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Table of Contents
ECONOMICS
E - b o o k A s s es s m ent D I G I l i nk s
VI
1 Introduction To
Micro Economics
Learning Objectives
Introduction To Micro-Economics 1
The term or word ‘Economics’ comes from A science grows stage by stage,
the Ancient Greek oikonomikos (oikos and at every stage, its newer definition
means “households”; and, nomos means emerges and a concept associated with it
“management”, “custom” or “law”). Thus, receives some special emphasis. However,
the term ‘Economics’ means ‘management the study of a subject is made possible
of households’. The subject was earlier when it possesses its clear cut definition
known as ‘Political Economy’, is renamed and boundary.
as ‘Economics’, in the late 19th century by Four definitions, each referring to
Alfred Marshall. particular stage of the growth of the subject
of Economics, are presented here. They are:
01. Smith’s Wealth Definition,
1.3 representing the Classical era;
Economics Its ature 02. Marshall’s Welfare Definition,
representing the Neo-Classical era;
The nature of a subject refers to its 03. Robbins’ Scarcity Definition,
contents and how and why they find representing the New Age; and,
a place in the subject. This nature is
04. Samuelson’s Growth Definition,
understood by studying the various
representing the Modern Age.
definitions given by the notable
economists. The existence of multiplicity
of the definitions makes some scholars
1.3.1 ealt Definition
comment that a search for a clear definition
Adam Smith
of Economics is an exercise in futility.
J. M. Keynes, for example, observes that Adam Smith (1723-
“Political Economy is said to have strangled 1790), in his book “An
itself with definitions”. Their presence Inquiry into Nature and
makes studying a subject interesting, Causes of Wealth of
exciting, enjoyable, or worthwhile. In fact, Nations” (1776) defines
their presence in a social science subject “Economics as the
is a clear sign of the growth of the science. science of wealth”. He
It indicates that there exists freedom for explains how a nation’s wealth is created
people associated with such as science and increased. He considers that the
to formulate fresh definitions. These individual in the society wants to promote
associates appreciate and make use of the his own gain and in this process, he is
opportunity afforded to them and come guided and led by an “invisible hand”. He
up with a plethora of definitions saying: states that every man is motivated by his
‘The more, the merrier’. Each definition self interest This means that each person
represents a unique generalisation. A wide works for his own good.
Introduction To Micro-Economics 2
Introduction To Micro-Economics 4
Introduction To Micro-Economics 5
i. E conomics as an A rt
Can be Cannot be
Art is the practical application of proved proved
P ositive E conomics
a. An increase in money supply implies a
price-rise in an economy.
b. As the irrigation facilities and application
of chemical fertilizers expand, the Goods (also called ‘products’, ‘commodities’,
production of food-grains increases. ‘things’ etc)
c. An increase in the birth rate and a a. as material things, they are tangible;
decrease in the death rate reflect the b. have physical dimensions, i.e., their
rate of growth of population. physical attributes can be preserved
over time;
Normative E conomics
c. exist independently of their owner;
a. Inflation is better than deflation. d. are owned by some persons;
b. More production of luxury goods is not e. are transferable;
good for a less-developed country.
f. have value-in exchange;
c. Inequalities in the distribution of wealth
and incomes should be reduced.
Ki nd s of Good s (and Services)
a. Free and Economic goods
1.5 Free goods are available in nature and in
Basic Concepts in abundance. Man does not need to incur
Economics any expenditure to own or use them. For
example air, and sun shine. Water was also
Like other sciences, Economics also an example in the past, but at present it has
has concepts to explain its theories. A exchange value. So it is not a free good.
complete and clear grasp of their meaning
Introduction o Micro Economics 7
Introduction To Micro-Economics 8
as inventories like assets. For example, A sick person derives utility from
it is useless to possess a ticket for a taking a medicine, but definitely, it
cricket-match once the match is over. is not providing pleasure;
It cannot be stored and it has no value- 4. Utility is personal and relative. An
in-exchange. individual obtains varied utility
from one and the same good in
different situations and places;
1.5.2 Utility
5. Utility is the function of the
a. Meaning intensity of human want. An
individual consumer faces a
‘Utility’ means ‘usefulness’. In
tendency of diminishing utility;
Economics, utility is the want-
satisfying power of a commodity 6. Utility is a subjective concept it
or a service. It is in the goods and cannot be measured objectively and
services for an individual consumer it cannot be measured numerically;
at a particular time and at a particular 7. Utility has no ethical or moral
place. significance. For example, a cook
Introduction To Micro-Economics 9
1.5.7 Equilibrium
1.5.8 Income
a. Stable Equilibrium Income represents the amount of
Prof. Stigler states that “equilibrium monetary or other returns, either earned
Growth of resources
profit. A resource is in equilibrium It is the purchasing power of income which
when it gets fully employed and gets is based on the rate of inflation.
