Core Economic Problems

• The primary issue in economics involves allocating scarce resources effectively
• Economics studies how to allocate limited resources to satisfy unlimited human wants.
• Scarcity leads to choices regarding resources uses
• Scarce resource allocation is addressed through pricing systems in capitalist, socialist, or mixed systems.

Core Economic Problems

• The fundamental economic questions includes determining what goods to produce, how to produce them, and for whom

What to Produce

• Societies must decide which goods to produce such as rice, clothing etc
• Societies must determine the quantities of each product
• Decisions on production are based on societal priorities
• Prioritizing consumer goods impacts future availability Prioritizing capital goods can lead to more consumption in the future

How to Produce

• Goods can be produced by varying the combination of production elements
• Land abundance may have extensive vegetation
• Intensive agricultural practices come about when land is scarce
• Abundant labor uses labor-intensive methods while labor shortages use capital-intensive approaches
• Using cheaper machines and techniques are needed for simple goods with small outputs
• Choosing factor combinations and production techniques should seek minimum production cost, efficient resource allocation, and increase overall economic output

For Whom to Produce

• Basic economic considerations include how products are distributed inside a society
• Good distribution is based on consumers trading
• Purchase power determines access to products
• Income distribution relies on resource contribution toward production and market prices for those services
• Governments affect income distribution through taxation and transfer payments
• Heavier taxes reduce disposable incomes
• Taxes with social security attempts to reduce inequalities for maximum social welfare

Economic Theory

• Economics relies on organized theoretical knowledge and verified hypotheses
• According to Boulding, theories without facts lack value but facts are meaningless without theories
• Economic theories use definitions, assumptions and predictions

Definitions

• Theories use variables, which can vary in value
• Variables can be endogenous, explained within a theory, or exogenous, which influence endogenous variables from outside the theory
• Exogenous factors like weather, influence soft drink demand

Assumptions

• Theories make assumptions about incentives, relationships, and conditions
• Individuals are motivated to improve self interest in economics
• Firms aim for maximum profit
• Input/output links inform production function theory
• Theories operate under specific conditions, such as no government refers to no significant government intervention

Predictions

• Scientific predictions are if-then statements such as if the price of a commoditiy increases then the consumers will reduce their demand
• Predictions are then assessed to confirm if it matches real word events

Constructing Economic Theories

• Start by clearly stating the problem for investigation
• Researchers should collect information relevant to the investigation
• To find patterns, data should be grouped by similarities and differences
• It is important to formulate a hypothesis to explain facts
• Conduct testing on the hypothesis to assess if it is capable of explaining the considered facts
• Theories should be verified and confirmed

Economic Models

• Models can function as synonyms for theories
• A way to apply theories, for instance, applying consumer demand theory to the soft drink market in Osun State, Nigeria.
• Models rely on a set of meaningful and consistent assumptions to simplify phenomenon and behaviour for study
• Models represent an abstraction from reality
• Models don't describe the true economic world

Purpose of Models

• Models are built to explain consumer or producer's behaviour, which is know as Analysis
• A good model should forecast effects. This is Prediction

The Validity of Models

• Validity is measured by predictive power, consistency, realism, information, generality, and simplicity
• Milton Friedman asserts, predictive performance acts as the most important criterion
• Paul Samuelson believed, assumption realism and explanatory power are most important.
• The predictive performance of a product is important when the product is forecasting the effects of a certain change
• Realism of assumptions is crucial for explaining system behaviour
• Validity is proven by a model's ability to predict and explain accurately
• A sound model's conclusions apply universally, regardless of the scale or market dynamics of the firm

Logical Fallacy

• False-cause fallacy: the assumption that two events occur together, one event has caused the other
• Fallacy of compostition: the assumption that what is chosen for each part taken separately is true for the whole or what is true for the whole is also true for each part considered separately.
• Ceteris paribus fallacy: this occur when the effect of changes in one set of variables are incorrectly attributed to another set of variables

Positive Science

• Objective science involves predictions of phenomena
• Economics studies phenomena to identify characteristics and relationships as theoretical predictions

Normative Science

• Subjectively determining moral desirability occurs in normative economics
• Value judgements derive societal ethics
• Government policies on attaining objectives are addressed

Theory of Demand

• Demand represents what a consumer is willing to purchase at a price over time
• Desire must be backed by willingness and ability to spend
• Demand must have resources and willingness to spend

Law of Demand

• A product's price is the determinant of demand
• Demand moves opposite to price
• A schedule can be used to display demand
• The demand curve displays the law

