13MBA1004 - Evolution of Economics

8/13/2019 13MBA1004 - Evolution of Economics

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Physiocrats Mercantilists

A group of economists who believedthat the wealth of nations wasderived solely from the value of

"land agriculture" or "landdevelopment.

People who follow the economicdoctrine that government control offoreign trade is of highest

importance for ensuring themilitary security of the country.


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Capitalists Socialists People who follow the economic

system characterized by private orcorporate ownership of capital

assets and goods.

Folk who enforced the economicsystem characterized by socialownership of the means of

production and co-operativemanagement of the economy.


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Monetarists Keynesians Monetarism is a school of economic

thought that emphasizes the role ofgovernments in controlling the

amount of money in circulation. It is the view that variation in

the money supply has majorinfluences on national output in theshort run and the price level overlonger periods.

Keynesianism is the view that in theshort run, especially duringrecessions, economic output is

strongly influenced by aggregatedemand (total spending in theeconomy).


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Adam Smith - was a Scottish moral philosopher and a pioneer of politicaleconomy; one of the key figures of the Scottish Enlightenment, Adam Smith is bestknown for two classic works: The Theory of Moral Sentiments (1759), andAn Inquiryinto the Nature and Causes of the Wealth of Nations (1776).

Smith is cited as the "father of modern economics" and is still among the mostinfluential thinkers in the field of economics today.

Alfred Marshall - is known as one of the founders of economics. Marshallsinterest in utilitarianism, specifically ethics, reflects the influence of his early socialphilosophy to his later activities and writings.

His book, Principles of Economics (1890), was the dominant economictextbook in England for many years. It brings the ideas of supply and demand, marginalutility, and costs of production into a coherent wholesome.


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Robert Malthus - was a British cleric and scholar, influential in the fields ofpolitical economy and demography.

Malthus became widely known for his theories about change in population. HisAn Essay on the Principle of Population observed that sooner or later population willbe checked by famine and disease. Food production grows in arithmetic progressionwhereas the population grows in geometric progression.

David Ricardo - was a British political economist. His most importantcontribution was the theory of comparative advantage, a fundamental argument in favorof free trade among countries and of specialization among individuals.

According to his Theoryof Rent,rent is the portion of the produce of earth tothe landlord, for its original and indestructible powers of the soil.

Ricardo argued that there is mutual benefit from trade (or exchange) even if one

party (e.g. resource-rich country) is more productive in every possible area than itstrading counterpart (e.g. resource-poor country), as long as each concentrates on theactivities , where it has a relative productivity advantage.


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Jean Baptiste Say(J.B Say) - was a French economist and businessman. Hehad classically liberal views and argued in favor of competition, free trade, and lifting

restraints on business.He is best known due to Say's Law, which is named after him and at times credited

to him, but while he discussed and popularized it, he did not originate it.

John Stuart Mill (J.S Mill) was an English philosopher, political economistand civil servant. He has been called "the most influential English-speaking philosopher

of the nineteenth century.Mill's conception of liberty justified the freedom of the individual in opposition

to unlimited state control. He was a proponent of utilitarianism, an ethical theorydeveloped by Jeremy Bentham.


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Economics

Micro

Individuals,Firms, Markets,

Families.

Macro

Income,Consumption,

Savings, Export,Import,

GovernmentExpenditure,Investments,

Taxes, Inflation.

Monetary

Money, Rate ofinterest, RBI,SEBI, Stock

Exchange,Exchange Rates,Depreciation.

Public

Income

(of Government)

Expenditure

(of Government)

All the Taxes

(by Government)


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LAW OF DEMAND The law of demand says that ceteris paribus when the

price of a product is high, quantity demanded is low,and vice versa.

In other words, other factors remaining the same, thedemand for a product is inversely related to the price.


