ECO 121 COURSE GUIDE

CONTENTS PAGE

Introduction……………………………………………….. iv
Course Aims……………………………………………… iv
Working through this Course…………………………..... iv
Course Materials………………………………………….. v
Study Units……………………………………………….. v
Assessment File………………………………………….. v
Tutor-Marked Assignment (TMA)………………………. vi
Final Examination and Grading…………………………. vi
Course Marking Scheme…………………………………. vii
Course Review…………………………………………… vii
How to Get the Most of this Course……………………… viii
Facilitator/Tutors and Tutorials………………………….. ix
Summary………………………………………………….. ix

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ECO 121 COURSE GUIDE

INTRODUCTION

ECO 121: Principle of Economics is a three-credit and one-semester

undergraduate course for Economics student. The course is made up of
21 units spread across fifteen lectures weeks. This course guide tells you
what economic problems are and how are they use to solve households
and firm’s economic needs. It tells you about the course materials and
how you can work your way through these materials. It suggests some
general guidelines for the amount of time required of you on each unit in
order to achieve the course aims and objectives successfully. Answers to
your tutor marked assignments (TMAs) are therein already.

COURSE CONTENT

This course is basically an introductory course on the Micro-economics

aspect of economics theory. The topics covered includes the subject
matter of economics and basic economics problems; the methodology
of economics science; and the general principles of resource allocation;
market mechanism-demand and supply; price determination and
elasticity, theory of consumer behaviour; theory of production; market
structure price and output under perfect competition; monopoly;
monopolistic competition and oligopoly. It takes you through meaning
of economics and its various definitions. Since economics is defined
based on the two assumptions, the assumptions were elaborated on in
relation with some other concepts that are interwoven. Thereby
interdependency and complexity of economics become obvious through
real life scenario given in the units.

COURSE AIMS

The aim of this course is to give you in-depth understanding of the

economics as regards:

• fundamental concept and practices of economics

• to familiarise students with scarce economics resources which
form the basis for rational decision by households and firms
• to stimulate student’s knowledge of decision making within the
households and firm
• to show the circular relationship between households and firm,
input and output and flow of resources within the economy
system
• to expose the students to economic history and behaviours of
households and firms in allocation of resource and in
manipulation of factors of production for profit maximisation

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ECO 121 COURSE GUIDE

COURSE OBJECTIVES

To achieve the aims of this course, there are overall objectives which the
course is out to achieve though, there are set out objectives for each unit.
The unit objectives are included at the beginning of a unit; you should
read them before you start working through the unit. You may want to
refer to them during your study of the unit to check on your progress.
You should always look at the unit objectives after completing a unit.
This is to assist the students in accomplishing the tasks entailed in this
course. In this way, you can be sure you have done what was required of
you by the unit. The objectives serves as study guides, such that student
could know if he is able to grab the knowledge of each unit through the
sets of objectives in each one.

At the end of this course, you should be able to:

• define economics, state its important and enunciate on

assumptions upon which the definitions are based
• state why and how available choices leads to decision making
and Relate basic economic concept and problems
• enumerate the importance of basic economics question and know
how to apply rationality to answering the questions in the
decision making process
• list and explain different methods of solving economic problem
which lead to different types of economies. Differentiate between
different types of economies and know the weaknesses and
strength of each method of economy
• explain how firms transforms resources allocated (input) into
product (output) and understand the circular flow of supply and
demand between households and firm
• discuss price mechanism, explain demand for a commodity in
relation to changes in price and elucidate on factors that
determines quantity demanded and supplied. Define elasticity in
relation to demand and supply
• explain why government interfere in the market price
determination and how government interfere in the market
• explain the concept of utility, marginal and tot utility
• describe how input are employed in satisfying human wants,
consumer’s preference and indifferent curve and consumer
equilibrium point on the budget line
• discuss factors of productions and their specific contribute to
process of production
• explain Cost concepts and their definitions, different market
structures and behaviour of firms.

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ECO 121 COURSE GUIDE

WORKING THROUGH THE COURSE

To successfully complete this course, you are required to read the study
units, referenced books and other materials on the course.

Each unit contains Self-Assessment Exercises. At some points in the

course, you will be required to submit assignments for assessment
purposes. At the end of the course there is a final examination. This
course should take about 15weeks to complete and some components of
the course are outlined under the course material subsection.

COURSE MATERIALS

The major component of the course, what you have to do and how you
should allocate your time to each unit in order to complete the course
successfully on time are listed follows:

1. Course Guide
2. Study Unit
3. Textbook
4. Assignment File
5. Presentation Schedule

STUDY UNITS

There are six modules in this course broken into 21 units which should
be carefully and diligently studied.

Module 1 Basic Concept in Economics

Unit 1 What is Economics?

Unit 2 Fundamental Principles of Economics Contents
Unit 3 Economics and Basic Economics Problems
Unit 4 The Economics System

Module 2 Demand and Supply

Unit 1 The Basis of Decision-Making Units

Unit 2 Demand
Unit 3 Supply

Module 3 Price Determination

Unit 1 Market Equilibrium

Unit 2 Price Ceiling and Price Floor
Unit 3 Elasticity of Demand
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ECO 121 COURSE GUIDE

Unit 4 Elasticity of Supply

Module 4 Theory of Consumer Behaviour

Unit 1 Basis of Choice: Utility

Unit 2 Budget Constraint
Unit 3 Equilibrium, Price and Income Changes

Module 5 Theory of Production

Unit 1 Factors of Production

Unit 2 Production Process and Cost Concepts
Unit 3 Law of Production

Module 6 Theory of Firm

Unit 1 Perfect Competition

Unit 2 Monopoly
Unit 3 Monopolistic Competition and Oligopoly
Unit 4 Market Structures Comparison

Each study unit will take at least two hours, and it include the
introduction, objectives, main content, conclusion, summary and
references. Other areas border on the Tutor-Marked Assessment (TMA)
questions. Some of the self-assessment exercises will necessitate
discussion, brainstorming and argument with some of your colleagues.
You are advised to do so in order to understand and get acquainted with
historical economic event as well as notable periods.

There are also textbooks under the references and other (on-line and off-
line) resources for further reading. They are meant to give you
additional information if only you can lay your hands on any of them.
You are required to study the materials; practise the self-assessment
exercise and tutor-marked assignment (TMA) questions for greater and
in-depth understanding of the course. By doing so, the stated learning
objectives of the course would have been achieved.

TEXTBOOKS AND REFERENCES

For further reading and more detailed information about the course, the
following materials are recommended:

Friedman, D. D. (1990). Price Theory: An Intermediate Text. South-

Western Publishing Co.

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ECO 121 COURSE GUIDE

Foley, D. K. (2003). Rationality and Ideology in Economics.

November 30th, 2011,
http://homepage.newschool.edu/~foleyd/ratid.pdf.

Marshall, A. (1920). Principles of Economics. Library of Economics and

Liberty. Assessed November 29, 2011
http://www.econlib.org/library/Marshall/marP4.html.

Reynolds, L. R. (2005). Alternative Microeconomics.

November 25, 2011, from
http://www.boisestate.edu/econ/Ireynol/web/Micro.htm.

Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth
of Nations.

Foley, D. K. (2003). Rationality and Ideology in Economics. Accessed

November 30, 2011 from
http://homepage.newschool.edu/~foleyd/ratid.pdf.

North, D. C. (1990). Institutions, Institutional Change and Economic

Performance. Cambridge: Cambridge University Press.

Welch, P. J. & Welch, G. F. (2010). Economics: Theory and Practice.

(pp.1-560). United State of America: John Wiley & Sons Inc.

Mahadi, S. Z. (2006). Understanding Economics. Kuala Lumpur:

Cosmopoint Sdn. Bhd.

Samuelson, P. A. & Nordhaus, W. D. (2010). Economics. (9th ed.). New

York: McGraw Hill Companies.

O’Sullivian, A. & Sheffrin, S. M. (2003). Microeconomics Principles

and Tools.
(3rd ed.). New Jersey: Pearson Education Inc.

Ojo, O. (2002). ‘A’ Level Economics Textbook for West Africa. (5th ed.).
Ibadan: Onibonoje Publishers.

Case, K. E. & Fair, R. C. (1999). Principles of Economics. New Jersey:

Prentice Hall.

Hal, R. V. (2002). Intermediate Microeconomics: A Modern Approach.

(6th ed.). New York: Norton.

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ECO 121 COURSE GUIDE

ASSIGNMENT FILE

This file presents you with details of the work you must submit to your
tutor for marking. The marks you obtain from these assignments shall
form part of your final mark for this course. Additional information on
assignments will be found in the assignment file and later in this Course
Guide in the section on assessment.

There are four assignments in this course. The four course assignments
will cover:

Assignment 1 - All questions in Module 1 Units 1 –4, Module 2 Units 1-3

Assignment 2 - All questions in Module 3 Units 1 –4, Module 4 Units 1-3
Assignment 3 - All questions in Module 5 Units 1-3
Assignment 4 - All questions in Module 6 Units 1-4

PRESENTATION SCHEDULE

The presentation schedule included in your course materials gives you

the important dates for the submission of Tutor-Marked Assignments
and attending tutorials. Remember, you are required to submit all your
assignments by due date. You should guide against falling behind in
your work.

ASSESSMENT

There are two types of assessment in this course. First are the Tutor-
Marked Assignments; second, there is a written examination.

In attempting the assignments, you are expected to apply information,

knowledge and techniques gathered during the course. The assignments
must be submitted to your tutor for formal Assessment in accordance
with the deadlines stated in the Presentation Schedule and the
Assignments File. The work you submit to your tutor for assessment
will count for 30 % of your total course mark.

At the end of the course, you will need to sit for a final written
examination of three hours' duration. This examination will also count
for 70% of your total course mark.

TUTOR-MARKED ASSIGNMENT

There are four Tutor-Marked Assignments in this course. You will

submit all the assignments. You are encouraged to work all the
questions thoroughly. The TMAs constitute 30% of the total score.

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ECO 121 COURSE GUIDE

Assignment questions for the units in this course are contained in the
Assignment File. You will be able to complete your assignments from
the information and materials contained in your set books, reading and
study units. However, it is desirable that you demonstrate that you have
read and researched more widely than the required minimum. You
should use other references to have a broad viewpoint of the subject and
also to give you a deeper understanding of the subject.

When you have completed each assignment, send it, together with a
TMA form, to your tutor. Make sure that each assignment reaches your
tutor on or before the deadline given in the Presentation File. If for any
reason, you cannot complete your work on time, contact your tutor
before the assignment is due to discuss the possibility of an extension.
Extensions will not be granted after the due date unless there are
exceptional circumstances.

