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Chapter 1
1.1 What is economics

Definition of Economics: Resources versus Wants Box 1.1
1.2 Scarcity, choice and opportunity cost

Wants: more and better → unlimited Versus Needs: essential → limited (calculate)Versus Demand:
want + ability to pay

Resources: Natural/ Human/ Man – Made → limited

Scarcity: Because resources are (1)scares, has to (2)choose. Example: Time

Definition of Opportunity Cost: (3) Best Forgone opportunity
1.3 Illustrating scarcity, choice and opportunity cost: the production possibility curve

Production possibility Curve(concave): levels of output + given limited resources + given fixed
production techniques (figure 1.1) Illustrate: choice, scarcity and opportunity cost (trade – off)
1.4 Further applications of the production possibilities curve (Box 1.2)

Goods versus Services: Tangible versus Non Tangible

Consumer versus Capital Goods: Individuals versus Production

Non- versus Semi-versus Durable consumer goods: Times used

Final versus Intermediate Goods: When used

Private versus Public goods: Who used

Economic versus Free Goods: Cost + Price

Homogeneous (exactly the same) versus Heterogeneous Goods (different varieties)

Production possibilities Curve: Figure 1.1 unattainable, inefficient

Shifts in the production possibility curves: Figure 1.2-4
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Chapter 1
1.5 Economics as a social science

As a social science: behaviour of human beings in changing environment versus Natural science
controlled environment, example chemistry

Ceteris paribus: “all other remain the same” to explain unpredictable outcomes.

Also Empirical science: measured economic performance
1.6 Microeconomics and macroeconomics

Microeconomics: individual parts of Economy, example: consumers, households. Box 1.3

Macroeconomics: Economy as a whole, example: Total production, income and expenditure. Box
1.3
1.7 Positive and normative economics

Positive statement: Facts

Normative statement: Debated
1.8 A few points to note: Only Levels and rate of change

Levels: example, wages and income versus Rates: example, inflation and growth

Example: Box 1.5
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Chapter 2
2.1 Different economic systems
 What, How, For Whom
 Traditional\ Command\ Market\
 Box 2.1
 Property Rights
 Coordinating mechanism
( Mixed)
2.2 The traditional system
 Rigid system – slow to adapt
 Substance economy – stagnate
 Economic activity is secondary to religious and culture values
2.3 The command system
 Political planners own factors of production - no motive for improvement
 No profit motive – inefficient production
2.4 The market system
 Adapt and innovate
 Self – interest promotes economic activity
 Co-ordination occurs without planning
2.5 The mixed economy
 Mix depends on the perceived problems in society
 Box 2.4 Prices - Rationing function - goods and services vs allocation function - factors of production
2.6 South Africa's mixed economy
 Privatisation vs Nationalisations
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Chapter 3
3.1 Introduction

Micro vs macro (image)
3.2 Production, Income and Spending

Production generates Income (for various factors of production) which use for spending on Production
(fig 3.1)

Stock (once) versus flow variable(time dimension or continues) Box 3.1
3.3 Sources of production: the factors of production

Natural resources: non-renewable

Labour: quality and quality
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Capital: Depreciation (not money)

Entrepreneurship

Technology

Capital intensive vs labour intensive
3.4 Sources of income: remuneration of the factors of production
3.5 Sources of spending: the four spending entities (only subsections)

Households: people who make economic decisions and sells factors of production on the factor market

Firms: employs factors of production and produce goods and services for the goods market

Box 3.4
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Chapter 3
3.6 Putting things together: a simple diagram

Figure 3.2
3.7 illustrating interdependence: circular flows of production, income and spending (only
subsection)

Figure 3.3 and figure 3.4
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Chapter 4
4.1 Demand and Supply: an introductory overview

Functioning of a specific market with household (intended demand) and firms (intended supply). Figure 4.1
4.2 Demand

Absolute and relative prices - box 4.1
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Definition: Quantities of a good or service that the potential buyers are willing and able to buy. (flow)

Quantity demand(Qd) depends on: price of the good(Px), the price of related goods(Pg), income of the
individual(Y), taste(T), number of people(N) → Qd = f (Px, Pg, Y, T, N)
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Qd = f (Px) ceteris paribus for (Pq, Y, T, N)
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Example: Table 4.1 → Figure 4.2 (also words, schedules, equations)
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Law of demand: higher prices, lower quantity demand → negative, inverse relationship
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Market Demand: adding individual demand curves horizontally (Figure 4.3)

Movement Along a demand curve(fig4.4) ⌂ P → versus Shift of the demand curve → ⌂ P of related good
(Substitutes (fig 4.5)/Complements(fig 4.6)) Pg / ⌂ consumer tastes or preferences, T / ⌂ population, N / ⌂
expected future price / ⌂ Income / Etc.

