INTRODUCTION – PART 2

ECONOMICS: SCARCITY, DEMAND AND

SUPPLY, MARKET FAILURES

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Module 1 - Introduction Objectives

• The students will be able to

• 1. Define and discuss economics
• 2. Discuss the law of demand and supply
• 3. Construct demand and supply curves in relation to price
• 4. Explain market failures.
• 5. Perform the assigned task diligently and in an honest
manner

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 Economics and Scarcity
• Resources are the basis for producing the food, shelter,
medical care and luxury goods that we want
• Natural resources (land and timber)
• Capital goods resources (factories and machineries)
• Human capital (labor)
• Entrepreneurial ability – which is measured by how
well the entrepreneur combines resources, makes
policy decisions, innovates and how well he/she
takes risks.
• Resources are scarce
• There are not enough of them to produce everything
we need and desire
• Scarcity forces as to choose among competing uses
for society’s resources.
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• Productive efficiency can be defined as, or achieved by,
producing at a minimum cost given the level of output and
the available technology.

• allocative efficiency - use of existing resources to maximize

society's satisfaction. It is using our limited resources to
produce the right mix, or amounts, of the various goods and
services - not too much, not too little, but the amount that
gives society the most satisfaction

• Equity is a "fair" distribution of income, or goods and

services.

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Economics and Scarcity

• Easiest way to think about the problem of societal

choice is by looking at a basic economic concept
and graph called production possibilities.

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Economics and Scarcity

• Production possibilities curve

• A graph showing alternate combinations of the
maximum amounts of two different goods that
can be produced during any particular time
period if the economy’s resources are efficiently
and fully employed
• Explains scarcity and the need for choices

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Economics and Scarcity
• In examining production possibilities, we must make these
assumptions about our economy.
1. All available resources are used fully (No workers unemployed, no idle
equipment, buildings, etc.)
2. All available resources are used efficiently (Efficiency means that we use
our knowledge and technology to produce the maximum amount of output
with these resources)
3. The quantity and quality of available resources are not changing during
our period of analysis, (The same number of workers, no additional
trainings, the same materials, no discovery or use of new resources)
4. Technology is not changing during our period of analysis (no
technological change)
5. We can produce only two goods with our available resources and
technology

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Table 1-1: Production Possibilities Table (Brux)

Alternatives A to F – possible combinations of bread and roses that the

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Figure 1-1: Production Possibilities Curve (Brux)

Points A through F show alternative combinations of bread and roses that the economy can
produce, whereas point U represents unemployed resources (Connecting all points gives
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Economic concepts that is illustrated by
production possibilities

1. Opportunity cost
• The best alternative forgone in order to
produce or consume something else
• What you give up to get something else
• Ex. The opportunity cost of producing roses
(20) is the bread (30) we give up when we
produce the roses.
2. Unemployment
• A situation in which resources are not fully
used in production (at point U). (not in
production possibilities curve but at some
point below it)

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Economic Growth
• A country is not restricted to a single production
possibilities curve forever. Economies may grow, and the
variable that we assumed that are not changing do change
over time.
• Economic growth
• A sustained increase in production represented by an
outward shift of the production possibilities curve
• Economic growth may occur if
• The quality or quantity of society’s resources
increases
• Or if new technologies are developed so that we can
produce more output with our available resources

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Figure 1-2: Production possibilities curve with economic growth (Brux)

Note that more of both bread and roses can be produced when the production possibilities
curve shifts outward as a result of economic growth
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Luxury goods

Brux, Dowling and Valenzuela

Staple food

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Things can be used in production possibilities

Ex. Staple goodsand luxury goods

Agricultural goods and manufactured goods
Consumer goods and capital goods
Military goods and civilian goods
Private goods and public goods

If we wish to expand public education, we may have to

give up some of our national defense.
We can’t have more of everything. There are always
opportunity costs to consider

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 We can’t have more of everything. There are
always opportunity costs to consider

• US invasion in 2003 - full cost of war - $1 trillion to $ 2

trillion

• The World Bank, United Nations and European Commission estimate the
cost of reconstruction and recovery after two years of war to be around
$486 billion, according to a new joint report. This is an increase of $75
billion from last year.Peb 22, 2024

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ECONOMICS AND DISTRIBUTION

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 Economics and Distribution
• Production and distribution choices of goods and services are
important.
• HUNGER IN THE WORLD OF PLENTY IS NOT A PROBLEM OF
PRODUCTION BUT OF DISTRIBUTION
• As important as production choices are choices relating to the distribution of goods
and services.
• On what basis should distribution choices be made?
• Should the decision be based on equality so that everyone receives
the same amount of every good that everyone else does?
• Should people receive a share of the goods and services that is
proportional to their contribution to producing these goods and
services?
• Should the government make the distribution decisions, perhaps
giving higher rations to those most deserving?

