Question

1) Why is it that the price that occurs in the market is not likely to be exactly equal to the value that the individual consumer places upon it?

2) Why is it that if one sector of the economy is in surplus, another sector must be in deficit? Give your answer both verbally and numerically.

3) What problem is created if incomes earned by one sector do not return to the economy as some form of spending?

Answer 1

1) economic value of a commodity is the maximum amount a consumer is willing to pay in a free market. whereas market value is the minimum value a consumer is willing to pay. The value placed by the consumer on a good can at times be greater than the market value.

2) The three essential sectors are private foreign and government sector. The balance among these sectors results in rearranging the aggregate demand among these sectors. The government fiscal balance is a major financial sector balance in domestic economy apart from foreign financial and private financial sector. The aggregate of the surpluses and deficits across these sectors must be zero.

3) The circular flow of income shows that the incomes which do not come back are transfers or gifts. Leakages in the form of saving do not flow in the accounting flow of income unless it is converted into investment