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UNIT I INTRODUCTION 1.2 DEFINITIONS OF ECONOMICS DIFFERENT METHODS OF ECONOMIC EVALUATION

1.1

1.3

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+,-.1/0-1 necessitated in development of content of Economics . The $o#d 2Economics' is de#ived f#om the 3#ee! $o#ds 24(54S'( a house) and 26E7E(6'(to manage) meaning 7anagement of household Economics is 28o$ a family in a household 2economises best of its income9 so also the society(nation) have to use its #esou#ces $isely. :46S;7<T(46 signifies the use of goods in the satisfaction of human $ants o# the use of thing o# employing of it fo# the pu#pose of en=oyment. Economics in gene#al can be defined as> Economics is the study of ho$ people allocate thei# sca#ce #esou#ces to p#oduce and consume# goods and se#vices to satisfy thei# unlimited $ants $ith the ob=ective of ma&imi?ation thei# gains. @E@;:T(AE 7ET84@> @eductive method is #easoning d#a$n f#om gene#al to the mo#e pa#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) SA)EES(3ene#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. <a#tial E"uilib#ium> <a#tial e"uilib#ium e&ists $hen e"uilib#ium #elates to a single va#iable. ;nde# this method9 one va#iable is isolated and studies f#om #est of the va#iables. The scope of definition of economics as defined by> Adam Smith Alf#ed 7a#shall Cionel )obbins <aul Samulelson Dacob Aine# Bealth definition Belfa#e definition Sca#city definition 3#o$th o#iented definition 7ode#n definition ESSAY TYPE QUESTIONS 1Q) Explain Jac ! Vin"#$% &"'ini(i n ' Ec n )ic%* An%: P# ' Jac ! Vin"# +1,-. /1-012

:ont#ibutions> Economic 7odeling of the %i#m including :ost :u#ves. And also cont#ibuted to Theo#y of (nte#national T#ade .

Cong.)un

and

Sho#t.)un

Acco#ding to Dacob Aine#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 Aine#9 unde# imp#ession that Economics can be best unde#stood by analysing the va#ious issues *Economic p#oblems1 and $ith $hat solutions did Economists t#ied to solve these issues. <#of Dacob Aine#9 thei# e&ists ce#tain cent#al economic p#oblems in any economy .They a#e>
1) Bhat Types of 3oods to be p#oduced and in Bhat Euantities> 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.

SHORT TYPE QUESTIONS 1E) @efine and @istinguish bet$een %#ee goods and Economic 3oods. Ans) %#ee goods 1.%#ee gift f#om natu#e 2.Supply is unlimited 3.These goods command no p#ice. 0.6o cost of p#oduction. F.These goods have value in use but not value in e&change ,.These goods a#e not included in 6ational income. Economic goods 1. 7ostly man made goods 2. supply is al$ays limited in #elation to thei# demand. 3.These goods command p#ice. 0. These goods have cost of p#oduction. F.Economic goods have both value in use and value in e&change ,.Economic goods a#e included in 6ational income.

VERY SHORT TYPE QUESTIONS 1E) <#ice> The value of commodity e&p#essed in te#ms of money is called <#ice. The <#ice of anything is its value measu#ed in te#ms of a Standa#d 7oney unit i.e.9 the value of commodity e&p#essed in te#ms of money. %o# e&ample a commodity e&changed fo# )s F-9then the p#ice of that commodity is )s. F-. 2E) :hoice p#oblem> The p#oblem of choice a#ises because the means a#e sca#ce in #elation to the unlimited ends. Time is 2sca#ce' and the#efo#e one has to choose bet$een completing $ays of spending it. The g#eatest amount of choice occu#s9 ho$eve# in the e&penditu#e of one's income. %i#st one has to decide ho$ much to spend on food9 clothing9 #ent9 business etc a#e constantly conf#onted $ith choices. The p#oblem of :hoice is ;nive#sal. 3E) @eductive method> @eductive method p#oceeds f#om gene#al to pa#ticula# i.e.9 Be sta#t f#om a fe$ 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. 0E) 7ic#o Economics> The te#m 27ic#o economics' is de#ived f#om the g#ee! $o#d. 7ic#o $hich means 2small'. 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. FE) <a#tial E"uilib#ium> <a#tial E"uilib#ium e&ists $hen an e"uilib#ium #elates to a single va#iable. The e"uilib#ium of a single consume# o# single fi#m o# a single indust#y o# single ma#!et is an e&ample of pa#tial e"uilib#ium analysis. Alf#ed 7a#shall popula#i?ed <a#tial e"uilib#ium analyses.

