Economics Study Material for Junior Inter (1)

8/13/2019 Economics Study Material for Junior Inter (1)

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UNIT I

1.1 INTRODUCTION

1.2 DEFINITIONS OF ECONOMICS

1.3 DIFFERENT METHODS OF ECONOMIC EVALUATION

SYNOPSIS:

The systematic (scientific study) method of studying Economics developed by Adam Smith.

Adam Smith in his boo! An En"ui#y into natu#e and causes of $ealth of nations vie$ed

economics is science dealing $ith $ealth. Adam Smith is conside#ed as the %athe# of

Economics.

Economics developed out of the necessity to e&plain ce#tain aspects of man's social and

indust#ial development.

The la#ge scale p#oduction due to ndust#ial evolution *1+,-1/0- necessitated in

development of content of Economics. The $o#d Economics' is de#ived f#om the #ee! $o#ds 454S'( a house) and 6E7E6'(to

manage) meaning 7anagement of household

Economics is 8o$ a family in a household economises best of its income9 so also the

society(nation) have to use its #esou#ces $isely.

:46S;7 Economics is the study of ho$ people allocate thei#

sca#ce #esou#ces to p#oduce and consume# goods and se#vices to satisfy thei# unlimited $ants

$ith the ob=ective of ma&imi?ation thei# gains.

@E@;:TE 7ET84@> @eductive method is #easoning d#a$n f#om gene#al to the mo#epa#ticula#(specific) .8e#e $e d#a$ a fe$ indisputable facts about human natu#e and d#a$

infe#ence(conclusion) f#om them about specific individual cases.

E&> 6@A6 B47E6 BEA SAEES(ene#al)

Sita is an ndian Boman (pa#ticula#)

The#efo#e> Sita may $ea# sa#ees. (:onclusion)

nductive 7ethod> The p#ocess of #easoning f#om pa#ticula# to gene#al o# f#om the individual to

unive#sal.


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:ont#ibutions> Economic 7odeling of the %i#m including Congun and Sho#tun

:ost :u#ves. And also cont#ibuted to Theo#y of nte#national T#ade.

Acco#ding to Dacob ine#9 an Ame#ican Economist defined Economics as Economics is $hat

Economists do. Any sub=ect can be best unde#stood by setting ce#tain limits (scope) . As Science of

Economics has become $ide# and it is ve#y difficult to e&plain it in a p#ecise definition. 8ence9 Dacob ine#9unde# imp#ession that Economics can be best unde#stood by analysing the va#ious issues *Economic

p#oblems and $ith $hat solutions did Economists t#ied to solve these issues.

1) Bhat Types of oods to be p#oduced and in Bhat uantities> The economy has to decide $hethe#

to p#oduce necessities o# lu&u#y goods. These decisions a#e influenced by individuals as $ell as

gove#nment policies. f the p#esent consumption is given impo#tance mo#e fo# consumption goods

than capital goods a#e !ept on hold. And mo#e #esou#ces a#e allocated fo# the p#oduction of capital

goods fo# futu#e p#oduction and consumption. %o# e&ample9 if economy decides to p#oduce #ice9$heat9 schools9 hospitals etc and as #esou#ces a#e sca#ce9 the economy has to decide again9 ho$

much #ice $heat9 ho$ many 8ospitals and Schools to p#oduce.

2) 8o$ to p#oduce these goods> The#e a#e alte#native methods of p#oducing diffe#ent goods in any

economy. A decision has to be made $hethe# to use labou# intensive o# capital intensive

techni"ues. %o# e&ample9 :loth can be p#oduced th#ough handlooms9 po$e# looms o# auto looms

(i.e.9 labou# intensive to capital intensive technology).f economy decides to c#eate mo#e

employment oppo#tunities than it may adopt labou# intensive technology.

3) %o# $hom to p#oduce these goods and Se#vices> The "uestion is conce#ned $ith the dist#ibution of

income and $ealth among diffe#ent sections of the society. %o# e&ample9 if the#e is g#eate# demand

fo# compute# p#ofessionals in the economy9 thei# sala#ies inc#eases9 thei# pu#chasing po$e# also

inc#eases and no$ they can affo#d to buy mo#e numbe# of goods and se#vices them befo#e. That is

ho$ the dist#ibution patte#n changes ove# time. n the $o#ds of Ama#tya Sen9 the people $ho

la#ge# incomes9 $ould have la#ge# entitlement fo# goods and hence $ill get g#eate# sha#e of output.

