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  2. 2. ECONOMICS <ul><li>Why do people study economics? </li></ul><ul><li>Many study eco because they hope to make money. </li></ul><ul><li>Some worry that they will be considered illiterate if they cannot understand the difference between supply and demand. </li></ul><ul><li>Others are interested in learning how computers and the information revolution are shaping our society or why the inequality in the distribution of income has risen so sharply in recent years. </li></ul>
  3. 3. <ul><li>Defn:- </li></ul><ul><li>The study of how the forces of supply and demand allocate scarce resources. Subdivided into microeconomics, which examines the behavior of firms, consumers and the role of government; and macroeconomics, which looks at inflation, unemployment, industrial production, and the role of government. </li></ul>Economics
  6. 6. MACRO-ECONOMICS <ul><li>Defn:- </li></ul><ul><li>Macroeconomics is a branch of economics that deals with the performance,structure, and behavior of a national or regional economy as a whole. </li></ul>
  7. 8. USES OF MACRO-ECONOMICS <ul><li>The study of macroeconomics is imp as it tell us how the economy as a whole works. </li></ul><ul><li>We cannot and derive the laws governing macroeconomic variables such as national income total employment general price level by studding micro-eco decision of ind consumers firms and industries. </li></ul><ul><li>What is true in case of an individual firm or indus may not be true 4 the economy as a whole </li></ul>
  8. 9. Supply and Demand <ul><li>Since we are convinced now that trading goods and services makes people better off, the next step is to understand how markets- places or situations in which people interact and trade- are theorized to operate. </li></ul><ul><li>We’ll use the example of gold jewelry to develop a model for demand and supply. </li></ul><ul><li>The model, in its graphical representation, can also demonstrate how different events can affect the demand and supply for gold jewelry. </li></ul>
  9. 10. The Law of Demand <ul><li>Any phonetic resemblance to “The Law of The Man” is purely a linguistic artifact of the English language. </li></ul><ul><li>The Law of Demand (aka Theory of Demand) simply states that as prices of things rise, people buy less. </li></ul><ul><li>This should not be exciting, as you have probably operated according to this law all of your life. </li></ul><ul><li>Example on the board of individual and market demands </li></ul>
  10. 11. Aggregate Demand for Goods & Services <ul><li>Aggregate demand (AD) curve: indicates the various quantities of domestically produced goods and services that purchasers are willing to buy at different price levels. </li></ul><ul><li>The AD curve slopes downward to the right, indicating an inverse relationship between the amount of goods and services demanded and the price level. </li></ul>
  11. 12. P 2 Y 1 Y 2 P 1 Aggregate Demand Curve <ul><li>As illustrated here, when the general price level in the economy declines from P 1 to P 2 , the quantity of goods and services purchased will increase from Y 1 to Y 2 . </li></ul>Goods & Services (real GDP) Price Level AD A reduction in the price level will increase the quantity of goods & services demanded.
  12. 13. <ul><li>Each of these factors tends to increase the quantity of goods & services purchased at the lower price level. </li></ul><ul><li>Other things constant, a lower price level will increase the wealth of people holding the fixed quantity of money, lead to lower interest rates, and make domestically produced goods cheaper relative to foreign goods. </li></ul>P 2 Y 1 Y 2 P 1 Goods & Services (real GDP) Price Level AD A reduction in the price level will increase the quantity of goods & services demanded.
  13. 14. The Law of Supply <ul><li>From the producers’ perspective, the higher the market price of a good happens to be, the more they’re willing to sell. </li></ul><ul><li>Continue the example on the board of individual and market supplies. </li></ul><ul><li>Factors that can affect shifts in supply include input prices, technology, expectations, etc… </li></ul>
  14. 15. economics <ul><li>The ASC shows the relationship between the price level and the quantity supplied of goods & services by producers. </li></ul>P 105 P 100 P 95 Y 1 Y 2 Y 3 Aggregate Supply Curve Goods & Services (real GDP) Price Level AS (P 100 ) An increase in the price level will increase the quantity supplied in the short run .
  15. 16. economics <ul><li>In the short-run, firms will expand output as the price level increases because higher prices improve profit margins since many components of costs will be temporarily fixed as the result of prior long-term commitments. </li></ul>P 105 P 100 P 95 Y 1 Y 2 Y 3 Goods & Services (real GDP) Price Level AS (P 100 ) An increase in the price level will increase the quantity supplied in the short run .
  16. 17. Four Key Markets Coordinate the Circular Flow of Income <ul><li>Goods and Services market </li></ul><ul><li>Resource market </li></ul><ul><li>Loanable Funds market </li></ul><ul><li>Foreign Exchange market </li></ul>
  17. 18. <ul><li>Goods and Services Market : Businesses supply goods & services in exchange for sales revenue. Households, investors, governments, and foreigners (net exports) demand goods . </li></ul><ul><li>Resource Market : Highly aggregated market where business firms demand resources and households supply labor and other resources in exchange for income. </li></ul>Four Key Markets
  18. 19. <ul><li>Loanable Funds Market : Coordinates actions of borrowers and lenders. </li></ul><ul><li>Foreign Exchange Market : Coordinates the actions of Americans that demand foreign currency (in order to buy things abroad) and foreigners that supply foreign currencies in exchange for dollars (so they can buy things from Americans). </li></ul>
  19. 20. <ul><li>Four key markets coordinate the circular flow of income. </li></ul><ul><li>The resource market coordinates the actions of businesses demanding resources and households supplying them in exchange for income. </li></ul><ul><li>The loanable funds market brings net household saving and the net inflow of foreign capital into balance with the borrowing of businesses and governments. </li></ul><ul><li>The foreign exchange market brings the purchases (imports) from foreigners into balance with the sales (exports plus net inflow of capital) to them. </li></ul><ul><li>The goods & services market coordinates the demand for and supply of domestic production (GDP) . </li></ul>The Circular Flow Diagram