Negotiation

Session 1 and 2 summary.

A product is said to be in equilibrium when the demand curve and the supply curve intersect at the equilibrium price and quantity on the graph. The aggregate demand curve is the total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is shown by the formula Y= C+I+G+NX. Where C= Consumption, I=investment, G=Government purchases and NX= Net exports. It is shown by the formula

Y= A *f(L,K,NNRR). A = technology, L= labor, K= capital and NNRR= Natural resources.

The consumption function is The function is used to calculate the amount of total consumption in an economy denoted by the formula C = A + mpc×[GDP – TAX]

There are a variety of consumption theories such as

• Keynesian: Consumption theory : The Keynesian Theory of consumption says that the current real disposable income is the most important determinant of consumption in the short run. It is a measure of the quantity of goods and services that consumers have buy with their income

• Permanent Income Theory: It describes how a person spreads consumption over a lifetime.  It also mentions that a persons consumption pattern is not determined by the current income but also by the future incomes of a person. The hypothesis states that changes in permanent income, rather than changes in temporary income, are what drive the changes in a consumer's consumption patterns

• Relative income Theory : The relative income hypothesis states that an individual’s attitude to consumption and saving is not determined by his current level of income but by their past levels of income. According to Duesenberry High-income people not only consume more than others, but also set consumption standards for everyone else.

• Life cycle theory: explains an individual's consumption patterns. The life-cycle hypothesis implies that individuals plan their consumption and savings behavior over their life cycle. An individual does so accumulating when they earn and dis-saving when retire them.

When people have the savings they can do two things whether save it or spend it on consumption. It is denoted by the formula

        S = Y - C.

 When C is greater than Y, saving is negative and is called dissaving. People can consume more than their income allows by running down their savings or other forms of accumulated wealth.