ECONOMICS
by
Dr. Tarek Mohamed Salem
th
4 Communication
Electronics and Communication Department
AGENDA TO ECONOMICS
01 INTRODUCTION TO ECONOMICS
› MICROECONOMICS
› Factors of production
02 Demand
› Introduction to demand
› Law of demand
› Factors Affecting Demand
03 Supply
› Introduction to supply
› Law of supply
› Factors Affecting supply
AGENDA TO ECONOMICS
04 Demand and Supply Equilibrium
05 Elasticity and its Application
› Price Elasticity of Demand
› Price Elasticity of supply
06 General topics in economics
› Abbreviations
01 Factors Of Production
In the theory of Economics, there are four factors of
production. The factors
› are land, labor, capital, and entrepreneurship.
These four factors of production are used in various
combinations for the production of goods and services.
Since these factors are limited by nature, and human
wants are unlimited, we, as a country, face a decision
over the efficient allocation of these scarce resources or
factors of production.
Sometimes the type of economic system decides the
ownership of the factors of production. For example, in a
Capitalist economy, the factors of production are owned
by individuals who use them for their own profit.
Four Factors Of Production
Land
Labor
Capital
Entrepreneurship
1- Land/Natural Resources
Land refers to all the natural resources. These
resources are gifts that are given by nature. Some
common examples of natural resources are water,
oil, copper, natural gas, coal, and forests. These
resources can be renewable, such as forests, or
nonrenewable such as oil or natural gas. The
income earned from land or other such natural
resources is called rent.
2- Labor
Labor, as a factor of production, involves
any human input. The quality of labor
depends on the workforce’s skills, education,
and motivation.
Generally speaking, the higher the quality
of labor, the more productive is the
workforce.
If someone has ever paid you for a job,
you have contributed labor resources to the
production of goods or services.
Labor can be physical or mental. The
income earned by labor resources is called
wages. It is the largest source of income for
most people.
3- Capital
Here capital refers to manufactured resources such as
factories and machines. These are man-made goods used in
the production of other goods. Their use in commercial
production is what separates them from consumer goods.
Some common examples of capital include hammers, forklifts,
conveyor belts, computers, and delivery vans. An increase in
capital goods means an increase in the productive capacity of
the economy.
The income earned by owners of capital resources is interest.
4- Entrepreneurship / organization
An entrepreneur is someone who takes on risk and
brings the other three factors of production together.
Entrepreneurs are a vital engine of economic growth
helping to build some of the largest firms in the world
as well as some of the small businesses in your
neighborhood.
The payment an entrepreneur receives is called profit
as a reward for the risk they take.
Factors of Production
Are Owned By ………….
Are Valued For………….
Factors of
Capitalis Communi
Productio Socialism Mixed
m sm
n
Are
Individual
Owned Everyone Everyone Both
s
By
Are
Usefulness Usefulness Utility &
Valued Profit
to people to people Profit
For
02 INTRODUCTION TO DEMAND
1- Demand
Demand is defined is the amount of good or service a
consumer is willing and able to buy per period of time. It is
very important to understand the term: “willing and able”.
Many people want to buy products that they cannot
afford at prices they cannot pay. Because they are
not able to purchase, there we cannot include them in
the demand.
The Demand can be plotted on a graph or even shown in
a table. It shows how much of product is desired at a
certain price.
Keywords:
- demand
- willing and able
- period of time
02 INTRODUCTION TO DEMAND
2- The Demand Curve
The graph below shows
a movement along the
curve, which illustrates how:
price (P) affects the quantity
demanded (QD).
At Price P2 the QD is Q2.
When the price increases to
P1, then the QD falls to Q1.
02 INTRODUCTION TO DEMAND
3- The Law of Demand
The Law of Demand states that the quantity
demanded for a good or service rises as the price falls,
ceteris paribus (or with all other things being equal).
The other-things-being-equal assumption is very
important in law because the demand for goods also
varies with several other factors than just the price.
Therefore, the Law of Demand is an inverse
relationship between price and quantity demanded.
However, there are a few exceptions to this law such
as Giffen goods and Veblen goods.
02 INTRODUCTION TO DEMAND
Generally, the Law of Demand holds true because of
two factors:
› 1. The Substitution Effect
› - The Substitution Effect occurs when there is a
change in the price of a product.