0) Efficient use of p#oduction #esou#ces> This #efe#s to the efficiency of economic system. As the cent#al

p#oblem of any economy is the sca#city of #esou#ces9 the main concent#ation is on ho$ to utili?e

these #esou#ces economically and efficiently in o#de# to ma&imi?e the output (Technical efficiency)and to satisfy the needs of the people (economic efficiency).

F) A#e the available #esou#ces fully utili?ed> esou#ces being Sca#ce9 eve#y economy t#y to fully utili?e

the available #esou#ces9 so that it can p#ovide mo#e employment oppo#tunities. This "uestion

assumed impo#tance du#ing the g#eat economic dep#ession of 1G3-.Cate# 7ac#o Economic theo#y

gained impo#tance.

,) s the economy g#o$ing o# static ove# timeH . nc#ease in the p#oduction of goods and a se#vice ove#time is !no$n as economic g#o$th. The impo#tant "uestion is $hethe# the economy is able to

p#oduce mo#e numbe# of goods and se#vices in o#de# to inc#ease the standa#d of living of the

people $hich is the main ob=ective of the developing count#ies.


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SHORT TYPE QUESTIONS

1) @efine and @istinguish bet$een %#ee goods and Economic oods.

Ans)

%#ee goods Economic goods

1.%#ee gift f#om natu#e 1. 7ostly man made goods

2.Supply is unlimited 2. supply is al$ays limited in #elation to thei#

demand.

3.These goods command no p#ice. 3.These goods command p#ice.

0.6o cost of p#oduction. 0. These goods have cost of p#oduction.

F.These goods have value in use

but not value in e&change

F.Economic goods have both value in use and

value in e&change

,.These goods a#e not included in

6ational income.

,.Economic goods a#e included in 6ational

income.

VERY SHORT TYPE QUESTIONS

1) The value of commodity e&p#essed in te#ms of money is called @eductive method p#oceeds f#om gene#al to pa#ticula# i.e.9 Be sta#t f#om a fe$

indisputable facts about human natu#e and d#a$ infe#ences f#om them about conc#ete individual cases. t

is also !no$n as abst#act and analytical method. The la$ of diminishing ma#ginal ;tility is the best e&ample

of @eductive #easoning. The method uses mathematical tools and techni"ues to ma!e gene#ali?ation mo#e

e&act and p#ecise.

0) 7ic#o Economics> The te#m 7ic#o economics' is de#ived f#om the g#ee! $o#d. 7ic#o $hich means

small'. Thus 7ic#oeconomics deals $ith the analysis of pa#ticula# economic unit and conside# in detail the

behaviou# of that pa#ticula# unit. n othe# $o#ds 7ic#oeconomics is the 7ic#oscopic study of the economy.

7ic#o economics mainly studies behaviou# of individual units li!e individual household9 individual fi#ms9

g#oup of fi#ms9 g#oup of consume#s9 individual o# g#oup of indust#ies.

F)


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SYNOPSIS

13 U(ili(4 : ;tility is the potentiality (o# po$e# 9capacity) of commodity to satisfy a pa#ticula# $ant.

.3 A#!i(#a(#4:The lite#a#y meaning of A#bit#a#y is not planned o# #andom

53 Ma#6inal 7(ili(4:7a#ginal utility is defined as the change in Total utility #esulting f#om a one unit

change in consumption of the commodity pe# unit of Time.

83 Ca#&inal n7!"#% :ca#dinal numbe#s a#e 1.29390.. . f consume# is $illing to spend s 2- on an appleand s 1- on o#anges .The utility de#ived by apple is t$ice than on o#ange.

93 The la$ of @iminishing ma#ginal utility is also called as ossen's fi#st la$

3 The la$ of e"uima#ginal utility is also called as ossen's second la$

03 4#dinal utility> o#dinal means o#de#' o# #an!ing'. 4#dinal utility assumes that utility is a sub=ective

concept and cannot be measu#ed in te#ms of 1st92nd93#dI

,3 :a#dinal utility> :a#dinal utility assumes that utility of a consume# can be measu#ed in te#ms of

a#bit#a#y units called utils'.

ESSAY TYPE QUESTIONS

1) E&plain the la$ of @iminishing ma#ginal utilityH Bhat a#e its limitationsH

Ans> The e#man Economist9 ossen9 E&plained the Ca$ of @iminishing ma#ginal utility based on

obse#vation of 8uman Jehaviou#. 8ence it is also called as ossen's %i#st Ca$. Alf#ed 7a#shall e&plained

and popula#i?ed the la$.

