Module H4 Session 1 Guidance for Trainers
Module H4 Session 1 Guidance for Trainers
Discussions
Discussion 1
The students should examine difference points on the curve so that they see that as price
falls, people demand more (quantity) because it is cheaper, and vice versa. It helps to look
at specific points along the curve, particularly towards the ends of the curve.
Then they should consider the shape of the curve. This is frequently NOT a straight line,
but concave in shape because at very high price levels, a fall in price does not stimulate
much more demand for the goods, but as they become cheap, quantity demanded often
rises faster than the fall in price.
Discussion 2
Question What happens to Pe if the factors affecting supply change, so that supply
increases (producers can supply more goods at each price level)?
Answer The supply curve shifts to the right (parallel to its old position), intersecting the
demand curve at a lower price, so Pe falls.
Question What happens to Pe if the factors affecting demand change, so that demand
increases (people want to – and can afford to – buy more at each price level)?
Answer The demand curve shifts to the right, intersecting the supply curve at a higher
price, so Pe rises.
Note – the students should be able to work out the answers for themselves by drawing
lines on the graph entitled ‘supply and demand for maize’.
Discussion 3
Q. Is Pe the same as the market price? A. No, it is the equilibrium or market-clearing price the price at which sellers can sell all they want, and buyers can buy all they want (a
theoretical concept). The market price could be very different! There is much debate
SADC Course in Statistics
Module H4 Session 1 Guidance – Page 1
Module H4 Session 1 Guidance for Trainers
among economists about whether market forces lead to market prices eventually moving
towards equilibrium prices, or whether market prices get ‘stuck’ away from Pe.
Q. Is Pe the most efficient price for the economy? A. Not necessarily – but this is a matter
of debate between economists! (See section on Market failure at end of Session 1).
Q. Does Pe imply a fair or just distribution of resources (equity)? A. Pe tells us nothing
about equity. It would be just as possible to achieve Pe in a society with an unequal
distribution of income (where wealthy people’s demand has strong weight and poor
people’s demand counts for little) as in a society with a relatively equal income distribution.
Discussion 4
Q. What is the ‘price’ of money? A. The interest rate.
Q. What happens to the interest rate if supply of money increases? A. It falls.
Discussion 5
No guidance needed.
Discussion 6
Note that it is worth spending some time on these points, because many economic models
are based on the assumption of perfect competition and free, efficient markets. If these
assumptions do not hold in a given economy, we must tread carefully: standard approaches
to economic analysis may not be applicable.
Exercises
Exercise 1
‘Opportunity cost’ means the cost in terms of giving up one thing in order to produce
another. The opportunity cost of producing 45,000 more pairs of shoes by moving from C
to B is roughly 22,000 pairs of trousers which will no longer be produced. Opportunity
cost is a very important concept in economics. The fact that the production possibility
frontier is concave means that the opportunity cost of production rises as more of a
SADC Course in Statistics
Module H4 Session 1 Guidance – Page 2
Module H4 Session 1 Guidance for Trainers
particular good is produced – for instance, if we are at B instead of C and decide we want
to produce around 45,000 more pairs of shoes, we have to give up 75,000 pairs of trousers!
Exercise 2
The graph should look like this (fictitious example for Botswana):
Supply and demand for foreign exchange
Exchange rate:
Botswana Pula
per US$
Supply
BWP11:US$1
BWP8:US$1
Demand 2
Demand 1
Million US$ per month
The ‘price’ of foreign exchange is the exchange rate. If demand for foreign exchange
increases, the demand curve shifts to the right, crossing the supply curve at a higher
exchange rate (e.g. moving from 8 to 11 BWP per US$). Foreign exchange becomes more
expensive: you have to pay more local currency to obtain it.
Note that it is also valid to draw the graph the other way around, i.e. US$ per BWP on the
vertical axis, and Million BWP per month on the horizontal axis.
Exercise 3
A word of warning: If you do not have data on quantities of food consumed, you might be
tempted to use expenditure on particular foods as a proxy for quantities consumed. This
would only work if prices remain unchanged over the period of time, because expenditure
= quantity x price. If prices remain unchanged, then change in quantity consumed will be
the same as change in expenditure – but prices seldom remain unchanged, so this approach
is not recommended.
SADC Course in Statistics
Module H4 Session 1 Guidance – Page 3
Module H4 Session 1 Guidance for Trainers
Note for trainers on demand elasticity
It should be stressed that elasticity calculations involve a relationship between percentage
change in quantity demanded and percentage change in another factor. This can be written
mathematically – in the case of price elasticity – as:
Q
P

Q
P
… where Q = quantity, P = price and Δ is the delta sign meaning ‘change’.
Here we have simplified the topic to explain the concepts, but you may want to explore
further. If so, you will need to take care! In particular, there is often confusion about
graphical representations. On a straight line demand curve, price elasticity varies along the curve
from infinity to zero, which seems strange! At the centre of the straight line, there is unitary
elasticity. By contrast, a concave demand curve might have unitary elasticity all along the
curve. It is also possible to have a straight-vertical-line demand curve (perfectly inelastic),
and a straight-horizontal-line demand curve (perfectly elastic). For further information, see
economics text books such as:
Anderton, A.G. (2000) Economics, 3rd edn. Causeway Press, Ormskirk, Lancashire, UK.
Begg, D.K.H, Fischer, S. and Dornbusch, R. (2007) Economics, 8th edn. McGraw Hill,
Maidenhead, Berkshire, UK.
SADC Course in Statistics
Module H4 Session 1 Guidance – Page 4