UNIT II THEORY OF CONSUMPTION

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 83 93 :3 03 ,3

SYNOPSIS

change in consumption of the commodity pe# unit of Time. Ca#&inal n7)!"#% : ca#dinal numbe#s a#e 1.29390.. . (f consume# is $illing to spend )s 2- on an apple and )s 1- on o#anges .The utility de#ived by apple is t$ice than on o#ange. The la$ of @iminishing ma#ginal utility is also called as 3ossen's fi#st la$ The la$ of e"ui.ma#ginal utility is also called as 3ossen's second la$ 4#dinal utility> o#dinal means 2o#de#' o# 2#an!ing'. 4#dinal utility assumes that utility is a sub=ective concept and cannot be measu#ed in te#ms of 1st 92nd 93#dI :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 2utils'. ESSAY TYPE QUESTIONS

1E) E&plain the la$ of @iminishing ma#ginal utilityH Bhat a#e its limitationsH Ans> The 3e#man Economist9 3ossen9 E&plained the Ca$ of @iminishing ma#ginal utility based on obse#vation of 8uman Jehaviou#. 8ence it is also called as 3ossen'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( 2nd apple93#d apple9 0th apple) the utility becomes ?e#o and negative.

The la$ can be e&plained $ith the help of the follo$ing Table> ;nits of commodities (Apples) 1 2 3 0 F , Total utility (;tils) 23F 0F FF0F 7a#ginal ;tility(;tils) 21F 1-F .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 (additional utility) 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< ' Di)ini%=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

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. SHORT TYPE QUESTIONS 1Q) Explain (=" 'ac( #% (=a( &"("#)in" &")an& An%) D")an& '7nc(i n %(a("% (=" 'ac( #% (=a( &"("#)in" (=" &")an& ' # a 6 Q& M f(<69K9<S:9T) &3

The above e"uation can be e&plained as "uantity demanded depends(function) on <#ice of the good 6(<6)9(ncome of the consume#(K)9<#ice of Substitute and complementa#y goods( < sc) and Tastes and <#efe#ences of the consume#. 1 .<#ice of the good> The#e is an inve#se #elationship bet$een the "uantity demanded and the p#ice of the commodity. That is $hen the p#ice falls9 the demand fo# the good inc#eases and the demand fo# the good dec#eases $ith a #ise in the p#ice of the good. 2. :onsume#'s (ncome> (t is obvious that income $ill influence the amount of most goods and se#vices people $ill pu#chase at any given p#ice. (n case of 2no#mal' goods the "uantity demanded inc#eases $ith #ise in income. Jut in the case of 2(nfe#io#' goods the "uantity demand at any p#ice $ill fall $ith an inc#ease in income .The idea is the that the consume# gene#ally goes in favou# of bette# goods as soon as they can affo#d to. 3. <#ices of substitutes and complementa#ies> (n case of substitutes the#e e&ists a di#ect o# positive #elationship bet$een the p#ice and "uantity demanded. %o# e&ample9 goods li!e Tea and :offee9 an inc#ease in the p#ice of one $ill tend to inc#ease the demand fo# othe#. (n case of :omplementa#y goods the#e e&ists an inve#se o# negative #elationship bet$een the p#ice and "uantity demanded. %o# e&ample Tea and Suga#9 the fall in p#ice of Suga# may lead to inc#ease of demand fo# consumption of Tea. 0. :hanges in Tastes and <#efe#ences> Tastes and <#efe#ences diffe# $ith consume#. (f consume# ac"ui#es a taste fo# a pa#ticula# commodity9 its demand is bound to inc#ease. %o# e&ample9 the demand fo# a pa#ticula# b#and of soap inc#eases due to the use of the same in an adve#tisement involving a famous film acto# o# act#ess. VERY SHORT TYPE QUESTIONS
1. :a#dinal ;tility> :a#dinal ;tility is an app#oach of measu#ing ;tility. The app#oach assumes that