Bhat the The Ca$ of @iminishing 7a#ginal ;tility says >

Acco#ding Alf#ed 7a#shall The la$ of @iminishing 7a#ginal ;tility says that the additional benefit

$hich a pe#son de#ives f#om a given inc#ease of his stoc! of thing diminishes $ith eve#y inc#ease in the

stoc! that he al#eady has.

E&planation of The Ca$>

7a#ginal utility o# additional utility de#ived on successive consumption of pa#ticula# commodity declines.

The utility de#ived $hen a consume# is hung#y by consuming an Apple is mo#e. Jut an enventual

consumption of Apple( 2ndapple93#dapple9 0thapple) the utility becomes ?e#o and negative.


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The la$ can be e&plained $ith the help of the follo$ing Table>

;nits of

commodities

(Apples)

Total utility

(;tils)

7a#ginal

;tility(;tils)

1 2- 2-

2 3F 1F

3 0F 1-

0 F- -F

F F- -

, 0F 1F

The table e&plains changes in Total utility and ma#ginal utility as consume# successively inc#eases

consumption units of commodity (Apple).

The fi#st column sho$s units of commodity (apples)9 second and thi#d columns sho$s total utility

and ma#ginal utility.

The infe#ence d#a$n f#om the table a#e as the "uantity of apples inc#eases the ma#ginal utility

dec#eases .total utility is inc#easing upto fifth unit of apple but a diminishing #ate. 7a#ginal utility is falling

f#om the beginning and becomes ?e#o $hen total utility is at F- 9 i.e.9 at ma&imum. The economic

implication of ?e#o ma#ginal utility is that the desi#e fo# that pa#ticula# commodity is fully satisfied. At this

stage Total ;tility is falling and 7a#ginal ;tility becomes 6egative.

The table e&plains the The Ca$ of @iminishing 7a#ginal ;tility that ma#ginal utility (additionalutility) goes on diminishes9 as the consume# uses mo#e and mo#e units of that commodity.

The Ca$ of @iminishing ma#ginal utility can be e&plained $ith the help of a @iag#am.

Dia6#a ' ;La< ' Diini%=in6 Ma#6inal U(ili(4>

n the above diag#am9 Total ;tility (T.;) and 7a#ginal ;tility (7.;) a#e measu#ed on the K a&is and

"uantity of apples on L a&is. T; #ep#esent Total ;tility cu#ve and 7.; #ep#esents 7a#ginal ;tility cu#ve. t is


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evident f#om the diag#am that the total utility cu#ve is sloping up$a#ds initially9 #eaches its ma&imum level

and sta#ts diminishing indicating that as the stoc! of Apples inc#eases. Total ;tility is inc#easing and

#eache3s the ma&imum level at fifth unit of apple and afte#$a#ds sta#ts declining. The shape of the

7a#ginal utility cu#ve indicates that as the consumption inc#eases utility is falling. The 7a#ginal ;tility

cu#ve touches the L a&is 9 $he#e ma#ginal utility is e"ual to ?e#o and $hen the total utility is at the

ma&imum. This point indicates that the consume# is completely satisfied $ith the consumption of Apples.

7a#ginal ;tility cu#ve lies belo$ the L a&is as the 7a#ginal ;tility is 6egative fo# the si&th unit of Apples.The Ca$ of @iminishing 7a#ginal ;tility states that as the stoc! of a commodity $ith the consume#

inc#eases its ma#ginal utility @iminishes.


1Q) Explain (=" 'ac(#% (=a( &"("#in" &"an&

An%) D"an& '7nc(in %(a("% (=" 'ac(#% (=a( &"("#in" (=" &"an& '# a 6&3

Q& M f( 7a#ginal ;tility is the addition made to the total utility by consuming one mo#e

units of the commodity. n othe# $o#ds it is the addition to the total utility f#om the consumption of an


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additional unit of commodity. 7a#ginal utility dec#eases as stoc! inc#easing in the consumption. That is

$hy ma#ginal cu#ve slopes do$n$a#ds f#om left to #ight.

3. :onsume#'s E"uilib#ium > The consume# is said to be e"uilib#ium $hen he is able to get ma&imum

satisfaction $ith his limited income. The condition fo# consume#'s e"uilib#ium is that the #atio o#

ma#ginal utility to p#ice must be e"ual in case of diffe#ent commodities.

UNIT III

ELASTICITY OF DEMAND

SK6

Elasticity of @emand measu#es the deg#ee of sensitiveness o# #esponsiveness of demand to change

in p#ice9 ho$eve# the change may be small o# g#eate#.

