Economics Lesson Note for SS2 First Term

Economics Topics for Senior Secondary School – Edudelight.com

SCHEME OF WORK FOR ECONOMICS S.S.S. TWO FIRST TERM

WEEKSTOPICS
1Basic tools for Economics Analysis; measures of central tendency (mean, median, mode, using grouped data)
2Measures of dispersion; range, variance, mean deviation, standard deviation
3Theory of consumer behavior; concept of utility (Tu, Au, & Mu(, law of diminishing marginal utility
4Demand and supply; change in quantity demanded, Demand and supply; change in quantity supplied, change in supply, effects of changes in demand and supply on equilibrium price and quantity.
5Elasticity of supply; meaning, types and measurement of elasticity of supply. (Graphical illustration), importance of elasticity of supply to consumers, producers and government.
6Elasticity of Demand; meaning, types and measurement of elasticity of demand. (Graphical illustration), importance of elasticity of demand to consumers, producers and government.
7Income elasticity of demand; definition, types (positive and negative), measurement of Income elasticity of demand
8Cross elasticity of demand, definition, measurement of cross elasticity of demand
9Price control / legislation; meaning, types (minimum and maximum)
10Rationing and hoarding; meaning of Rationing and hoarding, effects of Rationing and hoarding, black markets and its effects.

WEEK: ONE

TOPICS: MEASURES OF CENTRAL TENDENCY

Arithmetic mean

The arithmetic mean, also popularly referred to as the “mean” is the average of a series of figures or values. The arithmetic mean can also be prepared for grouped data. In this case, the class mark (mid-point) of the individual class interical is used for the X – column

Formula used is

Arithmetic Mean

Example

Calculate the mean of the following marks scored by students in an econo

20, 12, 18.

Use a class interval of 0-9, 10-19, 20-29, e.t.c.

Solution

Frequency table for marks scored by students in Economics Examination

Scores (grouping)Class marks (X)TallyFrequency (F)FX
0-94.5III313.5
10-1914.5     IIII   IIII9130.5
20-2924.5   IIII6147
30-3934.5      IIII5172.5
40-4944.5IIII4178
50-5954.5II2109
60-6964.5I164.5

The Median

The median is defined as an average, which is the middle value when figures are arranged in order of magnitude.

When the items are large, it may be necessary to use other methods other than arranging in order of magnitude to calculate the median. This will require that a frequency table be prepared.

Hence, from a frequency distribution, the median is calculated thus;

      THE MEDIAN

The median is defined as an average, which is the middle value when figures are arranged in order of magnitude.

When the items are large, it may be necessary to use other methods other than arranging in order of magnitude to calculate the median.

This will require that a frequency table be prepared.

Hence, from a frequency distribution the median is calculated this;

 th   Member for odd number of items i.e N is odd

Median =  th  +  th  

                                    2

Member for even number of items i.e N is even.  Where N is the summation of all the frequency and this is the terminal cumulative frequency.

Example 1

Use the information in the table: Calculate the median age of ssII students

Age Distribution of SSII Students

Age (yrs)681011121314
Frequency510387108

Solutions

Cumulative frequency for age Distribution of SSII Students

Age Distribution of SSII Students

Age (yrs)681011121314
No of students (Frequency)510387108

Median age =th   =    = 26th number in CF.

Example 2

The data in table represents the marks scored by Economics students in NECO examination.  Calculate the median score.

Marks scored by Economics students in

Marks %12182430364048
Frequency611081234

Solution

Cumulative frequency of table for Marks scored by Economics students in NECO Examination

Marks %12182430364048
Frequency6110181234
Cumulative Frequency671725374044

From the table, there are 44 members as indicated by the terminal (last) cumulative frequency. Since this 44 is even, the median score will be;

=   +  th      

                    2

Median score =      th  +  th      

                                                2

The 22nd member is 30 marks

The 23rd member is 30 marks

Median score   =    = 30 marks

Median score = 30

Mode for Grouped Data

For a grouped data the formula is; x = Li +  x c

 = Frequency of the modal class minus frequency of the class immediately before the modal class

 = Frequency of the modal class minus frequency of the class immediately after the modal class

Li = Lower class boundary of modal class

C= size of modal class interval.

