Introduction Class12

Introduction
What is economy?
It is a place where people earn their living.
For e.g. India
Different sectors of an economy are:-

 Household
 Firm/ Business
 Government
 Rest of the world (Foreign Sector)
Types good:-
1. Final Good: It refers to those goods that do not require further
processing. These goods are also known as consumer goods and
are produced for the purpose of direct consumption by the end
consumer.
In simple words, final goods are commodities that are manufactured by
a company for a subsequent consumption by the consumer. These
goods satisfy the needs or wants of a consumer.
2. Intermediate Good: It refers to goods that are used by businesses for
producing goods or services. These goods are also known as
producer goods.
In other words, intermediate goods are used for producing final goods
or consumer goods. It can also be said that they act as inputs in other
goods and constitute the final goods as ingredients.
3. Capital goods: It refers to as the fixed or tangible assets that are
purchased by a business in order to produce finished products or
consumer goods. Capital goods are not readily convertible into cash.
They are durable and they do not wear out quickly.
The most common examples of capital goods can be equipment,
machinery, buildings, computers, and more.
4. Consumer Good: It refers to those goods which are directly used for
the satisfaction of human wants. These are not used for the
production of other goods.
 Durable Goods
 Semi-durable Goods
 Non durable Goods
 Services
Stock and Flow Concept:
Stock Flow
Stock is defined as a variable that is Flow is defined as a variable which is

measured at a particular point in time measurable over a period of time
Stock does not have a time dimension Flow has a time dimension attached with
attached with it it
Stock is static in nature Flow is dynamic in nature
Stock influences the flow, as such Flow influences the stock, as in

greater amount of capital will lead to increased flow of money supply in an
greater flow of services economy results in increase in the
quantity of money
Real Flow and Money Flow:
Real Flow: The flow of factor services from the households to the firms
and the corresponding flow of goods from firms to the households in an
economy is known as the Real Flow. Real flow is also known as
Physical Flow.
Money Flow:The flow of factor payments from the firms to households
for their factor services and the corresponding flow of consumption
expenditure from households to the firms for the purchase of goods and
services produced by the firms is known as Money Flow. Money flow is
also known as Nominal Flow.
Circular Flow of Income
The circular flow of income is an economic model that reflects how
money or income flows through the different sectors of the economy.
Phases of Circular Flow of Income:
The three different phases in a circular flow of income are Generation,
Distribution, and Disposition.
1. Generation Phase:
The first phase of the circular flow of income is Generation Phase. In
this phase, the firms produce goods and services by taking the help of
the factor services.
2. Distribution Phase:
The second phase of the circular flow of income is the Distribution
Phase. In this phase, factor incomes such as wages, rent, interest, and
profit flow from firms to the households.
3. Disposition Phase:
The last phase of the circular flow of income is the Disposition Phase.
In this phase, the income received by the factors of production is spent
on the goods and services produced by the firms.
Circular Flow (2 Sector Model)
1. There are only two sectors in an economy i.e. households and firms.
2. Household sector provides factor services to the firms and makes

consumption expenditure on goods and services produced by the firms.
3. Firms produce goods and services and make factor payments (rent,
wages, interest, profit) to household sector for their factor services
(land, labor, capital, entrepreneur).
4. There are no savings in the economy by the household sector which

means all income is spent on consumption.
5. The outer loop shows the real flow of income and the inner loop
shows the money flow of income.
6. So there is a circular and continuous flow of money income as the
entire factor payment is received back with firms through consumption
expenditure.
7. This flow of income continues as production is continuous process

due to never ending human wants. It makes the flow of income circular.

Introduction Class12

Uploaded by

Copyright:

Available Formats

Introduction Class12

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Introduction Class12

Uploaded by

Copyright:

Available Formats

Introduction

Different sectors of an economy are:-

Stock is defined as a variable that is Flow is defined as a variable which is

Stock is static in nature Flow is dynamic in nature

Stock influences the flow, as such Flow influences the stock, as in

2. Household sector provides factor services to the firms and makes

4. There are no savings in the economy by the household sector which

7. This flow of income continues as production is continuous process

You might also like