PMT210 Summary Economics PDF

A SUMMARY TO BASIC PRINCIPLE OF ECONOMICS PMT210 WRITTEN & COMPILED BY: BALOGUN CLINTON OLUWASEGUN (a.k.a. POLymer) COURTESY: POLYMER IMPACT CONCEPT® IN CONJUCTION WITH FST-KLASSˡ⁹ (08169051017)...

A SUMMARY TO BASIC PRINCIPLE OF ECONOMICS PMT210 WRITTEN & COMPILED BY: BALOGUN CLINTON OLUWASEGUN (a.k.a. POLymer) COURTESY: POLYMER IMPACT CONCEPT® IN CONJUCTION WITH FST-KLASSˡ⁹ (08169051017) BASIC MACRO AND MICRO ECONOMICS. 26TH OF JUNE 2016 Fst KLass”19 Polymer impact concept Economics is a social science that studies the production, distribution and consumptions of good and service. It is a complex social science that span from mathematics to psychology. There are different definitions of economics as they are economists. Alfred Marshal in 1980: defines economics as “the study of mankind in the ordinary business of life”. It enquires how he gets his income and how he uses it. Adam Smith In 1778 economics as “an inquiry into the nature and causes of wealth of nations” J.S.Mill In 1844: economics as “practical science of production and distribution of wealth” A.C Piguo : economics as the science of material welfare Sam Aluko defines economics as common sense made difficult Paul a. Samuelson: regard economics as a queen of social science. Jacob Viner: “defines economics as “economics is what economist does” However the most generally accepted definition of economics was by Prof. Lord lionel robins: economics as a social science which studies human behaviour as a relationship between end and scare means which as an alternative uses. Fundamental economic problem Scarcity and choice Scarcity is refers to the limited nature of the supply of resource Choice is the act of choosing or making decision among numerous want. In making choice, a scale of preference has to be drawn up. Types and function of economics system Economic system is the way in which the available productive resources in a country are owned, distributed and managed and utilised for satisfaction of human want. Economic system helps to tackle the basic economic problem of the society which includes; What to produce Where to produce How to produce For whom to produce Types of economics system Capitalism Socialism and Mixed economy Capitalism: Economics system in which the means of production are owned and manage by private individuals. Features of capitalism Private ownership Free market enterprise Profit maximization Freedom of choice Accumulation of wealth Existence of competition Production and consumption are regulate by price system Economic activities are market oriented Socialism: means of production and distribution are controlled and owned by the government. Features of socialism Joint decision-making Non profit motive Promotion of welfare Equitable distribution of income No competition Absence of economic rivalry Mixed Economy: economics system in which both private and government ownership of means of production and distribution exist together in a country. Nigeria operate this type of economics system. 1|Page Fst KLass”19 Polymer impact concept Features of mixed economy system Joint participation Check and balance Fair competition Economic freedom Freedom of choice Function of economy system  Allocation of resources  Organization of production  Distribution of good and services  Economic growth and development  Economics stability Price system or price mechanism is the process by which monetary value of a commodity service or factor of production is determined by the interplay of the force of supply and demand what Adam smith called “ the indivisible hand “. THEORY OF DEMAND Demand is the quantity of a given commodity that a consumer is willing and able to purchase at a particular price and over a period of time. Want: is refers to the desire or willingness to purchase a given unit of a commodity at a particular price and time but not back up with the ability to pay for it. It referred to as mere demand Types of demand 1. Joint/complementary demand: The demand for those goods and services that go together in use of ones implies the use of the other. E.g. petrol and motor car 2. Competitive/substitute demand: The demand for those goods and service that serve the same purpose and are therefore close substitute for one another in use. E.g. omo and bimbo detergent. 3. Composite demand: this is when good demanded for uses in various purposes. E.g plank is used in making house-roof, chairs, beds etc. 4. Derived demand: This is the demand for goods and services that are not for their own sake but for the sake of other goods or services. E.g. palm fruit which palm kernel and oil can be obtain. Law of demand The law of demand states that “as the price of a unit of a given commodity decreases, all things being equal (ceteris-paribus) its quantity increases, and vice-versa”. The lower the price the higher the quantity demanded and the higher the price the lower the quantity demanded. Demand schedule: shows the various quantities demanded of a commodity at different price. Demand curve: this shows the graphical illustration of the information on the demand schedule. Exception to the law of demand 1. Inferior goods: These are good in which as the consumer’s disposable income increase less of them are being are demanded and vice-versa. 