Example

The table below shows the distribution of the weight of students in a certain school.

Weight (kg)40-4445-4950-5455-5960-6465-69
Frequency41115938

Obtain the modal of the weight.

Class Boundary                  Frequency

39.5 – 44.5                           4

44.5 – 49.5                           11

49.5 – 54.5                            15

54.5 – 59.5                           9

59.5 – 64.5                           3

64.5 – 69.5                           8

From the table, the modal class has frequency of 15.  The class boundaries are 49.5 -54.5. Therefore, the lower boundary of the modal class is 15, while the frequency is before and after it are 11 and 9 respectively.

Li = 49.5

 = 15 – 11 = 4

 = 15 – 9 = 6

C = 44.5 – 39.5 = 5

Mode = Li +  x c

= 49.5 +   x 5

= 49. 5 + (0.4) 5

= 49.5 + 2

= 51.5kg

Questions

Marks (kg)55-5960-6465-6970-7475-7980-8485-8990-9495–99100-104
Frequency26923251310651
  1. State the modal class
  2. Estimate the mode of the distribution, correct to one decimal place

2.        The frequency table below represents the number of oranges picked by 20 students.

Calculate the median of the table.

X012345 
F256421 

Economics Topics for Senior Secondary School – Edudelight.com

Week 2

MEASURES OF DISPERSION

The measures of dispersion is also called measure of variation.

The Range

The range is the simplest and most straight forward measure of dispersion.  It is the difference between the maximum values in the date.

Example

Find the range in the table below

Marks6-1011-1516-2021-2526-30 
Frequency35264 

Solution

The maximum (highest) score = 30

The minimum (lowest) score = 6

= 24.

Mean Deviation

Examples:

Calculate the mean deviation for the set of data in table below

Age of SS2 students that won scholarship

 8101418  
 4358  

Solution

Age of SS2 students that won scholarship

Age (x)FrequencyFXX-F(X-)
84325.823.2
103303.811.4
145700.21.0
1881444.233.4
 20276 f = (X-) = 69.2

Mean =    =      = 13.8

M.D  = 

            =  

            =  3.49

VARIANCE AND STANDARD DEVIATION

Example:  The marks scored by Economics Students in their NECO Examination are presented in the table below.  Calculate the variance and standard deviation.

Marks102030405060
No of students (frequency)86121864

Solution

Mark (x)FrequencyFX(X-)(X-)2f(X-)2
1088023.7561.694493.52
20612013.7187.691126.14
30123603.713.69164.28
40187206.339.69714.42
50630016.3265.691594.14
60424026.3691.692766.76
 541820  10859.26

X =    =    = 33.7

  1. Variance = =   =            = 201.1
  2. Standard Deviation =             =

= 14.18

= 14.2

Questions

Marks scored by some  students in an economics test are;

6          9          5          7          6          7          5          8          9          5

8          9          5          7          5          8          7          8          6          5

6          5          7          6          9          9          7          8          8          7

 8         9          8          5          8          9          5          6          9          7

8          5          6          9          8          6          7          6          9          5

2.        Find the range of the grouped frequency table below.

X1-1011-2021-3031-4041-5051-6061-7071-80
F469129541

Economics Topics for Senior Secondary School – Edudelight.com

WEEK 3

The Theory of Consumer Behavior

The theory of consumer behavior is primarily concerned with how the consumer or household tries to satisfy his or her wants by dividing his or her limited amount of income between the various commodities that gives him or her the amount of satisfaction.

The Concepts of Utility

The term utility refers to the amount of satisfaction derived from the consumption of a commodity at a particular time.

Types of Utility

  1. Form Utility:  This is the transformation of commodity from the consumption of a commodity at a particular time.
  2. Place Utility:  Place utility involves the changing of location of a commodity from one geographical area where it has little utility to another area where its utility is higher.
  3. Time Utility:  This is the ability of a commodity or service to satisfy a consumer’s wants at a particular time.

