highlights of budget 2013-2014

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IMPORTANT TERMS IN BUDGET THAT EVERYONE MUST KNOW

Do you get confused or stressed when you listen about the budget on business news channels or read about it in the newspapers? Do technical terms such as current account deficit, GDP, fiscal deficit,government expenditure, corporate tax, STT(securities transaction tax), abatement, etc sound intimidating to you? Listed below is a comprehensive picture of some of these technical terms.

Union Budget
The Union Budget is the annual report of India. It is an exhaustive display of the government of India’s finances. The Finance Minister puts down a report that contains Government of India’s revenue and expenditure for one fiscal year. The fiscal year runs from April 01 to March 31. It comprises the revenue budget and the capital budget. It also contains estimates for the next fiscal year.

Abatement 
Abatement is reduction of or exemption from taxes granted by a government for a specified period, usually to encourage certain activities such as investment in capital equipment. A tax incentive is a form of tax abatement.

Direct taxes
These are the taxes that are levied on the income of individuals or organisations. Income tax, corporate tax, inheritance tax are some instances of direct taxation. Income tax is the tax levied on individual income from various sources like salaries, investments, interest etc. Corporate tax is the tax paid by companies or firms on the incomes they earn.

Indirect taxes
Indirect taxes are those paid by consumers when they buy goods and services. These include excise and customs duties. Customs duty is the charge levied when goods are imported into the country, and is paid by the importer or exporter. Excise duty is a levy paid by the manufacturer on items manufactured within the country. Usually, these charges are passed on to the consumer.

Revenues & expenditure
The government’s budget comprises largely about revenues and expenditure. Government revenue is the income a government receives, while government expenditure is the money it spends. Spending or expenditure is further divided into plan and non-plan. 

Revenue receipt & expenditure 
All revenues or receipts include taxes, while expenditure consists of salaries, subsidies and interest payments. These revenue receipts and expenditure—which generally do not lead to sale or creation of assets—come under the revenue account. 

Capital receipt & expenditure 
Capital receipt is the amount received from the sale of assets, shares and debentures. Capital account includes all receipts from liquidating (for instance selling shares in a public sector company), assets and spending to create assets (for example lending to receive interest). 

Revenue budget 
The government has to prepare a revenue budget which outlines in detail revenue receipts & revenue expenditure. The revenue budget consists of revenue receipts of the government (revenues from tax and other sources), and its expenditure. 

Capital budget
The government also prepares capital budget which includes capital receipts and payments.

Capital receipts
Capital receipts are government loans raised from the public, government borrowings from the Reserve Bank and treasury bills, loans received from foreign bodies and governments, divestment of equity holding in public sector enterprises, securities against small savings, state provident funds, and special deposits.

Capital payments
Capital payments are capital expenditure on acquisition of assets like land, buildings, machinery, and equipment. Investments in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties.

Gross tax revenue 
The total tax received by the government from which it has to pay the states their share as mandated by the relevant finance commission. The balance is available to the Union government. 

Non-tax revenue 
The main receipts under the non-tax revenue are interest on loans given by the government, and dividends and profits received from PSUs. The government also earns from various services, including public services, it provides. Of this, only the Railways is a separate department, though all its receipts and expenditure are routed through the Consolidated Fund of India. 

Capital receipts
These include recoveries of loans and advances. 

Gross budgetary support 
Gross Budgetary Support is the government’s support to five-year plans, which includes state plans. The five-year plans are divided into five annual plans. The funding of the plan is split almost evenly between government support (from the budget) and internal and extra-budgetary resources of state-owned enterprises.

Plan expenditure
There are two components of expenditure—plan and non-plan. Planned expenditure is essentially the budget support to the annual plans. This is typically considered developmental spending (on health, education, infrastructure and social goals). Like all budget heads, it is also split into revenue and capital components. 

Non-plan expenditure 
This is in the nature of consumption expenditure, broadly corresponding to revenue expenditure: interest payments, subsidies, salaries, defence & pensions. Its ‘capital’ component is small, the largest chunk being defence.

