how to relate economic areas to demand and supply theory?

Question

various eco areas like: GDP,inflation, monetary policy etc...has to be related to demand and supply theory in conjunction with circular flow analysis........ but the problem is...i dont just get the meaning of this...can any1 help me plz!!!

Answer 1

Start by thinking what each of these terms means. You have a lot of concepts in your question, and once you start to break them down, thety are less confusing.

GDP is how much stuff an economy produces. The circular flow means that if someone produces $100 of stuff, they will receive $100 for it, so GDP is also equal to the total income generated by everyone in an economy. If you assume that everything that is produced is eventually bought, you also get the same number when you add up how much everyone spends. This fact that it doesn't matter whether you count everything that is produced, all of the income in an economy or the total amount spent, you alwsys should get the same answer, is known as the circular flow since the money keeps going around.

In each transaction, there is supply and demand. The person produces the stuff and then supplies it to the purchaser, who demands it.

Inflation is just how much average prices increase in an economy. When there is too much demand, prices go up (ie inflation rises). When there is too much supply, prices fall (ie inflation goes down).

Monetary policy is just the process by which interest rates are set. When interest rates are high, people borrow less and therefore they spend less buying things so that demand falls. When interest rates go down, people are more likely to borrow money to buy or rennovate a house, take an overseas holiday or buy a car, which means that demand increases.

Hope this helps. If you find a good economics text book, it will explain all of this. While it can seem daunting at first, read it slowly and away from too many distractions and hopefully it will all start to make sense. Part of the trick is not to think that it is more complicated than it really is.