2. Giffen goods: These are goods in which the demand for them decreases as their price falls because as the prices of such goods fall, extra real income that ensures from such fall in price will be used on more nourishing food stuff. 3. Ostentation or luxurious goods: These are the goods that the consumers buy to show-off. 4. Fear of future rise in price: The rumours that the price of a commodity May likely increase in future will lead to a mad rush for such good when their price have not change. DETERMINANTS OF DEMAND (THE DEMAND FUNCTION)  Price of the commodity  The price of other commodity  Income of the consumer  Taste or preference of consumer 2|Page Fst KLass”19 Polymer impact concept  Expectation of a future change in the price of the commodity  Government policy  Population of consumer Qd= F(p) where Qd = is the quantity demanded P = the price of commodity F = function The quantity demanded function for a commodity is given as Qd=21 – 3P Price 0 1 2 3 4 5 Quantity demanded 21 18 15 12 9 6 THEORY OF SUPPLY Supply: This is defined as the amount or quantity of a commodity which the producer/sellers are willing and able to offer for a sale at a given price and at a specific period of time. Types of supply 1. Joint supply: This refers to the supply of those commodities that are from the same source of origin. E.g palm oil and palm kernel. 2. Competitive supply: This is the supply of a product that serves more than one purposes/uses. E.g. cassava tuber. In supply for production of garri will adversely affect the supply of fufu. 3. Composite supply: this refers to the supply of several commodities for the satisfaction of a particular want or more to meet a particular need. E.g. supply of pepper, tomatoes, onions, maggi, vegetable, locust beans, groundnut oil, meat, fish, e.t.c for meeting the need for soup. Law of supply The law of supply states that “as the price of a commodity increases all things being equal a commodity increases all things being equal; its quantity supplied also increase and vice- verse”. That is the higher the price the, the higher the quantity supplied and the lower the price, the lower the quantity supplied other things being constant. Factor affecting supply  The price of commodity (P)  The price of other commodities (Po)  Cost of production /price of input production (Pf)  State of technology (T)  Weather (W)  Government policy  Number of producer  Goal of firm (G) The determination of equilibrium price and quantity The equilibrium price or the market price is the price of which the quantity demanded is equal to the quantity supplied. That is Qd=Qs Qs = quantity supplied F= function P=price Given Qs= 14 + 4p complete the table below Price (#) 1 2 3 4 5 6 Qs (gram) 18 22 26 30 34 38 THEORY OF CONSUMER’S BEHAVIOUR Utility: This is the amount of satisfaction derived from the consumption of a given commodity at a particular time. Utility also means to satisfy human desire. Assumptions of Approaches to Theory of Utility 3|Page Fst KLass”19 Polymer impact concept  Cardinal approach: This school of thought believes that utility is measurable like a physical commodity.  Ordinary approach: This school of thought believes that utility is not measurable but can only be ranked by consumer’s satisfaction. Concept of Utility  Total utility (Tu); This is refers to the entire overall satisfaction derives from consuming successive unit of a particular commodity  Marginal utility (Mu): This is the satisfaction derives from consuming an additional or extra unit of commodity or additional satisfaction lost as a result of reducing the consumption of a commodity MU=  Average utility (Au): this is the average or unit satisfaction Au= Utility schedule: this show the different satisfaction derived from the various unit of a commodity consumed. Utility curve: this is the graphical representation of information on the utility schedule. Complete the table below using the formula above Qd 1 2 3 4 5 6 7 Tu 10 18 24 28 30 30 28 Au 10 9 8 7 6 5 4 Mu 10 8 6 4 2 0 -2 Note: at Qd=2 Au= =9 following the procedure you get the remaining values At Qd= 2 Mu= Tu₂ - Tuˡ i.e Mu= 18-10 =8 Law of Diminishing Marginal Utility States that “ the satisfaction derives from every successive unit of commodity consumed decreases as the total consumption increases and vice-versa”. The higher the unit or quantity of a commodity consumed all things being equal the lower the satisfactions derived vice-versa. Utility Maximization/ consumer equilibrium Utility is maximised or the consumer is at equilibrium when the value of the marginal utility of a unit commodity is equal to the price of the unit. When Mux=Px Utility maximization equation is =  Price must be equal to the marginal utility  The marginal utility must be diminishing It must be subjected to constraint that: 1 = Pxqx + Pyqy + Pnqn Theory of consumer behaviour (indifference curve analysis) In 19th century Francis Edge Worth was the first economics who incorporated the analysis in economic literature. Assumption to indifference curve  Axiom of rationality: The consumer are rational  Axiom of ordinarily: show that utility is non-measurable.  