Golden Generation Group
BUSINESS
CHAPTR ONE: PUBLIC FINANCE
Public Finance: is the study how the governments collect revenues through
taxation and how spend that revenue on public services.
The Components of public finance are:
Public revenue, debt, and Expenditure
A government: is an organization that has authority over society and provides
public services.
Elements Of public finance
1. Resource allocation
2. Income distribution
3. Economic stabilization
Public goods: are the products and services that we all consume in which no
one can exclude anyone else from the advantages that come with their use.
Fiscal policy: is a decision made by a government regarding spending or
taxation.
Government Budget
A government Budget : is a quantified plan showing expected revenue and
expenditure.
Government budgets can be classified into two main elements:
a) Revenue budget and b) Capital budget.
Capital budget: is a budget for acquiring or up keeping fixes assets.
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A budgeting Model: is a tool to align current economic performance with
financial goals.
Importance Of Government Budgeting
1. Budgets are vita policy tools to prevent government deficits.
2. Budget facilitates accountability and control of spending of government
resources.
Budgeting Models
1. Incremental Budgeting. 2. Zero-based budgeting. 3. Activity-based
budgeting. 4. Rolling budgets.
The puntland government uses incremental method. The advantages of
incremental budgeting is
a) It’s easy to calculate
b) Quick to implement
c) Easy to explain.
Project budgets: are the financial resources allocated to the achievement of
the project.
Other important classification of budgets are master budgets, Functional
budgets, and Cash budgets.
Master budget: is a budget that recaps and integrates all the individual budgets
of an organization.
Functional budget: is a budget for a particular process or department within an
organization.
Cash budgets: is estimation of cash inflows and outflows of the government.
Government Revenue
Sources of public revenue are Tax and Non-tax.
Government revenue is the income collected by the government from tax and
non-tax source.
Tax sources include: taxes on income, wealth, production and imports.
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Non-tax source include: profit from government enterprises, property income
and charges.
Government Expenditure: is spending of government to provide essential
goods and services to satisfy the needs of society.
Main areas of government Expenditure
1. Recurrent expenditure.
2. Development expenditure.
3. Transfer payments.
Recurrent expenditure: is the spending on consumer goods and services for
the day-to-day activities.
Development expenditure: is the spending on the acquisition, maintenance,
and development of capital goods.
Transfer payment: is sharing funds to individuals by the government without
receiving anything in return.
Public debt: is the total amount of debt owing to lenders by a government.
Sources of public debt are Internal and External.
TAXTION
Purposes of taxation
● To raise revenue for the government
●To control of harmful products
● To influence the price system and protect domestic industries.
Principals if taxation
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Fairness
Efficiency
Convenience
Certainty
Impact of taxation on the economy
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●Discourage work
●Reduce saving
●Lower investment
● Lower innovation and entrepreneurship.
Classification of taxes
Taxes can be classify in two main
Direct taxes and Indirect taxes.
In puntland there are two main categories of taxes levied by the state. Inland
revenue tax and Custom duty.
We can classify customs duty into Import duty and Export duty
Import duty: is the tax levied on the goods imported. Export tax: is the one
which the government levy on the goods exported by businesses and citizens.
Direct tax: are the taxes that individuals directly pay to the government.
Direct tax include income tax, property tax, and capital gains tax.
Income tax: is a tax levied on the income earned by individuals and
corporations.
Personal income tax: is the tax that the government levies on the income
earned by individuals
A corporate tax is a tax that the government levies on the profit of limited
liability companies and other incorporated businesses.
Property tax: is the tax levied on the value of a property.
Capital gains tax: tax that the government levies on the value gained from
sales of an asset.
Indirect taxes: are the taxes which the taxpayer shifts the tax burden to
another person.
Indirect tax can be classify according to how the government levies the tax in
this way, taxes can be ad valorem tax and Specific tax.
Ad valorem tax: is a tax based on the value of tax the base where specific tax:
is tax government bases on the units sold.
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Indirect tax also can be selective and general tax.
The following are the most famous indirect tax levied:
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Sales tax
Value-added tax
Customs duty
Excises duty
Lump-sum tax: is a fixed sum that a person pays per period.
Tax rate structure
Tax rate structure describes the relationship between the tax collected during a
given period and the tax base.
Tax rates can be average tax rate (AMT) or Marginal tax rate( MTR).
An ATR i the rate of total taxes divided by the value of taxable base.
An MTR is the tax collected on the additional money value of the tax base as
the tax base increases.
We can classify taxes into proportional, progressive, and regressive.
