i) DEMAND AND SUPPLY CURVE OF BANANAS

ii) The demand curve was downward slopping due to the fact

that of income effect. When the price of the

commodity increases, consumers buy less because the

purchasing power of their money will have depreciated. If

the price is plotted against quantity demanded, we get a

downward slopping demand curve. For instance, at a lower

price, a given amount of money will buy more goods than at

higher price, for example ,$100 can buy 10 Lamps at $10 each

while the same $100 can buy 20 Lamps at a reduced price of

$5. Thus the purchasing power can be equated to an increase

in real income and hence is seen as the income effect of

price fall.

Furthermore, a fall in the price of a good makes it

relatively cheaper when compared with competing goods. There

will be probably be some switching goods of purchases away

from the now relatively dearer substitute towards the good

whose price has fallen . For instance, in this situation,

price of oranges may fall making it relatively cheaper

compared to bananas. This reason is called the substitution

effect. Thus why the demand curve slopes downward.

Moreover, the is the law of diminishing marginal utility.

Utility is a term referring to satisfaction derived from

consumption of a good or service. A person buys a good

because it yields him satisfaction. As he buys more of a

good , the total utility is not proportionate to the

increase in his consumption. The additional utility derived

from the unit purchased is called marginal utility of a good

and it is generally accepted that marginal utility

diminishes as consumption increases. A person only buys more

of a good as price falls as indicated by the diagram above.

Furthermore, the demand curve slopes downward due to the

effect season. During winter season, the demand of summer

wear fall despite the price effect. This have got a greater

impact in developed countries for instance in Russia.

Moreover, common sense and ordinary observation tells us

that consumers prefer cheaper goods to dearer ones. This is

because price is often an obstacle which deters people from

buying more of a product. Hence, the higher the obstacle,

the less will be bought by consumers.

Despite the above, according to the diagram above, the

supply curve is slopping upwards. This may be due to the

fact that, an increase in the price usually means that

production will become more profitable and existing

procedures are expected to expand their outputs in response

to rising prices and hence more profits. Hence thus why

there is a rise in the supply curve.

In addition, a rise in supply curve may be due to the

reason that in the long run an increase in price (and hence

profits) would tend to encourage new firms to enter the

industry. A number of supply in the market for example if

new firms enter the industry, the supply increases, hence an

increase in the supply curve.

Moreover, changes in the technology or technical knowledge

tend to increase supply of goods and services. According to

Thomas Malthus population is increasing at a geometric rate

that is 2,4,6,8, whilst food production is growing at an

arithmetic rate that is 1,2,3. So there is need to make use

of technological advancement for instance the genetic

modified organisms. These tend to increase production so as

to match with the population increase. An increase in

production will mean an increase in supply for instance

chicken production. So it is in this context that the supply

curve is slopping upwards.

iii) Market disequilibrium results if the demand price is

not equal to the supply price and the quantity demanded is

not equal to the quantity supplied. For market

disequilibrium, the opposing forces that are out of balance

are demand and supply. The result of the imbalances between

these two forces is the existence of a shortage or a

surplus. Both arises due to the inequality between quantity

demanded and quantity supplied.

A shortage exists if the quantity demanded exceeds the

quantity supplied at the current market price. This

condition emerges if the market price is below the

equilibrium price. With a market shortage, buyers are unable

to buy as much of the good as they would like at the current

price. As such, they are motivated to raise the price of the

product.

On the other hand, there exist surplus, this situation

happens if the quantity supplied exceeds the quantity

demanded at the current price. This condition emerges if the

market price is above equilibrium price. With a market

surplus, sellers are unable to sell as much of the goods as

they would like at the current price causing market

flooding. This, however, motivates sellers to lower their

product price.

The market disequilibrium can be illustrated using the

following graphs of a market for bananas .

SHORTAGE

The graph above shows a deficit being created at $2 price.

At $2 the quantity demanded is 30 bananas and the quantity

supplied is 10 bananas. This is a clear indication of

disequilibrium . The buyers cannot buy all that they want,

for instance in this case they want to buy30 bananas, but

only 10 bananas are offered for sale by sellers. This

shortage, motivates sellers to raise prises. This brought

about the concept of the highest bidder.