;tility de#ived f#om diffe#ent commodities can be measu#ed in te#ms of a#bit#a#y units 2;tils'. (n simple :a#dinal ;tility analysis gives nume#ical e&p#ession to ;tility.
2. 7a#ginal ;tility> 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

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<4S(S> 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 mid.point of an a#c of a demand cu#ve. The concept of A#c elasticity 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. ESSAY TYPE QUESTIONS 1E) Bhat is <#ice elasticity of @emandH E&plain the diffe#ent fo#ms of <#ice Elasticity of @emand. Ans) The concept of <#ice Elasticity of @emand $as developed by Alf#ed 7a#shall. <#ice elasticity of demand e&p#esses the #esponse of "uantity demanded of a good to changes in its p#ice $ith a given consume#'s income9 tastes and p#efe#ences and p#ices of all othe# goods. (t is a #elative measu#e. 7athematically9 the p#ice elasticity of demand is al$ays negative9 since the change in "uantity demanded is in opposite di#ection to the change in p#ice but $e igno#e this minus sign. 7a#shall has suggested the fo#mula to measu#e the deg#ee of change in "uantity demanded conse"uent upon the change in the p#ice of good. Acco#ding to 7a#shall's fo#mula p#ice elasticity of demand is gene#ally classified unde# five sub Nheads.
1. <e#fectly Elastic @emand> This concept is ve#y #a#e in #eal life 7a#!et. 8o$eve#9 in the case of fi#m

$o#!ing unde# pe#fect competition9 this concept has some #elevance. <e#fectly elastic demand is a slightest #ise in p#ice causes the "uantity demanded of the commodity to fall to ?e#o (consume#s totally tu#ns to substitutes commodities)9 and the slightest fall in p#ice causes an infinite inc#ease in "uantity demanded of the commodity. The#efo#e9 the demand cu#ve fo# a fi#m $ill be a ho#i?ontal st#aight line pa#allel to the L N a&is implying infinite elasticity.

(n the above diag#am @@ is the demand cu#ve9 ho#i?ontal to L.a&is9 $he#e the elasticity coefficient is infinity. 2. <e#fectly (nelastic @emand> (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 co.efficient is 2o'9 then demand cu#ve $ill be ve#tical to L.a&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 21' 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. 6p M Bhen the Elasticity co.Efficient is g#eate# than 1 $e call that situation as )elative Elastic @emand 9 $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 pine apple 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 co.efficient is less than 21' 9$e call such situation as )elatively inelastic demand 9 $he#e pe#centage change in p#ice is g#eate# than pe#centage change in "uantity. VERY SHORT ANS?ER QUESTIONS
1. <#ice Elasticity > <#ice Elasticity of demand can be defined as the #atio of pe#centage *p#opo#tional1

change in "uantity demanded of a p#oduct to pe#centage *p#opo#tional1 change in p#ice. As demand of a good is negatively #elated to its p#ice9 $e al$ays #efe# absolute value of elasticity O. pO .<#ice elasticity of good & is e&p#essed by 6p& M pe#centage change in the "uantity of 2L <e#centage change in the p#ice of L 2. A#c 7ethod> The A#c method studies a po#tion o# segment of demand cu#ve. The a#c elasticity is the ave#age elasticity . (ts magnitude $ill diffe# acco#ding as $e ma!e smalle# o# bigge# move on the demand cu#ve. The A#c method is #elevant in case $hen the A#c involved is small. (t should be used $hen the change in p#ice not ve#y la#ge.

