Introduction to Economics

Definition:
The study of how society allocates scarce resources (Inputs used to produce outputs-goods) and
goods and services.

Inputs include labour, capital, entrepreneurship and land.

Economics can be divided into two:

1. Microeconomics: Focuses on actions of individuals and industries- usually the dynamics
between buyers and sellers and borrowers and lenders
2. Macroeconomics: Analyses economic activity of the entire country or the international
marketplace e.g. the effect of taxes on a population, the outcome of investing in industries
or financial products etc.

Factors of production
1. Land: This is a natural and primary factor of production. Land in economics refers to:
-On the surface (e.f. soil, agriculture, land etc.)
-Below the surface (minerals, rocks, ground water etc.)
-Above the surface: (e.g climate, rain, etc.)

Features of land:
- Natural
- Primary factor of production
- Inelastic supply i.e. fixed in supply
- Graded i.e different qualities e.g fertility
- Passive factor i.e it doesn’t work on its own initiative-needs other resources
- May have diminishing returns i.e if used for farming-nutrients can run out
-Derived demand
- No social cost i.e. it already exists-not made by man
- Durable and non-perishable
- Immobile but versatile- can be used for multiple purposes
- Site or location value i.e. its value depends on location and use
- Appreciates and gives rewards such as rent etc.

2. Labour: Any valuable service rendered by a human agent. It can be physical or mental,
where services are provided. It is a primary factor of production.

Features of Labour:
- Inseparable from labourer i.e. sale of service and not themselves
- Perishable i.e. it cannot be stored for later use
- Cost cannot be determined

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 - Active factor of production
- Heterogeneous factor i.e. no two people have the same quality or efficiency and skills
- Imperfect mobility i.e doesn’t always allow movement from different sectors because
of different skill requirements, education backgrounds, lifestyle etc.
- Inelastic supply i.e fixed supply, cannot always be changed according to demand
- Human capital i.e investments made such as education health, training etc.
- Trade unionism i.e. allows negotiations to be made for better working conditions
- Derived demand i.e the demand for labour is dependent on the supply of employment
- Mean as well as an end i.e. needed for production and also to use the product

3. Capital: Investment of money in a business for production. Capital can be wealth, money
or income
A commodity used as a wealth becomes a capital e.g. if a car is purchased with wealth,
and then used as a taxi, it becomes capital.
In economics, money becomes capital when used to buy goods or services that aid in
production.
Money being used by consumers for personal use doesn’t count as capital.

Capital is a source, and income is the result from using capital.

Types of capital:
- Fixed capital i.e. capital used multiple times until wears out e.g machines, vehicles,
buildings
- Working capital (variable capital) i.e. single use capital, where it can only be used
once for production into a finished product e.g. raw materials
- Circulating capital i.e. the money used to purchase raw materials. Working capital and
circulating capital are synonymous
- Sunk capital i.e. A good which only has a specific use in producing a particular
product e.g. textile loom can only be used in a textile mill
- Floating capital i.e. capital that has alternative uses e.g. electricity, fuel, vehicles
- Money capital i.e. funds available for purchasing goods, raw materials etc. It is used
to acquire fixed assets and to pay for expenses.
- Real capital i.e. capital goods and assets other than money such as, buildings,
machinery etc.
- Private capital i.e. physical assets, except land, that bring income to an individual
- Social capital i.e. assets owned by a community e.g. roads, hospitals, schools etc.
- National capital i.e. capital owned by the nation, it can be private or public capital
- International capital i.e. assets owned by international organisations like UN, WHO,
World Bank etc.

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4. Entrepreneurship: An entrepreneur is someone who performs organizational and risk-baring
functions. They put together land, labour and capital to produce a good or service. Entrepreneurs
take risks to make a loss or profit from organizing the other three factors of production.

Qualities/Skills of an entrepreneur
- Organisational skills
- Professionalism
- Risk bearer/taker
- Innovative
- Decision maker
- Negotiation skills

Demand and Supply

Demand: Consumers desire, willingness and ability to pay for a good or service at a certain
time. It refers to the quantity of a product or service that is desired. Quantity is the amount of a
product that people are willing to buy at a certain price. The relationship between price and
quantity demanded is known as the demand relationship.

