demand and supply, market equilibrium , Circular Flow

1. EME – UNIT 1
By
S.Selvaraj, AP/CSE
Kongu Engineering
College

2. Economics
• Dynamics of Business and Economics
• Basic Concepts and Principles
• Demand and Supply
• Law of Demand and Supply, Determinants of D/S
• Market Equilibrium
• Circular flow of economic activities and income

3. Dynamics of Business and
Economics
3

4. Nature of Business
• A business tries to earn
a profit by providing
products that satisfy
people’s need.
What is a product?
Goods or service with
tangible and intangible
characteristics that
provide satisfaction and
benefits. Sometimes
product can also be an
idea.
Tangible Goods
Automobile
Computer
Loaf of bread
Television
Services
Dry cleaning
Photo processing
Checkup at doctor’s
Movie star performance
4

5. GOAL OF BUSINESS
organizations:
• Profit
Earn a Profit - The
reward for the risks that
businesses take in
providing products.
• Non-Profit
Organizations- provide
goods and services but
do not have the
fundamental purposeof
earning profits.
5

6. Maintaining Profitability Quality
products
Efficient
operations
Social
responsibility
Business
ethics
Profitability
6
Management skills
•Planning
•Organizing
•Controlling
•Leading
Marketing Expertise
•Products
•Price
•Promotion
•Distribution
Finance
• Skills to maintain fund
• Expanding its operations
• Maintaining day to day operations

7. People and activities of Business
7

8. The Economic Foundations of Business
Distribution of resources for the
production of goods and services
within a social system.
Resources
• Natural resources (land, forests, minerals, water)
• Human resources (labor)
• Financial resources (capital)
8

9. Economic Systems
Three Important questions :
1. What types and quantities of goods/services will
satisfy consumer needs?
2. How will goods/services be produced? By whom?
With what resources?
3. How are goods/services distributed to consumers?
to produce goods
society distributes its
and
How a
resources
services.
9

10. Economic Systems….
A society in which the people without regard to
class, own all the nation’s resources.
•China
•North Korea
•Cuba
Communism
10

11. Economic Systems…..
System in which the government owns and operates basic
industries but individuals own most businesses.
•Sweden
•India
•Israel
Socialism
11

12. Economic Systems…..
Free Enterprise – individuals own and operate majority
of businesses providing goods and services
•United States
•Japan
•Australia
•Canada
Capitalism
12

13. Economic
Systems
Free Market -- All economic decisions made without
government intervention (pure capitalism)
Government intervenes and regulates business to
some extent (modified capitalism)
Pure Capitalism
Modified Capitalism
13

14. Economic
Systems
No country practices pure capitalism or pure
socialism/communism. Economic systems
contain various elements of government
intervention.
Mixed Economies
14

15. 15
FREE ENTERPRISE SYSTEM
Rights
• Individuals – have the right to own property and to
pass this property on to their heirs.
• Individuals & businesses – right to earn profits and
to use the profits as they wish, within the constraints
of their society’s law and values.
• Individuals & businesses – right to make decisions
that determine the way the business operates.
• Individuals- right to choose what career to pursue,
where to live, what goods and services to purchase
and more

16. Comparison of Communism, Socialism, and Capitalism
16

17. Supply & Demand
Demand : number of goods/services consumers
buy at given price at a specific time
Supply : number of products businesses will sell
at different prices at a specific time
Distribution of resources and products
determined by supply and demand
17

18. Forces of Supply & Demand
Price at which number of products supplied equal amount of products
consumers are willing to buy at a specific time = equilibrium price
18

19. Nature of Competition
Pure competition – many small businesses in same product
market (Agri goods). Price is determined solely by supply &
demand.
Monopolistic competition – small number of businesses little
difference in products (Soft drinks). Businesses have some
power over pricing.
Oligopoly– very few businesses selling a product (Airlines
industry). Businesses have full control over pricing.
Monopoly- only one business providing a product (electricity,
nature gas suppliers, business based on patents obtained)
Rivalry among businesses for consumers’
dollars.
19