Concepts of total utility, marginal utility and average utility

  1. Total Utility:  this refers to the total amount of satisfaction derived from all the units of a commodity consumed at a particular time.

Tu

       0

                                       units of commodity consumed

            Total Utility Curve

  • Marginal Utility:  This refers to the additional satisfaction derived by consuming an extra unit of a commodity.

MU  =      =        =                      

Where    =  Change in total utility

                 =  Change in quantity

                =  New level of total utility

                    =  Old Level of total utility

                        =  New level of quantity

                       =  Old level of quantity

            0                                          Mu            Units of commodity consumed

  • Average Utility:  this is the amount of satisfaction derived by a consumer per unit of a commodity consumed.

=

Utility                                     AU

   0                                          Units of Commodity consumed

Relationship between total utility and marginal utility schedule of Total, marginal and average utility.

Quantity of Goods consumedTotal UtilityMarginal UtilityAverage Utility
000
1151515
2251012.5
332710.7
43869.5
54138.2
64327.2
74306.1
842-15.3

Both marginal utility and total utility are related

When a consumer increases consumption of a commodity total utility rises to a maximum and then decline.  On the other hand, the marginal utility of any commodity decreases as more is consumed.  When total utility increases to a maximum point then marginal utility is zero.

As total utility continued to decrease, marginal utility becomes negative.  The table shows the relationship between both concepts.

At quantity seven, total utility is zero.  When total utility decrease at 8th unit, MU is negative.

The fact that total utility increases at a decreasing rate is shown by the decreasing steps of marginal utility curve.

            45

             40

             35                                                                  TU    

            30

             25     

             20     

             15

             10     

               5

                          0

               5      1          2          3          4          5          6          7          8

Units of Total Marginal Utility

Schedule of Total and Marginal Utility

The Law of Diminishing Marginal Utility

The law of diminishing marginal utility states that the amount of satisfaction (or utility) an individual derives as his consumption of that commodity increases as a result of continuous consumption of the same commodity.

Utility Maximization

Utility Maximization for one product

For one product, a consumer maximizes utility when the marginal utility of that commodity equals the price of the commodity.  This is represented mathematically thus,  MUx = Px

Utility maximization of many products

In case of many products the consumer will be at equilibrium where there is equality of the ratio of the marginal utility of the individual commodity to their twice.

The utility maximization concept requires that the ration of marginal utilities of the last units of the commodities should be equal to the ration of prices.

               =     =  

Derivation of demand curve from utility theory

Derivation of demand is based on the law of diminishing marginal utility.  Marginal utility is key concept underlying demand.

It slopes downward from left to right like the demand curve.

A consumer’s demand for any product is a function of marginal utility. Marginal utility slopes that is more of a commodity is consumed, the satisfaction derived declines.

Derivation of Demand curve from marginal utility curve.

            1

            55

            50

            45

            40                                           Marginal Utility Curves

            35

            30

            25

            20

            15      

            10

              5                                                                                                                         MUx

               0      1          2          3          4          5          6          7          8          9          10

                                    Quantity Consumed

            50

            45

            40                                           Demand Curve

            35

            30

            25

            20

            15      

            10

              5

               0      1          2          3          4          5          6          7          8          9          10  x

                                                Quantity Demand

WEEK 4

CHANGE IN QUANTITY DEMANDED

A change in quantity demanded is a movement along a/single demand curve.

The main determinant of a change in the quantity of a commodity demanded is the price of the commodity under consideration.  The quantity of a commodity demanded changes with price.

More is purchased at a lower price than at a higher price.

A change in the quantity demanded is of two types.

1.        Increase in the quantity demanded: There is an increase in the quantity demanded if the quantity purchased increases as a result of a decrease in the price of the commodity.