Factors affecting demand:

- The price of the good/service i.e. the demand for a product is dependent on the price.
There is usually a negative relationship, which means if the price increases, the
demand decreases.
- Price of related goods i.e. complements and substitutes
- Personal disposable income i.e. the more disposable income (after tax) available, the
more one is likely to buy
- Tastes or preferences i.e. the greater the desire, the more likely to buy
- Consumer expectation about future prices and income i.e. if a consumer feels that the
product and price are good, and the price is likely to increase, he will purchase more
at that time
- Population i.e. increase in population means increase in demand
- Nature of the good i.e. if a basic commodity, it will have higher demand
- Advertising i.e. the quality of advertising depends on the demand
- Availability of credit i.e. this is usually for durable products e.g. furniture and
electrical appliances
- Government policy i.e. through legislation

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The law of demand states that other things remaing the same, the quantity demanded of a good
increases when its price falls and vice-versa.

The correct terms to use when price is a causative factor are expansion and contraction in
demand. If price is not the causative factor, then it can be said that demand is increasing or
decreasing.

In economics, it is assumed that the price is the only factor in demand.

The main assumptions are:

 Habits, tastes and fashions remain.

 Income of the consumer does not change.
 Prices of related goods remain constant.
 The number of buyers remains constant.
 The commodity is a normal good and has no prestige or status value.
 People do not expect changes in the price.
 Price is independent and quantity demanded is dependent.

Demand curves: When the cost of a commodity changes, the demand of the commodity
changes. When the cost goes up, the demand goes down. A demand curve shows the relationship
between the price and demand (consumption). The x-axis is the unit price of the commodity and
the y-axis shows the total amount of the commodity consumed at the price. Because less of a
commodity is consumed when the price goes up, the demand curve drops.

Sometimes, a small change in price will have a big drop in consumption, but for some
products a big change in price doesn’t affect consumption.

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The slop of the demand curve describes the relationship of consumption. A gentle slope
indicates a large price increase doesn’t lower demand, but a steep slope means that a small
change decreases demand.

The gradient of the slope of the demand curve can be used to describe the relationship
between price and consumption. A slope with a 0.0 gradient or negative gradient shows an
increase in price, decreases demand.

If the demand doesn’t decrease when the price increases, there will be no slope, but a
horizontal line, with a 0.0 gradient

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 Inelasticity: When the price increases and people pay more, but consumption reduces, the
gradient will be between 0.0 and -1.0. This usually happens with basic commodities

Elasticity: If the price goes up and the people consume less, the gradient would be less than
more than -1.0. This is usually seen for luxury items.

Shifts in demand curve:

When any factors that affect demand, apart from price, the demand curve shifts. This is a change
in demand rather than a change in the quantity of demand. A shift to the right means an increase
in demand, while a shift to the left is a decrease in demand.

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Supply: The amount of product a producer is willing and able to sell at a given price, while all
other factors are constant.

Supply schedule: A table showing how much one or more firms will be willing to supply at
particular prices. It shows the quantity of goods that a supplier is willing and able to sell at a
specific price under existing circumstances.

Factors affecting supply

- Good’s price i.e. the price affects the supply. The relationship is positive, an increase
in price will increase quantity supplied
- Price of related goods i.e. the changes in prices of other commodities may change
the supply of commodities that do not change. The production of a good whose
price is higher, will become more profitable to produce and resources will move
towards production.
- Technology i.e. if there is a technological advancement in production of a good, the
supply increases
- Expectations i.e. if a producer thinks that demand will increase in the future, supply
will increase
- Price of inputs i.e. if the price of inputs increases, the supply will decrease due to
increased production costs
- Number of suppliers i.e. The more suppliers in the market, the more competition,
driving prices down
- Government policies and regulations
- Weather and climate
- Incidence of strikes i.e. if no labour to produce, supply decreases

Supply Curve: As the prices increase, the supply increases. As prices decrease, supply decreases.
When the price is higher, suppliers produce more. Supply refers to the amount of a good or
service that producers are willing and able to supply at a specified price.

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If the supply curve shifts to the left, supply decreases. Some factors that could affect the shift
include:
-Increased production costs
-Increased government regulation
-Pessimistic market expectations
-Withdrawal of market competitors

If the supply curve shifts to the right, supply increases. Some factors that could affect the shift
include:
- Decreased production costs

- Decreased government regulation

- Optimistic market expectations
- Entrance of new market competitors
- New technology

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Equilibrium: The point of equality or agreement between buyers and sellers. Both supply and
demand show the mutual willingness of consumers and producers to purchase or sell respectively
at varying prices and quantities. The schedules cannot explain the actual market price that the
deals take place; this is possible when the quantities demanded and supplied are at a uniform
price. Equilibrium is the point where complete satisfaction of the buying and selling behavior is
fulfilled at a given economic activity.

