Economics 1A – 2025

Economics – is the social science that studies the choices that individuals, businesses,
governments and entire societies make as they cope with scarcity and incentives that influence
and reconcile those choices.

Scarcity – is defined as the inability to satisfy our unlimited wants and needs due to the lack of
resources required to fulfill them, scarcity in other words refers to the limited or finite
resources.

Choices – think about choices as a tradeoff, giving up one thing to gain another

Opportunity cost – opportunity cost the cost of an action is the highest valued alternative
forgone

Incentives – are rewards that encourage an action or a penalty that discourages one

Micro economics – is the study of the choices that individuals and businesses make, the way
these choices interact in the markets and the influence of governments

Macroeconomics – is the study of the performance of the national economy and the global
economy

Trade off – a trade-off is the cost of choosing one option over another, it represents what you
give up or sacrifice to obtain something else

Positive statement – about what is

Normative statement – about what ought to be

Central economics questions

What – speaks to which goods and services should producers be produced

How – speaks to the manner in which these goods and services are produced

For whom – those consuming goods and services produced within a given economy

Factors of production include – land, labor, capital and entrepreneurship

Self-interest – self-interest is if you think that the choice is the best one available

Social interest – a choice is in the social interest if it leads to an outcome that is the best for
society as a whole
The production possibilities frontier

- The production possibilities frontier (PPF) is the boundary between these combinations
of goods and services that can be produced and those that cannot

- Production efficiency is if we produce goods and services at the lowest cost, this
outcome occurs at all the points on the PPF, producing at any output level on the PPF
implies the maximization of production given the available resources
- At any points inside the PPF, production is inefficient because we are giving up more
than necessary of one good to produce a given quantity of the other good.
- Resources are misallocated when they are assigned to tasks for which they are not the
best match.

The PPF and marginal cost:

- The marginal cost of a good is the opportunity cost of producing one more unit of it.

Week 2: lesson 3 – supply and demand

Markets and prices

Competitive market – a market that has many buyers and sellers, so no single buyer or seller
can influence the price.

Money price – is the price of an object is the number of rand that must be given up in exchange
for it.

Opportunity cost – is if an action is the highest valued alternative forgone

Relative price – the ratio of one price to another it is called a relative price and a relative price is
an opportunity cost

Demand

If you demand something then you:

- Want it
- Can afford it
- Plan to buy it

The quantity demanded of a good or service is the amount that consumers plan to buy during a
given time period at a particular price

The law of demand

The law of demand states: other things remaining the same, the higher the price of a good, the
smaller is the quantity demanded, and the lower is the price of a good, the greater is the
quantity demanded.

A higher price reduces the quantity demanded because of the substitution effect and income
effect

Substitution effect – is when the price of a good rises, other things remaining the same, its
relative price – its opportunity cost rises, although each good is unique, it has a substitute,
other goods that can be used in its place.

Income effect – when a price rises and all other influences on buying plans remain unchanged,
the price rises relative to people’s income.

A demand cure – shows the relationship between the quantity demanded of a good and its
price when all other influences on consumers planned purchases remain the same.

The willingness and ability to pay is a measure of marginal benefit.

Factors causing a movement along a demand curve (change in the quantity demanded)

1. Price of product

Factors causing a shift of the demand curve

1. Income of the consumer

2. Consumer preference
3. Price of related products
4. Size of the consumers household

Determinants of demand
 - Price of product - Px
- Income of the consumer - Y
- Price of related products - Pg
- Consumer preference - T
- Size of the consumers household – N

Change in demand

- When any factor influences buying plans changes other than the price of the good, there
is a change in demand.

Six main factors bring changes in demand include:

1. The prices of related goods

2. Income
3. Population

a complement: is a good that is used in conjunction with another good

expected future prices: if the expected future price of a good rises and if the good can be
stored, the opportunity cost of obtaining the good for future use is lower today that it will be in
the future when people expect the prices to be higher.

Income: consumers income influences demand, when income increases, consumers buy more
of most goods; and when income decreases, consumers buy less of most goods

A normal good – is one for which demand increases as income increases

An inferior good – is one for which demand decreases as income increases

Population – the larger the population, the greater Is the demand for all good and services, the
smaller the population, the smaller is the demand for all goods and services.

Preferences – determine the value that people place on each good and service.
Supply
The quantity supplied of a good or service is the amount that producers plan to sell during a
given time period.