Demand: a summary, Table 4.3 figure 4.7
4.3 Supply

Definition: q of a good or service that the producers plan to sell at each possible price

Quantity supply(Qs) depends on: price of the good(Px), price of alternative products(Pg), price of factors of
production and other inputs(Pf), expected future price(Pe), state of technology(Ty) → Qs = f (Px, Pg, Pf,
Pe, Ty)
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Qs = f (Px) ceteris paribus for (Pg, Pf, Pe, Ty)
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Example: Table 4.4 → figure 4.8(also words, schedules, equations)
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Law of supply: higher prices, higher quantity supplied → positive, direct relationship
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Market Supply: adding individual supply curves
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Movement Along (fig 4.9) a supply curve ⌂ P→ versus Shift of the supply curve → Pg, Pf, Pe, Ty, etc.

Supply: a summary: Table 4.5 and Figure 4.10
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Chapter 4
4.4 Market Equilibrium

Move towards equilibrium, never reach - Box 2.4
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Table 4.6 → Figure 4.11
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Excess Demand: Qd > Qs, Excess Supply: Qd < Qs, Equilibrium: Qd = Qs

Function of prices in a market economy: Rationing goods + services to who can afford them
Allocating factors of production where it is needed (cost) the most.
4.5 Consumer surplus and producer surplus
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Consumer surplus: the difference between what consumers pay and the value they receive Fig 4.12
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Producer surplus: the difference between the lowest prices at which producers are willing to supply
the different quantities and the price they actually receive Fig 4.13
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Consumer and producer surplus at equilibrium Fig.4.14 combination of the above
4.6 Algebraic analysis of demand and supply

Appendix 4.1
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Chapter 5
5.1 Changes in Demand

Increase in demand (any determinants except price) equilibrium ↑P ↑Q → figure 5.1(a) and Decrease in
demand ↓P↓Q →figure 5.1(b) Figure 5.2
5.2 Changes in Supply

figure 5.3 & 5.4
5.3 Simultaneous change in Demand and Supply

Precise outcome cannot be predicted; change may work in opposite direction. Example: Increase in
Demand + Decrease in supply = 3 different Q → figure 5.5 table 5.1
5.4 Interaction between related markets
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Substitutes figure 5.6
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Complements figure 5.7
5.5 Government Intervention (exclude subsidies – import tariffs)

Maximum prices (price ceiling) → figure 5.8 + 5.9
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Consequences: shortage (excess demand)/ prevent market mechanism from allocating/ black market activity
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Example rent control
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Minimum prices (price floor) Figure 5.10 + 5.11
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Consequences: surplus (excess supply)/ artificially high prices/ farms owned by big companies benefit/
inefficient producers are protected/ disposal of surplus – further cost.
5.6 Agricultural prices
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Figure 5.18 fallacy of composition
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Chapter 6
6.1 Introduction

Direction and how much ⌂Q
6.2 A general definition of elasticity

Responsiveness of dependent variable (Q) to change in independent (p) formula p104
6.3 Price elasticity of demand (ep)

Definition: 1%⌂P →? %⌂Q

Meaning of ep 1.5 = 1%⌂P → 1.5%⌂Q

Calculate price arc elasticity of demand Box 6.1
ep =




(Q2-Q1)/(Q2+Q1)
--------------------(P2-P1)/(P2+P1)
ep versus TR → figure 6.2 and box 6.2
Five categories of ep Table 6.2 and Figure 6.3
Impact of a change in supply Figure 6.1
Determinants of ep: substitutes >; complements <; Types of wants satisfied ⌂; Time >; proportion of income>.
6.4 Other demand elasticity's

Income elasticity Definition: ey: %⌂Y →%⌂Q

+ ey = normal goods /- ey = inferior goods / ey >1 = luxury goods / 1> ey >0 = essential goods

Example Table 6.3
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Cross elasticity eC): %⌂Pa →%⌂Qb

+substitutes, -complements
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Table 6.4 interpret values (exclude Supply elasticity)
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Chapter 7
7.1 Introduction to the indifference approach

Degree of satisfaction, derives, consumption of goods and service.
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Cardinal Utility: can be measure versus Ordinal Utility: can be ranked(place in order of preference)
7.2 Marginal utility and total utility
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Subjective
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Marginal utility: extra utility derives from the consumption of one additional unit

Total utility: sum of marginal

Law of diminishing marginal utility: marginal utility eventually declines Table 7.1
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Box 7.1 relationship between total, average and marginal magnitudes
7.3 Consumer equilibrium in the utility approach
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Weighted marginal utilities are equal and all income spend (total utility is max) Table 7.2
7.4 Derivation of an individual demand curve for a product

