Trade, Money and Capital Advanced Economies have three features: -Trade Specialisation: trade between individuals and coun...
Trade Specialisation and Division of Labour <ul><li>Today’s World:  </li></ul><ul><li>- Countries depends on specialisatio...
Contd.. <ul><li>Specialisation gives greater productivity. </li></ul><ul><li>Individuals and countries voluntarily trade g...
Money <ul><li>It is the means of payment. </li></ul><ul><li>Due to the acceptance of money as payment or goods and debts, ...
Capital <ul><li>Capital has to be produced before it is used. </li></ul><ul><li>More capital formation => consumption cut ...
Economic Role of Government <ul><li>Three functions of Govt. :- </li></ul><ul><li>-Increase efficiency by promoting compet...
Efficiency <ul><li>Smith (1776): </li></ul><ul><li>Perfectly competitive markets will produce an efficient allocation of r...
Imperfect Competition <ul><li>It happens when a buyer or a seller affects the price level. </li></ul><ul><li>Consequences ...
Externalities <ul><li>Involve involuntary imposition of costs or benefits.  </li></ul><ul><li>Examples:  </li></ul><ul><li...
Public Goods <ul><li>These are commodities which are enjoyed by everyone in the Society. No one can be excluded. </li></ul...
Equity <ul><li>Markets do not produce a fair distribution of income which is not acceptable from the social point of view....
Macroeconomic Growth and Stability <ul><li>Economic growth denotes the growth in Nation’s output. </li></ul><ul><li>Macroe...
Contd.. <ul><li>Since 1930s Govt.s are succeeded to curb the inflation. </li></ul><ul><li>In most of the industrialised co...
Introduction to Demand and Supply
Demand and Demand Curves (a) <ul><li>There exists a definite relationship between the </li></ul><ul><li>market price of a ...
Law of Demand <ul><li>Law of downward-sloping demand :  When the </li></ul><ul><li>price of a commodity is raised (and oth...
Demand and Demand Curves (b) <ul><li>The individual demand curve shows the quantity demanded at each price by one consumer...
Demand and Demand Curves (c) <ul><li>Demand curves are downward sloping. </li></ul><ul><li>As price falls, consumers buy m...
Market Demand Curve (d) <ul><ul><li>The market demand curve is the horizontal sum of the demand curves of all individuals....
Factors behind the demand curves <ul><li>Average Income </li></ul><ul><li>Size of the Market </li></ul><ul><li>Related Goo...
Shifts in a Demand Curve versus Movements along a Demand Curve <ul><li>A change in price is represented by a movement alon...
Sources of Shifts in the Demand Curves (a) <ul><li>Tastes </li></ul><ul><li>Prices of related goods </li></ul><ul><li>Inco...
Sources of Shifts in Demand Curves (b) <ul><li>Tastes: If one day everyone in the United States woke up and liked Britney ...
Sources of Shifts in Demand Curves (c) <ul><li>Prices of related goods </li></ul><ul><li>Complementary goods: Peanut butte...
Sources of Shifts in Demand Curves (d) <ul><li>Price of related goods </li></ul><ul><li>Substitute goods </li></ul><ul><ul...
Sources of Shifts in Demand Curves (e) <ul><li>An increase in income increases the demand for most goods. </li></ul><ul><l...
Sources of Shift in Demand Curves (f) <ul><li>Availability of credit </li></ul><ul><ul><li>If banks reduce the number of a...
Sources of Shift in Demand Curves (f) (cont.) <ul><li>A change in expectations </li></ul><ul><ul><li>If consumers believe ...
Supply and Supply Curves <ul><li>The  supply schedule  (or  supply curve ) for a commodity shows the relationship between ...
The  Slope of the Supply Curve <ul><li>The supply curve is upward sloping. </li></ul><ul><li>When the price of a good or s...
Market Supply <ul><li>The market supply curve is the horizontal sum of the supply curves of all the suppliers. </li></ul><...
Forces behind the Supply Curves <ul><li>Cost of Production </li></ul><ul><li>Technological Advances </li></ul><ul><li>Pric...
Shifts in a Supply Curve versus Movements along a Supply Curve <ul><li>A change in price is represented by a movement alon...
Sources of Shifts in Supply Curves (a) <ul><li>A change in the price of inputs </li></ul><ul><li>A change in technology </...
Sources of Shifts in Supply Curves (b) <ul><li>A rise in the price of coffee increases the costs of making espresso. </li>...
Sources of Shifts in Supply Curves (c) <ul><li>If a new technology improves coffee bean harvesting, the costs of producing...
<ul><li>A  market equilibrium  comes at the price at which quantity demanded equals quantity supplied. </li></ul><ul><li>-...
Law of Supply and Demand (b) <ul><li>The   equilibrium price is the market clearing price that equates quantity demanded w...
