Summary
Human beings have basic wants, and naturally, they are not self sufficient. Therefore, they have to produce and exchange what they do not have with those who do have it. Right decisions have to be made in regard to the quantities produced and the prices that will be charged by firms. This is done through the demand and supply theory. In most economies, supply and demand face a lot of challenges. Supply challenges range from small firms with structural supply rigidities to huge firms who act as monopolists and cartels and charge consumers exploitative prices. These challenges affect the trading position of several economies in the international trade. Demand is rapidly increasing due to the rapid world increase in population. This study analyzes the firms’ decisions, the supply and demand of a commodity, the price of a commodity and the way the mentioned variables are affected by small economic groups and individuals.
Excerpt
Table Of Contents
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Chapter Two
Definitions
2.
0. Microeconomics
Microeconomics involves the study of economic actions and behavior of individuals and
small groups such as consumers, producers as well as small economic units such as
resource owners and business firms. It involves the analysis of the decisions made by
individual consumers and firms. It mainly deals with the analysis of price determination
which is an emphasis of the market arrangement. Maunder e tal (1996:14) explains that
macroeconomics is the study of individual decision making by both individuals and
firms.
Economics involves the study of how people and societies use scarce resources to
satisfy their wants or needs out of scarce resources. Scarce resources include raw
materials, labor, capital energy which aid production and finally fulfills the purpose of
satisfying human wants. Society and individual wants include education, medical care,
clean environment, and therefore a dire need to have resources to achieve these goals,
which unfortunately are scarce. Maunder, e tal (1996 ), defines economics as the social
science of studying human behavior and, in particular the way in which individuals and
societies choose among alternative uses of scarce resources to satisfy wants. Scarce
resources and unlimited wants lead man to resort to the basic principles of economics
that include scarcity, choice and opportunity cost.
Scarcity implies that that there is always a fixed stock of resources that are relatively not
enough to satisfy man's needs.
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Choice refers to the ability of man to choose from the many alternatives what is best for
him. Choice helps individuals or firms to take the right decision while it helps the gov-
ernment to make the appropriate decision and goes on to implement it.
Opportunity cost refers to the alternative sacrificed whenever choice is made. The
concept of opportunity cost is important since the resources are not enough to satisfy
man's wants at a particular time. During production and consumption, sacrifices are
made so that alternative possibilities are foregone because society is faced with a
challenge of scarce resources. Opportunity cost is progressively used in the process of
exchange where maximum benefit is given up to physical resources such as land, labor
and capital.
Scarcity is argued by economists to be a fundamental economic problem. To satisfy
individual and society wants implies that they have to choose among alternatives
available in order to overcome the fundamental economic problem of scarcity. Econom-
ics therefore entails of how choices are made. In line with this Gregory (2012, p 7)
says that rational people systematically and purposefully do the best they can to
achieve their objectives given the available opportunities. The people across the globe
are struggling to work to be better out of the opportunities available to them. In our
communities the majority of the people are now awake and therefore the importance of
hard work towards poverty eradication and improvement of the welfare.
An economic good is always scarce. The cost of acquiring an economic good is zero. It
provides satisfaction relatively scarce and marketable.
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A free good exists in natural abundance .Quantity demanded for it is less than supply at
zero prices. Economists argue that there are relatively few, if any.
2.
1. Production
Production is man's endeavor to use the scarce available resources so as to achieve
satisfaction out of them. (Ocan, 2006: 73) defines production as any activity aimed at
bringing about a physical change in a good to make it more satisfying and useful.
Through the production process, wealth is created and inputs are changed into goods
and services meant for human satisfaction. Production entails direct and indirect pro-
duction. Under direct production man engages in production in a bid to satisfy one's
own satisfaction. Cases are of this production are observed in subsistence production
where an individual produces his crops for home consumption. Under indirect produc-
tion, firms and individuals engage in production for exchange or sale and money is
widely used as a medium of exchange. Therefore to attain maximum benefit, specializa-
tion and division of labor is necessary. Specialization and division of labor allows
everybody to do what he can at his best since the activity is divided into a series of
repetitive tasks and each individual does one task.
There are three levels of production and these include; primary production, secondary
production and tertiary production.
Primary production involves man's exploration in the environment to exploit resources
aimed at aiding the production process. It entails activities such as hunting, fishing,
mining, farming, oil drilling and other extractive industries.
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Secondary production involves converting the raw materials into the finished products. It
is a stage where value is added to the primary products. Activities involved include
textiles, food processing, knitting and embroidery, construction, both on large scale and
small scale.
Tertiary production is the stage that increases value on the final product as well as
moving commodities from the firms to the final consumers. It is a service provision stage
where the goods and services are made available to the consumers.