                                    D

             N50

            N20

                                                                              D

                 0                        30                45     Quantity demanded

Increase in the quantity demanded

2.        Decrease in the quantity demanded: There is a decrease in the quantity demanded if the quantity of the commodity purchase decreases as a result of an increase in price.

                                    D

             N30

                                                                        Decrease in the quantity demanded

            N10

                                                                              D

                 0                        20                50     Quantity demanded

Changes in Demand or Shifts in Demand curve

This is a complete shift of demand curve to the right or left.

There is a change in demand of the demand curve shifts to an entirely new position.

This is a completely new demand Schedule and demand curve, showing that at the old price, more or less of the commodity would be purchased.

A shift or change in demand is determined by other factors affecting demand except the price of the commodity e.g. change in taste and fashion, changes in population size, etc.

A change in demand is of two types:

(a)       Increase in Demand: If there is an increase in demand, the demand curve will shift to the right indicating that at the old price more of the commodity will be purchased.

          D0                      D1

N80

    0                                           D0                          D1

                              35                            75     Quantity demanded

Rightward shift (Increase in Demand)    

(b)       Decrease in Demand: if there is a decrease in demand, the demand curve will shift to the left, showing that at the old price less of the commodity is being purchased.    

  D1                      D0

N60                              Leftward shift (decrease) in demand

    0                                           D1                          D0

                              40                            65     Quantity demanded

Change in Quantity supplied.

A change in the quantity supplied of a commodity means a movement along a particular supply curve.

If is determined by the price of the commodity.

A change in quantity supplied is of two types;

1.        Decrease in the quantity supplied: The quantity supplied decreases as a result of a decrease in the price of the commodity.

                                                                        S

40

20

              S

                                    50                   100      Quantity supplied

Decrease in the quantity supplied

2.        Increase in Quantity supplied: With an increase in the quantity supplied, the quantity offered for sale increase as a result of an increase in the price of the commodity.

                                                            S

60

30

            S

    0                        40               80    Quantity supplied

Increase in the quantity supplied.

SHIFT OR CHANGE IN SUPPLY

A Change in supply brings about a shift in the supply curve either to the right or to the left.

With change in supply, the supply curve shifts to an entirely new position indicating that at each of the old prices more or less of the commodity will be supplied.  It is determined by the factors affecting supply other than the price of the commodity.

A change in supply is also of two types;

1.        Decrease in supply: With a decrease in supply, the supply curve will shift to the left, showing that at each of the old prices, less of the commodity will be supplied.

                                                       S1            S2

                 70

                           S1                      S2

                    0                  90                           120      Quantity supplied

Leftward shift (decrease) in supply

2.        Increase in Supply: With an increase in supply the supply curve shifts to the right indicating that at each of the former prices, more of the commodity will be supplied.

                                    S                      S

50

                         30                   80                             Quantity supplied

Rightward Shift (Increase) in supply

Questions

1.        Discuss the factors that should innovate a producer to supply more of a commodity.

2.        Differentiate with the aid of diagram between change in supply and change in quantity supplied.

WEEK 5

Elasticity of Demand

Elasticity of demand can be defined as the degree of responsiveness of quantity demanded to little changes in the price of a commodity, or to change in the income or taste of the consumer, or to change in the prices of other commodities.

Price Elasticity of Demand

Price elasticity of demand refers to the degree of responsiveness of demand to little changes in prices of goods and services.

Types of Price Elasticity

1.        Elastic demand: Demand is elastic if a little change in price brings about a greater change in the quantity of a commodity demanded.

                      D

            P1

            P2

                                                                                        D

                                                                                                E > 1

            0                      Q2              Q1

Elastic or fairly Elastic Demand curve.

2.        Inelastic Demand: Demand is inelastic if a larger change in price of commodities leads to little or no change in the quantity demanded.

                                                            E > 1

0                          Q1      Q2    Quantity demanded

Inelastic demand

3.        Unity or Unitary Elasticity of Demand: Demand is unitary if a change in price leads to an equal change in the quantity of goods demanded

                            D

       P1                                                                        E = 1

      P2

                                                                                    D

      0

                              Q1                     Q2           Quantity demanded

Unity or Unitary Elastic Demand.

