2281-01-02 Economics Aggregate Demand Is the total planned spending at a given price level.

There are four main components of total spending or countrys goods a services. These are consumption C. Investment I; government spending on goods a Page | 1 services G; net exports minus net imports. (X M). Total spending can be in relation to income. It is the called aggregate expenditure and again consists of C + I + G + (X M) total. Spending falls as the price level rises its & rises as income rises. The largest components of the spending is consumption. Consumption: C is the amount house holds spend or goods and services to justify the needs & wants. The proportion of their disposable income (Y) after direct taxation plus any state benefits is called average propensity to consume. GS income the total amount spent is likely to increase. Influence on consumption: The main influence on consumption is people. People spend is comparison to what they will be spending is the future is based on rise of their income. Wealth: Increase in the value of the peoples assets is likely to encourage people to spend more , assets of the people are their houses and they seek ways to the improve their current property. Availability and Cost of Credit: The easier and cheaper it is to borrow the more likely they are likely to sprend when people spend Distribution of Income: A less even distribution may reduce spending. This is because rich who consist of higher income groups will not significantly increase their spending whereas middle and lower income groups experiencing reduction in their income will reduce their spending by large amounts.

2281-01-02 Economics Age Structure: Middle aged people tend to spend lower proportion of their income than the young. Inflation: The effects of inflation are uncertain people may be tempted to for the purchases of cars; washing machines and other items experience the prices to rise. Indirect taxes: A rise in indirect taxes will likely to reduce consumption. Range of Goods of Services: The greater the range of goods and services and higher their quality the more people are likely to spend. Page | 2

Savings: (S) is disposable income not spent so it is. So it is expressed as Y-C. The proportion of the disposable income which is saved is called average propensity to save. APS. . Influences on savings: The most obvious requirement is the ability to save and this depends upon the level of income. Social Attitude: The prevailing social attitude towards the careful management of money influences the level of saving. The range of financial Institution:In developed economics all kinds of institution for the deposits are available. Saving banks; commercial banks insurance companies and building societies are widely known easily accessible and usually have the confidence of the people. This range of opportunities not only stimulates savings but ensures that most of the potential saving is available to

2281-01-02 Economics borrowers. In some developing economics there are which have the confidence of the public. The rate of interest: In most cases a rise in the rate of interest will increase saving. Inflation: Inflation lends to reduce the real value of wealth so people may save more when inflation rises in order to maintain the real value of their savings. Habit: People may get into the habit of saving so a merit changes in the rate interest are not likely to affect this form of saving carried out. Contractual-Saving: Carried out through is the insurance companies Page | 3 such institutions

pension funds and building socials the individual savers put himself under a contractual agreement to pay a fixed sum the insurance premium. Targets: May savers have a targets such as the deposit for new home the purchase price of a motorcycle or the cost of the holiday abroad. Saving in order to accumulate a fixed sum of money is not likely to be influenced greatly by the change in the rate of interest. In fact an increase in the rate of interest might reduce the revel of such saving since at the higher

interest rate the sum will accumulate faster rate. Government Policies: Government encourage saving by for example allowing a certain amount to be saved in the tax free saving scheme. Corporate Saving: Companies save in order to build up reserves which will act as a guard against future business fluctuations and provide fund for future expenses. Government Saving: A government saves when its income from the tax revenue is greater than its expenditure. This may over unexpectedly if the level of the

2281-01-02 Economics economics activity is higher than expected or it may result from deliberate government policy if the government raises taxes government consumer expenditure reduces . Page | 4 Investment & the Rate of Interest: Firms invest when the rate of return is greater than expected. Changes in Technology: Advances in the technology will make machines more productive and likely to stimulate investment. Changes in the cost of the Capital: If the capital because cheaper at easy instalments more capital is likely to be purchased. Corporation Tax: Corporation tax is a tax on profits of the firms lowering corporation tax will increase post tax returns and stimulate investment. Government incentive: An increase in the government grants and in estimate tax allowances will be likely to increase investment. Profit Levels: Higher profit levels will encourage firms to in meeting cost and will provide them with the finance to do so. Rate of change of Income: This is one of the main in finance on investment and its significance is related to accelerator theory. Accelator theory: States that net investment Is related be the rate of the change of the income. For example. The growth of the rational income increases corruption will Firm will seek to increase their productive capacity. According to the accelator theory a change in the rate of the change of the

2281-01-02 Economics demand for consumer services will cause a greater percentage change in the demand for capital. Government Spending:The government spends money both on capital and consumer goods and services. The level of the government spending is influenced by the number of factors including the level of the economic activity the age of the population and level of the government financed or subsidised goods and services. Page | 5

Net exports. The amount earned from exports and the amount spent on imports are influenced by the following factors:a. Price of the domestic goods & Services relative to the foriegn goods & services. b. quality e. d. e. The quality of the dormice goods and services relative to the of forever goods and services. Exchange rate Income level @ home and abroad The effectiveness of the marketing of the domestic goods and

services relative to the marketing of the foreign goods & services.

Aggregate Demand is the total amount that will be spent at different values of price level. It is composed of consumption Consumtion:, investment I, Government

G: Net exports (X-M) The aggregate demand Curve: shown the firms overseas quantity of goods and services buyers and government are prepared to buy at different values of the general price level. It is drawn on the

2281-01-02 Economics assumption that other things eg the money supply ,rates of taxation, the marginal propensity to consume remain unchanged

. Why the demand curie slops downward from left to the right. There are three main reasons why there is an inverse relationship hence

Page | 6

between the general price level and the aggregate demand aggregate demand were slopes down from left to the right a. and b.

a rise in is the price level reduces the real value of the people income wealth and hence decreases their ability to consume. Higher prices increase peoples and forces demand to hold money for transaction. The increase in the transaction of demand for money is

likely to goods e.

raise the rate of interest and thereby reduce the demand for (consumption) and demand for capital goods interment.

An income in the general price level will make the domestic goods services less competitive against foreign goods services this will reduce the demand for the domestic goods.

Movement along the demand curve isinfluenced because of the change in the price of the commodity.

A general rise in price level will cause a contraction in the demand curve and a fall in the price of the commodity will cause on expansion in aggregate demand. If the general price level falls because peoples purchasing power will increase the transactions demand for money will fall causing a reduction in the interest rate and domestic good and services will become more price competitive.

2281-01-02 Economics

Shifts in the Aggregate demand: Reasons then the price will shift the aggregate demand curve this could be because of the reduction in taxes, increase in money supply ,a fall in the exchange rate and rise in the quality of domestically produced goods a rise in population will entries increase in demand for wide range of the goods and services. A fall in the interest rate will possibly stimulate demand for consumer goods to capital goods an increase in wealth is likely to increase the consumption of the goods. Page | 7

Aggregate Supply: Is the total output all firms old firms are willing to supply at a given price level.

The short run aggregate supply curve: The short run aggregate supply slopes upward from left to the right.

In the short run it is assumed that the prices of all the factors of production are fixed output is associated with higher average costs. This is because over time may have to be paid less, efficient machines may be used and less efficient methods of production may have to be employed. To higher output is associated with higher unit costs firms will only supply

2281-01-02 Economics more goods and services. If they can be sold at the higher prices resulting in an upward sloping output they rise by small amounts make the short run aggregate supply curse elastic. Shifts in the Short run aggregate supply curse: The short run supply curve will move to the right and move to the left as a result of the change in an influence other than the change in the general price level. Shifts in the short run supply curve are often referred to as supply __side shocks______ . A decrease in the short run aggregate supply will mean firm will offer less sale at a given price level, that is decrease in the short run aggregate supply Curve Page | 8

. The

following factors can cause decrease in the short run aggregate

supply curve. A rise in cost of production any level of production. Causes reduce aggregate supply. A rise in raw materials cost will cause the rise in the costs of production causing than to reduce their output. A rise in the corporation tax will only raise firms cost of production but also may provide less of an incentive for entrepreneurs and reduce their willingness to produce. Unfavourable weather construction work. Natural disasters for instance floods may damage a member of firms ability to produce. A decrease in the productivity of factors of production will raise costs and lower supply. will affect agricultural production and firms to

2281-01-02 Economics The Long Run Aggregate Supply:

The long run aggregate supply is vertical this is maximum potential output possible with given resources and given technology. At low levels of output the long run aggregate supply curve is horizontal (perfectly elastic). This because with a resulting high level of employment output level without a rise in costs. More workers can be Page | 9

recruited at the current wage and a rise in demand for raw materials and capital goods will not raise their price.

Then at a higher level of output it starts to slope upward,as firms begin to experience rise is cost as they have to compete for increasingly scarce labour raw materials and capital goods. At the full employment level curve becomes becomes vertical. Again this rrepresent the maximum potentials output.

2281-01-02 Economics Shifts in the long run aggregate supply Curve Over time an economy potential output can change as a result of the change in the quality and quality of factors of production. Increase in the long run aggregate supply curve is shown below:Page | 10

The specific causes of an increase in the curve include an increase in the supply curve. Interaction of demand a supply: The equilibrium level of the output is determined when aggregate demand and aggregate supply intersect. Increase in human capital. Improved health care training education Increase in investment Technological process Discovery of raw materials Greater incentive to work

If the price level was initially below P the excess demand would push the price level back to the equilibrium point whereas if the price was above P some goods and services would not be sold and suppliers will have to cut their prices.

An increase in the aggregate demand resulting from an increase in government spending is likely to cause increase in output and the price level at least in the short run.

2281-01-02 Economics

In the long run the market will be in equilibrium and the economy will operate where aggregate demand equals aggregate supply

Page | 11

Effects of are increase in the aggregate demand. The increase in the aggregate demand will result in the rise of the prices of the commodities. Monetary policy covers government changes in either supply of the money or interest rates. These polices are usually implemented by the central bank of the country. In the recent years in of countries changes in interest rate have been the main policy to in finance economic activity. An increase in the interest rate will lead to reduce aggregate demand. This is because saving will be encouraged borrowing discouraged and the spending power of the households who are the borrowers will be reduced. This downward pressure on spending is likely to reduce inflationary pressure but may have on adverse effect on balance of payment. This because a higher rate of interest will attract hot money flow into the country which will cause rise in the value of the money and cause export prices to rise and import prices to fall. It has been found difficult to control the money supply. In the past governments have sought to limit the growth rate of the money supply measures without great success. The most important form of money is bank deposits a large part of these deposits come into being as a result of saving by the sector including building societies. Total spending is very much in financed by firms and households to borrow from the banks either directly lowers and overdrafts or indirectly though credit schemes. So an attempt to control the

2281-01-02 Economics money supply must be directed at the banking sectors utility so send or to in finance households willingness to borrow.