FINAL EXAMINATION AND GRADING

The final examination will be of three hours' duration and have a value
of 70% of the total course grade. The examination will consist of
questions which reflect the types of self-assessment practice exercises
and tutor-marked problems you have previously encountered. All areas
of the course will be assessed

Revise the entire course material using the time between finishing the
last unit in the Module and that of sitting for the final examination too.
You might find it useful to review your Self-Assessment Exercises,
Tutor-Marked Assignments and comments on them before the
examination. The final examination covers information from all parts of
the course.

COURSE MARKING SCHEME

The table presented below indicates the total marks (100%) allocation.

Assignment Marks
Assignments (Best three assignments out of 30%
four that is marked)
Final Examination 70%
Total 100%

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ECO 121 COURSE GUIDE

COURSE OVERVIEW

The table presented below indicates the units, number of weeks and
assignments to be taken by you to successfully complete the course,
Principle of Economics (ECO 121).

Units Title of Work Weeks Assessment

Activities (End of Unit)
Course Guide
Module 1 Basic Concepts in Economics
1 What is Economics? Week 1 Assignment 1
2 Fundamental Principle of Week 1 Assignment 1
Economics
3 Economics and Basic Week 2 Assignment 1
Economics Problems
4 The Economics System Week 2 Assignment 1
Module 2 Demand and Supply
1 The Basis Decision-making Week 3 Assignment 1
Units
2 Demand Week 3 Assignment 1
3 Supply Week 3 Assignment 1
Module 3 Price Determination
1 Market Equilibrium Week 4 Assignment 2
3 Price Ceiling and Price Floor Week 4
5 Elasticity of Demand Week 5 Assignment 2
4 Elasticity of supply Week 5 Assignment 2
Module 4 Theory of Consumer Behavior
1 Basis of Choice: Utility Week 6 Assignment 2
2 Budget Constraint Week 7 Assignment 2
3 Equilibrium, price and income Week 8 Assignment 2
changes
Module 5 Theory of Production
1 Factors of Production Week 9 Assignment 3
2 Production Process and Cost Week 10 Assignment 3
Concepts
3 Law of Production Week 11 Assignment 3
Module 6 Theory of Firm
1 Perfect Competition Week 12 Assignment 4
2 Monopoly Week 13 Assignment 4
3 Monopolistic competition and Week 14 Assignment 4
oligopoly
4 Market Structure Comparison Week 15 Assignment 4
Total 15 Weeks

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ECO 121 COURSE GUIDE

HOW TO GET THE MOST FROM THIS COURSE

In distance learning the study units replace the university lecturer. This
is one of the great advantages of distance learning; you can read and
work through specially designed study materials at your own pace and at
a time and place that suit you best.

Think of it as reading the lecture instead of listening to a lecturer. In the

same way that a lecturer might set you some reading to do, the study
units tell you when to read your books or other material, and when to
embark on discussion with your colleagues. Just as a lecturer might give
you an in-class exercise, your study units provides exercises for you to
do at appropriate points.

Each of the study units follows a common format. The first item is an
introduction to the subject matter of the unit and how a particular unit is
integrated with the other units and the course as a whole. Next is a set of
learning objectives. These objectives let you know what you should be
able to do by the time you have completed the unit.

You should use these objectives to guide your study. When you have
finished the unit you must go back and check whether you have
achieved the objectives. If you make a habit of doing this you will
significantly improve your chances of passing the course and getting the
best grade.

The main body of the unit guides you through the required reading from
other sources. This will usually be either from your set books or from a
reading section. Some units require you to undertake practical overview
of historical events. You will be directed when you need to embark on
discussion and guided through the tasks you must do.

The purpose of the practical overview of some certain historical

economic issues are in twofold. First, it will enhance your understanding
of the material in the unit. Second, it will give you practical experience
and skills to evaluate economic arguments, and understand the roles of
history in guiding current economic policies and debates outside your
studies. In any event, most of the critical thinking skills you will develop
during studying are applicable in normal working practice, so it is
important that you encounter them during your studies.

Self-Assessments are interspersed throughout the units. Working

through these tests will help you to achieve the objectives of the unit and
prepare you for the assignments and the examination. You should do
each Self-Assessment Exercises as you come to it in the study unit.

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ECO 121 COURSE GUIDE

Also, ensure to master some major historical dates and events during the
course of studying the material.

The following is a practical strategy for working through the course. If

you run into any trouble, consult your tutor. Remember that your tutor's
job is to help you. When you need help, don't hesitate to call and ask
your tutor to provide it.

Read this Course Guide thoroughly

Organise a study schedule. Refer to the `Course overview' for more

details. Note the time you are expected to spend on each unit and how
the assignments relate to the units. Important information, e.g. details of
your tutorials, and the date of the first day of the semester is available
from study centre. You need to gather together all this information in
one place, such as your dairy or a wall calendar. Whatever method you
choose to use, you should decide on and write in your own dates for
working each unit.

Once you have created your own study schedule, do everything you can
to stick to it. The major reason that students fail is that they get behind
with their course work. If you get into difficulties with your schedule,
please let your tutor know before it is too late for help.

Turn to Unit 1 and read the introduction and the objectives for the unit.

Assemble the study materials. Information about what you need for a
unit is given in the ‘overview' at the beginning of each unit. You will
also need both the study unit you are working on and one of your set
books on your desk at the same time.

Work through the unit. The content of the unit itself has been arranged
to provide a sequence for you to follow. As you work through the unit
you will be instructed to read sections from your set books or other
articles. Use the unit to guide your reading.

Up-to-date course information will be continuously delivered to you at

the study centre.

Work before the relevant due date (about 4 weeks before due dates), get
the Assignment File for the next required assignment. Keep in mind that
you will learn a lot by doing the assignments carefully. They have been
designed to help you meet the objectives of the course and, therefore,
will help you pass the exam. Submit all assignments no later than the
due date.

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ECO 121 COURSE GUIDE

Review the objectives for each study unit to confirm that you have
achieved them. If you feel unsure about any of the objectives, review the
study material or consult your tutor.

When you are confident that you have achieved a unit's objectives, you
can then start on the next unit. Proceed unit by unit through the course
and try to pace your study so that you keep yourself on schedule.

When you have submitted an assignment to your tutor for marking, do

not wait for its return before starting on the next units. Keep to your
schedule. When the assignment is returned, pay particular attention to
your tutor's comments, both on the Tutor-Marked Assignment form and
also written on the assignment. Consult your tutor as soon as possible if
you have any questions or problems.

After completing the last unit, review the course and prepare yourself
for the final examination. Check that you have achieved the unit
objectives (listed at the beginning of each unit) and the course objectives
(listed in this Course Guide).

FACILITATORS/TUTORS AND TUTORIALS

There are some hours of tutorials (2-hour sessions) provided in support

of this course. You will be notified of the dates, times and location of
these tutorials. Together with the name and phone number of your tutor,
as soon as you are allocated a tutorial group.

Your tutor will mark and comment on your assignments, keep a close
watch on your progress and on any difficulties you might encounter, and
provide assistance to you during the course. You must mail your Tutor-
Marked Assignments to your tutor well before the due date (at least two
working days are required). They will be marked by your tutor and
returned to you as soon as possible.

Do not hesitate to contact your tutor by telephone, e-mail, or discussion

board if you need help. The following might be circumstances in which
you would find help necessary.

Contact your tutor if you:

• do not understand any part of the study units or the assigned reading
• have difficulty with the Self-Assessment Exercises
• have a question or problem with an assignment, with your tutor's
comments on an assignment or with the grading of an assignment.

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ECO 121 COURSE GUIDE

You should try your best to attend the tutorials. This is the only chance
to have face to face contact with your tutor and to ask questions which
are answered instantly. You can raise any problem encountered in the
course of your study. To gain the maximum benefit from course
tutorials, prepare a question list before attending them. You will learn a
lot from participating in discussions actively.

SUMMARY

The course, Principle of Economics (ECO 121), expose you to basic

concepts in economics and production, production process; utility
derivable by consumers through consumption of output to satisfy their
wants. This course also gives you insight into price determination by
invisible hand of the market through demand and supply for output.
Thereafter it shall enlighten you about decision making by households
and firms theory of consumer behaviour and theory of firm.
Conclusively it explicates on how different behaviours of firms lead to
different market structures and also make comparison between these
different structures.

On successful completion of the course, you would have developed

critical thinking skills with the material necessary for efficient and
effective discussion of economic issues, factors of production and
behaviour of firms and households. However, to gain a lot from the
course please try to apply anything you learn in the course to term
papers writing in other economic development courses. We wish you
success with the course and hope that you will find it fascinating and
handy.

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 MAIN
COURSE

CONTENTS PAGE

Module 1 Basic Concept in Economics……………….. 1

Unit 1 What is Economics?............................................. 1

Unit 2 Fundamental Principles of Economics Contents 8
Unit 3 Economics and Basic Economics Problems…. 12
Unit 4 The Economic System……………………… 18

Module 2 Demand and Supply………………………….. 26

Unit 1 The Basis of Decision-Making Units…………. 26

Unit 2 Demand………………………………………… 31
Unit 3 Supply………………………………………….. 42

Module 3 Price Determination…………………………… 49

Unit 1 Market Equilibrium……………………………… 49

Unit 2 Price Ceiling and Price Floor…………………….. 60
Unit 3 Elasticity of Demand…………………………….. 65
Unit 4 Elasticity of Supply………………………….. … 77

Module 4 Theory of Consumer Behaviour………………… 88

Unit 1 Basis of Choice: Utility………………………… .. 88

Unit 2 Budget Constraint……………………………… 96
Unit 3 Equilibrium, Price and Income Changes……… 104

Module 5 Theory of Production………….…………… 110

Unit 1 Factors of Production……………………….. 110

Unit 2 Production Process and Cost Concepts……. 117
Unit 3 Law of Production…………………………… 126

Module 6 Theory of Firm……………………………. 134

Unit 1 Perfect Competition………………………… 134

Unit 2 Monopoly……………………………………. 145
Unit 3 Monopolistic Competition and Oligopoly…… 151
Unit 4 Market Structures Comparison……………… 161
ECO 121 MODULE 1

1
ECO 121 PRINCIPLE OF ECONOMICS

Economics is a science which deals with wealth creation through

production of goods and services, their distributions as well as
consumption. The process plays a huge task in the society because it
influences the majority of our decisions in our day-to-day activities.
However, defining economics has pose difficulties because there is no
single acceptable definition. Therefore different economists have given
economics different types of definitions. Famous among these
economists were: Adam Smith, David Ricardo, Thomas Malthus, J.S.
Mill, John Stuart Mill., Karl Marx, Alfred Marshall, J. B. Say, James
Henderson, John Keynes, Irving Fisher, Lionel Robbins and host of
others. Each of these famous economists either gave a definition which
others think it is either too narrow or too broad to describe economics.
Brooks (2012) is of the view that economics can be confusing therefore
it is difficult to find a single or clear definition of it. However, the
definition given by Lionel Robbins in his book, An Essay on Nature and
Significance of Economic Science received several criticisms but
remains a mainly acceptable definition of economics. Robbins defined
economics “as a science which studies human behaviour as a
relationship between given ends and scarce means which have
alternative uses”. This definition touched on major aspect of economics
such as human behaviour (rationality), human needs and scarce
resources, choices as a result of scarce resources and alternative uses of
resources.