Reasons for the Downward Sloping Demand Curve

• When a product price falls, that product becomes comparatively less expensive, this is Substitution effect
• When a product becomes cheaper, consumer buying power increases, this is Income effect
• Falling prices increase number of consumers
• An income effect for inferior good is negative

Exceptions to the Law of Demand

• Bandwagon effect: Consumers demand products because others are purchasing them
• Snob effect: Consumers avoid products that are popular to be exclusive
• Veblen goods' utility is measure by their high price
• Giffen paradox: Consumers purchase necessities even if price increase

Market Demand

• Market demand is the total quantity that consumers buy for a price with all the other factors constant
• Market demand is also the total number of demands by all of the consumers for a product at a certain point in time at a given price with all other factors constant

Determinants of Demanded Quantity

• If income, tastes, and other related factors remain constant and the price of almost all communities fall; quantity demanded increases
• Three relationships exists between the demand of one good and other goods prices:
  • A fall in the price of one good may lower the household's demand for one another good
  • A fall in the price of one good may raise the household's demand for one another good
  • A fall in the price of one good may leave it unchanged

Income of Consumer

• An expected rise in income will increase the quantity of a good that is demanded, with two possible exceptions
• A change in income might leave the quantity demanded unaffected for reasons like:
  • This will be the case with goods for which the desire if completely satisfied after a certain level of income with this level
  • Variations in the commodity will have no effect on the quantity demanded

Tastes and Preferences

• A taste change toward liking a commoditiy will cause an increase in demand with prices and incomes static
• Consumer expectations, credit and population affects total demand

Demand Function

• Individual demand for an item is influenced by its price, consumer income, costs of related goods, tastes, preference, and advertisement
• The general individual demand function is qa = f(px, I, pr, T, A) Individual's demand Function is qd = f(px) if Income is also considered

Demand Curve

• If price goes down, quantity demanded will rise, if it rises it falls, this is the Movement along a demand curve
• Increase in demand causes shifts to the curve
• Changes in factors outside of price leads to demand curve shift

Supply of a Commodity

• Quantity is based on what producers offer at prices over time
• The entire schedule defines it

What effects commodity supply

• Factors Determining Supply
• Price
• Input prices
• Technology
• Other related good costs
• Future cost expectations
• The Supply function writes all factors as variables

How Quantities supplied and the prices relate

• Rising prices increase supply quantities and is opposite of demand price dynamics
• Rising prices leads other to supply more, with other factors at rest
• The relationship with quantity creates increasing supply slope

Shifts in supply

• If a quantity moves along is a change in the price of a product, this an experience along the supply curve
• Factors other than prices cause bodily shifts
• Increase are to the right due to input costs, while tax decreases are also to the right

Market equilibrium

• Supply and demand meet at prices and quantities which determine trade volume
• Consumers want a certain quantity at prices alongside firm willingness to sell
• Surplus or shortage results if buying and selling do not allign

Market Equilibrium Defined

• Markets are in equilibrium when no participant wants to change behavior as everyone trades as wanted
• Equilibrium price happens when the buyers match the quantity alongside what is being offered in quantity

Mathematical Derivation of Equilibrium

• Equilibrium can be determined by equation solving
• Supply, QD and QS, at equilibrium is equal to Q, Q*
• Setting supply with demand at P yields equilibrium price, P
• Insert P into the supply equations along is to determine quantities

Dynamics of Equilibrium Analysis

• Understanding economic units is completed through equilibrium analysis under numerous conditions
• Nature: Stable, instable and neutral
• Analysis Type: Static and Dynamic
• Economy Segment: General and Partial
• Term Length: Long and short-term
• Numerous equilibrias

Comparative Statistics

• A way economists can analysis how consumer and firm variables react from change based on environmental/ exogenous variables

Static Equilibrium

• Comparing static equilibrium before and after changes happen is the main point of static equilibrium

Market Equilibrium

• Supply and demand shifts can happen alongside what bought/sold
• Research into such changes refers to comparative statics assessment since it is inclusive of comparing the two static situtions from after and before the change

Market Equilibrium impacts

• Increased income leads to higher demand, and supply fixed; results in demand shifting to the right and price increase
• Reduced demand shifts demand curve to the left, surpluses at old price, results pressure to price downwards

Model Price Effects Based on Demand and Supplies

• The amount of how both demand alongside the supply depend on the size of shifts towards supply and demand curves
• Significant increase found in demand among slight reduction in supply will make increase in price at a quick rate compared to that of equilibrium quantity

Maximum Price

• Legal price controls on commodity sales sometimes get passed
• Consequences are analyzed using the model

