This document provides an overview of basic economic concepts. It discusses topics such as demand and supply, equilibrium, elasticity, factors of production, price, economic growth, productivity, scarcity, and resource allocation. It also introduces the production possibility frontier (PPF) as a model that illustrates the key economic problem of scarcity and tradeoffs that exist in allocating limited resources between different goods and services. The PPF shows the maximum quantities of two goods an economy can produce while using its resources efficiently.

1. BASIC CONCEPTS TO ECONOMICS
• Rojana Dhakal, Lecturer,
SHAS

2. INTRODDUCTION
• Economics is the social
science that studies the
production,
distribution and
consumption of goods
and services.

3. Economics is about …
• Limited resources
• Unlimited “wants”
• Choosing between
which ‘wants’ we can
‘afford’ given our
resource ‘budget’
• Economics is the study
of how society manages
with its scarce resources.

4. Economics is about choice
Budget
Good ‘A’
Good ‘B’

5. Demand
• Demand refers to how
much (quantity) of a
product or service is
desired by buyers.
• The quantity demanded
is the amount of a
product people are
willing to buy at a certain
price;
• the relationship between
price and quantity
demanded is known as
the demand relationship

6. Law of demand
• The law of demand states that, if all other factors
remain equal, the higher the price of a good, the less
people will demand that good.
• The amount of a good that buyers purchase at a
higher price is less because as the price of a good
goes up, so does the opportunity cost of buying that
good.
• As a result, people will naturally avoid buying a
product that will force them to forgo the
consumption of something else they value more.
• The chart below shows that the curve is a downward
slope.

7. Price in Rs/kg Quantity demanded in Kg5
5 10
10 8
15 6
20 4
25 2

8. • Price and
demand
relationship
• The demand relationship
curve illustrates the
negative relationship
between price and
quantity demanded.
• The higher the price of a
good the lower the
quantity demanded (A),
and the lower the price,
the more the good will be
in demand (C).

9. Factors affecting to demand
• Price of commodity
• Income of consumer
• Price of related goods
• Weather
• Custom and fashion
• Size of population

10. • Supply
• Supply represents how much the
market can offer.
• Supply quantities that will be
sold at certain price.
• The quantity supplied refers to
the amount of a certain good
producers are willing to supply
when receiving a certain price.
• The correlation between price
and how much of a good or
service is supplied to the market
is known as the supply
relationship.
• Price, therefore, is a reflection of
supply and demand.

11. • Supply
relationship
• Supply relationship
shows upward slope
i.e. higher the price,
the higher the
quantity supplied.
• Producers supply
more at a higher
price because selling
a higher quantity at a
higher price will lead
to high return and
profit.

12. • Time and Supply
• Factors influencing to
supply• the supply relationship is a
factor of time.
• price change that is caused
by demand will be
temporary or permanent.
• sudden increase in the
demand and price
;suppliers may simply
accommodate demand by
using their production
equipment more
intensively.
• Price of commodity
• Price of factors of
production
• Price of related goods
• Production
technology
• Change in income
• New inventions
• State of natural
resources

13. • Equilibrium
• When supply and demand are equal
(i.e. when the supply function and
demand function intersect) the
economy is said to be at equilibrium.
• At this point, the allocation of goods
is at its most efficient because the
amount of goods being supplied is
exactly the same as the amount of
goods being demanded.
• Thus, everyone (individuals, firms, or
countries) is satisfied with the current
economic condition.
• At the given price, suppliers are
selling all the goods that they have
produced and consumers are getting
all the goods that they are
demanding.

14. • Disequilibrium
• Disequilibrium occurs
whenever the price or
quantity is not equal to
P* or Q*.
1. Excess supply
If price is set too high,
excess supply will be
created within the
economy, and there will be
allocative inefficiency.

15. • Disequilibrium
2. Excess Demand:
• Excess demand is created
when price is set below
the equilibrium price.
• Because the price is so
low, too many consumers
want the good while
producers are not making
enough of it.

