Paul Anthony Samuelson (May 15, 1915 â December 13, 2009) was an American economist. It was the second American textbook that attempted to explain the principles of Keynesian. Market economics: Samuelson believed unregulated markets have drawbacks, he stated, 'free markets do not stabilise themselves. Gregory Mankiw Brief principles of macroeconomics 2008.pdf. (All chapters TEST BANK for Principles of Microeconomics 7th Edition. Gregory Mankiw. Free eBook while your book ships. Mankiw's popular PRINCIPLES OF MICROECONOMICS is the most widely used resource of its kind in economics classrooms worldwide, covering only the most important principles to avoid overwhelming students with excessive detail. Extensive updates in the eighth edition feature relevant, meaningful examples. Principles of Microeconomics, 8th Edition PDF Free Download, Reviews, Read Online, ISBN:, By N. Gregory Mankiw. Mankiw's PRINCIPLES OF MICROECONOMICS, 8E. With its clear and engaging writing style, this book emphasizes only the material that will help you better understand the world in which you live, will make you a more astute.
This graph shows the circular flow of income in a five-sector economy, flow of money is shown with purple and flow of goods and services with orange. Money flows in opposite direction of goods and services.[1]
Basic diagram of the circular flow of income. The functioning of the free-market economic system is represented with firms and households and interaction back and forth.[2]
The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow analysis is the basis of national accounts and hence of macroeconomics. The idea of the circular flow was already present in the work of Richard Cantillon.[3]François Quesnay developed and visualized this concept in the so-called Tableau économique.[4] Important developments of Quesnay's tableau were Karl Marx' reproduction schemes in the second volume of Capital: Critique of Political Economy, and John Maynard Keynes' General Theory of Employment, Interest and Money. Richard Stone further developed the concept for the United Nations (UN) and the Organisation for Economic Co-operation and Development to the system, which is now used internationally.
Overview[edit]The circular flow of income is a concept for better understanding of the economy as a whole and for example the National Income and Product Accounts (NIPAs). Abit bios download. In its most basic form it considers a simple economy consisting solely of businesses and individuals, and can be represented in a so-called 'circular flow diagram.' In this simple economy, individuals provide the labour that enables businesses to produce goods and services. These activities are represented by the green lines in the diagram.[5]
Model of the circular flow of income and expenditure
Alternatively, one can think of these transactions in terms of the monetary flows that occur. Businesses provide individuals with income (in the form of compensation) in exchange for their labor. That income is spent on the goods and services businesses produce.These activities are represented by the blue lines in the diagram above.[5] The circular flow diagram illustrates the interdependence of the âflows,â or activities, that occur in the economy, such as the production of goods and services (or the âoutputâ of the economy) and the income generated from that production. The circular flow also illustrates the equality between the income earned from production and the value of goods and services produced.[5] Of course, the total economy is much more complicated than the illustration above. An economy involves interactions between not only individuals and businesses, but also Federal, state, and local governments and residents of the rest of the world. Also not shown in this simple illustration of the economy are other aspects of economic activity such as investment in capital (producedâor fixedâassets such as structures, equipment, research and development, and software), flows of financial capital (such as stocks, bonds, and bank deposits),and the contributions of these flows to the accumulation of fixed assets.[5] History[edit]Cantillon[edit]
Representation of Cantillon's primitive circular flow model[6]
One of the earliest ideas on the circular flow was explained in the work of 18th century Irish-French economist Richard Cantillon,[3] who was influenced by prior economists, especially William Petty.[7] Cantillon described the concept in his 1730 Essay on the Nature of Trade in General, in chapter 11, entitled 'The Par or Relation between the Value of Land and Labor' to chapter 13, entitled 'The Circulation and Exchange of Goods and Merchandise, as well as their Production, are Carried On in Europe by Entrepreneurs, and at a Risk.' Thornton eds. (2010) further explained:
Cantillon distinguished at least five types of economic agents: property owners, farmers, entrepreneurs, labors and artisans, as expressed in the contemporary diagram of the Cantillonâs Circular Flow Economy.[6] Quesnay[edit]
Tableau économique
François Quesnay further developed these concepts, and was the first to visualize these interactions over time in the so-called Tableau économique.[4] Quesnay believed that trade and industry were not sources of wealth, and instead in his 1758 book Tableau économique (Economic Table) argued that agricultural surpluses, by flowing through the economy in the form of rent, wages, and purchases were the real economic movers, for two reasons.