Policy instruments: A central bank or behalf of government or groups of governments may such to in finance banks utility so send or customers demands for losses (the demand for money) if needs to control the former it may try to in finance the towards supplies of liquid assets are important become amount a bank can lend depends on its ability to meet the demand for esteems for cash. Liquid assets are important because amount a bank can send depends in its ability to meet the demand for customers for cash. The more the liquid assets a bank has the greater the amount it can potentially send. If or the other hand it needs to in finance demands for loans it may ______ to attar the rate of interest. Relationship between controlling the money supply and the changing rate of interest a central bank such as the bank of the England can fix either the quality of money or its price. It can not fix the both simultaneous. If the demand for money (equinity performance) does not change any changes in the supply of money will after rate of interest (except at very low levels) following figure shows decrease in money supply from MS to MS, covering the rate of interest to rise from R to e, L, MS alternatively if the supply of money remains fixed any change in ask demand for money will bring about a change is the rate of interest.

Page | 12

2281-01-02 Economics Since the. Control bank can not determine. Demand it is in the same position as a monopolist can determine quantity or price not both. If it chooses to fix a particular rate of interest then it must supply whatever quantity of money will be demanded at that rate as the demand for money changes so must the supply all cosies the rate of interest money change. If the authorities decide to fix supply of money the rate of interest will very as the demand, rises. Open market operations. The central bank can act directly on the supply of the financial amount in the banking system by means of its activities in the market for securities (government bonds and other government securities) in the open market. On a daily basis central bank avoids. Functions in the interest rates. So if there is shortage of funds it will purchase government securities to increase. Them. Moreover of it wishes, to restrict bank leading it will sell securities, the banks and other buyers will pay for these securities will cheques drawn on their accounts in the commercial banks. These cheques will be payable to the centrol bank of the country which will hold claims on the retail banks the debts will be settled by reduction of the bankers deposit at the bank of England. Special deposits the central bank can instruct retail banks to place more of their liquid assets will it this reduction in their liquid assets may mean that they will reduce their bank sending if the central bank coshes to encourage bank sending it can release any deposits it is holding and thus increase the bank supply of liquid assets. Exchange Rate: Is the price of money / currency is losses of the other currencies. Government which operate their ____ currencies have decided to operate fixed managed or floating exchange rates a fixed rate is one which is set at a certain price and is kept at that price by government action when necessary a managed exchange rate is one. Where extent to which the exchange rate can change is limited by intention of central bank and floating rate is determined by market forces. Page | 13

2281-01-02 Economics Exchange Rate Policy: Covers government decisions on covers government delirious on whether to influence the value of the currency whether it is to operate at fixed , pegged or a floating exchange rate and whether to link with other Page | 14

countries. A government can in finance the value of its currency by changing its interest rate and buying and selling of its currency ,if the value of the currency will rise,it will increase its purchasing power and put

downward pressure on inflation. However it may also harm its balance of segment position and reduce economic activity. In contrast reducing the value of the currency may increase employment growth help the balance of payment but increase inflationary pressure. Operating a floating exchange rate helps market grocers to determine its value but may create some uncertainty. A rise in the demand for UK goods (exports) will lead 2 to an increase in the demand for pounds by foreigners wishing to buy UK goods. A fall in the demand for goods imported leads to supply of pounds in the foreign in markets as UK artisans are changing fever pounds into foreign currency . Th advantages of floating exchange rate. Some people say thatfloating exchange rate are desirable because in theory they correct balance of payments deficit automatically. Disadvantage of the exchange Rate: They can cause uncertainty for the business mangers and they could be disure of the future prices of their exported goods.

Fixed Exchange Rate: The central bank of the country uses its reserve of foreign currency to help the currency at the same exchange rate for example the demand for exports falls and will put a downward pressure or the exchange rate. The central bank will immediately use some of its foreign reserve to purchase its currency cancelling out the fall in demand. If the currency is increased

2281-01-02 Economics in value it is said to be revalue and if it is decrease it is said to be devalued. Advantage of the Fixed Exchange Rate: Under a fixed exchange rate business mangers engaged in foreign trade can make considerable prediction about future exports and import prices. This certainty may provide a secure basis for investment and increased foreign trade. Fixed exchange rate are difficult to be maintained in the times of inflation and that a central bank may have large funds to maintain fixed exchange exchange rate. Page | 15

Policies: Macro fiscal policy economic problem:High employment High rate of inflation Balance of payment deficit Low economic growth Macro Economic Objections:Reduce an employment Stable price and control inflation Remove BOP deficit To get fast economic growth Fiscal Policy: Fiscal policy is adopted by government objective of fiscal policy is to maintain the economic without inflation and deflation fiscal policy is a demand side (demand management) policy. It control the aggregate demand in the economy. 1. 2. 3. 4. Government revenue (Taxation) Government expenditure Subsidies Transfer payment

2281-01-02 Economics 5. Deficit Financing

Taxation: Taxes are the main source of income for the government tax is a compulsory financial contribution from the people of a country to the government. No one is exempted from it. Types of Taxes: Page | 16

1. 2. 3. 4. 5.

Direct tax Indirect tax Progressive tax Regressive tax Proportional tax

Fiscal Policy: Direct Tax: Direct tax are imposed on the incomes of individuals. In this tax impact and incidence of tax is on some person. No one can shift the burden of tax on others. Direct taxes effect aggregate demand e.g. income tax cooperate tax insentience tax wealth tax capital growth tax. They are progressive in nature. Indirect Tax: These taxes are imposed on goods and services ( Expenditure). In this tax impact and incidence of tax is on different persons. Indirect tax aerate inflation in the country because taxes are added in prices e.g sales tax custom duty value added tax traffic. They are regressive un nature. Progressive Tax: When income of the people increases rate of tax also increases. When income of the people decreases rate of tax also decreases. Income rate of tax:200,000 400,000 600,000 10% 15% 20%

2281-01-02 Economics Regressive Tax: When income increase rate of tax decrease and when income decrease rate of tax increase. Income Tax Rate:300,000 600,000 900,00 20% 15% 10% Page | 17

Proportional Tax: When income increases or decreases rate of tax remain some. At all level of incomes rate of tax remain same. Income Tax Rate:400,000 800,000 1200,000 10% 10% 10%

National Income: Money value of all the goods and services produced in a country in a year is called nation income. National income = Gross Domestic product Measurement of National Income: Outcome Method: In this method market value of all the goods and service which are produced in a country in a year is calculated. Commodity Rice TV Doctors Rate 5 Kg 500 100,000 Quantity 50,000 10,000 20000 Market Value 25 m 5m 10 m

Sector Agriculture Industry Transport

Value 10 m 20 m 10 m

2281-01-02 Economics Banking Health Education Trading International Tourism 10 m 10 m 30 m 10 m Page | 18 30 m 20 m

Precautions in this method: 1. e.g Avaid from double accounting wheat 1 kg 10 Flour Bread N.I 15 20 45 10 5 5 20

A country should avoid from multiple accounting of the value of goods otherwise national income will be over calculated. This will mislead the government to plan for coming year. 2. 3. Personal services and home made goods are not induced in GDP. Expenditure Method: In this method total expenditure in a country in a year are calculated. Country can divide in three sectors:a. Private Sector: (1) Consumption (C): This is the spending by household to satisfy their daily needs. (2) Investment (I): this is the spending by individuals to buy capital to generate b. Public Sector: Government spending (G) defence law and order administration development. c. International Trade: Exports Imports income.

2281-01-02 Economics X M

Aggregate demand = Income = National income = Gross Domestic = Imports AD = Y = NI = GDP = C + I + G + X M 3. Income Method: In this method reward of factor of production are recorded which they have earned in one year. Y = GDP = Rent + Interest + Profit + Wages In this method incomes from ill-legal sources are not included in the GDP of the country. Money GDP = Nominal GDP Real GDP = Nominal GDP Inflation rate GDP per capital / head Disposable income = yd Yd = income direct tax Yd = Y DT DT DT = yd = yd = Total GDP/population Total Population Product = Consumption + Investment + Govt + Exports Page | 19

Advantages of direct tax: 1. 2. 3. 4. 5. 6. Principle of equality Progressive in nature Easy to collect Economic of collect Control inflation Flexible in nature

Disadvantages of direct tax: 1. 2. 3. Disintegrative to handwork Discourage saving Encourage tax evasion

2281-01-02 Economics 4. Unavoidable

Advantages of indirect tax: 1. 2. 3. 4. Discourage the use of de-merit goods Consumer had choice to avoid by not consuming the good Easy to pay Cannot be avoid because the taxes are added in price Page | 20

Disadvantages of indirect tax: 1. 2. 3. 4. They are regressive in nature, their burden is mostly felt by poor class. Indirect taxes may contribute to inflation Wide tax base Indirect tax lead to create uncertainty in govt revenue. AD = C + I + GDP + X M Output = income = expenditure = aggregate demand Former potatoes 100 kg market sell 100 kg x 10 = 1000 Determination of equilibrium level of national income: 1. 2. 3. 4. Increase in AD leads to increase in the price level Fall in AD leads to decrease in price level Increase in AS leads to decrease in the price level Decrease in AS leads to increase in the price level Income living standard Saving and Investment Balance of Payment deficit Economy

Effects of Taxation: 1. 3. 5. 7. 2. 4. Prices Employment 6. Efforts

Income: When direct tax is imposed or rate of direct tax is increased by government disposable income of the people will fall now they have less money to spent living standard of the people also falls. On the other hand fall

2281-01-02 Economics in the rate of direct tax increase the disposable income of the people. Now people have more money to spend living standard rises. Prices (Inflation rate): Increase in direct tax means fall in disposable income consumption falls. Aggregate demand falls which leads to fall in the price level. But fall in the direct tax leads to increase the price level in the country. Page | 21

When indirect tax is imposed prices will rise so but when indirect taxes falls prices will also fall. Because Indirect taxes are added and subtracted from the prices of goods.