Axiom of diminishing marginal rate of substation: amount of the consumer wish to give up for an extra unit of X in order to maintain same level of satisfaction.  Axiom of consistency: consumer must be consistent in is choice.  Axiom of transitivity: the consumer must be transitivity in his choice. If he prefers X to Y and Y to Z then, he should prefer X to Z. Characteristics of indifference curve 1. It is a negative slope. i.e. slope downward from left to right. 2. They must be convex from the origin. 3. The indifference curve does not intersect obey axiom of transitivity 4. The higher the indifference curve, the higher the level of satisfaction attained by individual consumers. 4|Page Fst KLass”19 Polymer impact concept Marginal Rate Substitution This is the rate at which a consumer will exchange successive unit of one commodity for another to maintain same level of satisfaction. This is calculated as MRSxy= and MRSyx = QX 1 2 3 4 5 6 Qy 18 13 9 6 4 3 MRSxy 5 4 3 2 1 Budget line: This represent the maximum of two commodities X and Y which a consumer can purchase given his income and the price of goods. Budget line = Pxqx + Pyqy = = Consumer equilibrium: Consumer is said to be in equilibrium when he maximises his total utility or satisfaction subject to the given constraints. The slope of indifference curve must be equal to the slope of the budget line. = Elasticity of demand Elasticity of demand refers to the measure of the degree of responsiveness of demand to change in certain factors that influence demand which could either be price of the commodity or income of the consumer. Types of elasticity of demand Price elasticity of demand Cross elasticity of demand Income elasticity of demand Price elasticity of demand: This is the degree of responsiveness of demand to slight change in price. Ep= Therefore Ep= * A negative sign is always inserted in order not to make it has a negative value Point elasticity: This measure the elasticity at a particular point along the demand curve. Q= abP Q= quantity demanded a= constant b= slope Example obtain the following from Qd= 10 – P Px 10 9 8 7 6 5 4 3 2 1 0 Qd 0 1 2 3 4 5 6 7 8 9 10 From the above  If Ep is zero then it is perfectly inelastic that is change in price has no effect on the Qd. Ep=0 At price = 2 Qd= 10 – 2 =8 Ep= Ep= 0.25  If EP is less than one (Ep < 1) it is inelastic. This implies that a change in price leads to a less proportionally change in the Qd. At price =10 Qd=10 – 10 Qd=0 Ep= = Ep tends to infinity  If Ep equal infinity (Ep=a) the demand is perfectly elastic. This implies that at the prevailing market price, several quantities will be demanded if not all.  If EP I greater than one (Ep>1) it is elastic. Thus change in price leads to more proportionally change Qd.  If Ep is equal to one (Ep=1) it is unitary. This means a change in price leads to a proportional change in Qd ARC Elasticity: This is the co-efficient of price elasticity between two points. Determinant of Elasticity of Demand  Availability of close substitute 5|Page Fst KLass”19 Polymer impact concept  Expenditure on the product  Time adjustment  Degree of need  Habit  Range of alternative uses of commodity  The proportion of market supplied. Income Elasticity of demand: This is the degree of responsiveness of demand in response to a change in income. Ey= * Ey= * It has a negative value for inferior goods while positive valve for normal goods. Cross elasticity of demand: It is the degree of responsiveness of quantity demanded of commodity A in relation to the price of another commodity B. EAB= * EAB = * It has a positive value when goods are close substitutes to another while negative value when goods are complimentary. Theory of production Production is defines as the creation of wealth and utility Factors of production Land → Labour → Capital → Entrepreneurship Land: These are resources provided free by nature e.g space, minerals, sunshine, etc. Characteristics of land  Land is said to be fixed in supply  Land varies in quality  Land is also heterogeneous in nature  Land is not geographically mobile  Land is subjected to diminishing return  The reward of land is rent Labour: There are human’s efforts, (physical and mental, skilled and unskilled) which are directed to the production of good and services. Characteristics of land It is supplied by human being and so has moral and ethical aspects Labour is perishable. That is effort cannot be stored Labour produce and it from whom production take place. They can combine together in trade union and force up chain on entrepreneur. Labour is free to choose between work and leisure. Labour can decide whether or not to replenish itself. Reward of labour is wages Efficiency of labour: this means ability to produce the maximum output possible with a given level of resources. It depends on the following Environmental background → Educational and training → The working conditions → Welfare service → The co-operating factors → Wages Capital: These are stock of physical assets to facilitate the production of goods and services. Characteristics of capital  Capital is artificial and not natural  It depreciates over time  It is mobile geographically and to some extent occupationally  Increase through process of capital formation  Reward of capital is interest Types of capital Fixed capital: this form of capital does not change its form in the production process. It is durable. E.g road Circulating capital: it is the one that complete its form in the production process e.g Raw material. 