At a price above equilibrium, supply exceeds demand, while at a price below E, the quantity
demanded exceeds that supplied. Prices that are out of balance are points od disequilibrium,
which creastes shortages or over supply. These changes shift the demand and supply, therefore
changing the equilibrium price and quantity in the market.

Elasticity
Price elasticity of demand: This is the degree of responsiveness of the quantity demanded of a
commodity to the change in is own price.

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 ED = Percentage or proportionate change in Quantity Demanded =
Percentage or proportionate change in price
If the ratio is greater than 1, the quantity demanded is elastic. This means that the demand
changes more than proportionate in response to a change in price.
If the ratio is less than 1, the quantity demanded is inelastic. This means that the demand
changes less than proportionately in response to a change in price.
If the ratio is 1, the quantity demanded has unitary elasticity. This means that the quantity
demanded changes in proportion to the change in price.

Summary of interpretations

Value Descriptive Terms

Perfectly inelastic demand

Inelastic or relatively inelastic demand
Unit elastic, unit elasticity, unitary elasticity,
or unitarily elastic demand
Elastic or relatively elastic demand
Perfectly elastic demand

Arc Elasticity: The coefficient of price elasticity between 2 points on the demand curve. It is
an estimate of the elasticity along a range of points on the demand curve. The estimate
improves as the arc becomes smaller and approaches a point in the limit.

Arc elasticity of demand= - ∆Q X (P1+ P2)/2 = - (Q2- Q1) X (P1+ P2)/2

∆P (Q1+ Q2)/2 (P2-P1) (Q1+ Q2)/2
Point elasticity: This is the price elasticity at a specific point on the demand curve. It evaluated
price elasticity at a point. For a straight line, the point elasticity can be calculated by:
Point elasticity of demand= - ∆Q X P
∆P Q

In the formula, P is the price divided by quantity at the point and ∆Q is the reciprocal of
Q ∆P

the slope line.

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Factors affecting price elasticity of demand:
- Determinants i.e.

Factors that determine the price elasticity of demand

-Availability of substitute goods, the more substitutes available, the higher elasticity is likely to
be. If no substitutes, demand will be inelastic.
- Breadth of definition of a good i.e. the broader the good/service, the lower the elasticity
- Percentage of income i.e. the higher the percentage of consumers income, the higher the
elasticity. People pay more attention to price of goods based on income.
-Necessity i.e. the greater the need, the lower the elasticity
- Duration i.e. the longer the price changes hold, the higher the elasticity
- Brand loyalty i.e. the loyalty to brands can result in inelastic demand.
-Who pays i.e. if a consumer doesn’t directly purchase a good they consume, the demand is
inelastic

Income elasticity of demand: The measure of the degree of the responsiveness of a

commodity to changes in income.

Income Elasticity of Demand = Percentage or proportionate change in Demand

Percentage or Proportionate Change in income

 Where the ratio is greater than one, the demand is income elastic
 Where the ratio is less than one, the demand is income inelastic
 Where the ratio is equal to one, the demand is of unitary income elasticity

For computational purposes the coefficient of income elasticity of demand can be estimated by
the following formula.
Income elasticity of demand (EY) = ∆Q/Q = ∆Q X Y
∆Y/Y ∆Y Q

If EY is positive, the good is normal

If EY is negative the good is inferior.
In the case of inferior goods, an increase in income will lead to a decrease in the demand so that
income elasticity of demand will be negative. When demand does not change as income changes,
income elasticity of demand is zero.

Cross elasticity of demand: The measure of the degree of responsiveness of the demand of one
commodity to a change in price of a related commodity.

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Proportionate or percentage change in demand of commodity A
Proportionate or percentage change in price of commodity B

( given no change in the price of commodity A)

The coefficient of cross elasticity of demand is calculated by the following formula:

Cross elasticity of demand (EAB) = ∆QA/QA = ∆QA X PB

∆PB/PB ∆PB QA

If A and B are substitutes EAB is positive.

On the other hand, if A and B are complement, EAB is negative.

When commodities are unrelated in the sense that they are independent of each other, EAB = 0

Cross elasticity of demand measures the degree of substitutability and complementarity of

different commodities.