Saving and Investment: At higher direct taxes disposable income falls. Saving depends upon disposable income.

When direct taxes increases, business profits and investment falls. When direct taxes decreases, business profits and investment rises. When indirect tax Prices C Saving When indirect tax Cost of production Profit Production Investment

Employment: Increase in direct tax, decrease the disposable income of the people, consumption falls, aggregate demand falls, stage of surplus goods will increase, producers decrease the production and _______ of markers from the jobs unemployment increases.

2281-01-02 Economics When indirect tax increases, cost of production of firm rises, profit level falls, they decreases the production and relies the workers form the jobs Page | 22 . Employment level increase. To increase the job opportunities govt should decrease direct and indirect taxes.

Balance of Payment defect:

When

the value of imports exceeds the value of exports country

face the balance of payment deficit. In this situation capital outflow are greater than the capital inflow. Countrys spending in imports is greater then the receipt from exports. Govt impose customs duties (tariff) on imported goods, which is a indirect tax. In this way price of imports rises and demand for import decreases. People of the country buy the domestically produced goods. Govt remove the indirect tax on domestically produced goods as a result

prices of domestic goods falls. Domestic goods become competitive and demand for exports increases. Balance of Payment can be removed. Efforts: Heavy direct taxes discourage the efforts of the people. They want to remain unemployed and get unemployment allowances. This is because of the heavy income taxes, so people get less disposable income. Business man and workers do not show their accurate income, so tax evasion is there.

Economy: High direct and indirect taxes have bad effect on the growth of the economy. These taxes decrease the aggregate demand and discourage the production in the country.

2281-01-02 Economics

Reasons of Taxation or objectives of taxation: 1. 2. 3. 4. 5. To arrange finance for govt. To make distribution of income more even. To get macro economic objectives. To provide public and merit goods. To control the consumption of some goods. Page | 23

1.

To arrange finance for govt: Government needs finance to meet the expenditures. Govt prepare

the infrastructure in the country e.g roads, dams airports, post offices, communication, factories, buildings, banks etc. govt provide the subsides to some industries, to increase the supply.

2.

To make distribution of income more even. Govt want to make the distribution of income more even in the

country. In this way gap between the rich have to pay high rate of tax and poor have to pay low rate of tax indirect tax on luxuries are higher and on basic necessaries are lower. Tax amount collected form the people are distributed on the poor in shape of subsidies and transfer payment. Motor cycle and small houses are exempted from tax.

3.

To achieve macro economic objectives.

a.

To reduce unemployment: Govt decrease the rate of direct tax, disposable income of the people increases consumption increases, aggregate demand increase consumption increase (AD) =C+I+G. More goods are produced to satisfy increasing demand which create more jobs opportunities for the people of the country. Govt can also increase government expenditure on

2281-01-02 Economics infrastructure, defence, law and order and transfer payment. In this way aggregate demand increases. Economy exports , which creates job for the people. Page | 24 b. To Control inflation: When government increases the rate of direct tax, disposable incomes falls, consumption falls, AD decreases, price level go down, govt can also decrease the rate of indirect tax, price of goods will decrease. c. To correct BOP Deficit: BOP deficit means that value of imports exceeds value of exports Govt import indirect taxes (custom duties) on imported goods so prices of imported goods will rise demand for imports falls. People purchase cheap domestic goods. BOP deficit can be removed.

4.

To provide public and merit goods.

a.

Public Goods.

These goods are provided by govt free of

cost consumer face no opportunity cost. These goods are non-extendedly and non-exactable. Public goods improve the living standard of the people. Govt provide these goods with the help of tax amount e.g street lights, roads, Clarence, public parks, libraries, radio broad casting.

b.

Merit goods. These goods are beneficial for the people and create external benefits. Private sector provide these goods in less quantity because these goods yield less profit for producers due to less price. Objective of govt is not to earn profit but to increase the well fare of the people so govt provide merit goods at low price e.g education and hospitals.

2281-01-02 Economics

5.

Control Consumption of some Goods: Govt encourage the production and consumption of merit goods.

Govt provide subsidies and give tax concessions. Supply of these goods increase and price falls which leads to increase in the consumer price of these goods e.g education, medical care, training schools, computers. Govt discourage the consumption of some goods by imposing heavy taxes cost of production increases, profits fall, supply falls, price rises, demand decreases e.g cigrettes.

Page | 25

Govt Spending: Good expenditure is spent by the public sector in the grants to nationalized by individuals.

Types of Govt expenditures: 1. Current expenditures. This is spending on day to day running of

the public services. 2. Capital Expenditures. This is the spending on social,

infrastructure e.g spending on schools, hospitals, reads, airports, post offices.

3.

Transfer Payments.

These are the payments to e.g pensions,

the unemployed and subsidies to products.

4.

Debit Interest:this is payment for interest on govt loans. a. b. c. d. e. Defence Law and order, protective services Roads Education Environmental Services, parts

2281-01-02 Economics f. g. h. i. j. k. l. m. n. o. Budget: Public Finance. Budget is based on expenditure plans and taxations Deflationary effect Decrease in price level in the Health Care State benefits, pensions, unemployed benefits Infrastructure Factories Foreign affairs Govt administration Subsidies Interest on loans Utility Services, Water, Gas, Electricity, Telephone Page | 26

plans in a country for economy financial year. 1. Surplus Budget.

country . Govt revenue is greater from taxation Govt spending. A surplus budget is when govt spending is less than govt revenue. 2. Deficit Budget. (Inflationary effect) Increase in price level in the

country. Govt revenue from taxation< Govt Spending. A deficit budget is when govt spending is greater than govt revenue.

3.

Balanced Budget. (Neither

inflationary or deflationary effect) No

change in the price level in the country. A balanced budget is when govt spending is equal to govt revenue from taxation = Govt spending

Reasons for govt spending:To increase development in the country To achieve macro economic objectives To provide merit goods To improve the living standard of the people

2281-01-02 Economics Sources of Govt revenue or explain how are govt expenditure paid for: 1. 2. 3. 4. 5. 6. Taxation (Direct or Indirect) Profits from trading surpluses of govt owned industries Public sector borrowing Fine and fees Sale of assets Foreign aid Page | 27

1.

Taxes: Taxes are the main source e of income by the govt . Tax is

compulsory amount people pay to the govt and no are can deny. There are two main types of taxes. Direct taxes, when impact and incident of tax is on same person. These taxes are imposed on the income of the people and no on can shift the burden of tax on others e.g income tax corporate, wealth, inheritance and capital gain tax. They are progressive in nature. Indirect tax is when impact and incident of tax is on different people indirect taxes are imposed on goods and services. Indirect tax is regressive in nature e.g sales tax, custom duties tariffs, value added tax. Govt rise the major portion of budget from taxation. The amount of tax is not sure every tear. This amount on increase or decrease. Increase in tax revenue shows the growth of the country and GDP. 2. Profits from trading surpluses: Govt has its own industries which are running under the super vision and control of the state. In Pakistan govt has owned deferent industries e.g PTC, Pakistan railway. PIA, WAPDA, WASA, Schools, hospitals, factories and universities. These institution, if earn the profit then surplus goes to govt. 3. Public Sector Borrowing. When govt budget is deficit, this means govt money from taxation is less than the govt spending. Now govt needs more funds to cover the govt spending. In this way govt can take internal and external loans. Internal

2281-01-02 Economics loans are taken from central bank, commercial bank and from individuals by selling govt securities and bonds. External loans are taken from world bank, international monetary fund and from govt of some countries. These loans are the sources of income for govt although in future country has to return these loans with interest rate. 4. Fees and Fines: Different govt departments e.g police, martial corporations, and local govt impose fines on different people and firms. Govt also collect revenue from licence fees TV traffic. 5. Sales of Asset: Govt sell nationalize industries to private sector and rise the revenue e.g Pakistani govt has sold steel will & PTCL. 6. Foreign Aid. Sometimes govt receives foreign aid from United Nation and from developed countries. This aid is provided to improve the literacy rate to improve health facilities and to reduce poverty in the country. Foreign aid is a source of services, which help to govt to develop the inflation of the country. a. Expansionary (Inflationary). Reason. This policy is adopted by govt during depression, when Page | 28

aggregate demand and prices are very low in economy. This period able to show high unemployment and low output. Solution. a. Made deficit budget b. Increase in govt

spending c. e. Decrease in direct tax Increase in transfer payments d. Decrease in indirect tax

b.