The overall objective of production activity is to satisfy man's wants. Hard working
communities have moved from strength to strength in achieving wealth accumulation
and therefore a high standard of living among the respective populations is evidenced.
On the hand communities where there is a poor attitude to work, their production levels
are low and this seems to be one of the major factors why some areas are still under
abject poverty.
2.2.1
. Scarcity of factors of production (Resources)
Economic resources are goods that are used to produce other goods or services. These
goods are inputs or factors of production. These include land, labor, capital, and entre-
preneurship.
Land. Land refers to all natural resources. These natural resources include the gifts of
nature which include soil, water, air, minerals, among others. These resources are
normally referred to as free gifts of nature because they are natural endowments. Land
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has a unique characteristic because it is where all production takes place. Land is fixed
in supply and subject to the law of diminishing returns.
Labour. Human beings provide labor in terms of physical and intellectual services in the
process of production. For production to take place, human resource is needed in labor
units employed to the production activity for example drivers, singers, teachers. Labor is
a resource that needs to be well managed to maximize returns from it. These include
provision of education to improve labor productivity. Also important is health services to
have health labor that is able to offer its maximum man hours on the job. Human
resource management is vital for human resource planning, training, induction, coach-
ing counseling, supervision, so that units of labor employed are properly utilized.
Capital. Capital is the physical assets that are used in the creation of more goods and
services. Capital can be categorized as real capital and money capital. Examples of
real capital includes infrastructure, machines, factories, while money capital includes
paper notes, coins, stocks, bonds, and other financial assets. They are capable of
producing other goods and services.
Entrepreneur. An entrepreneur organizes the production process by planning and
organizing factors as well as bearing risk. The entrepreneur has the role of managing
and undertaking product risk during the course of production and providing an environ-
ment for other factors to operate. Dumba, (2004, p 7), stresses that an entrepreneur
has the ability to understand what the market wants which improves his ability to
innovate. In addition it is important to note that innovation plays a major role in society
development.
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In the school environment there are many resources under our jurisdiction. These
include scholastic materials, human resource that includes teaching and non- teaching
staff, students and physical infrastructure. It is important to note that all these resources
need to be taken care of carefully because they each contribute significantly towards
the school and national goals of education. Staff needs motivation and supervision,
students need care, counseling and guidance.
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Chapter Three
Exchange system
A barter system is a market system that involves direct exchange of physical goods and
services. Much as the barter system may be an effective system in a simple economy, it
does not function well in a complex economy where there are multiple production
systems. The major loophole associated with a barter system is that any trade requires
a double coincidence of wants. This type of trade can only take place if each person
wants what the other person is willing to trade and is willing to give up what the other
person wants. This has therefore called for use of money system for easy facilitation of
trade in almost all societies though with different magnitudes. In some communities of
Uganda some people can even work for food. A day's work on someone's farm is
equated to some amount of food at the end of the day. Dilts, (2004, p 13), identifies
characteristics of the market system that are essential in the allocation of resources
which include comparative advantage, division of labor, specialization and capital
goods. It is however important that communities where resources are not properly
utilized, it is not easy to determine their comparative advantage. Productivity is general-
ly not well developed to induce proper functioning of markets.
3.
0. Relative and nominal prices
Price shows the value of a commodity at a particular time. This can be reflected in
relative terms for instance how expensive this good is by the units of it in terms of units
of another. This reflects the opportunity cost of acquiring a good or service in either
barter or monetary systems of exchange. This shows how goods and services are
either expensive or cheap in relation to others. For a barter system, the relative price
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means the trading ratio between any two goods or services. For example if one 28
gauge iron sheet is traded for two 32 gauge iron sheets, the relative price of a 28 gauge
is two 32 gauge iron sheets.
In a market economy, there are competitive market prices of that are determined by
activities of buyers and sellers through the interaction of demand and supply.
3.
1. Demand theory
Demand is the willingness of the consumer to buy a certain quality and quantity of
goods at a certain price. Demand is greatly affected by the purchasing power. Lack of
purchasing power will lead to no effective demand. A population with low purchasing
power especially in developing countries has low effective demand.
For a normal good, the higher the price, the less quantities will be bought and the lower
the price the more quantities of a commodity will be bought. Quantities purchased by all
consumers can be summed up to give market demand. Jhingan, (2006, p 136), stress-
es that for a commodity to have demand, consumers must have the willingness to buy
that commodity, which is related to per unit time. This implies that demand is measura-
ble within a given time after which it changes.
A demand curve is an important instrument to show the price-quantity relationship as
shown in the diagram below.