The model Quesnay created consisted of three economic agents: The 'Proprietary' class consisted of only landowners. The 'Productive' class consisted of all agricultural laborers. The 'Sterile' class is made up of artisans and merchants. The flow of production and/or cash between the three classes started with the Proprietary class because they own the land and they buy from both of the other classes. Quesnay visualised the steps in the process in the Tableau économique. Marx[edit]In Marxian economics, economic reproduction refers to recurrent (or cyclical) processes[9] by which the initial conditions necessary for economic activity to occur are constantly re-created.[10] Economic reproduction involves the physical production and distribution of goods and services, the trade (the circulation via exchanges and transactions) of goods and services, and the consumption of goods and services (both productive or intermediate consumption and final consumption). Karl Marx developed the original insights of Quesnay to model the circulation of capital, money, and commodities in the second volume of Das Kapital to show how the reproduction process that must occur in any type of society can take place in capitalist society by means of the circulation of capital.[11] Marx distinguishes between 'simple reproduction' and 'expanded (or enlarged) reproduction'.[12] In the former case, no economic growth occurs, while in the latter case, more is produced than is needed to maintain the economy at the given level, making economic growth possible. In the capitalist mode of production, the difference is that in the former case, the new surplus value created by wage-labour is spent by the employer on consumption (or hoarded), whereas in the latter case, part of it is reinvested in production. Further developments[edit]
The competitive price system adapted from Samuelson, 1961
An important development was John Maynard Keynes' 1933 publication of the General Theory of Employment, Interest and Money. Keynes' assistant Richard Stone further developed the concept for the United Nations (UN) and the Organisation for Economic Co-operation and Development to the systems, which is now used internationally. The first to visualize the modern circular flow of income model was Frank Knight in 1933 publication of The Economic Organization.[13] Knight (1933) explained:
Knight pictured a circulation of money and circulation of economic value between people (individuals, families) and business enterprises as a group,[15] explaining: 'The general character of an enterprise system, reduced to its very simplest terms, can be illustrated by a diagram showing the exchange of productive power for consumption goods between individuals and business units, mediated by the circulation of money, and suggesting the familiar figure of the wheel of wealth.'[16] Types of models[edit]Two sector model[edit]In the basic circular flow of income, or two sector circular flow of income model, the state of equilibrium is defined as a situation in which there is no tendency for the levels of income (Y), expenditure (E) and output (O) to change, that is: Y = E = O
Two sector circular flow diagram
This means that the expenditure of buyers (households) becomes income for sellers (firms). The firms then spend this income on factors of production such as labour, capital and raw materials, 'transferring' their income to the factor owners. The factor owners spend this income on goods which leads to a circular flow of income. This basic circular flow of income model consists of six assumptions:
Three sector model[edit]It includes household sector, producing sector and government sector. It will study a circular flow income in these sectors excluding rest of the world i.e. closed economy income. Here flows from household sector and producing sector to government sector are in the form of taxes. The income received from the government sector flows to producing and household sector in the form of payments for government purchases of goods and services as well as payment of subsidies and transfer payments. Every payment has a receipt in response of it by which aggregate expenditure of an economy becomes identical to aggregate income and makes this circular flow unending. Four sector model[edit]A modern monetary economy comprises a network of four sector economy these are:
Each of the above sectors receives some payments from the other in lieu of goods and services which makes a regular flow of goods and physical services. Money facilitates such an exchange smoothly. A residual of each market comes in capital market as saving which in turn is invested in firms and government sector. Technically speaking, so long as lending is equal to the borrowing i.e. leakage is equal to injections, the circular flow will continue indefinitely. However, this job is done by financial institutions in the economy. Five sector model[edit]In the five sector model the economy is divided into five sectors:[17]
The five sector model of the circular flow of income is a more realistic representation of the economy. Unlike the two sector model where there are six assumptions the five sector circular flow relaxes all six assumptions. Since the first assumption is relaxed there are three more sectors introduced.
