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Economics

Economics seeks to understand the
functioning of market places. An area of
the subject known as microeconomics
examines consumers, firms and workers
within markets, seeking to understand
why prices change for particular
products, what influences the costs of
firms and in particular what will influence
a firm’s of profitability.
Economics as a Science
 Economics
is a study of how society
decided what, how and for whom to
produce.
 Being a social science that studies the
relationship between ends and scarce
means which have alternative uses.
Macroeconomics
 The
study of how the entire economy
works.
 Examines
the whole economy as one
very large market. Macroeconomics
looks to address how the government
might manage the entire economy to
deliver stable economic growth.
Microeconomics

The study of how individuals make economic
decisions within an economy.

Businesses operate within an economic environment.
The revenue they receive from selling a product is
determined within a market. In addition to this, the cost
that the firm has to pay for its labour, raw materials and
equipment are also priced within separate markets.
Microeconomics address the various influences at the
market level that will impact upon a business’s revenues
and costs. Macroeconomics address the issues at a
economy level which will similarly effect a business’s
revenues and costs. Comprehending, reacting to and
possibly even controlling micro and macroeconomic
influences on the business are crucial business skills.
Factors of production
 These
are grouped into four categories:
 Land
 Labour
 Capital
 Enterprise
Land, labour,capital and
enterprise

Land. This is where your raw materials come
from: oil, gas, base metals and other
minerals.
 Labour. This is the ability of individuals to
work.
 Capital is production machinery, computers,
office space or retail shops.
 Enterprise is the final factor of production that
brings land, labour and capital together and
arranges them into units that can produce
products in the pursuit of profit.
Opportunity costs
 These
are the benefits forgone from the
next best alternative.
 The cost of a good is the quantity of
other goods which must be sacrificed to
obtain another unit of that good.
Beer
A
Z
Figure 1
Y1
1000 litres
of beer
Y
500 litres
Of beer
Y2
500
pizzas
1000
pizzas
B
Pizza
Production possibility frontier

Figure 1 shows the maximum amounts of
beer and pizza that can be produced with a
fixed amount of resources. At Y 1000 litres of
beer and 1000 pizzas can be produced. At Y1
more beer can be produced but some pizza
production has to be sacrificed, while a Y2
beer can be sacrificed in order to produce
more beers. Z cannot be achieved with
current resource levels and X represents
unemployment with production of beer and
pizzas below the optimal levels attainable on
the frontier, such as Y, Y1 and Y2.
Production possibility frontier

Shows the maximum amount of one good
that can be produced fro each given level of
output of the other good. Showing the trade
off or menu of choices that society must make
in deciding what to produce. Resource are
scarce and points outside the frontier are
unattainable. It is efficient to produce within
the frontier. Moving on to the frontier, society
could have more of some good without
having less of any good.
A production possibilities curve for the Wild Coast
community
The production possibilities curve once again
Improved technique for producing capital goods
Improved technique for producing consumer goods
Increase in the quantity or productivity of the
available resources
THE
INTERDEPENDENCE
BETWEEN THE MAJOR
SECTORS,
MARKETS
AND FLOWS IN THE
MIXED ECONOMY
The Role of the market and the allocation
of resources in various economic systems
A
market is a shorthand expression for
the process by which household
decisions
about
consumption
of
alternative goods, firms’ decisions
about what and how to produce, the
workers decisions about how much and
for whom to work are all reconciled by
adjustment of prices.
A command Economy
 In
a command economy, decisions on
what, how and for whom are made in a
central planning office. No economy
relies entirely on command.
A Free Market Economy

This has no obvious government intervention.
Resources are allocated entirely through
markets in which individuals pursue their own
self-interest.
 Modern economies in the West are mixed,
relying mainly on the market but with a large
dose f government intervention.
The three major flows in the economy
The circular flow of goods and services
The circular flow of income and spending
The government in the circular flow of production,
income and spending
The foreign sector in the circular flow of income and
spending
Financial institutions in the circular flow of income and
spending
The major elements of the circular flow of income
and spending
Box 3-3
The Public Sector in South Africa
MEASURING THE
PERFORMANCE
OF
THE
ECONOMY
A Lorenz curve
THE
ECONOMIST’S
ANALYTICAL
TOOLKIT
The basic elements of a graph
Plotting points on a graph
A graphical presentation of the relationship
between maize production and rainfall
Some possible relationships in
economics
The 45-degree line
Examples of intercepts and slopes
DEMAND,
SUPPLY AND
PRICES
Demand, Supply and Market
Equilibrium Price
 Demand
is the quantity that buyers wish
to buy at each price. Other things equal
the lower the price, the higher the
quantity demanded. Demand curves
slope downwards.
Supply
 The
supply is the quantity of a good
sellers wish to sell at each price. Other
things equal, the higher the price, the
higher the quantity. Supply curves
slope upwards.
The interaction between households and firms
Anne Smith’s weekly demand for tomatoes
The market demand curve
A movement along a demand curve
Two substitutes: butter and margarine
Two complements: video cassette recorders (VCRs)
and video cassettes
A change in the quantity demanded versus a
change in demand
Johnny’s annual supply of tomatoes
A movement along a supply curve: a change
in the quantity supplied
Shifts of the supply curve: changes in supply
Demand, supply and market equilibrium
The consumer surplus
Concepts and Application of
Elasticity

Price elasticity of demand measure the
sensitivity of quantity demanded to changes
in the own price of a good, holding constant
the prices of other goods and income.
Demand elasticity is negative since demand
curves slope down. Generally, the demand
elasticity changes with the movement along a
given demand curve, elasticity falls as price
falls.
Demand

This is elastic if the price elasticity is more
negative than –1 (for example –2). Price cuts
then increase total spending on the good.
Demand is inelastic if the demand elasticity
lies between –1 and 0. Price cut then
reduces total spending on the good. When
demand I unit elastic, the demand elasticity is
–1 and price changes have no effect on total
spending on the good.
Cost price elasticity f demand
 This
measures the sensitivity of quantity
demanded of one good to changes in
the price of a related good. Positive
cross elasticity tends to imply that
goods are substitutes. Negative crosselasticity tends to imply that goods are
substitutes.
Income Elasticity of Demand

This measures the sensitivity of quantity
demanded to changes in income, holding
constant the prices of all goods.
 Inferior goods have negative income elasticity
of demand. Higher incomes reduce the
quantity demanded and the budget share of
such goods. Luxury goods have income
elasticity larger than 1.
 Higher incomes raise the quantity demanded
and the budget share of such goods
Price elasticity of demand at different points along a
linear demand curve
The relationship between price elasticity of
demand and total revenue
Assignment
Question