Excess Supply <ul><li>The law of supply and demand predicts that prices will move to equilibrium values. </li></ul><ul><li...
Excess Demand <ul><li>Excess demand causes prices to rise. </li></ul><ul><li>Consumers cannot buy as much of the item as t...
Using Demand and Supply Curves (a)
Using Demand and Supply Curves (b)
Price and Cost (b) <ul><li>In the basic competitive model, the price equals the marginal cost. </li></ul><ul><li>An exampl...
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  • trade money and capital

    1. 1. Trade, Money and Capital Advanced Economies have three features: -Trade Specialisation: trade between individuals and countries depends on specialisation - Division of Labour. -Money: It measures the economic value of things and is used for financing trade. -Capital: It leverages labour power into a much more efficient factor of production and increases production.
    2. 2. Trade Specialisation and Division of Labour <ul><li>Today’s World: </li></ul><ul><li>- Countries depends on specialisation of individuals and firms. </li></ul><ul><li>-Connected by an extensive network of trade. </li></ul><ul><li>Specialisation occurs when people concentrate on a particular set of tasks. </li></ul><ul><li>Capital and land are highly specialised. </li></ul>
    3. 3. Contd.. <ul><li>Specialisation gives greater productivity. </li></ul><ul><li>Individuals and countries voluntarily trade goods in which they specialise for others’ products – vastly increasing the range and quantity of consumption. </li></ul><ul><li>Have potential to raise living standards. </li></ul>
    4. 4. Money <ul><li>It is the means of payment. </li></ul><ul><li>Due to the acceptance of money as payment or goods and debts, trade is facilitated. </li></ul><ul><li>Governments control the money supply through their central banks. </li></ul><ul><li>Like other factors, money can spoil the economy or can overheat the economic engine. </li></ul>
    5. 5. Capital <ul><li>Capital has to be produced before it is used. </li></ul><ul><li>More capital formation => consumption cut and more savings=> increase future productivity and future consumption. </li></ul><ul><li>In market economy, capital is privately owned- income from the capital goes to individuals =>capitalism. </li></ul>
    6. 6. Economic Role of Government <ul><li>Three functions of Govt. :- </li></ul><ul><li>-Increase efficiency by promoting competition, curbing externalities like pollution and providing public goods. </li></ul><ul><li>-Promote equity by using tax and expenditure programs to redistribute income towards particular group. </li></ul><ul><li>-Foster macroeconomic stability and growth – reducing unemployment and inflation. </li></ul>
    7. 7. Efficiency <ul><li>Smith (1776): </li></ul><ul><li>Perfectly competitive markets will produce an efficient allocation of resources- economy is always on PPF. </li></ul><ul><li>Why does an Economy fall short of efficient perfect competition? </li></ul><ul><li>Imperfect Competition </li></ul><ul><li>Externalities </li></ul><ul><li>Public Goods. </li></ul>
    8. 8. Imperfect Competition <ul><li>It happens when a buyer or a seller affects the price level. </li></ul><ul><li>Consequences of Imperfect Competition: </li></ul><ul><li>-When it happens society moves inside the PPF. </li></ul><ul><li>-Too high price and too low output is the hallmark of the inefficiencies associated with imperfect competition. </li></ul><ul><li>Steps taken by the Government to curb The IE: </li></ul><ul><li>-Regulate the price and profits of monopolies such as local water, electricity etc. </li></ul>
    9. 9. Externalities <ul><li>Involve involuntary imposition of costs or benefits. </li></ul><ul><li>Examples: </li></ul><ul><li>-Airport creates noise but do not compensate people living around the airport. </li></ul><ul><li>-Companies spend lot of money on R and D which have positive impact on the society </li></ul><ul><li>Govt.s are more concerned about the negative externalities rather than positive ones. </li></ul><ul><li>Govt. regulations are designed to control externalities like air and water pollution, damage from strip mining, hazardous wastes etc. </li></ul>
    10. 10. Public Goods <ul><li>These are commodities which are enjoyed by everyone in the Society. No one can be excluded. </li></ul><ul><li>Example:- Defense, Roads etc. </li></ul><ul><li>Private provision of Public Goods is insufficient. Govt. has to step into encourage the production of public goods. </li></ul><ul><li>Govt has to find the revenues to pay for its public goods and for its income redistribution programs. </li></ul><ul><li>Sources of revenues: </li></ul><ul><li>-Taxes levied on Personal and Corporate incomes. </li></ul><ul><li>-Taxes on wages and sales of the consumer goods etc. </li></ul>
