CONSUMPTION, DEMAND AND UTILITY THEORY
(Exam-Ready Study Guide)
1. The Economic Problem (Why Economics Exists)
The fundamental reason economics exists is scarcity.
Human wants are unlimited, but resources are limited.
Because of this, every society must answer three fundamental economic questions:
1. What to Produce
The economy must decide:
• Which goods and services to produce
• How much of each good to produce
Producing more of one good means producing less of another.
This creates opportunity cost.
Opportunity Cost
Opportunity cost is:
The value of the next best alternative sacrificed when a choice is made.
Example:
A farmer has land and must choose between:
• Growing maize
• Raising cattle
If the farmer chooses cattle, then the profit from maize is the opportunity cost.
2. How to Produce
Goods can be produced using different combinations of factors of production:
• Land
• Labour
• Capital
• Entrepreneurship
Different production methods exist.
Labour-Intensive Production
Uses more labour and fewer machines.
Example: small-scale farming using manual labour.
Capital-Intensive Production
Uses more machinery and technology.
Example: large commercial farms using tractors and irrigation systems.
Goal:
Efficient production = lowest cost per unit
, 3. Who Gets the Goods
The economy must decide how goods and services are distributed.
Distribution may depend on:
• Equality
• Income
• Effort
• Need
Example:
In a market economy, goods are usually distributed based on ability to pay.
2. Specialisation and Trade
Specialisation means that different regions focus on producing goods they are best suited to
produce.
Countries and regions then trade with each other.
Example in South Africa:
Region Specialised Product
North-West Red meat
Western Cape Apples
KwaZulu-Natal Sugar cane
Benefits of specialisation:
• increases total production
• improves efficiency
• raises economic welfare
3. Demand
Demand refers to the relationship between price and quantity demanded.
Definition
Demand is:
The willingness and ability of consumers to buy a good at different prices during a given time
period.
Important assumption:
Ceteris paribus = all other factors held constant
Law of Demand
The law of demand states:
When price increases → quantity demanded decreases
When price decreases → quantity demanded increases
This creates the downward-sloping demand curve.
(Exam-Ready Study Guide)
1. The Economic Problem (Why Economics Exists)
The fundamental reason economics exists is scarcity.
Human wants are unlimited, but resources are limited.
Because of this, every society must answer three fundamental economic questions:
1. What to Produce
The economy must decide:
• Which goods and services to produce
• How much of each good to produce
Producing more of one good means producing less of another.
This creates opportunity cost.
Opportunity Cost
Opportunity cost is:
The value of the next best alternative sacrificed when a choice is made.
Example:
A farmer has land and must choose between:
• Growing maize
• Raising cattle
If the farmer chooses cattle, then the profit from maize is the opportunity cost.
2. How to Produce
Goods can be produced using different combinations of factors of production:
• Land
• Labour
• Capital
• Entrepreneurship
Different production methods exist.
Labour-Intensive Production
Uses more labour and fewer machines.
Example: small-scale farming using manual labour.
Capital-Intensive Production
Uses more machinery and technology.
Example: large commercial farms using tractors and irrigation systems.
Goal:
Efficient production = lowest cost per unit
, 3. Who Gets the Goods
The economy must decide how goods and services are distributed.
Distribution may depend on:
• Equality
• Income
• Effort
• Need
Example:
In a market economy, goods are usually distributed based on ability to pay.
2. Specialisation and Trade
Specialisation means that different regions focus on producing goods they are best suited to
produce.
Countries and regions then trade with each other.
Example in South Africa:
Region Specialised Product
North-West Red meat
Western Cape Apples
KwaZulu-Natal Sugar cane
Benefits of specialisation:
• increases total production
• improves efficiency
• raises economic welfare
3. Demand
Demand refers to the relationship between price and quantity demanded.
Definition
Demand is:
The willingness and ability of consumers to buy a good at different prices during a given time
period.
Important assumption:
Ceteris paribus = all other factors held constant
Law of Demand
The law of demand states:
When price increases → quantity demanded decreases
When price decreases → quantity demanded increases
This creates the downward-sloping demand curve.
