GE04: Fundamental of Business Economics

Lecture 10 & 11: Supply & Demand for Public and Private Goods
in the Market Economy

Presented by
Dr. M. Anwar Ullah, FCMA

The Institute of Cost and Management Accountants of

Bangladesh
ICMA Bhaban, Nilkhet, Dhaka – 1205
Email: anwar2023@yahoo.com.sg
Supply and Demand for Goods in the Market Economy

The Economic Way of Thinking

• Everything has a cost
• People choose for good reasons
• Incentives matter
• People create economic systems to influence choices and
incentives
• People gain from voluntary trade
• Economic thinking is marginal thinking
• The value of a good or service is affected by people’s choices
• Economic actions create secondary effects
• The test of a theory is its ability to predict correctly
Supply and Demand for Goods in the Market Economy
Public goods Vs. Private goods

 Product divisibility (pricing goods and exclusion)

 Product indivisibility (enjoy without deprive others, Radio,
TV, defence services, street lighting, measures for air pollution,
but the problem is how to ensure voluntary pay???
Free riders problem?)

 Private goods is subject to the principle of exclusion.

 Public-private partnership –
(i)Both public and private sector may operate efficiently;

(ii)Product divisibility is supported by the political and social

objectives of society;

(iii)Additional characteristics of pure public and private goods are

externalities (market or non-market effects, Social Marginal Cost and
Average Cost, Impure public goods.)
Supply & Demand for Goods in the Market Economy

Types of Goods/Services

• Public goods/services
• Private goods/services
• Pure public goods/services
• Quasi-public good/services
• Merit goods/services
Supply and Demand for Goods in the Market
Economy
Public finance Sphere
Modern economy is money economy, there is a increasing trend
of Govt. expenditure.
Government borrowing from private banks:
• shifts resources from private to public,
• and when repay with interest then resources are reversed.

Public finance is needed for

• Public goods/services (political and social desirability)
• Pure public goods/services
• Quasi-public good/services
• Merit goods/services
• Market inefficiency (economically viable and socially
desirable)
• Infrastructure/ Utility services
Supply and Demand for Goods in the Market
Economy

Constraints for Public goods provision

• Scarcity of resources
• Lack of efficiency and skill
• Political and social acceptability
• Lack of initiative and incentives
 Supply and Demand for Goods in the Market
Economy

Private investment/trading Sphere

• Quasi-public good/services
• Impure public goods/services
• Economically viable and commercially profitable
goods/services
• If merit goods are privatized, govt. is to supplement the
availability

State and Market economy

• Existence of state and its corrective role
- distributive role
- allocative role
• Protect economy against destabilizing forces
 Theory of Public Finance

The subject matters of Public Finance

• Theory of Publicc Revenue

• Theory of Public Expenditure
• Financial Administration
• Stabilization, Growth and Distributive Justice
• Local Governments Finance
 Theory of Public Finance
Similarities and Dissimilarities between Public and Private Finance
Similarities
• Limited resources, try for best use
• Satisfying the wants and needs of society
• Engaged in production, exchange, saving, capital accumulation,
investment, raise loan, and so on.
Dissimilarities
• Public borrowings can be from internal and external even non-repayable
but private finance from internal with a few exception from external.
• Govt. can create legal tender currency
• Private finance follow market principle and public finance follow budget
principle
• View of private finance is based on short term motive but public is
relatively long
• Private finance consider revenue first while public finance consider
expenditure
 The Circular Flow of Resources,
Goods, Services and Money Payments
 Economic Use of Resources
Production possibility curve
A graphical representation of the alternative combinations of the amounts of
two goods or services that an economy can produce by transferring resources
from one good or service to the other. This curve helps in determining what
quantity of a nonessential good or a service an economy can afford to
produce without jeopardizing the required production of an essential good or
service. Also called transformation curve.

Marginal Cost and Marginal Benefits

An increase in an activity's overall benefit that is caused by a unit increase in the
level of that activity, all other factors remaining constant.

Maximum Social net Advantages

• Public finance should be used with judicious discretion and thoughtful
planning - budgeting
• Collect taxes, fees etc, is draining public resources and restore it by
spending for public
• The case of state activity is important – Market mechanism vs. state
indifference to economy