Central plan outlay
It is the division of financial resources among the various sectors in the economy and the ministries of the government.

Finance Bill
The government proposals for the levy of new taxes, changes in the present tax structure or continuance of the current tax structure beyond the period approved by Parliament, are laid down before Parliament in this Bill. The Parliament approves the Finance Bill for a period of one year at a time, which becomes the Finance Act.

Public debt 
Public debt or public borrowing is considered to be an important source of income to the government. If revenue collected through taxes & other sources is not adequate to cover government expenditure government may resort to borrowing. Such borrowings become necessary more in times of financial crises & emergencies like war, droughts, etc. Public debt may be raised internally or externally. Internal debt refers to public debt floated within the country; while external debt refers loans floated outside the country.

Fiscal policy
Fiscal policy is a change in government spending or taxing designed to influence economic activity. These changes are designed to control the level of aggregate demand in the economy. Governments usually bring about changes in taxation, volume of spending, and size of the budget deficit or surplus to affect public expenditure.

Fiscal deficit
The fiscal deficit is the gap between expenditure and revenue receipt. Generally the government spends more than what it earns through various sources. This shortfall, which is met with borrowed funds, is called fiscal deficit.

Revenue deficit 
It is the excess of revenue expenditure over revenue receipts. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero. In such a situation, the government borrowing will not be for consumption but for creation of assets. 

Effective revenue deficit 
This is an even tighter number than the revenue deficit. It is revenue deficit less grants for creation of capital assets. 

Primary deficit 
It is the fiscal deficit less interest payments made by the government on its earlier borrowings. 

Gross domestic product
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

Fiscal deficit
It is the gap between expenditure and revenue receipt. Fiscal deficit is essentially the difference between what the government spends and what it earns. It is expressed as a percentage of GDP.

FRBM ACT
The Fiscal Responsibility and Budget Management Act was enacted in 2003 and required the elimination of revenue deficit and reduction of fiscal deficit to 3% of GDP. The financial crisis and the subsequent slowdown had forced the government to abandon the path of fiscal consolidation for a while. A new fiscal consolidation road map is likely to be announced this year. 

Ways and means advances 
A system whereby the Reserve Bank of India (the country's central bank) extends loans to the central and state governments to offset temporary cash flow problems they may have. Ways and means advances may be issued without collateral (normal WMAs) or they may be guaranteed by Indian government bonds (special WMAs). 

Current account deficit 
The CAD is the difference between a country’s total imports of goods, services and transfers and its total export of goods, services and transfers. In common terms, it means that India is a net debtor to the rest of the world.

Securities transaction tax 
STT is levied on every purchase or sale of securities that are listed on the Indian stock exchanges. This would include shares, derivatives or equity-oriented mutual funds units. The rate of tax that is deducted is determined by the central government, and it varies with different types of transactions and securities. STT is deducted at source by the broker or AMC, at the time of the transaction itself, the net result is that it pushes up the cost of the transaction done.

INTERNATIONAL TRADE

International trade is the exchange of goods, services and capital across national borders. It is a multi-trillion dollar activity, central to the GDP of many countries, and it is the only way for people in many countries to acquire resources they require. Absent trade, consumers and suppliers are forced to either develop substitute goods or devote a large percentage of their income to acquiring products where demand is inelastic and domestic supply is inadequate.

Two of the key concepts in the economics of international trade are specialization and comparative advantage.

It seems readily apparent that countries can benefit from trade if each country does something better than the other (i.e. can produce goods or services at a lower cost). What if one company is more efficient in every good? This situation is called absolute advantage.

Even in situations of absolute advantage, though, there can be benefits to trade. As long as a country is not equally superior in producing all goods, there will be different relative costs for producing various goods. This is where comparative advantage comes in; so long as the two countries have different relative efficiencies, the two countries can benefit from trade – the country with absolute advantage will still benefit by directing its resources to those goods where it is most productive and trading for the others.

Specialization refers to this process; countries (as well as individual businesses) can maximize their welfare by specializing in the production of those goods where they are most efficient and enjoy the largest advantages over rivals. 