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DETERMINANTS OF DEMAND

DEMAND

TASTES ANDPREFERENCE

S OF THECUSTOMER

EXISTINGWEALTH OF

THECUSTOMER

EXPECTATION

REGARDINGFUTURE

PRICECHANGES

SPECIALINFLUENCES

INCOME OFTHE

CUSTOMER

PRICE OFTHE

SUBSTITUTEPRODUCT

PRICE OFTHE

COMPLEMENTARY

PRODUCT

CHANGES INPOLICY


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NATURE OF THE DEMAND CURVE

- changes in demand curve

0

2

4

6

8

10

12

q1 q2


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DEMAND FORECASTING

TECHNIQUE:- Normal equation:

Equation of straight line

y = a+bxMultiply both sides with , we get

y = n(a) + (b) x

Multiply both sides with x, we get

xy = n(a)x + (b) x2

This is also called as regression method.

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ELASTICITY OF DEMAND Elasticity is the proportional (or percent) change in

one variable due to the proportionate change inanother variable.

The formula for elasticity is:

E = percentage change in x

percentage change in y


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TYPES OF ELASTICITY OF DEMAND Price elasticity of demand:

Cross elasticity of demand:

Income elasticity of demand:Advertising or Promotional Elasticity of Demand:


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DEMAND FORECASTING METHODS Expert opinion

Survey

Market experiment Time series Analysis

Barometric Analysis


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LAW OF SUPPLY The law of supply states that, other factors remaining

constant, higher the price, greater is the quantitysupplied and lower the price, lower is the quantitysupplied.

The supply function is represented as:

SX=f(PX), other things remaining constant

Whereas,SX=Amount of product X supplied; and

PX=Price of the product


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The supply schedule and supply

curve of chocolates as an exampleSituation Price Quantity

Supplied

A 50 22

B 40 15

C 30 9

D 20 4

E 10 00

10

20

30

40

50

60

0 5 10 15 20 25

Series1


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DETERMINANTS OF SUPPLY

SUPPLY

CHANGES INGOVERNMENT

POLICIES

COST OFPRODUCTION

AVAILABILITYOF OTHERPRODUCTS

CLIMATICCHANGES


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ELASTICITY OF SUPPLY Elasticity of supply refers to the percentage change in

quantity supplied of a product due to one percentchange in its price. This can be denoted in an equationform

E= % change in the quantity supplied of a product

% change in its price

= Q/Q = Q x P

P/P P QWhere,

E=elasticity, P= original price, Q= original quantity.

P= change in price, Q= change in quantity.


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TYPES OF ELASTICITYWhen the elasticity of supply is Known as

Equal to infinity Perfectly elastic supply

More than one but less than infinity Relatively elastic supply

Equal to one Unitary elastic supply

Less than one but more than zero Relatively Inelastic supply

Equal to zero Perfectly Inelastic supply


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ISOQUANTS The Isoquant Curve is a

graph showing possibleinputs after certain levels

of output.

The Isoquant Curve helpsfirms adjust their inputagainst their output.

This is a method used tomeasure the influence ofinputs on production levelsand output possibilities.


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INDIFFERENCE CURVE ANALYSIS It is also called as

Ordinal Utility Theory

Utility is not Measurable

but it is measurablerelatively

Utility can be ordered inpairs.

People reveal theirpreference.

Budget curve(E) definesmaximum limit


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LAW DIMINISHING MARGINAL UTILTIY The law of diminishing

marginal utility states thatif a consumer goes onconsuming more units of a

particular product at agiven point of time, histotal utility increases butonly at a diminishing rate.

In other words, the desire

of that product goes ondecreasing as he consumesmore and more units ofthat product.


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LAW OF DIMINISHING MARGINAL PRODUCTWhen one of the factors

of production is heldfixed in supply,

successive additions ofthe other factors willlead to an increase inreturns up to a point, but

beyond this pointreturns will diminish.


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Production function The production function

explains relationship betweenthe maximum quantity ofoutput that can be processedfrom given amounts of

various inputs for a giventechnology, which can beexpressed in the form of amathematical model,schedule (table) or graph.

