Economics CPA KASNEB notes

1. 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: planned economy, free market economy, mixed economy
– Consumers’ sovereignty and its limitations

2. Demand, supply and determination of equilibrium

– Demand analysis
– Definition
– Law of demand
– Exceptional demand curves
– Individual demand versus market demand
– Factors influencing demand
– 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

3. 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

4. Determination of equilibrium

– 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
– Effect of taxes and subsidies on market equilibrium
– Price controls: Maximum and Minimum price control
– Price decontrol: Effect of Minimum and Maximum price decontrol
– Reasons for price fluctuations in agriculture

5. 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

6. The theory of a firm: The theory of production

– 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 diminishing returns to scale
– Demand and supply of factors of production
– Wage determination: demand and supply for labour
– Wage differential
– Trade unions: functions, effectiveness and challenges
– Transfer earnings and economic rent

7. 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

8. Market structures

– Definition of a market
– Necessary and sufficient conditions for profit maximisation
– Mathematical approach to profit maximisation
– Output, prices and efficiency of: Perfect competition, monopoly, monopolistic competition, oligopolistic competition


9. 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
– Mathematical approach to the determination of equilibrium national income
– Inflationary and deflationary gaps
– The multiplier and accelerator concepts
– Business cycles/cyclical fluctuations

10. Economic growth, economic development and economic 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
– 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

11. Money and banking

– The nature and functions of money
– Demand and supply of money
– Theories of demand for money: The quantity theory, the Keynesian liquidity preference theory

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
– Classical theory of interest rate determination
– 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

12. Inflation and unemployment

– Inflation
– Definition and types of inflation
– Causes of inflation: cost push and demand pull
– Effects of inflation
– Measures to control inflation

13. Unemployment

– Definition of unemployment
– Types and causes of unemployment
– Control measures of unemployment
– Relationship between unemployment and inflation: The Phillips curve

14. Agriculture and Industry

– Role of agriculture in economic development
– Challenges facing agricultural sector in developing countries
– Policies to improve the agricultural sector
– Role of industry in economic development
– Benefits of small scale industries in developing countries
– Obstacles to industrial development in developing countries
– Policies to enhance industrial development in developing countries

15. International trade and finance

– Definition of International trade, advantages and disadvantages
– Theory of absolute advantage and comparative advantage
– World trade organisation (WTO) and concerns of developing countries
– Protection in international trade
– Regional integration organisations, 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
– Foreign Direct Investment: case for and case against FDI
– Foreign Aid: Case for and case against foreign aid
– Bretton Woods financial institutions: International Monetary Fund (IMF) and World Bank
– Foreign debt management: causes, consequences of excessive debt and interventions
– Structural Adjustment Programmes (SAPs) and their impacts on the LDCs

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