The #esponsiveness of @emand to change in the ncome of the consume# is called as ncome

Elasticity of @emand.

A#c method is the elasticity at the midpoint of an a#c of a demand cu#ve. The concept of A#celasticity is #elevant in case $hen the A#c involved is small. That is9 A#c Elasticity fo#mula9 should9

the#efo#e9 be used $hen the change in p#ice is not ve#y la#ge.


1) Bhat is


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n the above diag#am @@ is the demand cu#ve9 ho#i?ontal to La&is9 $he#e the elasticity coefficient is

infinity.2. t is a situation $he#e the "uantity demanded #emains unchanged even

afte# substantial changes in p#ice of the good. An @iabetic9 continues to spend fo# nsulin9 i##espective

of p#ice of nsulin.

Bhen the elasticity coefficient is o'9 then demand cu#ve $ill be ve#tical to La&is.

3. ;nita#y Elastic @emand> t is a situation $he#e the p#opo#tionate change in "uantity demand is e"ually

p#opo#tionate to the change in the p#ice of the good. Elasticity of demand hence is said to be e"ual to

unity o# 1. %o# e&ample9 suppose that the p#ice of a pineapple is #upees 2- and the demand fo# this

0-- units. %u#the# suppose that the p#ice falls f#om #upees 2- to #upees 1F9then the demand fo# f#uit

has gone upto F-- units9 then

6pM


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Bhen the elasticity co efficient is e"ual to 1' 9then elasticity of demand is said to be unity. The

demand cu#ve in this case is !no$n as ectangula# 8ype#bola.

0. elatively Elastic @emand> t is a situation $hen the p#opo#tionate change in "uantity demanded is

g#eate# than the p#opo#tionate change in the p#ice of the good. %o# e&ample9 suppose that the p#ice of

a pineapple is #upees 2- and the demand fo# it is 0-- units. %u#the# suppose that the p#ice has fallen

f#om #upees 2- to #upees 1F as a #esult the demand fo# it has gone upto ,-- units 9then elasticity of

demand.

6pM

Bhen the Elasticity coEfficient is g#eate# than 1 $e call that situation as elative Elastic @emand9

$he#e pe#centage change in "uantity demanded $ill be g#eate# than pe#centage change in p#ice.

F. elative nelastic @emand> t is a situation $hen the p#opo#tionate change in "uantity demanded is less

than the p#opo#tionate change in the p#ice of the good. %o# e&ample9 suppose that the p#ices of a pineapple is #upees2- and the demand is fo# 0-- units. %u#the# suppose that the p#ice has gone do$n f#om

#upees 2- to #upees 1F and the demand fo# pineapple has gone upto only 0F- units .Then9 the

elasticity of demand9


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6p M

Bhen the elasticity coefficient is less than 1' 9$e call such situation as elatively inelastic demand9

$he#e pe#centage change in p#ice is g#eate# than pe#centage change in "uantity.

VERY SHORT ANS?ER QUESTIONS

1.


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satisfaction of a consume# f#om t$o goods. t is d#a$n on the assumption that fo# all possible combinations

of the t$o goods on an indiffe#ence cu#ve9 the satisfaction level #emains the same.

In&i''"#"nc" Sc="&7l"> An indiffe#ence cu#ve is d#a$n on the basis of an indiffe#ence schedule. The

indiffe#ence schedule has seve#al combinations of t$o goods f#om $hich hePshe de#ives the same o# e"ual

satisfaction. So9 the va#ious combinations in the schedule a#e e"ually p#efe##ed. The $hole discussion can

be made clea# by an e&ample.

combinations 6umbe# of Apples 6umbe# of

4#anges

A

J

:

@

E

%

1

2

3

0

F

,

2-

1F

11

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F

n the above schedule9 the consume# gets as much total satisfaction f#om combination A(1 appleQ 2-

o#anges) and as $ell f#om othe# combinations ie.9 J9:9@9E and % . The total satisfaction is the same in all

these combinations.