16. Shift Vs Movement • Movements
• A supply curve is a graphical
representation of the
relationship between the
amount of a commodity that
a producer or supplier is
willing to offer and the price
of the commodity, at any
given time.
• The amount of commodity
supplied changes with rise
and fall of the price while
other determinants of supply
remain constant.
• Supply curve will occur
when the price of the
good changes and the
quantity supplied
changes accordance to
the original supply
relationship.
• movement occurs when
a change in quantity
supplied is caused only
by a change in price, and
vice versa.

17. • Movements
• The movement in supply
curve can be of two types –
extension and contraction.
• Extension in a supply curve
is caused when there is an
increase in the price or
quantity supplied of the
commodity while
contraction is caused due to
a decrease in the price or
quantity supplied of the
commodity.

18. • The movement in demand
curve occurs due to the
change in the price of the
commodity.
• Determinants: Price
• Change in Quantity Demanded
• Demand Curve will move
upward or downward.
• Upward Movement:
Indicates contraction of
demand, in essence, a fall in
demand is observed due to
price rise.
• Downward Movement: It
shows expansion in demand,
i.e. demand for the product or
service goes up because of the
fall in prices.

19. • Shift
• Shift in demand and supply curve
occurs when a goods quantity of
demanded or supplied changes even
though price remains the same.
• Shifts in the demand curve change the
original demand relationship, quantity of
demand would occur due to other
changes/factors.
• Demand Curve will shift rightward or
leftward.
• Rightward Shift: It represents an
increase in demand, due to the favorable
change in non-price variables, at the same
price.
• Leftward Shift: This is an indicator of a
decrease in demand when the price
remains constant but owing to unfavorable
changes in determinants other than price.

20. • Shift in supply curve
• The amount of
commodity that the
producers or suppliers
are willing to offer at the
marketplace can change
even in cases when
factors other than the
price of the commodity
change.
• Such non-price factors
can be the cost of factors
of production, tax rate,
state of technology,
natural factors, etc.

21. • Shift in supply curve
• The shift in supply curve can
also be of two types – rightward
shift and leftward shift.
• The rightward shift occurs in
supply curve when the quantity
of supplied commodity
increases at same price due to
favorable changes in non-price
factors of production of the
commodity.
• Similarly, a leftward shift occurs
when the quantity of supplied
commodity decreases at the
same price
Reasons for rightward shift
of supply curve
• Improvement in technology
• Decrease in tax
• Decrease in cost of factor of
production
• Favorable weather condition
• Seller’s expectation of fall in
price in future
Reasons for leftward shift of
supply curve
• Use of old or outdated
technology
• Increase in tax
• Increase in cost of factor of
production
• Unfavorable weather condition
• Seller’s expectation of rise in
price in future

22. • Supply curve
shifts
• Quantity of supplied
decreased from Q2 to
Q1
• Shift in the supply
curve implies that the
original supply
relationship has
changed
• Quantity supplied is
affected by a factor
other than price

23. • Elasticity
• The degree to which a
demand or supply curve
reacts to a change in price
is the curve's elasticity.
• Elasticity varies among
products because some
products may be more
essential to the
consumer.

24. Elasticity
• A good or service is
considered to be highly
elastic if a slight change
in price leads to a sharp
change in the quantity
demanded or supplied.
• Usually these kinds of
products are readily
available in the market
and a person may not
necessarily need them in
his or her daily life.
• An inelastic good or
service is one in which
changes in price witness
only modest changes in
the quantity demanded or
supplied, if any at all.
• These goods tend to be
things that are more of a
necessity to the consumer
in his or her daily life.

25. • Elasticity
• Elasticity = (% change in
quantity / % change in price)
• If elasticity is greater than or
equal to one, the curve is
considered to be elastic. If it is
less than one, the curve is said to
be inelastic.
• the demand curve is a negative
slope, and if there is a large
decrease in the quantity
demanded with a small increase
in price, the demand curve looks
flatter, or more horizontal.
• This flatter curve means that the
good or service in question is
elastic.

26. • Inelastic demand
is represented with a
much more upright
curve as quantity
changes little with a
large movement in
price.

27. • Supply
Elastic
• Change in price
results in a big
change in the
amount
supplied, the
supply curve
appear flatter
and is
considered
elastic.
• Elasticity would
be greater than
or equal to 1.