The decisions made by individuals, corporations and governments are

vital to their survival. Therefore, studying economics and understanding
its principles is imperative. Studying economics provides many helpful
benefits. For instance, an individual is assisted in understanding the
decisions on household issues; it assists business outfit in understanding
the financial sector, the impact of government decision making on their
business and latest development in business society and the global
economy. It also teaches the concept of relative scarcity as a result of
limited resources, supply and demand, choices, opportunities,
opportunity cost and benefits and how all these can impact the decision
making of individuals, businesses and government. It also teaches how
these decision making processes affect the society.

Economics can also be defined as the approach to understanding

behaviour that starts from the assumption that people have objectives
and tend to choose the correct ways of achieving them. The first half of
the assumption is that people have objectives (it is assumed that the
objectives are reasonable and by extension, simple) and the second half
of the assumption, that people tend to find the correct way to achieve
their objectives, is called rationality. The term rationality is somewhat
deceptive according to Friedman (1990). He posited that the fact that
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ECO 121 MODULE 1

this term suggests that the way in which people find the correct way to
achieve their objectives is by rational analysis does not translate to the
fact that the decision is rational. Sometimes somewhat complicated
objective can lead to apparently irrational behaviour and decision.

There are main questions which economic science has to directly deal
with, and with reference to which its main work of collecting facts, of
analysing them and of reasoning about them should be arranged. The
greater part of the practical issues may be lying outside the range of
economic science, yet it supplies principal objectives in the milieu to an
economist work. This varies not only from time to time but also from
place to place. For instance, questions like: what are the causes, in the
contemporary world, that affect the production, the distribution,
consumption and exchange of wealth? What effects are these having on
the group of industry and trade; on the money and capital markets;
wholesale and retail businesses; foreign trade and exchange, and the
relations between employers and employed? How do all these
movements act and react upon one another? How do their ultimate differ
from their immediate tendencies? Marshall (1920).

Technically, economics is the study of how diverse alternatives or

choices are appraised in order to best achieve a certain objective. The
sphere of economics is the study of processes by which scarce resources
are allocated to satisfy unlimited wants. Ideally, the resources are
allocated to their highest valued uses. Supply, demand, preferences,
costs, benefits, production relationships and exchange are tools that are
used to describe and evaluate the market processes by which individuals
allocate scarce resources to satisfy as many wants as possible (Reynolds,
2005). For example, let consider Mr. A who is stuck in making two
decisions: 1. What type of car to buy? 2. Which area to live taking into
consideration his place of work? (Note that an individual decision will
affect two businesses, one is the car business and two is the estate
management business). In either case, Mr. A can perk up his decision by
devoting time and effort in studying the alternatives available in each
case. In the case of the car, if he considered fuel-efficiency of the cars in
his list of choices, then his decision determines with certainty which car
he gets and this is considered a rational decision. In the case of which
area to live, in his decision (on the choice of house), he may be
considering closeness to his office, the traffic in the route from the area
to his office, road linkages and networks etc. If the area is far from his
office and the road is always with traffic problems, but he choose the
area because the house is beautiful; then he has wasted his time and
efforts on considering better alternatives and maximising them; if he
choose a house nearer to his office with less traffic problem, then his
time is not wasted and the decision may be considered rational. Though

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ECO 121 PRINCIPLE OF ECONOMICS

we can predict his correct decision but his mistake in this situation
which he may consider rational is not easily predictable.

Meanwhile, introspection or rather self-examination does not enable Mr.

A to measure what is going on in B's mind, nor Mr. B to measure what
is going on in Mr. A's mind. Therefore, comparing the satisfactions of
different people is somehow complex. More so, we continually assume
that the comparison can be made in daily life. However the very
multiplicity of the assumptions actually made at different times and in
different places is a confirmation of their conventional nature.
Conventionally, we usually assume for certain purposes that people in
comparable circumstances are proficient to have equal satisfactions. Just
as for purposes of justice we assume equality of responsibility in similar
situations as between legal subjects. Subsequently for purposes of public
finance, we agree to assume equality of capacity for experiencing
satisfaction from equal incomes in similar circumstances as between
economic subjects. But, although it may be suitable to assume this, there
is no way of proving that the assumption rests on establish-able reality.

SELF-ASSESSMENT EXERCISE

Give various definitions of economics you know.

3.2 Importance of Economics

According to Adam Smith (1776), economics is concerned with

inquiring into the nature and causes of the wealth of nations. This is
because the study of economics assists individuals in the society to
understand the decisions of households, businesses and governments
based on beliefs, human behaviour, structure, needs and constraints as a
result of scarcity. Consequently, economics is a study of man and how
he thinks, lives, and moves in the ordinary course of business of life. It
deals with the ever dynamic and delicate forces of human nature.
Economics as a social science gives larger opportunities for precise

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ECO 121 MODULE 1

scarcity of skilled manpower. How to produce is another problem, due

to differences in availability of resources in differing economy. For
whom to produce is another problem of economics and it depends on
the socioeconomic ideology while how much to produce is a problem
which depends on the production, Potential and size of the market. The
problem of by whom to produce is also very big. For example, in a
capitalist economy there is usually an occupational freedom while the
aim of a socialist economy is social control over productive activities.
However, in a mixed economy there is the permutation of both capitalist
and socialist economies. Therefore, a big concern is on how the
available resources would be allocated, to get maximum total output.
Basically, economics is important in order to study how people react to
and allocate limited resources. However, in the process of taking full
advantage of one's own benefit there is the broader benefit of efficient
allocation of resources across society.

SELF-ASSESSMENT EXERCISE

It is unimportant to study economics. True or False? Substantiate your

answer.

4.0 CONCLUSION

Economics is a social science that studies the relationship between

scarce resources and the process of allocating them in order to satisfy
unlimited wants. It studies how individuals, businesses and government
goes through process of decision making in order to get most benefit
from their choice having compare the cost and benefit before taken a
decision. This decision is deemed rational in as much the act is
influential to achieving some well-defined end. It is aimed at
maximising resources which hitherto have been allocated efficiently.

5.0 SUMMARY

Summarily, economists are concerned with choosing the correct way to

achieving an objective which may allows us to be able to predict human
behaviour while their mistake may not be easily predictable.
Consequently, not all decisions are rational though it is expected that
individual goes through the decision making process for the purpose of
maximising the scarce resource. Hence, studying economics is important
to assist individual, government and businesses in their day-to-day
decision making for overall benefit of the economy.

6.0 TUTOR-MARKED ASSIGNMENT

5
ECO 121 PRINCIPLE OF ECONOMICS

1. Explicate on the relationship between the basic economic

problems.
2. In economics, the nature and wealth of a nation is inquired into.
Expatiate.
3. Give example of a rational decision you have ever made while
you are stuck between two choices.
4. Enunciate on the meaning of economics and its relationship
between objectives and rationality.

7.0 REFERENCES/FURTHER READING

Friedman, D. D. (1990). Price Theory: An Intermediate Text.

South-Western Publishing Co.

Foley, D. K. (2003). Rationality and Ideology in Economics. Accessed

November 30, 2011 from
http://homepage.newschool.edu/~foleyd/ratid.pdf.

Marshall, A. (1920). Principles of Economics. Library of Economics and

Liberty. Assessed November 29, 2011
http://www.econlib.org/library/Marshall/marP4.html.

Reynolds, L. R. (2005). Alternative Microeconomics. Accessed

November 25, 2011
from http://www.boisestate.edu/econ/Ireynol/web/Micro.htm.

Smith, A. ((1904). An Inquiry into the Nature and Causes of the Wealth
of Nations.
Edwin Cannan (Ed). London: Methuen & Co. Ltd.

Chad, B. (2012). What is Economics? Accessed January 29, 2013 from

www.businessnesdaily.com/2639-econ.

6
ECO 121 MODULE 1

UNIT 2 FUNDAMENTAL PRINCIPLES OF

ECONOMICS

CONTENTS

1.0 Introduction
2.0 Objectives

7
ECO 121 PRINCIPLE OF ECONOMICS

3.0 MAIN CONTENT

3.1 Overview of Principle of Economics

The field and discipline of economics is divided into two main areas,
leveled to individuals and the society. The study of individuals, their
economic decisions making, and how those decisions intermingle is
called microeconomics. Microeconomics could also be defined as the
study of the decisions of individuals, households, and businesses in
specific markets. In contrast, macroeconomics is the study of the overall
functioning of an economy such as basic economic growth,
unemployment, or inflation, whereas Scarcity in microeconomics is not
the same as poverty. Macroeconomics is concerned more with the up-
and-down trends in the larger economy. Both of these disciplines are
based on some key fundamental principles.

3.2 Choices

In our day-to-day life, we are usually faced with one objective or the
other that requires decision making. Every decision involves choices and
by extension having more of one good means having less of another
good. Therefore there is usually a trade-off between the two choices.
This is applicable not only to individuals but also to families,
corporations, government and societies. Take for instance, if Ade has
N20 and is stuck between buying an ice-cream or chocolate candy. He
must take a decision whether to buy chocolate candy or go for the ice-
cream. His decision might be influenced by some other factors. For
example if it is a sunny day and Ade is thirsty, he might prefer ice-cream
to chocolate candy. If he has discovered that taking chocolates stimulate
him to a good sleep, he might go for chocolate because he need a good
sleep thereafter or leave that choice because he must study thereafter. He
will thus go for one of the choices which he believes is the correct one to
maximise his satisfaction.

SELF-ASSESSMENT EXERCISE

Why do you think that individual, corporation and government make

choices?