Contractionary (Deflationary). Fiscal policy

2281-01-02 Economics Reason. This policy is adopted by govt during boom or inflation. In this

period inflation and aggregate demand is very high. Solution. a. b. c. d. Govt make the budget surplus Decrease in govt spending Increase in direct tax Decrease in transfer payments Page | 29

This leads to decrease in aggregate demand and price level. Inflation When there is general and persistent increase in the price level in an economy inflation takes place. Too much money chasing too few goods. When inflation takes place then. Prices of goods increase Cost of living increase Living standard fall Value of money fall Purchasing power fall Real income = Money income Inflation rate Real Wage = Nominal Wage Inflation rate Causes of inflation or reasons of inflation or why inflation take place. 1. 2. Demand pull inflation Budget deficit Govt spending increase Direct tax decreases Rapid increase Fall in interest rate 3. Cost Push inflation: Increase in indirect tax Increase in wages by trade union Increase in cost of production

2281-01-02 Economics 4. 5. 6. Profit push inflation Imported inflation Monetarist view of inflation Page | 30

Explanation 1. Demand pull inflation:

Inflation can take place due to increase in aggregate demand

Elasticity of Supply Formulae to gird elasticity of supply Elasticity is calculated by the following formulae :Elasticity = Percentage change is supply

2281-01-02 Economics Demand Percentage change in price

Mathematically Page | 31

Table : Price 10 20 Q5 40 50

Zero Elasticity of Supply Infinite elastic. Mere the supply can change upto any extent at the same price. In other words elasticity of supply is equal to infinity if the supply of the commodity may change to any extent at the same price. Mere supply is elastic. Exceptional Supply Curue. Zero and infinite elasticity of supply are

represented in two exceptional supply curues Stocks. In the very short period response of the seller to the increase in price will totally depend upon the size of the stocks maintained by them. If the stocks are risible the response will be high and supply would be more elastic as compared to a situation where the stocks do not have sufficient quantity. Moreover the maintenance of the stocks will depend on whether the commodity is durable or punishable. Capacity. In the short run the size of the plant can not be increased. This if the producers want to increase their supply in response to increase in price, for instance it would depend upon the utilized excel capacity in the existing plant higher the excess capacity in plants more responsive will be supply to a given increase in price, Thus it is concluded that the electricity

2281-01-02 Economics of supply will be high if the existing plant has reasonable excess capacity which lies un-used. Time Period. The response of seller to an increase in price will totally depend on the size of the excess capacity because plant can not be changed in the short run. Moreover the long run is the time period during which size o the plant can be changed and methods of production can be revised. Cont of Factors. To produce more in response to the change the fine will employ more factors. In order to attract them a high cost has to be paid. If the cost of employing additional factors is high the responsiveness of the supply would be low and vice-versa. Long Run. Is the line period sufficient to change even the fixed factors. Page | 32

The size of the plant can change in the long run. Elasticity of Supply and Supply Curve. When the supply curue starts from origin the elasticity is equal to one. Price elasticity of demand (PED). This is usually referred to a simply

elasticity of demand. Lt measures the responsiveness of the change in quantity demanded to the change in price. Elasticity of demand can be measured in several ways as follows :PED = Percentage change in quantity demanded Elasticity of demand and total Revenue Factors in fluency elasticity of demand: a. The possibility of substitution if where are close substitutes for a good demand is likely to be more elastic for example a rise in the price of the beef will cause more people to each luscious. b. The case of the complementary goods. Complementary goods are those which are oftenly used such as bread and butter peas and motor cars and portal usually and increase in the demand for one causes increase in the demand for the other. = Percentage change in quantity demanded

2281-01-02 Economics a. Negative : Income measures but demand for the good decreases as in the case of inferior goods this has a requisite commercial value. b. Zero : Income decreases but demand remain the same as in the case of salt and paper. c. Inelastic: Income increases and demand increases by a smaller proportion as with requisites such as basis good stuff. This has a minors value between 0 and 1. d. Elastic: Income measures and demand increases by greater properties as with luxuries. This has a market value more than .. Cross Elasticity of Demand Cross elasticity of demand ; Supply Side Policy : New Classical Economists Free Market Supply Side Policies Privatization Cutting of Income Tax Cutting corporation tax Training Education. This training is a merit good and is top to market forces is likely to be under considered. Government is measures to improve education should arise the quality of the labour force. Government Grants. Genders is the quality + quantity of the investments are thought to be very important for economic growth. Total pre-cuts Return to the scale The concept of elasticity of supply is similar to the elasticity of = An product % change in the demand of good A Page | 33

demand. It also studies the responsiveness of supply to the change of price. elasticity of supply is the degree of responsiveness of demand to a change in price lighter the degree the responsiveness of supply to a change in price more elastic will be supply.

2281-01-02 Economics

To find elasticity of supply in the example have we apply the formulae. Putting the values in the formulae elasticity supply = 25 Page | 34

Elasticity of supply is always positive as where is a direct relationship between price and quantity supplied when price increases, supply also increases and vice versa. Creator than one if the elasticity of supply is greater than one when percentage quantity supplied is grater than the percentage change in price. This situation is referred to as elastic. Less when one if the percentage change in quantity supplied is less than the percentage change is the price supplied when elasticity is called elastic. Equal to one this refer to a situation when the percentage change in the quantity supplied is equal to the percentage change in price this is unitary elastic.

If the supply of a commodity remains exactly the same even price changes it would be the case of zero r responsiveness. This zero responsiveness means zero elasticity. This means elasticity of supply is zero if the supply does not change in response to the price.

What influences elasticity of supply elasticity of uppity can be higher or low clip ending upon certain factors. The main factors are availability of stocks.

2281-01-02 Economics When the supply curve starts from the Y exist elasticity of supply on this is greater tan one.

Page | 35 When the supply curve starts from them axis the elasticity of supply is less than one.

Percentage change in price

Where

indicates the amount of change.

Where the elasticity is less than one demand is said to be inelastic. Where it is more than one demand is said to be elastic. Values of elasticity vary along the given demand cure.

A rise in price leads to contraction in quantity and fall in price leads to expansion. Price elasticity demand is negative for normal goods price elasticity of demand is positive for inferior goods.

When the price is inelastic PED

a raise in price will lead to the rise

in the revenue and the fall in total revenue. When the demand has unit elasticity PED has no affects on the total revenue. arise or fall in price

2281-01-02 Economics

When the demand is elastic that is PED

a rise in price will lead to a

fall in the total revenue and fall in price will lead to rise in total revenue. Page | 36 Degree of the enmity requisites tend to have inelastic demand of they elastic demand if they have institutes moreover luxuries could have inelastic demand if they have no close substitute.

habit:

Because of habit people may be accustomed to bring a particular

good or service or brand of good and may be reluctant to change even if prices increase. Demand is inelastic for such good (eg to be across and alcohol) Income: Elasticity demand Income elasticity of demand refresh to the responsiveness of demand to changes in income it is measured by the following formulae :-

Percentage change in income

Cross elasticity of demands refers to the responsiveness of demand for one good to a change in the price of others good it is measured by the following formulae:5change in the price of good B

If the good A and good B are substitutes then the answer will be positive (+) answer because an income in the price of good B will cause demand of the good A to increase. The goods then lasagne the position accurate. If the good A + B are complementary the access will be _ (ve) because the increase in the price of the good B will cause decline in the demand for good A it is useful for the manufacturers to allow the errors elasticity of demand for the good they produce because they are able to any change in

2281-01-02 Economics the demand for the good as a result of the changes of the price of the other good. Are designed to increase aggregate supply by improving the working of products and factors market among supply side policies are incentives to worth education and elasting trade union reforms position and Page | 37

deregulation. More people may be encouraged to enter the labour market by cutting income tea and welfare benefits. This will increase the return from the working capital and reduce the return.

Improved education and training will raise produces productivity and increase this flexibility and mobility. Trade union reform may also increase workers flexibility and mobility and cut on the number of days lost through sales supply ride policies are those deli gene to increase the long terms growth potential and nearby in the long run. Improve the economics performance in terms and of economic growth but also in terms of employments, inflation and the balance of progress portion. They are to simple the working of products and factors markets. It is a micro economics approach designed to raise the performance of the micro economy in supply side policies are the quantity or the quality of resources will increase thereby rifting the long run aggregate supply cure to the right and enabling the country to produce more goods services. Different approaches supply side policies trend to be associated will new classical economists moreover now both eco classical economists and keyrian economists recognition the importance of the supply side of the economy. Advocate supply side policies are designed to improve the efficiency and flexibility of markets by increasing economy incentives and the level of competitions and reducing the role of the government. In contrast key rises believe that government intervention can improve the working of markets. They advocate interventionist supply side policies which will encourage the private sector to do things which they are either that doing or that

2281-01-02 Economics doing in different quality e.g giving grounds to firms to set up in depressed regions and to increase their level of increment. Deregulations : In values rumouring laws and regulations which restrict competition although new classical economists believe that some restrictions are fortified e.g level on the age at which people can starts work and safety regulations they favour getting ride of negotiations which protect the interest of existing supplies for example in UK in 1979 the Nation Bus Corporation had its monoply of local distance coach level removed when the conservation government allowed private operations to compete this was followed in 1986 by the deregulation of the local laws services and the stock exchange. This includes transferring assets from public to the private sector selling of the nationalized industries and putting local authority services such as refuse collection into the private sector. New classical economists believe that firms operate more efficiently in the private sector where they are subject to the discipline of the market if they do not produce what consumers want will then go out of the business. It is agreed that reducing the marginal of income will raise the supply of labour in a number of ways. It will encourage more people to seek employment for example others and those who have retired early. It will produce some people to work longer hours. It will encourage the employed to seek work more actively a income gap between after tax wage rates and unemployment benefit will have been increased. This will increase the funds fires have available to invest and will increase the financial incentive to invest. Private sector leads not to spend the optimum amount on training firms may under-spend or training because they plan to trained workers from other firms and because they fear that the other firms may take the persons they train so advocate government producing of the private sector training Page | 38

2281-01-02 Economics schemes a better trained labour force will b employable more produces and material

Page | 39

Labour is the only variable factor all the units of productions are equally efficient. There are no changes in the techniques of the production. The detail is the diagram the law of the diminishing returns which states that a of one factor of production are added to the other the increment in output will first rise and then decline. Column 1 2 shows the different level of output at the different level of employment. Average production that is output for worker is shown in the column 3 and is used by obtaining the formulae :Total of workers Marginal product shown in the column fourth desirous the changes in the total output brought about by varying employment by one person. The employment of the third person advises loan of the output while significantly a fourth person increases the total output by 20 tones. Since labour is the one variable factor is the example, changes is the output are related directly to the changes in employment. So it is possible

2281-01-02 Economics to speak of the changes in the production of the labour or changes in return to the labour gen the number of people increases from 1 6 total output continue to increase. But in the case of the average product and the marginal product as none profit are employed both R and marginal product begins to rise reach a maximum value and start to full. Page | 40

Increasing returns the total product increases at an increasing rate (MP is increasing) Diminishing returns the total product is increasing at a decreasing rate (MP is falling) Zero returns : The total product is constantnegative returns the total

product is falling.

