Determination of income and employ ment
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This document discusses two approaches to determining equilibrium level of output and national income: the aggregate demand (AD) equals aggregate supply (AS) approach and the savings (S) equals investment (I) approach. It provides diagrams and tables to illustrate equilibrium and how the economy adjusts when AD does not equal AS or when S does not equal I. The key points made are that equilibrium occurs when AD=AS or S=I, and that if AD>AS, inflation will result, while if AD<AS there will be unemployment.
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The document discusses key macroeconomic concepts including aggregate demand, aggregate supply, the consumption function, investment function, and the multiplier. It provides details on how each of these factors impact macroeconomic variables like output, employment, prices, and trade. It also examines the relationship between aggregate demand and supply using the AD-AS framework and how this intersection determines macroeconomic equilibrium.
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Aggregate demand is the total planned expenditure in an economy at a given price level. It is composed of consumption (C), investment (I), government spending (G), and net exports (X-M). Each component is influenced by various economic factors - consumption depends on disposable income and credit availability, investment depends on interest rates and profit levels, government spending depends on public opinion and the state of the economy, and net exports depend on domestic and foreign income and exchange rates. Changes in any component will cause the aggregate demand curve to shift right for an increase or left for a decrease on a graph with real output on the x-axis and price level on the y-axis.
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The document discusses production, costs, revenues, and equilibrium for firms. It defines key economic concepts like total product, average product, marginal product, total cost, average cost, marginal cost, total revenue, average revenue, and marginal revenue. It explains the law of variable proportions and returns to scale. It also discusses the conditions for a firm's short-run equilibrium using the marginal revenue-marginal cost approach.
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I AM CONFIDENT THAT STUDENTS WILL FIND THIS SLIDE USEFUL AND SUITABLE FOR CBSE EXAMINATION IN 2017-18. ANY FEEDBACK OR QUERIES YOU CAN POST IT TO MY E-MAIL ID.
Effective demand
Effective demand refers to the total demand for goods and services in an economy, which includes consumption demand and investment demand. According to Keynes, effective demand determines the level of output and employment in an economy. Effective demand is low in capitalist systems because savings increase as income rises, creating a "leakage" out of the system that must be filled by investment in order to maintain output and employment levels. The economy reaches equilibrium at the point where aggregate demand and aggregate supply curves intersect, but this equilibrium may occur at less than full employment if investment is insufficient to make up the gap between income and consumption. The government therefore has an important role in managing aggregate demand to minimize unemployment.
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National income is defined as the total money value of all final goods and services produced in an economy during a year. It is measured using product, income, and expenditure methods. The key concepts are GDP, GNP, NDP, NNP measured at market price, factor cost, and constant/current prices. National income estimation faces problems due to non-monetized sectors, illegal activities, and lack of data in developing countries like India. Its growth rate has increased from 4.4% initially to over 6% in recent decades.
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The document discusses production, costs, revenues, and equilibrium for firms. It defines key economic concepts like total product, average product, marginal product, total cost, average cost, marginal cost, total revenue, average revenue, and marginal revenue. It explains the law of variable proportions and returns to scale. It also discusses the conditions for a firm's short-run equilibrium using the marginal revenue-marginal cost approach.
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This document defines key macroeconomic concepts related to aggregate demand and supply. It explains that:
1. Aggregate demand is the total planned expenditure on final goods and services and equals consumption + investment + government spending + net exports. Consumption and investment make up aggregate demand in a simple two-sector economy.
2. Aggregate supply is the total planned output of final goods and services and equals national income. National income equals consumption + savings at the national level.
3. The consumption function shows the relationship between consumption and national income, where consumption has an autonomous and induced component. The marginal propensity to consume is the change in consumption from a change in income.
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The document discusses the concept of quasi rent. It defines quasi rent as a temporary gain earned by a factor of production due to a temporary limitation in its supply in the short run. Specifically:
- Quasi rent arises for capital equipment/machinery in the short run when its supply is fixed and it earns surplus over its transfer earnings.