A country's balance of payments basically tracks the financial flows between trading partners. The balance of payments includes the payments made for imports and exports, as well as financial transfers. Exports create a positive entry, while imports are a negative. That said, a balance of payments must always balance out at zero – a trade deficit (more imports than exports) must be balanced with foreign investments, declines in reserves, or increased debt; likewise, a trade surplus will be balanced out with financial outflows or increased reserves.

Within a nation's balance of payment is the current account. The current account is made up primary of a company's trade balance (exports minus imports), as well as net interest and dividends, and net transfer payments (like foreign aid).

Impediments to Trade

While free trade is generally thought of as a positive, countries will periodically put up barriers to trade. Tariffs are taxes on imports that make imported goods more expensive and less competitive relative to domestically-produced goods. While national governments used to obtain a significant percentage of their receipts from tariffs (in the days before income taxes were common), tariffs today are more commonly used to protect domestic industries and/or to punish other countries for perceived wrongdoing (typically subsidizing local industries to the detriment of the importing country's industries).

Subsidies are transfer payments given by governments to domestic suppliers of goods or services. The motivation to provide subsidies is to increase production and/or lower prices for a country's consumers and/or to make domestically-produced goods more competitive with imports.

Quotas are limits on the amount of a good that can be imported in a given period. Quotas serve a similar purpose to tariffs in that the increase the price of imported goods, but quotas can be even more severe as no additional goods are available once the quota level is reached.

Cost-Push Inflation Versus Demand-Pull Inflation

Do you remember how much less you paid for things even two years ago? This increase in the general price level of goods and services in an economy is inflation, measured by the Consumer Price Index and the Producer Price Index.  But there are different types of inflation, depending on its cause. Here we examine cost-push inflation and demand-pull inflation. 

Factors of Inflation 

Inflation is defined as the rate (%) at which the general price level of goods and services is rising, causing purchasing power to fall. This is different from a rise and fall in the price of a particular good or service. Individual prices rise and fall all the time in a market economy, reflecting consumer choices or preferences and changing costs. So if the cost of one item, say a particular model car, increases because demand for it is high, this is not considered inflation. Inflation occurs when most prices are rising by some degree across the whole economy. This is caused by four possible factors, each of which is related to basic economic principles of changes in supply and demand:

1. Increase in the money supply.
2. Decrease in the demand for money.
3. Decrease in the aggregate supply of goods and services.
4. Increase in the aggregate demand for goods and services.

In this look at what inflation is and how it works, we will ignore the effects of money supply on inflation and concentrate specifically on the effects of aggregate supply and demand: cost-push and demand-pull inflation. 

Cost-Push Inflation 

Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation. Cost-push inflation basically means that prices have been "pushed up" by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation). 

Production Costs 

To understand better their effect on inflation, let's take a look into how and why production costs can change. A company may need to increases wages if laborers demand higher salaries (due to increasing prices and thus cost of living) or if labor becomes more specialized. If the cost of labor, a factor of production, increases, the company has to allocate more resources to pay for the creation of its goods or services. To continue to maintain (or increase) profit margins, the company passes the increased costs of production on to the consumer, making retail prices higher. Along with increasing sales, increasing prices is a way for companies to constantly increase their bottom lines and essentially grow. Another factor that can cause increases in production costs is a rise in the price of raw materials. This could occur because of scarcity of raw materials, an increase in the cost of labor and/or an increase in the cost of importing raw materials and labor (if the they are overseas), which is caused by a depreciation in their home currency. The government may also increase taxes to cover higher fuel and energy costs, forcing companies to allocate more resources to paying taxes. 

Putting It Together 

To visualize how cost-push inflation works, we can use a simple price-quantity graph showing what happens to shifts in aggregate supply. The graph below shows the level of output that can be achieved at each price level. As production costs increase, aggregate supply decreases from AS1 to AS2 (given production is at full capacity), causing an increase in the price level from P1 to P2. The rationale behind this increase is that, for companies to maintain (or increase) profit margins, they will need to raise the retail price paid by consumers, thereby causing inflation. 