Circular flow of income topics[edit]Leakages and injections[edit]![]() In the five sector model, there are leakages and injections
Leakages and injections can occur in the financial sector, government sector and overseas sector:
In terms of the circular flow of income model, the leakage that financial institutions provide in the economy is the option for households to save their money. This is a leakage because the saved money can not be spent in the economy and thus is an idle asset that means not all output will be purchased. The injection that the financial sector provides into the economy is investment (I) into the business/firms sector. An example of a group in the finance sector includes banks such as Westpac or financial institutions such as Suncorp.
The leakage that the Government sector provides is through the collection of revenue through Taxes (T) that is provided by households and firms to the government. This is a leakage because it is a leakage out of the current income thus reducing the expenditure on current goods and services. The injection provided by the government sector is Government spending (G) that provides collective services and welfare payments to the community. An example of a tax collected by the government as a leakage is income tax and an injection into the economy can be when the government redistributes this income in the form of welfare payments, that is a form of government spending back into the economy.
The main leakage from this sector are imports (M), which represent spending by residents into the rest of the world. The main injection provided by this sector is the exports of goods and services which generate income for the exporters from overseas residents. An example of the use of the overseas sector is Australia exporting wool to China, China pays the exporter of the wool (the farmer) therefore more money enters the economy thus making it an injection. Another example is China processing the wool into items such as coats and Australia importing the product by paying the Chinese exporter; since the money paying for the coat leaves the economy it is a leakage.
The state of equilibrium[edit]In terms of the five sector circular flow of income model the state of equilibrium occurs when the total leakages are equal to the total injections that occur in the economy. This can be shown as: Savings + Taxes + Imports = Investment + Government Spending + ExportsOR S + T + M = I + G + X.This can be further illustrated through a fictitious economy where: S + T + M = I + G + X Therefore, since the leakages are equal to the injections the economy is in a stable state of equilibrium. This state can be contrasted to the state of disequilibrium where unlike that of equilibrium the sum of total leakages does not equal the sum of total injections. By giving values to the leakages and injections the circular flow of income can be used to show the state of disequilibrium. Disequilibrium can be shown as: Therefore, it can be shown as one of the below equations where: Total leakages > Total injections$150 (S) + $250 (T) + $150 (M) > $75 (I) + $200 (G) + $150 (X) Or Total Leakages < Total injections $50 (S) + $200 (T) + $125 (M) < $75 (I) + $200 (G) + $150 (X)The effects of disequilibrium vary according to which of the above equations they belong to. If S + T + M > I + G + X the levels of income, output, expenditure and employment will fall causing a recession or contraction in the overall economic activity. But if S + T + M < I + G + X the levels of income, output, expenditure and employment will rise causing a boom or expansion in economic activity.
Circular Flow of Income effects of saving
To manage this problem, if disequilibrium were to occur in the five sector circular flow of income model, changes in expenditure and output will lead to equilibrium being regained. An example of this is if: S + T + M > I + G + X the levels of income, expenditure and output will fall causing a contraction or recession in the overall economic activity. As the income falls households will cut down on all leakages such as saving, they will also pay less in taxation and with a lower income they will spend less on imports. This will lead to a fall in the leakages until they equal the injections and a lower level of equilibrium will be the result. The other equation of disequilibrium, if S + T + M < I + G + X in the five sector model the levels of income, expenditure and output will greatly rise causing a boom in economic activity. As the households income increases there will be a higher opportunity to save therefore saving in the financial sector will increase, taxation for the higher threshold will increase and they will be able to spend more on imports. In this case when the leakages increase the situation will be a higher level of equilibrium. Significance of study of circular flow of income[edit]The book A General Approach to Macroeconomic Policy[18][citation needed] identifies four possible areas of significance:
Circular flow diagram as a subsystem of the environment[edit]
The economic system as a subsystem of the environment: natural resources flow through the economy and end up as waste and pollution
