Course Content
INTRODUCTION TO ECONOMICS
Definition of economics Basic economic concepts: economic resources, human wants, scarcity and choice, opportunity cost, production possibility curves/frontiers Scope of economics: Micro and macro economics Methodology of economics: positive and normative economics, scientific methods, economics as a social science. Economic systems: free market economy, mixed economy.
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DEMAND ANALYSIS
Definition Individual demand versus market demand Factors influencing demand Exceptional demand curves Types of demand Movement along and shifts of demand curves Elasticity of demand Types of elasticity: price, income and cross elasticity Measurement of elasticity; point and arc elasticity Factors influencing elasticity of demand Application of elasticity of demand in management and economic policy decision making
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SUPPLY ANALYSIS
Definition Individual versus market supply Factors influencing supply Movements along and shifts of supply curves Definition of elasticity of supply Price elasticity of supply Factors influencing elasticity of supply Application of elasticity of supply in management and economic policy decision making
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DETERMINATION OF EQUILLIBRIUM
Interaction of supply and demand, equilibrium price and quantity Mathematical approach to equilibrium analysis Stable versus unstable equilibrium Effects of shifts in demand and supply on market equilibrium Price controls Reasons for price fluctuations in agriculture
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THE THEORY OF CONSUMER BEHAVIOUR
Approaches to the theory of the consumer - cardinal versus ordinal approach Utility analysis, marginal utility (MU), law of diminishing marginal utility (DMU) Limitations of cardinal approach Indifference curve analysis; Indifference curve and budget line Consumer equilibrium; effects of changes in prices and incomes on consumer equilibrium Derivation of a demand curve Applications of indifference curve analysis: substitution effect and income effect for a normal good, inferior good and a giffen good; derivation of the Engels curve Consumer surplus /Marshallian surplus
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THE THEORY OF FIRM
Factors of production Mobility of factors of production Short run analysis Total product, average and marginal products Stages in production and the law of variable proportions/the law of diminishing returns Long run analysis Isoquant and isocost lines The concept of producer equilibrium and firm’s expansion curve Law of returns to scale Demand and supply of factors of production Wage determination theories Trade unions: functions and challenges Producer surplus/economic rent/Marshallian surplus
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THE THEORY OF COSTS
Short run costs analysis and size of the firm’s total cost, fixed cost, average cost, variable costs and marginal cost Long run costs analysis Optimal size of a firm Economies and diseconomies of scale
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MARKET STRUCTURES
Definition of a market Necessary and sufficient conditions for profit maximization Mathematical approach to profit maximization Output, prices and efficiency of: perfect competition, monopoly, monopolistic competition, oligopolistic competition
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NATIONAL INCOME
Definition of national income Circular flow of income Methods/approaches to measuring national income Concepts of national income: gross domestic product (GDP), gross national product (GNP) and net national product (NNP), net national income (NNI) at market price and factor cost, disposable income Difficulties in measuring national income Uses of income statistics Analysis of consumption, saving and investment and their interaction in a simple economic model Determination of equilibrium national income Inflationary and deflationary gaps - The multiplier and accelerator concepts - Business cycles/cyclical fluctuations
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ECONOMIC GROWTH, DEVELOPMENT AND PLANNING
The differences between economic growth and economic development Actual and potential growth The benefits and costs of economic growth Determinants of economic development Common characteristics of developing countries Role of agriculture and industry in economic development Obstacles to economic development The need for development planning Short term, medium term and long term planning tools Challenges to economic planning in developing countries
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MONEY
The nature and functions of money Demand and supply of money Theories of demand for money: The quantity theory, the Keynesian liquidity preference theory
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THE BANKING SYSTEM
Definition of commercial banks The role of commercial banks and non-banking financial institutions in the economy Credit creation Definition of central bank The role of the central bank; traditional and changing role in a liberalised economy, such as financial sector reform, exchange rate reform Monetary policy, definition, objectives, instruments and limitations Determination of interest rates and their effects on the level of investment, output, inflation and employment Harmonisation of fiscal and monetary policies Simple IS–LM Model Partial equilibrium and general equilibrium
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INFLATION
Definition and types of inflation Causes of inflation: cost push and demand pull Effects of inflation Measures to control inflation
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UNEMPLOYMENT
Definition of unemployment Types and causes of unemployment Control measures of unemployment Relationship between unemployment and inflation: the Phillips curve
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INTERNATIONAL TRADE AND FINANCE
Definition of International trade Theory of absolute advantage and comparative advantage World trade organization (WTO) and concerns of developing countries Protection in international trade Regional integration organizations, commodity agreements and the relevance to less developed countries (LDCs) Terms of trade, balance of trade, balance of payments (causes and methods of correcting deficits in balance of payments), exchange rates, types of foreign exchange regimes, factors influencing exchange rates, foreign exchange reserves International financial institutions: International Monetary Fund (IMF) and World Bank National debt management: causes and interventions Structural Adjustment Programmes (SAPs) and their impacts on the LDCs
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CPA 004: Economics
About Lesson

There exists 3 types of Economic systems.