8
ECO 121 MODULE 1

3.3 Opportunity Cost

In making a decision, we implicitly compare the costs and benefits of

our choices over the other one. Opportunity cost is whatever must be
given up to obtain something. Let us refer back to the case of Ade
above, assuming he chooses chocolate candy because he needs it to
stimulate him to a deep sleep. The ice-cream becomes the opportunity
cost of buying chocolate candy. An out-of-pocket expense is the price of
the chocolate i.e. N20 which is an obvious cost. Opportunity cost is an
implicit cost and other less obvious costs given up to have the best
alternative. So implicit costs are cost that includes next best opportunity
given up, this must be included in aggregate opportunity cost.

SELF-ASSESSMENT EXERCISE

Opportunity cost is an implicit cost and other less obvious costs given
up to have the best alternative. Explicate on this statement.

3.4 Rationality

As far as basic economics is concern, it assumes that people act

rationally so as to gain the most benefit for themselves especially when
benefit is compared with the associated costs. Behaviour, decision,
expectation etc. can be rational or irrational. Foley (2003) defined the
word “rational” to mean an act that is consistent and influential to
achieving some well-defined end. He went further to define the word
“irrational” as behaviour that appears to be intrinsically self-defeating or
insane. For instance it is rational to pile up stones to make a wall, if you
want to build a wall, but irrational to pile stones up in one place simply
in order to move them to another place, and then move them back again.
The concept of “rationality” also connotes a reasonable orientation
toward the real world, and an ability to explain one’s actions to others in
terms that they can understand. Rational people usually think at the
margin by comparing costs and benefits such that changes in either the
benefit or cost may change their decisions. People respond to incentive
for instance changes in prices. Broadly speaking, people are more likely
to buy a particular good if it is cheaper to other substitutes that are
changes in cost determine their decision to buy. That is if an action
becomes more costly, then there is an incentive to swap to other choices
since there are substitutes for all actions.

9
ECO 121 PRINCIPLE OF ECONOMICS

SELF-ASSESSMENT EXERCISE

Expound on how changes in cost and benefit usually affect the decision
making.

4.0 CONCLUSION

The objectives of each individual differ so also are the alternatives

available to them. In satisfying these objectives, there is the need for
efficient allocation of scarce resources. This is paramount in order to
satisfy as many wants as possible. Therefore categorising the choices to
see the best that can maximise each objective is supreme in cost analysis
of the choice made. The rationale behind a choice may be influenced by
social institutions that arise from human behaviours. All these have their
effects on economic growth of individual, businesses and government.
Economic problems are another tool in resolving the conflict of
objectives and choices and it assist in making rational decision. This
shall be fully discourse in the next unit.

5.0 SUMMARY

It is established that economics studies how decisions are made by

individual, businesses and government on wealth creation through
production of goods and services. The decisions on distributions of such
goods as well as their consumption affect our day-to-day activities and
the overall economy. In consequence, careful review of objectives and
choices, the opportunity cost of the best alternative forgone and rational
decision are vital economic concept that are imperative in the study of
economics.

6.0 TUTOR-MARKED ASSIGNMENT

1. Explain ‘implicit or opportunity cost’. Give real life example

(your example must be different from what was given under this
unit).
2. Give an example of a rational decision you have ever made while
you’re stuck between two or more choices.
3. Enunciate on the meaning of economics and its relationship
between objectives and rationality.
4. Discuss ‘choices’, ‘opportunity cost’ and ‘rationality’ in relation
to economics.

10
ECO 121 MODULE 1

7.0 REFERENCES/FURTHER READING

Friedman, D. D. (1990). Price Theory: An Intermediate Text.

South-Western Publishing Co.

Foley, D. K. (2003). Rationality and Ideology in Economics. Accessed

November 30,
2011 from http://homepage.newschool.edu/~foleyd/ratid.pdf.

Marshall, A. (1920). Principles of Economics. Library of Economics and

Liberty. Assessed November 29, 2011
http://www.econlib.org/library/Marshall/marP4.html.

Reynolds, L. R. (2005). Alternative Microeconomics. Accessed

Novemeber 25, 2011.
from
http://www.boisestate.edu/econ/Ireynol/web/Micro.htm.

11
ECO 121 PRINCIPLE OF ECONOMICS

UNIT 3 ECONOMICS AND BASIC ECONOMIC

PROBLEMS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Overview of Basic Economics Problems
3.2 What to Produce?
3.3 How much to Produce?
3.4 How to Produce?
3.5 For whom to Produce
3.6 When to Produce?
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

All economies are usually faced with basic economic problems that have
to do with production, distribution and consumption in the economy.
The basic economic problems arise as a result of resources that are
relatively scarce when compared with the objectives for which they
should be used. Human wants are infinite and the resources are limited.
Basically, the resources can be categorised into two: 1. Human resources
2. Natural (physical) resources. As said earlier, there arises the need to
make choices as a result of the limited resources (scarcity) which
individual intends to maximise. There is the need to strike a balance
between scarce resources and unlimited and insatiable human wants.
Consequently, decision making on choices assist individual, businesses
and government to allocate scarce resources efficiently. These problems
led to the basic economics problems which must be answered.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• relate basic economic concepts and problems

• understand the importance of basic economic question
• state how to apply rationality to answering the questions in the
decision making process
• explain the effects of the problem on production, distribution and
consumption in an economy.

12
ECO 121 MODULE 1

3.0 MAIN CONTENT

3.1 Overview of Basic Economic Problems

Human wants are unlimited and ever dynamic due to ever changing
demands and needs for resources which are limited. Therefore, in
resolving the economic problems, the method of solving it spin round
prioritisation of choices in order to know most pressing of the objectives
and which ones to be solved first. Knowing which want can be
accomplished and why and how it should be accomplished, when it
should be accomplished and where it should be accomplished leads us to
correct way of fulfilling the wants with the relatively scarce resources.
This is because, human wants drives the economy through the demand
and supply of goods and services to be used in realisation of differing
objectives of individual, businesses and the government. For instance,
house is a necessity not a luxury; having access to good shelter is of
utmost important. House and other needs are fulfilled by patronising the
product markets. Product markets obtain the needed factors of
production from the factor markets after decision on basic economic
problems had been answered. In Nigeria, most people are conversant
with buying a land and then developing it into a house by themselves.
Meanwhile, in the United State of America (U.S.A), it is a common
practice to buy a house. Figure 1.1 shows a graph of real income (money
available for consumption) and the price of getting a house in the U.S.A.
The resources (real incomes) to satisfy human want (house) have been
falling according to the graph since 1970. In contrast, home prices have
been sky rocketing since 2002 such that the real wages is far below the
house prices. This is an example of the most basic economic problem.

13
ECO 121 PRINCIPLE OF ECONOMICS

Fig. 1.1: Real Income and House Prices

Source:
http://www.democraticunderground.com/discuss/duboard.php?az=view_
all&address=389x5213572

The problems such as stated in Figure 1.2 on basic economic problems

and product market are discussed in the following section.

14
ECO 121 MODULE 1

Product

What
Consumers Business
How to produce?
Number of units to
produce?

When
to produce?

For
whom?

Factor
Market

Fig.1.2: Product Market and Basic Economic Problems

• What to produce?
• How much to produce?
• How to produce?
• For whom to produce?
• When to produce?

3.2 What to Produce?

What to produce - thorough evaluation and rating of goods and services

from most valued to least valued is a required step in arriving at a
decision of what to produce. This is a vital stride to support the
assumption that there is usually a trade-off between the choices and
because of the comparability of different things that we valued.

15
ECO 121 PRINCIPLE OF ECONOMICS

3.3 How much to Produce?

How much to produce- since there are different goods and services in
the marketplace competing, there is the need to determine how much of
the goods or services of our choice we should produce. Demand for
comparable goods or services may affect the decision making process on
how much to produce. If the decision on how much to produce shows
that large quantity should be produced then cost and benefit of large
scale production may as well influence the decision on how to produce?

3.4 How to Produce?

How to produce-there are different methodologies for production of
goods, if the decision on how much to produce shows a large quantity it
may influence the method of production to be adopted. There are other
factors that may affect the decision on how to produce such as
availability of raw material.

3.5 For whom to Produce?

For whom to produce- this is shaped by the principles governing how
goods are distributed among the members of a society. The distribution
method may modify incentives that influence the behaviour of
individuals.

3.6 When to Produce?

When to produce- The timing of production and the time that the final
output of a good (or service) is available in the market may affect its
value. By and large, goods to be consumed at some future date are
perceived to have relatively lower value than those available currently
for consumption. More so, producers of seasonal goods must have their
new equipment and input materials ready for the next season.

SELF-ASSESSMENT EXERCISE

Elucidate on the basic economic problems with relevant examples.

4.0 CONCLUSION
Economics is a social science that studies the relationship between
scarce resources and the process of allocating them in order to satisfy
unlimited wants. It studies how individuals, businesses and government
goes through process of decision making in order to get most benefit
from their choice having compare the cost and benefit before taken a
decision. This decision is deemed rational in as much as it the act is
influential to achieving some well-defined end. It also studies how
decisions of individual, businesses and government on wealth creation

16
ECO 121 MODULE 1

through production of goods and services, their distributions as well as

consumption affect our day-to-day activities and the overall economy.

5.0 SUMMARY
Fundamentally in economics, there are concept such as choices,
opportunity cost, rationality and reaction of people to incentives. Given
that all actions has an alternative, for each objective that people have,
they must go through decision making process to select the best or
correct way to maximise the benefit from their choice. Aside the out-of-
pocket expense which is the cost price for a particular choice, other cost
that are implicit which is chiefly the best alternative that was forgone
must be included in the cost of the choice made. Changes in cost or
benefit somehow affect the decision making. Choosing the correct way
to achieving an objective allows us to be able to predict human
behaviour while their mistake may not be easily predictable.
Consequently not all decisions are rational.