SURPLUS

The diagram above illustrates how surplus is created at a $6

price. At $6 price, the quantity demanded is 10 whilst the

quantity supplied is 30 . This indicates a market

disequilibrium and not an equilibrium. The sellers are

deprived of selling all they can offer, for example, in this

scenario, the sellers wants to sell 30 bananas, but only 10

bananas are being purchased by the buyers. This is

unfortunate to sellers to an extent that they allow a price

decree.

Despite the above, for the sake of concluding the above

comparison, there exists a price of equilibrium of $4 and

an equilibrium quantity without shortage or surplus of 20

bananas as indicated below.

EQUILIBRIUM DIAGRAM

1) Money is famously analysed in terms of four functions that

is a medium of exchange, a common measure of value (or unit of

account), a standard of value (or standard of deferred

payment) and a store of value.

In terms of defining money, we have it as a combination of

any liquid or cash assets held within a central bank and the

amount of physical currency circulating in the economy. In

United Kingdom the M0 is referred to as Narrow money. M0 is

the most liquid measure of the money supply. It includes cash

or asserts that could quickly be converted into currency. This

measure is known as Narrow money in the sense that it is the

smallest measure of the money supply for example bank notes

and coins.M0, M1 and M2 fall under narrow money.

Money is also understood in the case of broad money. According

to McConnell broad money is a measure of the money supply that

includes more than just physical money such as currency and

coins (also termed narrow money). It generally includes

demands at commercial banks and monies held in easily

accessible accounts. Components of broad money are still very

liquid and non cash components can usually be converted into

cash very easily. One measure of broad money is M3, which

includes currency and coins and deposits in checking accounts,

savings accounts and small time deposits, overnight repos at

commercial banks and none institutional money market accounts.

This is the main measure of the money supply and is the

economic indicator usually used to assess the amount of

liquidity in the economy as it is relatively easy to track

(Subramanian; 2013).

When money is used to intermediate the exchange of goods and

services, it is performing a function, as a medium of

exchange. It there by avoids inefficiencies of a barter

system, such as the ''double coincidence of wants'' problem.

Money's most important usage is as a method for comparing the

values of dissimilar objects. Thus according to Mc Connell

and Brue (2005) ''money is what money is money does,'' which

generally means anything that performs the functions of money

is money.

Furthermore, according to Blanchard (2006) money as a unit of

account (in economics), is a standard numerical monetary unit

of measurement of the market value goods, services and other

transactions. Also known as ''measure'' or the ''standard'' of

relative worth and deferred payment, unit of account is a

necessary prerequisite for the formulation of commercial

agreements that involve debt. To function as a ''unit of

account,'' whatever is being used as money must be divisible

into smaller units without loss of value, precious metals can

be coined from bars or method down into bars again. It should

also be fungible that is, one unit or price must be perceived

as equivalent to any other, which is why for example diamond

works of art or real estate are not suitable as money.

Furthermore, it should have a specific weight or measure or

size to be verifiably countable. For instance, coins are often

middle with a receded edge so that any removal of material

from the coin (lowering the commodity value) will be easy to

detect. Money therefore, act as a standard measure and common

denomination of a trade. It is thus a basis for quoting and

bargaining of prices. Also necessary for developing efficient

accounting systems, hence ''money is what money does.''

In addition, Whitehead (1982) argues that money function as a

standard of deferred payment. It is particularly distinguished

by some text particularly older ones, other texts subsume this

under functions. A standard of deferred payment is an accepted

way to settle debts, a unit which debts are denominated and

the status of money as a legal tender, in these jurisdictions

which have this concept, states that it may function for

discharge of debts. When debts are denominated in money, the

real value of debts may change due to inflation and deflation

and for sovereign and international debts via debasement and

devaluation.

Moreover, money is used as a store of value. It must be able

to be reliably sowed, stored and retrieved and be predictably

used as a medium of exchange when it is retrieved . The value

of the money must also remain stable over time. Some have

argued that inflation, by reducing the value of money

diminishes the ability of the money to function as a store of

value. Hence problems rises in the functions of money.

Furthermore, there have been many historical disputes

regarding the combination of money's functions .Some argue

that they need more separation and that a single unit is

insufficient to deal with them all. One of these arguments is

that the role of money as a medium of exchange is in conflict

with its role as a store of value. Its role as a store of

value requires holding it without spending , whereas its role

as a medium of exchange requires it to circulate. Others argue

that storing value is just deferral of the exchange, but does

not diminish the fact that money is a medium of exchange that

can be transported both across and time.