  1. Free market enterprise,
  2. Centrally planned, and
  3. Mixed economies. 

1. The Free Market Economy/Enterprise (The Price System)

  • The free market system is where the free market forces determine what is produced.
  • The decisions reflect private preferences and interests.
  • For the free enterprise to operate there must be a price system/mechanism.
  • The price system is the situation where the vital economic decisions in the economy are reached through the workings of the market forces.
  • The questions “What?”, “How?”, and “For whom?” are answered here and help greatly in decision making.
  • The free market gives rise to the concept of Consumer Sovereignty – a situation in which consumers are the ultimate determinants, subject to the level of technology, of the type and quantity of commodities to be produced.
  • Consumers are said to exercise this power by bidding up the prices of the goods they want most; and suppliers, following the lure of higher prices and profits, produce more of the goods.

Features of a free market system

  1. Private ownership of resources: In the private sector a significant portion of resources are owned by individuals or companies, therefore the owners practice full control over the means of production, allocation, and exchange of products and also labor supply 
  2. Freedom to participate: Any person is at liberty to take part in the market since the decision to produce or consume certain products is voluntary.
  3. Self Interest as the Dominating Motive: Firms aim at maximizing their profits, workers aim at maximizing their wages, landowners aim at maximizing their return from their land, and consumers at maximizing their satisfaction
  4. Competition: Economic rivalry or competition envisages a situation where, in the market for each commodity, there are a large number of buyers and sellers. It is the forces of total demand and total supply which determine the market price, and each participant, whether buyer or seller, must take this price as given since it’s beyond his or her influence or control.
  5. Reliance on the Price Mechanism: Price mechanism is where the prices are determined on the market by supply and demand, and consumers base their expenditure plans and producers their production plans on market prices. Price mechanism rations the scarce goods and services in that, those who can afford the price will buy and those who cannot afford the price will not pay.
  6. Limited Role of Government: In these systems, apart from playing its traditional role of providing defence, police service and such infrastructural facilities as roads for public transport, the Government plays a very limited role in directly economic profit making activities.

Resource allocation in a free enterprise

  • Although there are no central committees organizing the allocation of resources, there is supposed to be no chaos but order. The major price and allocation decisions are made in the markets. The market being the process by which the buyers and sellers of a good interact to determine its price and quantity.
  • If more is wanted of any commodity say wheat – a flood of new orders will be placed for it. As the buyers scramble around to buy more wheat, the sellers will raise the price of wheat to ration out a limited supply. And the higher price will cause more wheat to be produced. The reverse will also be true.
  • What is true of the market for commodities is also true for the markets for factors of production such as labour, land and capital inputs.
  • People, by being willing to spend money, signal to producers what it is they wish to be produced.
  • Prices are the signals for the appropriate technology.
  • The “for whom?” question is answered by the fact that anyone who has the money and is willing to spend it can receive the goods produced. Who has the money is determined by supply and demand in the markets for factors of production (i.e. land, labour, and capital). These markets determine the wage rates, land rents, interests rates and profits that go to make up people’s incomes.
  • The distribution of income among the population is thus determined by amounts of factors (person- hours, Acres etc.) owned and the prices of the factors (wages-rates, land-rents etc.).

Advantages of a Free Market System

  1. Incentive: People are encouraged to work hard because opportunities exist for individuals to accumulate high levels of wealth.
  2. Choice: People can spend their money how they want; they can choose to set up their own firm or they can choose for whom they want to work.
  3. Competition: Through competition, less efficient producers are priced out of the market; more efficient producers supply their own products at lower prices for the consumers and use factors of production more efficiently. The factors of production which are no longer needed can be used in production elsewhere. Competition also stimulates new ideas and processes, which again leads to efficient use of resources.
  4. A free market also responds well to changes in consumer wishes, that is, it is flexible. Because the decision happen in response to change in the market there is no need to use additional resources to make decisions, record them and check on whether or not they are being carried out. The size of the civil service is reduced.