its maximum payment. Thus, static
equilibrium is based on given and
constant
0 prices, quantities, E E1income,
1.6
X
Goods-X
technology, population etc. Economics Its
Diagram 1.3 Methods, Facts,
Theories and Laws
Y
Market 1.6.1 Met ods o Economics
S
D Deduction and Induction
E Like any other science, Economics
price
Introduction To Micro-Economics 15
Introduction To Micro-Economics 16
Introduction To Micro-Economics 18
UNIT 1
for many analytical purposes. We shall involves the decision regarding the choice
discuss below some of its popular uses. of location on the production possibility
curves. A production combination
represented by any point inside the
Y
Production Possibilities Curve
PPC indicates that the economy is using
inefficient methods of production and
A1
inefficient combination of resources.
A
Goods-Y
Growth of resources
1.11 Conclusion
This chapter has given a broad overview
0
of economics. Moreover the present
E E1 X
Goods-X certain common characteristics of
economics definitions of Wealth,
Diagram 1.3
Welfare, Scarcity & Growth free essential
( i) The problem of choice questions an economy must solve; what to
produce, how to produce and for whom
The
Y problem of choice arise because of
to produce and also looked at division of
the given limitedMarket
resources and
S
unlimited
economics, distinguishing between Micro
wants,D may relate to the allocation of
and Macroeconomics. It has introduced
E
Introduction To Micro-Economics 19
price
D
S
Chapter-01.indd 19 03-09-2018 16:24:33
some basic concepts frequently appearing
Value Power of a commodity
throughout the lessons.
to command other
It is perhaps both importance, the commodities in an
study of economics is an intellectually exchange
fascinating adventure highly relevant and
it affects people’s life. Every now and then Price Value of a commodity
after learning lesson, think of economic expressed in terms of
activities in and around you. Perhaps in money
this way learning of economics makes to Income The amount of monetary
think like an economist. or other returns, either
earned or unearned,
GLOSSARY accruing over a period of
time
Scarcity The gap between what
people want and what Deductive Deduction is a process
people can get Method in logic facilitating or
arriving at an inference,
Production Creation of utility moving from general to
Distribution Share of the national particular
income reaching the four Inductive Induction is a process
factors of production Method in logic facilitative or
Services Services, like goods, are arriving at an inference,
economic entities; and moving from particular
are inseparable from their to general
owners and are intangible,
perishable in nature
Introduction To Micro-Economics 20
Introduction To Micro-Economics 21
Introduction To Micro-Economics 22
Answers art A
1 2 3 4 5 6 7 8 9 10
c c c c d c b a b d
11 12 13 14 15 16 17 18 19 20
b d d a a a d c b a
21. What is meant by Economics? 25. Name any two types of utility.
28. Explain the scarcity definition of 31. Elucidate different features of services.
Economics and assess it.
32. What are the important features of utility?
29. What are the crucial decisions involving
33. Distinguish between microeconomics
‘what is produced?’
and macroeconomics.
30. Explain different types of economic
34. Compare positive economics and
activities.
normative economics.
Introduction To Micro-Economics 23
35. Compare and contrast various 37. Elaborate the nature and scope of
definitions of Economics. Economics.
36. Explain various divisions of 38. Explain basic problems of the economy
Economics. with the help of production possibility
curve.
ACTIVITY
Meet ten of your class-mates and prepare a Report on the
advantages of studying Economics.
References
Introduction To Micro-Economics 24
2 Consumption Analysis
Learning Objectives
2.1 2.2
Introduction Human W ants
Consumption Analysis 26
Definition Illustration
Marshall states the law as, “the additional The law can be explained with a simple
benefit which a person derives from a illustration. Suppose a consumer wants to
given increase of his stock of a thing, consume 7 apples one after another. The
diminishes with every increase in the utility from the first apple is 20. But the
stock that he already has”. utility from the second apple will be less
than that of the first (say 15), the third less
Assumptions than that of the second (say 10) and so
1. Utility can be measured by cardinal on. Finally, the utility from the fifth apple
numbers such as 1, 2, 3 and so on. becomes zero and the utilities from sixth
and seventh apples are negative (or disutility
2. The marginal utility of money of the
or disliking). This tendency is called the
consumer remains constant.