› For example, we say that the price of Olive oil has
gone up. In comparison to olive oil, other cooking oils
such as canola oil or peanut oil suddenly seem
less expensive.
› - Therefore, people will switch to a close substitute if
the price goes up and the demand will increase.
02 INTRODUCTION TO DEMAND
To put it another way, if the price of a substitute of good X
goes up, then good will become relatively cheaper and
people will move towards good X. There will be an increase
in demand for good X.
To take a real-world example, consider:
They are universally considered to be good substitutes for
each other. The Substitution Effect simply states that when
the price of Coke goes up, then more people will more
likely purchase Pepsi.
2. The Income Effect
› The Income Effect also occurs when there is a change in
the price of a product. For example, let’s say you buy
four loaves of bread a month and then one day the
price of a loaf of bread goes up. This increase in price will
likely mean that you cannot afford to buy four loaves,
instead, you buy two.
› You’ve lowered your demand for bread because the
price increase has reduced your disposable income.
› You won’t necessarily stop buying bread or switch over
to something cheaper, you just buy less.
› Stated differently, if the price of good X rises, then
consumer’s purchasing power will drop and then people
will tend to buy less of good X will the same income. The
Income Effect simply means that when a good
becomes more expensive then people can afford less of
it.
A Shift in the Demand Curve
The below diagram holds true for normal
goods only. Normal goods are products
that consumers buy more of if their
disposable income (income after taxes)
increases. Inferior goods are those
products which are consumed less when
someone’s disposable income increases.
Cheap cars or highly discounted brands
are examples of inferior goods.
02 INTRODUCTION TO DEMAND
4- A Shift in the Demand Curve
The rise in D is
shown by the
shift in the
demand curve
(from D to D₁).
This results in
Price and QD
increasing from
P1 to P2 and Q1
to Q2
respectively.
Demand Shifts from D to D₁
02 INTRODUCTION TO DEMAND
5- Factors Affecting Demand
A shift in the demand curve occurs when the
curve moves from D to D₁, which can lead to a
change in the quantity demanded and price.
There are six factors affecting demand. These
factors are not the same as a movement along
the demand curve, which is affected by price or
quantity demanded. A shift can be an increase in
demand, moves towards the right or
upwards, while a decrease in demand is a shift
downwards or to the left.
Six Factors Affecting Demand
Substitutes
Normal Goods
Market Size
Change in Preferences
Price Expectations
Complimentary Goods
1. Normal Goods
When there is an increase in the consumer’s income, there
will be an increase in demand for a good. If the consumer’s
income falls then, there will be a fall in demand.
Inferior goods: As opposed to demand for "normal goods,"
which goes up as income increases, demand for inferior
goods goes down as income increases. Consumers of inferior
goods "trade up" to higher priced goods as soon as they can
afford it. Transportation provides a good example. When
income is low, it makes sense to ride the bus.
2. Change in Preferences
If there is a change in preferences, then there
will be a change in demand.
For example, yoga became mainstream a couple
of years ago, and health enthusiasts
promoted its benefits.
This trend led to an increase in demand for yoga
classes.
3. Complimentary Goods
When there is a decrease in the price
of compliments then the demand for its
compliments will increase.
Complementary goods are goods you usually
buy together, like bread and butter, tea and
milk. If the price of one goes up, the demand
for the other good will fall. For example, if the
price of yoga classes fell then there would be an
increase in demand for yoga mats.
4. Substitutes
An increase in the price of substitutes will affect
the demand curve.
Substitutes are goods that can consumers buy in
place of the other like how Coca-Cola & Pepsi
are very close substitutes. If the price of one
goes up, the demand for the other will rise. For
example, if meditation classes became more
expensive then there would be an increase in
demand for yoga classes
5. Market Size
If the size of the market increases, like if a
country’s population increases or there is an
increase in the number of people in a
certain age group then the demand for
products would increase.
For example, if the birth rate suddenly
skyrocketed, then there would be an
increase in demand for baby products.
6. Price Expectations
When there is an expectation of a price
change, if people expect the price of a
good to increase shortly, then they are
more likely to purchase sooner, which
would increase demand for the product.
For example, if people are expecting the
price of a laptop to fall then they will delay
their purchase till the price lowers.