Demand-Pull Inflation 

Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macroeconomy: households, businesses, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, they compete to purchase limited amounts of goods and services. Buyers in essence "bid prices up", again, causing inflation. This excessive demand, also referred to as "too much money chasing too few goods", usually occurs in an expanding economy. 

Factors Pulling Prices Up 

The increase in aggregate demand that causes demand-pull inflation can be the result of various economic dynamics. For example, an increase in government purchases can increase aggregate demand, thus pulling up prices. Another factor can be the depreciation of local exchange rates, which raises the price of imports and, for foreigners, reduces the price of exports. As a result, the purchasing of imports decreases while the buying of exports by foreigners increases, thereby raising the overall level of aggregate demand (we are assuming aggregate supply cannot keep up with aggregate demand as a result of full employment in the economy). Rapid overseas growth can also ignite an increase in demand as more exports are consumed by foreigners. Finally, if government reduces taxes, households are left with more disposable income in their pockets. This in turn leads to increased consumer spending, thus increasing aggregate demand and eventually causing demand-pull inflation. The results of reduced taxes can lead also to growing consumer confidence in the local economy, which further increases aggregate demand. 

Putting It Together 

Demand-pull inflation is a product of an increase in aggregate demand that is faster than the corresponding increase in aggregate supply. When aggregate demand increases without a change in aggregate supply, the ‘quantity supplied' will increase (given production is not at full capacity). Looking again at the price-quantity graph, we can see the relationship between aggregate supply and demand. If aggregate demand increases from AD1 to AD2, in the short run, this will not change (shift) aggregate supply, but cause a change in the quantity supplied as represented by a movement along the AS curve. The rationale behind this lack of shift in aggregate supply is that aggregate demand tends to react faster to changes in economic conditions than aggregate supply. 

As companies increase production due to increased demand, the cost to produce each additional output increases, as represented by the change from P1 to P2. The rationale behind this change is that companies would need to pay workers more money (e.g. overtime) and/or invest in additional equipment to keep up with demand, thereby increasing the cost of production. Just like cost-push inflation, demand-pull inflation can occur as companies, to maintain profit levels, pass on the higher cost of production to consumers' prices. 

Conclusion 

Inflation is not simply a matter of rising prices. There are endemic and perhaps diverse reasons at the root of inflation. Cost-push inflation is a result of decreased aggregate supply as well as increased costs of production, itself a result of different factors. The increase in aggregate supply causing demand-pull inflation can be the result of many factors, including increases in government spending and depreciation of the local exchange rate. If an economy identifies what type of inflation is occurring (cost-push or demand-pull), then the economy may be better able to rectify (if necessary) rising prices and the loss of purchasing power. 

COUSTESY: INVESTOPEDIA 

LABOR AND UNEMPLOYMENT

 Labor is a driving force in every economy – wages paid for labor fuel consumer spending, and the output of labor is essential for companies. Likewise, unemployed workers represent wasted potential production within an economy. Consequently, unemployment is a significant concern within macroeconomics.

"Official" unemployment refers to the number of civilian workers who are actively looking for work and not currently receiving wages. Given that official unemployment statistics specifically exclude those who would like to work but have become discouraged and ceased looking for employment, the true unemployment rate is always higher than the official rate.

Within the unemployment number are several sub-types of unemployment.

• Frictional unemployment results from imperfect information and the difficulties in matching qualified workers with jobs. A college graduate who is actively looking for work is one example. Frictional unemployment is almost impossible to avoid, as neither job-seekers nor employers can have perfect information or act instantaneously, and it is generally not seen as problematic to an economy.
• Cyclical unemployment refers to unemployment that is a product of the business cycle. During recessions, for instance, there is often inadequate demand for labor and wages are typically slow to fall to a point where the demand and supply of labor are back in balance.
• Structural employment refers to unemployment that occurs when workers are not qualified for the jobs that are available. Workers in this case are often out of work for much longer periods of time and often require retraining. Structural unemployment can be a serious problem within an economy, particularly in cases where entire sectors (manufacturing, for instance) become obsolete. 

