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Welcome to: INTRODUCTION TO ENERGY

ECONOMICS
Course Code:
ESE 303
Unit Two (2):
Sem:
1 Basics in Economics
Credit:
3HRS

Location
TBA

Programme
HND 3

LECTURER: Isaac Kwasi Yankey, DEPT: Energy Systems Eng.

2.1 Introduction
• Derived from Greek word “Oikonomikus”- skilled
in household management.
• Dictionary of Economics- The study of the
production, distribution and consumption of
wealth in human society.
• Economics can be viewed as the science that deals
with the production, allocation and use of goods
and services.
• Economics examines how we make choices in a
world of scarcity.
• The study of how society manages its scarce
resources. 2

2.2. Needs, Wants and Scarcity

• Needs:
– are the goods or services which are essential or
basic to a persons life. Eg. food, clothing and
shelter.
– E.g. One may need clothes but not need a dress
designer.
• Wants:
– are what people desire or wish to have or
experience. e.g. car, watching movies, etc
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• Scarcity:
– is defined as the limited nature of society’s resources.
• Scarcity therefore forces people to choose from the
limited resource to satisfy their unlimited wants.
• Scarcity means:
– not enough or there can never be enough goods and
services to satisfy the needs of individuals, families
and society.
• But where there is scarcity and choice there is cost.
• Therefore a decision has to be made to forego the
other alternatives.
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• The price of this other opportunity is called

opportunity cost.
• Making choices in a world of scarcity means that we
forego some goods and services to obtain those that
we want.
• Opportunity cost is not limited to the cost of
investing the money but also includes any other
opportunity you could spend the money on like
buying something, saving etc.
• Opportunity cost is expressed in relative prices i.e
the price of one choice relative to the price of
another. 5

Fig 1.1 shows how scarcity determines different economic systems

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2.3 Microeconomics & Macroeconomics

• The field of economics is traditionally divided
into two (2) broad subfields:
1. Microeconomics
– is the study of how households and firms make
decisions and how they interact in specific
markets.
– A microeconomist might study:
• the effects of rent control on housing in Accra,
• the impact of foreign competition on Ghana’s Auto
industry.
• or the effects of compulsory school attendance on
workers’ earnings.
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2. Macroeconomics:
– is the study of economy-wide phenomena,
including:
• inflation,
• unemployment,
• economic growth, e.t.c
– A macroeconomist might study:
• the effects of borrowing by the federal government,
• the changes over time in the economy’s rate of
unemployment,
• or alternative policies to raise growth in national living
standards.
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2.4 Factors of Production

• Resources used in producing goods and services to
meet human wants.
• Due to the scarcity of resource it is important to use
these resources efficiently to maximize production.
• The concept of production refers to
– manufacturing,
– distributing and
– provision of goods and services.
• Economics make distinction between four (4) types of
resources:
1. Land,
2. Labour,
3. Capital and
4. entrepreneurship. 9

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2.4.1 Land
• In economics Land include natural resources
such as:
• Soil,
• Water,
• Plants
• Minerals available for production.
• Land has the following characteristics:
1. It is durable
2. It is limited in supply
3. It is a gift of nature
4. It is said to be immobile
5. It is owned by people but can be rented out.
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2.4.2 Labour
• In economics labour refers to:
– human inputs that is services and rewards received.
• Labour is limited as a factor of production and does
not have the same quality.
• Labour has the following characteristics:
1. A labourer offers his services.
2. Labour has greater mobility than land.
3. Labour services cannot be kept or stored.
4. Labour is not homogeneous product.

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• The value of labour like all other factors of

production is determined by:
1. Total supply.
2. Elasticity of supply.
3. Elasticity of demand for product using factors.
4. Physical productivity of factor.

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2.4.3 Capital

• Capital refers to the

– machines, factories tools and so on which are used
as input in producing other goods and services.
• Capital has the following characteristics:
1. It is a durable asset.
2. It is owned by people but can be rented out.
3. Capital factor and service are generated over a
production period.
4. Capital goods first has to be produced.

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• There are three types of capital:

1. Fixed Capital:
• Physical assets which do not vary as the level of output
varies.
• E.g. Machinery, plants equipment, new technology,
factories and buildings.
2. Social capital:
• Created from government investment spending.
• E.g. education, hospitals, housing and road networks.
3. Working capital:
• Stocks of finished and semi-finished goods that will be either
consumed in the near future or will be made into finished
consumer goods.
• E.g. Inventory. Give extra examples
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2.4.4 Entrepreneurship
• An individual or group with skills of creative
decision making, risk-taking or starting a new
business.
• An entrepreneur sees new opportunity to satisfy a
demand and finds new and better ways or less
costly ways to use resource.
• These new ways to meet consumer demands earns
him a profit.
• An entrepreneur plays a vital role in the dynamics
of a market economy.
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2.5 Definition of Demand

• The amount of a particular good or services that a
consumer or group of consumers will want to
purchase at a given price during a specific time.
Ceteris paribus
• Two key conditions has to be fulfilled for a
particular good or services to be demanded:
1. Means.
2. Desire.