UNIT IV INDIFFERENCE CURVES

(ndiffe#ence cu#ves analysis assumes that the consume#9 $hile spending money on goods9 acts in a

#ational manne#. (n othe# $o#ds9 the consume# endeavou#s to ma&imi?e the total satisfaction obtainable f#om a given income. (ndiffe#ence cu#ve techni"ue mainly tells that 2;tility' is not measu#able. And it also says that the consume# cannot go beyond hisPhe# p#efe#ence o# indiffe#ence. The Judget line sho$s all possible combinations of t$o goods that a consume# can buy9 $ith the given income of the consume# and p#ices of the t$o goods. ESSAY TYPE QUESTIONS 1Q) Bhat a#e indiffe#ence cu#ves H Cist out its p#ope#ties. An%) The indiffe#ence cu#ve a#e d#a$n on the basis of his scale of p#efe#ence. The scale of <#efe#ence #eflects his tastes and p#efe#ences. A consume#9 in the #eal $o#ld9 $ould be pu#chasing many goods to satisfy his $ants. Jut9 he#e $e a#e #est#icting t$o goods only. The#efo#e9 an indiffe#ence cu#ve #ep#esents

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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 ,

21F 11 / , F

(n the above schedule9 the consume# gets as much total satisfaction f#om combination A(1 appleQ 2o#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 $e get 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. 2. 3. 0. F.

(ndiffe#ence cu#ves have a negative slope9 (ndiffe#ence cu#ves a#e conve& to the o#igin9 (ndiffe#ence cu#ves neve# inte#sect9 (ndiffe#ence cu#ves need not be pa#allel to each othe#9 and A highe# indiffe#ence cu#ve is al$ays p#efe##ed to a lo$e# one. VERY SHORT ANS?ER QUESTIONS

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

2.

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#eto9 Sluts!y9 8ic!s and Allen. (ndiffe#ence 7ap . (t sho$s a ce#tain level of satisfaction to the consume#.

3. In&i''"#"nc" Map> A set of indiffe#ence cu#ves d#a$n fo# diffe#ent income levels is called as

0. A7&6"( # P#ic" lin"> 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 <#ice line9 then line #ep#esents the #atio of the p#ices9 that is the p#ice of one commodity in te#ms of anothe#.

UNIT V THEORY OF PRODUCTION

SYNOPSIS: <#oduction is conve#sion of inputs into output. (t includes manufactu#ing9 pac!aging9 t#anspo#t9 sto#ing etc. The p#ocess of p#oduction continues till the good #eaches the hands of the consume#.

10 The la$ of #etu#ns to scale e&plains input.output #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 $hole indust#y and they a#e not dependent on the output level of individual fi#ms. Jenefits of inf#ast#uctu#e9 speciali?ation9 ma#!eting etc.9 a#e available to all the fi#ms. ESSAY TYPE QUESTIONS 1Q) S(a(" (=" la< ' @a#ia!l" p# p #(i n% an& "xplain i(% i)p #(anc"
A) The la$ 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 input.output #elation in a situation $hen the output is inc#eased by inc#easing the "uantity of one input9 !eeping the othe# inputs constant. Bhen the "uantity of one facto# is inc#eased and the "uantities of the othe# facto#s of p#oduction a#e !ept constant9 natu#ally the p#opo#tion bet$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. Aa#iable (nput labou# Total <#oduct Ave#age <#oduct 7a#ginal p#oduct

1 2 3 0 F , +

3 / 1/ 20 2, 2, 20

3 0 , , F.2 0.3 3.0

3 F 1, 2 .2

The table sho$s labou# is inc#eased in the fi#st column. Th#ee types of p#oducts9 total ave#age and ma#ginal p#oducts a#e given in the table. %o# e&ample 9 $hen 2 labou#e#s a#e employed output is / and fo#

1F

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<nM T<n N T< n.1(7p M 7a#ginal <#oduct9 T< M Total <#oduct9 nM 6umbe# of units. 3iven the fi&ed facto#9 labou# is inc#eased unit $ise to inc#ease output. As labou#e#s a#e inc#eased9 total9 ave#age and ma#ginal p#oducts inc#ease at fi#st9 #each a ma&imum and then decline. The ma#ginal p#oduct declined fi#st9 follo$ed by ave#age p#oduct and finally total p#oduct. :hanges in output a#e much clea# in the ma#ginal p#oduct. (t inc#eased at a highe# #ate upto 3 #d labou#e#9 the#eafte# it inc#eased at a lo$e# #ate and finally it becomes ?e#o and negative.

