ASSIGNMENT OF BUSINESS COMMUNICATION

SUBMITTED TO :PROF. PRASHANT BHAGAT

MEMBERS SONAM SAPLE

PRACHI GROUP
R. NO SIGN

REMARK

SHITAL SAWANT POOJA NIKAM PRACHI CHAVAN SAGAR AMBRE KRUNAL PADWAL

TOPICS
SR

NO

SUBJECT
Aggregate Demand Aggregate Supply Equilibrium of aggregate demand and aggregate supply. Consumption function.

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AGGREGATE DEMAND, SUPPLY, CONSUMPTION INTRODUCTION :FUNCTION

MACRO ECONOMICS THEORY IS CONCERNED WITH THE AGGREGATE BEHAVIOUR OF THE ECONOMY WHOLE.THECONCEPT OF AGGREGATES IS PRESENTED BY PROF. J.M. KEYNES IN HIS BOOK , THE GENERAL THEORY OF EMPLOYMENT , INTEREST AND MONEY. IN THIS PRESENTATION WE WILL COME TO KNOW ABOUT FACTORS TO DETERMINE AGGREGATE DEMAND AND AGGREGATE SUPPLY AND HOW THEIR EQUILIBRIUM IS ATTAINED.

AGGREGATE DEMAND

Aggregate demand refers to the total demand for different types goods and services by all types of buyers in a country at different prices during a given period of time, generally a year. Like expenditure by the government and net earning from foreign transactions.

DETERMINANTS

Where, AD = C+I+G+(X-M) AD = AGGREGATE DEMAND C= AGGREGATE CONSUMPTION DEMAND. I= AGGREGATE INVESTMENT DEMAND G=AGGREGATE GOVERNMENT EXPENDITURE

FUNCTIONS

AMOUNT OF MONEY WHICH THE ENTREPRENEURS EXPECT TO RECEIVE FROM THE SALE PRODUCED AT PARTICULAR LEVEL OF DEVELOPMENT. AS THE LEVEL OF EMPLOYMENT INCREASES, INCOME RISES , OUTPUT INCREASES. KEYNES SAYS, WHEN INCOME INCREASES PEOPLE TEND TO SPEND SMALLER PROPORTION OF INCOME ON CONSUMPTION GOODS. ADF CURVE SHOWS THE SAME LEVEL OF EMPLOYMENT INCREASES & THE SALE OF OUTPUT RISE .

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AGGREGATE SUPPLY

AGGREGATE SUPPLY REFERS TO THE TOTAL QUANTITY OF GOODS AND SERVICES, WHICH CAN BE PRODUCED & SUPPLIED WITH THE AVAILABLE FACTORS OF PRODUCTION NAMELY LAND, LABOUR CAPITAL & ORGANIZATION IN AN ECONOMY DURING A GIVEN PERIOD OF TIME .

SECTORS OF AGGREGATE SUPPLY

PRIMARY SECTOR : ALL TYPES OF AGRICULTURAL COMMODITIES SECONDARY SECTOR : ALL TYPES OF INDUSTRIAL GOODS TRETIARY SECTOR : ALL TYPES OF SERVICES.

DETERMINANTS AS = F

(N,L,K,T)

WHERE, AS = AGGREGATE SUPPLY

F = FUNCTION OF OR DEPENDS UPON N= NATURAL RESOURCES L = LABOUR K = STOCK OF CAPITAL T = STATE OF TECHNOLOGY (-)= BAR STAND OF CONSTANT

Equilibrium of aggregate demand and aggregate Effective demand: The principle of effective demand supply

occupies an important position in Keynes theory of emoloyment.according to Keynes, effective demand determines the level of income and employment in the economy. It refers to that point at which aggregate demand curve intersects aggregate supply curve. This is an equilibrium level where there is no tendency on parts of the entrepreneurs to expand or contract the production.

AGGREGATE DEMAND AND AGGREGATE SUPPLY

Effective demand is also the total expenditure off all the people on all types of consumers goods and investments at a given period. Effective demand=Total national expenditure=Total national income=money value of tiotal national output. The intersection points of aggregate demand and aggregate supply function determines the equilibrium level of employment in the economy.

AGGREGATE DEMAND

At this point aggregate demand price is equal to aggregate supply price.in other words,it is the point which what the enterpreneurs expect to receive equals what they must receive and there are maximised.This is called the point of intersections where the point or level of effective demand and enterpreneurs earn just normal profits.

EFFECTIVE OF AGGREGATE DEMAND AND SUPPLY

Effective demand refers to that levels of demand in the country which is fully met with by the corresponding supply.in other words, the aggregate demand is equals to aggregate supply.the economy will have the equilibrium output and employment at this point. Aggregate supply refers to the total money value of all goods and services available to purchase.it is equal to the total of consumption expenditure and savings.

AGGREGATE DEMAND

Symbolically, AD=C+I *At equilibrium, AD=AS C+I=C+S Therefore, I = S *Thus what is saved at the point of equilibrium is fully invested.