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2.5.1 Demand Curve and Schedule

• A graph showing the relationship between the
price of a product and the quantity of the
product demanded over a given period of time.
• It shows the quantity demanded (Qd) of a product
and its price (P).
• The demand curve can be different in shape:
• straight line,
• concave and
• convex curve.
• The slope of the demand curve depends on the
scale used.
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• The price and quantity demanded are inversely

related.
• Other things being constant.

Fig. 1.2. Shows the demand curve usually slopes downwards from left to right 18

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2.5.2 Demand Schedule

• A table showing the quantities of a product a consumer is
willing and able to buy at varying prices in a given period
of time.

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[Link] Quantity Demanded (Qd)

• The amount of goods that people are willing and
able to buy at a particular price during a specific
time period.
• This is illustrated by a point on the demand curve
and is measured as an amount per unit time.
• A shift in demand is referred to as change in
demand.
• Movement along the demand curve as a results of
change is referred to as change in quantity
demanded (Qd).
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2.5.2 The Law of Demand

• The Qd will rise as the price decreases and will
decrease as the price rises, ceteris paribus.
• The five (5) factors that influence a change in
demand are:
1. Prices of related Goods.
2. Expected future prices.
3. Income.
4. Population.
5. Preferences.

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Table 1.1 The determinants of quantity demanded

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• An increase in demand will shift the demand curve

upward and vice versa.

Fig. 1.3 Change in quantity demanded versus a change in demand

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A Change in Qd = a movement along the demand curve

 Price

A change in demand = a shift in the demand curve

 This can happen for many reasons
Change in non-price
determinants of demand
Change in demand
Shift of demand curve

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2.6 Definition of Supply

• The amount of goods and services which is offered for sale
at a given price per unit of time.
• The supply curve:
shows the relationship
between the price of a
good and the quantity
supplied of that good
at a specific period of
time.

Fig.1.4. shows the supply curve and it usually slopes upwards from left to right 25

A supply schedule is a table showing the different

quantities of goods that producers are willing and
able to supply at various prices over a period of
time.

Fig. 1.5 Supply schedule 26

2.6.1 Quantity Supplied (Qs)

• This refers to the total amount of goods that all
firms are willing and able to sell at a given price in
a given time period.
• A change in Qs = movement along the supply
curve.
• A change in supply = a shift in the supply curve.

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2.6.2 The Law of Supply

• If the price of goods increases, quantity supplied
will increase.
• By this law sellers will be willing to produce more
and sell more as the price goes up.
• This is because producers want to maximize profit
at higher prices.
• There are five factors that can influence a change in
supply. They are:
1. Prices of productive resources (Production cost).
2. Prices of related goods produced.
3. Expected future price.
4. The number of suppliers.
5. Technology. 28

Table 1.2 The determinants of quantity supplied

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• A change in Qs= movement along the supply curve

Price
• A change in supply = shift in the supply curve
This can happen for many reasons.

Change in non-price determinants

of supply  Change in supply
 Shift of supply curve

Fig.1.6 A change in the quantity supplied versus a

change in supply 30

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2.7 Demand and Supply Together

• We now want demand and supply together to see
how they determine the:
– quantity of goods sold
– prices.
• There is a point the supply and demand curve
intersect. This point is called:
– Market Equilibrium.
• The price at which these two curves cross is called
the:
– Equilibrium Price.
• The quantity at this point is called the:
– Equilibrium Quantity.
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• Equilibrium:
a situation in which
supply and demand have
been brought into
balance.
• Equilibrium Price:
the price that balances
supply and demand.
Fig 1.7 The equilibrium of supply and demand
• Equilibrium Quantity.
the quantity supplied and the quantity demanded
when the price has adjusted to balance supply and
demand. 32

• Suppose that the market price is above the

equilibrium price.
• At a price of $2.50 per cone, the quantity of the
good supplied exceeds the quantity demanded.
• There is a surplus of
the good.
• Suppliers will respond
to the surplus by cutting
their prices.

Fig.1.8 Markets not in equilibrium 33

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• This process continue until the market reaches a

new equilibrium.
• Suppose that the market price is below the
equilibrium price.
• At a price of $1.50 per
cone, the quantity of
the good demanded
exceeds the quantity
supplied.
• There is a shortage of
the good. Fig.1.9 Markets not in equilibrium
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• Sellers will respond to the shortage by raising

their prices without losing sales.
• This process continue until the market reaches a
new equilibrium.
• Indeed, this phenomenon is so persistent that it is
sometimes called the
– law of supply and demand.
• Surplus:
– a situation in which quantity supplied is greater than
quantity demanded.

