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Basics of Macroeconomics
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This lesson gives a background of circular flow of income by understanding the relationship between production and consumption

Arpita Prakash
NCERTs series initiator at Unacademy 'Educator of the Month' for Feb'19 CBSE 0.1% Merit Certificate holder in Mathematics

Unacademy user
Hello ma'am, I have a doubt. You said that production of consumer goods is inversely proportional to the production of capital goods, it is a trade off. But then went on to explain how if the production of capital goods is less then consumer goods will also be affected similarly and the production of the same will decrease. Can you explain this further please?
thanku mam for this most awaited class 12 economics whole lesson
  1. Total final output produced in an economy o Output of consumer goods- purchase depends on people's capacity to spend ( income dependent) o Output of capital goods- purchased by business enterprises ( used either for maintenance of capital stock or for in it's addition) o In a specific time period (eg an year)- Either in form of consumption or investment . Hence a trade off- if more production of consumer goods-> less production of capital goods and vice versa Crucial factor enabling sale of goods and services is demand for such products backed by purchasing power Incomes earned by people as owners of factors of production are used to meet their demand for goods and services o Labourer- earning wages; entrepreneur- earning profits; landlord- earning rents; owner of capital earning interests Circular causation of consumption and production - o Production process ->generates factor payments ->generates goods and services (outcome)-> income generation ->capacity to purchase final consumption goods -> enable sale by business enterprises