Economics is the attempt to explain the behavior and interactions of an individual’s, households, firms, industries etc. Now the scarce resources must be balancing the wants and needs of one group of people against those of another, and is directly related to the politics, ideology and values.
In the economy as a circular flow that is Figure A. there is two things that are involved i.e. Firms and households. Now the household demands the manufactured goods and services where as the firm on the other hand demands resources like labor, capital, land and managerial skills. From the household the employee goes to firm to work and then he uses the finished resources for his personal use and this is how the cycle works. In Figure B. we should realize that not all the income is spent. Some income is saved and recycled to investment through the financial markets and that we can see in fig. B.
As we cannot consider an economy as isolated from the rest of the world since countries have a great impact on each other owing to transactions such as imports, exports, and foreign borrowing. Therefore we should incorporate both the foreign and government sector in the flow charts as we can see in the Figure. C. In this the government sector makes payments to households and firms, collect taxes, borrows saving and consumes both goods and labor. The foreign sector buys and sells goods and services and borrows and saves it in the domestic financial market.
Now to understand the concept of supply and demand we should first know the meaning of those terms. Supply means the goods and services which we try to make it available to the customers on time and demand means to fulfill the needs of the buyer by providing him/her the services at the right place on right time.
In Figure D. the supply curve is in the upward direction because the price is high as the producer is willing to produce the given quantity....