The law of supply

- Other things remaining the same, the higher the price of a good, the greater is the
quantity supplied; the lower the price of a good the smaller is the quantity supplied.

A supply curve

- Shows the relationship between the quantity supplied of a good and its price when all
other influences on producers planned sales remain the same.

Minimum supply price

- The supply curve can be interpreted as a minimum-supply-price curve, a curve that

shows the lowest price at which someone is willing to sell, this lowest price is the
marginal cost

A change in supply

 When any factor that influences selling plans other than the price of the good changes,
there is a change in supply
 Six main factors bring changes in supply: the prices of factors of production, expected
future prices and technology.

Technology

 The term ‘technology’ is used broadly to mean the way that factors of production are
used to produce a good. A technology change occurs when a new method is discovered
that lowers the cost of producing a good

Determinants of supply

- Price of product
- Price of alternative products
- Prices of factors of production and other outputs
- Expected future price of product
- Technology

Factors causing a movement along the supply curve

- Price of product

Factors causing a shift of the supply curve

- Price of alternative products

- Prices of factors of production and other outputs
- Expected future price of product
- Technology
Market equilibrium – an equilibrium is a situation in which opposing forces balance each other,
equilibrium in a market occurs when the price balances buying plans and selling plans, the
equilibrium price is the price at which the quantity demanded equals the quantity supplied.

Equilibrium price: the price for a good or service at which the quantity demanded equals the
quantity supplied

The equilibrium quantity – is the quantity bought and sold at the equilibrium price; a market
moves toward its equilibrium because:

- Price regulates buying and selling plans

- Price adjusts when plans do not match
Lesson 4 – elasticity

The price elasticity of demand – is a units-free measure of the responsiveness of the quantity
demanded of a good to a change in its price when all other influences on buying plans remain
the same.

Formula -

Inelastic and elastic demand: If the quantity demanded remains constant when the price
changes, then the price elasticity of demand is zero and the good is said to have a perfectly
inelastic demand, If the percentage change in the quantity demanded equals the percentage
change in the price, then the price elasticity equals 1 and the good is said to have a unit elastic
demand, if the quantity demanded changes by an infinitely large percentage in response to a
tiny price change, then the price elasticity of demand is infinity and the good is said to have a
perfectly elastic demand.
Total revenue and elasticity

- The total revenue from the sale pf a good equal the price of the good multiplied by the
quantity sold, when a price changes, total revenue also changes

The factors that influence the elasticity of demand

The elasticity of demand for a good depends on:

- The closeness of substitutes: the closer the substitutes for a good or service, the more
elastic is the demand for it
- The proportion of income spent on the good: the greater the proportion of income spent
on a good, the more elastic (or less inelastic) is the demand for it
- The time elapsed since the price change: the longer the time that has elapsed since a
price change, the more elastic is demand.

Cross elasticity of demand

 The cross elasticity of demand is a measure of the responsiveness of the demand for a
good to a change in the price of a substitute or complement, other things remaining the
same
Week 4 – lesson 7: household choices – utility and demand

Consumption choices

The choices you make as a buyer of goods and services – your consumption choices – are
influenced by many factors, you can summaries them under two broad headings

- Consumption possibilities
- Preferences

Consumption possibilities

Your consumption possibilities are all the things that you can afford to buy, you can afford many
different combinations of goods and services but they are all limited by your income and by the
prices that you must pay.

Consumption choices are limited by income and by prices.

Consumers budget line

We describe this limit with a budget line, which marks the boundary between those
combinations of goods and services that a household can afford to buy and those that it cannot
afford.

Changes in consumption possibilities

Consumption possibilities change when income or prices change, a rise in income shifts the
budget line outward but leaves its slope unchanged, a change in price changes the slope of the
line.

Preferences

Preferences are based on ones likes and dislikes, to achieve this. Goal, we need a deeper way of
describing preferences, one approach to this problem uses this idea of utility and defines utility
as the benefit of satisfaction that a person gets from the consumption of goods and services

We distinguish two utility concepts:

- Total utility
- Marginal utility

Total utility

The total benefit that a person gets from the consumption of all the different goods and services
is called total utility.

Total utility depends on the level of consumption – more consumption generally gives more
total utility.

Marginal utility

We define marginal utility as the change in total utility that results from a one – unit increase