4. The underlying assumptions of
rational decision making
Consumers aim to maximize utility
Utility is the satisfaction derived from consumption of a
bundle of goods
On the other hand producers try to maximize the
profits
So as we can see both consumers and producer actions
are based on their self interests
6. What is a market?
Any situation where buyers and sellers meet would be
known as a market in simple.
Characteristics of a market;
Existence of buyers
Sellers
Something of value to trade
7. Classify the market
Commodity market
Here consumers demand for goods and services for final
consumption purposes
Has a direct demand
Consumer’s purchase decisions are based on marginal utility
gained through the consumption of the product
8. Classify the market
Factor market
The market where factors of production are traded.
These goods are mostly purchased by producers for
further production purposes
Has an indirect demand
Producers purchase decisions are based on the marginal
productivity of the factors.
9. Question 01
What are the Differences between factor market and
commodity market? 4 marks
10. Needs, wants, purchasing power
and demand
Needs are the basic human
requirements
Wants are the different ways we
satisfy our needs
Purchasing power is the ability to buy,
availability of funds in hand to make a
purchase decision
Demand; the wants that are backed by
purchasing power.
11. Question 02
Explain the inter-relationship among needs, wants,
demand and purchasing power? 4 marks
13. What is demand?
When other things remain constant
the quantities of goods or services
bought at a given price in a given
time period.
The products that are bought by
consumers differs according to the,
Willingness
Purchasing power
14. Types of demand
Effective demand- Consumers’ desire
to buy something is backed up by
willingness and ability to pay for it
could be simply known as effective
demand.
Latent demand-This exists when there
is willingness to purchase a good or
service, but where the consumers lack
the real purchasing power to be able to
afford the product.
15. What is individual demand?
This refers to the quantity of goods
a single individual will buy at certain
price levels
16. What factors affect individual
demand?
Price of the relevant good (Px)
Price of other goods. (Pn)
Substitute goods- goods that can be used instead of another
good.
Complementary goods- goods that are used together with
another.
Consumer tastes and fashions (T)
Future expectations (E)
Consumer income (Y)
Advertising and branding
17. Price of the relevant good
When the price of the relevant good increase, the
quantity demand decreases as purchasing power
decrease.
When the price of the relevant good decrease, the
quantity demand increase
Therefore we can see a negative relationship
18. Price of substitutes
When the prices of substitutes rise, the demand for our
product is higher and vice versa
Therefore we can see a positive relationship between
the price of substitutes and the QD for our product.
19. Price of complements
Complements are those goods which are used together
If prices of complementary goods increase, the QD of
relevant good will decrease and vice versa
Negative relationship
20. Consumer income level
Higher the consumer income more the QD will be as
higher income levels increase the purchasing power and
vice versa
Positive relationship
21. Consumer’s tastes
When there is a higher preference to a particular good
the QD is higher
Positive relationship
22. Consumer’s expectations on future
prices
If consumers expect the future price to go up they will
demand more now so that they can use them in future
when the prices are higher.
If consumers expect the future prices to go down they
will buy less now to gain the advantage of buying it at a
lower future price.
23. Advertising and branding
Advertising and branding can influence the customers to
purchase goods and therefore higher the advertising
and branding activities higher the demand will be
25. What is market demand?
Market demand is the total quantity
of goods and services which all the
consumers or customers will buy at
various price levels in a specific
market. In other words it is the
totality of all individual demands.
26. What factors affect market
demand?
Price of the relevant good (Px)
Price of other goods. (Pn)
Substitute goods- goods that can be used instead of another
good.
Complementary goods- goods that are used together with
another.
Consumer tastes and fashions(T)
Future expectations (E)
Consumer income (Y)
Advertising and branding
Number of buyers (N)
29. Law of demand
At a certain time period under
“ceteris paribus” concept the
negative relationship between price
of the relevant good and the
quantity demanded of it could be
simply known as the law of demand.
30. Presentation of law of
demand
Schedule method
Graphical method
Equation method
QDx = a - bp
32. Theoretical reasons for the
negative relationship
between price and demand
Income effect
Substitution effect
Diminishing marginal utility
33. Income effect
This states when income is held constant if a price of a
commodity increases the real purchasing power declines
and so does the demand.
34. Substitution effect
This states that when price of the substitute good
remains constant decrease in the price of the good will
create a higher demand as people shift to our product
as they see our product as cheaper to that of the
substitute.