4.        Perfectly Elastic Demand: In this curve any slight increase in price will make consumers stop buying the commodity at all, while a slight decrease in price will make the consumers purchase all the quantity of that commodity available.

                         P        E = Infinity                                                                D

                           0                                                                                          Quantity demanded

                        Perfectly Elastic demand

5.        Perfectly Inelastic Demand: Demand is said to be perfectly inelastic of a change in price has no effect on the quantity of goods demanded.

                                    D

         0                         Q                                             Quantity demanded.

Perfectly Inelastic Demand

Measurement of elasticity of Demand

Elasticity of demand can be measured or determined by calculating the elasticity of demand co-efficient.  The formula used in calculating the elasticity of demand is;

Co-efficient of price elasticity of demand =

Note:

If the co-efficient is more than 1, demand is elastic

If the co-efficient is less than 1, demand is inelastic

If the co-efficient is 1, elasticity of demand is unitary.

Example:

Given the figure below;

Price of commodity A in January = N5.00

Price of commodity A in February = N7. 00

Quantity of A bought in January = 20kg

Quantity of A bought in February = 16kg

  1. Calculate
  2. Percentage change in quantity bought (%)
  3. Co-efficient of price elasticity of demand
  4. From your answer, is the demand elastic or inelastic.
  5. How do you know this?

Commodity A

MonthPriceQuantity demanded
January5.0020kg
February7.0016kg 
  • Percentage change in quantity demanded =  x    =  x    =  20%

ii.         Percentage change in price  x    =  x    = x   =40%

iii.        Co-efficient of price elasticity E.D =   =  =  or 0.5 E.D  = 0.5

b.i.      Demand is inelastic

ii.         0.5 is less than one. Hence, the co-efficient of price elasticity of demand is inelastic.

Question

Given the following information; price of bread in November = N10

Price of bread in December = N14

Quantity bought in November N40

Quantity bought in December = N36

  1. Calculate percentage change in price
  2. Calculate percentage on quantity bought
  3. Calculate the co-efficient of price elasticity of demand.
  4. What type of demand elasticity is this?
  5. How did you know this?

WEEK 6         Elasticity of supply

Elasticity of supply measures the degree of responsiveness of the quantity of a commodity offered for sale to a little change in the price of that commodity or to a change in the cost of production.

Types of Elasticity of Supply

  1. Elastic Supply: Supply is elastic if a little change in the price of a commodity or cost of production brings about a more than proportional change in the quantity supplied.

S

          P1                                                                                                                                                                     P2                                                                                                                                                                                          

                        S

               0                  Q2       Q1      Quantity supplied

Fairly Elastic supply curve

  • Inelastic Supply: Supply is inelastic if a little change in the price or the cost of production brings about a less than the proportional change in the quantity of the commodity supplied.

P1

                                                E < 1

Fairly inelastic supply curve

  • Unitary Elastic Supply: Elasticity of supply is unitary (or unity) if a change in price or cost of production brings about a proportional change in the quantity of the commodity sold.

P1

         P2

Unitary Elastic Supply curve

  • Perfectly Elastic supply or Infinitely Elastic Supply: a little increase in the price of the commodity would result in the supply of all the stock of that commodity available and vice versa.

P                                                          s                                                                      E =

    0                                                                 Quantity supplied

Perfectly Elastic supply curve

  • Perfectly Inelastic Supply: This indicates that changes in price do not bring any change in the quantity supplied.

s

                                                E = 0

      0                        Q                       Quantity supplied

Perfectly Inelastic supply curve.

Measurement of Elasticity of Supply

The elasticity of supply can be determined or measured by calculating the co-efficient of the elasticity of supply.

Co-efficient of price elasticity of supply =  Negative signs are ignored.

