Economics: Scarcity, Markets and Elasticity
Scarcity, choice and markets
Economics begins with scarcity: unlimited wants against limited resources, so every choice carries an opportunity cost - the value of the next best alternative forgone. Demand is the quantity consumers will buy at each price; supply is the quantity producers will offer. A change in price causes a movement along the curve; a change in any other determinant (income, tastes, prices of related goods, technology, costs) shifts the curve. Confusing these two is the most common exam trap.
Elasticity
Price elasticity of demand (PED) = percentage change in quantity demanded ÷ percentage change in price. Demand is elastic when |PED| > 1 and inelastic when |PED| < 1. If demand is elastic, a price rise reduces total revenue; if inelastic, a price rise increases it. Candidates often ignore this relationship and assume revenue always rises with price.
Market intervention and macroeconomics
A price ceiling set below equilibrium creates a shortage and black markets; a price floor set above equilibrium creates a surplus. Externalities are third-party costs or benefits not reflected in market prices. Macroeconomics covers GDP, inflation, unemployment and the balance of payments. Demand-pull inflation arises from excess aggregate demand; cost-push inflation from rising input costs.
Worked example
Price rises from Ksh 100 to Ksh 110 (10%) and quantity demanded falls from 500 to 400 (20%). PED = 20 ÷ 10 = 2, so demand is elastic. Total revenue falls from Ksh 50,000 to Ksh 44,000, because the price rise loses more revenue than it gains. Rule of thumb: elastic demand combined with a price rise is a bad combination.