The higher the positive value of the coefficient of cross elasticity of demand in the case of
substitutes, the higher the degree of substitutability.

On the other hand, in the case of complements, the higher the negative value (in absolute terms)
of the coefficient of cross elasticity of demand, the higher is the degree of complementarity of
the commodities.

Thus the main factor determining the cross elasticity of demand is the degree of substitutability
and complement ability of the commodities.

Importance of elasticity of demand

- Price elasticity of demand is relevant for planned changes in prices of the products.
If price elasticity of demand is inelastic, then it will be possible to increase revenue
by raising the price. If the price elasticity of demand is greater than one an increase
in price will reduce revenue.
- Government requires knowledge of price elasticity of demand to estimate the yield
of prospective tax. They tax products with inelastic demand such as beer and
cigarettes. If demand were elastic, it would increase tax and hinder production,
decreasing revenue.

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 - Price elasticity of demand is relevant if a country is considering devaluation
(cheapening of a country’s currency in terms of a foreign currency) to rectify a
balance or payment problems. Devaluation decreases export prices, and increases
import prices. The higher the two, the greater the balance of payment improvement.
- The government is able to anticipate the consequences of price changes in emission
levels and reduce utilization of fuels, to aid in environmental changes
- Aids in explanation of price instabilities in the agricultural sector. With elastic
demand, a small change in price leads to greater fluctuations in demand.
- In monopolies, price discrimination can be used to increase total revenues. A higher
price can be charged with lower price elasticity of demand,

Income elasticity may be useful to a government to help in policy decisions. As income grows,
the demand will change at different rates depending on income elasticity. Similarly companies
can use this is production planning. It is better to enter the production of commodities with
high-income elasticity of demand.

Cross elasticity is useful to firms that show how a change in price of a competitor would affect
their own. In high cross elasticity of demand, a firm tries to keep prices stable. If low cross
elasticity of demand, the firm increases their prices.

For the government, cross elasticity is useful in using tariffs. A tariff is a tax imposed on a good
imported into the country. The tariffs are usually imposed when the cross elasticity of demand
for a local product and their foreign substitutes is high therefore higher tariff restricts imports.

Price elasticity of supply: A measure of the extent to which the supply of a good responds to
chances in one of the influencing factors. It is a measure of the degree of responsiveness of the
quantity supplied to a change in the goods own price. Price elasticity of supply is given by the
following formula:

Price elasticity of supply = Percentage Change in Quantity Supplied

Percentage Change in Price

This can be expressed as ∆QS/QS X 100 = ∆QS X Qs

∆P/P X 100 ∆P PA

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The price elasticity of supply measures the rate of response of quantity demanded due to a price
change. We calculate the Price Elasticity of Supply by the formula:

PEoS = (% Change in Quantity Supplied)/ (% Change in Price)

The price elasticity of supply shows how sensitive the supply of a good is to a price change. The
higher the price elasticity, the more sensitive producers and sellers are to price changes.

Very high price elasticity suggests that if the price of a good goes up, sellers will supply less of a
good, if the price goes down, suppliers will sell more.

Very low price elasticity implies the opposite, changes have little influence on supply.

 If PEoS > 1 then Supply is Price Elastic (Supply is sensitive to price changes)
 If PEoS = 1 then Supply is Unit Elastic
 If PEoS < 1 then Supply is Price Inelastic (Supply is not sensitive to price changes)

The determinants of price elasticity of supply:

- The adjustment time
- The availability of space capacity i.e. If fixed factors of production are being used to
the fullest extent, no matter how great the increase, the supply will be inelastic. If
however a firm is operating below capacity and there are unemployed resources,
supply will be elastic.
- The level of unsold stock. If suppliers are holding large stocks, supply will be elastic
and an increase in demand can be met by run down stocks. If on the other hand
stocks are depleted it may be difficult to increase output and supply will then be
inelastic.
- The ease with which resources can be shifted from one industry to another.
- The availability of variable factors of production. If variable factors of production
are not easily available, then supply will be inelastic, even if the firm has spare
capacity with respect to fixed factors of production. A firm should be able to employ
variable factors of production easily and combine these with spre fixed factors that
are available before the supply becomes elastic.
- Ease of substitution. Supply will tend to relatively elastic if firms can use different
combinations of labour and capital to produce a particular level of products,
especially in the case of a firm producing a range of products.
- The number of firms. In the industry generally, the greater the number of firms, the
more elastic is the market or industry supply

The importance of price elasticity of supply

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 i. The low price elasticity of supply of agricultural goods partly explains why agricultural
prices tend to fluctuate more than those of manufactured goods.

ii. Price elasticity of supply enables one to determine the likely effect of a change in
demand. Elastic supply means that production can meet increased demand and
consumers benefit since prices do not rise excessively. Inelastic supply tends to be
associated with overcharging and limited supply.