Example

Price (N)Quantity supplied
410
612
  1. Calculate co-efficient of elasticity of supply
  2. What type of supply is this
  3. How do you know

Solution

Change in quantity supplied

 x  =  x

=  x  = 20%

Change in price.

 x  =   x  = 50%

  1. Co-efficient of elasticity of supply   = =  = 0.40
  2. Inelastic supply
  3. Supply is inelastic because the co-efficient of elasticity of supply is less than 1

MEASUREMENT OF ELASTICITY OF DEMAND

Elasticity of demand can be measured or determined by calculating the elasticity of demand co-efficient. The co-efficient of elasticity of demand can be calculated using the following formulae.

  1. Co – efficient of price elasticity demand = %change in quantity demand /% change in price.
  2. C o-efficient of income elasticity of demand = %change in quantity demand /% change in income.
  3. Co-efficient of cross elasticity of demand =  %change in quantity of commodity X demanded /% change in price of commodity.

\

WEEK 7           INCOME ELASTICITY OF DEMAND

Income elasticity of demand refers to the degree of responsiveness of demand to changes in income of consumers. It measures how changes in income of consumers will affect the quantity of commodities demanded by such consumers. Income elasticity of demand is negative for inferior goods sine an increase in income will leads to a decreased demand for them. Income elasticity of demand is measured thus, co-efficient of income elasticity of demand = %change in quantity demand /% change in income.

TYPES OF INCOME ELASTICITY OF DEMAND

  1. Positive income Elasticity of demand. Income elasticity is said to be positive if an increase in income of consumers leads to increase in the quantity demand. This applies to normal commodities.
  2. Negative income Elasticity of Demand: if an increase in income of consumers leads to decrease in quantity of goods and services demand, income elasticity is said to be negative. In such a situation, demand falls as income of consumers rises. This applicable to inferior goods

Example: a weekly income of a clerk was increased from #100 to #125 as a result of his promotion in the office. He is able to purchase 300 loaves of bread instead of 200 per week. (1)  Calculate the co-efficient of his income elasticity of demand. (2) is the demand elastic? (3) what kind of food is bread to the consumers?

Solution

Income                                         Quantity demand

   Old                             New      Old (leaves) New (leaves)

100                 125                                  200                   300

  1. Percentage change in quantity demand = New Qd – Old /old Qd X 100

=300 – 200 X 100

                200

= 50%

  • Percentage changes in income = new income – old income X 100

Old income

                = 125 – 100 X 100

                                100

                = 2500/100

=  25%

Income elasticity = %           Qd/%           income

= 50%/25%

=2.0

The co-efficient of income elasticity = 2

  • The co-efficient of elasticity of demand is elastic. It is greater than 1
  • The kind of food bread is to the consumers in normal good, because as the income increase, his demand for bread also increases thus, Indicating a positive type of income elasticity of demand.

WEEK 8   CROSS ELASTICITY OF DEMAND

Cross elasticity of demand refers to the degree of responsiveness of demand for a commodity to change in the price of another commodity. In other words, cross elasticity of demands refers to the proportionate change in the quantity of goods (X) demand over the proportionate change in the price of another goods(Y) demanded, that as it measures how changes in the price of a commodity will affect the demand of another commodity. Cross elasticity of demand applies mainly if this is an increase in goods that have close substitutes as well as complementary goods. For example, demand for Elephant/ detergent will increase if there is an increase in the price of OMO.

MEASUREMENT OF CROSS ELASTICITY OF DEMAND

Cross elasticity of demand can be measured or calculated by using the co-efficient of cross elasticity of demand. Thus, co-efficient of cross elasticity of demand=

 Percentage change in quantity demand of commodity X /percentage change in price of commodity Y

Income elasticity = %           QX/%          PY

Example: the table below shows the response of quantity demanded of changes in prices of two

  pairs of commodities.

Commodity                  changes in price(#)                commodity         changes in quantity(kg)

                                Original price     new price                                           original quaty.   New quanty.