While high unemployment is undesirable, full employment (meaning zero unemployment) is neither practical nor desirable. When economists talk about full employment, frictional unemployment and some small percentage of structural unemployment are excluded. Economists do not generally believe it is practical or desirable to have 100% employment in an economy.

In particular, the Phillips curve highlights why this is so. Generally there is a relationship between inflation and unemployment – the lower the rate of unemployment, the higher the rate of inflation. While a variety of factors can alter the curve (including productivity gains), the essential take-away is that neither a zero-unemployment or zero-inflation scenario is viable on a long-term basis.

There is also a tradeoff between employment and efficiency. Businesses maximize their profits when they produce the largest number of goods possible at the lowest price possible. In some cases, though, labor is more expensive (less efficient) than capital equipment. Consequently, there is always a trade-off between the cost and productivity of labor and that of labor-substituting capital equipment and that effectively reduces the number of jobs available. Likewise, structural employment is a recurrent problem as technology progresses – workers find their skills no longer match the needs of the employers and must update their training as industries adopt new technologies

BUSINESS CYCLE IN MACROECONOMICS

The business cycle is the pattern of expansion, contraction and recovery in the economy. Generally speaking, the business cycle is measured and tracked in terms of GDP and unemployment – GDP rises and unemployment shrinks during expansion phases, while reversing in periods of recession. Wherever one starts in the cycle, the economy is observed to go through four periods – expansion,peak, contraction and trough.

Recession is typically used to mean a downturn in economic activity, but most economists use a specific definition of "two consecutive quarters of declining real GDP" for recession. By comparison, there is no formal definition of depression. While recessions have averaged around 10 months in length since the 1950s, the recovery/expansion phases have a much wider range of lengths, though around three years is relatively common.

The movement of the economy through business cycles also highlights certain economic relationships. While growth will rise and fall with cycles, there is a long-term trend line for growth; when economic growth is above the trend line, unemployment usually falls. One expression of this relationship is Okun's Law, an equation that holds that every 1% of GDP above trend equates to 0.5% less unemployment.

The relationship between inflation and growth is not as clear, but inflation does tend to fall during recessions and then increase through recoveries.

While the business cycle is a relatively simple concept, there is great debate among economists as to what influences the length and magnitude of the individual parts of the cycle, and whether the government can (or should) play a role in influencing this process. Keynesians, for instance, believe that the government can soften the impact of recessions (and shorten their duration) by cutting taxes and increasing spending, while also preventing an economy from "overheating" by increasing taxes and cutting spending during expansion phases.

In comparison, many monetarist economists disagree with the notion of business cycles altogether and prefer to look at changes in the economy as irregular (non-cyclical) fluctuations. In many cases, they believe that declines in business activity are the result of monetary phenomena and that active government inflation is ineffective at best and destabilizing at worst.

There are numerous other alternate theories on the business cycle and its causes/influences. Real business cycle theorists, for instance, believe that it is external shocks like innovation and technological progress that drive cycles, and that issues like excessive overcapacity can drive downturns. Other theorists suggest that excess speculation or the creation of excess levels of bank capital drive business cycles. 

ECONOMIC SYSTEMS

Within the study of macroeconomics, there are certain basic goals for economic systems. Generally speaking, desirable goals include economic growth, full employment, economic efficiency (achieving the maximum output for the available resources), price stability and balanced trade. Most economists would also include economic freedom (the right to freely choose to work, invest and consume according to one's inclinations) as a key goal and some would also point to an equitable distribution of income as a worthwhile goal.

When considering the concept of market efficiency, it is also important to note the existence of those who basically oppose the notion that free markets are the desirable mechanism for allocating resources. In particular, egalitarianism holds that every participant in an economy should get an equal share, untying compensation from productivity.