2) Money can be classified into notes and coins. It is in two

categories of narrow and broad money. Narrow money is the

money that can be used on day to day bases that is for

transaction purposes. Broad money used for both transaction

purposes and a of savings. A central bank is an institution

that issues currency, regulate money supply, controls interest

rates, oversees financial market and financial system

stability and operations. Many central banks also have an

oversight role for the banking industries in their

jurisdiction, having input into policy and regulation and the

implementation thereof. Central banks may also be referred to

as Reserve banks, monetary authority, state banks.

In controlling the supply of money, central banks uses a

monetary policy.Monetary policy refers to deliberate attempts

to manipulate the rate of interest and money supply in order

to bring about desired changes in the economy. In general

terms monetary policy is used to regulate credit conditions

and the supply of money in order to fulfil macroeconomic

objectives. The overall objective is to improve the standards

of living within the economy. There are two main categories of

monetary policy instruments. On the one hand there are those

instruments of policy that are designed to have a general

effect on the financial sector and through that sector, on the

whole economy. On the other hand there are instruments of

control that are specific in their effects on particular

financial organisations. These include instrument for general

control and instrument of specific control.

General control instruments affect certain key interest rates

or the authorities may directly engage in transactions in key

financial markets in order to affect credit throughout the

economy.

This may be through open market operation (OMO). ‘Open market

operations’ refers to the buying or selling of government

securities (bonds or treasury bills) by the central bank to

the public. The principle is to exchange ‘paper assets’ for

‘cash.’ For example, if there is excess liquidity in the

market the central bank will enter the market selling

government securities. People will exchange their cash for the

securities and hence the excess liquidity is mopped up.

Conversely if there is a shortage, the central bank will enter

the market buying the securities from the public thereby

injecting liquidity into the market.

Furthermore, there is discount policy or accommodation window.

The discount policy refers to variations in the rates at which

the central bank discounts first class bills and other terms

at

which the central bank, as a lender of last resort, advances

funds to certain domestic parties in the money market, usually

to enable those parties to make good a reserve asset

deficiency. Holders of first class bills such as treasury

bills can apply to the central bank for the maturity dates of

their bills to be brought forward. This is granted on

condition that the holder will receive an amount less than

what they were going to receive upon maturity of the bill.

Thus the central bank will ‘discount’ the bill. For example if

an investor holds a $100m bill that will mature in the next

three months, the investor can apply to liquidate the bill

today but instead of receiving $100m the central bank will pay

an amount less than $100m for example $80m. The bill would

have been discounted by 20% which is the $20m. Discounting

increases the liquidity situation in the market. Thus if the

central bank is pursuing a tight monetary policy it will

increase the rediscount rate or the central bank can close the

accommodation window facility. Hence, a money regulatory

system by central institutes.

On the other hand there is instrument of specific control,

this have their impact on specific financial institutions and

that impact is in the short-term restricted to those specific

institutions.

Under this, there is Moral suasion or moral persuasion

consists of central bank requests or admonitions to banking

institutions to act or not to act in certain ways and it may

cover any of the bank’s activities e.g. lending policy. Moral

suasion in not compulsory and hence banks may not agree to

change. However because of the nature of the relationship

between the central bank and these banks moral suasion has

been successfully implemented in Zimbabwe.

Furthermore, The central bank can wish to make credit tighter

and call specifically for a special deposit from commercial

banks. This dampens optimism and so curtails business

spending.

In addition , according to Carlton and Perloff, ( 2005) said

that there is Ceilings and directional controls. This refers

to lending ceilings and selective credit controls. It involves

the authorities imposing formal or informal maximum or

minimum levels of amounts banks can lend to certain specific

borrowers or categories of borrowers or for certain specific

purposes.

There is Variable reserve ratio, this refers to attempts to

control credit creation by commercial banks by manipulating

the cash ratio. From the illustration on the credit creation

process we concluded that the smaller the cash ratio, the

greater the banks’ ability to increase money supply and vice

versa. For example the central bank can increase the cash

ratio if it wants to reduce the level of money supply growth

from the creation of credit.