(n the above figu#e9 2L' a&is measu#es va#iable facto#9 labou#e#s and 2K' a&is measu#es output. (n the diag#am output changes a#e divided into th#ee stages. (n stage ( 9 total p#oduct inc#eases #apidly and ave#age ma#ginal p#oducts #each ma&imum. (n the second stage total p#oduct inc#eases at a lo$e# #ate9 ave#age and ma#ginal p#oduct fall slo$ly. (t is in the thi#d stage all the p#oducts fall and ma#ginal p#oduct becomes ?e#o and negative. Cet us no$ unde#stand $hy such changes in output ta!e place. 8ighe# output in the beginning occu# fo# t$o #easons. Bhen fi&ed capital (machine) is used less than its capacity9 employment of additional labou#e#s cont#ibutes mo#e output. Suppose machine is used only to the e&tent of +F pe#cent of its capacity. Employment of e&t#a labou#e#s on it $ill #esult in mo#e output . Second #eason fo# highe# output is $ith employment of addition of all labou#e#s9 division of labou# and specialisation is possible. I)p #(anc": 1. (t has a ve#y $ide almost unive#sal application. 2. The la$ applies in all fields of p#oduction9 $hethe# ag#icultu#e 9 mining o# manufactu#e. 3. The validity of the la$ is not me#ely based on theo#etical #easoning but it has been suppo#ted by e&tensive empi#ical evidence. 0. The la$ has fo#med the basis fo# a numbe# of economic doct#ines p#opounded by the English classical economists9 especially 7althus and )ica#do. The#efo#e9 this la$ occupies a ve#y impo#tant place in the #ealm of economic thought. 2E) E&plain the la$ of #etu#ns to scale. 7ention the #easons fo# diffe#ent !inds o# #etu#ns.
A) The la$ of #etu#ns to scale e&plains input.output #elation in the long pe#iod. (t is possible to ma!e

ad=ustment in all inputs in this pe#iod. The changes in all inputs is called change in scale of p#oduction changes in output a#e called #etu#ns. 8ence9 it is called the la$ of #etu#ns to scale. Acco#ding to the la$9 the#e $ill be th#ee !inds of #etu#ns. (n case of t$o inputs.capital and labou#9 suppose changes a#e made as 1Q292Q090Q/I. etc9 such changes in inputs fi#st gives inc#easing

1,

#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.

1+

(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 $hen inputs a#e doubled9 ma#ginal #etu#ns a#e mo#e than doubled .Such a change in output is called inc#easing #etu#ns. Jut in the thi#d and fo#th input combinations9 out.put has inc#eased in the same p#opo#tion. 8ence these a#e constant #etu#ns. Cate# simila# change inputs a#e giving diminishing #etu#ns. The follo$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 K.a&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 dis.economies ente# into p#oduction and

1/

lead to constant #etu#ns. Jeyond this9 any inc#ease in output causes mo#e dis.economies and #esults inc#easing #etu#ns. (nc#easing #etu#ns #esults f#om economies of scale. @is.economies in the late# pe#iod cause constant and dec#easing #etu#ns.

1G

VERY SHORT ANS?ER QUESTIONS

1. A@"#a6" p# &7c(: Total p#oduct (T<) divided by the numbe# of gives the ave#age p#oduct(A<) . 2. Opp #(7ni(4 c %(: 4ppo#tunity cost of a facto# is the benefit that is fo#egone f#om its alte#native

use. The oppo#tunity cost of a labou#e# is the ea#nings he could get f#om the alte#native employment. (t can be applied to :onsumption.