20. Economic Cycles and Productivity
Economic Expansion – economy is growing and
consumers are spending money
Economic Contraction – spending declines,
layoffs, economy slows down
Expansion and Contraction
20

21. 21
Economic Cycles terms
•Inflation– condition characterized by continuing
rise in prices
•Recession– decline in production, employment,
and income
•Unemployment– % population wants to work
but unable to find jobs
•Depression– unemployment very high;
consumer spending low; business output sharply
reduced

22. Overall Unemployment Rate
U.S. Civilian Labor Force 1920 - 2007
22

23. Measuring the Economy
• Gross Domestic
Product (GDP) – the
sum of all goods
and services
produced in a
country during a
year
23

24. Evaluating Our Nation’s Economy
24

25. 25
BASIC CONCEPTS AND
PRINCIPLES

26. Economics - Definitions
• Derived from Greek work oikos (house) and
nomos (custom or law)
• Adam smith (1723-1790) - Father of economics-
“…an enquiry into the nature and causes of the
wealth of nations”
• Alfred Marshall (1842-1924)- “…the study of
mankind in the everyday business of life”
• Lionel Robbins(1898-1984) – “ the science
which studies human behaviour as a relationship
between ends and scare means which have
alternative uses” 29

27. 27
Economics Defined….
•“ as a body of knowledge or study that discusses
how a society tries to solve the human problems of
unlimited wants and scarce resources”
•“ is a Social science since it deals with the society
as a whole and human behaviour in particular, and
studies the production, distribution, and
consumption of goods and services”.
(Study of how individuals and societies deal with
scarcity)

28. 28
Basic Assumptions
• Ceteris Paribus
– Latin phrase
– “With other things (being) the same” or “all other
things being equal”.
• Rationality
– Consumers and producers measure and compare the
costs and benefits of a decision before going ahead.
– Involves making a choice that gives the greatest
benefit relative to cost.
– Firms aim at maximizing profit and minimizing the
cost while consumers aim at maximizing utility and
minimizing sacrifice.

29. 29
Types of Economic Analysis
• Micro and Macro
– Microeconomics (“micro” meaning small): study of the
behaviour of small economic units
• An individual consumer, a seller/ a producer/ a firm, or
a product.
• Focus on basic theories of supply and demand in
individual markets
– Macroeconomics (“macro” meaning large): study
of aggregates.
• Industry as a unit, and not the firm.
• Focus on aggregate demand and aggregate supply,
national income, employment, inflation, etc.

30. 30
Types of Economic Analysis.....
• Positive and Normative
– Positive economics: “what is” in economic matters
• Establishes a cause and effect relationship
between variables.
• Analyzes problems on the basis of facts.
– Normative economics: “what ought to be” in
economic matters.
• Concerned
judgments.
• Incorporates
with questions involving value
value judgments about what the
economy should be like.

31. 31
Types of Economic Analysis....
• Short Run and Long Run
– Short run: Time period not enough for consumers and
producers to adjust completely to any new situation.
• Some inputs are fixed and others are variable
– Long run: Time period long enough for consumers and
producers to adjust to any new situation.
• All inputs are variable
• Decisions to adjust capacity, to introduce a larger
plant or continue with the existing one, to change
product lines.
In terms of accounting or finance:
short run- any time period less than a year
Long run- 5 to 6 years or even as high as 20 years

32. 32
Types of Economic Analysis....
• Partial and General Equilibrium
– Partial equilibrium analysis: Related to
analysis
micro
• Studies the outcome of any policy action in a
single market only.
• Equilibrium of one firm or few firms and not
necessarily the industry or economy.
– General equilibrium: explains economic
phenomena in an economy as a whole.
• State in which all the industries in an economy
are in equilibrium.
• State of full employment