Pricing effect of Maximums

• Maximum set above equilibrium has no immediate impact
• Below set level causes shortage
• Demand surpasses with that of supply
• Price to get reduced from previously set points
• Output gets limited, and causes a commodity shortage

Setting Max Price

• No impact or causes commodity shortage below equilibrium levels
• Facing ceilings with which production not at the means that demand's has needs can likely have allocation has happened across through ways, or means at the following: First coming, as well as first to being served alongside with the basis from the long, linear queues that could start getting resulted to be able to rise Allocation from those with sellers preferences Government at time may choose to decide in order to have the rationing those items among using, issuing vouchers Black trades may get developed Minimum Price Legislation

Price Minimiums

• Passing laws are based setting minimal certain products sold
• Exists within countries and provides prevent the manufacturer with the power to block the retailer then comes to the sell points with set price
• Free minimum and market price are set effect the attain of market prices

Effects from minimum pricing

• Above equilibrium, price floor makes actual price, create product surplus, as sold at a loss, due to demand surplus
• Equilibrium set below then market effect will come into play and create effect
• In total settings from minimal prices made and no minimum effect as minimum gets set before or the other reason then commodity will look out to come up then market get develop, in which levels will have to exceed

Price Elasticity of Demand

• Responsiveness for the measurement for request changes for commodities in with self price
• Pointed with to give value when get to look at elasticity from in prices Arc usage helps in measurements

Point Price Elastic Demand

• Quantity shifting through proportions and demand is the proportionate, plus small in price Symbolically, this will make the write

Linear Demand Curves and Data

• If the slope at the demand happens to only change during point, which comes to nothing for us to measure then with that of elasticity, which takes places on and given the particular part from selected from this measurement for linear

Quantity and Curves Relations with Data

• We can have solve that of arc elasticity which is demands by estimating that of the mid data using such schedule that in points have the following, all along in different and same with varying characteristics

Slope Curves Data Measurements

• Slope and elastic have data that is shown from many different lengths Elastic measurement changes at different rates

Linear curve characteristics

• Zero: elasticity shown in one way with curve
• Curve, from those same changes does have
• Zero: Elasticity happens when it is at infinity

Supply Side data relating to changes to curve side elasticity and change in price

• Range availability is related to elasticity
• Commodity side that ranges are set

Price Elasticity and Marginal Revenue

• Marginal revenue, relationship and elasticity, that gets created here along on and with that of equation, we get
  • Set Equation from the with the relationships come into play for Elasticity to come about:
    • Easily let known those if or as, there is something, which has better ways in and make changes

Price Elasticity and Total Quantity

• Elasticity and total are set towards quantity
• Inelastic demand leads to similar revenues when prices shifts

Consumer Expenditure and Elasticity

• From these, the know by we law with one other from economics will see with those of expenditures happens with commodities changes come, from what occurs at total or is increase
• In cases where the elasticity measurement as it happens with one other, elasticity measure and the relation comes the relation

THEORY OF CONSUMER BEHAVIOUR

• Is that the decision making happens with consumer
• Which helps center towards maximizing behavior for utilities with which have resources then comes conditions from markets too

Approaches for Consumers

• Behavior looks with to Cardinal, as well as with that comes to indifference

Cardinal View

• Assertion gets completed from when get get know the consumer acts with rational with such
• The theory starts for consumer works with personal then gets with the help towards getting and or deriving into certain with commoditiy
• They kick off getting started with that utility can be known as measured by setting figures
• Utilities gets measured, as it all lies

Axioms the assumption

• Maximizing and getting to look at the utility can be found when get to looking with commodity all alongside is income with cost effective Cardinal-
• Units as in Monetary- These that indicates amount of money all alongside help with the cost units The rate is get in terms and with unit Marginal is measured and as its all depends Is know as Fixed marginal is assume for
• Level to alter those in income. Total happens across great totalities, it is all comes into account with items

Utility for Great Items of Commodity

• The more one gets that greater is
• This leads with amount of quantities
• Items that get derive that is derive towards successive utility with and the unit gets derived the better units from The request to have particular the the get comes down from amount is

Equilibrium Consumers

• Maximizing with total derives that is what have spent with private income, all then takes towards objective then comes Marginal set all in terms The consumer stays even after in is set into total equilibrium and which have spent the same value and time Marginal equal is all it is takes now

Quantiles

• Utilities get measured as those with that one knows and look at comes with chart of what makes and takes Prices that may occur that come in

Prices

• To look out which has the higher units while that of value
• Consumer gets prepared with when is in prepared to look into price
• The expenditure does get into affect across goods with that which has the that takes a maximization with consumers
• Which now looks as that in which will come with consumers income Derivation has to do with curve