While egalitarianism may be an extreme means of dealing with inequalities economies, these inequalities are important. Inequalities can arise from differences in abilities, differences in human capital, discrimination, individual preferences, market power and simple luck. Generally speaking, even the staunchest laissez faire economists oppose discrimination as it interferes with the efficient operation of the economy.

The Gini ratio is one commonly-used metric for economic inequality; in particular it measures the inequality of income distribution across an economy.

While there is still some academic interest in command and communist economics, and a fairly thriving interest in mixed economies (where there is a mix of government planning and market economics), most economic theory focuses on market systems. Market systems feature private property and economic participants are motivated by self-interest to maximize their happiness and profits.

Perfect competition is a market in which there are many small independent consumers and producers. Firms produce standardized products and there are no barriers to entry or exit. Firms competing in perfect competition are price-takers. By and large, perfect competition is a thought object (having no barriers to entry or exit is rare), but the market for freelance writing comes close. 
In a monopoly, there is a single producer and there are no close substitutes to that product. In a monopoly there are extremely high barriers to entry (if not outright prohibition of competition) and firms are price-setters without government intervention.

As most readers will realize, true perfect competition and true monopoly are quite rare in actual practice. More common, though, are monopolistic competition and oligopolies.

Monopolistic competition features a relatively large number of firms offering differentiated products. Barriers to market entry and exit are relatively low. Oligopoly sees a few large producers competing in a market, with either differentiated or standardized products. There are relatively significant barriers to entry, and some mutual interdependence among the producers

Macroeconomics: Supply, Demand and Elasticity

DemandDemand is driven by utility – the pleasure or satisfaction that a consumer obtains from consuming a good or service. Total utility is a function of the quantities of goods/services consumed and the quantities of work done. What is more relevant is the notion of marginal utility – the additional utility that comes from consuming one additional unit of a good or service. This feeds into the law of diminishing marginal utility – at some point, marginal utility will always decrease. 

Consumers maximize their utility by consuming up to the point where the marginal utility is at zero. Consumption is a byproduct of disposable income, where disposable income equals gross income minus net taxes. Expressed differently, disposable income is also equal to the sum of consumption and saving.

There are a variety of equations that can express individual consumption. A person's marginal propensity to consume is largely determined by income, as that marginal propensity equals the change in consumption divided by the change in disposable income. Similarly, a person's marginal propensity to save can be measured as the change in savings divided by the change in disposable income. At all times, then, the marginal propensity to consume and to save must equal "1."

What determines the rate of consumption and savings? Wealth plays a role, as higher wealth leads to more consumption. Consumer expectations also play a significant role; if consumers expect economic conditions to worsen, they will spend less and save more. Household debt is also a factor, as debt represents future consumption brought forward into the present. Finally, taxes and transfers also impact consumption – the more people are taxed, the less they consume, while higher transfer payments from the government can increase consumption.

The total demand for goods and services within an economy is the aggregate demand. Aggregate demand (often expressed as "Y") is the sum of consumer demand, investment spending, government spending and net exports. The curve of aggregate demand is downward-sloping, as demand declines as prices increase.

Demand can be influenced by a variety of factors. Some of the most significant demand factors include:

• Increase/decrease in real wealth – As consumers' wealth increases, they demand more goods. This rate of increase does slow at higher levels of wealth, though, as more income is devoted to savings (future consumption).
  
• Decrease/increase in real interest rate – Interest rates are in many respects the price of money and higher rates discourage consumption.
  
• Increase/decrease in optimism – As consumers feel better about the economy (and by extension, their job and earnings prospects), they spend more.
  
• Increase/decrease in expected inflation – Inflation erodes the value of unspent money; when consumers expect higher rates of inflation (or rather, the higher prices that make up inflation), they will consume today rather than see their money buy less in the future.
  
• Higher/lower real incomes abroad – If foreigners earn more, they can spend more money on trade goods (imports).
  
• Reduction/increase in exchange value of currency – A stronger currency encourages more spending on imported goods as they become cheaper.