33. 33
Economic Decisions/Questions
The fundamental problem faced by economy :
• WHAT to produce? (make) - Choice
• HOW to Produce?(manufacture) - efficiency
• FOR WHOM to Produce? (who gets
distribution
• Are Resources used economically? – scarcity
• Are resources fully employed?
• Is the economy growing?
what) -
The way these questions are answered, determines the
economic system

34. Economic Principles Relevant to
Managerial Decisions
• Concept of scarcity
– Unlimited human wants
– Limited resources available to satisfy such wants
– Best possible use of resources to get:
• maximum satisfaction (from the point of view of
consumers) or
• maximum output (from the point of view of producers or
firms)
• Concept of opportunity cost
– Opportunity cost is the benefit forgone from the alternative
that is not selected.
– Highlights the capacity of one resource to satisfy multitude of
wants
– Helps in making rational choices in all aspects of business,
since resources are scarce and wants are unlimited 37

35. 35
Economic Principles Relevant to
Managerial Decisions ….
• Concept of margin or increment
– Marginality: a unit increase in cost or revenue or utility.
• Marginal cost: change in Total Cost due to a unit change in output.
MC = TCn – TCn-1
Marginal cost = (Change on total cost)/change in totaloutput
= dTC/ dQ
• Marginal revenue: change in Total Revenue due to a unit change
in sales.
• Marginal utility: change in Total Utility due to a unit change in
consumption.
– Incremental: applied when the changes are in bulk, say
10% increase in sales.

36. Economic Principles Relevant to Managerial
Decisions…
• Discounting Principle
– Time value of money : Value of money depreciates with
time
• A rupee in hand today is worth more than arupee
received tomorrow.
– Outflow and inflow of money and resources at different
points of time
1
PVF = (1 r)n
where
PVF = Present Value of Fund,
n = period (year, etc.)
R = rate of discount 36

37. PVF Example
Example :
Company Z has sold goods to Company M for Rs. 5000.
Company M gave an offer to Company Z that either
Company M pays Rs. 5000 immediately or pay Rs. 5500
after two years. Discounting rate is 8%.
•Now, in order to understand which of either deal is
better i.e. whether Company Z should take Rs. 5000
today or Rs. 5500 after two years.
•we need to calculate a present value of Rs. 5500 on the
current interest rate and then compare it with Rs. 5000.
• if the present value of Rs. 5500 is higher than Rs. 5000,
then it is better for Company Z to take money after two
years otherwise take Rs. 5000 today.
•Result: As present value of Rs. 5500 after two years is
lower than Rs. 5000, it is better for Company Z to take
Rs. 5000 today

38. 38
Production Possibilities Curve
• Shows the different combinations of the quantities of two goods
that can be produced (or consumed) in an economy at any point
of time.
• Depicts the trade off between any two items produced (or
consumed).
• Highlights the concepts of scarcity and opportunity cost
– Indicates the opportunity cost of increasing one item's production (or
consumption) in terms of the units of the other forgone
– Slope of the curve in absolute terms
• Assumptions
– The economy is operating at full employment.
– Factors of production are fixed in supply; they can howeverbe
reallocated among different uses.
– Technology remains the same.

39. Food
Clothing
FQ
CP CQ
Figure 1.3: PPC for the Society
Q
FP
P
O
Production Possibilities Curve….
Productively
Inefficient Area
Technically
Infeasible Area
39

40. 40
• All points on the PPC (like P and Q) are points of maximum
productive efficiency.
• In the figure, OFp of food and OCp of clothing can be produced
at Point P and OFQ of food and OCQ respectively at point Q,
when production is run efficiently.
• All points inside the frontier are feasible but productively
inefficient.
• All points to the right of (or above) the curve are technically
impossible (or cannot be sustained for long).
• A move from P to Q indicates an increase in the units of
clothing produced and vice versa.
• It also implies a decrease in the units of food produced. This
decrease in the units of food is the opportunity cost of
producing more clothing.
Production Possibilities Curve….