28. • Inelastic
Supply
• If a big
change in
price only
results in a
minor change
in quantity
supplied, the
supply curve
is steeped and
its elasticity
would be less.

29. • Capital • Factors of Production
• Items that are used to
create a good or services.
It includes factor of
production
• factors of production
that helps to understand
regarding making
decision scarce resources
and choices.
• Factors of production is
necessary to understand
how goods and services
are produced.
• Land or natural
resources:
Renewable resources
Non renewable
resources
• Labor or human
resources
• Capital
• Entrepreneurs

31. • Price • Price
• Price is the quantity of payment or
compensation given by one party
to another in relation for one unit
of goods or services.
• As market conditions change, the
optimal price will change.
• At any time, there is only a certain
supply of good available. Supply
may be affected by the availability
of raw materials.
• Demand may fluctuate depending
on competitor products, an item's
perceived value, or its affordability
to the consumer market.
• Price determine what
goods are to be
produced and in what
quantities
• Price determine how
the goods are
produced.

32. • Economic growth • Economic Growth
• Economic growth is an increase
in the production of goods and
services in an economy.
Increases in capital goods, labor
force, technology, and human
capital can all contribute to
economic growth
• Economic growth that increased
income and less unemployment.
• It is measured by GDP
• Measurement of economic
growth involves national income
accounting.
• An increase in economic growth
caused by more efficient use of
inputs( increased productivity of
labor, capital, materials) referred
as intensive growth
• Is growth in the quantity of
output produced based on the
expansion of quantity of
inputs used or increases in
the amount of inputs
available for use (increased
population, new territory) is
called extensive growth.

33. • Technology • Productivity
• Is the collection of techniques,
skills, methods and processes
used in the production of goods
or services or in the
accomplishment of objectives.
• Technology economics is the
science of modeling technology
change, markets and value creation
including business models.
• Technology is a fundamental driver
of economic progress that can also
represent a disruptive force that
destroys industries as it creates new
ways of achieving value
• Developed advanced economies.
• Quality of being productive.
It measures in terms of rate
of output per unit o input.
• It measures the efficiency of
production, efficiency
means using factors of
production to their fullest
extent.
• Partial productivity
• Labor productivity
• Multi-factor productivity

34. • Technology • Productivity
• Is the collection of techniques,
skills, methods and processes used
in the production of goods or
services or in the accomplishment
of objectives.
• Technology economics is the science
of modeling technology change,
markets and value creation including
business models.
• Technology is a fundamental driver of
economic progress that can also
represent a disruptive force that
destroys industries as it creates new
ways of achieving value
• Developed advanced economies.
• Quality of being
productive. It measures in
terms of rate of output per
unit o input.
• It measures the efficiency
of production, efficiency
means using factors of
production to their fullest
extent.
• Partial productivity
• Labor productivity
• Multi-factor productivity

35. • Productivity • Productivity
• Quality of being productive.
It measures in terms of rate
of output per unit o input.
• It measures the efficiency of
production, efficiency
means using factors of
production to their fullest
extent.

36. Scarcity and allocation
• Scarcity refers to the unavailability of a certain
commodity in the market.
• It means society has limited resources and therefore can
not produce all the goods and services people wish to
have.
• Resources are scarce to the extent that they are not
sufficient to allow all goods to be accomplished at once.
• Due to infinite desires, classify resources which are
limited in relation to their demand.

37. scarcity
• If something is a scarce it will have a market
value.
• If the supply of a good or service is low, the
market price will rise.
• Goods and services that are plentiful, supply will
have lower market value because supply can
easily meet the demand from consumers.

38. choice
• Resources are scarce, society must decide which
want will do satisfy
• maximum satisfaction obtained by utilizing the
productive resources that are available.
• Because of scarcity, choices have to be made on a
daily basis by individual consumers, firms and
government.
• Individual seeking to maximum their own
welfare.