6|Page Fst KLass”19 Polymer impact concept Personal capital: this is the wealth inherit in the individual. Eg skills Private capital: The private capital are owned by individual Social capital: are those items of property owned by public e.g hospitals Factor affecting capital formation  Saving : this determine the level of capital formation  Efficient use of factors of production  Types of investment in the country  Population growth  Private and public imports  Inflation  Government policies Capital consumption: This is using capital without repairing or replacing the depreciated capital/good so that capital/stock is allowed to run down. Entrepreneurship: one who undertake production with a view to earning a profit. Characteristics of entrepreneurships  They organise all other factor of production  They receive income in form of profit  The entrepreneur is the most mobile  They may be single person like a farmer. Function  He takes decision to as; what to produce → How to produce → Where to produce and → when and for whom to produce.  He bears the risk of production  Organize and controls are in his hands, the success of the business depends largely upon his efficiency.  They are policy maker of enterprise.  The reward of entrepreneur is Profit Theory of Cost Cost of production: this is all the reward due to factors of production which include; rent, wages and salaries, interest and profit. Cost is divided into two Short run cost: costs are fixed. Long run cost: Costs are variable. Implicit and explicit cost Implicit cost: This refers to the value resources owned and used by the firm in production process. Explicit cost: These refer to the expensive which the firm incur to purchase or hire resource in the production process. Concept of cost Variable cost (Vc): these are those that vary without put e.g cost of raw material Fixed cost (Fc): those cost that do not vary with output. Total cost curve In short run total cost depend on the output of the firm, state of technology, price of input and some fixed factor like capital. They are into two; Total Variable and Total Fixed cost Total cost (Tc)= Total fixed cost (TFC) + Total variable cost (TVC) Total fixed cost (TFC): overall obligation which the form incurs per unit of time for all variable factor of production. Marginal cost (Mc): this is the extra cost of producing more output. MC= AFC= or ATC – AVC AVC = or ATC – AFC AC= AFC + AVC 7|Page Fst KLass”19 Polymer impact concept MC = TC= AC * Q Example: compute the table below Q TFC TVC AFC AVC AC TC 1 200 120 200 120 320 320 2 200 140 100 70 170 340 3 200 180 66.7 60 126.7 380 4 200 200 50 50 100 400 5 200 240 40 48 88 440 6 200 280 33.3 46.7 80 480 Using the formula above, you get the table correctly. Q TC AC MC 1 40 40 2 70 35 30 3 90 30 20 4 100 25 10 5 150 30 50 6 240 40 90 Production function: this describes the technical relationship between inputs and outputs in physical terms. It specifics the combination of input used to produce a certain amount of output at any given period. Total production: Refers to total output of a commodity provided by the combination of a fixed factor and variable input. Average product of the variable factor labour: This is defined as the total product divided by the number of the unit of labour used. APL= LABOUR 1 2 3 4 5 6 7 8 TP 3 8 12 12 17 17 16 13 APL 3 4 4 3 3.8 2.8 2.9 1.6 MPL 3 5 4 3 2 0 -1 -3 LAW OF DIMINSHING MARGINAL RETURN States that “the addition of a variable factor of production on fixed amount, the increment in total output will at first rise and then decline” Money Money is anything that is relatively scare but has a fixed and unvarying price in terms of the unit of account and it is generally acceptable within a given society in settlement if debt of for payment of goods and services. Trade by barter: This is the exchange of goods for goods and service for services. Feature of trade by barter  It waste time  Lack of common measure of value  Indivisibility of commodity  Difficulty in storing wealth 8|Page Fst KLass”19 Polymer impact concept  Problem of saving Historical development of money Commodity money→ Metallic money → token money → bank note Kind of money Token money → Fiduciary issue→ Currency → legal tender → instrument of credit Function of money As a medium of exchange → as a unit of account → as a measure of value → a store of wealth/value → a measure of deferred payment → easy working of price system. Quality of good monetary medium Acceptability→ stability → divisibility → durability → portability → standardized unit → scarcity/intrinsic value Demand for money: means to hold money for different motive. Motive of holding money include; Transactive motive Precautionary motive Speculative motive When money are set aside for Money is usually held in cash for People keep money to exchange day to day requirement such as non-predictable and foreseen it for either of asset wherever buying of food and other contingencies such as sickness they want to do so. Money is necessities and other emergencies held of