41. 41
Demand and supply analysis

42. 42
Demand
“If you can’t pay for a thing, don’t buy it. If you can’t get paid for it, don’t
sell it” (Benjamin Franklin)
 The process to satisfy human wants/ needs/desires – Demand
 Desire: an aspiration to acquire something
 Want: having a strong desire for something
 Demand: effective desire
Demand is that desire which is backed by willingness and ability to
buy a particular commodity, at a given point of time.
Quantity of the commodity which consumers are willing to buy at a
given price for a particular unit of time.
 Things necessary for demand:
 Time
 Price of the commodity
 Amount (or quantity) of the commodity consumers are willing to
purchase at the price

43. Types of Demand
 Direct and Derived Demand
 Direct demand is for the goods as they are such
as Consumer goods
 Derived demand is for the goods which are
demanded to produce some other commodities;
e.g. Capital goods
 Recurring and Replacement Demand
 Recurring demand is for goods which are
consumed at frequent intervals such as food
items, clothes.
 Durables are purchased to be used for a long
period of time (cars, watches, bikes, mobile phones)
 Wear and tear over time needs replacement 45

44. Types of Demand….
 Complementary and Competing Demand
 Some goods are jointly demanded hence are
complementary in nature, e.g. software and
hardware, car and petrol.
 Some goods compete with each other for demand
because they are substitutes to each other, e.g.
soft drinks and juices.
 Individual & Market Demand
 Demand for an individual consumer is Individual
demand. Eg. Your demand for Swift car.
 Demand by all the consumers for the product know
as Market demand. Eg. Demand for swift in 2015.
 Industry demand is the demand for the product by
all firms in the industry. Eg. Demand for car in year
2015 in India 46

45. Determinants of Demand
 Price of the product
 Single most important determinant
 Negative effect on demand
 Higher the price-lower the demand
 Income of the consumer
 Normal goods: demand increases with increase in consumer’s income
 Inferior goods: demand falls as income rises
 Price of related goods
 Substitutes
 If the price of a commodity increases, demand for its
substitute rises.
 Complements
 If the price of a commodity increases, quantity demanded of its
complement falls.
47

46. 46
Determinants of Demand….
 Tastes and preferences
 Very significant in case of consumer goods
 Expectation of future price changes
 Gives rise to tendency of hoarding of durable goods
 Population
 Size, composition and distribution of population will
influence demand
 Advertising
 Very important in case of competitive markets
 Growth of Economy
If economy is growing, demand for goods of better
quality will be high.
 Consumer credit
 Easy access to loans for purchasing consumer goods

47. 47
Demand Function
 Interdependence between demand for a product and its
determinants can be shown in a mathematical functional
form
 Dx = f(Px, Y,Py, T,A, Ef, N)
 Independent variables: Px, Y,Py, T,A, N
 Dependent variable: Dx
 Px: Price of x
 Y: Income of consumer
 Py: Price of other commodity
 T: Taste and preference of consumer
 A: Advertisement
 Ef: Future expectations
 N: Macro variable like inflation, population growth,
economic growth

48. Law of Demand
 A special case of demand function which shows relation between
price and demand of the commodity
Dx = f(Px)
 Other things remaining constant, when the price of a commodity
rises, the demand for that commodity falls or when the price of a
commodity falls, the demand for that commodity rises.
 Price bears a negative relationship with demand
 Reasons
 Substitution Effect : When the price of a commodity falls (rises),
its substitutes become more (less) expensive assuming their
price has not changed.
 Income Effect: When the price of a particular commodity falls,
the consumer’s real income rises, hence the purchasing power of
the individual rises.
 Law of Diminishing Marginal Utility: as a person consumes
successive units of a commodity, the utility derived from every
next unit (marginal unit) falls.
50