Q=f(K,L)where, capital(K) andLabor(L) are categorizedunder the productionfunction Q.


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Types of Production FunctionThere are two types of production functions.

i) Cobb Douglas production function:-

It is widely used to represent the technological relationshipbetween the amounts of two or more inputs, particularly physical

capital and labor, and the amount of output that can be producedby those inputs.

It is given as

P(L, K) = Lk -1

Where,

P = total production in a year

L = labour input

K = capital input

and are the output elasticity of labour and capital, respectively.

,-change of o/p with respect to i/p


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Constant elasticity of substitution (CES) is a property of

some production functions and utility functions; more precisely, itrefers to a particular type of aggregator function which combinestwo or more types of consumption, or two or more types ofproductive inputs into an aggregate quantity.

This aggregator function exhibits constant elasticity of

substitution.ii) CES production function:-

The CES production function is a type of production functionthat displays constant elasticity of substitution.

In other words, the production technology has a constant

percentage change in factor (e.g. labour and capital) proportionsdue to a percentage change in marginal rate of technicalsubstitution.


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Where,

Q= output.

F = Factor productivitya= Share parameter

K,L = Primary production factors (Capital and Labor)

r= (s-1)/s

s= 1/(1-r) = Elasticity of substitution.

rrr LaakFQ /1))1((


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Factors Of ProductionAccording to the traditional classification, there are four factors

of production. They are

Land

Labor Capital

Organization/Entrepreneurship

Q=f(L,L,K,O)

Where, Q= production function


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Land Land as a factor of production refers to all those natural resources or

gifts which are provided free to man.

It includes several things such as Land surface, air, water, minerals,forests, rivers etc.


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Labor Labor is the human input into the production process.

Alfred Marshall defines labor as the use or exertion of body and mind,partly or wholly, with a view to secure an income apart from thepleasure derived from the work.

The concept of Division of Laborwas introduced by Adam Smith inhis book An Enquiry into the Nature and Causes of Wealth ofNations.


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Capital Capital is the man made physical goods used to produce other goods

and services a.k.a., money.

According to Marshall, Capital consists of those kinds of wealth otherthan free gifts of nature, which yield income.

Forms of Capital Physical or Material Resources.

Money Capital or Monetary Resources.

Human Capital or Human Resources.


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Organization or Entrepreneurship An entrepreneur is a person who combines the different factors of

production(land, labor and capital), in the right proportion andinitiates the production and also bears the risk involved in it. They areotherwise called as Organizers.

Functions of Entrepreneur Identifying the Profitable Investible Opportunities.

Deciding the size of unit of production.

Deciding the location of the production Unit.

Identifying the optimum combination of factors of production.

Making Innovations. Deciding the reward payment.

Taking risks and facing Uncertainties.


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PERFECTLY COMPETTITIVE MARKETThe following are thecharacteristics of a perfectlycompetitive market:

Large number of buyers andsellers.

Homogenous product.

Free entry and exit of firms.

Perfect mobility.

Absence of transportationcost .

FIG:- Demand curve of a firmin a perfectly competitivemarket.


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OLIGOPOLY Oligopoly is a form of

imperfect competition inwhich a few firms produceeither a homogenousproduct or products whichare close but not perfectsubstitutes for each other.

The number of firms may

vary from two to ten firms. A market in which there

are only two players iscalled DUOPOLY.


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FACTORS IN OLIGOPOLY Kinked Demand curve:-

It explains the interdependence of the firms in a noligopoly and why firms stick to one price.

Cartel formation:-

Cartels are formed when competing oligopolists enterinto some kind of an agreement in order to maximize jointprofits.

joint-profit maximization sharing of the market. Price Leadership:-

One firm sets the price and the others follow, becauseit is advantageous to them or they prefer to avoiduncertainty.


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13MBA1004 - Evolution of Economics

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