The law of the diminishing returns deals with what are essentially short run situations. It is assured that rome of the resources used is production are fixed in supply. In the long run however it is possible for a firm to vary the amount of all the factors of production employed and more land can be acquired more buildings erected and more machinery installed. In the long run it is possible to change the scale of production. It is a feature of the production. What when the scale of production is altered output changes

2281-01-02 Economics are not usually proportionate for example when a firm doubles its rise its output it will tend to change by more that 100% or less than 100%. Label shows the increase in total output as the scale of the production increases the firm increases its size. But the proportion between the factors remains unchanged (e.g out of labour per 5 acres of land) as the firm increases its size from 4 people and 20 acres of land to 12 people and 60 acre of land and80 acres of land content returns to scale Coy further growth in the rise of firm yields decreasing returns to seek because output increases less than proportionately. The relationship between returns to scale and economics of scale. Increasing returns to scale are usually associated will falling average cost which can be referred to as economics of scale. This become in the absence of changes is the costs of the output if the output increases by a greater percentage than inputs each unit will become cheaper to produce. In the same way decreasing rate of returns are usually associated with falling associated with falling average out cost which can be preferred to as economic of scale. This because in the observe of the engages is the earth of input if out put increases by a greater percentage inputs each not will because cheaper to produce in the same way decreasing rate of returns are usually associated with falling average just costs which can be preferred to as economies of scale. This because in the absence of the changes in the earths of input, if output increases by a greater percentage than inputs each not will become cheaper to produce. In the same way decreasing returns to the scale are Page | 41

usually matched by diseconomies of scale with average cost rising as the output increases more slowly than the change in the scale of production. Changes in the output and costs :-

Total Cost Inputs 10 20

Total Costs 200 400

Total Outputs 200 500

Increase in Increase in Average Inputs Output

100%

150%

80 P

2281-01-02 Economics 30 40 50 600 800 1000 800 1067 1280 Page | 42 33 1/3 % 25% 33 1/3 % 25% 75 P 75 P

When the input increase by a greater percentage (increasing returns to scale) and average cost falls economics of scale. Output rises by the same percentage when input rises from 30 to 40 (constant returns) cost remains uncased when input rises from 40-50 output rises by matter percentage (decreasing returns).

COST + BENEFIT ANALYSIS Private Cost increased by those who by product and those who produce the product for complete if a person changes a battle of whising the cost may be and if a firm produces costs the cost in turn of wages parts increases may be 1500. Private Benefits those who buy the products and those who produce the products so catering the private benefit of selling of ear is the revenue it remains. Social Cost labour, raw material to the external costs of the production external costs might impose costs on society such as air We add the private cost of production such as the Which can also be called internal benefits received by Which can also be collect internal cost are the costs

2281-01-02 Economics pollution from the operation of the motor vehicles or the river pollution from the dumping of the wars materials such as: Social Cost = Private cost + External Cost Mere private cost means the cost of the economic activity consumption and production generated by the premium himself and external cost is the cost that is imposed on a third party of the economic activity. Page | 43

Social Benefits of an

Is the mixture of the private benefit and external benefit

economic activity. Private benefit means utility and satisfactory production or consumption of goods may confer external benefits on the third party or the community at large for which payment is not required for example anti smoking company can have wide spread implications.

Social benefits = private benefit + external benefit

Economic Goods and free goods Economic goods are achieved through scare resources because they are created from the mare measures there is a limit on the amount a economic good can be produced by the scarcity. Moreover not all the goods are produced from the scares measures an example could be fine air, but the economic goods have opportunity cost. Capital Goods. Which are also known as producer goods, investment

goods and immediate goods not brought by the household for final consumption instead they are bought by other firms as raw materials or inputs for the factors of production. Consumer or Final Goods. Are bought by the premium or the households for the purpose of the final consumption to satisfy wants and needs. Cars,

2281-01-02 Economics television, washing machines or similar goods purchased by individuals or the households for ordinary consumer usage.

Public Goods.

Goods + services.

Which are provided by the

Page | 44

government because emery one benefits from the enme if they do not pay the government provides these goods services as no private firm wishes to produce them, because nobody would pay for their use examples of the public goods are defence, police, street lights, cleaning of the environment, light house.

Merit Goods.

Societies government produces goods + services because

they think that people ought to have them even if they can not afford to pay them. Such goods + services are called merit goods examples of these goods are health care and education. We are entitled to these goods + services if even we do not have the money. Merit good can also be provided by the private sectors.

Demand.

Is the ability and willingness to buy a commodity the quantity

demanded at a given price. Individual Demand to Market Demand. The relationship between the

quantity demanded of a product by a single individual and the price of the product . There by adding the qualities demanded by each individual buyer at each price the market demand is obtained.

2281-01-02 Economics Extension and contractors of the demand cause can be referred to as extension and contraction as a result of the rise in price for P1 - P2 and fall is quantity demanded from Q1 Q2. Cause of Changes in Demand. A change in demand is always caused by a Page | 45

change in at least are of the conditions of the demand.

Changes in the Disposable Income.

This is one of the most important

determination of the demand. On increase in disposable income i.e income available for spending will lead to an increase in demand for most goods and services. There are exception but rising income is undoubtedly the most important reason why demand for most goods and services increases. (an outward right of the demand curve). A change in fashion touts habits. according to latest trends. Wealth In rou industries demand can change

Food, shops have very well in the recent years with the increasing interest is a healthy diet a new pop star can lead to big increase is the demand for records. Advertising: The whole point of the advertising is to increase the demand for some other goods and services firms spend huge sums or advertising in order to raise demand. Change in the price of the other goods as the prices of the good changes and the demand for it changes the demand for some other goods will change as well. Some examples will show the way this happens. If butter becomes cheaper there will be an increase in the demand for bitter and decrease in the demand for margarine. Butter and margarine are

2281-01-02 Economics substitutes as the price of one of the them fully so the demand for others falls at every price. Butter and margarine are said to be in competitive demand. It the price of rape rises the demands for records with rise. If the demand for the records falls there will be an increase in the demand for them. There will also be an increase in the demand for video rapes video tabors and video recorders are complements and as the price of one of them falls so the demand for the other rises . Video recorders and video lapels are said to be in the joint demand. Other complementary goods are records and record players. If the price of the record player falls the demand for records will rise a change in credit facilities. If it becomes Page | 46

easier to borrow money the demand for many goods + services will rise. The increased used of the credit facilities the credit cards has boosted the demand forginds changes in population and the size and structure comprising of infants, young, adults male females have given rise to ever rising demand. Supply of Goods and Services The supply of the goods and services is the amount that suppliers are willing to pay it in the market. Qualities : deal with represent in formation in a Once again we must emphasis that economists often numerical values and very often try to quantative way.

Product : how much

It entirely depends upon the nature of the commodity it could be stretched in the market like shares at the stock exchange.

tradable items such as Suppliers: as manufactures of the possibly be an intermediary in the

These are sellers of the product and are often referred to producers although they may but not be

production,

could

production;

in the production, or they may be in the selling

2281-01-02 Economics sources. Per period of time : supply must be live barred e.g if Acer computer has to supply 200 units the should define their time lines. Citrusparbus : considered multi The demand curve.
1800 1600

Page | 47 factors are in financial.

Only two variable prices and quantity should be

Price of Quality Standard (PC) PC 2000 1800 1600 1200 1000 800

Demanded per weak (D) 2000 3000 4000 6000 7000 8000
P R I C
0 300 4000

Quantity Demanded

E
D2 D1 D

2281-01-02 Economics A rise in quality Demanded is in financed by Fall in price Page | 48 PC

1200

Qs 1000 2000 3000 4000 5000 6000 7000

(a)

An

increase

in

800 1000 1200 1400 1600 1800

price leads to increase in supply. (b) Decrease in price

leads to fall in supply.

800

2000
1000 3000

S1

Price

1200

1000

3000

4000

Quantity Supplied

(a)

Explanation of the horizontal shift companies are now willing and PCs @ each and every price. Previously they had 3000 units but now they are prepared to

able to supply

only been prepared to supply supply 4000 units. (b)

Explanation of the vertical shifts companies wanted $ 1200 to

persuade than to supply 3000 units per week now they are willing to accept $ 1000 expansion and contraction of the supply.

2281-01-02 Economics Expansion: change in its When supply of a commodity increases due to the price it is referred to as expansion in supply. If the

price goes up due to the increase in the price per the relationship given by the low of supply it could be example of expansion and is measured by come from left to the right upwards. Page | 49

the measurement along the supply

y P R I C E Expansion

o x

Quality Supplied R I C E

Contraction: Like expansion it is also change in supply caused by the change in price. Decrease in supply however is because of commodity a movement along the supply contraction.

decrease of the price of the curve right to left represents

Contractio n

Quality Supplied R I C E

2281-01-02 Economics The factors other than price may also affect supply of cunnodity. If the supply increases due to a change in factors other than price it is referred to as rise in supply ensures. Page | 50
P R I C E Rise R I C E

Fall : A change in factors other

supply of commodity. This decreas is called fall in supply. It is represented in shift of supply curve to the left.
a. Cost of B R I C b. Techniques of production E R No of sellers in the I c. C market E R I C E

Quality Supplied R I than price C E

may also decrease the

P R I C E

Quality Supplied R I C E

2281-01-02 Economics Expansion and contraction is movement along the curve. Rise and fall in shifting of the supply curve.

Page | 51 SET 1

Aggregate Demand. Consumption. Influence on consumption. Wealth. Availability and lost of credit. Distribution of Income. Age Structure. Inflation. Indirect taxes. Range of goods and services. Savings. Influences on savings. Social attitude. The range of financial intuition. Government Policies. Corporate saving. Govt saving. Investments. Changes in technology. Changes in the cap it cost of capital. Corporation tax. Govt Incentive. Profit level. Rate of change of income. Accelerator Theory.

2281-01-02 Economics Govt spending. Net exports. The aggregate demand curves. Page | 52 Why the demand curves shops from left to right? Shifts in the aggregate demand. Aggregate supply. The short run aggregate supply curve. Shifts in the short run aggregate supply curve. The long run aggregate supply. Shifts in the long run aggregate supply curve. Interaction of demand and supply. Long run equhibruim Monetary Policy. Policy Investments. Special deposits. Exchange rate. Exchange rate policy.