6.0 TUTOR-MARKED ASSIGNMENT

1. Explicate on the relationship between the basic economic
problems
2. Economics inquiries into the nature and the causes of wealth of a
nation. Discuss
3. Enunciate on the meaning of economics and its relationship with
basic economic problems

7.0 REFERENCES/FURTHER READING

Foley, D. K. (2003). Rationality and Ideology in Economics. Accessed
Rlo br00e000fro)

17
ECO 121 PRINCIPLE OF ECONOMICS

UNIT 4 THE ECONOMICS SYSTEM

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Overview of Economic System
3.2 What is Economic System?
3.3 Types of Economic Systems
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

In understanding economics science and its methodologies, there is the

need to thoughtfully consider the intricacies of people, resources, agents,
institutions and their mechanism. Economics studies the relationship
between the people and the institutions in a society with the limited
scarce resources in that society. Consequently, there is the need to
answer basic economic problems. These questions are answered in
different methods, these methods determines the type of economic
system that a country is operating. As mentioned earlier, the concern of
each economic determines its methodology. Capitalist Economy is
usually concerned with an occupational freedom, while the aim of a
Socialist Economy is social control over major but selected productive
activities. In the same vein, Communist economy system takes control
of all major sources of production. In socialist and communist
economies, basic economic decision are made by the government while
in Market economy, these decisions are made by the invisible hand of
market forces. Another methodology of economics science is Market
economy where the mechanism is based on free market and free prices.
However, in a Mixed Economy there is the permutation of both
capitalist and socialist economies. Therefore, a big concern is on how
the available resources would be allocated, to get maximum total output.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• state different methods of solving economic problems which lead

to different types of economies
• differentiate between different types of economies

18
ECO 121 MODULE 1

• explain the weaknesses and strengths of each method of

economy.

3.0 MAIN CONTENT

3.1 Overview of Economics System

Different individuals live together in a community with a set of

objectives and shared values. A community is a place where these
individuals with set of objectives and shared values interact. In a group
of people in a community or society, each individual possibly may have
different and competing objectives. As a result, social institutions
emerge to resolve the conflict between individual objectives. People of
similar objectives usually meet together as a result of demand and
supply of goods and services. Their meeting place is referred to as the
market. Market is a social institution where people of similar objectives
meets to exchanges values and meet their demands. In doing this,
different types of economic decision making processes are adopted by
the individual and social institutions. Social institutions have its
influence on human behaviour which determines their decisions in
answering basic economic problem.

SELF-ASSESSMENT EXERCISE

Where do people of similar demand and supply usually meet?

3.2 What is Economic System?

An economic system consists of individual, institutions and their

interaction in the process of answering basic economic problems.
Individual and institutions work together to answer basic economic
problems in relation to the resources in the society, its scarcity and how
these scarce resources can be allocated to meet conflicting and diverse
objectives. The mechanism of production, distribution and
consumptions varies in our society. This is because each society answers
the basic economic problems in different ways. How each society
answered the basic economic problems; that is the economic decisions
they make; determines the type of economic system they will operate. In
the economic decision making, we have the households as the major
actor followed by the institutions and then the government. North (1990)
posited that institutions are the rules of the game in a society. Formally,
they are the humanly devised constraints that shape human interaction
which means they influence human behaviour. In consequence they
structure incentives in human exchange, whether political, social, or
economic. Institutional change shapes the way societies evolve through
time and hence it is the key to thoughtful historical change. An
19
ECO 121 PRINCIPLE OF ECONOMICS

economic system must be able to answer basically three of the economic

problems such as what to produce? That is what types of goods and
services to produce. How to produce? That is what the resources
available that can be employ for production of goods and services. For
whom to produce? That is; who is the receiver of the final products from
production. Hence an economic system encompasses various processes
of organising and motivating labor, producing, distributing, and
circulating of the fruits of human labor. Fruit of labor refers to products
and services, consumer goods, machines, tools, and other technology
used as inputs to future production, and the infrastructure within and in
the course of which production, distribution, and circulation arises.

SELF-ASSESSMENT EXERCISE

What determines the type of economic system a society operates?

3.3 Types of Economic Systems

Economic decision made by a society shapes the economic system of

that Country. The Figure 1.3 shows the basic economic systems:

• Traditional economy
• Controlled economy
• Free market Economy
• Mixed economy

Economic Systems

Traditional Economic Controlled Economic Free Market Economic

System System System

Mixed Economic
System

Fig.1.3: The Economic System

20
ECO 121 MODULE 1

Traditional Economy

In a traditional economy, the economic decisions are made based on

believes, norms religion and customs of that society. Specifically the
economic decision on economic questions of what to produce, how to
produce, for whom to produce, where to produce etc. are made based on
believes, religion, customs, habit and norms of that society. For
instance, the economies of some countries are believed to be traditional.
Arab and African Countries such as Saudi Arabia, Nigeria, Iran,
Pakistan, Kenya, Ghana, Qatar etc where people produce what they
learnt their forefathers produced, following their custom of producing it;
sell products that are produced the same way their forefathers produced
it are traditional economies. For instance in Nigeria, people of Abeokuta
is known for the ‘adire’ cloth business while the Oke-ogun people
continue to produce the ‘ofi’ traditional attires as worn in the pictures
below.

21
ECO 121 PRINCIPLE OF ECONOMICS

Barter-direct exchange of goods and services with other goods and

services are part of the norms. For instance in Yoruba land, an exchange
of food for services called ‘agbaro’ is still in operation in some part of
the land. ‘Agbaro’ means that a group of friend will assist a member of
the group to clear a portion of land while they receive in turn, food for
their services instead of money. This is done based on custom of
friendship.

Strengths

There is usually a strong family or societal relationship between the

individuals in the traditional economy. Hence, there may be economic
securities and safety for members of the society. This in turn may
promote economic stabilities in the traditional economy.

Weaknesses

Lack of innovation or resistance to innovations. Such technical know-

how may be monopolised by the family that specialised in a certain
profession. Modern ideals may not be welcome because they usually
want to do things the same way it was done before they were born.

Controlled Economy

In a controlled economy, it is the government that makes the economic

decision and it is solely done meaning that there are no private sector
initiatives. Government planners decide on what to produce, how many
shoe industry will produce the number of shoes the government decided
should be produced. How to allocate resources to the producer is the
business of the government planners. Controlled or Planned economies
are usually associated with Socialism and Communism where
government determines the wages of workers, the prices of goods and
services and level of output. Former Soviet Union, Cuba, Germany,
Russia, North Korea etc are close examples of Controlled or Planned
economies. Albeit, Germany and Russia seems to have move to mixed
economy as it is the case with countries under other economic system.

Strengths

Ability to accomplish social goals quickly. Planning for more labor in

production in a control economy can reduce unemployment. There is
plausible provision of more economic securities to the participant in this
economy. This type of economy may be able to provide an equal
distribution of income and goods and services.

22
ECO 121 MODULE 1

Weaknesses

It is difficult for Controlled economy to match consumer’s wants and

needs with the productions. Complexity of production may lead to
production problems. The economic participants may have to depend on
a small number of economic choices as provided by the government
planners. There may be overproduction of some products and
underproduction of other products.

Free Market Economy

Free market economy or market economy is an economic system where

the basic economic decisions are made by the buyers and sellers,
individual households and businesses in the economy through the price
mechanism. Unlike the controlled economy where private sectors are
non existence; free market economy allow individuals to operate their
own businesses and answer economic problems using their owned
resources, make profits and determine the prices of goods and services.
Companies and businesses can choose cost effective method of
production to maximise profit and minimise cost of production. For
example, adire cloth can be made using the traditional hand methods, the
modern machine and combination of the two methods. If the
combination of the two methods is the cheapest method of production,
then the company will go for it. It should be noted that Government
interventions in free market economy is not allowed.

Strengths

There may be a good opportunity for innovation and incentive to

produce. There is usually economic freedom in a free market economy.
There may be a direct link between the buyer and the seller through
price mechanism.

Weaknesses

There may be few incentives to protect the environment. Market power

may be concentrated in the hand of few. People without marketable skill
may lack adequate protection.

Mixed Economy

The economic decision on what to produce; how and where to produce;

for whom to produce; is made jointly by the government and the private
sectors in the economy. This is achieved through the demand and supply
mechanism (price and profit) based on free market enterprise. Mixed
economy is a combination of controlled economy and market economy.
23
ECO 121 PRINCIPLE OF ECONOMICS

Most economies of the world show evidence pointing to characteristics

of mixed economy. Therefore, we may conclude that there is no pure
controlled; traditional or free market economy. Countries like Nigeria,
United State of America, United Kingdom, Malaysia, China and all
modern economies are mixed economies. It should be noted that in a
mixed economy, government intervention is limited somehow to market
regulation in the business and household sector as well as input and
output market. This is because businesses own resources, they also
determines how the resources are put into use. That is what to produce,
to whom to produce and how to produce. There should not be
government intervention in a truly free-market economy. But as a result
of the mixed economy, government serves as regulators to some sectors
or industries in the economy.

Strength

There is effectiveness in achieving social goal. There is likelihood or

providing economic security

Weaknesses

There may be lack of incentives to create quality goods and services.

There may be lack of environmental protection.

SELF-ASSESSMENT EXERCISE

List and discuss briefly the basic economic system.

4.0 CONCLUSION

Each market has its own strengths and weaknesses as stated above,
market economy seems to be a better option. Its ability to promote
efficiency and growth, to protect environment and economic freedom to
own resources and to employ it in efficient ways is outstanding.
Especially when compare to traditional economy and command
economy. Nevertheless, most economies are moving towards mixed
economy where command or traditional economies ideas are combined
with market economic values.

5.0 SUMMARY

This unit discussed four basic economic systems in the world which
were determined by how a country answered the basic economic
question especially questions on what to produce and how to produce.
Traditional economy is based on answering economic problem of what
to produce by producing what their forefathers produced employing also
24
ECO 121 MODULE 1

the way they produced it. In command economy, government answer the
basic economic problems and determines how and what to produce
without private sector initiative. Market economy allows forces of
demand and supply to determine what and how to produce, with
protection of economic freedom. While mixed economy combines
market and controlled economies ideas. Most modern economies tend to
adopt mixed economy system.

6.0 TUTOR-MARKED ASSIGNMENT

1. What determines the type of economic system a country will

adopt?
2. Is there pure traditional or controlled economy? If No, what is the
most popular of the economic system?
3. Explain basic economic systems and mention at least two
strengths and weaknesses.
4. List the weaknesses of market and mixed economies.

7.0 REFERENCES/FURTHER READING

North, D. C. (1990). Institutions, Institutional Change and Economic

Performance. Cambridge: Cambridge University Press.

Welch, P. J. & Welch, G. F. (2010). Economics: Theory and Practice.

Pp. 1-560. United State of America: John Wiley and Sons Inc.

