TEMS COLLEGE OF EDUCATION

LECTURE NOTES: INTRODUCTION TO ECONOMICS

LECTURE: Mr Nyondo Sangwani

Bachelor of Art Economics

Student Masters of economics

Human Psychosocial Councillor

Motivational Speaker

Computer Specialist

INTRODUCTION TO ECONOMICS

Economics definition

There are many definitions of economics

-Economics is defined as the production distribution and consumption of goods and services
in order to satisfy human needs and wants.

-Economics is defined as the allocation of scarce resources in order to satisfy human needs
and wants

Economics can be divided into two branches microeconomics and macro economics.

Microeconomics

the study of how individual household firms behave when making economic decisions or
how individuals firms allocates scarce resources by responding to changes in the price of
goods incentives resources and other methods of production.

Examples of micro economics

An individual creating a budget to put themselves in a better financial position and also when
firms decide to lay off workers in order to minimise costs.

Macroeconomics
This is the study of how the aggregate economy behaves when allocating scarce resources or
it can be defined as the branch of economics that deals general economic factors such as
gross domestic product interest rates and the balance of payments. Or it is the branch f
science that deals with how an overall economy behaves.

An example of macroeconomics statement is that there is an increase in the price of mealier

meal in the country. It also includes issues concerning with unemployment levels in the
country rise of inflation etc.

Is economics a science or an art?

Science refers to the systematic study of certain behaviour to analyse that behaviour scientists
first collect data or facts then systematically analyse and test to understand the behaviour or
pattern of the data set.

If we analyze economics on term basis of science then we find that it is not always true in
economics but thinking always works in the above scientific pattern but outcomes or results
are not for each experimental as in natural science. Now in the scientific study has been
categorised in two branches in the above defined logic Social science Natural science

Economics is the study of social science in social science there are two types positive and
normative

Positive science means which true and testable like laws testable microeconomics consist of a
large part of laws positive statement therefore economics is like a positive science normative
science opinions regarding the desirability of various actions are called normative
statements .macroeconomics and economic planning which are branches of economics are
mostly normative because the answers may turn to be wrong may be denied. Therefore
economics in this case it is a science.

Now economics as an art

Art is concerned with the application of scienecetific theor.fro example according to the
Robbins definition individuals have to choose the best possible alternative that depends on
the past experience of the individuals so when we apply a scientific theory than some
practical problems may arise and to tackle them by the leaned skills is an art

Therefore economics is both an art and a science

Economic problems

There are three economic problems we try to solve in economics

What to produce?

How to produce it?

For whom to produce to?

Descriptive and analysis of economics

There are two types of economic statement positive and normative economics

Positive statements

These are economic statements based on description quantification explanations and

objectivity. This statement can be proved when subjected to the real economic situation. This
is why economics is called a science

Normative statement

They are conclusion statement in economics base on subjectivity economic statements or

arguments which cannot be proved when subjected in different economic settings they will
behave different try that is the reason why economics is called an art.

Economic systems

Free enterprise

Planned economy

Mixed economy

Important definitions in economics

Scarcity

When things are not readily available

Choice

Humans decides to choose things based on availability

Opportunity cost

The forgone alternatives chosen is referred to as opportunity cost

Production possibility curve

A graph showing the combination of two goods a nation can produce with its maximum
available resources and technology

True or False Questions

1. Economic models and theories are accurate statements of reality.
2. In the statement “consumption is a function of disposable income,”
Consumption is the dependent variable.
3. Graphs provide a visual representation of the relationship between
Two variables.
4. A production-possibility frontier depicts the unlimited wants of a
Society.
5. When there is full employment, the decision to produce more of
 One good necessitates decreased production of another good.
6. There are increasing costs of production because economic resources
Are not equally efficient in the production of all goods and services.

2. PRODUCTION POSIBILITY FRONTIER

Production
Production possibilities frontier (PPF) shows the maximum attainable combinations of two products
that may be produced if we use our resources efficiently.

Sometimes economists call this Production Possibilities Curve (PPC).

PPF or PPC, we mean the very same thing by them.

A
200

B
100

50 100

Production Possibilities Frontier

PPFs can be used to demonstrate:
) opportunity costs (trade-offs).

b) efficient production.

c) economic growth.
a) Understanding opportunity costs -The Shape of PPFs
Constant opportunity cost PPFs are
–Linear lines

–Opportunity cost is constant (the same) no matter where you produce.