- It is measured as the total revenue earned minus the total variable costs.
- Unlike economic rent which persists in both the short and long run, quasi rent disappears in the long run when the supply of the factor can be increased.
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The classical theory of income and employment
Classical economists believed that a free market would always achieve full employment through flexible wages and prices. According to Say's Law, increased production would create its own demand through higher incomes. However, Keynes criticized this view, arguing that reduced wages would lower aggregate demand by reducing incomes. The classical theory was valid for individual firms but failed to consider economy-wide effects of changes in income and demand.
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The document defines key macroeconomic concepts such as aggregate demand, aggregate supply, and their components. It discusses how equilibrium output is determined by the intersection of the aggregate demand and aggregate supply curves. The saving-investment approach to determining equilibrium is also covered, where equilibrium occurs at the point where planned saving equals planned investment. Factors that can cause excess demand and deficient demand are explained, along with their impacts and appropriate policy responses.
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This document provides an overview of macroeconomics concepts across several chapters. It defines macroeconomics as dealing with aggregate economic metrics rather than individual parts. Key concepts discussed include the circular flow of income and goods between households, firms, and the government. The document also examines gross domestic product, national income, consumption, investment, fiscal and monetary policy, and how international trade impacts a country's national income. Multiple diagrams and equations are presented to illustrate macroeconomic relationships between sectors.
Classical theory of employment
Classical economists believed that full employment was the normal state of the economy and any deviation from it was abnormal. They assumed a closed economy with homogeneous goods, laissez-faire policies, and a barter system. According to Say's law, supply creates its own demand so overproduction is not possible. The classical theory held that output and employment are determined by production functions and the demand and supply of labor, with diminishing marginal returns. Labor market equilibrium occurs at the wage rate where demand and supply of labor intersect.
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This document defines key macroeconomic concepts related to aggregate demand and supply. It explains that:
1. Aggregate demand is the total planned expenditure on final goods and services and equals consumption + investment + government spending + net exports. Consumption and investment make up aggregate demand in a simple two-sector economy.
2. Aggregate supply is the total planned output of final goods and services and equals national income. National income equals consumption + savings at the national level.
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The document discusses the concept of quasi rent. It defines quasi rent as a temporary gain earned by a factor of production due to a temporary limitation in its supply in the short run. Specifically:
- Quasi rent arises for capital equipment/machinery in the short run when its supply is fixed and it earns surplus over its transfer earnings.
- It is measured as the total revenue earned minus the total variable costs.
- Unlike economic rent which persists in both the short and long run, quasi rent disappears in the long run when the supply of the factor can be increased.
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Circular flow
The circular flow refers to the continuous flow of goods, services, and money between two main sectors in an economy: households and firms. There are two types of circular flow - the real flow involving the exchange of goods and services, and the monetary flow involving the exchange of money between households and firms. In a two sector economy, households own factors of production such as labor which they supply to firms, who use these factors to produce goods and services which are then purchased by households using the income received. This continuous exchange of goods, services and money between households and firms is known as the circular flow of income.
Consumer equilibrium
This document discusses concepts related to consumer utility and consumer equilibrium. It defines total utility as the satisfaction derived from consuming a commodity and marginal utility as the additional satisfaction from consuming one more unit. Consumer equilibrium exists when marginal utility per rupee equals price, meaning the consumer derives the most satisfaction for their money spent. The law of diminishing marginal utility and conditions for consumer equilibrium in a single commodity are explained. Graphs and a utility schedule are provided to illustrate these concepts.
Forms of market
This document discusses different types of markets in microeconomics. It defines a market as the exchange of goods and services. Markets are classified as perfect or imperfect. A perfect market has many buyers and sellers of homogeneous products that sell at a single price determined by supply and demand. Features include no barriers to entry/exit and perfect information. Imperfect markets include monopoly, monopolistic, and oligopoly. A monopoly has a single seller with no substitutes. A monopolistic market has differentiated products and some barriers. An oligopoly has a few dominant sellers controlling most of the market. The document provides details on features of each type and compares perfect and monopoly markets. It ends with self-evaluation questions.