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Price
D
0 quantity
The quantity of a good is inversely related to the price of a good, keeping other factors
constant. The law of demand is derived from this inverse relationship. The demand
curve shown has a negative gradient a reflection of the inverse relationship between
the price of a good and quantity demanded in a given time. When prices go up quantity
demanded reduces and when prices go down, quantity demanded increases, ceteris
paribus. Other determinants of demand other than price include prices of related
goods, level of people's income, the number of consumers, tastes and preferences,
expectations of future prices among other factors. The increasing world population for
instance has led to increased demand for food, and other basics leading to inflation,
hunger and poverty in some communities.
Taking an example of complementary goods, these goods have a characteristic of being
bought and used together. For example milk used to make tea will require the house-
hold to demand bread as well. An increase in demand for one will lead to the demand
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for the demand for the other. For substitutes, an increase in the price of X will lead to
decrease its demand and an increase in quantity for commodity Y since they are more
or less alternative to each other.
Demand for food is increasing at an alarming rate. This is as a result of an increasing
global population. Demand for food leads to increased consumption agricultural prod-
ucts. According to Malthusian theory of population, total demand for food is directly
proportional to human numbers. It states that population grows exponentially to the
extent that resources will be unable to support the available population. This is in
agreement of the present situation where there is prevalent hunger in some areas. It is
estimated that over 700 million people in the developing world do not access sufficient
food, a condition that subjects them to poor health.
There are many determinants of demand which include the following;
a. The relative prices of the goods available
The consumer will demand more of a commodity whose price is relatively lower. The
lower prices will attract the consumers while high prices will scare away the customers
according to the law of demand. For substitutes like beans and peas, an increase in the
price of beans will cause consumers to switch to peas, ceteris paribus, and a decrease
in the price of beans will make consumers demand more of the beans. While for the
complements like fuel and car, an increase in the price of car will negatively affect the
quantity demanded of fuel because there will be few cars lining up on the fuel station for
fuel, ceteris paribus.
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b. Level of income of income of the consumer
The financial resources at the disposal of the consumer determine the pattern of de-
mand at the existing price, keeping other factors constant. For a normal good, an
increase in income is followed by an increase in the demand of a commodity and this
reflects a positive income elasticity of demand.
c. Tastes
Tastes and preferences of the consumers influence the demand of a product. Tastes
change with the traditions, fashions for and against the product in question leading to a
change in the quantity of the product that will be demanded.
d. The size of the population
The size of the population determines how much of a product will be demanded provid-
ed that the population has adequate purchasing power and the product in question is
within the tastes of the population.
e. Economic conditions
In terms of good economic conditions, the demand of the product will be high compared
to when the economy is in bad economic position
f. Seasonal factors
Some products are on high demand for some seasons and this trend tends to change
with changing seasons. Examples of these products include gum boots, umbrellas
jackets during the wet season. Their prices tend to be high during the wet season
because they are highly demanded in this particular season and their prices fall during
the dry season. Shops are highly stoked with these products during the wet season and
they tend to disappear during the dry season.
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g. The law of diminishing Marginal Utility
D.J. Brown, (1985 : 70) illustrates that if all my shoes are falling to pieces, the need for
new ones press a need for buying a new pair- the marginal utility (extra benefit I receive
from having one pair rather than none is high for a new pair. Having bought them,
however I am quite desperate to obtain the second pair. The marginal utility conveyed
by the second pair is less than that of the first. This shows that as more and more of a
commodity is consumed, the consumer places less value in obtaining additional unit of
that commodity, ceteris paribus.
3.
2. Supply theory
Supply refers to quantities that the producers are willing to offer at given prices in a
given period of time. Producers are attracted by high prices to supply more quantities to
the market while when the prices are low producers will not be attracted to sell since
they would want to make profits after covering all the costs of production.
Price
S
0 Quantity
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Supply is affected by factors that include the number of producers, the level of technol-
ogy used in production, availability of capital to employ among other factors. Dumba,
(2004, p 31), emphasizes that supply decisions depend on the profit potential. Profit
potential induces both local and foreign investors to be innovative a factor that improves
supply.
In developing communities, production techniques and limited capital tend to prohibit
production levels that affect what is supplied to the market. For instance subsistence
production in agriculture that concentrates on production basically for home consump-
tion. Labor is therefore not employed in gainful employment. Others are involved in the
informal sector such as shoemakers, tailors, carpenters, vendors and many others
where little incomes are earned for bare subsistence of their families. This affects the
supply levels to the market, the trading position of these countries and the incomes of
the population.
An increase in the price of capital, raw materials and labor resources increases the cost
of production and therefore it becomes unprofitable for one to engage in production and
supply at the market prices. The on-going price increase in oil products has affected the
energy sector and manufacturing sector in countries across the world. It has negatively
impacted on supply and made inflation levels to rise in most economies.
Improvements in technology will lead to increased productivity and profitability. This is
as a result of reduced production costs and increased labor productivity. This is evi-
denced by economies of advanced countries such as U.S, China, Japan, among others
with high technologies and high productivity.