49. Demand Schedule and Individual
Demand Curve
Point
on
Deman
d
Curve
Price
(Rs
per
cup)
Demand
(‘000 cups)
a 15 50
b 20 40
c 25 30
d 30 20
e 35 10 50
10 20 30 40
Quantity of coffee
e
35
d
30
c
25
b
20
a
15
O
49

50. Change in Demand
Price
D2
D0
D1
Quantity
50
0
 Shift in demand curve from D0 to
D1
 More is demanded at same price.
 Increase in demand caused by:
 A rise in the price of a
substitute
 A fall in the price of a
complement
 A rise in income
 A redistribution of income
towards those who favour the
commodity
 A change in tastes that
favours the commodity
 Shift in demand curve from D0 to
D2
 Less is demanded at each price.

51. Movements Along and Shifts of
The Demand Curve
D2
D1
Quantity
Price
Entire demand curve shifts
rightward when:
• income or wealth ↑
• price of substitute ↑
• price of complement ↓
• population ↑
• expected price ↑
• tastes shift toward ↑
51

52. Movements Along and Shifts of
The Demand Curve
D1
D2
Quantity
Price
Entire demand curve shifts
leftward when:
• income or wealth ↓
• price of substitute ↓
• price of complement ↑
• population ↓
• expected price ↓
• tastes shift toward ↓
52

53. 53
Exceptions to the Law of Demand
Law of demand may not operate due to the
following reasons:
 GiffenGoods – meat & bread
case (Ireland case) Rice (inferior
goods)
 Snob Appeal - Diamond
 Demonstration Effect - items of luxury,
fashion
 Future Expectation of Prices (Panic buying)
 Goods with No Substitutes
 Life saving drugs, petrol and diesel
 Insignificant proportion of income spent
 Match box, Salt

54. 54
Market Demand
 Market: interaction between sellers and buyers of a good
(or service) at a mutually agreed upon price.
 Market demand
 Aggregate of individual demands for a commodity at a
particular price per unit of time.
 Sum total of the quantities of a commodity that all buyers in
the market are willing to buy at a given price and at a
particular point of time (ceteris paribus)
 Market demand curve: horizontal summation of individual
demand curves

55. 55
Supply
• Indicates the quantities of a good or service that the seller
is willing and able to provide at a price, at a given point
of time, other things remaining the same.
• Supply of a product X (Sx) depends upon:
– Price of the product (Px)
– Cost of production (C)
– State of technology (T)
– Government policy regarding taxes and subsidies (G)
– Other factors like number of firms (N)
• Hence the supply function is given as:
Sx = (Px, C, T, G, N)

56. Law of Supply
 Law of Supply states that other things remaining the same, the
higher the price of a commodity the greater is the quantity supplied.
 Price of the product is revenue to the supplier; therefore higher price
means greater revenue to the supplier and hence greater is the
incentive to supply.
 Supply bears a positive relation to the price of the commodity.
Point
on
Supply
Curve
Price
(Rs.
Per cup)
Supply(‘000
cups per
month)
a 15 10
b 20 20
c 25 30
d 30 45
e 35 60
Supply Schedule
10 20 30
15
20
30
35
25
b
a
c
e
d
Quantity of Coffee
Supply Curve
40 50 60
58
0

57. Change in Supply
S2
S0
S1
Price
Quantity
O
 Shift in the supply curve from S0
to S1
 More is supplied at each price.
the
 Increase in supply caused by:
 Improvements in
technology
 Fall in the price of inputs
 Shift in the supply curve from S0
to S2
 Less is supplied at each price.
 Decrease in supply caused by:
 A rise in the price of inputs
 Change in government policy
(V
A
T) 59

58. Changes in Supply and in
Quantity Supplied
Price
S2
S1
Entire supply curve shifts
rightward when:
• price of input ↓
• price of alternate good ↓
• number of firms ↑
• expected price ↑
• technological advance
• favorable weather
Quantity
58