SupplyThe counterpart to aggregate demand is aggregate supply – the total amount of goods and services that are produced in an economy at a given price level. There are a variety of combinations of goods and services that can be produced in an economy and the production possibilities curve illustrates the maximum output that can be achieved in an economy (assuming full employment and full resource utilization). Full production is predicated on using resources in a maximally efficient way. 

Firms maximize their profits by producing up to the point where the marginal revenue of the next good sold is equal to the marginal cost of producing it. Likewise, a similar philosophy is at work when firms consider whether to make new investments. For a business to make an investment, the expected real rate of return must be equal to or higher than the real cost of investment. Consequently, higher rates generally depress investment activity.

There are numerous factors that can influence supply:

• Increase/decrease in resources – When the availability of materials is a limiting factor in production, an increase in resources allows for a greater supply of goods or services.
  
• Improvements in technology/productivity – Better technology and/or productivity allow producers to create more goods at a lower price.
  
• Changes in efficiency of resource use – Better efficiency means that suppliers can produce more goods or services from the same resource base.
  
• Decrease/increase in resource prices – As the cost of resource inputs declines, suppliers can offer more goods/services at the same price.
  
• Reduction/increase in inflation – Inflation increases the cost of production; lower inflation allows for a greater supply of goods at the same price.
  
• Favorable/unfavorable supply shocks – Favorable supply shocks increase the profitability of production for suppliers, while a negative supply shock (an embargo, for instance) can significantly curtail a company's access to supplies and ability to produce goods.

When supply and demand are equal (when the two curves intersect), the market is said to be in equilibrium. At all times, both consumers and producers look to maximize their utility. Consumers maximize their utility by consuming goods with a positive marginal utility; suppliers maximize their utility by producing goods and services where the marginal revenue is greater than the marginal cost. 
ElasticityElasticity refers to the degree to which the demand and supply curves react to changes in price. Expressed as the equation, elasticity equals % change in quantity / % change in price. This means that highly elastic goods and services will see significant changes in demand/supply with very small changes in price.

Elasticity can be influenced by a number of factors, including: the availability of substitutes (more substitutes = more elasticity), the amount of income available, and time. Elasticity is a somewhat intuitive idea (people will pay almost any price for life-saving drugs, but may switch soda brands for a price difference of pennies), but it has many important applications. Elasticity plays a key role in determining the effect of changing prices on business revenue, the analysis of tax burden, the benefits of trade, and the effects of advertising. 

FOUNDATION OF MACROECONOMICS

While there are relatively clear definitions separating microeconomics and macroeconomics, the reality is that both sections of economics draw heavily from certain shared underlying concepts. Both are underpinned by the reality that there are unlimited wants and only limited resources to meet them.

Economics holds that maximizing welfare is a key goal in all economic pursuits. Welfare can be broadly defined as the maximum enjoyment of resources for the minimum output of effort (work, labor or capital). Welfare is measured in part by consumer and producer surpluses – consumer surplus is calculated as the difference between the price a consumer is willing to pay and the actual price, while the producer surplus is the difference between the sales price and the price the producer would have accepted.

Scarcity and choice are primary factors in macroeconomics. Scarcity does not mean the same thing as "shortage"; scarcity means that a good or service is in demand with a limited amount of resources - there is excess demand at a price of "zero" and therefore the equilibrium price is always above zero. 

In comparison, a shortage is a situation where demand exceeds supply and there are impediments to the price rising enough to clear the excess demand – trucks to resupply a store may be late and the store is unwilling (or unable by law) to raise prices. In that case, there will be a temporary shortage of goods. Scarcity is a driving force in economics, as there is little trouble in allocating goods and services that are either limitless or valueless. 

Marginalism is likewise a critical concept in macroeconomics. Marginalism refers both to the effect per unit of a small change in any variable, as well as the process of weighing only the costs and benefits that are directly related to a particular decision. For instance, it only makes sense for an economic agent to act when the marginal benefit is higher than the marginal cost.

SCHOOLS OF THOUGHT IN MACROECONOMICS

The field of macroeconomics is organized into many different schools of thought, with differing views on how the markets and their participants operate.