T=" In&i''"#"nc" C7#@"> $ith the help of an ndiffe#ence schedule $e can d#a$ an indiffe#ence cu#ve to

study its p#ope#ties.

n the above diag#am9 apples a#e sho$n on the 4L a&is and o#anges on the 4K a&is . The va#ious

combinations of apples and o#anges a#e sho$n by points A9J9:9@9E and %. so9 $hen $e =oin these points9 $eget a cu#ve :9 $hich is !no$n as an ndiffe#ence cu#ve. The#efo#e9 an indiffe#ence cu#ve #ep#esents the

p#efe#ences of a consume#. The points on the indiffe#ence cu#ve sho$s the va#ious combinations of t$o

commodities $hich give the consume# the e"ual level of total(satisfaction f#om the t$o) satisfaction. So9

an indiffe#ence cu#ve may the#efo#e be defined as the locus of the va#ious combinations of the


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commodities $hich yield the same total satisfaction to the consume#. So $e can say that on an indiffe#ence

cu#ve may the#efo#e be defined as the locus of the va#ious combinations of the commodities $hich yield

the same total satisfaction to the consume#. So $e can say that on an indiffe#ence cu#ve9 the level of

satisfaction at va#ious points is the same that is cu#ve. AMJM:M@MEM%. The cu#ve is also !no$n as the iso

utility o# cu#ve of e"ual utility.

T=" 'i@" P#p"#(i"% ' In&i''"#"nc" c7#@"% a#":

1. ndiffe#ence cu#ves have a negative slope9

2. ndiffe#ence cu#ves a#e conve& to the o#igin9

3. ndiffe#ence cu#ves neve# inte#sect9

0. ndiffe#ence cu#ves need not be pa#allel to each othe#9 and

F. A highe# indiffe#ence cu#ve is al$ays p#efe##ed to a lo$e# one.


1. O#&inal U(ili(4> This is in cont#ast to ca#dinal utility. The vie$ that in compa#ing satisfaction levels9 the

di#ection of diffe#ence can be obse#ved but the magnitude of diffe#ences cannot be measu#ed. This

app#oach is the combined effo#t of Edgefo#th9 fishes9 A g#aph sho$ing $hat combinations of "uantities of t$o goods can be affo#ded by

a consume# $ith a fi&ed amount to spend. n the case of


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The la$ of #etu#ns to scale e&plains inputoutput #elation in the long pe#iod. t is possible to ma!e

ad=ustments in all inputs in this pe#iod. Bhen all inputs a#e changed in e"ual p#opo#tions the#e a#e

th#ee !inds of #etu#ns. %i#st the#e a#e inc#easing #etu#ns follo$ed by constant and dec#easing

#etu#ns.

E&te#nal economies a#e those economies $hich acc#ue to fi#ms as a #esult of e&pansion in the

output of $hole indust#y and they a#e not dependent on the output level of individual fi#ms.

Jenefits of inf#ast#uctu#e9 speciali?ation9 ma#!eting etc.9 a#e available to all the fi#ms.


1Q) S(a(" (=" la< ' @a#ia!l" p#p#(in% an& "xplain i(% ip#(anc"

A) The la$ of va#iable p#opo#tions occupies a ve#y impo#tant place in economic theo#y. t desc#ibes the

p#oduction function $ith one va#iable facto# $hile the "uantities of othe# facto#s of p#oduction a#e

fi&ed. That is9 it desc#ibes the inputoutput #elation in a situation $hen the output is inc#eased by

inc#easing the "uantity of one input9 !eeping the othe# inputs constant. Bhen the "uantity of one

facto# is inc#eased and the "uantities of the othe# facto#s of p#oduction a#e !ept constant9 natu#ally thep#opo#tion bet$een the va#iable facto#s and the fi&ed facto# is alte#ed. That is9 the #atio of the va#iable

facto# to that of the fi&ed facto# goes on inc#easing as a "uantity of va#iable facto# is inc#eased. t is

because that in this la$ $e study the effect on output. f va#iations in facto# p#opo#tion9 this la$ is

called the la$ of va#iable p#opo#tions.

7a#shall stated the la$ thus9 An inc#ease in capital and labou# applied is the cultivation of land

causes in gene#al less than p#opo#tionate inc#ease in the amount of p#oduce #aised9 unless it happens

to coincide $ith an imp#ovement in the a#ts of ag#icultu#e.

Acco#ding to :ai#nes9 n the absence of the la$ of diminishing #etu#ns9 the science of political

economy $ould be as completely #evolutionised as if human natu#e itself $e#e alte#ed. Such is the

impo#tance of the la$ of diminishing #etu#ns in economic theo#y. Stigle# states that an inc#ease in one

input $ith othe# inputs being held constant9 beyond a point output $ill diminish. The la$ is e&plained

$ith the help of a table and diag#am.

a#iable

nput

labou#

Total


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3 it is 1/. Thus ma#ginal p#oduct is 1//M1-. t can be calculated fo# any numbe# of labou#e#s $ith the

fo#mula. 7


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#etu#ns9 late# constant #etu#ns and finally diminishing #etu#ns. The th#ee !inds of #etu#ns a#e

e&plained $ith follo$ing e&ample.