The circular flow diagram is an abstraction of the economy as a whole. The diagram suggests that the economy can reproduce itself. The idea is that as households spend money of goods and services from firms, the firms have the means to purchase labor from the households, which the households to then purchase goods and services. Suggesting that this process can and will continuously go on as a perpetual motion machine. However, according to the Laws of Thermodynamics perpetual motion machines do not exist.[19] The First Laws says matter and energy cannot be created or destroyed, and the Second Laws says that matter and energy move from a low entropy, useful, state towards a less useful higher entropy state.[20] Thus, no system can continue without inputs of new energy that exit as high entropy waste. Just as no animal can live on its own waste, no economy can recycle the waste it produces without the input of new energy to reproduce itself. The economy therefore cannot be the whole. It must be a subsystem of the larger ecosystem.[19] The abstraction ignores the linear throughput of matter and energy that must power the continuous motion of money, goods and services, and factors of production. Matter and energy enter the economy in the form of low entropy natural capital, such as solar energy, oil wells, fisheries, and mines. These materials and energy are used by households and firms a like to create products and wealth. After the material are used up the energy and matter leaves the economy in the form of high entropy waste that is no longer valuable to the economy. The natural materials that power the motion of the circular flow of the economy come from the environment, and the waste must be absorbed by the larger ecosystem in which the economy exists.[21] This is not to say that the circular flow diagram isn't useful in understanding the basics of an economy, such as leakages and injections. However, it cannot be ignored that the economy intrinsically requires natural resources and the creation of waste that must be absorbed in some manner. The economy can only continuing churning if it has matter and energy to power it and the ability to absorb the waste it creates. This matter and low entropy energy and the ability to absorb waste exists in a finite amount, and thus there is a finite amount of inputs to the flow and outputs of the flow that the environment can handle, implying there is a sustainable limit to motion, and therefore growth, of the economy.[19] See also[edit]References[edit]
This article incorporates text from Bureau of Economic Analysis. Measuring the Economy : A Primer on GDP and the National Income and Product Accounts, 2014, a publication now in the public domain. Further reading[edit]
External links[edit]
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Short-run equilibrium of the firm under monopolistic competition. The firm maximizes its profits and produces a quantity where the firm's marginal revenue (MR) is equal to its marginal cost (MC). The firm is able to collect a price based on the average revenue (AR) curve. The difference between the firm's average revenue and average cost, multiplied by the quantity sold (Qs), gives the total profit.
Long-run equilibrium of the firm under monopolistic competition. The firm still produces where marginal cost and marginal revenue are equal; however, the demand curve (and AR) has shifted as other firms entered the market and increased competition. The firm no longer sells its goods above average cost and can no longer claim an economic profit.
Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.[1][2] In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The 'founding father' of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933).[3]Joan Robinson published a book The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition. Monopolistically competitive markets have the following characteristics:
The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.
Characteristics of monopolistic competition[edit]There are six characteristics of monopolistic competition (MC):
Product Differentiation[edit]MC firms sell products that have real or perceived non-price differences. However, the differences are not so great as to eliminate other goods as substitutes. Technically, the cross price elasticity of demand between goods in such a market is positive. In fact, the XED would be high.[7] MC goods are best described as close but imperfect substitutes.[7] The goods perform the same basic functions but have differences in qualities such as type, style, quality, reputation, appearance, and location that tend to distinguish them from each other. For example, the basic function of motor vehicles is the sameâto move people and objects from point to point in reasonable comfort and safety. Yet there are many different types of motor vehicles such as motor scooters, motor cycles, trucks and cars, and many variations even within these categories. Many firms[edit]There are many firms in each MC product group and many firms on the side lines prepared to enter the market. A product group is a 'collection of similar products'.[8] The fact that there are 'many firms' gives each MC firm the freedom to set prices without engaging in strategic decision making regarding the prices of other firms and each firm's actions have a negligible impact on the market. For example, a firm could cut prices and increase sales without fear that its actions will prompt retaliatory responses from competitors. How many firms will an MC market structure support at market equilibrium? The answer depends on factors such as fixed costs, economies of scale and the degree of product differentiation. For example, the higher the fixed costs, the fewer firms the market will support.[9] Freedom of Entry and Exit[edit]Like perfect competition, under monopolistic competition also, the firms can enter or exit freely. The firms will enter when the existing firms are making super-normal profits. With the entry of new firms, the supply would increase which would reduce the price and hence the existing firms will be left only with normal profits. Similarly, if the existing firms are sustaining losses, some of the marginal firms will exit. It will reduce the supply due to which price would rise and the existing firms will be left only with normal profit. Independent decision making[edit]Each MC firm independently sets the terms of exchange for its product.