    11. 11. Equity <ul><li>Markets do not produce a fair distribution of income which is not acceptable from the social point of view. </li></ul><ul><li>If income inequality exists, Gove can take the following steps: </li></ul><ul><li>-can engage progressive taxation, </li></ul><ul><li>-taxing large income at a higher rate than small incomes. </li></ul><ul><li>-impose heavy taxes on wealth. </li></ul><ul><li>Can make transfer payments like aid for elderly , blind and disabled people </li></ul><ul><li>-can subsidize the consumption of low-income group </li></ul>
    12. 12. Macroeconomic Growth and Stability <ul><li>Economic growth denotes the growth in Nation’s output. </li></ul><ul><li>Macroeconomic policies for stabilization and economic growth include fiscal policies along with Monetary Policies. </li></ul><ul><li>Fiscal policies- change in taxes and change in govt. spending. </li></ul><ul><li>Monetary policies- change in money supply and money demand – affect interest rates and credit conditions. </li></ul>
    13. 13. Contd.. <ul><li>Since 1930s Govt.s are succeeded to curb the inflation. </li></ul><ul><li>In most of the industrialised countries, we find </li></ul><ul><li>some variant of a mixed economy. </li></ul><ul><li>-the market determines output and prices in most individual sectors. </li></ul><ul><li>-government steers the overall economy with programs of taxation, spending, and monetary regulation. </li></ul>
    14. 14. Introduction to Demand and Supply
    15. 15. Demand and Demand Curves (a) <ul><li>There exists a definite relationship between the </li></ul><ul><li>market price of a good and the quantity demanded of that good, other things held constant. This relationship between price and quantity bought is called the demand schedule, or the demand curve. </li></ul>
    16. 16. Law of Demand <ul><li>Law of downward-sloping demand : When the </li></ul><ul><li>price of a commodity is raised (and other things are held constant), buyers tend to buy less of the commodity. </li></ul><ul><li>Similarly, when the price is lowered, other things being constant, quantity demanded increases. </li></ul>
    17. 17. Demand and Demand Curves (b) <ul><li>The individual demand curve shows the quantity demanded at each price by one consumer. </li></ul>
    18. 18. Demand and Demand Curves (c) <ul><li>Demand curves are downward sloping. </li></ul><ul><li>As price falls, consumers buy more of the good. </li></ul><ul><li>The position of an individual’s demand curve also depends on: </li></ul><ul><ul><li>Income </li></ul></ul><ul><ul><li>Social trends </li></ul></ul><ul><ul><li>The price of related goods </li></ul></ul><ul><ul><li>Expectations about the future </li></ul></ul>
    19. 19. Market Demand Curve (d) <ul><ul><li>The market demand curve is the horizontal sum of the demand curves of all individuals. </li></ul></ul>
    20. 20. Factors behind the demand curves <ul><li>Average Income </li></ul><ul><li>Size of the Market </li></ul><ul><li>Related Goods </li></ul><ul><li>Taste and Preferences </li></ul><ul><li>Special Influences – umbrella in Rainy Season. </li></ul>
    21. 21. Shifts in a Demand Curve versus Movements along a Demand Curve <ul><li>A change in price is represented by a movement along the demand curve. </li></ul><ul><li>All other changes that affect demand will shift the demand curve. </li></ul>
    22. 22. Sources of Shifts in the Demand Curves (a) <ul><li>Tastes </li></ul><ul><li>Prices of related goods </li></ul><ul><li>Income </li></ul><ul><li>Demographics </li></ul><ul><li>Information </li></ul><ul><li>Availability of credit </li></ul><ul><li>Changes in expectations </li></ul>
    23. 23. Sources of Shifts in Demand Curves (b) <ul><li>Tastes: If one day everyone in the United States woke up and liked Britney Spears CDs, the demand curve for Britney Spears CDs would shift to the right. </li></ul>
    24. 24. Sources of Shifts in Demand Curves (c) <ul><li>Prices of related goods </li></ul><ul><li>Complementary goods: Peanut butter and jelly </li></ul><ul><ul><li>When the price of peanut butter rises, there is movement along the demand curve for peanut butter. </li></ul></ul><ul><ul><li>When the demand for jelly falls, the demand curve for jelly shifts to the left. </li></ul></ul>
    25. 25. Sources of Shifts in Demand Curves (d) <ul><li>Price of related goods </li></ul><ul><li>Substitute goods </li></ul><ul><ul><li>When the price of coffee rises, there is movement along the demand curve for coffee. </li></ul></ul><ul><ul><li>When the demand for tea increases, the demand curve for tea shifts to the right. </li></ul></ul>
    26. 26. Sources of Shifts in Demand Curves (e) <ul><li>An increase in income increases the demand for most goods. </li></ul><ul><li>The demand curve shifts to the right. </li></ul>
    27. 27. Sources of Shift in Demand Curves (f) <ul><li>Availability of credit </li></ul><ul><ul><li>If banks reduce the number of automobile loans they approve, the demand for cars decreases and the demand curve shifts to the left. </li></ul></ul>