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nputs o#

scale

Total etu#ns 7a#ginal

etu#ns

: C

1Q2

2Q0

3Q,

0Q/

FQ1-

,Q12

0

G

1F

21

2,

3-

0Rinc#easing

F #etu#ns

, constant

, #etu#ns

F

diminishing

0 #etu#ns

%#om the table it is clea# that all inputs a#e changed in e"ual "uantities o# scale is changed. :hanges

in output can be obse#ved f#om total and ma#ginal #etu#ns. 4utput changes a#e mo#e clea# f#om the

ma#ginal #etu#ns. n the beginning $hen inputs a#e doubled9 ma#ginal #etu#ns a#e mo#e than doubled .Such

a change in output is called inc#easing #etu#ns. Jut in the thi#d and fo#th input combinations9 output has

inc#eased in the same p#opo#tion. 8ence these a#e constant #etu#ns. Cate# simila# change inputs a#e giving

diminishing #etu#ns. The follo$ing diag#am e&plains the aspects.

n the above diag#am scale o# combination of inputs a#e p#esented on L a&is and ma#ginal #etu#ns

on Ka&is . As inputs a#e inc#eased in the fi#st pa#t ma#ginal #etu#ns cu#ve i# #ising i.e.9 the#e a#e inc#easing

#etu#ns to the p#oduce#. n the ne&t pa#t the cu#ve is stable sho$ing constant #etu#ns. %inally9 fu#the#

inc#ease in inputs is #esulting in dec#easing #etu#ns.

R"a%n%: The #easons fo# diffe#ent !inds of #etu#ns to the p#oduce#. nc#easing #etu#ns occu# in the fi#th

phase because of ce#tain advantage available to a fi#m. These a#e !no$n as economies of scale o# inte#nal

economies. As the fi#m e&pands its output9 it en=oys ce#tain benefits li!e establishing bette# machines9

division of labou#9 speciali?ation9 sells p#oducts mo#e easily and uses se#vices of efficient manage#s etc. All

these come unde# inte#nal economies. t is because of these benefits o# economies9 the#e a#e inc#easing

#etu#ns in the fi#st phase. As output is inc#eased fu#the#9 ce#tain diseconomies ente# into p#oduction and


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lead to constant #etu#ns. Jeyond this9 any inc#ease in output causes mo#e diseconomies and #esults

inc#easing #etu#ns. nc#easing #etu#ns #esults f#om economies of scale. @iseconomies in the late# pe#iod

cause constant and dec#easing #etu#ns.


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1. A@"#a6" p#&7c(: Total p#oduct (T


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and demanded a#e e"ual. This s called e"uilib#ium p#ice. This p#ocess is e&plained $ith the help of a

diag#am.

n the above diag#am the supply and demand cu#ves a#e d#a$n. They tell us the "uantity supplied and

demanded at diffe#ent p#ices. The supply cu#ve is up$a#d sloping on the othe# demand cu#ve is do$n

sloping. Cet us unde#stand ho$ the ma#!et b#ings a balance bet$een supply and demand. Suppose at one

time the p#ice is s0 .At this p#ice less is demanded by consume#s but mo#e is supplied by the p#oduce#s.

The e&cess supply $ill push do$n the p#ice as indicated by a##o$ ma#! in the diag#am. Suppose p#ice is s 2

at anothe# time. The demand is mo#e than supply. The e&cess demand $ill push up the p#ice as indicated

by the a##o$ ma#! in the diag#am. These ad=ustments in supply and demand leadto e"uilib#ium p#ice in thema#!et. n the e&ample9 at p#ice #s39 the supply and demand cu#ves inte#sect each othe#. At this p#ice

supply and demand a#e e"ual. The "uantity supplied by p#oduce#s is e"ual to "uantity demanded by

consume#s. The#efo#e the#e is no p#essu#e on the demand o# supply to b#ing a change in p#ice. Thus9

ma#!et al$ays $o#!s fo# the e"uilib#ium p#ice unde# pe#fect competition.

S=i'(% in %7ppl4 an& &"an& c7#@"%> Sometimes the#e may be shifts in supply o# demand cu#ves. These

shifts ta!e place because of changes in othe# facto#s but notdue to p#ice. Such shifts change the e"uilib#ium

p#ice.

a) S=i'(% in &"an&> The inc#ease o# dec#ease in the demand may be due to changes in income9 tasts9

seasons etc. n such cases shifts ta!e place in demand cu#ves. Cet us unde#stand $hat happens to p#ice

if supply #emains the same and demand cu#ve shifts.