UNIT VI THEORY OF VALUE

SYNOPIS: 7a#!et dete#mines the p#ice of the p#oduct. @epending upon the competition among p#oduce#9 7a#!et may be <e#fect competition o# (mpe#fect competition. A ma#!et $ith a single p#oduce# is called monopoly. 8e#e the p#oduce# is the p#ice ma!e#. A consume# finds no close substitutes fo# the monopoly p#oduct. 4ligopoly is a type of ma#!et9 $he#e competition e&ists among fe$ p#oduce#s. (f ma#!et is dominated by only t$o p#oduce#s9 such ma#!et is called @uopoly . ESSAY TYPE QUESTIONS 1Q) D"'in" p"#'"c( c )p"(i(i n3 H < p#ic" ' a c )) &i(4 i% &"("#)in"& 7n&"# p"#'"c( c )p"(i(i n* A) <e#fect competition is a ma#!et $ith a la#ge numbe# of selle#s selling identicalp#oducts to many buye#s. The conditions unde# it p#omote competition among p#oduce#s. The#e is a unifo#m p#ice th#ough the ma#!et. P#ic" &"("#)ina(i n 7n&"# p"#'"c( c )p"(i(i n: ;nde# pe#fect competition9 the fo#ces of supply and demand in the ma#!et dete#mine the p#ice of the good. Ad=ustment in supply and demand ta!es place to b#ing a balance bet$een them. E"uilib#ium p#ice is established at the point $he#e the supply and demand a#e e"ual. The#e is a p#ice ta!e# in this ma#!et. A table and diag#am help us to unde#stand changes in supply9 demand and e"uilib#ium p#ice. p#ice Euantity demanded Euantity supplied

1 2 3 0 F

F0321-

1230F-

The table sho$s the demand and supply schedule of a good. :hanges in p#ice a#e al$ays as causing a change in supply and demand. As p#ice inc#eases9 the#e is a fall in the "uantity demanded. (t means9 p#ice and "uantity demanded have negative #elation. Jut #ise in p#ices has inc#eased the supply of goods. The #elation bet$een p#ice and supply of goods is positive. Eve#y time a change in p#ice causing some change in the supply $ell as demand. At one p#ice )s39it can be obse#ved the "uantity supplied

2-

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 the ma#!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.

21

(n the above figu#e9 supply cu#ve(SS) and demand cu#ve(@@) inte#sect at p#ice 4<. This is the e"uilib#ium p#ice in the ma#!et. Though the supply cu#ve #emained same9 the#e a#e shifts in the demand cu#ves. (f demand dec#eases the#e is a ne$ demand cu#ve @ 1@1. This demand cu#ve inte#sects supply cu#ve at 4<1. Suppose demand inc#eases $ithout a change in supply9 it $ill give us a ne$ p#ice. Bhen demand inc#eases to @2@29it inte#sects supply cu#ve at 4<2. The ne$ e"uilib#ium p#ice $ill be 4< 2. Thus the#e $ill be change in p#ices $hen the#e a#e shifts in demand cu#ves. S=i'(% in %7ppl4: This is anothe# situation $he#e demand cu#ve #emains the same. The#e a#e changes in supply due to changes in input p#ices9 technology etc.9 This $ill cause shifts in supply.
!)

(n the above diag#am demand cu#ve (@@) and supply(SS) inte#sect at p#ice 4<.Bithout any change in demand an inc#ease in supply shifts the cu#ve to S 1S1. This cu#ve inte#sects at a ne$ e"uilib#ium p#ice 4<1.Simila#ly a dec#ease in supply gives a ne$ cu#ve S 2S2. Again it inte#sects demand cu#ve at ne$ e"uilib#ium p#ice 4<2. Thus changes in supply cu#ves leads to ne$ e"uilib#ium p#ices in the ma#!et. Supply o# demand cu#ves inc#ease o# dec#ease due to ce#tain #easons. Bheneve# it happens9the#e $ill be changes in e"uilib#ium p#ice. VERY SHORT TYPE QUESTION ANS?ERS 1). @uopoly> @uopoly is one type of oligopoly ma#!et. The#e a#e only t$o p#oduce#s in the ma#!et. They ma!e decisions eithe# independently o# togethe#. The commodities p#oduced by may be homogenous o# diffe#ent.

22

2). <#ice diffe#entiation> 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.

