This paper is intended to equip the candidate with knowledge, skills to Identify the impact and interaction of economic principles in various situations and apply the principles in decision making




A candidate who passes this paper should be able to:

  • Apply basic mathematical and graphical techniques to analyse economic relationships
  • Apply the knowledge of economics in decision making
  • Analyse economic problems and suggest possible policy related recommendations
  • Apply knowledge of economics in international trade and finance




4.1       Microeconomics


4.1.1    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.


4.1.2    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.   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.   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

4.1.3    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


4.1.4    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     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


4.1.5    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


4.2       Macroeconomics

4.2.1    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


4.2.2    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


4.2.3    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


4.2.4   Inflation and unemployment  Inflation

  • Definition and types of inflation
  • Causes of inflation: cost push and demand pull
  • Effects of inflation
  • Measures to control inflation  Unemployment

  • Definition of unemployment
  • Types and causes of unemployment
  • Control measures of unemployment
  • Relationship between unemployment and inflation: the Phillips curve


4.2.5    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


4.2.6    International trade and finance

  • Definition of International trade, advantages and disadvantages
  • Theory of absolute advantage and comparative advantage
  • World trade organization (WTO) and concerns of developing countries
  • Protection in international trade
  • Regional integration organizations, 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


4.3       Emerging issues and trends



Mudida R.(2009) Modern Economics. Second Edition. Focus Publishers Ltd. Nairobi, Kenya

Mukras. M. S (2010) Elements of Mathematical Economics. Kenya Literature Bureau. Nairobi, Kenya

Several syllabus content from various bodies and learning institutions.



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