2281-01-02 Economics

Free market economy. The main feature of this type of economy is that government plays no part in how resources are allocated by the consumers and producers, although of course these do not communicate directly with each other to see how this is so even must consider the main features of free market economy. a. In free market economies productions is under taken for profit we say that the producers are motivated for profits. This supply means that producer. Produce these goods and services that are highly profitable. b. A important feature of the free market economies is that there is freedom of choice this means that consumers are free to choose which occupations they will enter. Producers are at free will to produce goods of their choice. c. The government does not take any attempt to in finance what is produced how it is produced and for whom it is produced in a free market economy it is important to note that there are no state benefits of any kind. Suck as pension supplementary benefits, free school means and so on. d. Resources are allocated through a mechanism when consumers buy particular goods and serves they are in fact casting a vote for the continued production of goods and services when particular goods and service become none popular than more votes are cast than those in the previous time the result is that the price of these goods and services will rise. From a practical point of view the fundamental principle of the market mechanism and price system dominates the free market economic system. Page | 53

2281-01-02 Economics The government has very restricted part to play it should central national defence; act against monopolies, issue ,money, raise tax. It should not in finance the demand and supply activity in the market. Centrally Planned economy. The main features of a centrally planned economy; State over all the factors of production and the government decides what to produce and how to allocate what production. The government will make a plan for the production say a fine year period placing its resources accordingly for example a government may decides to use many resources on hospitals and schools, and very few resources using pop record, fashionable clothing and television sets. All worker are employed by the state. Page | 54

Some possible

benefit of the centrally

planned economy:(a) factors of production can be public

organized go produce

goods and merit goods and services like health and education. (b) The distribution of wealth is more goods and

equal because

services can be priced so that everyone can afford them and no individual can become rich by making profit. Because state owns all the factors of production

2281-01-02 Economics The government can ensure that factors are not a threat to environment and that ensured. Page | 55

health and safety of the worker is No private property is allowed.

reward of factors are taken by the central authority. Everybody works according to his capacity and gets at least according to his basic requirement. The minimum level of basic requirements is decided by the central authority for the property.

government private and personal

The

socialist

perspective

private

property has specific meaning and it is distinct from personal property it is that property which can serve the people as basic for earning income like a piece of land. This kind of property is not allowed in a pure socialist economy. However, the

personal property is certainly allowed which may compnse cases, personal refrigerator,

belonging the

television set and all other amenities income. This is what is referred to as equality in the socialists perspective income of the people will certainly differ even if this called class less society. However the basic

requirements are ensured.

2281-01-02 Economics The historical references supports the fact the this concept to was was the not Page | 56

adjusted requirement

according and

implemented in strict terms. In this system all employees work as the employees of the government with a financial incentive. This has a negative effect on their work attitude; state , control has discouraging

effect on incentives which is true dimushes efforts and initiative. Mixed Economy System Where there is both a public (state) and a private sector where no

governmental firms and individual decide what is produced and the economy is call mixed economy. Pakistan is a mixed economy where the government has variety of ways in which it influences what is produced it can simply pay firms to produce a particular goods or service for example electricity; natural gas; railway.

2281-01-02 Economics i. Scarce Resources. ii. Infinite wants ii Diseconomies of scale iii. iv. Opportunity cost Economic decision making v. Spending wisely v. Monopoly Iii. Terms of firm Iv. Competition policy Page | 57 i. Economies of scale

i.

Patterns of spending

i.

Size of firm, reasons of small firms Integration

ii. iii. iv.

Division of labour ii. Barter Demand, curves, factors affecting it

iii. Business finance iv. Sole proprietorship, advantage, disadvantage v. Partnership, advantage, disadvantage

v.

Supply curves, factors affecting it

i.

Market price, graphically

i.

Private ltd co, advantage, disadvantage

ii.

Price elasticity demand

ii.

Public ltd Coadvantage, disadvantage

iii.

Income elasticity demand

iii. Nationalization

iv.

Price elasticity supply

iv. Privatization

2281-01-02 Economics v. Special cases of elasticity v. Cost benefit analysis

i.

Inequality of income

i.

National income

Page | 58

ii.

Purpose and chain of production

ii.

Deindustrialization

iii.

Factors of production

iii. Primary, secondary, tertiary iv. Money supply and rate of interest v. Public expenditure

iv.

Wage rate determination

v.

Factors affecting demand for labour

i. ii. iii.

Economic rent Transfer earning Fixed cost, total cost; variable cost

i. ii.

Why do we pay too Types of taxes

iii. System of taxation

iv.

Break even point

iv. Unemployment and its types v. Unemployment graphically

i. ii.

Inflation Retail price index

i. ii.

Productivity How can a market fail

iii.

Causes of

iii. How firms decisions

2281-01-02 Economics inflation iv. Stock of unchange v. Types of shares v. Why to borrow money Page | 59 can affect us iv. Sources of finance

i.

Location of industry

i.

Developed and developing economies

ii.

Factors affecting population

ii.

Public and the private sector

iii.

Functions and types

iii. Consumption

iv.

Theory of absolute advantage

iv. Economy

v.

Theory of comparative advantage

v.

Value judgment

i.

Demand side policy

i.

Economic problem

ii.

Supply side policy

ii.

Conflict of interest

iii.

What influences aggregate demand

iii. Economics

iv.

What influences savings and investment

iv. Planned economic system

2281-01-02 Economics v. Booms and cression v. Market economic system

i.

Measuring national income

i.

What do resources produce

Page | 60

ii.

Circular flow of income

ii.

Income and wealth

iii. iv. v.

Multiplier effect Economic growth Benefits of income growth

iii. Specialization iv. Self efficiency

i.

How to achieve economic growth

ii.

Trade union, purpose, function

iii.

Competition policy

iv. v.

Advertising Perfect competition

2281-01-02 Economics Balance of payment account. In the same way that companies calculate their profit or loss no rations calculate their trading position. However, for nations the calculations are larger and more complicated for instance imports into Brtains need to be paid in foreign currencies where values now fluctuates daily. The exchange rate have a big influence over the balance of payment. The balance of payment is a rational account showing the financial transactions of one nation with the rest of the world over a period of line. Although monthly figures are calculated, quarterly and yearly totals are more useful indicators of trends because the official figures particularly initials are of the revised. This caused by the used of estimates and the different dates for collecting information the statistics are collected by the government. The format of the account has been changed over time, but the basic intention remains the same. If the total payments exceed total income then is outflow of funds and vice-versa an rations seek a net inflow but obviously they can not achieve it, because the surplus of one ration would lead to defer it of another ration, example if the balance if the surplus of rich oil producing countries is improving them the deficit of the developing countries is even on the rise. Page | 61

The balance of payment can be divided into two sections. Current account : This part of the balance of payment is regarded as the most important as shows a nations trading strength if the payments are greater than receipts, there is definite which is considerable. This account is subdivided as shown is the table above. Visible trade - trade is goods.

2281-01-02 Economics Invisible trade trade is services Visible trade : The money earned from the British export for goods (e.g) (tractorn to Zambia) is credited added to this account while payment from imported goods (e.g ) Japanese earns sold in Britain) are debited. The difference between the totals is become as the balance of the trade. Page | 62

The mpossible causes of pyment defecit deficit could be because of the following: Increased import penetration for instance imports now account for one quarter of the total UK demand in volume terms. The losses of the market share by exporters, for example, the UK share of world trade in manufacture was 6.5 percent in 1988 compared with 9 percentage in 1978. .The decline in the oil resource: Oil helped to produce a visible trade surpluses in 1980. However with oil production in the north sea past it peak and falling world oil prices; oils net contribution to the balance of payment accounts in 1988 was only Rs 2.5 billon. De industrialization of the UK economy ; the run down of the British manufacturing base in the early 1980s has resulted in the massive import bill for manufacturers. The manufacturers section in its own equaled the current a/c defecit.

Invisible Trade:

The income earned from the rule of the British services

abroad is known as invisible export e.g an insurance premium paid by Greek ship-owner to lyods Broker, when British residents spend money on foreign services e.g a Eneekes accommodation in the Bendorm, they are creating invisible imports, because payment is going out the Britain. The main invisible are as follows:-

2281-01-02 Economics Government expenditure on Embassies, contribution to international bodies, military bases / forces abroad and over seas aid. These all create a substantial defecit. Interest profits and dividends; these earning from loan; companies and shares respectively earn substantial surplus for the British economy. Other financial services. The earnings of solicitor, brokers, merchants and shares respectively earn substantial surplus for the British economy. Tourism: This cover the expenditure tradless abroad, from Page | 63

the British point of view, the debits and credits roughly balance. Private Transfers: Individual transfer money to other

countries. Most industrialized nations contains migrants who result funds to relatives in the family of origin. Such monies are small but slowly increasing defecit in the invisible account. A large invisible surplus has always been a feature of the Britiain account in modern time . Investments. The two types of investments identified in the

account are direct and portfolio dirct refers to the purchase of physical capital e.g factories while portfolio investment is the acquisition of paper assets e,g buying share on a foreign stock exchange such as the wall street. It is interesting to note that in 1987 account more UK portfolio assets were sold then bought and the produced a surplus. o In 1980s the general trends has been for inware investment to outweigh out ward investment. In the short run, net inward investment benefits the balance of payment accounts because official financing is not needed, resources can be accumulated and borrowing repaid. However in the

2281-01-02 Economics long run it may be detrimental . The profits, interest and dividends from the investment are remitted abroad and become invisible imports, thus creating the current a/c defecit Page | 64 Trade Control / Portection. Tariffs: imports and if for imports. Quotas: These can be intorodced to limit the quantity of strengthening balance of payment. These can be used to raise the price of demands is elastic, choke off the demand

imports thereby

Exchange Control capital account defecit created by investment outlows can be countered by exchange

control. That is British citizens buying shares and British companies building factories overseas needed government permission to obtain the necessary foreign

currency. This policy is relaxable per requirement.

The terms of trade:

The terms of trade represents the

buying power of a countrys export in terms of imports. It shows the price changes of goods in international trade rather than value changes. It compares the average change in the price of exports with the average change in the price of imports. This calculation is through index members. The figures for the less of trade is a percentage based on the movement of the two index members. One for imports and one for exports.

