Introduction to Economics:

Economics is the social science studying the production, distribution and consumption oI goods
and services. At its most basic, however, economics considers how a society provides Ior its
needs. Its most basic need is survival; which requires Iood, clothing and shelter. Once those are
covered, it can then look at more sophisticated commodities such as services, personal transport,
entertainment, the list goes on. Since any allocation oI scarce resources must inevitably involve
balancing the want and needs oI group oI people against those oI another, economics is directly
related to politics, ideology and values.
The Economy as a Circular Flow:
In economics, the terms circular Ilow oI income or circular Ilow reIer to a simple economic
model which describes the reciprocal circulation oI income between producers and consumers.
In the circular Ilow model, the inter-dependent entities oI producer and consumer are reIerred to
as "Iirms" and "households" respectively and provide each other with Iactors in order to Iacilitate
the Ilow oI income. Firms provide consumers with goods and services in exchange Ior consumer
expenditure and "Iactors oI production" Irom households.



The concepts of supply and demand:
Relationship between the quantity oI a commodity that producers have available Ior sale and the
quantity that consumers are willing and able to buy. Demand depends on the price oI the
commodity, the prices oI related commodities, and consumers' incomes and tastes. Supply
depends not only on the price obtainable Ior the commodity but also on the prices oI similar
products, the techniques oI production, and the availability and costs oI inputs. The Iunction oI
the market is to equalize demand and supply through the price mechanism. II buyers want to
purchase more oI a commodity than is available on the market, they will tend to bid the price up.
II more oI a commodity is available than buyers care to purchase, suppliers will bid prices down.
Thus, there is a tendency toward an equilibrium price at which the quantity demanded equals the
quantity supplied. The measure oI the responsiveness oI supply and demand to changes in price
is their elasticity. Accordingly, the next section oI this note will Iocus on three topics;
a) Determination oI the market price and quantity
b) Market Iailures and the role oI government.
etermination of the market price and quantity:
Equilibrium means a state oI equality or a state oI balance between market demand and supply.
Without a shiIt in demand and/or supply there will be no change in market price. In the diagram
above, the quantity demanded and supplied at price P1 are equal. At any price above P1, supply
exceeds demand and at a price below P1, demand exceeds supply. In other words, prices where
demand and supply are out oI balance are termed points oI disequilibrium.



arket failures and the role of government:
There is a clear economic case Ior government intervention in markets where some Iorm oI
market Iailure is taking place. Government can justiIy this by saying that intervention is in the
public interest. Basically market Iailure occurs when markets do not bring about economic
eIIiciency.
1) Inequality:
Market Iailure can also be caused by the existence oI inequality throughout the economy. Wide
diIIerences in income and wealth between diIIerent groups within our economy leads to a wide
gap in living standards between aIIluent households and those experiencing poverty. Society
may come to the view that too much inequality is unacceptable or undesirable.
2) Public Goods:
Public Goods not provided by the Iree market because oI their two main characteristics
Non-excludability where it is not possible to provide a good or service to one person without it
thereby being available Ior others to enjoy
Non-rivalry where the consumption oI a good or service by one person will not prevent others
Irom enjoying it Examples: Street lighting / Lighthouse Protection, Police services, Air deIence
systems, Roads / motorways, Terrestrial television, Flood deIace systems, Public parks &
beaches.
3) Failure of competition:
Few modern markets meet the stringent conditions required Ior a perIectly competitive market.
The existence oI monopoly power is oIten thought to create the potential Ior market Iailure and a
need Ior intervention to correct Ior some oI the welIare consequences oI monopoly power.
4) Underutilized resources:
When a national economy exhibits high levels oI unemployment, idle Iactories, huge balance oI
payments deIicits or surpluses, and unanticipated inIlation, it is diIIicult even Ior economists to
argue that all resources are being eIIiciently utilized by the market system.
5) Externalities:
The social optimum output or level oI consumption diverges Irom the private optimum. Main
problem is the absence oI clearly deIined property rights Ior those agents operating in the market.
When property rights are not clearly deIined, market Iailure is likely because producers &
consumers may not be held to account.

ggregate emand and ggregate Supply:
Aggregate demand reIers to the Ilow oI total expenditure in an economy. In real terms, the
expenditure Ilow in a community consists oI consumption expenditure plus investment
expenditure, expressing the total demand Ior consumption goods and capital goods.
Aggregate supply reIers to the total production oI goods and services available Ior purchase by
the economy in a given period. Aggregate supply reIers to national product.

Introduction to National Income ccounting:

National income accounting deals with the aggregate measure oI the outcome oI economic
activities. The most common measure oI the aggregate production in an economy is Gross
Domestic Product (GDP). It is the market value oI all Iinal goods and services produced in an
economy within a given period oI time (typically a year), whether or not those goods are sold to
the Iinal consumer. It does not matter who owns the resources as long as it is contained within
the geographical border oI a country. What is happening to the GDP oI a country over time is an
important indicator oI how well the economy is perIorming.

Calculating GDP involves adding together trillions oI diIIerent goods and services produced by
the economy. Computation oI GDP Iocuses on transactions involving Iinal output oI goods and
services produced in the current year.

GDP private consumption gross investment government spending (exports imports)

GNP C + I + G + (X-)

1) Consumption:
C: Consumption is the expenditures oI the household sector. It includes spending on
1) durable goods which last Ior more than one year, 2) non-durable goods, and 3) services.

2) Investment:
I: Investment is the expenditure oI the business sector, including 1) purchases oI new
capital goods which are equipment or tools that aids in the production process, 2) changes in
business inventories, 3) purchases oI new residential housing.


3) Government Spending:
G: Government Spending is the expenditure oI the public sector, such as education and
deIense expenses. TransIer payments are not included. II Government`s expenditure is greater
than taxes collected Irom business and household sector, government is having a deIicit; iI
government`s expenditure is smaller than the taxes collected, government is having a surplus; iI
the two amounts are equal, and government`s budget is balanced. When there is a budget deIicit,
government needs to borrow debt Irom the business, household or the Ioreign sectors.
Government`s debt is usually higher in recession than in an expansion phrase oI the business
cycle because government needs Iunding to Iinance their deIicit.

4) Net Exports:
Xn: Net Exports is the diIIerences between exports (goods and services sold to the
Ioreign markets) and imports (goods and services produced and imported Irom abroad).
Xn X M (Xexports, Mimports)