Consumption Analysis 27
4. Music and
A1 Poetry and 5. Readings
TU / MU
30 B1
MU of Apple
B TU
20
I mportanceA3or A pplication of
10
C the L aw of DMU
1 2 3 4 5 6 7 X
0
Units 1. The Law of DMU is one of the
Zero Utility
Negative Utility
MU fundamental
A A2 laws Nof consumption.
X 0 B2 B1
Diagram 2.1
It has applications
Units of Apple in several fields of Units of
study.
Diagram 2.2
Consumption Analysis 28
Y Y
M P
MUm of Orange
B3
A1 B1
MUm of Apple
A3
0 A A2 N X 0 B2 B1 Q X
Units of Apple Units of Orange
Diagram 2.2
Substitution”. Eg. For Apple 50⁄25; for this entire income (i.e., ₹14) on Apple and
Orange 20⁄4. In such situation, spending Orange. The price of an Apple is ₹2 and the
more money on orange is wiser. price of an Orange is ₹1. This law can be
illustrated with the help of Table 2.2
Illustration
This Law can be illustrated with the help of If the consumer wants to attain
table 2.2. Let us assume that the consumer maximum utility, he should buy 5 units of
has a given income of ₹14. He wants to spend
Consumption Analysis 30
Consumption Analysis 31
UNIT 2
Potential Price (Marginal = Potential Price –
Units of commodity (Apple) Price
Utility) Actual Price
1 6 2 6-2=4
2 5 2 5-2=3
3 4 2 4 - 2= 2
4 3 2 3-2=1
5 2 2 2-2=0
Total 20 10 10
where, Y
Price
Price (in ₹)
B1
In Table 2.3 the consumer is willing C
P
to pay rupees 6, 5, 4, 3 and 2 for purchasing D1
the successive units of apples. Hence, he
is willing to pay (Potential Price Total
Utility) ₹20 for apples. But, he actually 0 Q X
N X pays
0 ₹10 B2 (₹2 Q
B1 x 5)) for getting 5 apples.
X Quantity Demanded
Hence, Units of Orange Diagram 2.3
DiagramConsumer’s
2.2 Surplus = Total Utility (Actual
Price x units of
Commodity) Hence, actual price is OPCQ (OP x OQ).
Potential Price (Total Utility) is ODCQ.
= TU – (P x Q)
Therefore,
= 20 –(2 x 5)
Consumer’ Surplus = ODCQ – OPCQ
= 20-10 = 10. = 20-10 = 10
The concept of Consumer’s Surplus = PDC (the shaded area) Y
can also be explained
d1 d with the help of a d d1
Y
diagram. Criticism
Y
1. Utility cannot be measured, because
In the diagram 2.3, X axis shows the utility is
B A A subjective.
B
amount P1 demanded and Y axis represents P
Price
P1
2. Marginal utility of money does not
the price. DD1 shows the utility which
Price
remain constant.
Price
Chapter-02.indd 32
Diagram 2.8 22-10-2018 13:01:13
2.8 Definitions
Law of Demand The Law of Demand says as “the quantity
demanded increases with a fall in price
Demand is essential for the creation, survival and diminishes with a rise in price”.
and profitability of a firm. “Demand in –Marshall
economics is the desire to possess something “The Law of Demand states that people will
and the willingness and the ability to pay a buy more at lower price and buy less at higher
certain price in order to possess it”. prices, other things remaining the same”.
–J. Harvey - Samuelson
D 2.8.4 Determinants of
represents the Pprice of the commodity.
3
DD is the demand curve, which has a Demand
negative slope i.e., slope downward from 1. Changes in Tastes and Fashions: The
D
left to right which
O indicates that when demand for some goods and services
Q X
X
ded Consumption Analysis
Quantity Demanded
34
Diagram 2.10
Chapter-02.indd 34 22-10-2018 13:01:13
Y
Q
50
40
TU / MU
30
is very susceptible to changes in tends to decrease Bthe demand (if TU
20
tastes and fashions other things remain constant).