Table 7.4 With Budget R10.00 2 Chocolates and 2 Yoghurt – Price of chocolate = R2.00

Table 7.5 With budget R10.00 4 Chocolates and 2 Yoghurt – Price of chocolates = R1.00

Demand curve derived from above Figure 7.1
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Chapter 9
9.1 Introduction

Types of firms (individual proprietorships, partnerships, companies, close corporations, cooperative,
trusts, public corporations)
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The goal of the firm (maximize profit but principal-agent problem)

Profit, revenue and cost (profit is surplus of revenue over cost, TR=PxQ, AR=TR/Q, MR=⌂TR/⌂Q :
Box 9.2)

short run (fixed capital equipment, variable labor) and the long run (variable labor and capital) in
production and cost theory
9.2 Basic cost and profit concepts

TC=cost of production, AC = TC/Q, MC = ⌂TC/⌂Q
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Opportunity Cost = Alternative sacrificed

Explicit cost = monetary payment versus Implicit cost = opportunity cost not reflected in monetary
payment

Economic cost: Explicit + Implicit cost

Profit (Figure 9.1) : Accounting profit = TR – Explicit cost

Economic profit = TR - economic cost (Explicit + Implicit)

Normal profit = TR equal to economic cost

Economic loss = TR < economic cost
9.3 Production in the short run

Definition: Physical transformation of inputs into output

Fixed input: cannot be altered in the short run versus Variable input can be altered in the short run

Production function: relationship between inputs and outputs

Law of diminishing returns: more inputs/ production process/ point is reached/ MP↓, AP↓, TP↓
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Table 9.2 → Figure 9.2 MP & AP relationships in figure 9.3
9.4 Cost

Economic cost include Opportunity cost = Implied cost

Fixed Cost: remains constant irrespective of Q versus Variable cost: change when total product
changes
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AFC = TFC/TP, AVC = TVC/TP, AC = TC/TP, MC = ⌂TC/⌂TP

Table 9-4 → Figure 9.4 and 9.5

Relationship between production and cost: (Fig 9.6) Maximum MP → Minimum MC, Maximum AP →
Minimum AVC
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Chapter 10
10.1 Market Structure

Perfect Competition vs. Monopoly vs. Monopolistic Competition vs. Oligopoly → Table 10.1

Number of firms/ Nature of product/ Entry/ Information/ Collusion/ Control over price/ Demand curve/
Economic Profit
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Equilibrium : MR = MC
10.2 The equilibrium conditions

Shut down rule: TR = > TVC → TR just sufficient to cover TVC, continue in order to retain employees and
clients

Profit maximizing rule: MR = MC → revenue earned from the last additional unit (MR) is equal to the cost
of producing the last unit (MC).

MR < MC → profit decreasing

MR > MC → expanding production increase profit
10.3 Perfect Competition

Definition: No market participant → influence → price →”Price Taker”

Requirements: large number of buyers and sellers/ no collusion/ identical products/ freedom of entry and
exit/ perfect knowledge/ no government intervention/ mobile factors of productions

Relevance: Analysis of various markets
10.4 The Demand for the product of the firm

Demand Curve = Sales Curve → horizontal at market price (figure 10.2) Higher → another supplier, lower
→ not optimum “Price Taker”

Receive same price for any number of units therefore MR = AR = P (Box 10.2 – Numerical proof)
10.5 Equilibrium of the firm under perfect competition

Figure 10.3
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Different equilibrium positions: figure 10.4

AR > AC → Economic Profit

AR = AC → Normal Profit

AR < AC → Economic Loss (if AR = AVC → shut down point)
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10.6 The supply curve of the firm and the market supply curve

Figure 10.5 → various quantities at different prices. Not below (b) → close down point (does not cover
variable cost)

Supply curve slope = MC curve slope → because MC↑ as output(supply)↑

Market Supply = ∑ individual supply curve
10.7 Long-run equilibrium of the firm and the industry

2 Options: leave/enter or change size

Figure 10.6-8
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Chapter 12
12.1 Introduction

Figure 12.1
12.2 The labour market versus the goods market

Box 12.1 – money (nominal) wages: amount of actual money received versus real wages: purchasing power
of money received

Versus goods market p.209
12.3 Perfect competitive labour market

Requirements for perfect competition p.210

Equilibrium in the labour market figure 12.2

The market supply of labour: figure 12.4 shift due to non-wages determinants p.212

The market demand of labour: figure 12.6 shift due to non-wages determinants p.215

Study Guide: Employ more workers (profit) when labour (wages) MRP (MPP x P) until Wage = MRP
12.4 Imperfect labour markets

Reasons for imperfect p.216

Trade unions: craft versus industrial p.218/9 figure12.9

Government intervention in the labour market Minimum wages: Figure 12.11
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