interest rates are very low and exchange their liquid cash for high returns Value of money: this means the quality of goods and service that money can buy. Quantity theory of money The crude quantity theory: This is the direct relationship between the quantity of money and the level of price so that for example if quantity of money rises by 10%, the price will also increase by 10%. The Sophisticated quantity theory: Mv = PT where M= normal money P=price T= total number of transaction V= transaction velocity The Cambridge Approach: Alternative approach to the role of money in an economy and does not ask what dictates the speed with which money changes hands. M=Md=PrKR where Pr= average price level k= ration of the money R=national income Liquidity: Ease with asset can be converted at its full value into money Rate of Interest: this is the reward for parting with liquidity. Bank Commercial bank: deals with money and credit and their objective is making profit Function: Accepting deposit → Granting loans → they act as agent of payment → providing foreign exchange → keeping value→ discounting bill exchange → agent of government. Central bank: Apex of the monetary and banking structure of a country. Functions: Owns by government → dept of management → The Issue of currency → bankers bank → promoting economic development → cheque clearing → facilities to entertain public complains. Capital market: the market that facilitate the borrowing and lending of both medium and long term load and investment. Money market: the market that facilitate the borrowing and lending of short term funds. International trade and payment Trade means the buy and selling of goods and services. Domestic trade: trade within a country at a given period of time. International trade: trade outside a country at a given period of time. Difference between domestic and foreign trade Difference of language → difference of currency → artificial barriers → distance → mobility factor of production Reason for international trade Mineral resource → difference in climate → different in capital possession→ technical know- how technology → strategic reasons. 9|Page Fst KLass”19 Polymer impact concept Theory of absolute advantages (Adam smith): states that “a country will specialize in the production of a commodity in which it has absolute advantages over the other”. Theory of comparative advantages (David Richards): state that “when a country had absolute advantage in the production of two commodities. The law of absolute advantage will not be adequate to justify the need for trading with other nations”. Terms of trade Nation terms of trade: This is the exchange ratio between different commodities, the relationship between price of nations export and price of its import. Nation term of trade = Balance of payment (BOP): a systematic account of trading transaction between the recording country and the rest of the trading world within a specific time. Note: A country has a BOP surplus when its receipts are greater than payment. A country has a BOP deficit when its payment is greater than receipt. A country has a BOP balance when its receipts are equal than payment. Current Account: this is made up of the flow of payment and receipt for visible goods and invisible goods. Capital account: this shows the flow of money from a country as a result of internal investment of various kinds. Momentary movement account: this show how the balance of both the current and capital account are settled. Exchange rate: refers to the price of once currency in terms of another currency. Public finance Public finance: This deal with government income and expenditure within a specific period of time. Problem of public finance Government revenue including tax → government expenditure → public debt → Budget policy Fiscal policy: this is the deliberate use of government taxation, expenditure and borrowing instrument to influence the level of economic activities in the country. It influences resources allocation. Source of government revenue Taxation → borrowing → fees and charge → rent, royalties and profit → grants Taxation: a compulsory contribution to the public authority to meet its expenses and for the provision of general benefits. Principle of taxation (Adams smith “wealth of the nation”)  Canon of certainty: explains that the amount of time and manner of tax to be paid must be clearly made know to the tax payer in particular and general public.  Canon of convenience: it stipulates that tax should be levied at a time or in a manner in which the payer finds it most convenient to pay.  