Mahadi, S. Z. (2006). Understanding Economics. Kuala Lumpur:

Cosmopoint Sdn. Bhd.

http://www.mtholyoke.edu/courses/sgabriel/econ_system.htm

http://www.slideshare.net/ansley22/economic-systems-5586142

http://www.motherlandnigeria.com/attire.html

25
ECO 121 PRINCIPLE OF ECONOMICS

MODULE 2 DEMAND AND SUPPLY

Unit 1 The Basis of Decision-Making Units

Unit 2 Demand
Unit 3 Supply

UNIT 1 THE BASIS OF DECISION-MAKING UNITS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Firms as Primary Producing Unit
3.2 Households as the Consuming Unit
3.3 Demand and Supply Circular Flow
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Goods and services usually referred to as ‘commodities’ are produced

by firms while household individuals are the consumers of the
commodities. Firms are the ‘sellers’ while households are the ‘buyers’.
Sellers and buyers exchanges goods and services for money in a place
called ‘market’. There are different types of market, we have the
physical market where sellers and buyers interact, we have the market
through intermediaries such as the banks and finance institutions and we
also have market over telephone, internet, and emails orders. Basically
the sellers (supply) and the buyers (demand) interaction in the market
form the ‘market force’. Market force is the forces of demand and
supply which determines the quantity of goods and services as well as
their prices. Their prices in turn determine the quantity that we be
bought and sold. Meanwhile price is defined as the rate at which a
commodity is exchanged for money or other units of exchange. Price
tends to rise when there is little supply of goods and services. We refer
to this situation as ‘scarcity’. When there is plentiful supply (by
competing firms-supply) then we have ‘excess’ of goods in the market.
This usually brings the price down. Therefore, “Price determination” is
one of the core focuses of microeconomics.

26
ECO 121 MODULE 2

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• apply market operation in answering the what, how and for whom
goods and services are produced
• explain how firms transforms resources allocated (input) into
product (output)
• highlight the circular flow of supply and demand between
households and firm.

3.0 MAIN CONTENT

3.1 Firm as Primary Producing Unit

Firms and households are made up of people in the society who are
performing different functions with different human behaviour. The
role of firm is primarily to produce. For this to be achievable, some
individuals must decide to produce a particular product(s). In doing this,
resources must be allocated (land, labour, capital, building etc);
allocated resources are transformed into what we call output while the
resources allocated are the input to generate the product. For example,
factors such as land on which National Open University of Nigeria is
built; the buildings; the academic and non-academic staffs (labour);
federal government funds to the university (capital) are all combined
together as input to assist in producing education and graduate (output)
for this economy in different sector. Firms engage in production for the
purpose of maximising profits for those people who come together to
established it. They engage in production so as to sell their products at a
price higher than the cost price at production. The difference between
the selling price and the cost price is known as the ‘profit’. However,
those who manage; organise and coordinate and take decision in a firm
are called entrepreneur.

SELF-ASSESSMENT EXERCISE

Who is an entrepreneur?

3.2 Households as the Consuming Unit

Individuals, group of people and or family or unrelated people sharing a

house are known as household. These set of people form entrepreneurs
that take risk of producing products by employing employees (labour)
and funding the process of transforming resources (input) into a
particular product (output). There are different decisions made at
household level based on their taste; preferences and what they can
27
ECO 121 PRINCIPLE OF ECONOMICS

afford to do with their limited incomes. Therefore households are the

primary consumer of the firms’ output. Households’ income, taste and
what they prefer has effects on what they consume. In essence their
income, taste and preference determine the units of output of the firm
that they will buy. They go through decision-making to determine what
they like and how to prioritise before choices are made. Different
preferences and limited resources (income) are common factors to every
household. Households’ income determines what they consume from the
product market. Product or output market is a market where goods
and services are exchange. In the output market, firms supply goods
and services that the households demand. In the same vein, at the
input market, households supply labour that the firms demands.
Input market or factor market is a market where resources used to
produce products are exchange.

SELF-ASSESSMENT EXERCISE

Household is a decision-making unit in the economy. Explain

3.3 Demand and Supply Circular Flow

From the above definition of input or factor market and output or

product market, it can be infer that demand and supply flow from firm to
households and in turn from household to firm in a circular form. The
decision on how much to produce which is taken after deciding on what
to produce determines their supply to the output or product market. If
the supply is determine, there is the need to take a decision on what is
the required input needed to achieve the supply target. For example, if
Nasmalt Company decides that a million units of Nasmalt drink is to be
produced and supply to the households who demands to buy; assuming
the question of land and building as factors of production might have
been taken care of. Land market is a factor market where land and
other tangible assets are supply to firms and in return households
obtain rent as rewards. The question of labour and capital will also be
raised. These two are sourced from Labour and capital markets which
are types of factor markets where households supply land resources to
the firm. Labour market is a type of input markets; it can be defined
as a market where the factors of production or input are exchanged.
Household supplies work to the firm in exchange for wage payment.
Wage payment or income to the household also flow back again to the
firm in form of capital. Capital market is a market where the
households supplies their savings from income that flow to them
from firm back to the firm for future profit claim or for interest.
Therefore, services flow from household to firms through the labour
market. In contrast, products produced by labour for the firm flows to
household through the product or output market.
28
ECO 121 MODULE 2

SELF-ASSESSMENT EXERCISE

Define the following:

a. Labour market
b. Land market
c. Capital market

PRODUCT OR
OUTPUT MARKET

FOR EXCHANGE OF
GOODS AND
HOUSEHOLDS
INDIVIDUAL OR GROUP
OF PEOPLE
DEMAND AND PAY FOR
GOODS AND SERVICES.
SUPPLY RESOURCES TO
INPUT MARKET

FACTOR OR INPUT
MARKET

FOR EXCHANGE OF
RESOURCES
LAND
LABOUR
CAPITAL
Fig. 2.0: Demand and Supply Circular Flow

4.0 CONCLUSION

There are two basic decision-making units in an economy namely the

households and the firms. The households demand for goods and
services (products) and they supply the factors of production. While the
firm supply goods and services and demand for factors of productions –
land, labour and capital- from the households. Each of them gets
rewards for the exchange. Wages and rents are the rewards for
29
ECO 121 PRINCIPLE OF ECONOMICS

households while money paid for goods and services and skill of labour
are rewards to the firms. Land, labour and capital are the three key
factors of production. Each of them is available at the factor or input
market. Goods and services are available at the output market. Supplies
and demands from household and firms form the economics activities in
the economy and it moves in a circular flow.

5.0 SUMMARY

Firms are the primary producing unit in an economy; they produce

products after answering the question what to produce? How to
produce? For whom to produce? They employ the factors of production
(input) to produce product(s) to be sold in the market to the buyers at a
price higher than the cost price in order to make profit. Economic
activities within the economy between the firms and the households
moves in a cycle with each party been rewarded in exchange of goods
and services as well as wages and rent. Many markets are involved; the
firm demand for labour from labour market, land from land market,
capital from capital market. These three are the main factor markets also
known as the input market. Supply of goods and services by the firm is
made available to the households in the output market.

6.0 TUTOR-MARKED ASSIGNMENT

1. Mention and define the two major markets for economic

activities.
2. What flows from the firm to the household and what flows from
the households to the firms?
3. Explain what is meant by commodities, input and output market
and their relationship.

7.0 REFERENCES/FURTHER READING

Case, K. E. & Fair, R. C. (1999). Principles of Economics. New Jersey:

Prentice Hall.

Obafemi, F. et al. (2005). Principles of Economics. Lagos: El-Sapphire

Ltd.

Awodun, M. O. (2000). Economics; Microeconomics Theory and

Applications. Chapter 7&8.

30
ECO 121 MODULE 2

UNIT 2 DEMAND

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Demand and Price: A Link
3.2 Demand Curve
3.3 Factors Affecting Demand for Commodity
3.3 Movement and Shift on the Demand Curve
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Quantity of a commodity purchased by an individual or family or group

of people at different prices at a given time and place is known as the
demand for such commodity. With this definition, there is a link
between the various commodities and households’ purchase.
Households in various places are the consumer of firms’ commodity;
they therefore behave in a predictable habitual pattern such that
increases in prices of commodity are responded to by the consumer.
Usually consumer tends to buy less when there is an increase in the price
of a commodity but buy more when there is a decrease in the commodity
price. It can be inferred that price and quantities are inversely related. In
other words, quantity demanded will decrease when there is a rise in
price and it increases when there is a fall in price. In essence, price
affects quantity demand for a commodity. It should be recall that in the
last unit, we understand that income of households also determines what
they consume. Whatever quantity they wish to demand for is regulated
by their limited resources to purchase. However, price and income are
not the only factor that can affect quantity demanded. One other factor
earlier mentioned is the preference of households. Therefore some
factors affecting demand for a commodity which are considered constant
are listed as follows:

• households’ income
• households’ preference and taste
• prices of a related commodities
• number of consumers
• expectation of future price change.

31
ECO 121 PRINCIPLE OF ECONOMICS

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• discuss price mechanism

• explain demand for a commodity in relation to changes in price
• elucidate on factors that determines quantity demanded
• explainthe movement and shift on the demand curve.

3.0 MAIN CONTENT

3.1 Demand and Price: A Link

Determination of prices of commodity is known as “price theory” in

economics. This theory is the backbone of microeconomics and it is
basically connected to the theory of demand and supply. Income and
substitution effects are better use in explaining the link between demand
and price. A sudden increase in price of a commodity means a reduction
in the consumption power of the consumer; as a result of fall in their real
income. This situation is referred to as income effect. Income effect is
the effect of a change in price on quantity demanded as a result of price
changes which made them worse off. Meanwhile, Quantity demanded
can be define as the amount of goods or commodities that consumers are
willing and able to buy at a given price over a given period of time. In a
situation like this people will feel poorer because they will not be able to
buy so many goods that the same money was buying before the increase
in price. Household therefore may have to cut down the amount of items
they always consume. For instance, sudden increase in the petrol price
on January 1st, 2012 in Nigeria has affected prices. Cost of
transportation had not only gone up by almost 50 per cent but prices of
other items has sky rocket too. Household that consumes may be 10
liters of petrol that use to cost 650 naira on their generator will now have
to pay 970 naira to get the same liters of petrol. This household has three
options:

1. It is either they reduce the use of the generating set so as to

continue to buy 650 naira petrol. That means cutting down the
numbers of liters they use to buy.
2. They may have to spend 970 naira to buy 10 liters but cut down
on may be the food items, drinks, beverages or whatever they
think they can afford to cut down so as to spend same real income
wisely.
3. The last option is to switch to alternative products or substitutes.
Since the substitutes will be cheaper in price. This option is
referred to as substitution effects.

