circular flow 2
TRANSCRIPT
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Circular Flow of
Income
Production Possibility
Frontier
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Business Economics/Circular Flow-Prof. Monica Gupta 2
Over View
Circular flow
Three Market Arenas
Aggregate demand
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Business Economics/Circular Flow-Prof. Monica Gupta 4
Circular Flow of Income
A diagram showing the
income received and
payments made by eachsector of the economy.
Real flow Money flow
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Business Economics/Circular Flow-Prof. Monica Gupta 5
Four Components
Households
Firms
Government
Rest of the World (ROW)
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Business Economics/Circular Flow-Prof. Monica Gupta 6
Firms Households
ROW
Government
Wages interest dividend profits rent
Consumer Expenditure
Factors of Production (FOP)
Goods and Services (GAS)
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Business Economics/Circular Flow-Prof. Monica Gupta 7
Unique Features
Leakages Withdrawals
Additions Injections
Households
Every transaction must have
two sides.
Govt. and house holds alsoimport.
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Business Economics/Circular Flow-Prof. Monica Gupta 8
Unique Features
Factor market
Commodity market
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Business Economics/Circular Flow-Prof. Monica Gupta 9
The Three Market Arenas
1. The Goods and Service
Market
2. Labor Market
3. Money (Financial) Markets
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Business Economics/Circular Flow-Prof. Monica Gupta 10
The Goods and Service Market
Demand Supply
1. Firms
2. ROW
Households
Firms
Government
ROW
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Business Economics/Circular Flow-Prof. Monica Gupta 11
The Labor Market
Demand Supply
1. Households
2. ROW
Firms
Government
ROW
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Business Economics/Circular Flow-Prof. Monica Gupta 12
The Money Market Funds
Demand Supply
1. Households
2. ROW
Households
Firms
Government
ROW
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Business Economics/Circular Flow-Prof. Monica Gupta 13
The Money Market Features
Borrow Lend
Activity
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Business Economics/Circular Flow-Prof. Monica Gupta 14
The Money Market Features
Promissory Note
Treasury Bond/Bill
Corporate Bonds
Interest
Shares Dividend
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Business Economics/Circular Flow-Prof. Monica Gupta 15
Aggregate Demand The total demand for GAS in an
economy.
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Business Economics/Circular Flow-Prof. Monica Gupta 16
Aggregate Supply
The total supply for GAS in an
economy .
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Business Economics/Circular Flow-Prof. Monica Gupta 17
Aggregate Demand and Supply Curves
P*
Y*
AD
AS
Aggregate Output Y
OverallPrice
levelP
E
O
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Business Economics/Circular Flow-Prof. Monica Gupta 18
Production Possibilities
Model The production possibilities
frontier shows the
combination of output thatthe economy can possibly
produce given the available
factors of production.
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Business Economics/Circular Flow-Prof. Monica Gupta 19
Assuming
Level of factors of Production
Fixed Technology
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Business Economics/Circular Flow-Prof. Monica Gupta 20
Production Possibilities Frontier
F
AB
C
E
D
3000
1,000
1,000
300
2,200
2,000
700600
Quantity of Cars Produced
QuantityofCompute
rsProduced
Trade offs
Efficient Production
Scarcity
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Business Economics/Circular Flow-Prof. Monica Gupta 21
Production Possibilities Frontier
F
A
B
G
E
3000
1,000
1,000
2,200
2,000
700600
Quantity of Cars Produced
Quantity
ofComputer
sProduced
Economic Growth
Opportunity Cost
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Business Economics/Circular Flow-Prof. Monica Gupta 22
Production Possibilities Frontier
F
A
B
E
3000
1,000
1,000
2,200
2,000
700600
Quantity of Cars Produced
Quantity
ofComputer
sProduced
Economic Growth
Choose between A and B or anypoint on frontier.
1. Government
2. Markets
3. Both
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Business Economics/Circular Flow-Prof. Monica Gupta 23
Vilfredo Pareto Pareto Optimality
A test of economic system is when it permits
all its citizens to maximize satisfaction
(Welfare).
Distribution between consumersAllocation of productive recourses
The output of goods
Conditions (Optimize):- ParetoOptimal
Welfare
Condition
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Business Economics/Circular Flow-Prof. Monica Gupta 24
Pareto Optimal Welfare Condition
An allocation of resources is pareto efficient
for a given set of consumer tastes, resources
and technology, if it is impossible to move to
another allocation which would make some
people better off and nobody worse off.
D to A is Pareto improving ParetoOptimal
Welfare
Condition
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Business Economics/Circular Flow-Prof. Monica Gupta 25
Economic Concepts Scarcity
Trade Offs
Efficiency
Opportunity Cost
Economic Growth
Welfare
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Business Economics/Circular Flow-Prof. Monica Gupta 26
Thank you