39. Allocation
• Resource allocation must difficult task:
• It is the scheduling of activities and the
resources required by those activities while
taking into consideration of both the resources
availability and their proper utilization.
i. What to produce
ii. How to produce
iii. For whom to produce
iv. Balance in development

40. • Resource allocation • Resource Allocation
1. What to Produce
• Think about what to produce and
how many quantities arises directly
from the scarcity of resources.
• Production first meet the societal
needs.
2. How to Produce
• It includes methods of production
• Labor intensive: labor may play
major role which focuses more job
favoring or , employment
• Capital-intensive: large volume of
production
• Right decision depends on current
state of the economy.
3. For whom to Produce
• Distribution based on
total product among
different units,
individuals and families.
• 4. Balance in
Development
• Allocating the resources
• A nation must gave the
priority to maintain the
sector balance in
developement.

41. Model of economy

42. Production Possibility Frontier
• the production possibility frontier (PPF) represents
the point at which an economy is most efficiently
producing its goods and services and, therefore,
allocating its resources in the best way possible.
• If the economy is not producing the quantities
indicated by the PPF, resources are being managed
inefficiently and the production of society will
decline.
• The production possibility frontier shows there are
limits to production, so an economy, to achieve
efficiency, must decide what combination of goods
and services can be produced.

43. • PPF
• It represents combination of
output that the economy can
possibly produce given the
available factors of production.
• Represents extreme possibilities
• Economy divided its resources
with other
• An outcome is efficient if the
economy is getting all it can
from scarce resources it has
available

44. Any point inside the curve:
resources are not being
utilized efficiently.
Any point outside the
curve: not attainable with
current level of resources
Combination of X and Y
goods lying inside due to
resources used inefficiently
Increase total production
by moving towards PPF by
reaching any point C,A,B
D unattainable , can be
reached increasing
efficiency, resources and
technology.

46. • PPF will shift
if there is
improvement
in productivity
and efficiency.
• Introduction of
new technology
or
advancement
in the
technology of
production

48. • Let's turn to the chart by side.
Imagine an economy that can
produce only wine and cotton.
According to the PPF, points A, B
and C - all appearing on the curve -
represent the most efficient use of
resources by the economy.
• Point X represents an inefficient use
of resources,
• while point Y represents the goals
that the economy cannot attain with
its present levels of resources

49. • in order for this economy to
produce more wine, it must give
up some of the resources it uses to
produce cotton (point A). If the
economy starts producing more
cotton (represented by points B
and C), it would have to divert
resources from making wine and,
consequently, it will produce less
wine than it is producing at point
A.
• As the chart shows, by moving
production from point A to B, the
economy must decrease wine
production by a small amount in
comparison to the increase in
cotton output. However, if the
economy moves from point B to C,
wine output will be significantly
reduced while the increase in
cotton will be quite small.
• keep in mind that A, B, and
C all represent the most
efficient allocation of
resources for the economy;
the nation must decide how
to achieve the PPF and
which combination to use.
• If more wine is in demand,
the cost of increasing its
output is proportional to
the cost of decreasing
cotton production.
• Point X means that the
country's resources are not
being used efficiently or,
more specifically, that the
country is not producing
enough cotton or wine given
the potential of its
resources.
• Point Y, as we mentioned

50. • When the PPF
shifts outwards,
we know there
is growth in an
economy.
• Alternatively,
when the PPF
shifts inwards it
indicates that
the economy is
shrinking as a
result of a
decline in its
most efficient

51. Opportunity cost:
• cost refers to the expenses incurred by the
producer to produce the goods and services.
• In economics it is stated as the value of inputs
used in production in the cost of the output
achieved.
• Opportunity cost is the cost of the best
alternative foregone. It is the alternative cost or
transfer cost. It is the benefit of using resource
for the next most attractive alternative.

52. Opportunity cost
• assume that an individual has a choice between
two telephone services. If he or she were to buy
the most expensive service, that individual may
have to reduce the number of times he or she
goes to the movies each month.
• Giving up these opportunities to go to the
movies may be a cost that is too high for this
person, leading him or her to choose the less
expensive service.

53. References
• Palistha Maharjan, "Movement along a Supply
Curve and Shifts in Supply Curve,"
in Businesstopia, January 7,
2018, https://www.businesstopia.net/economics
/micro/supply-curve-movement-shift.