Increasing opportunity cost PPFs are
–Bowed outwards

–As you keep increasing production, opportunity cost is increasing.

 a) Constant opportunity cost PPF

A
200

C
100

B
0
100

a) Increasing opportunity cost PPF

A
100

C
100

100 100
 a) Increasing Opportunity Costs
Increasing automobile production by
200 here

Only reduces aircraft carrier

production by 50
400
350
Increasing automobile
C
200 production by 200 here

Reduces aircraft carrier

production by 150

100 200 400 500

a) Increasing vs. constant opportunity cost PPFs

What is the importance of the difference?

Why is there a difference?

Which is more realistic?

What is the advantage of using the constant opportunity cost PPF?

a) Characteristics of PPF
Both constant and increasing opportunity cost PPFs have a negative slope (they are
downward sloping).

This is because of the trade-offs. Due to scarcity we can only produce more of one product if
we give up some of the other product.
 Explaining points on the ppf graph

These two points are

unattainable

400
350
These points are efficient points
C
200

These are inefficient points

B
0 400

ECONOMIC GROWTH

Maize

500

100

0 600
100 Soya beans

When the curve of the production posibility frontier shifts outward then there is
economic growth
maize

100

0 500
100 Soya beans

When there is technological change in the production of soya beans the graph will shift
to the other side.

3. BUDGET CONSTRAINT ECONOMICS

a budget constraint shows the combinations of goods and services that a consumer can
purchase given their income and the prices of those goods and services. It illustrates the
trade-offs between different choices a consumer faces between good x and y.

Key Concepts:

1. Income (Y): The total amount of money available to a consumer for spending on
goods and services.
2. Prices (P): The cost of goods and services in the market.
3. Quantities (Q): The amount of goods and services the consumer decides to purchase.

The Budget Line Equation:

The budget constraint can be expressed mathematically as

M =P x X + P y Y

Where

M = income

P x And P y are the prices

X and Y are the quantities or units of goods and services

Graphical Representation:

The budget constraint is typically represented as a straight line on a graph where:

 The x-axis shows the quantity of good x

 The y-axis shows the quantity of good y

0 X

−P1
The slope of the budget line is determined by the ratio of the prices of the two goods left
P2
−P2
, and the intercepts on the axes represent the maximum quantity of each good that can be
P1
purchased if all income is spent on that good alone.

Changes in Budget Constraint:

1. Changes in Income:
o If income increases, the budget line shifts outward, allowing the consumer to
purchase more of both goods.

Y
 0
o If income decreases, the budget line shifts inward.
X

2. Changes in Prices:
o If the price of one good increases, the budget line rotates inward, making that
good relatively more expensive.

o If the price of one good decreases, the budget line rotates outward, making
that good relatively cheaper.
Consumer Choice:

The budget constraint, combined with the consumer's preferences (represented by

indifference curves), determines the optimal combination of goods that maximizes the
consumer's utility. The point where the highest indifference curve is tangent to the budget
line represents this optimal choice.

Budget line

INDIFERENCE CURVE

A consumer maximises his or her

utility at this point
Y

0
X
Example:

Suppose a consumer has K100 to spend on two goods: apples and bananas. Apples cost K2
each, and bananas cost K1 each. The budget constraint would be:

2 X +Y =100

This can be graphically represented by plotting the budget line and identifying the possible
combinations of apples and bananas the consumer can purchase within their budget.

100

0 50
DEMAND AND SUPPLY
Demand and supply are fundamental concepts in economics that describe the relationship
between the quantity of a good or service that consumers are willing and able to purchase and
the quantity that producers are willing and able to sell. Here’s a breakdown of each concept:

Demand

Demand refers to how much of a product or service is desired by buyers.

The quantity demanded is the amount of a product people are willing to buy at a certain price.

The relationship between price and quantity demanded is defined by the law of demand,
which states that, all else being equal, as the price of a product decreases, the quantity
demanded increases, and vice versa.

Key components of demand:

1. Price of the good: The primary factor affecting demand.

2. Income of consumers: Higher income generally increases demand for goods.
3. Prices of related goods: Substitute goods and complementary goods can affect
demand.
4. Tastes and preferences: Changes in consumer tastes can increase or decrease
demand.
5. Expectations: If consumers expect prices to rise in the future, they may increase
current demand.
6. Number of buyers: More buyers increase the demand.

Demand Curve: Graphically represents the relationship between the price of a good and the
quantity demanded. It typically slopes downward from left to right, indicating that as price
decreases, quantity demanded increases.