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 Economics and Distribution
• On what basis should distribution choices be made?
• Should the decision be based on equality so that everyone receives
the same amount of every good that everyone else does?
• Should people receive a share of the goods and services that is
proportional to their contribution to producing these goods and
services?
• Should the government make the distribution decisions, perhaps
giving higher rations to those most deserving?

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Economics and Distribution

• In a market-based economy
• Choices of distribution & production are
based primarily on prices
• Prices are determined by demand and supply

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DEMAND AND SUPPLY

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Demand and Supply

• Law of Demand
• Price and quantity demanded are negatively
related all other things equal
Demand schedule –
• A table that shows quantities consumers are
willing to buy at alternative prices during a
specified time period

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• A table that shows quantities consumers are willing to buy at alternative
prices during a specified time period is _____________.

•?

• Demand schedule

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Table 1-2: Demand schedule for tutoring services, one week

Table 1-2 Peoples willingness to buy tutoring services where: P = alternative

possible prices of tutoring services Qd (quantity demanded) stands for the
amounts of tutoring that students are willing and able to purchase at these various
prices.
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Table 1-2: Demand schedule for tutoring services, one week

Law of demand: Price and quantity demanded are negatively related, all other
things equal. (When price goes up, quantity demanded goes down, and vise
versa)
People will be willing and able to buy more of a good or service at low prices than
at high prices.
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Demand and Supply

• Demand curve - A graph that shows:

• Quantities consumers are willing to buy
• At alternative prices
• During a specified time period
• All possible combinations of alternative
prices and quantity demanded
• Assuming that all factors except price that
could affect quantity demanded are held
constant

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Q2.

• ________________A graph that shows:

• Quantities consumers are willing to buy
• At alternative prices
• During a specified time period
• All possible combinations of alternative
prices and quantity demanded
• Assuming that all factors except price that
could affect quantity demanded are held
constant

• Demand curve

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Demand schedule and demand curve

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Demand and Supply

• Demand curve
• Downward sloping
• Reflects the law of demand

Law of Demand
Price and quantity demanded are negatively
related all other things equal
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Change in demand

•Caused by changes in
factors affecting the
demand
•Not the price
•New demand schedule
•New demand curve

Demand curve D’ represents larger quantities demanded at each price than does demand
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Demand and Supply

• Increase in demand
• Demand curve - shifts forward (to the right)
• For every price: a higher quantity demanded
• Decrease in demand
• Demand curve - shifts backward (to the left)
• For every price: a smaller quantity demanded

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Demand and Supply

• “There is no free lunch”

• Every choice has an opportunity cost
• Every activity chosen entails another activity given up

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Demand and Supply

• Supply schedule - A table:

• Quantities that suppliers are willing to sell
• At alternative prices
• During a specified time period

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Q3

• ________- A table that shows quantities that suppliers are

willing to sell at alternative prices during a specified time
period
• Supply schedule

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Example of a Supply schedule for tutoring
services, one week

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Demand and Supply

•Law of supply
•There is a positive relationship between
price and quantity supplied. All other
things equal
•It is upward sloping. Price and quantity
supplied increase together.

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Demand and Supply

• Supply curve - A graph:

• Quantities that suppliers are willing to sell
• At alternative prices
• During a specified time period
• Law of supply
• There is a positive relationship between price and
quantity supplied. All other things equal
• It is upward sloping. Price and quantity supplied increase
together.

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Demand and Supply
• Increase in supply
• Supply curve - shifts forward (to the right)
• Decrease in supply
• Supply curve - shifts backward (to the left)

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EQUILIBRIUM

• Equilibrium
• A state of balance
• A point at which quantity demanded equals quantity
supplied
• Intersection of demand and supply
• Market
• Naturally tends to move toward the equilibrium point

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Figure 1-7: Market for tutoring services, one week

Tutors charge $1/hour

Quantity demanded is 100
hours (bargain)

Quantity supplied 20 hours

(little incentive to provide
tutoring)

Shortage of tutoring
services of 80 hours

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The market will clear at point E. At $3, quantity demanded equals quantity supplied
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Table 1-6: Supply and demand for tutoring services,
one week

Figure 1-7

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 Demand and Supply
• Shortage
• Quantity demanded > quantity supplied
• Shortage occur when the market price are below the
equilibrium price (Ex. 3 dollars)
• Students may bid for tutoring services that are available
and in the process price will be bid up.
• 2 things happen as price increase
(Price - pushed up)
• Buyers decrease their quantity demanded
• Sellers increase the quantity supplied
• The process will come to a screeching halt when the
equilibrium is reached (shortage will disappear)
• Rationing function of price
• Price movement rations away a shortage
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Figure 1-8: Response to a shortage of tutoring services

At a price of $1, quantity demanded exceeds quantity supplied by 80 hours. The 80-hour
shortage will cause price to rise to the equilibrium price of $3.
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Demand and Supply

• Surplus
• Quantity supplied > quantity demanded
• Occurs only when the price > market level
• Price - pushed down
• Increase in quantity demanded
• Decrease in quantity supplied
• The surplus will disappear
• Rationing function of price
• Falling price rations away a surplus

