Economy: National Income and its Accounting
I am starting with the first chapter that is national income and accounting. Now in the chapter of national income we will discuss about income of a nation. Income of a nation is determined by per capita income because, sum total of per capita income is national income .We will discuss the technical aspects also but for common parlance for your easy understanding sum total of per capita income is national income and per capita income measured on the basis of total income upon population . But here you need to remember that population should be of midyear. Because if you are taking the population of 1st January that would be the national income of last year. So to have accuracy in national income you take the mid mid year population as your sample data. And this year is calendar year. That means which starts on 1st of January and ends on 31st December. It is not financial year; financial year is from 1st of April till 31st of March. But when you look at per capita income this income is, total income divided by population, the population is of midyear population and that year must be calendar year. But per capita income is decided on the basis of two things first is law of demand. Demand and supply will determine per capita income. How much is the level of demand in the market and how much is the level of supply in the market? The equilibrium point would be called price, market price. So demand and supply are the two most important components of any economy cycle .You can talk about so many things shares, goods, services, commodities, trade but everything is equal to demand and supply .How much is the quantity demanded? How much is the quantity supplied? That would determine the overall growth that would determine the flourishness of the market that would determine the market price that would determine the per capita income .So economy revolves around these two terms demand and supply. So then what is demand? And what is supply? To put it very simply what is law of demand means which governs the way the consumer demands. What are the factors which decide the level of quantity demanded? Then we have law of demand. Law of demand says, let me explain it by way of a diagram on x- axis we are taking demand, on y- axis we are putting price .Law of demand will go like this, that means if price is high quantity demanded is less. Now look at this price goes down price 1 it is price 2 it is demand 1 it is demand 2. If you look at this aspect you find that price is going down and quantity demanded increases. So law of demand we can call it D curve. Law of demand says that in normal circumstances with a fall in price, quantity demanded increases. So what are the determinants of demand? Means which determines demand. Under normal circumstances law of demand says that, with the fall in price quantity demanded increases and under normal circumstances what are the determinants of demand? The first determinant is price obviously. If price is more quantity demanded would be less. Second is income of the consumer. If level of income is low quantity demanded would be less. Third is price of related goods, like if more substitutes are available that will also determine the demand for a particular commodity .If there are several brands of soaps, shampoos are available related goods, then the quantity demanded for a particular brand of soap will be determined by these factors as well. Fourth you have taste of preferences. Means preferences also determines the demand. If taste increases quantity demanded would also increase. Fifth factor is expectations. Expectations of changes in price, like if a consumer expects that in coming days price of a particular commodity will go down. So today the demand would be less because it also it is also based on expectation of a consumer with regards to the future change in the price. And then you have change in weather. So like suppose weather is changing weather also decides the quantity demanded. So it was the determinant of demand. These these 6 factors determine the demand. And law of demand says that under normal circumstances with fall in price quantity demanded would increase.
Now let me tell you something about the law of supply. Law of supply, it says that; let me explain it by way of a curve diagram. Again on x- axis we will put supply and on y- axis we will put price. It goes like this, this we can say supply curve. It says that under normal circumstances, under normal circumstances if price increases price is going up what you find is supply is also increasing supply 1, supply 2. So law of supply says that if under normal circumstances if there is an increase in price, quantity supplied also increases. The reason is with increase in supp prices, the manufacturer gets more profit. So since manufacturer is getting more profit with increase in supply so the whenever with increase in prices so whenever there is increase in prices the manufacturer supplies more quant units of that particular commodity. Now if we look at the determinants of supply, as we have seen in case of demand. Determinants of supply, the first would be again price. Means price increases supply also increase because with every increase in price, manufacturer gets more profit. Second is cost of production. If cost of production increases supply goes down, because now the manufacturer has to incur more cost on its production, so it also decides the supply. Third would be change in taxes. Like if taxes levied by the government are increased on a particular commodity you find less supply because the entire manufacturing. Entire work of production becomes costly .Fourth you have change in technology, if technology is improved supply is more because technology has a direct relation with the supply. With a improved technology a producer or a manufacturer brings the cost of production down and supplies more into the market. And natural factors. Natural factors like if there is calamity or if supply is based on some natural factors as well like suppose fruits , vegetables and if there is draught and if there is more rain which spoils the agricultural output then that also decides the overall supply . Having said that now we will, now we will mix both demand plus supply that is equal to market. Because what happens in the market? There are two persons one is buyer and the other one is seller. And when buyer and seller both are in agreement with both are in agreement on quantity demanded and quantity supplied that is market price. And the entire market activity is based on buyers and sellers. So we will we will mix both the laws law of demand and law of supply that will make, let me tell you law of demand plus law of supply is equal to law of market. Now what happens here is, law of demand is D curve it is S curve here you find equilibrium, both D curve and S curve intersects each other at this point, and hence this rate would be the market price. This x- axis represents x demand and supply, y- axis represents price and the the meeting point where D curve and S curve intersects each other that would be the market price. Now this is law of market. I am talking about assuming that there is perfect competition in the market because there are various types of markets that in for various types of commodities. I have taken this law of market keeping in mind that there is perfect competition in the market. Perfect competition means there are large number of firms in the market, they are producing homogeneous products. In a situation of perfect market firms cannot exploit consumers. Why? Because there are large number of firms and you what you find is they are producing homogeneous products. So it is up to the consumer which brand or which form it wants to go with. In a situation of perfect competition what you find is, firm is a price taker firm is not a price maker because there are so many firms operating in the market .Firms are producing homogeneous products, so perfect competition is desirable in the market because here what you find is resource allocation. The resource which are allocated to different products is based on the wishes of the consumers, because there are large number of firms and firms have to obey, firms have to honor, firms have to comply with the wishes, demands of the consumer. Firms cannot dictate terms to the consumers.