Supply

Supply refers to how much the market can offer. The quantity supplied is the amount of a
certain good producers are willing to supply when receiving a certain price. The relationship
between price and quantity supplied is defined by the law of supply, which states that, all else
being equal, as the price of a product increases, the quantity supplied increases, and vice
versa.

Key components of supply:

1. Price of the good: The primary factor affecting supply.

2. Cost of production: Higher production costs can reduce supply.
3. Technology: Advances in technology can increase supply.
4. Prices of related goods: If the price of alternative goods rises, producers may switch
to producing those goods.
5. Expectations: If producers expect higher prices in the future, they might reduce
current supply.
6. Number of sellers: More sellers increase the supply.
Supply Curve: Graphically represents the relationship between the price of a good and the
quantity supplied. It typically slopes upward from left to right, indicating that as price
increases, quantity supplied increases.

Market Equilibrium

Market equilibrium occurs where the supply and demand curves intersect. At this point, the
quantity of the good supplied equals the quantity demanded. The corresponding price is
known as the equilibrium price, and the quantity is known as the equilibrium quantity.

Shifts vs. Movements

 Movements along the curve: Caused by changes in the price of the good itself. For
demand, a movement along the curve reflects a change in the quantity demanded due
to a price change. For supply, it reflects a change in the quantity supplied due to a
price change.
 Shifts of the curve: Caused by changes in other factors (non-price determinants). For
demand, this can be changes in income, tastes, etc. For supply, this can be changes in
production costs, technology, etc.

Understanding demand and supply is crucial for analyzing how markets function and for
making informed business decisions

INDIFFERENCE CURVE ANALYSIS

Indifference curve analysis is a tool used in microeconomics to understand consumer

preferences and the choices they make to maximize their satisfaction or utility. This analysis
focuses on the combinations of goods that provide the consumer with the same level of
satisfaction, which is represented by indifference curves.

Key Concepts in Indifference Curve Analysis

1. Indifference Curves

An indifference curve represents all the combinations of two goods that provide the same
level of utility or satisfaction to a consumer. The consumer has no preference for one
combination over another on the same curve, hence they are "indifferent" among them.

Properties of Indifference Curves:

 Downward Sloping: Indicates that as the quantity of one good increases, the quantity of the
other good must decrease for the consumer to remain equally satisfied.
 Convex to the Origin: Reflects the principle of diminishing marginal rate of substitution
(MRS), meaning that as a consumer substitutes one good for another, the amount of the
second good required to compensate decreases.
 Do Not Cross: Each curve represents a different level of utility, so two curves cannot
intersect.
  Higher Curves Represent Higher Utility: Indifference curves further from the origin
represent higher levels of satisfaction.

2. Marginal Rate of Substitution (MRS)

The MRS is the rate at which a consumer is willing to trade one good for another while
maintaining the same level of utility. It is the slope of the indifference curve at any given
point and typically decreases as you move down along the curve, reflecting the diminishing
MRS.

MRS=−ΔYΔX\text{MRS} = -\frac{\Delta Y}{\Delta X}MRS=−ΔXΔY

3. Budget Constraint

The budget constraint represents all the combinations of two goods that a consumer can
afford given their income and the prices of the goods. It is typically represented by a straight
line where the slope is determined by the relative prices of the two goods.

Budget Constraint Equation: PxX+PyY=IP_x X + P_y Y = IPxX+PyY=I Where:

 PxP_xPx and PyP_yPy are the prices of goods X and Y, respectively.

 XXX and YYY are the quantities of goods X and Y, respectively.
 III is the consumer's income.

4. Consumer Equilibrium

Consumer equilibrium occurs where the highest attainable indifference curve is tangent to the
budget constraint. At this point, the slope of the indifference curve (MRS) equals the slope of
the budget constraint (the ratio of the prices of the two goods).

MRS=PxPy\text{MRS} = \frac{P_x}{P_y}MRS=PyPx

Graphical Representation

1. Indifference Curves: Graph showing multiple downward sloping and convex curves.
2. Budget Line: A straight line with a slope equal to the negative price ratio.
3. Equilibrium Point: The point where the budget line is tangent to the highest possible
indifference curve.

Applications of Indifference Curve Analysis

1. Consumer Choice: Helps in understanding how consumers decide on the optimal

consumption bundle given their preferences and budget constraints.
2. Effect of Changes in Income: Analyzes how changes in income affect the consumer's optimal
choice (Income Effect).
3. Effect of Changes in Prices: Examines how changes in the prices of goods influence the
consumer's choice (Substitution Effect and Income Effect).
4. Policy Analysis: Useful in evaluating the impact of taxes, subsidies, and other economic
policies on consumer behavior.
Indifference curve analysis is a fundamental concept in microeconomics that provides deep
insights into consumer behavior, preferences, and the impact of economic variables on
consumer choices.