Ability to pay → neutrality → Flexibility  Canon of economy: it states that taxation must be collected in such a way that cost of collection form only small proportion of the amount collected. Types of taxes 1. Direct taxes: Tax is paid on the basis of one’s income or wealth. In most cases paid employees have their taxes deducted from their salaries. Advantages Involves PAYE pay as you earn → base on equitable distribution of income 2. Indirect taxes: Tax is placed on goods and services and is paid only when such good and service are brought. Advantages Easy to collect → means to raise revenue for government → means of regulation consumption Definitions of terms in taxation A Poll Tax: this is tax levelled equally on everybody A Value added Tax (VAT): tax which is imposed on a commodity at each stage of its production or distribution. It is proportional tax A Specific Tax: this is a fixed sum that is imposed on a commodity. It is a proportional tax 10 | P a g e Fst KLass”19 Polymer impact concept A Valorem Tax: this is a tax levied on the gain received as a result of the sale of capital assets such as stock and shares. System of taxation Progressive taxation Regressive taxation Proportional taxation This is a situation when a high- This is a situation when high- This is when equal percentage income earner does not only income earner pays the same is used to calculate the amount pay more tax than a low-income amount with low-income of tax to be paid by both the low earner in absolute terms but also earner. E.g indirect taxes and high income earner. a higher percentage of his income. Incidence taxation: this means the final resting place of a tax burden. For direct tax: payer bears the burdens while for indirect tax: burdens are on supply and demand. Budget A budget is a financial statement of government on the estimate revenue and expenditure for a given year. Balanced budget: a budget is said to be balance when government revenue covers the estimated expenditure Surplus budget: a budget is said to be surplus when government revenue generated is greater than the estimated expenditure. Deficit budget: a budget is said to be deficit when government revenue generated is less than the estimated expenditure. Recurrent revenue: this is the money received by government yearly from all the various forms of tax. Recurrent expenditure: this means expenditure on running cost. Public debt This is the total borrowing by the government or public authority at home or overseas. Why public debit Deficit financing → rapid growth of population → capital formation → investment opportunity → unforeseen circumstance → industrialization Debt burden: refers to as interest and amortization paid on outstanding debts. Measurement of public debt 1. Debt service = 2. External debt = 3. Interest service ration Borrowing policy: These are difference source of credit opened to the creditor countries. Debt management: this is refers to any deliberate official action of government, central bank or the treasury to alter the quantity and kind of natural government debt obligations. Debt can be domestic or external debt management. Basic function of debt management Policy → Regulatory → operationally → accounting → statistical analysis Form of debt conversion Debt for debt Debt for export Debt for cash Debt for equity Debt for nature National income The circular flow of income: the economy of a given society consists of only two units; the household unit and the business unit. The circular flow of income operate effectively under certain assumption 11 | P a g e Fst KLass”19 Polymer impact concept  Economy is composed of only two sector ; business and household  The business and household sector is the sole producer of goods and services and production occurs by hiring the factor of production  The household are the sole buyer of goods and service  The firm keep their production level exactly equal to their sale levels  The firm pay-out to household all the money which they receive from the sales informs of wages and salaries, interest and profit. Business sector Land Rent consuption/expen Labour goods and Wages diture Capital service Interest Household sector From the illustration circular flow of income above:  The factor of production flow from household into business sector.  Rent, wages, interest and profit flows from the business sector to the household  Meanwhile goods and service flow from the business sector to the household as the household purchase them.  While money flows from their household to the business sectors Definition of terms Gross Domestic Product (GDP): This is the total monetary value of goods and service produced in a country within a period of one year regardless of nationality. GDP= NDP + Depreciation or GDP= GNP – Net Income Gross National Product (GNP): This is the total monetary value of goods and service produced by citizen of a country both aboard and home. GNP= GDP + Yn – Yf Yn=income earn by citizen abroad Yf= Income earn by foreigners in country Net National Income (NNP): This is the total monetary value of goods and service produced by all citizen of a country within a year after allowance has been made for the consumption of the fixed capital used in the production process. NNP= GNP – Depreciation Personal Income (PI): It is the total earning of individual for taking part in the production of goods and service PI= GNP- coy profit – coy tax transfer payment Disposable income: this is a part of income which is left after personal income tax is deducted. Amount left for spending and saving. Approaches to Estimation of National Income 1. Output method: GDP is obtained by adding together all the output of factor of production. 2. Input method: GDP is obtained by adding together all the rewards accursed in the factor of production. 