REVIEW OF BASIC ECONOMIC CONCEPTS

ECO103

LEARNING OBJECTIVES

At the end of the session, the student will:

1. Explain the nature, importance and methods of economics.
2. Discuss the law and elasticity of demand and supply.

3. Explain the relationship among demand, utility and consumer

behavior.
4. Explain how a firms cost of production changes as the firms

output changes.

NATURE OF ECONOMICS

Economics deals with using limited resources

to obtain unlimited human needs and wants.

FUNDAMENTAL ECONOMIC PROBLEM

Scarcity is the condition wherein most things that most

people need and want are available only in limited

supply.
Can you provide examples of scarce resources?

OPPORTUNITY COST
Since resources are scarce, we have to choose which resources to use

and what outputs to produce.

Opportunity Cost pertains to the value of the best foregone

alternative.
Examples:

Teenagers must choose between buying clothes or gadgets

Companies must choose how many people to employ
The government must choose how much to spend on education

MICROECONOMICS VS MACROECONOMICS

MICROECONOMICS- study of small economic units

such as individuals, firms, and industries

MACROECONOMICS- study of the large economy as

an aggregate such as economic growth, government

spending, unemployment, inflation, etc.

DEMAND AND SUPPLY

Demand and supply are the two words that

economists use most often. They are they

forces that make market economies work.

DEMAND, SUPPLY AND MARKET

Demand and supply refer to the behavior of

people as they interact with one another in

markets.

LAW OF DEMAND

Law of Demand states

that, other things equal,

the quantity demanded
of a good falls when the
price of the good rises.

LAW OF SUPPLY

Law of Supply states that,

other things equal, the

quantity supplied of a good
rises when the price of the
good rises.

MARKET EQUILIBRIUM

Equilibrium refers to a

situation in which the

price has reached the
level where quantity
demanded equals
quantity supplied.

ELASTICITY OF DEMAND AND SUPPLY

Elasticity is a measure of how much buyers and

sellers respond to changes in market

conditions.
Uses:
Analysis of consumption and saving behavior
Effect of changing price on firms revenue

ELASTICITY OF DEMAND

Price elasticity of demand is a measure of

how much the quantity demanded of a

good responds to a change in the price of
that good.

ELASTICITY OF DEMAND

Demand tends to be more elastic:

The larger the number of close substitutes
If the good is a luxury
The more narrowly defined the market
The longer the time period

PRICE ELASTICITY OF DEMAND

(Q2 Q1) /[(Q2 Q1) / 2]

Price elasticity of demand =
(P2 P1) /[(P2 P1) / 2]

EXAMPLE:
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the

amount you buy falls from 10 to 8 cones, then your elasticity of demand would be
calculated as:

THE VARIETY OF DEMAND CURVES

Inelastic demand
Elastic demand
Perfectly inelastic

Perfectly elastic
Unit elastic

INCOME ELASTICITY OF DEMAND

Income elasticity of demand measures how much the

quantity demanded of a good responds to a change in
consumers income.
Percentage change
in quantity demanded
Income elasticity of demand =
Percentage change
in income

INCOME ELASTICITY OF DEMAND

Goods consumers regard as necessities tend to be

income inelastic such as food, fuel, clothing, utilities and
medicines
Goods consumers regard as luxuries tend to be income
elastic such as sports cars, jewelries, branded items

INCOME ELASTICITY OF DEMAND

The responsiveness of demand to changes in

incomes:
Normal Good demand rises as income rises and vice

versa (positive sign)

Inferior Good demand falls as income rises and vice

versa (negative sign)

CROSS PRICE ELASTICITY OF DEMAND

The responsiveness of demand of one good to changes in the

price of a related good either a substitute or a complement

PRICE ELASTICITY OF SUPPLY

Price elasticity of supply is a measure of how much the

quantity supplied of a good responds to a change in the

price of that good.
Percentage change
in quantity supplied
Price elasticity of supply =
Percentage change in price

CONSUMER BEHAVIOR AND UTILITY: BUDGET CONSTRAINT

People consume less than they desire because

their spending is constrained, or limited, by their

income.

CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION

The budget constraint

shows various
combinations of goods the
consumer can afford given
the income and prices of
goods.

CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION:

INDIFFERENCE CURVE

An indifference curve

is a curve that shows

consumption bundles
that give the consumer
the same level of
satisfaction.

CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION:

OPTIMIZATION

Consumers want to get the combination of goods

on the highest possible indifference curve.

However, the consumer must also end up on or

below his budget constraint.

CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION:

OPTIMIZATION

Combining the indifference curve and the budget

constraint determines the consumers optimal

choice.

CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION:

OPTIMIZATION

Consumer optimum occurs at

the point where the highest
indifference curve and the
budget constraint are tangent.

CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION:

The utility of a good or service is determined by how much

satisfaction a particular consumer obtains from it. Utility is not

a quality inherent in the good or service itself.
Total utility is a conceptual measure of the number of units of

utility a consumer gains from consuming a good, service, or

activity.
Marginal utility is the increase in total utility obtained by

consuming one more unit of a good, service, or activity.

CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION:

As a consumer consumes more and more of a good or

service, its marginal utility falls.

Utility maximization requires seeking the greatest total

utility from a given budget.

THE COST OF PRODUCTION

The economic goal of the firm is to maximize

profits.
A firms cost of production includes all the

opportunity costs of making its output of goods

and services explicit and implicit costs.

THE COST OF PRODUCTION

The production function

shows the relationship

between quantity of inputs
used to make a good and
the quantity of output of
that good.

THE VARIOUS MEASURES OF COST

Fixed costs are those costs that do not vary with

the quantity of output produced.

Variable costs are those costs that do vary with

the quantity of output produced.

TYPES OF COSTS

DIFFERENT COST CURVES

ANY QUESTIONS?

LEARNING TASK: BASIC ECONOMIC CONCEPTS

A SHORT QUIZ WILL BE AVAILABLE ON BB LEARN

FROM 5PM TO 11PM ON JULY 10.

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UNEMPLOYMENT AND INFLATION