Maltina                                 50              80                        maltonic                      200                   300

Close up                               50              60                        maclean                       120                  150

  1. Calculate the cross elasticity demand (i) maltaina and ,maltonic (ii) close up and maclean
  2. Are their elasticity elastic or inelastic and state your reasons

Solution:

  • Cross elasticity of demand for maltina and maltonic

Let X = maltonic, y = maltina

Percentage change in quantity demand of maltonic (X) = New Qd – OriginalQd  100/original Qd

300 – 200 X 100

                200

= 100  100/200

= 50%

  • Percentage change in price of maltina = New price – Original price X 100 /original price

    = 80 – 50 X 100 / 50

= 3000/50

=60%

  • Cross elasticity of maltonic and matltina = 50%/60%

= 0.83

  • Crosselasticity of demand for maclean and close up

Let X = maclean                 Y = close up

  1. % change in quantity demand for maclean X = New Qd – OriginalQd  100/original Qd

150 – 120 X 100/120

= 3000/120

= 25%

  •  
  •  

ii.     Percentage change in price of maltina = New price – Original price X 100 /original price

                                60 – 50 X 100/50

                                = 1000/50

                                = 20%

Cross elasticity of demand for maclean and close up = 25%/20%

                                                                                                        = 1.25.

REASONS

  1. The cross elasticity for maltina and maltonic is inelastic because the elasticity, which is 0.83, is less than 1
  2. The cross elasticity for malcean and close up is elastic because the elasticity which is 1.25, is greater than 1

Economics Topics for Senior Secondary School – Edudelight.com

WEEK 9

PRICE LEGISLATION

Price legislation, also known as price control policy, refers to how the government or its agency fixes the price of essential commodities.

Price control was carried out in Nigeria by the price control board.

Types of Price Control Policy

  1. Minimum Price Control Policy
  2. Maximum Price Control Policy

WEEK 10

HOARDING

In economics, hoarding is the practice of obtaining and holding scarce resources, possibly so that they can be sold to customers for profit.

Definition

Under capitalist theory, if this is done so that the resource can be transferred to the customer or improved upon, then it is a standard business practice (e.g. buying up a bunch of wood to turn into a house); however, if the sole intent is to hold an otherwise unavailable resource it is considered hoarding.

Causes

Hoarding behavior may be a common response to fear, whether fear of imminent society-wide danger or simple fear of a shortage of some good. Civil unrest or natural disaster may lead people to collect foodstuffs, water, gasoline, and other essentials which they believe, rightly or wrongly, will soon be in short supply.

Economically speaking, hoarding occurs due to individuals obtaining and holding assets thought to be undervalued and build up reserves of it in hopes to profit or save money later. Examples include times when price controls were in effect as in the case of Germany after World War II, communist countries, or after natural disasters when goods are in such short supply that consumers stockpile (this is sometimes compounded by anti-price gouging laws which prevent the supply and demand curves from functioning). In these cases the hoarding disappears after the price controls are removed.

Example

A feature of hoarding is that it leads to an inefficient distribution of scarce resources, making the scarcity even more of a problem. An example occurs in cities where parking is inadequate. In such a case, businesses may post signs indicating that their lot is for their employees and customers only, and all other vehicles will be towed. This prevents businesses from allowing their parking to overflow into neighboring lots when their capacity is exceeded. Thus, when the capacity is reached at one business, there may be no legal place to park, while there would have been, if hoarding had not occurred. If a single business posted those signs, it would, indeed, improve the parking situation at that business, as they could continue to park at adjacent businesses, while the others could not park in their lot.

Definition of ‘Rationing’

Rationing refers to an artificial control on the distribution of scarce resources, food items, industrial production, etc.

Definition: Rationing refers to an artificial control on the distribution of scarce resources, food items, industrial production, etc. In banking, credit rationing is a situation when banks limit the supply of loans to consumers. In economics, rationing refers to an artificial control of the supply and demand of commodities.

Description: Rationing is done to ensure the proper distribution of resources without any unwanted waste. Banks use credit rationing to control lending beyond the monetary base of the bank. Controlling the prices and demand and supply leads to availability of goods and services for every section of the society.

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