Circular Flow 2

8/2/2019 Circular Flow 2

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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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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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Four Components

Households

Firms

Government

Rest of the World (ROW)


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Firms Households

ROW

Government

Wages interest dividend profits rent

Consumer Expenditure

Factors of Production (FOP)

Goods and Services (GAS)


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Unique Features

Leakages Withdrawals

Additions Injections

Households

Every transaction must have

two sides.

Govt. and house holds alsoimport.


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Unique Features

Factor market

Commodity market


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The Three Market Arenas

1. The Goods and Service

Market

2. Labor Market

3. Money (Financial) Markets


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The Goods and Service Market

Demand Supply

1. Firms

2. ROW

Households

Firms

Government

ROW


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The Labor Market

Demand Supply

1. Households

2. ROW

Firms

Government

ROW


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The Money Market Funds

Demand Supply

1. Households

2. ROW

Households

Firms

Government

ROW


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The Money Market Features

Borrow Lend

Activity


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The Money Market Features

Promissory Note

Treasury Bond/Bill

Corporate Bonds

Interest

Shares Dividend


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Aggregate Demand The total demand for GAS in an

economy.


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Aggregate Supply

The total supply for GAS in an

economy .


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Aggregate Demand and Supply Curves

P*

Y*

AD

AS

Aggregate Output Y

OverallPrice

levelP

E

O


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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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Assuming

Level of factors of Production

Fixed Technology


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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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F

A

B

G

E

3000

1,000

1,000

2,200

2,000

700600


Quantity

ofComputer

sProduced

Economic Growth

Opportunity Cost


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F

A

B

E

3000

1,000

1,000

2,200

2,000

700600


Quantity

ofComputer

sProduced

Economic Growth

Choose between A and B or anypoint on frontier.

1. Government

2. Markets

3. Both


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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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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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Economic Concepts Scarcity

Trade Offs

Efficiency

Opportunity Cost

Economic Growth

Welfare


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Thank you

Circular Flow 2

Documents

Transcript of Circular Flow 2