2281-01-02 Economics National income The measuring and importance is symbolized by (Y) is the amount of the goods services produced in a particular period of time usually one year. The size of national output is very important because it influences the level of employment, the and of prices the land of output and people standard of living. Usually an increase in Y will mean mane jobs upward pensions or prices more output and a better standard of living a fall in national income will have the opposite effect. National income is equal the total aggregate demand in the economy (AD) the becoming if in balance. Y = AD This is when the supply of goods and services produced in economy is equal to the demand of these goods and services if AD is greater then Y than Y than civil have to rise. If AD is less then National income Page | 65

then Y will have to fall. House Hold

Factor payment wages, items profit, interest and rent

Factor services labour, Capital enterprceman land

Gads + services

Consumer spending an goods + services

Firms

2281-01-02 Economics Circular flow in a closed economy The inner circle in diagram shows the real flock. Imports of the products and factor and factor services and outer circle the money flow of spending and income this figure is a simplified diagram it assumes all income is spent and that households and firms are the. Only two sectors in the economic activity. In some income is spent and that households and firm are the only sectors involved in the economic activity. how income and expenditure leaks outs of the circular flow, the form of saving taxation and imports Page | 66

economies of scale. Where an expansion of output leads to reduction in the unit cost the benefits are referred to as economies of scale are the benefits that accrue. It films as a results of its that acme it firms as a results of its own decision to produce larger outputs. They occur because the fins output is rising proportionally than the inputs hence the films are getting increasing returns to scale. If the increase in the output is product ional to the increase in put the films could get costumed reburies to scale and long run average cost curie will be horizontal. In the output in less then proportional then the fim will see demisting returns to scale. Technical economies refer to the advantages gained directly in the form duction process. Some production techniques. Only become viable at a certain land of output.. Marketing economies this is where the large fines can ache nice sowings in unit cost from advertising or packaging the usual one s benefit of lower prices they huffing in health from supplest. Larger supermarkets are very good example of the fins growing the way financial economies large focus will find both access to borrowed fumes easier and costs lower than smaller films will this because the presides risk of lending to the large scale praetors is lower.

2281-01-02 Economics Managerial economics fins producing on a large scale may be able to organize their stricture in order to get more efficient management of resources they may attract the best management lament through salaries overall this will bod to falling long rn cost to managing the be Risk bearing economies these might explain why a fim gets larger they may because diversified it is a way of spreading business risk. A diversified coulometer can cover only lassies in any activity within the fro fast for authorities on option rot open to marker fines. Risks can be reduced by competing watts activity in purpose and that household and fir are there only sectors involved in the economic activity. In practice some income is saved some to taxed. Page | 67

2281-01-02 Economics

Equilibrium

or market price. The meaning of equilibrium price is

determined in the market by focus of demand and supply. . Let us illustrate equilibrated by supply and demand schedules already established. Price a. b. c. d. e. .1 .8 .6 .4 .2 Quality demand 100 180 300 450 650 Quality supplied 475 400 300 1125 50 Page | 68

Changes in demand and supply and their effect on equilibrate.

On irritable is demand will misfit use demand ensure to the result will be higher equilibrate and a greater demand for with all other factors remaining equal will course an increase supplied very forum. Equilibrium or market price. The meaning of equilibrium price is deterred in the market by focus if demand and supply equilibrium is the point when economic forces obtain economic balance Price f. g. h. i. j. .1 .8 .6 .4 .2 Quality demand 100 180 300 450 650 Quality supplied 475 400 300 1125 50

2281-01-02 Economics

Page | 69

100 700

200 300 400

500 600 Quality demanded and suppled

On increase is demand will shift the demand curve to the right the result will be higher equilibrium and a greater quality

supplied for example a rebate in demand for with all when factors remaining equal will cause all increase in the price of milk and a greater quality supplied by former. A decrease in demand will shift the demand curve to the left. The result will be lower equilibrium price and the lesser quality supplied for example a decrease in demand for cares all other factors remaining equal will cause of decrease in the price of caus and lesser quality of eases supplied assume an increase in supply. On increase in supply curvee will shift the supply curse to the right. The result will be Lower equilibrium and a lower quality demanded for example increase in the supply of petrol all other factors remaining equal one cause the decrease in the

2281-01-02 Economics price of petrol and a greater quality demanded. Assume a decrease in supply a decrease in supply will shift the supply curse to the left the result will be a higher equilibrium price and lesser quality demanded for example a decrease in the supply of coffee will cause a increase in the price coffee. The operation of the price machines what will happen to the price of potatoes if the harness will ruined. A disease of potatoes will effect the supply of potatoes. The supply of potatoes will diminish which will shift the supply ensure the left. Page | 70

What will happen to the price of the patrol of the demand of the cars will decrease. A decrease is demand for cars may fall due to fallowing living standards or higher prices of cars a drop in the demand and for cars will cause decrease is demand for patrol they are complementary good and price of petrol will drop.

Tea and coffee are substitutes. An increase in the demand and for tea will mean that less coffee will be demanded a drop in demand for coffee will cause lower price for coffee.

2281-01-02 Economics The the price mechanism indicates private enterprises as to where the recourses should be allocated. If the price of apples is rising and the price of the oranges falling then enterprises will begin to grow apples and less oranges the price signal is determined by the demand and supply of the demand increase than all things if remaining equal price will increase the supply increase all things remaining equal price will decline. Price are determined in the market. Page | 71

The price also indicates changes in consumer wash for instance if people want more apples than organs the demand for apples will rise and demand for oranges will fall. The consumer is being in the price

mechanism because changes in demand cause changes in price. Price changes will also bring about changes in supply to correspond with the change in demand for instance if people want move apples then the price of apples will rise and supplies will supply more apples because they have become more profitable the cous umers by changes then demand were caused change in supply advertising makes distribution easier because it infores crammers about the product and services over 90 % of the advertising is through newspapers and television the plying and selling of the advertising space is this media is very competitive To be successful advertising needs to be at the right time in the right place and at the right price. Once of advertising highs scales as lights scales usually mean grater profits than most focus items such this assails rise overheads becoming lower per unit of output and acreage costs falls. Increased company layover can also be obtained through promoting of new products and generating a popular of new products and generating a popular company image. An increase amount of advertising aims to format many commodities of the company at the same time. Most advertising is permissive it arm to for made people to buy one good or service rather than another focus complete for a share of market for their particular brand. Some advertising to were as scale is undertaken on behalf

2281-01-02 Economics of all the industry this is collective advertising In this the general produce such as milk is advertised rather than a particulars diary Informative advertising some advertising provides information even if it is only a brand name inform rather then persuade for instance generating a popular company image. An increased amount of advertising aims to promote many commodities of the company at the same time. Most advertising is permanent any to procured people to busy are good or service rather them out hems particulars brand. Some advertising to increase scales is undertaken on behalf of all. The indents this is products much as milk is advertised rather them a particulars daring informative even if it is only a brand name however some advertisements are intended to inform rather them pomade for instance go mermen deportment issue advertising. Or health, read safely and one prevention other mailing informative advertising can be found a lacteal and hoed forecastle informative advertising based or facts / dates / it less / place of an event rather them maligning claims for goods and services. Costs of advertising the rates charged for advertising depends or the medico used. Take vision is more expulsive then newspapers because it lends to attract a larger advance and then more vassal import the rates changed for television very well the channel and the an time similarly in newspaper the rate of the prices and is dependent on the following factors. The size of the advertisement the position in the publication the day of the week and if it is coloured for the objectivity to promote brand loyalty and gain an increase in demand they are allying to make the demand curse of their product more industries advantages to the comments. Prices of the products are competitively post low. Advertising agencies. Most Page | 72

advertising exports have the following road map to following. a. b. c. Fine out about the product and it market. Plan the campaign. Produce the advertisement. In the media.

2281-01-02 Economics d. Advise the products about the image and brand probation about the image and brand proportion of the goods and service. MONOPOLY There are two definitions of monopoly pure monopoly exurbs where there is a role supplier. In this case the fin coils be the industry. The governments defecation is a firms which has 25 % or greater share of the market for example in 1999, Cadburys controlled 32 % of the UK chocolate market and non newspaper 30 % of the national daily paper market and 56.2 % of the UK, tabloid paper market. Moreover market share above is not always a good guide to monopoly. A fin supplying a quarter of the total market may have greater market power if the rest of the market is shared by measures firms. Whereas it may face very fierce competition if the rest of the market is shared by supplied by there firms of almost equal size. Conference is also often made to natural monopoly. A natural monopoly occurrence when there is a room for only one firms is the industry producing at the minimum efficient level. The situations can assize when there is just one source of supply of new material. However none commonly it occurs when economies of scale are very significant and no only firm to supply the entire market at a lower price thus any other number of firms. Page | 73

2281-01-02 Economics CHARACTTERISTIES OF MONOPOLY

Barriers to entry there are a number of possible restrictions or the entry of the new firms. They one is the dominating priorities in the market. Ownership of natural lessons: Some natural resources are concentrated into small regions for example the crises of changes burgundy and morsel are associated with the amices they produced. Ownership of Outlet: If a firm owners the retail outlets for a product it can enjoy monopoly power for example in measures gone petroleum comprises own petrol fuelling stations. Economics of scale: are on important and common barrier to entry. In the ease of natural monopolies for example the provision of rail track, technical economics are so significant that the industry can support one firm only. In industries where economics of scale are significant thence may be little prospects for the new firms to enter the market. The firm could only produce with the existing firm or firms berceuses its average cost of production would be so much greater. Only by starting or a scale comparable to that employed by the existing firm or firms would a new entrant be able to compete efficiently. Moreover even this would be roily unless the market had a very large growth potential because the issuance in supply would reduces market prices. Page | 74

Types of Monopoly: a. Local monopoly: When the monopoly is local in character for example local fish and chip shop may have monopoly in the local neighborhood. b. Stationery monopoly: These are the monopolies which are based or the acts of parliament for example the nationalized industries. Also patents may have been grated to a particular firm which means that no other firms ______ copy a particular

2281-01-02 Economics process for specific period of time. This will give fin the monopoly in producing the same good. c. Natural monopolies: These are the monopolies which are industries where the economics of scale to be achieved. These the optimum size of fine will be a large and monopoly may develop, such as those in motor cars and chemical industries. Page | 75

2281-01-02 Economics ADVANTAGE OF MONOPOLY

1.