23

UNIT VII THEORY OF DISTRIAUTION

SHORT TYPE QUESTIONS 1Q)3 ?=a( a#" (=" c )p n"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> <ayment of #emune#ation to facto#s of p#oduction and decision ma!ig9 ma#!et analysis etc. <#ofits ea#ned by the f#im can be vie$ed as follo$s> a) 6o#mal <#ofits> These p#ofits a#e paid fo# the se#vices of management and a#e sufficient to induce the ent#ep#eneu# to stay in the indust#y. 6o#mal p#ofits a#e included in the p#ice of the good. b) Abno#mal <#ofits> Bhen the #evenue of a fi#m is ove# and above the cost of p#oduction9 a abno#mal p#ofits. This is a sho#t #un condition and acc#ues due to ma#!et fluctuations. .Q) Explain (=" ("#) T#an%'"# Ea#nin6% A) T=i% concept of #ent $as fi#t int#oduced by Doan )obinson. (t is also called the oppo#tunity cost in e&plaining economic #ent.T#ansfe# ea#nings means $hat a facto# of p#oductionmay be ea#ning n its p#esent employment ove# $ht it couldea#n in its ne&t best employment o# hat a facto# can ea#n in its ne&t best alte#nativeuse. F # E&ample 9if a piece of land in its p#esent ue get )s 1F--P. a yea# as #ent9 if by change it is t#ansfe##ed to its ne&t best use9 $he#e it can ea#n )s12--P. a yea# then it is clea# that it ea#ns )s3--P. in its p#esent use is called #ent. VERY SHORT ANS?ER QUESTIONS 1) Q7a%i #"n(: Euasi #ent is the #ent paid to man.made facto#s of p#oduction9 $hose supply cannot be inc#eased in the sho#t pe#iod. The concept of "uasi #ent $as fi#st int#oduced by 7a#shal. This is a sho#t te#m concept. This type of #ent is the facto#s o# agents of p#oduction $hen the demand fo# this agent suddenly inc#eases9 as the supply of these facto#s cannot be inc#eased in the sho#t #un.

20

UNIT VIII NATIONAL INCOME

ESSAY TYPE QUESTIONS 1Q) 3 Explain (=" @a#i 7% )"(= &% ' calc7la(in6 Na(i nal Inc )"3 A)3 Acco#ding to :ai#n :#oss 6ational (ncome can be loo!ed in any one of the th#ee $ays9 as the 6ational (ncome measu#ed by adding up eve#ybody's income by adding up eve#ybody's output and by adding up the value of all things that people buy and adding in thei# savings . The#e a#e th#ee methods of measu#ing national income. 1) 4ut put method o# p#oduct method 2) (ncome method and 3) E&penditu#e method
1) 4utput method> (t is also !no$n as invento#y method o# commodity se#vice method . (n this

method $e find the ma#!et value of all final goods and se#vices p#oduced in a count#y du#ing a given pe#iod of time. The enti#e output of final goods and se#vices p#oduced n a count#y du#ing a given pe#iod of time. The enti#e output of final goods and se#vices a#e multiplied by thei# #espective ma#!et p#ices to find out the g#oss national p#oduct. 6( M (<1E1Q<2E2Q<3E3QII.Q<nEn) N @ep#eciation N(ndi#ect ta&es Q 6et income f#om ab#oad. Bhe#e 6( M 6ational (ncome9 <M p#ice of the goods o# se#vice9 EM Euantity of goods o# se#vice p#oduced9192I..n a#e the va#ious goods and se#vices p#oduced. The values of #a$ mate#ial9 inte#media#y goods etc.9 should not be included. 4nly final goods should be ta!en into account. 8e#e $e find out value added in the diffe#ent secto#s li!e Ag#icultu#e9 3ove#nment p#ofessionals9 (ndust#y and se#vice secto#s. 8ence it is also called Aalue added 7ethod .
2) (ncomes 7ethod> (n this method9 the incomes ea#ned by all facto#s of p#oduction a#e agg#egated

to a##ive at the national income of a count#y. The fou# facto#s of p#oduction #eceive incomes in the fo#m of $ages9 #ent9 inte#est and p#ofits. This is also 6ational (ncome at facto# cost. 6(M BQ(Q)Q<Q 6et income f#om ab#oad 6( M 6ational (ncome9 BMBages9 (M(nte#est9 )M)ent9 <M<#ofits. This method gives us 6ational (ncome acco#ding to dist#ibutive sha#es.
3) E&penditu#e 7ethod> (n this method $e add the pe#sonal consumption e&penditu#e of households9

e&penditu#e of the fi#ms9 3ove#nment pu#chase of goods and se#vices9 net e&po#t plus net income f#om ab#oad. 6( M E8QE%QE3Q 6et e&po#tsQ 6et income f#om ab#oad. 8ence 6ational (ncome M p#ivate final consumption e&penditu#e Q 3ove#nment final consumption e&penditu#e Q 6et domestic capital fo#mation Q 6et e&po#ts Q 6et income f#om ab#oad. VERY SHORT ANS?ER QUESTION
1) D"p#"cia(i n : D"p#"cia(i n i% a 7%"# c %( # #"plac")"n( c %(3

