ECONOMICS _ LECTURE

02
P R E PA R E D B Y: C A M S G A N D A 
 LAW OF SCARCITY
Goods are scarce because there are not
enough resources to produce all the goods that
the people want to consume.

SCARCITY
- Refers to the condition that all resources are
available only in limited supply.
PRODUCTION
”The act of MAKING the goods/ services.”
CONSUMPTION

”The act of USING the goods/ services to satisfy

human wants.”

SOCIAL COST
- Total cost to a society
- Opportunity costs borne by individual for their own
decisions plus additional costs borne by others.
PRODUCTION POSSIBILITIES FRONTIER
(PPF)
- Unlimited human wants
SCARCITY
- Limited quantity of goods

- What to produce? And for whom?

CHOICE

- The cost of something in terms of

OPPORTUNITY
COST
OPPORTUNITY FOREGONE
- TRADE OFF – more of one good thing can be
obtained only by giving of another thing
ELEMENTS OF DEMAND
AND SUPPLY
 PRICE
- Value of a product or services.
- Expressed by “MONETARY UNIT”

D greater S = prices increases

S greater D = prices decreases
DEMAND
- The number or amount of goods and
services desired by the consumers.

QUANTITY DEMANDED

- The amount of g/s consumers are willing and

able to buy/purchase at a given price, place at a
given period of time.
 DETERMINANTS OF DEMAND

PRICE OF RELATED
PRICE GOODS/COMMODITIES
- SUBSTITUTE
- COMPLEMENTARY
CONSUMER’S
INCOME CONSUMER’S TASTE
- NORMAL GOOD AND PREFERENCES
- INFERIOR GOOD
CONSUMER’S EXPECTATION POPULATION
OF FUTURE PRICES
 DEMAND SCHEDULE
The relationship between the quantity of good
demanded and the price of that good.
Demand Schedule for Shoes
PRICE QUANTITY
DEMANDED
1 1000
2 800
3 600
4 400
5 200
 DEMAND CURVE
It shows graphically the relationship between the quantity
of a good demanded and its corresponding price, with
other variables held constant.

• DOWNWARD SLOPING – negative/ inverse

relationship between the price of the good and the
quantity that consumers want to buy at a given price.
DEMAND SCHEDULE FOR SHOES

PRICE QUANTITY DEMANDED

1 1000

2 800

3 600

4 400

5 200
 LAW OF DEMAND
“ as price increases, quantity demanded decreases; and as
price decreases, quantity demanded increases, if other
factors remain constant.”

JUSTIFICATION FOR THE LAW OF

DEMAND
• INCOME EFFECT
• SUBSTITUTION EFFECT
 CHANGES INVOLVING DEMAND
CHANGES IN QUANTITY
DEMANDED
- Movement from one point to another point of the same
demand curve.
- Due to change in price.
CHANGES IN
DEMAND
- Shifting from one demand curve to another.
- Due to changes in all determinants except price.
 DEMAND FUNCTION
• It is a mathematical expression of the Law of
Demand or the relationship between price and
quantity demanded.

QD = a - b (P)
 SUPPLY
- The maximum units/quantity of goods and
services producers can offer.

QUANTITY SUPPLIED
- The amount or quantity of g/s producers are
willing and able to supply at a given price, at a
given period of time.
 DETERMINANTS OF SUPPLY

CHANGE IN CHANGE IN THE

PRICE OF RELATED
TECHNOLOGY
COST OF GOODS

INPUTS GOVERNMENT TAXES

USED/PRODU AND SUBSIDIES
CTION
EXPECTATION OF NUMBER OF FIRMS
FUTURE PRICES IN THE MARKET.
 SUPPLY SCHEDULE
The relationship between the quantity of good supplied
and the price of that good.
Supply Schedule for Shoes
PRICE QUANTITY SUPPLIED

1 200
2 400
3 600
4 800
5 1000
 SUPPLY CURVE
It shows graphically the quantity of a good supplied at
each price, with other factors that affect quantity supplied
held constant.

• UPWARD SLOPING – positive slope

- As price goes up, producers are willing to produce
more.
 LAW OF SUPPLY
“ as price increases, quantity supplied also
increases; and as price decreases, quantity supplied
also decreases, if other factors remain constant.”
 CHANGES INVOLVING SUPPLY
CHANGES IN QUANTITY
SUPPLIED
- Movement from one point to another point of the same
supply curve.
- Due to change in price.

CHANGES IN SUPPLY
- Shifting from one supply curve to another.
- Due to changes in all determinants except price.
 SUPPLY FUNCTION
• It is a mathematical expression of the Law of
Supply or the relationship between price and
quantity supply.

QS = c + d (P)
THE LAW OF SUPPLY AND DEMAND
Quantity
Supplied Price Quantity
Demanded

1 PRODUCERS
1 5
SHORTAG
2 2 4 E
3 BUYERS
3 3 EQUILIBRIU
M PRICE
4 4 2
SURPLUS
5 5 1
THE LAW OF SUPPLY AND DEMAND

“ when a supply is greater than demand, price

decreases. When demand is greater than
supply, price increases. When supply is equal
to demand, price remains constant.”
 COMPUTE THE EQUILIBRIUM PRICE
AND EQUILIBRIUM QUANTITY

1. Qd = 150 - 2p Qs = -200 + 2p
2. Qd = 185 - 7p Qs = 80 + 7p
3. Qd = 800 - 5p Qs = 450 + 5p