CONSUMPTION FUNCTIONS

INTRODUCTION: One of the important tools of keynesian economics in the consumption function. Consumption expenditure is the major determinants of aggregate demand in an economy.in this concept,we will discuss about the consumption function or keynes psychological law,savings function and their determinants.

MEANING OF CONSUMPTION FUNCTION

Consumption functions or propensity to consume refers to income-consmption relationship.it shows the functional relationship between the two aggregatetotal consumption and total national income.

CONSUMPTION
Symbolically it can be expressed with the help of following equation. C=f [Y] where, C=Aggregate consumption expenditure. f=Functional relationship. Y=Aggregate national income. Hence,consumption function shows the functional relationship between C and Y where the commodity C depends upon Y.but Y is an independent variable.

KEYNES PSYCHOLOGICAL LAW OF CONSUMPTION FUNCTION

Keynes gave the fundamental psychological law of consumption which forms the basis of consumption function or propensity to consume.According to this law, men are disposed as a rule and on the average,to increase their consumption as their income increases,but not as much as the increase in their incomes. This law explains the following tendencies of the people based on the psychology of normal human beings.

IMPORTANT POINTS OR PROPOSITIONS OF THE THEORY

1. When the total income of the commodity increases, consumption expenditure also increases but less than proportionately. 2. The increased will be divided between consumption expenditure and savings in different proportions. 3. An increased in income will thus always lead to an increase in both consumption and savings. 4.It is unlikely to lead either to fall in consumption or savings than before.

ASSUMPTION OF LAW

Keynes law is based on following assumption1.Constant Psychological and institutional factors: This law is based on the assumption that psychological and institution factors like income, taste,habits,population growth etc.remains in short period. 2.Normal economic conditions: It assume general economic conditions to be normal. 3.Laissez faire policy: This law is operated in a captialist economy where there is no government intervention.

PROPERTIES OR ATTRIBUTES OR CONCEPT OF CONSUMPTION FUNCTION

In the analysis of consumption function,Keynes has used the concepts of propensity to consume and save.Hence the properties of consumption function are A] Average propensity to consume. B] Marginal propensity to consume. 1]-Average propensity to consume[APC]It may be defined as the ratio of aggregate consumption expenditure to any level of aggregate incomeAPC = C/Y, Where C = Consumption and Y =Income It shows the percentage or proportion of income consumed. As income increases APC declines because the proportion of income spend on consumption decreases. But average propensity to save [APS] increases with the incerases in the income.

CONCEPTS OF CONSUMPTION FUNCTION

2]-Marginal propensity to consume[MPC]-

It may be defined as the ratio of change in the aggregate consumption to the change in aggregate income. MPC = Change in C/ Change in Y, where C = Change in consumption and Y = Change in income. MPC is always positive but less than one.Keynes says this is because that consumption increases less than proportionately when income increase.Since MPC is always positive,MPS [marginal propensity to save also will be positive].

FACTORS DETERMINING CONSUMPTION FUNCTION

Factors determining consumption function are classified intoA] Subjective factors. B] Objective factors. 1] Subjective factors : Psychological factors which cause change in consumption expenditure are included in subjective factors.Keynes points out that this remain stable in short period except in abnormal circumstances.

SUBJECTIVE FACTORS

Psychological factors like family affection precaution,foresight,provisions for old age etc.and encourage the people to reduce their consumption expenditure but lack of foresight, to live a luxuroius life, entertainment or to motivate the people to have higher consumption expenditure.

OBJECTIVE FACTORS

1-Distribution of income. 2-Disposal income. 3-Wind fall gains or losses. 4-Future expectations. 5-Tax structure. 6-Consumer credit. 7-Rate of interest. 8-Nature of income receipt. 9-Price. 10-Size of population 11-Stock of goods. 12-Social security.

SAVING FUNCTION

Saving function shows the functional relationship between aggregate national income and the level of savings. Aggregate savings in the economy comprises of personal savings,gross business savings and government savings.Keynes says that savins is the function of income.Higher the level of income,higher will be the volume of savings and viceversa.Savings is the part of income which is not consumed.It can be expressed as followsS = Y-C [ Saving =Income Comsumption ] Since saving is the part of income which is not consumed, the relationship between income and consumption can be used to explain saving function.

FACTORS DETERMINING PROPENSITY TO SAVE

Saving is the part of income which is not spent on consumption. Stable political condition and good banking facilities.The determinants of propensity to save are same as those of determinants or propensity to consume. Although when income increases, both consumption and saving are increase, but factors which positively affect propensity to consume, will negatively affect propensity to save and vice-versa.

DETERMINANTS OF SAVING FUNCTION

Since the savins function is the counterpart of the consumption, the factors determining saving function are also same. The determinants of savings function: 1-Level of income. 2-Future stock. 3-Price level. 4-Burdun of debts. 5-Permanent income. 6-Savings tendency. 7-Precaution motive. 8-Foresight motive.

NOTE ON SAVING FUNCTION

Savings refers to the excess income over consumption. Saving Function explains the relationship between income and saving. At any level of income, the amount of saving is equal to the difference between the income and consumption expenditure.Thus saving is that amount which is left after consumption.