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21

n the above figu#e9 supply cu#ve(SS) and demand cu#ve(@@) inte#sect at p#ice 4


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2). The commodity of each p#oduce# $ill be diffe#ent f#om that of othe# p#oduce#s.

Sometimes the diffe#ence may be ve#y small. Jut consume#s feel that one p#oduct is diffe#ent f#om othe#.

The diffe#ence may be due to mate#ial used colou# 9design9 9 pac!aging9 t#adema#! etc.


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UNIT VII

THEORY OF DISTRIUTION


1Q)3 ?=a( a#" (=" cpn"n(% ' n"( p#'i(%*

A) 6et p#ofits a#e the #e$a#d o# piece paid fo# the ent#ep#eneu#ial s!ills of the o#gani?e#. t is the #e$a#d he

gets fo# pe#fo#ming the follo$ing components>

1. is! bea#ing activities unde#ta!en by ent#ep#eneu#.

2. :oo#dination se#vices li!e b#inging the othe# facto#s togethe# and using thei# se#vices.

3. 7a#!eting se#vices> Bhen the pu#chases the se#vices of facto#sof p#oduction and selling his p#oduct in

goods ma#!et.

0. nnovato#'s functions> Jy e&plo#ing ne$ ma#!ets9 int#oducing ne$ techni"ues of p#oduction9 p#oviding

alte#nate uses to natu#al #esou#ces.

F. 4#ganisation %unctions>


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2F

UNIT IB

MACRO ECONOMIC ASPECTS

1) E&plain the 5eynesian theo#y of employment.

A) Dohn 7ayna#d 5eynes9 a famous J#itish economist of the t$entieth centu#y a#gued that full

employment is only a special case and in in gene#al the#e is al$ays a less than full employment. 8e

stated his employment theo#y in his famous boo! entitled the ene#al Theo#y of Employment9 nte#est

and 7oney9 published in 1G3,. 8is theo#y is !no$n as the 5eynesian theo#y of employment. 8e used

the te#ms agg#egate demand9 agg#egate supply and effective demand. t is necessa#y to !no$ the

meaning and significance of these te#ms to unde#stand the 5eynesian theo#y of employment.

(J) Agg#egate supply : ene#ally spea!ing the te#m agg#egate supply #efe#s to the total supply of all

commodities p#oduced by all the ent#ep#eneu#s put togethe# at a pa#ticula# level of employment in an

economy. The level of agg#egate supply depends on the level of employment. Ent#ep#eneu#s use land and

capital along $ith labou# to p#oduce commodities. The income they must #eceive f#om the sale of thei#

output should not be less than the total cost of p#oduction9 if they should continue to p#oduce the samelevel of output. This minimum amount that the ent#ep#eneu#s in the economy must obtain as p#ice fo# the

total output is called the agg#egate supply p#ice. The schedule sho$ing the agg#egate supply p#ice at

diffe#ent levels of employment is as follo$s >

A66#"6a(" S7ppl4 F7nc(in3

Cevel of employment

(in la!hs of $o#!e#s)

Agg#egate supply p#ice

(in c#o#es of #upees)

1-

11

12

13

10

1F

1,

F--

FF-

,--

,F-

+--

+F-

/--

Table sho$s diffe#ent levels of employment and the agg#egate supply p#ice at each level of

employment. Bhen the level of employment is 1- la!h $o#!e#s9 the agg#egate supply p#ice is sF--c#. t

means that the ent#ep#eneu#s must #eceive a minimum of s F--c# to continue the level of output

p#oduced by employing 1- la!h $o#!e#s. f they #eceive less than s F-- c# they $ould #educe the level of

output. f they #eceive mo#e than the e&pected minimum $hich is e"uivalent to the total cost9 they $ould

inc#ease the output. The table sho$s that the agg#egate supply p#ice inc#eases as the level of employment

inc#eases. The above table s e&plained f#om the follo$ing diag#am.