59. Changes in Supply and in
Quantity Supplied
Price
S1
S2
Entire supply curve shifts
rightward when:
• price of input ↑
• price of alternate good ↑
• number of firms ↓
• expected price ↑
• unfavorable weather
Quantity
59

60. Market Equilibrium

61. Market Equilibrium
 Equilibrium occurs at the price where the quantity demanded and
the quantity supplied are equal to each other.
 For prices below the equilibrium, quantity demanded exceeds
quantity supplied (D>S). Pulling price upward.
 For prices above the equilibrium, quantity demanded is less than
quantity supplied (D<S). Pushing price downward.
S
Price
E
25
D
Quantit
O 30
Pric
e
(Rs)
Supply
(‘000 cups
/ month)
Demand
(‘000 cups/
month)
15 10 50
20 15 40
25 30 30
30 45 15
35 70 10 62

62. Changes in Market Equilibrium
(Shifts in Supply Curve)
 The original point of equilibrium is
at E, the point of intersection of
curves D1 and S1, at price P and
quantity Q
 An increase in supply shifts the
supply curve to S2.
 Price falls to P2 and quantityrises
to Q , taking the new equilibrium
2
to E2 .
 A decrease in supply shifts the
supply curve to S0. Price rises to P0
and quantity falls to Q0 taking the
new equilibrium to E0
 Thus an increase in supply raises
quantity but lowers price, while a
decrease in supply lowers quantity
but raises price; demand being
unchanged.
2
Price
E
S1
S2
Quantity
E2
D1
D1
S2
S1
E0
P0
P
P2
Q Q Q
0
O
S0
S0
63

63. • The original point of equilibrium is
at E, the point of intersection of
curves D1 and S1, at price P and
quantity Q
• An increase in demand shifts the
demand curve to D2 .
• Price rises to P1 and quantity
rises to Q1 taking the new
equilibrium to E1
• A decrease in demand shifts the
demand curve to D0.
• Price falls to P* and quantity
falls to Q* taking the new
equilibrium to E2.
• Thus, an increase in demand raises
both price and quantity, while a
decrease in demand lowers both
price and quantity; when supply
remains same.
Q* Q1
P*
Price
D2
D1
Quantity
E1
D1
D2
S1
S1
E2
D0
P1
P
E
63
D0
O
Changes in Market
Equilibrium
(Shifts in Demand Curve)

64. Change in Both Demand and Supply
D1
Q1 Q2
P
1
P
2
D1
Quantity
S1
S
2
Pric
e
O
E
2
64
S
2
D2
D2
S
1
E
1
 Whether price will rise, or
remain at the same level, or will
fall, will depend on:
 the magnitude of shift and
 the shapes of the demand
and supply curves.
 Therefore, an increase in both
supply and demand will cause
the sales to rise, but the effect on
price can be:
 Positive
than S)
(D increases more
 Negative
than D)
(S increases more
 No change (increase in
D=increase in S)

65. Formula for Equilibrium Price, Excess
demand and Supply
Qd = Qs or Dx = Sx
Es = Qs-Qd
Ed = Qd-Qs

66. Problems in Demand and Supply

75. 75
Circular Flow of Economic
Activities and Income

76. 76
CIRCULAR FLOW OF ECONOMIC ACTIVITIES AND INCOME
The simple model of the circular flow assumes two players:
Firms (Producer)
• Produce and supply the goods and services by considering the
various factors of production
Households (Consumer)
• Who is an individual who purchase goods and services
 Households Provide services in terms of factor inputs to the firms
and get paid for these services by firms which households spend on
consumption.
 Thus Money and economic activities flowing between firms and
households create a circular flow
 It is a circular flow of money or income

77. Circular Flow of Income
Firms
Households
Financial
Market
Investment (I)
Savings
(S)
Goods and
Services (O)
Consumption
expenditure
(C)
(Two Sector Economy)
(Wages, Rent, Interest and Profits)
Factor Payments / Income
(Y)
Factor Inputs
In the equilibrium Y=E=O 68