3. Expenditure method: require adding up all expenditures on goods and service during the year. 12 | P a g e Fst KLass”19 Polymer impact concept Y= C + G + I + (X-Y) + P Y= income C= consumption I=investment P= income from abroad X-M = net income from abroad (export – Import) Uses of national income  It measure the economic performance  It indicates the overall living standard of people  It is used for economic planning  It serve as a basis of revenue allocation  It is useful for international comparison Growth of national income Capital → technology advancement → mineral resource → political stability The concept of consumption and savings Consumption: means utilization of goods and service for the gratification of human desire Saving: this are disposable income which are not spend on consumption of goods and service. Marginal propensity to save and consume Marginal propensity to consume (MPC): this measure the relationship between change in income and change in consumption. MPC= Marginal propensity to save (MPS): this measure the relationship between change in savings and change in income. MPS= Note: MPC + MPS = 1 Average propensity to save and consume Average propensity to consume (APC): this is a measure of the proportion of income spent on consumption of goods and services. APC = Average propensity to save (APS): this is a measure of level of income saved. APC = APC + APS = 1 INVESTMENT: this involves expenditure on capital goods. It is used to cover expenditures on goods which are not meant for present consumption but which are to yield benefit in future. Y= C + I Y= C + S Therefore S=I CONCEPT OF MULTIPLIER (k) CONCEPT OF MULTIPLIER (k): This measure the effect of a change in any of the component of aggregate demand such as private consumption, private investment, government expenditure, export and import on national income. For consumption k= = = For investment k= = = Thanks for participation Possible Question for Test and Exam to the Basic Principle of Economics 1. Balance of trade is the difference between ___________export and import 2. An economy in which both the public and private sectors contribute substantially to the growth is ___________________ Mixed Economy 3. The economic goal of public utility is to _______ To satisfy human desire 4. The main purpose of studying economics is to solve the problem of ______ Scarcity 5. The branch of economics that focuses on the individual consumers and firm is known as _________flow of national income 13 | P a g e Fst KLass”19 Polymer impact concept 6. An organized way by which a state or nation allocates its resources, goods and services is known as ______________economic system 7. The demand curve shows a _____ negative ______sloping 8. A shift in demand curve is caused by ______ Change in quantity demanded 9. What is the motive of holding money in avails peoples the opportunity to meet unforeseen circumstances _______ precautionary motive 10. The point which the quantity demanded is equal to quantity supplied is called ___equilibrium point _________ 11. Money as a means of payment originated as a result of the problem encountered by ___________ Trade by barter 12. The three fundamental concept in economics are __want____, ___scarcity __________and ____choice ______ 13. When you make choice, the benefit of the next forgone are known as ___________ opportunity cost 14. __ J.S.Mill __________ defines economics as the practical science of production and distribution of wealth. 15. The basic problem of economic is __what to produce___,_how to produce _____,___where to produce___and ____when and for whom to produce __ 16. Calculate the quantity demanded at price 5 using the function Qd=10-(2/3)P =6.67 17. When price elasticity is less than one, it is said to be ________ inelastic 18. A type of capital that completely changes its form in the production process is called ______ circulating capital 19. At commodity 1 the total cost is 40, at commodity 2 the total cost is 70, find the marginal utility ____ 30 20. The type of demand in which the use of one deserves other is said to be________ joint demand 21. The production within the boundaries of a nation is called _______ GDP 22. If S= -10 + 0.35Y, what is the planned consumption when y= #500___ Solution Y=500 S= -10 + 0.35*500 S= 165 Recall Y= S + C therefore C= Y – S C=335 23. If C= 15 + 0.77Y, what is the planned saving when y=#1600 ____ Solution Y=16000 C= 15 + 0.77*1600 C= #1247 Recall Y= S + C therefore S= Y – C S=#353 24. In national income accounting, NNP is derived by subtracting ___ from the GDP depreciation 25. A comparative advantage implies that a country will specialized in producing the commodity ____which it has absolute advantages over. 26. ___,___ and ___ are the basic approaches to the measure of national income Output, input and expenditure method 27. A change in consumption due to change in income is called __ marginal propensity consumed 14 | P a g e Fst KLass”19 Polymer impact concept Qd FC VC TC AC 20 200000 250000 450000 22500 30 200000 Q T 20000 40 200000 550,00 750000 S Answer Q= 400000 T= 600000 S=18750 28. The statement that utility is measurable like physical commodity was postulated by ____ the cardinalist 29. Given demand, Qd= 120 – 2p and Qs= 4P. The equilibrium price and quantity respectively are ______ answer #20 and 80. Recall Qs=Qd 15 | P a g e