[10] The firm gives no consideration to what effect its decision may have on competitors.[10] The theory is that any action will have such a negligible effect on the overall market demand that an MC firm can act without fear of prompting heightened competition. In other words, each firm feels free to set prices as if it were a monopoly rather than an oligopoly. Market power[edit]MC firms have some degree of market power. Market power means that the firm has control over the terms and conditions of exchange. An MC firm can raise its prices without losing all its customers. The firm can also lower prices without triggering a potentially ruinous price war with competitors. The source of an MC firm's market power is not barriers to entry since they are low. Rather, an MC firm has market power because it has relatively few competitors, those competitors do not engage in strategic decision making and the firms sells differentiated product.[11] Market power also means that an MC firm faces a downward sloping demand curve. The demand curve is highly elastic although not 'flat'. Imperfect information[edit]No sellers or buyers have complete market information, like market demand or market supply.[12]
Inefficiency[edit]There are two sources of inefficiency in the MC market structure. First, at its optimum output the firm charges a price that exceeds marginal costs, The MC firm maximizes profits where marginal revenue = marginal cost. Since the MC firm's demand curve is downward sloping this means that the firm will be charging a price that exceeds marginal costs. The monopoly power possessed by a MC firm means that at its profit maximizing level of production there will be a net loss of consumer (and producer) surplus. The second source of inefficiency is the fact that MC firms operate with excess capacity. That is, the MC firm's profit maximizing output is less than the output associated with minimum average cost. Both a PC and MC firm will operate at a point where demand or price equals average cost. For a PC firm this equilibrium condition occurs where the perfectly elastic demand curve equals minimum average cost. A MC firmâs demand curve is not flat but is downward sloping. Thus in the long run the demand curve will be tangential to the long run average cost curve at a point to the left of its minimum. The result is excess capacity.[19] Socially undesirable aspects compared to perfect competition[edit]
Problems[edit]Monopolistically competitive firms are inefficient, it is usually the case that the costs of regulating prices for products sold in monopolistic competition exceed the benefits of such regulation.[20] A monopolistically competitive firm might be said to be marginally inefficient because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market is productively inefficient market structure because marginal cost is less than price in the long run. Monopolistically competitive markets are also allocatively inefficient, as the price given is higher than Marginal cost. Product differentiation increases total utility by better meeting people's wants than homogenous products in a perfectly competitive market. [20] Another concern is that monopolistic competition fosters advertising and the creation of brand names. Advertising induces customers into spending more on products because of the name associated with them rather than because of rational factors. Defenders of advertising dispute this, arguing that brand names can represent a guarantee of quality and that advertising helps reduce the cost to consumers of weighing the tradeoffs of numerous competing brands. There are unique information and information processing costs associated with selecting a brand in a monopolistically competitive environment. In a monopoly market, the consumer is faced with a single brand, making information gathering relatively inexpensive. Parallel space download for kindle. In a perfectly competitive industry, the consumer is faced with many brands, but because the brands are virtually identical information gathering is also relatively inexpensive. In a monopolistically competitive market, the consumer must collect and process information on a large number of different brands to be able to select the best of them. In many cases, the cost of gathering information necessary to selecting the best brand can exceed the benefit of consuming the best brand instead of a randomly selected brand. The result is that the consumer is confused. Some brands gain prestige value and can extract an additional price for that. Evidence suggests that consumers use information obtained from advertising not only to assess the single brand advertised, but also to infer the possible existence of brands that the consumer has, heretofore, not observed, as well as to infer consumer satisfaction with brands similar to the advertised brand.[21] Examples[edit]In many markets, such as toothpaste, soap, air conditioning, smartphones and toilet paper, producers practice product differentiation by altering the physical composition of products, using special packaging, or simply claiming to have superior products based on brand images or advertising.[citation needed] See also[edit]Notes[edit]
External links[edit]
Principles Of Economics Mankiw
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