10
2. Changes in Weather: An unusually C
Price
periods of boom and prosperity, the E
Price
P3
P1
demand for all commodities tends
to increase. On the contrary, during D
times of depression there is a general
O Q1 Q2 X
slackening of demand. O
Quantity
7. Advertisement: In advanced
capitalistic countries advertising is a Diagram 2.6
powerful instrument increasing the
demand in the market. In the diagram 2.6, DD is the demand
curve which slopes upwards from left to
8. Changes in Income: An increase
right. It shows that when price is OP1,
in family income may increase the
OQ1 is the demand and when the price
demand for durables like video Y
risesYto OP2, demand also extends to OQ2.
recorders and refrigerators. Equal e >1 D
distribution of income enables poor P
P1
to get more income. As a result 2.8.6
P
1
Reasons for Ex ceptional
2
Price
E
Price
gives P3
P1 social distinction or prestige.
For example, diamonds.
D D
3. Ignorance: Sometimes, the quality of
the O
commodity isQjudged Q2 by it’s
X price. O Q1 Q2 Q3
1
X
ConsumersQuantity
think that the product is
Quantity
superior if the price is high. As such
Diagram 2.6 Diagram 2.7
they buy more at a higher price.
4. Speculative effect: If the price of the to OP1 (movement from A to B) quantity
commodity is increasing then the demanded decreases to OQ1.
consumers will buy more of it because
of the expectation that it will increase 2.8.9 Shift in the Demand
Y
still
Y further. Eg stock markets. Curve
e >1 D e <1
5. Fear of shortage: During times of A shift
P1 in the demand curve occurs with a
P1
emergency or war, people may expect change in the value of a variable other than
P2
shortage of a commodity and D so buy its price
P2 in the general demand function.
more. An increase or decrease in demand due to
Price
Price
Commodity Y
Diagram 2.17
Chapter-02.indd 36 22-10-2018 13:01:14
Y
Y
d1 d d d1
d1 d dd d1 Y
Y d1 d Y d
Y Y
1
Y Y
B A A B
B A A B P
Price
P1 B A P1 A B P
Price
P1 P1 P
Price
P1 P1
Price
Price
Price
Price
Price
Price
d d1
d d1
d d1
D d1 d O
D d1 d O
D d1 d O
O O
X O Q2 Q1 X O Q1 Q2 Q
X O Q2 Q1 X O Q1 Q2 X
Q2 QuantityQDemanded X Q1 Q2 X
Quantity
1
Demanded Quantity Demanded X
Quantity Demanded Quantity Demanded
Quantity Demanded
Diagram
Diagram 2.8
Diagram
Diagram 2.82.82.8
‘Extension’ and ‘Contraction’ of demand follow a change in price. Increases and
decreases in demand take place when price remains the same and the other factors bring
about demand changes.
Y
Y
Y Y
Y
Y R ep=α
2.9 R
R ep=α
ep=α
P0
e =1 P0
Elasticity
P0 Dof Demand
D e =1
e =1 Upper
D Upper ep>1
P1 Upper Segment ep>1
P1 Segment
ep>1
Price
P Segment Q ep=1
Price
Price
Q ep=1p
Price
A
CommoditY Y
oditYYY
CommoditY Y
demand
CommoditY
Comm
C A IC2
“Elastic” when the quantity
C
C
A demanded
A
IC2
IC2
increases by a large amount due toB a little IC
IC11 IC
B IC1 IC
fall in the
0 price and decreases by a large
B
0
IC
X 0 Commodity
Commodity X
X X 0 Commodity X
B
B X
X 0 Commodity X X 0 Commodity XB X
X Commodity X X
Consumption Analysis 37
Diagram 2.18 Diagram
Diagram 2.19
Diagram
Diagram 2.18 2.18 Diagram 2.19 2.19
Price
demand, which refers to the degree of
responsiveness of demand to the change in P3
Ep = P1
Diagram 2.10
P2
Price
P D
i.e. quantity OQ remains unchanged
Price
P D P3
Price
Price
P1 R1
D D
O Q1 Q2 X O Q0 Q1
X
Quantity Demanded Quantity Demanded
Diagram 2.12 Diagram 2.13
Shape of the
Numerical Value Terminology Description
Demand curve
ep = ∞ Perfectly Change in demand is infinite at a Horizontal
elastic given price
ep = 1 Unitary % Q % P Rectangular
elastic Hyperbola
Consumption Analysis 40
Consumption Analysis 41
Consumer’s Surplus 4
L 1
D(A)
Table 2.6 Total Outlay Method3 ep =
Price
Price (in ₹)
U
lower segment O 2 4 6 8
Price
2
A B D
segments of the line to thePright and to 2. Production: ProducersP generally
Price
1
3
the left of the particular point. decide their production level on the
basis of demand for the product.
