SUMMARY of Economics: An Introduction and Vocabulary Economics is the attempt to explain the behavior and interactions of an individual’s, households, firms, industries etc. Now the scarce resources must be balancing the wants and needs of one group of people against those of another, and is directly related to the politics, ideology and values. In the economy as a circular flow that is Figure A. there is two things that are involved i. e. Firms and households. Now the household demands the manufactured goods and services where as the firm on the other hand demands resources like labor, capital, land and managerial skills.
From the household the employee goes to firm to work and then he uses the finished resources for his personal use and this is how the cycle works. In Figure B. we should realize that not all the income is spent. Some income is saved and recycled to investment through the financial markets and that we can see in fig. B. As we cannot consider an economy as isolated from the rest of the world since countries have a great impact on each other owing to transactions such as imports, exports, and foreign borrowing. Therefore we should incorporate both the foreign and government sector in the flow charts as we can see in the Figure.
C. In this the government sector makes payments to households and firms, collect taxes, borrows saving and consumes both goods and labor. The foreign sector buys and sells goods and services and borrows and saves it in the domestic financial market. Now to understand the concept of supply and demand we should first know the meaning of those terms. Supply means the goods and services which we try to make it available to the customers on time and demand means to fulfill the needs of the buyer by providing him/her the services at the right place on right time.
In Figure D. the supply curve is in the upward direction because the price is high as the producer is willing to produce the given quantity. The reason for price high is because of the need in order to compensate a producer for the higher cost of obtaining the additional resources needed to produce the larger output. Similarly, in figure E. the demand curve slopes downward because buyers as a group respond to lower prices by purchasing more. Now in Figure F, in the freely operating market the market price and the quantity are determined simultaneously .
And one does not determine the other. There is only one actual market price and one actual quantity transacted. And so this means that some buyers and sellers were not able to make a transaction or additional transactions because they could not buy or sell at the going market price. So Buyers who were willing and able to pay the market price or more are indicated by the proportion of the demand curve. Now in figure G, as we can see that the marker prices and the quantities are at the equilibrium , new forces can causes either or both the supply and demand curves to shift.
Such forces create a new equilibrium point towards which price and quantity will adjust. As we have even studied about the market failures and the role of the government in which the strength of the market is that all resources and outputs with efficiently be allocated to their most productive, beneficial uses by the law of supply and demand. On these grounds, there appears to be no rule for government in the economy other than maintaining the rules of the marketplace, since the market is performing optimally.
However market failures which justify government interventions in the economy are as follows that is a) inequity (unfairness), b) failure of competition, c) underutilized resources, d) externalities, e) public goods. Now I would like to explain each of the failures one by one. a) Inequity: It is the distribution of resources and outputs resulting from a perfectly functioning market system will be efficient, but it may not be equitable. If the market’s distribution of benefit does not meet society’s criterion of equity, government can intervene to redistribute the ncome or wealth. b) Failure of competition: As we all know that there are some circumstances which lead to natural monopolies for example the economics of producing electricity may justify only one large power plant which exploits economies of scale to supply the entire community. c) Underutilized resources: It is when the national economy exhibits the high level of unemployment, idle factories, huge balance of payments deficits or surpluses, and unanticipated inflation; it is difficult even for economists to argue that all resources are being efficiently utilized by the market system. ) Externalities: Externalities are actions of one actor which affect another, but not directly through the market system. The actions of the polluter, for example, affect others by the reduced quality of the air and water they must consume, but the price of the polluter’s products does not reflect their cost of pollution. Thus government often provide regulatory incentives not to pollute or introduce market incentives through taxes or subsidies. e) Public goods: Some items have peculiar characteristics that when one person consumes the benefits, it does not detract others from also consuming the same benefits.
Example of public goods is national defense and public parks. Thus the market system fails to produce an optimal amount and quality of these goods. Aggregate supply and aggregate demand: Generally I would like to explain this by an example but first I would like to clear some concepts that are one would expect that market mechanisms will efficiently allocate resources and output throughout the economy. As only under special conditions would another actor intervene in the operation of a particular market? All of this analysis forms the basis of microeconomic.
Aggregate supply is the schedule relating the total supply of all the goods and the services in an economy to the general price level. While there is broad agreement among economists about the slope of the aggregate demand curve, a consensus view is almost impossible to identify. Aggregate demand is the result of the interactions of the nonfinancial and financial markets. The non-financial markets are divided into four types of expenditure. The financial market includes money and all other financial assets. This is why I have understood from the case study.