32
ECO 121 MODULE 2

Substitution effect is the effect of a change in price on quantity

demanded as a result of switching by consumers to alternative or from
alternative products. By implication, quantity demanded of some items
the household is consuming must be cut back as a result of price
increase. This shows a general relationship between price and
consumption. A rise in prices of goods and services will mean a fall in
quantity demanded. Consequently, a fall in prices of goods and
services will mean a rise in quantity demanded ceteris paribus (all
things being equal). This relationship is referred to as Law of
Demand.

SELF-ASSESSMENT EXERCISE

What is income effect and substitution effect? Explain the link between
price and demand.

3.2 The Demand Curve

Referring back to law of Demand above, a rise in price of goods will

translate to a fall in quantity demanded. In contrast, a fall in price means
a rise in quantity demanded. However when definite quantities are
demanded at particular prices for a particular commodity especially
when the lower and higher prices are considered, then we have what we
call demand schedule. For example, if Ade, Joke, Ola and others have
the following hypothetical demand schedule for beans as shown in the
Table 2.1; then how many kilograms of beans is demanded monthly?
The total quantity demanded at each price by Ade, Joke, Ola and
others is the market demand schedule for the month.

Table 2.1: Demand Schedule

Quantity Demanded for Bean Monthly

Price Ade Joke Ola Others Total
Market Demand
(naira per kg)
300 25 10 5 360 40 0
280 35 20 15 440 500
250 45 30 25 500 600
200 60 35 30 545 670
150 75 45 35 645 790
130 90 60 40 1000

Demand schedule therefore is table showing the different quantities of a

good and services a person is willing and able to buy at various prices
over a given period of time. However, relationship between quantity
33
ECO 121 PRINCIPLE OF ECONOMICS

demanded and prices shown in a demand schedule can be graphically

presented with price on the vertical axis and quantity demanded on the
horizontal axis. That is quantity demanded by Ade, Joke, Ola; others as
well as market total demand can be represented in a graph known as
demand curve. In short demand curve is a graphical representation of
demand schedule. A graphical representation showing the relationship
between price and quantity demanded of a good at a particular point in
time is called demand curve.

Price(#/Kg)
300
A
280

250 B

200
c
150

130 d

Fig. 2.1: Beans Market Demand Curve (Monthly)

Quantity Demanded

Joining together the points a, b, c, d, e, and f will produce a downward

sloping demand curve. The curve is downward sloping because when
the price is too high, only few consumers that can afford it will buy.
Meanwhile, a fall in price make consumption easier and many
consumers shall be willing to buy the product.

34
ECO 121 MODULE 2

SELF-ASSESSMENT EXERCISE

Differentiate between demand schedule and demand curve.

3.3 Factors Affecting the Demand Curve

It was mentioned earlier that the demand curve and demand schedule are
constructed based on assumption of ceteris paribus that is all things
being equal. This implies that other factors remain (constant) unchanged
except price. Unfortunately this assumption that other factors remain
constant is itself not constant. Note that price is not the only determinant
of quantity demanded. Demand is also affected by many other factors
earlier mentioned. They shall be discussed under this section. As a
reminder, the factors are: Households’ income; Households’ preference
and taste; Prices of related commodities; Number of consumers;
Expectation of future price change.

Households’ income

Households are the basic consumption unit in the economy; households’

income is the total sum of the earning of such consumption unit. When
there is a rise in households’ income, it is expected that there
households’ demand will rise because increase in income means
increase in their consumption power. So they tend to buy goods that
they can’t hitherto afford to buy. They also tend to go for quality and
more costly goods instead of inferior goods leading to increase in
quantity demanded. This will increase demand for various commodities.
In contrast, when households’ income decreases, they cut back on
quantity demanded leading to a fall in quantity demanded.

Households’ preference and taste

Preference and taste of individual consumers in the households is

another determinant that can affect quantity demanded. Preference and
taste are influenced by some other factors as well. Preference for a
commodity for instance may be as a result of religion or customs. While
the Yoruba have preference for Ankara, the Hausa have preference for
Guinea brocade and Ibo have preference for Judge and special batiks
due to their various customs. Taste may be affected by fashion-people
tend to demand for commodities that is in vogue or that are considered
as fashionable at a particular time. Branding of a good may be an
attraction to increase quantity demanded of it. Advertisement, health
reasons and level of desirability for a good are other factors which may
increase or decrease quantity demanded, and hence the demand curve.

35
ECO 121 PRINCIPLE OF ECONOMICS

Prices of related commodities

Some commodities are related especially when they are consume

together such as bread and butter, bread and cheese, tables and chairs,
vehicles and fuel, shoes and polish etc. Such goods are referred to as
complementary goods. How does this affect demand curve? Take for
example, if the new increase on bread prices has led to a fall in demand
for bread, it is expected that demand for margarine or butter or cheese
will also fall. Another category of related goods are substitute goods.
Substitute goods are goods that can replace one another in
consumption. Examples of substitute goods are margarine and butter,
Milo and bournvital or ovaltine, coffee and tea, personal car and public
transport etc. Take for instance if you decided to go to the Cinema with
your personal car you cannot at the same time go through the public
transport. You can decide to take tea because coffee is too expensive for
you. You may settle down for ovaltine because it is cheaper than Milo
and bournvital. These kinds of decisions will bring a fall or a rise to the
one you decided not to buy and the one you decided to buy respectively.

Number of consumers and income distribution

The population in a geographical location may affect quantity demand

positively or negatively. Nigerian population has increase the demand
for cars when compare to another country like Cameroun or Benin
Republic where Nigerians usually import cars. Distribution of income
among households in the economy is another factor that can affect
demand for commodities. As said earlier income of each household
determines their consumption power and demand for goods and
services. Distribution of income in an economy had created three
different income groups namely: The high income group; the low
income group and the middle income group. 2012 increase in petrol has
affected the consumption power of many households especially
households in the lower income group who travel within the country
with public buses. Most of them are market women and men who are
paying double cost for transportation of their goods and services. Hence,
they are forced to increase commodities’ prices.

Expectation of future price change

Expectation of a rise in price of goods may force people into what is

called ‘panic buying’. Such action is to safeguard against scarcity
usually generated when price rises. Seller may hoard the goods so that
buyers will be force to buy at the new price anywhere they’re able to get
supply. Hence, ‘panic buyers’ demands to buy more of the goods before
the prices goes up and becomes higher than normal. This action
increases the demand for goods.
36
ECO 121 MODULE 2

SELF-ASSESSMENT EXERCISE

You have decided to buy a tooth-paste but need to make a choice

between Close-up whose price is slightly high and Dabur Herbal tooth-
paste. You discovered that three third of the customers that comes into
the shop where you’re shopping are visiting Dabur Herbal tooth-paste’s
shelf and you decided to buy Dabur Herbal.

Is Close-up and Dabur Herbal substitute or complement? How will this

customers’ decision affect the demand curve?

3.4 Movement and Shift in Demand Curve

In a situation where other factors that can affect quantity demanded

changes, then the demand curve at point a, b, c, d, e, and f (in the
demand curve above) will have to shift. The points a, b, c, d, e and f are
the movement along the demand curve. However, when we talk of shift
in the demand curve as a result of changes in other determining factors
of demand aside price; then we mean a complete bodily shift of the
curve from left to right or right to left. For example, if the price of beans
(as stated above) remains unchanged from 300, 280, 250, 200, 150 and
130. Let assume that the quantity demanded changed as a result of a rise
in income of the household units- the consumption units in the economy.
Then the new total market of the quantity demanded increased as shown
in the Table 2.2:

Table 2.2: Quantity Demanded for Bean Monthly

Price Total Market Demand(Initial) Total Market

Demand(New)
(naira per kg) Kg Kg
300 400 500
280 500 600
250 600 700
200 670 800
150 790 900
130 1000 1200

37
ECO 121 PRINCIPLE OF ECONOMICS

Price(#/Kg)
300
a
280 aa

250

200

150 c cc

130

f ff

0 400 500 600 700 800

900 1000 1200
Quantity Demanded

Fig. 2.2: Beans Market Demand Curve (Monthly)

Looking at the above Table 2.2, you will notice a shift in the demand
curve due to increase in quantity demanded. The demand curve shifted
from a to aa, b to bb; c to cc; d to dd; e to ee and f to ff. Joining together
the new points aa, bb, cc, dd, ee and ff shows a complete bodily shift
from left to right side of the graph as shown by the arrows. Meanwhile,
if the quantity demanded decreases as a result of other determining
factors aside price, then the shift will be from right to left as shown in
Figure 2.3:

38
ECO 121 MODULE 2

Table 2.3: Quantity Demanded for Bean Monthly

Price Total Market Demand(Initial) Total Market
Demand(New)
(naira per kg) Kg Kg
300 400 350
280 500 300
250 600 400
200 670 500
150 790 600
130 1000 700

Price(#/Kg) D1 D0 D2
300
A
280 1

250 b
2

c
3

200
4 d
150

130 e

5
f
6

0 300 400 500 600 700

800 900 1000
Quantity Demanded
Fig. 2.3: Beans Market Demand Curve (Monthly)

From the above graph, notice a shift from right to left as indicated by the
arrows. The demand curves shifted from points a, b, c, d, e and f to 1, 2,
3, 4, 5 and 6 respectively. Joining the new points 1, 2, 3, 4, 5 and 6
39
ECO 121 PRINCIPLE OF ECONOMICS

together will produce a complete bodily shift of the demand curve from
D0 (right) to D1 (left) due to fall in quantity demanded may be as a
result of fall in households income; change in taste and preference of
consumers; bad effect of income distribution; fall in number of
consumers of the product which may occur for instance if the company
producing the product was reported in the news of unethical practices or
accused of adding a harmful chemical to the product. And vice versa for
the shift from left to right that is from D0 to D2 when there is increase in
quantity supplied as a result of changes in the above mentioned factors.
There is a simple equation of demand function is stated below. This
demand equation is often used to relate quantity with just one
determinant that is price. Note that if other determinant of price changed
this equation will also change. This shall be useful under discussion on
market equilibrium in this module.

Qd = a – bP
Where
Qd is the change quantity demanded
P is the price

The above equation is based on assumption of ceteris paribus (all things

being equal that is only price changes but other determining factors of
demand remain constant). For example if consumer income increases
the equation will change to:

Qd = a + bY

Also, the two factors can be combined to give

Qd = a – bP + cY

SELF-ASSESSMENT EXERCISE

Discuss other factors that can affect quantity demanded aside price of a
product and state simple demand equation.