PRODUCTION THEORY

Production theory is a branch of microeconomics that deals with the process of turning inputs
into outputs. It explores how firms combine labor, capital, raw materials, and other inputs to
produce goods and services and how they can do this efficiently to maximize profits. Here are
the key concepts in production theory:

Key Concepts in Production Theory

1. Factors of Production

Factors of production are the inputs used in the production process. They typically include:

 Labor (L): Human effort, including physical and mental work.

 Capital (K): Physical assets like machinery, buildings, and equipment.
 Land (T): Natural resources.
 Entrepreneurship: The skill and risk-taking ability of the person who brings the other factors
together.

2. Production Function

The production function describes the relationship between inputs and the maximum output
that can be produced with those inputs. It is usually expressed as: Q=f(L,K)Q = f(L,
K)Q=f(L,K) Where:

 QQQ is the quantity of output.

 LLL is the quantity of labor.
 KKK is the quantity of capital.
 fff represents the functional relationship.

3. Short-Run vs. Long-Run Production

 Short-Run: A period in which at least one factor of production is fixed. Typically, capital is
considered fixed, and labor is variable.
 Long-Run: A period in which all factors of production can be varied, and firms can adjust all
inputs to find the most efficient production method.

4. Law of Diminishing Returns

In the short run, as more of a variable input (like labor) is added to a fixed input (like capital),
the additional output produced by the variable input eventually decreases. This is known as
the law of diminishing marginal returns.
5. Isoquants and Isocosts

 Isoquants: Curves that represent combinations of different inputs that produce the same
level of output. Similar to indifference curves in consumer theory, but for production.
 Isocost Lines: Lines that represent all combinations of inputs that cost the same amount.
The slope of an isocost line is determined by the relative prices of the inputs.

6. Optimal Production

The optimal combination of inputs occurs where the highest isoquant is tangent to an isocost
line. This point represents the least-cost combination of inputs for a given level of output.

Marginal Products and Returns to Scale

1. Marginal Product

The marginal product (MP) of an input is the additional output produced by using one more
unit of that input, holding other inputs constant. MPL=ΔQΔLMP_L = \frac{\Delta Q}{\Delta
L}MPL=ΔLΔQ MPK=ΔQΔKMP_K = \frac{\Delta Q}{\Delta K}MPK=ΔKΔQ

2. Returns to Scale

Returns to scale describe how output responds to a proportional increase in all inputs.

 Increasing Returns to Scale (IRS): Output increases by a larger proportion than the increase
in inputs.
 Constant Returns to Scale (CRS): Output increases by the same proportion as the increase in
inputs.
 Decreasing Returns to Scale (DRS): Output increases by a smaller proportion than the
increase in inputs.

Cost Concepts in Production

1. Total Cost (TC)

The total cost is the sum of all costs incurred in production, including fixed and variable
costs. TC=TFC+TVCTC = TFC + TVCTC=TFC+TVC Where:

 TFCTFCTFC is Total Fixed Cost.

 TVCTVCTVC is Total Variable Cost.

2. Average and Marginal Costs

 Average Cost (AC): The total cost divided by the quantity of output produced. AC=TCQAC = \
frac{TC}{Q}AC=QTC
 Marginal Cost (MC): The additional cost of producing one more unit of output.
MC=ΔTCΔQMC = \frac{\Delta TC}{\Delta Q}MC=ΔQΔTC

Economies of Scale
Economies of scale occur when increasing production lowers the average cost per unit. This
can result from factors like bulk purchasing of inputs, specialization of labor, and more
efficient use of capital.

Graphical Representation

1. Isoquants and Isocosts: Graph showing isoquants (convex curves) and isocost lines (straight
lines) to determine the optimal combination of inputs.
2. Cost Curves: Graphs depicting the relationships between total, average, and marginal costs,
typically with U-shaped average and marginal cost curves due to economies and
diseconomies of scale.

Applications of Production Theory

1. Business Decision-Making: Helps firms decide on the optimal combination of inputs to

minimize costs and maximize output.
2. Policy Analysis: Assists policymakers in understanding how changes in technology, taxes,
and regulations affect production efficiency.
3. Supply Analysis: Provides insights into the supply side of markets, influencing pricing and
output decisions.

Production theory is essential for understanding how firms operate, how they make decisions
about resource allocation, and how they respond to changes in economic conditions