An%: The consumption of fi&ed capital o# fall in value of the capital due to $ea# and tea# is called @ep#eciation.

2F

UNIT IB MACRO ECONOMIC ASPECTS

1E) 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$ays a less than full employment. 8e stated his employment theo#y in his famous boo! entitled the 3ene#al Theo#y of Employment9 (nte#est and 7oney 9 published in 1G3,. 8is theo#y is !no$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 : 3ene#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 $ith labou# to p#oduce commodities. The income they must #eceive f#om the sale of thei# output should not be less than the total cost of p#oduction9 if they should continue to p#oduce the same level of output. This minimum amount that the ent#ep#eneu#s in the economy must obtain as p#ice fo# the total output is called the agg#egate supply p#ice. The schedule sho$ing the agg#egate supply p#ice at diffe#ent levels of employment is as follo$s > A66#"6a(" S7ppl4 F7nc(i n3 Cevel of employment (in la!hs of $o#!e#s) Agg#egate supply p#ice (in c#o#es of #upees)

111 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.

2,

(n the figu#e9 the agg#egate supply function 2AS' 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 Agg#egate demand p#ice (in la!hs of $o#!e#s) (in c#o#es of #upees)

2+

111 12 13 10 1F 1,

,-,2F ,F,+F +-+2F +F-

A66#"6a(" D")an&> In 3ene#al agg#egate demand means the total demand fo# al commodities in the economy 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

2/

(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:T(AE @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

111 12 13 10 1F 1,

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 $o#!e#s9 agg#egate demand p#ice is e"ual to agg#egate supply p#ice i.e.9)s. +--c#. So9 effective demand in the above table is )s+--c#.the concept of effective demand is e&plained th#ough follo$ing diag#am>

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 MONEYCAANDINE AND INFLATION

1E) EL<CA(6 T8E %;6:T(46S 4% 746EK. A) 7oney occupies a uni"ue place in an economic system. The society needs money fo# a va#iety of t#ansactions unde#ta!en by the people and the gove#nment in daily life. 7oney pe#fo#ms mainly th#ee impo#tant functions .They a#e 1. <#ima#y functions 2. Seconda#y functions and 3.:ontigency functions <#ima#y functions> The p#ima#y functions of many a#e #eally the technical and impo#tant functions of money. They a#e of t$o types. a) 7edium of E&change> 7oney se#ves as a medium of e&change. (t #emoves the inconveniences of the ba#te# system in $hich e&change of goods $as possible if only the#e $as double coincidence e of $ants. Any commodity can be e&changed fo# money. b) 7easu#e of Aalue> 7oney se#ves as a measu#e of the value of gods and se#vices. The value of each commodity is e&p#essed in the units of money i.e.9 <#ice.
1. 2.

Seconda#y %unctions> 7oney has the follo$ing seconda#y functions. a) Sto#e of value> The value of commodities can be sto#ed in the fo#m of money. The value of money can be p#ese#ved and "uestion of pe#ishability does not a#ise. The value of commodities can be sto#ed $ithout any decline9 in the fo#m of money by e&changing them fo# money. b) Standa#d of @efe##ed payment> 7oney se#ves as a standa#d of defe##ed payments. 7ost of the business t#ansactions ta!es place on the basis of c#edit. An individual consume# o# a business man may no$ 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.

3c) T#ansfe# of money> 7oney can be t#ansfe##ed f#om one pe#son to anothe# at any time and at

any place. :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.
3.

VERY SHORT TYPE QUESTIONS AND ANS?ERS 1E) 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. 2E) )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.