Monopolies had to be large fines and therefore enjoy the economics Page | 76

of scale and reduce cost. 2. 3. Benefit of lower costs may be passed or to consumer. A monopoly is research oriented and culture range of goods and

services in market oriented. 4. Monopolies avoid the works of competition such as necessary

duplication of services and finessed goods and services as per requirement one produced. 5. Monopolies can offer more choice to the customers for instance

compare BBC radio services and commercial services. BBC offers greater variety thou commercial radio. Disadvantages of monopoly: a. Monopolies are often criticized for charging higher prices for a lower output either because of the inefficiency (diseconomies of scale) or because savings in costs due to the economies of scale are absorbed in the profit margins of monopolies. b. Monopolies adopt restrictive measures to prevent new comers entering the market (industry barriers to industry). c. Monopolies can sometimes hence political ambitions. Monopolists are no powerful in the economy that they might wish to dominate the market as well as dictate terms to the government and threatere democracy. d. Monopoly may suffer from diseconomies of scale and is theme insufficient

2281-01-02 Economics FACTORS WHICH INFLUENCE

1.

The location of industry measures to the raw material: a. The firms in the industry do not want to be situated too for away from the required raw material because these may be experience to transport. There are certain industries such as extractive industries where the location decision is made very simple for instance coal can only be mired where there are supplies of coal and iron one. b. Measures to the market: The firm is the industry do not wart to be situated too for away for the market where the demand for product is because it may be experience to transport the finished goods to the market. There are certain firms such as these in the service in industries for example retainer and hair dresses. Where the location decision is again very simple. Such firms have to be located where there is a demand for their services. It would be worthless having a retail shop in the middle of _________. Page | 77

2281-01-02 Economics TRANSPORT CASH ARE A MAJOR CONSIDERATION

1.

When deciding where to locate the industry. This problem is evident Page | 78

when raw materials for the industry are situated in one percent of the country and the market is in another part of the country. 2. Material oriented industries: If the raw material used one truly and

experience to transport compared to the transportation of the finished goods them the industry will be located near the raw material as in the steel industry and new milling. 3. Market oriented industries: If the finished goods is truly and

experience to transport compared to transportation of the raw material then the industry will be located near the market; as in the car industry brewing and bakery. 4. Moreover many industries are said to be foot loose. This means that

the transport cost are not as major factor influencing location. Such industries are nec then material nor market oriented probably because the raw materials and finished goods one early the transport.

2281-01-02 Economics NEAR TO THE POWER SUPPLIES

1.

Industries require power to drive machineries and to provide heating Page | 79

and lighting. Before the industrial revolution power was based manly or water and therefore, factories have to the located near ______________ stress and river. However @ the beginning of the industrial revolution. Steam power was developed; by _____ watt, and to provide. Steam power industries seeded coal. Therefore, throughout the industrial revolutions, industries were located near the coal fields of south whales, northern England and control Scotland, In the modern society electricity is generally avoidable on the national grid and consequently industries have power at their disposal, whereas they are located near the United Kingdom. The near less to coal has declared as a major location influence. 2. The availability of factors of production. Industries need to be

situated rear to the quantity and quality of land, labour, capital and enterprise which is required. Some industries may require a great deal of cheap; flat land; routetires industries may require supplies of skilled labour. Some industries will require supply of cheap capital.

2281-01-02 Economics GOVERNMENT REGIONAL POLICY

The government provides many financial incentives in all effort to persuade fines to establish in the governmentally assisted areas natural economics of scale: The external economies of scale are a support a firms who will locate themselves in the area where they can fined supplies of the skilled labor where ancillary components fines are situated where transport likes are of good standard; where the qualified and skillful work force is available. Page | 80

2281-01-02 Economics PARTNERSHIP 1. This type of fines has the following factors:a. Partnership are owned ctry at least two partners, with a upper limit or he number of partners of seventy in some cases. The partners run the business when they are sleeping partner. b. At least one partner must have unlimited liability, a partner who just wishers to truest money in partnerships must take no purb in receiving the businesses known as the shaping partner. Selecting partners have limited inability. c. Partnerships are very common in professional services like doctors, layers, and architects. d. There are two types of partnership an ordinary (or general) partnership and a limited partnership. Both types of Page | 81

partnership have between two and twenty partners. e. The ordinary partnership: advantages: (1) Business officers still remain private unlike public joint stock companies. They do not have to make the public the financial situation of the company as its balance sheet.

2281-01-02 Economics THE DIFFERENT PARTNERS CASE

1.

Contribute their different skills and experiences to the firm, for Page | 82

instance one of the partner may be as accurate, another may be a selector and another a surveyor. This allows some degree of specification within the fine. This is an advantage over the role proprietor who has to rely or personal judgment. 2. 3. They are able to raise more capital thus the role trader. They are still quite small and enjoy the economies of small scale

production. 4. Disadvantages: a. Unlike the joint of stock companies _______ not have limited liability. b. c. Profits have to be shared among all the partners. They lend to be quite small and can not the economies of large scale production. d. All partner should be consulted when decisions are made this may lead to showing down of decision making compared to sole traders, decisions are __________ or all partners irrespective of whether they are consulted. e. The partnership is dissolved in the death or ___________ of a partner. 5. The limited Partnership: a. This is different from of an ordinary partnership because some of the partners must be ordinary partners. This means that this partners does not have limited liability and therefore cursis the full burden for praying off debts (even out of personal ______________) if the partnership fails limited, partnerships are not popular in the minded ________________________ to raise more capital and form a private joint stock company. 6. Advantage:

2281-01-02 Economics a. The limited partner has limited liability therefore taking less risk and may contribute to more capital. b. c. The limited partner has a share in the profits. Disadvantages only the ordinary partners have a _____ in reaming of the partnership and make decision makings the limited partners is a _______ of ___________, in that their contribution is capital. 7. The Limited Partners. Share of the profit will probably will be less Page | 83

because why are taking less of a risk. a. Limited partnership are unable to withdraw even part of their capital unless the ordinary partners__________. b. Partnership are owned and contributed by the partners and capital is raised from contributions by partners and possibly ______________________. The sole proprietor they do not issue shares and debutantes profits are divided amongst the partners the size of the allocation of partners allocation of profits depends or whether __________________ is a ordinary partner or limited partner. Profits and lasses are shared equally irrespective of the amount of capital ____________. This is no unless there is some prior agreement deed of partnership which will give details of the ratio to be apportioned partnerships are evident in the professions e.g. doctors; duties; barristers and solicitor where personal service is skill required.

2281-01-02 Economics How and Why Fines become bigger; integration:a. More fines become bigger by ____________________ for which this means why produce more of a particular good and probably _________ the rouge and variety of the goods they produce. They read not amalgamate _____ any other fine but achieve the economic of large scale production by internal expression. b. Some firms may for carted this anises Coker a group of firms martin their own separate identity and independence but meet friendly or unfriendly to set prices and output of the good or service _________ they are producing. ___________ no they are initiating _______________ because they are able to fix prices and output and present new comers from ____________ the industry. c. Another means in which firms can expand by its ______________ with another firm or firms by means of merger. A merger normally means that the firms have joined together to become a _______ firm. A merger may involve two _________ independent firms of roughly ____ may size _________ together or it may involve a large firm contritely _____________ a smaller firm which may house its name and industry comparably. The lather life merger may be ___________________ takeover which is ____________ achieved by holding companies. A holding companies is formed with the purpose of holding over alper companies which are known as subsidiary companies. This can be achieved by purchasing more then 50 % of the ordinary shareholding in the subsidiary. Types of ___________________: yet another less for ____________________ or merger is integration. These are several types of integration. Page | 84

2281-01-02 Economics d. Horizontal integration: Firms may become bigger by joining with other firms which are at the same productions process for ___________. MGB and National _________ join together with one another to become a large back; the _____________ and _______________ sweet companies join together. __________ Rover consists of may previously independent car firms such as __________; _______________ and rover. e. Vertical integration; firms may become bigger by joining with other firms which are at the different productions process; for instance an __________________ of chocolate may be own a cocoa plantation. There are two types of integration:f. (1) Back work integration. This means chose a firms joins Page | 85

will a supplier for the provision of new material or component parts. (2) Forward integration: This is when a firm joins __________ a firms smalls the goods in the market or deals i.e. the distribution network. (3) Lateral integration or ________________ a merger between firms where they have a common souse of _______ material or market outlets or have minilar products for example a laymanufactuner _________ which a _____________ ___________. g. Reasons (Notices) for Integration:(1) These are three main objectives which apply to each type of integration to be able to achieve the economics of reduce. (2) To achieve a greater share of the market and if possible a monopoly may reduce competition. (3) To achieve greater security in the market by opening large range and products within a ringlet latest.

2281-01-02 Economics PERFECT COMPEITION 1. The economics model of perfect competition is largely theoretical

but it does provide a useful tool for the economic analysis. The market structure is used as a means of assuressing the degree of competition in the real world markets. Economics set out the conditions of a perfectly competition market these contract these will the situations found in the markets for goods and services. 2. Characteristics. A perfectly competition market has a number of hy Page | 86

characteristics. All units of the productions are ______________ (i.e exaltedly the some as another) so _________ have no preferences for the product of any seller. 3. There are many buyers and sellers so that the _________ of anyone

buyer, or any one seller, has inference on the market prices. Each ______________ buyer comprises such a small part of total supply for such a small part of total supply what any change in their plans have ____________________ the market price. 4. Buyers are assumed to have perfect the __________ of market

coactions they how what prices are being asked for the product is _______. Part of the market equally sellers are fully aware of the activities of ___________________ and other sellers. 5. There _______ be so barriers to the movement of _________ from

one seller to another. 6. Since all units of production are identical buyers will approach

quoting the lowest prices. There is to attachment between the buyer and the sellers. 7. These are no restrictions or the entry of firms into market or on their

____________. 8. There is perfect mobility of resources so what firms wishing to

expand their output can adract resources. 9. There is no adverting.

2281-01-02 Economics 10. These characterizes near that in a perfect market. These will be only

one market price which is beyond the control of any one buyer or any one seller firms can not charge different prices because they are selling ________ products each of then is responsible for a ______ part of the local supply and before one fully aware of what is happening in the market. Page | 87