Types of Costs

1. Fixed costs: Costs that do not vary with the changing output e.g. machines, insurance
etc.
2. Variable costs: Costs that change depending on output e.g. raw materials
3. Semi-variable costs: This is a cost that depends on how much is produced e.g. labour

Total costs = Fixed costs + Variable costs

4. Marginal Costs: The cost of producing one extra unit
5. Opportunity cost: The next best alternative sacrificed
6. Economic cost: This includes both actual direct costs and the opportunity costs e.g. if
you take off work for training, you lose pay for a week, and the training costs, therefore
the total lost is the wages + training fee
7. Accounting costs: Monetary outlay for producing a certain goods
8. Sunk costs: costs been incurred that cannot be recovered
9. Avoidable costs: Costs that are not always necessary, also known as escapable cost

Market Failure
1. Social costs: the cost to society, can sometimes be referred to as true costs
2. External costs: costs imposed on a third party e.g. passive smoking
3. Private costs: costs incurred by yourself
4. Social marginal cost: the total cost of producing one extra unit for society

Economic Evaluation
This involves identifying, measuring and valuing both the inputs and outcomes of interventions
(costs and benefits)

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Economic evaluation can be done by:
- Provider or narrow perspective: consider inputs or outcomes and compares both
aspects across alternative interventions. This can be difficult as interventions are
ranked in terms of value for money
- Societal perspective: include only some elements of the inputs and outcomes

Types of economic evaluation

1. Cost-minimisation analysis: this compares two or more alternative interventions
whose outcomes are assumed to be the same. It is not recommended
2. Cost-effectiveness analysis: benefits are measured as a quantifiable unit. It cannot
be used to compare interventions. It is most suitable when interventions with the
same health aims are being compared
3. Cost-utility analysis: Uses a common measure of outcome to enable comparison
between a range of interventions. Benefits or outcomes are expressed as a measure
that reflects how individuals value or gain utility from the quality and length of life.
Usually can only identify large changes in individuals. Compares a range of
interventions linked to a common outcome/output
4. Cost-benefit analysis: Measures all outcomes in monetary terms. It calculates the
monetary value of health benefits and costs to conclude if one side is greater than
the other. It gives a cost-benefit ratio. It is useful in comparing interventions with
many diverse outcomes.

Process for economic evaluation

This should usually be done with a multidisciplinary team. The main steps to consider include:
- Defining the economic question and perspective
- Determining the alternatives to be evaluated
- Choosing the evaluation design
- Identifying, measuring, and valuing the costs
- Identifying, measuring and valuing the benefits
- Adjusting costs and benefits for the differential timing
- Measuring incremental costs and benefits together
- Testing the sensitivity of the results
- Presenting the results

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Money and Banking

Money is a medium used for exchange of goods and services. Money has four main fucntions
- a medium of exchange for goods and services
- A unit of account for placing a value on goods and services
- A store of value when saving
- A standard for deferred payment when calculating loans

Properties of money
- Acceptable to people as payment
- Scarce and in controlled supply
- Stable and able to keep its value
- Divisible without any loss of value
- Portable and not too heavy to carry

Commercial Banks
A bank is an authorized institution that performs 4 functions
1. Accepts deposits
2. Make loans
3. Arrange payments of bills
4. Provide customer services

Banks provide different types of accounts for different needs:

- Current accounts
- Savings accounts/Investment accounts
- Deposit accounts

The money allows one to borrow money in the form of a loan. There are two kinds of loans:
- An overdraft: bank allows customer to take more money than in the account out.
They are an agreed limit and are paid off when bank asks. Interest is charged daily.
- A loan is when a customer borrows a fixed amount and repays this in monthly
installments over a number of years. A fixed rate of interest is charged.