According to Miller (1999) another way of controlling money

supply is when banks are required to maintain reserve cash

balances with the Reserve Bank for management purposes. These

reserves can be varied depending on the monetary policy. For

example with a tight monetary policy the reserves can be

increased so as to reduce excess cash in the market.

REFERENCES

Blanchard, O.(2006). Macroeconomics. New Delhi: Peason

Education Inc.

Carlton, D. W and Perloff, J. M (2005). Modern industrial

organisation. International edition.

McConnell, C. R. and Brue, S.L. (2005). Economics Principles,

Problems and Policies. New York: McGraw Hill.

Miller, R. L. (1999). Economics today and tomorrow. New York:

McGraw Hill.

Suberamanian, S. (2003).Factors underlining the definitions of

broad money :An examination of recent U.S.A monetary

statistics and practices of other countries.IMF Working Paper.

Whitehead, G. (1982). Economics made simple. London: Heinemann

Ltd.

4) The economic problem is sometimes called basic

fundamental economic problem. It is one of the fundamental

economic theoretical principles in the operation of any

economy. It asserts that there is scarcity meaning there is

finite resources available and are insufficient to satisfy

human needs and wants. The question then becomes how to

determine what is to be produced and how the factors of

production (such as capital) are to be allocated. Economics

revolves around methods and possibilities of solving

fundamental economic problems. The economic problem can be

divided into different parts that is, problem of allocation of

resources, problem of economic efficiency, problem of

employment of resources and the problem of economic growth.

The problem of the allocation of resources arises due to the

scarcity of resources and refers to the question of which

wants should be satisfied and which should be left

unsatisfied. In other words, what should be produced and how

much to produce. More production of a good implies more

resources required for the production of that good, however

the challenge still remains that resources are scarcity. This

statement mean that if an economy decides to work with the

scarce resources to increase production of a good, it has to

withdraw some resources from the production of other goods. In

other words more production of a desired commodity can be

made possible only by reducing the quantity of resources used

in the production of other goods. For instance ZINARA may

decide to resurface Harare-Bulawayo road at the expense of

Harare- Beitbridge simply because the resource available will

be limited to undertake the work of Harare-Beitbridge road. So

it is in this context that one may note how resources may

shift on to another project. However, this have got a greater

impact on the opportunity cost. Thus economic is therefore to

find a possible solution to this problem.

Furthermore, the problem of allocation of resources also deals

with the question of whether to produce capital goods or

consumer goods. If the community decide to produce capital

goods, resources will have to be withdrawn from the production

of consumer goods. However, in the long run the investments on

capital goods will augment the production of consumer goods.

Thus both capital and consumer goods are important. However,

the problem is on determining what the optimal ratio of

production between these types of goods. Hence, economics have

come as an emergence aid to this problem.

In addition, there is the problem of economic efficiency.

Resources are scarce and it is important to use them as

efficiently as possible. Thus, it is essential to know if the

production and distribution of national product made by an

economy is maximally efficient. The production becomes

efficient only if the productive resources are utilised in

such a way that any reallocation does not produce more of one

good without reducing the output of any other good. In other

words, ''efficient distribution,'' means that any

redistribution of goods cannot make anyone better off without

making someone else worse off. Hence, the problem of scarcity

of resources have made it impossible to deal with economic

efficiency, but economics should find a possible solution to

this problem.

Moreover, there is the problem of full employment of

resources, it bases also its argument on the scarcity of

resources. The problem question is on whether all available

resources are fully utilised and this argument is the

important one. A community should achieve maximum satisfaction

by using the little resources that we have in the best

possible manner, resources should not be wasted but utilised

fully. However, in the capitalist economies, the available

resources are not fully utilised. In times of depression there

are many people willing and wanting to work who go without

employment . It supposes that the scarce resources are not

fully utilised in a capitalist economy. Hence, in this

scenario resources are not being fully utilised, thus a

problem in the economy, on the other hand economics is an

answer to this problem.

In addition, the economy faces a challenge of economic growth.

If the productive capacity of the economy grows, it will be

able to produce progressively more goods which will result in

a rise in the standard of living of the people in that

economy. The increase in the productive capacity of any

economy is called economic growth. However, there are various

factors affecting economic growth. This have been discussed by

numerous models including the Harrod-Domor model, the

Neoclassical growth model of Solow and Swan and the Cambridge

models of Kalder and Joan Robinson.