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2,

n the figu#e9 the agg#egate supply function AS' can be seen sloping up$a#ds f#om left to #ight. t sta#ted

f#om the o#igin $hich means that agg#egate supply is ?e#o $hen the employment is nil. As employment

level inc#eases the AS cu#ve #ises to the #ight. 46 is assumed to be full employment level. At this level9 the

agg#egate supply function AS is pa#allel to K a&is $hich means that the agg#egate supply is pe#fectly

inelastic.Cevel of employment

(in la!hs of $o#!e#s)

Agg#egate demand p#ice

(in c#o#es of #upees)


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2+

1-

11

12

13

10

1F

1,

,--

,2F

,F-

,+F

+--

+2F

+F-

A66#"6a(" D"an&> In ene#al agg#egate demand means the total demand fo# al commodities in theeconomy at a pa#ticula# level of employment. The ent#ep#eneu# e&pects community as a $hole to spend

to$a#ds pu#chase of the total output #eceived by households. The sum of consumption e&penditu#e and

investment gives agg#egate demand A@M:Q. The schedule sho$ing agg#egate demand p#ice at diffe#ent

levels of employment in the economy is as follo$s.

t can be seen the table9 that agg#egate demand p#ice #ises as the level of employment inc#eases.

Bhen the employment level is 1- la!h $o#!e#s the agg#egate demand p#ice is s,--. t g#adually inc#eased

to s+F- c#o#es $ith the inc#ease in employment level to 1, la!hs.

This is e&plained by follo$ing diag#ams


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n the above figu#e Ad cu#ve slopes up$a#ds f#om left to #ight. t means that the agg#egate demand #ises

along $ith the #ise in employment.

E%%E:TE @E7A6@> Effective demand is that level of agg#egate demand $hich is e"ual to the agg#egate

supply. Agg#egate demand e"uals Agg#egate supply the economy is in e"uilib#ium.

Cevel of employment in la!hs Agg#egate

supply p#ice in

s

Agg#egate

demand p#ice

n c#o#es

1-

11

12

13

10

1F1,

F--

FF-

,--

,F-

+--

+F-/--

,--

,2F

,F-

,+F

+--

+2F+F-

Table sho$s agg#egate supply p#ice and agg#egate demand p#ice at diffe#ent levels o f employment. Bhen

the level of employment is 10la!h $o#!e#s9 agg#egate demand p#ice is e"ual to agg#egate supply p#ice

i.e.9s. +--c#. So9 effective demand in the above table is s+--c#.the concept of effective demand is

e&plained th#ough follo$ing diag#am>


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2G

n the above fig the agg demand p#ice cu#ve (A@) and the agg#egate Supply p#ice cu#ve (AS) inte#sect each

othe# at point E. t sho$s the e"uilib#ium point. Effective @emand is E6. Effective demand e"uals 6ational

income(K).

Effective @emand M 6ational ncome M :onsumption e&penditu#eQ investment.

E@M KM:Q

UNIT B

MONEYANIN AND INFLATION

1) EL 7oney se#ves as a standa#d of defe##ed payments. 7ost of

the business t#ansactions ta!es place on the basis of c#edit. An individual consume# o# abusiness man may no$ pu#chase a commodity and pay fo# it in futu#e as this function ma!es it

possible to e&p#ess futu#e payments in te#ms of money.


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c) T#ansfe# of money> 7oney can be t#ansfe##ed f#om one pe#son to anothe# at any time and at

any place.

3. :ontingent functions> Jesides the p#ima#y and seconda#y functions 9money has ce#tain

contingent function s .They a#e>

a) 7easu#ement and dist#ibution of national income> 6ational ncome of a count#y can be

measu#ed in money by agg#egating the value of all commodities. This is not possible in ba#te#system.

b) 7oney e"uali?es ma#ginal utilitiesPp#oductivities> The consume# can e"uali?e the ma#ginal

utilities of diffe#ent commodities pu#chased by them $ith the help of money. :onsume# can

ma&imi?e thei# satisfaction by spending #upee at thei# disposal.

c) Jasis of :#edit> :#edit is c#eated by ban!s f#om out of the p#ima#y deposits of money. The

supply of c#edit in an economy is dependent on the supply of nominal money. t is not possible

to c#eate c#edit if the#e is no #ese#ve money.

d) Ci"uidity> 7oney is the impo#tant li"uid asset. n te#ms of li"uidity it is supe#io# to all othe#

assets. 7oney is cent pe#cent li"uid.

VERY SHORT TYPE QUESTIONS AND ANS?ERS

1) Ci"uidity> The ability of an asset to be conve#ted into money is te#med as li"uidity. Ci"uidity is also the

case $ith $hich such conve#sion ta!es place.

2) ecu##ing @eposits> ecu##ing deposits a#e ve#y convenient to those $ho cannot save huge amounts at

a time. A fi&ed amount in the multiple of s 1-P may be deposited eve#y month fo# a pe#iod one o# mo#e

yea#s.

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Economics Study Material for Junior Inter (1)

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