4.0 CONCLUSION

This unit explicates on the meaning of demand and the assumption of

price as the only factor affecting quantity of goods the households will
demand for at a particular point in time. Studying the market demand
over a period of daily, weekly, monthly or yearly may assist in seeing
the movement along the demand curve through the demand schedule.
When other factors that can affect demand are also considered it will
assist in seeing the shift in the demand curve. In summary, the unit
discussed on demand, demand schedule, demand curve.

40
ECO 121 MODULE 2

5.0 SUMMARY

Other factors that affects quantity demanded aside price were explained
in detail. Graph representation of demand curve when prices changes
and other factors remain constant was shown. This usually shows the
movement in the demand curve. So also the shift in the demand curve
when other factors changed except price showing a shift from right to
left and left to right on the demand curve as a result of changes in
quantity demanded.

6.0 TUTOR-MARKED ASSIGNMENT

1. Explain what you understand by commodities and demand for

commodities.
2. What other factors can affect quantity demanded in the market?
3. Explain how income effects and substitution effects can affect the
quantity demanded. 4. Why will a demand curve shift to the right
from left or left from right?

7.0 REFERENCES/FURTHER READING

Sloman, J. (2006). Economics. (6th ed.). England: Pearson Education

Limited.

Case, K. E. & Fair, R. C. (1999). Principles of Economics. New Jersey:

Prentice Hall.

Obafemi, F. et al. (2005). Principles of Economics. Lagos: El-Sapphire

Ltd.

Awodun, M. O. (2000). Economics: Microeconomics Theory and

Applications. Chapter 7 and 8.

41
ECO 121 PRINCIPLE OF ECONOMICS

UNIT 3 SUPPLY

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Supply and Price: A Link
3.2 Supply Curve
3.3 Factors Affecting Supply of Commodity
3.4 Movement and Shift on the Supply Curve
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Relationship between price and quantity demanded is referred to as

demand. The opposite of this is what is known as supply. The
relationship between the price and quantity of a good offered to the
market for sale is known as supply. In the last section, discussion on
quantity of commodity demanded and factors that can reduce or increase
quantity demanded by households are discussed. The effects of price on
the demand curve known as ‘movement on the demand curve’ as well as
the effects of other factors which are known as ‘the shift on the demand
curve’ were explored. Similarly under this unit, a link between supply
and price; supply curve and factors that can cause a movement on the
curve and or a shift on the curve shall be discussed.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• explain supply of a commodity in relation to changes in price

• elucidate on factors that determines quantity supplied
• enumerate the movement and shift on the supply curve.

3.0 MAIN CONTENT

3.1 Supply and Price: A Link

When the price of a commodity is high may be as a result of the demand

for it, which informed the firm’s decision to produce more. Then the
quantity supply to the market will increase. Firm’s decision to increase
number of output of the product requires that the firm put in additional
42
ECO 121 MODULE 2

input. These additional inputs shall increase the firm’s cost of

production. For instance, increase in wages to the labour for overtime
work to meet the targeted number of output and other cost on factor of
productions. Therefore, consumers should be ready to buy at the new
price if the firm is to supply outputs that will meet their market
demands. The increase in price however indicates that the firm which
has incurred additional cost of production should have additional profit.
Consequently, firm shall be encouraged to produce more so as to earn
more profit. As a matter of fact, firm may have to prioritise such product
for production while less profitable product may suffer for it. Supply is
defined as quantity of commodity a producer is able to produce and
willing to sell at a given price in a given place at a particular point in
time. Meanwhile, as prices fall in the market; may be as a result of over-
supply by many firms who wants to make more profit while meeting the
market demand; then supply will fall. This is known as the ‘Law of
Supply’. The higher the price the higher the quantity supplied, the lower
the price the lower the quantity supplied.

SELF-ASSESSMENT EXERCISE

State the law of supply

3.2 Supply Curve

Table 2.4: Quantity Supplied for Bean Monthly

Price Firm A Firm J Firm O Others Total Market

Supply (naira per kg)

300 25 10 5 360 400

280 35 20 15 440 500
250 45 30 25 500 600
200 60 35 30 545 670
150 75 45 35 645 790
130 90 60 40 810 1000

Supply schedule therefore is table showing the different quantities of a

good and services a producer is willing and able to produce at different
prices over a given period of time. However, relationship between
quantity supplied and prices shown in a demand schedule can be
graphically presented with price on the vertical axis and quantity
supplied on the horizontal axis. That is quantity supplied by firm A, firm
J, firm O, others firms as well as market total supply can be represented
in a graph known as supply curve. In short supply curve is a graphical
representation of supply schedule. A graphical representation showing
43
ECO 121 PRINCIPLE OF ECONOMICS

the relationship between price and quantity supplied of a good at a

particular point in time is called supply curve. A supply curve may be
individual firm supply curve or a market supply curve

30
0 j

i
28
0

25 h
0

g
20
0
f
15
0

130

0 200 300 400 500 600 700 800 900 1000

Quantity Supply

Fig. 2.4: Beans Market Supply Curve (Monthly)

Joining together the points f, g, h, i, j, and k will produce an upward

sloping supply curve. The curve is upward sloping because when the
price is too high, only then will firms be willing to produce more to
make more profit. Meanwhile, a fall in price make consumption easier
and many consumers shall be willing to buy the product then the firm
will reduce supply and the market supply will fall.

SELF-ASSESSMENT EXERCISE

Explain how price and supply interact.

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ECO 121 MODULE 2

3.3 Factors Affecting Supply of Commodity

Price is the first factor considered to be a major factor that can affect
demand while other factors are held constant. However, we have seen
from the discussion on demand and demand curve that these factors do
change too. When these occur the focus changed from movement along
the demand curve to a bodily shift in the demand curve. This is ditto for
supply curve, there are other factors aside price that can affect supply
curve such as cost of production, change in production techniques,
change in price of factor of production, price of alternative goods, price
and future expectation, number of buyers and sellers. How each of these
factors affects the supply curve is discussed below:

Cost of production

Change in input price, government policy, organisational change may

lead to higher cost of production for a firm. Higher cost of production
may bring down the profit of the firm. Hence a cut back on such product
due to higher cost of production. This will reduce the quantity the firm
can supply to the market and will shift the supply curve to the left.

Change in production techniques

Method of production is essentially affected by technological

advancement. Therefore technological advancement changes the
technique or method with which products are produced. Efficient
technique will readily increase supply of the product. In contrast,
inefficient method of production will reduce production capacity and in
turn the quantity that can be supply to the market.

Change in price of factors of production

Any increase in cost of factors of production such as wages to labour,

rent to land, and high cost of input factor such as raw material will
increase the overall cost of production and reduces quantity to be
produced thereby supply will fall.

Price of alternative goods

If the price of substitute goods falls as a result of fall in cost of

productions, rise in its prices which make it become more profitable or
as a result of fall in its raw materials; then the producer will increase the
supply of the substitute good because it will be more profitable. Thereby
there would be increase in supply of substitute good while the first
commodity which it can be substituted for will fall in supply.

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ECO 121 PRINCIPLE OF ECONOMICS

Price and future expectation

Speculation about increase in price of a commodity may lead to a fall in

supply to the market as the firm stockpile and increase supply after the
speculation becomes a reality. Again, the firm may increase production
in other to increase quantity supply and take advantage of the new price
increase speculated.

Numbers of buyers and sellers

Entrance of new firms into the industry will increase quantity supply to
the market. While exit of some firms from the market may be as a result
of closing down that line of business by such firms or they foresee
cheaper input factors for substitute and a higher profit; will reduce
supply to the market.

SELF-ASSESSMENT EXERCISE

The cost of input for a firm’s first product has become so high making
the production of that product unattractive because of low profit on it.
The firm decided to switch to increase in production of substitute whose
cost of production is cheaper and hence profit on it is higher.
Classify this scenario under one or two factors that can affect quantity
supply. Briefly give reasons for your answers.

3.4 Movement and Shift on the Supply Curve

Bodily shift of the supply curve as a result of one or more of the above
mentioned factors aside price is known as change or shift of the supply
curve. However, when the price changes and other factors remain
constant then we have movement along the supply curve as shown in the
above diagram. Figure 2.5 shows a shift from left to right (S0 to S1)
indicates increase in supply as a result of changes in other determining
factors. In the same vein, a shift from right to left (S0 to S2) indicate a
decrease in supply to the market.

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ECO 121 MODULE 2

PRICE S2
S0
S1
Decrease Increase

0 QUANTITY SUPPLY

Fig. 2.5: Shift in Supply Curve

Qs = c – dP
Where
Qs is the change quantity supplied
P is the price

The above equation is based on assumption of ceteris paribus (all things

being equal that is only price changes but other determining factors of
supply remain constant).

SELF-ASSESSMENT EXERCISE

When the supply curve shift from right to left or left to right we say
there is change in supply curve. Discuss three factors that can affect the
supply curve aside price.

4.0 CONCLUSION

In conclusion, whenever there is a rise in prices of commodities, law of

supply says the quantity to be supplied to the market will equally rise as
firms will increase their supply to the markets causing a total rise in
market supply. The firms’ decision to increase supply is borne out of the
fact that higher prices usually make investment on such product more
profitable. Though cost of producing addition units above the normal
unit usually produced by the firm is always there and the firm is willing
to incur more cost to maximize profits. Consequently in the long run,
more firms may want to take advantage of the profit and may be
attracted to the market.

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ECO 121 PRINCIPLE OF ECONOMICS

5.0 SUMMARY

This unit takes you through the supply and supply curve, other
determining factors that can cause a shift in the supply curve when price
is constant and movement along the supply curve when other factors
remain constant except price. Relationship between quantity supply and
price of the commodities was represented in an upward sloping graph.
Changes in price will only cause movement along the supply curve.
Other determinants of changes in supply and how they cause a shift in
the supply curve were also represented in a graph. A shift to the right
from the left shows increased supply while a shift from left to the right
shows a decreased supply.

6.0 TUTOR-MARKED ASSIGNMENT

1. Define the following:

a. Supply schedule
b. Supply curve
2. What do you think will happen to the supply curve for bread if
the cost of flour and sugar are very high?
3. Mention two factors that can affect supply curve apart from price.
How do you think they can cause a shift?

7.0 REFERENCES/FURTHER READING

Sloman, J. (2006). Economics. (6th ed.). England: Pearson Education

Limited.

Case, K. E. & Fair, R. C. (1999). Principles of Economics. New Jersey:

Prentice Hall.

Obafemi, F. et al. (2005). Principles of Economics. Lagos: El-Sapphire

Ltd.

Awodun, M. O. (2000). Economics: Microeconomics Theory and

Applications. Chapter 7 & 8.

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