78. 78
Circular Flow of Economic Activities
and Income
• Value of output produced (Y) = value of output sold (O)
• Value of output sold = Sum of consumption expenditure (C) and
investment expenditure (I).
E = O = C+I
• Income is either consumed or saved (S).
Y = C+S = C+I
• Savings are withdrawal of money from the circular flow
• Investment is injection of money into the circular flow
• For equilibrium savings should be equal to investments
• Hence Y=O=E

79. 79
Circular Flow of Income
(Four Sector Economy)
The third sector is Government (G)
• Government Spending
– On provision of public utility goods and services.
– Provides salaries to the households
– Pays to firms for purchases of goods and services - public ltdcompanies
• Government Revenue
– Households and firms pay various taxes and other payments and provide
factor inputs to the government.
– Government borrows from the financial market to fill revenuegap.
The fourth sector is the external sector
• Imports (M): Outflow of income occurs when the domestic firms
buy goods and services from foreign ones.
• Exports (X): Inflow of income takes place when foreign firms buy
goods and services from domestic ones

80. Circular Flow of Income
(Four Sector Economy)
Salaries
Remittances
for purchases
T
axes T
axes
Exports Exports
Imports Imports
Consumption
Expenditure
Government
(G)
Financial Market
Investment
(I)
Savings
(S)
Foreign Nations
(X-M)
Factor
Payments
Firms
Households
Factor Inputs
Goods
80

81. 81
Circular Flow of Income
(Four Sector Economy)
• National income includes expenditures on
investment, government and net of exports (X-M)
National Income=C+I+G+(X-M)
consumption,
• Since national income can either be consumed, or saved, or paid
as tax to the government:
C+I+G+(X-M)=C+S+T
• Sum of private investment and expenditure on net exports is equal
to the sum of savings and tax revenue. Thus:
I+G+X = S+T+M
• Therefore, W=J
• At equilibrium, total injections are equal to total withdrawals.

82. Macro-economic Variables
• Aggregate Demand and Aggregate Supply
–Aggregate Demand is the sum of demand for all goods and
services by all the consumers for a given period of time.
• aggregate demand (AD) for consumer goods i.e.
consumption demand (C)
• aggregate demand for capital goods i.e. (I).
Thus AD = C+I
• Aggregate supply is the total national output produced and
supplied by all the factors of production in an economy.
• It refers to the supply of all goods and services in the economy
for a given period of time.
• Aggregate supply (AS) consists of
–supply of consumer goods (C) and
–Supply capital goods (where capital comes from savings (S),
HenceAS=C+S 73

83. Macro-economic Variables….
• Stock and Flow
– Stock may be defined as any economic variable which has been
accumulated at a specific point of time
• like money, assets and wealth.
– Flow includes the variables which increase (inflows) and
decrease (outflows) the stock, over a period of time.
• like income, consumption, saving and investment
Stock=Inflows-Outflows
• Intermediate and Final Goods
– Intermediate goods (and services) are items purchased by firms
for using them in production of some other goods or utility.
(Partly finished goods or raw materials)
– Also known as producer goods because they are used as inputs
in the production of other goods.
– Final goods are those which are demanded by the final
consumer for using these goods as they are. 74

84. Macro-economic Variables….
• Capital formation
– The process of savings being converted into investment is known as
capital formation
– Gross Capital Formation refers to the aggregate of additions to fixed
assets (Fixed Capital Formation) and increase in stocks of inventories
during a period of time.
• Employment
– An employed person is willing and capable to work in a productive
activity and is engaged for certain number of hours per week, whether
working for self or someone else.
– The population of any country is divided into working population (age
group of 16 to 65 ) and dependents.
• Government Expenditure and Revenue
– Government Expenditure is which is made from public exchequer.
– Government Revenue is income received by government in various
forms, e.g. Taxes 75

85. Thank You