, community developers can design policies and interventions that
lower barriers to access, ensuring that all members of the community have the resources they
need to thrive