Introduction to economic problem
This document provides an introduction to economic problems and concepts. It defines economics according to Robbins as the study of human behavior in relationship to scarce resources that have alternative uses. It discusses the central problems that all economies face, including what and how much to produce, how to allocate resources, and for whom to produce. It introduces the concept of opportunity cost and explores production possibility curves to illustrate scarcity, tradeoffs, and efficiency. Key economic problems addressed are choice due to scarcity, utilization of resources, and growth of resources over time.
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Determination of income and employ ment
- 1. Prepared By:- KVS, Delhi Region DETERMINATION OF INCOME, OUTPUT AND EMPLOY MENT There are two approaches for the determination of equilibrium level of output . 1) AS=AD Approach 2) S=I Approach
- 2. Prepared By:- KVS, Delhi Region AD=AS Approach AD refers to desired expenditure in the economy during the accounting year. AD = C+I (C=consumption expenditure) ( I=Investment expenditure) AS refers to desired output during an accounting year . Hence it is equal to Y(income ) AS = C +S (c = consumption expenditure) (s = saving)
- 3. Prepared By:- KVS, Delhi Region Equilibrium • Equilibrium is attained when • AD=AS • The equilibrium can be attained at • Full employment • Under employment & • Over full employment conditions.
- 4. Prepared By:- KVS, Delhi Region • Schedule showing determination of equilibrium level of income . Y C I AD=C+I AS= Y 0 50 100 150 0 100 100 100 200 100 200 150 100 250 200 300 200 100 300 300 400 250 100 300 300 500 300 100 400 500 The above table shows the equilibrium level of income at Rs . 300 crores because at this level of income AD(300 ) =AS(300)
- 5. Prepared By:- KVS, Delhi Region Diagram showing equilibrium level of income. AD=C+I Y=AS=C+S AD=AS300 300 150 NATIONAL INCOME x Y 0
- 6. Prepared By:- KVS, Delhi Region ADJUSTMENT MECHANISM What happens when AS> AD What happens when AD> AS
- 7. Prepared By:- KVS, Delhi Region DIAGRAM SHOWING AS>AD (DEFICIENT DEMAND) • AS> AD AS>AD Y=AS C+I=AD INCOME AS, AD
- 8. Prepared By:- KVS, Delhi Region DIAGRAM SHOWING AD>AS(EXCESS DEMAND) • AD> AS AS>AD Y=AS C+I=AD INCOME AS,AD
- 9. Prepared By:- KVS, Delhi Region Equilibrium when S=I • Equilibrium level of income is determined at a point where saving & investment are equal. • i.e, S=I Y C S=Y-C I (INVESTMENT) 0 50 -50 100 100 100 0 100 200 150 50 100 300 200 100 100 400 250 150 100 The above table show the equilibrium level of income is Rs.300crores & at this point S(100) = I (100)
- 10. Prepared By:- KVS, Delhi Region Diagramatic presentation 0f s=i 100 National income saving investment 300 X Y S=I The diagram shows the equilibrium level of S=I
- 11. Prepared By:- KVS, Delhi Region THINK & ANSWER • See the diagram & answer how equilibrium will be brought about if S>I or I > S. S I income S>I I>S S,I
- 12. Prepared By:- KVS, Delhi Region Questions for self-evaluation • State the two approaches for the determination of equilibrium level of output . • Explain the meaning of equilibrium level of national income with the help of a diagram. • Explain what happen when • (1) AD>AS • (2) AD<AS
- 13. Prepared By:- KVS, Delhi Region Mrs. Anita Bhardwaj KV, Vigyan Vihar Mrs .Monika Bajaj KV, Tagore Garden Mrs. Leena Singh KV, AGCR Mr. Sri Keshav KV, no.2 Delhi Cantt Mrs .Ritu Tanwar KV, AFS Rajokri Compiled by:-