35. Things that are held constant
when explaining the substitution
effect
Substitute’s price
Taste
Income
36. Diminishing marginal utility
theory
This states that when a person consumes a certain
product more and more his or her extra utility which is
known as marginal utility declines after a certain point.
38. Exceptions for the law of
demand
“Snob goods”- luxurious items where
satisfaction comes without knowing
the price.
“Giffen goods”- goods where QD
falls when price falls
“Speculative goods”
“High quality products” i.e when the
quality is judged by the price.
39. Changes in demand and changes
in quantity demand
If the amount that is willing to buy
is changed because of the change in
the price of the concerned good, it
is known as changes in quantity
demand.
If the amount that is willing to buy
is changed due to changes in other
factors except price it is known as
changes in demand.
45. Reasons
Change in other factors affecting demand other than the
price of the relevant good
Increase in consumer income
Increase in taste and fashion
Increase in number of customers
Increase in prices of substitutes
Decrease in the prices of complements
Observation
Rightward shift of the demand curve
47. Reasons
Change in other factors affecting demand other than the
price of the relevant good
Decrease in consumer income
Decrease in taste and fashion
Decrease in number of customers
Decrease in prices of substitutes
Increase in the prices of complements
Observation
Leftwards shift of the demand curve
49. What is supply?
When other things remain constant
the quantities of goods or services
suppliers are willing to sell at a
given price in a given time period
could be simply known as supply.
50. What is individual supply? Or
supply of a firm?
The quantities of a good, which a
single firm will supply at various
price levels, could be simply known
as individual supply
51. What factors affect individual
supply?
Price of the relevant good
Prices of other related goods
Prices of inputs/cost of production
Technology
Future expectations of suppliers
Government policies
Other factors
52. Prices of the relevant good
When the price is high the suppliers are motivated to
sell more as it signals a higher level of revenue and
profits.
Therefore when the Px is high the Supply will also be
high
53. Price of other goods
Refer to the fact that the prices of substitutes and
complementary goods also affect the supply of a
product. For example if the price of wheat increases,
then farmers would tend to grow more wheat than rice.
This would decrease the supply of rice in the market.
54. Cost of inputs/cost of production
An decrease in costs of production, this means business
can supply more at each price. Lower costs could be due
to lower wages, lower raw material costs
55. Technology
Improvements in technology, e.g. computers, reducing
firms costs will increase the supply and vice versa
56. Future expectations of suppliers
If the suppliers expect the future prices to go up, they
will supply less now and vice versa
57. Government policies
Lower taxes reduce the cost of goods and therefore
supply increases
Increase in government subsidies will also reduce cost
of goods and will increase the supply
60. What is market supply?
The quantities of a good, which all
the firms will supply at various price
levels could be simply known as
market supply.
In other words it is the totality of
all individual supplies .
62. What factors affect market
supply?
Price of the relevant good
Prices of other related goods
Prices of inputs
Technology
Future expectations of suppliers
Government policies
Other factors
Number of suppliers in the market
63. Number of suppliers
An increase in the number of producers will cause an
increase in supply
65. Theory of supply
The theory of supply explains the
relationship between supply of
goods and services and the changes
of factors affecting to the supply.
66. Law of supply
At a certain time period when other
things remain constant the positive
relationship between the price and the
quantity supplied of the relevant
good could be simply known as the
law of supply.
67. Presentation of law of supply
As a schedule
As a graph
As an equation
QS=a+bp
68. As a schedule and a graph
Price Supply
1
2
3
4
5
10
20
30
40
50
69. Theoretical reasons for the law
of supply
Increasing opportunity costs
Increasing profit signals
70. Changes in supply and changes
in quantity supplied
If the amount that is willing to sell
is changed because of the change in
the price of the concerned good, it
is known as changes in quantity
supply.
If the amount that is willing to sell
is changed due to changes in other
factors except price it is known as
changes in supply.
76. Reasons
Change in other factors affecting Supply other than the
price of the relevant good
Decrease in cost of inputs
Decrease in the price of related goods
Improved technology
Favorable government policies
Observation
Rightward shift of the Supply curve
78. Reasons
Change in other factors affecting Supply other than the
price of the relevant good
Increase in cost of inputs
Increase in the price of related goods
Outdated technology
Unfavorable government policies
Observation
Leftward shift of the Supply curve