ClassicalClassical economists hold that prices, wages and rates are flexible and markets always clear. As there is no unemployment, growth depends upon the supply of production factors. (Other economists built on Smith's work to solidify classical economic theory. 

KeynesianKeynesian economics was largely founded on the basis of the works of John Maynard Keynes. Keynesians focus on aggregate demand as the principal factor in issues like unemployment and the business cycle. Keynesian economists believe that the business cycle can be managed by active government intervention through fiscal policy (spending more in recessions to stimulate demand) and monetary policy (stimulating demand with lower rates). Keynesian economists also believe that there are certain rigidities in the system, particularly "sticky" wages and prices that prevent the proper clearing of supply and demand.

MonetaristThe Monetarist school is largely credited to the works of Milton Friedman. Monetarist economists believe that the role of government is to control inflation by controlling the money supply. Monetarists believe that markets are typically clear and that participants have rational expectations. Monetarists reject the Keynesian notion that governments can "manage" demand and that attempts to do so are destabilizing and likely to lead to inflation.

New KeynesianThe New Keynesian school attempts to add microeconomic foundations to traditional Keynesian economic theories. While New Keynesians do accept that households and firms operate on the basis of rational expectations, they still maintain that there are a variety of market failures, including sticky prices and wages. Because of this "stickiness", the government can improve macroeconomic conditions through fiscal and monetary policy.

Neoclassical
Neoclassical economics assumes that people have rational expectations and strive to maximize their utility. This school presumes that people act independently on the basis of all the information they can attain. The idea of marginalism and maximizing marginal utility is attributed to the neoclassical school, as well as the notion that economic agents act on the basis of rational expectations. Since neoclassical economists believe the market is always in equilibrium, macroeconomics focuses on the growth of supply factors and the influence of money supply on price levels. 

New ClassicalThe New Classical school is built largely on the Neoclassical school. The New Classical school emphasizes the importance of microeconomics and models based on that behavior. New Classical economists assume that all agents try to maximize their utility and have rational expectations. They also believe that the market clears at all times. New Classical economists believe that unemployment is largely voluntary and that discretionary fiscal policy is destabilizing, while inflation can be controlled with monetary policy.

Austrian
The Austrian school is an older school of economics that is seeing some resurgence in popularity. Austrian school economists believe that human behavior is too idiosyncratic to model accurately with mathematics and that minimal government intervention is best. The Austrian school has contributed useful theories and explanations on the business cycle, implications of capital intensity, and the importance of time and opportunity costs in determining consumption and value.

INTRODUCTION TO MACROECONOMICS

In general, economics is the study of how agents (people, firms, nations) use scarce resources to satisfy unlimited wants. Macroeconomics is the branch of economics that concerns itself with market systems that operate on a large scale. Where microeconomics is more focused on the choices made by individual actors in the economy (individual consumers or firms, for instance), macroeconomics deals with the performance, structure and behavior of the entire economy. When investors talk about macroeconomics, discussions of policy decisions like raising or lowering interest rates or changing tax rates are discussed. 
Some of the key questions addressed by macroeconomics include: What causes unemployment? What causes inflation? What creates or stimulates economic growth? Macroeconomics attempts to measure how well an economy is performing, understand how it works, and how performance can improve.

While the term "macroeconomics" is not all that old (going back to Ragnar Frisch in 1933) many of the core concepts in macroeconomics have been the focus of study for much longer. Topics like unemployment, prices, growth and trade have concerned economists almost from the very beginning of the discipline, though their study has become much more focused and specialized through the 1990s and 2000s.

Likewise, it is difficult to name any sort of founder of macroeconomic studies. John Maynard Keynesis often credited with the first theories of economics that described or modeled the behavior of the economy, elements of earlier work from the likes of Adam Smith and John Stuart Mill clearly addressed issues that would now be recognized as the domain of macroeconomics.

Although microeconomic ideas like game theory are clearly quite significant today and the decision-making process of individual agents like firms is still an important field of study, macroeconomics has arguably become the dominant focus of economics – at least as it applies to the investment process and financial markets.