    28. 28. Sources of Shift in Demand Curves (f) (cont.) <ul><li>A change in expectations </li></ul><ul><ul><li>If consumers believe the price will increase in the future, demand increases today (when the good is cheaper); this shifts the demand curve to the right. </li></ul></ul><ul><ul><li>A change in expectations about the future affects current variables. </li></ul></ul><ul><ul><li>A change in expectations may be self-fulfilling. </li></ul></ul>
    29. 29. Supply and Supply Curves <ul><li>The supply schedule (or supply curve ) for a commodity shows the relationship between its market price and the amount of that commodity that producers are willing to produce and sell other things held constant. </li></ul>
    30. 30. The Slope of the Supply Curve <ul><li>The supply curve is upward sloping. </li></ul><ul><li>When the price of a good or service rises, the quantity supplied to the market rises. </li></ul><ul><ul><li>Suppliers find it more profitable to produce more goods or services when prices are higher. </li></ul></ul><ul><ul><li>A higher price allows firms to cover the higher costs of producing more goods. </li></ul></ul>
    31. 31. Market Supply <ul><li>The market supply curve is the horizontal sum of the supply curves of all the suppliers. </li></ul><ul><li>Just as individual supply curves have a positive slope, so do market supply curves. </li></ul>
    32. 32. Forces behind the Supply Curves <ul><li>Cost of Production </li></ul><ul><li>Technological Advances </li></ul><ul><li>Price of related goods </li></ul><ul><li>Govt. Policies </li></ul><ul><li>Special Influences </li></ul>
    33. 33. Shifts in a Supply Curve versus Movements along a Supply Curve <ul><li>A change in price is represented by a movement along the supply curve. </li></ul><ul><li>All other changes that affect supply shift the supply curve. </li></ul>
    34. 34. Sources of Shifts in Supply Curves (a) <ul><li>A change in the price of inputs </li></ul><ul><li>A change in technology </li></ul><ul><li>A change in the natural environment </li></ul><ul><li>A change in the availability of credit </li></ul><ul><li>A change in expectations </li></ul>
    35. 35. Sources of Shifts in Supply Curves (b) <ul><li>A rise in the price of coffee increases the costs of making espresso. </li></ul><ul><li>The supply of coffee decreases and the supply curve for coffee shifts left or up. </li></ul>
    36. 36. Sources of Shifts in Supply Curves (c) <ul><li>If a new technology improves coffee bean harvesting, the costs of producing coffee fall. </li></ul><ul><li>This increases the suppliers’ desire to sell at each price. </li></ul><ul><li>The supply increases and the supply curve shifts right. </li></ul>
    37. 37. <ul><li>A market equilibrium comes at the price at which quantity demanded equals quantity supplied. </li></ul><ul><li>-At that equilibrium, there is no tendency for the price to rise or fall. The equilibrium price is also called the market-clearing price. </li></ul><ul><li>-This denotes that all supply and demand orders are filled, the books are “cleared” of orders, and demanders and suppliers are satisfied. </li></ul>Equilibrium of Supply and Demand
    38. 38. Law of Supply and Demand (b) <ul><li>The equilibrium price is the market clearing price that equates quantity demanded with quantity supplied. </li></ul><ul><li>Equilibrium occurs where the demand curve intersects the supply curve— Qd = Qs . </li></ul>
    39. 39. Excess Supply <ul><li>The law of supply and demand predicts that prices will move to equilibrium values. </li></ul><ul><li>Excess supply causes prices to fall. </li></ul><ul><li>Suppliers cannot sell all they wish, so they cut price. </li></ul><ul><ul><li>Quantity demanded increases along the demand curve to point E 0 . </li></ul></ul><ul><ul><li>Quantity supplied decreases along the supply curve to point E 0 . </li></ul></ul>
    40. 40. Excess Demand <ul><li>Excess demand causes prices to rise. </li></ul><ul><li>Consumers cannot buy as much of the item as they want. </li></ul><ul><li>They bid up the price. </li></ul><ul><ul><li>As the price rises, the quantity supplied increases along the supply curve. </li></ul></ul><ul><ul><li>As the price rises, the quantity demanded decreases along the demand curve. </li></ul></ul>
    41. 41. Using Demand and Supply Curves (a)
    42. 42. Using Demand and Supply Curves (b)
    43. 43. Price and Cost (b) <ul><li>In the basic competitive model, the price equals the marginal cost. </li></ul><ul><li>An example of the difference between price and marginal cost is land. </li></ul><ul><ul><li>The supply of land is fixed (ignore reclamation from the sea). </li></ul></ul><ul><ul><li>So marginal cost is infinite or at least very high. </li></ul></ul><ul><ul><li>But the price of land is finite. </li></ul></ul>

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