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Methods of payments
-Cheques: The bank is ordered to pay someone else money. There is the person who write the
cheque (drawer), the bank ordered to pay the money (drawee) and the person receiving the
money (payee).
- Standing orders: a fixed amount is paid out on set dates
- Direct debits: a variable sum is paid out on set dates
-Credit cards: A card used to pay for items and payments are made later. No interest is charged
if payments are cleared within a month.
Other services provided by banks include: cash points/ATMs, exchange foreign currency and
issue traveller’s cheques, provide night safes and store valuables, execute wills and trusts and
collect debts
Credit creation
Some people leave money in the banks that earn interest. The bank uses these idle deposits to
give loans to people. If people were to cash out their deposits at once, there would not be
enough cash. The bank has created money doing this.

Money supply
This is the total amount of assets in circulation, which are acceptable in exchange for goods.
The control of money supply is usually by the national banks. They limit the amount of cash
and bank deposits in circulation.
As these banks issue the cash and coins, they can control the amount of cash in the money
supply.

Economic Growth

This is the long-term expansion of the productive potential of the economy. It is shown by the
increase in trend of potential GDP and is illustrated by an outward shift in a country’s long run
aggregate supply curve (LRAS).

What determines the rate of economic growth?

- Country dependent
- But inter-connected

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Growth drivers:

- Growth in physical capital stock- leading to a rise in capital per employee

- Growth in size of active labour force available for production
- Human capital
- Technological progress and innovation driven production i.e. higher GDP per hour
worked
- Institutions
- Rising demand for goods and services- either led by domestic demand or from
external trade

Challenges to economic growth:

- Changes in the real exchange rate affecting competitiveness

- Cyclical fluctuations in national output and external trade
- Financial instability e.g. unsustainable credit boom and fall in savings
- Volatility in world process for essential imports and key exports
- Political instability/military conflicts
- Natural disasters and other external supply shocks
- Unexpected breakthroughs in the state of technology.

There are three perspectives of growth:

1. Balanced growth; sector balance, e.g. between industries, regional balance, rural and
urban balance, internal vs. external balance, balance between consumption and
investment
2. Sustainable growth: Meets the needs of current generations without limiting resourcs
for future generations, macroeconomic stability, financial stability, environmental
sustainability-protection of natural capital
3. Inclusive growth: Benefits of growth widely distributed, rising median per capita
incomes, progress in reducing relative poverty, improving opportunities for all groups,
measures to tackle discrimination and barriers for affected groups.

National Income

This is the measure of the total monetary value of the flow of final goods and services arising
from the productive activities of a nation in any one year.

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Concepts of National Income:

1. Gross Domestic Product (GDP): This is the total monetary value of all final goods and
services produced within a country. Gross indicates that no deduction for depreciation is
made.
2. Gross National Product (GNP): This is the total monetary value of goods and services
produced by nationals or citizens of a country, some of the products can be produced
outside the country. GNP= GDP + net factor of income from abroad
3. Net National Product (NNP): NNP= GNP- Depreciation allowance
4. NNP at factor cost: NNP I at market price) – indirect taxes + Subsidies
5. National disposable income: national income +/- net transfer receipts and payments.
This measures the aggregate resources available to a nation for saving or consumption
6. Nominal vs. Real national income: a change in money value can occur because of
change in quantity or price, while leaving the volume of goods and services constant.
Real national output measures total output in constant prices, while nominal measures
total output in current prices.
7. Per capita income: national income divided by population of the country. It represents
average income of the people in a given year.

Uses of national income statistics:

- Indicate the standards of living

- Compare standards of living in different countries
- Assist the government in planning the economy
- To forecast future trends
- Business community- helps understand market trends to allow good investing

Methods of measuring national income:

1. Income method: This takes national income as the sum of all incomes earned by factors
of production in the economy

Adjustments made include: transfer payments are deducted, stock appreciation is

deducted, residual errors, net factor income from abroad, capital consumption or
depreciation

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 2. Product or value added approach: Add value of all final goods and services produced by
firms in a year.
3. Expenditure method: Adds all expenditure on al final goods and services in the
economy.

Revision question

1. (a) Explain the main determinants of elasticity of demand.

(b) Briefly describe three economic applications of the concept of elasticity of demand.

(c)
( i) what is arc elasticity of demand?
(ii) What is point elasticity of demand?
(iii) the demand of a commodity is five units when the price is Ksh 1,000 per unit.
When the price per unit falls to Ksh 600 the demand rises to six units. Compute the
point and arc elasticity of demand.

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