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FIGURE 1-9: Response to a surplus of tutoring services

At a price of $5, quantity supplied exceeds quantity demanded by 80 hours. This 80-hour
surplus will cause price to fall toAnyone
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SHIFT IN DEMAND AND SUPPLY

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Demand and Supply

• An increase in demand
• Because of an increase in income
• Demand curve shifts forward (to the right)
• New equilibrium:
• Increase in price
• Increase in quantity
• Note: supply curve will not shift

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Demand and Supply

• A decrease in demand
• Because of a decrease in income
• Demand curve shifts backward (to the left)
• New equilibrium:
• Decrease in price
• Decrease in quantity

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FACTORS THAT CAUSE REAL-WORLD
DEMAND AND SUPPLY CURVES TO SHIFT

• Factors that cause real-world demand curves to shift

• Changes in the number of consumers who wish to
purchase the product changes
• Changes in the taste of the consumers in the market
• Changes in the prices of complements or substitutes
• Changes in consumers’ incomes
• Changes in consumers’ expectations about a product’s
future price or availability

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Demand and Supply

• Substitute relationships
• Occur when the consumer substitutes one good for the other good
• E.g., butter and margarine; tea and coffee
• Complements
• The opposite of substitutes
• If the consumer uses more of one good, he or she will also use more
of the other
• E.g., digital cameras and memory cards
• pan cakes and maple syrup

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Factors that cause real world supply curves to
shift
• Changes in the number of sellers
• Changes in the prices of resources used to produce the product
• Changes in the technology used to produce the product.
• Changes in the prices of other products that could be produced with
the same resources
• Change in government taxes or subsidies.
• Changes in sellers’ expectations about the products’ future price

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Demand and Supply

• Step-by-step procedure for the preparation of graphs – cases 1 -4.

1. Graph the particular market in equilibrium
• Label vertical axis (P)
• Label horizontal axis (quantity axis) (Q)
2. Consider the situation
• Determine whether demand or supply curve shifts
• Increase or decrease?
• Shift curve forwards or backwards

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Demand and Supply

• Step-by-step procedure
3. Find the new point of equilibrium
• Label the new equilibrium price and quantity along their
respective axis
4. Compare the new quantity with the old quantity and the new
price with the old price

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Figure 1-13: Newspaper headlines: demand and supply

Rising costs of producing cars causes their New Harry Potter book causes increased
prices to rise. demand for Harry Potter toys, thereby raising
their
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Figure 1-13: Newspaper headlines: demand and supply

Boycott of chocolate decreases demand for Great weather causes an increase in the
chocolate, causing chocolate prices to fall. supply of pumpkins, which causes a decrease
inandtheir
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 MARKET FAILURES

Market failure is the economic situation

defined by an inefficient distribution of
goods and services in the free market.
Furthermore, the individual incentives for
rational behavior do not lead to rational
outcomes for the group.

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MARKET FAILURES CAN BE CAUSED BY:

• Lack of information, market control, public goods, and externalities.

• monopolies, inefficiencies in production and allocation, incomplete
information, and inequality.
• Externality, a term used in economics, refers to the costs incurred or
the benefits received by a third party, wherein such a third party
does not have control over the generation of the costs or benefits.

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Efficiency and Equity
• High prices encourage frugality and careful choices
among competing goods.
• Goods and services are allocated to those most willing to
pay, Thus, the market is an effective allocative device.
• High prices also encourage producers to offer more for
sale.
• Without prices, products might go to people who do not
strongly desire them and thus be wasted.
• In the market, prices ration away shortages and surpluses
suggesting that the marketplace is very efficient (using
resources in such a way as to maximize the desired
output) as a means of allocation and distribution.
• But the distribution of goods and services may not be
equitable (Fair)
• The market place
• Is often efficient, but not necessarily equitable
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Equity is a value-laden concept.

The market is often efficient, but not necessarily equitable

Efficient - (especially of a system or machine) achieving maximum

productivity with minimum wasted effort or expense.

Equity –
Equity in economics is defined as process to be fair in economy which can
range from concept of taxation to welfare in the economy and it also
means how the income and opportunity among people is evenly
distributed.
https://www.wallstreetmojo.com/equity-in-economics/

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 A Glimpse of the Future

• ECONOMIC SPILLOVER
• Economic Spillovers occur when some costs (or benefit)
related to production or consumption “spills over “onto
people not involved in the production or consumption of
the good.
Spillovers are costs or benefits of private market
activity shifted onto society at large (also called an
externality)
Ex. Pollution
Education – a spillover benefit
Beauty of a garden in a company – positive spillover
Neither economic efficiency nor equity occurs when
spillovers exits.

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A Glimpse of the Future

• ISSUES:
• Inequity`- Marketplace is not
necessarily equitable
• Discrimination
• Poverty
• Inequality of income distribution

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