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• Shortage:
– a situation in which quantity demanded is greater than quantity
supplied.
• law of supply and demand:
– the claim that the price of any good adjusts to bring the supply
and demand for that good into balance.
• The Three Steps to Analysis changes in Equilibrium are:

1. Decide whether the event shifts the supply curve or demand curve (or per haps
both).
2. Decide which direction the curve shifts.
3. Use the supply-and-demand diagram to see how the shift changes the
equilibrium.

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2.8 The Cost Of Production

• All firms, from Volta River Authority to your local
fast food shop, incur costs as they make the goods
and services that they sell.
• A firm’s cost is the key determinant of its
production and pricing decisions.
• Establishing what a firm’s costs are, however, is not
as straightforward as it might seem.
• Economists normally assume that the goal of a firm
is to maximize profit, and this assumption works
well in most cases.
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2.8.1 Total Revenue(TR),Total Cost (TC) and Profit

• The amount that the firm receives for the sale of its
out-put is called its Total Revenue.
• The amount that the firm pays to buy in-puts (fuel,
flour, sugar, workers, ovens, etc.) is called its Total
Cost.
• Profit is total revenue minus total cost
Profit = Total Revenue – Total Cost.
P = TR-TC
• Economists are interested in studying how firms
make production and pricing decisions.
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• Because these decisions are based on both explicit

and implicit costs, economists include both when
measuring a firm’s costs.
• Explicit costs: input costs
that require an outlay of
money by the firm.
• Implicit costs: input costs
that do not require an
outlay of money by the firm.
E.g. utilizing an asset or resource
that it already owns
Fig..1.13 Economist versus Accountant's view of a firm. 39

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2.9 Production Function

• Production is the process by which inputs are
combined, transformed and turned into outputs.
• Production Functions:
– The relationship between inputs and outputs expressed
numerically or mathematically.
• Production Functions are divided into two
efficiencies:
1. Economic efficiency:
• refers to the cheapest method of production in terms of Total
Cost (TC) to produce a given level of output.
2. Technology Efficiency
• refers to the minimum number of inputs used to produce a
given level of output. 40

Table 1.3 shows quantity of cookies produced per hour

• Table 1.3 shows that quantity of cookies produce per hour

depends on the number of workers.
• If there are no workers in the factory, Helen produces no
cookies.
• When there is 1 worker, she produces 50 cookies.
• When there are 2 workers, she produces 90 cookies, and
so on. 41

• Figure 1.14 presents a graph of these two columns

of numbers.
• This relationship between the quantity of inputs
(workers) and quantity of output (cookies) is
called the production function.

Fig.1.14. The production

function for cookies

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• The key is that people and firms think at the margin.

• To take a step toward understanding these decisions, the
third column in the table gives the marginal product of a
worker.
• The marginal product:
– is the increase in the quantity of output obtained from an
additional unit of that input.
• As the number of workers increase the marginal product
declines.
• This property is called diminishing marginal product.
• Diminishing marginal product:
– the property whereby the marginal product of an output
declines as the quantity of the input increases. 43

• To study a firms production and pricing decisions the most

important
relationship is
between quantity
produced and total
cost.
• A Total Cost Curve
shows the relationship
between the quantity
of output produced
and the total cost.
Fig1.15 The total cost curve
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• From data on a firm’s total cost, we can derive

several related measures of cost.
• A firms total cost can be divided into:
1. Fixed Cost and
2. Variable cost.
1. Fixed Cost:
– costs that do not vary with the quantity of output
produced.
– They are incurred even if the firm produces nothing at
all.
2. Variable Costs:
– costs that do vary with the quantity of output produced.
– The more a firm produced an output the higher its cost.
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• The first column of the table shows the number of

glasses of lemonade that might be produce, ranging from
0 to 10 glasses per hour.
• The second column shows Thelma’s total cost of
producing lemonade.
Table 1.4. Various measures of Cost

.
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2.10 Average and Marginal Cost

• The key part of the firms decision is how cost
will vary as it changes the level of production.
• To find the cost of the typical unit produced, we
would:
– divide the firm’s costs by the quantity of output it
produces.
• Although average total cost tells us the cost of
the typical unit, it does not tell us how much
total cost will change as the firm alters its level
of production.

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• The last column in Table 1.4 shows the amount

that total cost rises when the firm increases
production by 1 unit of output
• This number is called marginal cost.
• Average Total Cost:
– total cost divided by the quantity of output.
• Average Fixed Cost:
– fixed costs divided by the quantity of output.
• Average Variable Cost:
– variable costs divided by the quantity of output.
• Marginal cost:
– the increase in total cost that arises from an extra unit
of production.
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Table 1.5 Types of cost Summary 49

2.11 Cost Curves and their Shapes

Fig1.17. This figure shows the average total cost (ATC), average fixed cost (AFC),
average variable cost (AVC), and marginal cost (MC). 50

Assignment 2.

From the table above draw the the following curves: TC, ATC,
AFC, AVC and MC. Explain their importance in a firms
decision making. Due in Two weeks.
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THANK YOU.
SEE YOU NEXT
WEEK.

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