Proportional tax rate: is a tax that the rate is constant, regardless of the
increase of the tax base. It’s also called a flat tax rate.
Advantages
1. Easy to calculate and understand
2. It reduces tax evasion
Disadvantages
1. Violation of the equity principle
2. Creates income in equity
Progressive tax rate: is a tax that rate increases as income increases.
Advantages
1. Equitable income distribution
2. It allows government collect more revenue.
Disadvantage
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1. Discouraging high-income earners.
Regressive tax rate: is a tax that rate increases as income decreases.
Advantages
1. It rewards high-income earners and discourages tax evasion
2. It increases saving and investment.
Disadvantage
1. Increased income inequality and oppression of the lower section of
society.
CHAPTER TWO: DEMAND AND SUPPLY
Equilibrium: is a situation in which the forces of supply and demand are
balanced.
Equilibrium price: is the price at which the quantity demanded and supplied
are equal.
Equilibrium quantity: is the quantity demanded and supplied at the
equilibrium price.
Excess supply: it occurs when the product price is greater than the
equilibrium price.
Surplus = quantity supplied – quantity demanded
Quantity supplied exceeds quantity demanded  Surplus  Price decrease.
Excess Demand: when the price of a good is lower than the equilibrium
price.
Shortage = quantity demanded – quantity supplied
Quantity demanded exceeds quantity supplied  Shortage  Price increase
Market Structure
● Perfect competition Market
●Monopolistic competition market
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●Oligopoly market
●Duopoly market
●Monopoly market
There are two extreme market structures:
Perfectly competitive markets and Monopolies.
Characteristics Of Market Structures
a) Number of enterprises
b) Similarity of the products they sell
c) Ease of entering and exiting the market.
Perfect Competition Market
Price taking: Means accepting the price that market sets
Characteristics of perfect competition market
a) A large number of sellers
b) Homogeneous products
c) Easy entry and exit
Monopolistic Competition Market: is a market in which many firms produce
similar goods or services.
Characteristics of Monopolistic Competition Market
a) Many small sellers
b) Heterogonous Products
c) Easy entry and exit.
Oligopoly Market
AN oligopoly: is a market structure where few firms dominate the market
supply of a particular good or services.
A pure oligopoly exists when their products are un differentiable.
Characteristics of oligopoly market
a) Few sellers
b) Homogeneous or heterogeneous products
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c) Difficult Market entry.
Duopoly Market
Duopoly Market: is a market that has only two firms dominating the market.
Characteristics of duopoly market
a) Two sellers
b) Homogeneous or heterogeneous products
c) Difficult to entry
Monopoly Market: Is where a single firm operates the entire market supply
and has significant market power.
A pure monopoly exists where there is one supplier in the entire market.
Characteristics of monopoly market
a) Single seller
b) Unique product
c) Difficult entry
Price Elasticity of demand: is the responsiveness of the quantity demanded to
a change in price.
Price elasticity of demand =
Ed =
%∆𝑸𝒅
%∆𝒑
%∆𝑸 =
Q = Quantity
𝐩𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐝𝐞𝐦𝐚𝐧𝐝𝐞
𝐩𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐩𝐫𝐢𝐜𝐞
𝑸 𝟐−𝑸𝟏
𝑸𝟏
%∆𝒑 =
𝑷𝟐−𝒑𝟏
𝒑𝟏
p = Price
The demand is:
1.
2.
3.
4.
5.
Elastic, if price elasticity is greater than 1.
In elastic, if price elasticity is less than 1.
Perfectly in in elastic, if price elasticity is zero
Perfectly elastic , if price elasticity is infinite
Unitary elastic, if price elasticity is 1.
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Price Elasticity of Supply: is the responsiveness of the quantity supplied to a
change in price.
Price elasticity of supplied =
Es =
%∆𝑸𝒔
%∆𝒑
%∆𝑸 =
Q = Quantity
𝐩𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐬𝐮𝐩𝐥𝐢𝐞𝐝
𝐩𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐩𝐫𝐢𝐜𝐞
𝑸 𝟐−𝑸𝟏
𝑸𝟏
%∆𝒑 =
𝑷𝟐−𝒑𝟏
𝒑𝟏
p = Price
The supply is:
1.
2.
3.
4.
5.
Elastic, if price elasticity is greater than 1.
In elastic, if price elasticity is less than 1.
Perfectly in in elastic, if price elasticity is zero
Perfectly elastic , if price elasticity is infinite
Unitary elastic, if price elasticity is 1.
Prepared by Farhan Mohamoud Shire [ Farhan Yare ]
Prepared by Farhan Mohamoud Shire [ Farhan Yare ]