Disadvantages of a Free Economy

The free market gives rise to certain inefficiencies called market failures i.e. where the market system fails to provide an optimal allocation of resources. These include:

  1. Unequal distribution of wealth: The wealthier members of the society tend to hold most of the economic and political power, while the poorer members have much less influence. There is an unequal distribution of resources and sometimes production concentrates on luxuries i.e. the wants of the rich. This can lead to excessive numbers of luxury goods being produced in the economy. It may also result to social problems like crimes, corruption, etc.
  2. Public goods: These are goods which provide benefits which are not confined to one individual household i.e. possess the characteristic of non-rival consumption and non-exclusion. The price mechanism may therefore not work efficiently to provide these services e.g. defence, education and health services.
  3. Externalities: Since the profit motive is all important to producers, they may ignore social costs production, such as pollution. Alternatively, the market system may not reward producers whose activities have positive or beneficial effects on society.
  4. Hardship: Although in theory factors of production such as labour are “mobile” and can be switched from one market to another, in practice this is a major problem and can lead to hardship through unemployment. It also leads to these scarce factors of production being wasted by not using them to fullest advantage.
  5. Wasted or reduced competition: some firms may use expensive advertising campaigns to sell “new” products which are basically the same as may other products currently on sale. Other firms, who control most of the supply of some goods may choose to restrict supply and therefore keep prices artificially high; or, with other suppliers, they may agree on the prices to charge and so price will not be determined by the interaction of supply and demand.
  6. The operation of a free market depends upon producers having the confidence that they will be able to sell what they produce. If they see the risk as being unacceptable, they will not employ resources, including labour and the general standard of living of the country may fall.

2. Planned Economy

  • Also referred to as command economy or government controlled economy, socialism or communism
  • Is a system where all major economic decisions are made by a government ministry or planning organization. Here all questions about the allocation of resources are determined by the government.

Features of this system

  1. The command economies relies exclusively on the state.
  2. Although division of labor and specialization are found, the planned economies tend to be more self-sufficient and tend to take part in less international trade than market economies.
  3. There is no consumer or producer sovereignty
  4. Market forces do not determine the price of goods and services, they are set by the government
  5. The government decides what to produce, how to produce and the person to produce
  6. The government aims at providing goods and services to everyone but not profit maximization

Advantages of Planned System

  1. Full use of resources: Central planning can lead to the full use of all the factors of production, so reducing or ending unemployment.
  2. Large scale production: Economies of scale become possible due to mass production taking place.
  3. Public services: “Natural monopolies” such as the supply of domestic power or defence can be provided efficiently through central planning.
  4. Basic services: There is less concentration on making luxuries for those who can afford them and greater emphasis on providing a range of goods and services for all the population.
  5. There are less dramatic differences in wealth and income distribution than in market economy

Disadvantages of the Planned System

  • The centrally planned economies suffer from the following limitations:-
  1. Lack of choice: Consumers have little influence over what is produced and people may have little to say in what they do as a career.
  2. Little incentive: Since competition between different producers is not as important as in the market economy, there is no great incentive to improve existing systems of production or work. Workers are given no real incentives to work harder and so production levels are not as high as they could be.
  3. Centralized control: Because the state makes all the decisions, there must be large influential government departments. The existence of such a powerful and large bureaucracy can lead to inefficient planning and to problems of communication. Furthermore, government officials can become over privileged and use their position for personal gain, rather than for the good of the rest of the society.
  4. The task of assessing the available resources and deciding on what to produce, how much to produce and how to produce and distribute can be too much for the central planning committee.
  5. Also the maintenance of such a committee can be quite costly.

3. The Mixed Economy

  • There are no economies in the world which are entirely ‘Free’ or planned, all will contain elements of both systems.
  • The degree of mix in any one economy is the result of a complex interaction of cultural, historic and political factors. For example the USA which is a typical example of a largely work-based society, but the government still plans certain areas of the economy such as defence and provides very basic  care for those who cannot afford medical insurance.

Features

  1. The mixed economy includes elements of both market and planned economies.
  2. The government operates and controls the public sector, which typically consists of a range of public services such as health and education, as well as some local government services.
  3. The private sector is largely governed by the force of mechanism and “market forces”, although in practice it is also controlled by various regulations and laws.
  4. Some services may be subsidized, provided at a loss but kept for the benefit of society in general (many national railways, for example, are loss making), other services such as education or the police may be provided free of charge (though they are paid for through the taxation system).
  5. The private sector is regulated, i.e. influenced by the price mechanism but also subject to some further government control, such as through pollution, safety and employment regulation.

Advantages of the Mixed Economy

  1. Necessary services are provided in a true market economy, services which were not able to make profit would not be provided.
  2. Incentive: Since there is a private sector where individuals can make a lot of money, incentives still exist in the mixed economy.
  3. Competition: Prices of goods and services in the private sector are kept down through competition taking place.

Disadvantages of Mixed Economy

  1. Large monopolies can still exist in the private sector, and so competition does not really take place.
  2. There is likely to be a lot of bureaucracy and “red tape” due to existence of a public sector.
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