Lower segment of the d1 D
3. Distribution: Elasticity O of demand
d demand curve
O X
Q
Point Quantity Demandedalso helps in the determination of
Quantity Demanded
Xbelow the given point
O Q Q
Elasticity
1 2
rewards for factors of production.
Quantity Demanded Upper segment of Diagram 2.9 Diagram 2.10
4. International trade: Elasticity of
2.8 the demand curve demand helps in finding out the
above the given point terms of trade between two countries.
Terms of trade depends upon the
elasticity of demand for the goods of
Y Y Y
the two countries.
R ep=α
5. Public
P0 finance: Elasticity of demand
Upper helps the government in formulating
ORANGE
ep>1
Segment tax policies.
R For example, for
ORANGE
3
Price
Q ep=1
p
imposing tax on
S a commodity.
2
ep<1
S 6. Nationalization:
1
T The concept
Lower Segment ep=0 of elasticity of demandIC enables
0 M X
the
0 government
1 2 3 to decide over 0
Quantity X
nationalization of industries.
APPLE
Diagram 2.14 Diagram 2.15
Consumption Analysis 42
Y
Chapter-02.indd 42 Y Y
22-10-2018 13:01:16
2.10 Scale of Preference
Assumptions
1. The consumer is rational and his aim
is to derive maximum satisfaction.
2. Utility cannot be cardinally
measured, but can be ranked or
compared or ordered by ordinal
F.W.EdgeWorth (English Economist) number such as I, II, III and so on.
and Vilfredo Pareto (Italian Economist)
3. The Indifference Curve Approach is
criticised the Cardinal Utility Approach.
based on the concept “Diminishing
They assumed that utility cannot be
Marginal Rate of Substitution”.
measured absolutely, but can be compared
or ranked or ordered by ordinal numbers 4. The consumer is consistent.
such as I, II, III and so on. Edgeworth first This assumption is called as the
developed a more scientific approach to assumption of transitivity. If the
the study of consumer behaviour, known consumer prefers combination A to
as “Indifference Curve Approach” in1881. B and B to C, then he should prefer
In 1906, Vilfredo Pareto modified the A to C. If A>B and B>C, then A>C.
“Edgeworth Approach”. Again J.R.Hicks and
R.G.D.Allen refined the Indifference Curve An Indifference Schedule
Approach in 1934. Later, in 1939 J.R.Hicks An indifference schedule may be defined
in his book “ Value and Capital” gave a final as a schedule of various combinations
shape to this “Indifference Curve Analysis”. of two commodities which will give the
same level of satisfaction. In other words,
indifference Schedule is a table which
The theory of indifference curve was
shows the different combination of two
given by J R Hicks and RJD Allen, ‘A
goods that gives equal satisfaction to the
reconsideration of the theory of value’,
consumer.
Economics in 1934.
Consumption Analysis 43
O X O 6 8 10 X O
D
P3
2.12
2.11 An Indifference Map
An Indifference Curve D
O
Q One can draw
X several indifference
X
Quantity Demanded curves each representing an indifference
Quantity Demanded
Y IC
schedule. Hence, an Indifference Map is a
Diagram 2.9 R Diagram 2.10
20 family or collection or set of indifference
curves corresponding to different levels
S
of satisfaction. The Indifference Map is
ORANGE
15
R
ORANGE
3
Different combinations of two
2 S
commodities (as found T
in Indifference
IC3
Schedule)
1 can be presented in a diagram. IC2
IC
Then consumer gets different points IC1
0
X and when 1such2 points
3 are connected,
X 0 X
APPLE The said curve is
a curve is obtained. APPLE
Diagram 2.15
called as “Indifference Curve”. Therefore, Diagram 2.16
Consumption Analysis 44
Price
E
Price
P3
P1
In D
the diagram 2.16, the indifference Since y decrease as x increases, the
D
Curves IC1, IC2 and IC3 represent the change in y is negative i.e., –Δy, so the
Indifference
O Map,QUpper
1
Q2 IC representing
X equation
O is Q1 Q2 Q3 X
higher levelQuantity
of satisfaction compared to ∆Y
Quantity
MRSxy =− and
lower IC. ∆X
Diagram 2.6 Diagram 2.7
Marginal Rate of Substitution However, as with price elasticity of
The shape of an indifference curve provides demand the convention is to ignore the
useful information about preferences. minus sign in
Indifference curve replaces the concept Y
isMRSxy
of marginal utility with the concept of the Y X
Y
marginal rate of substitution.
e >1 D e <1
According to Leftwich “The P
2.14
P1 1
marginal
P2 rate of substitution of x for
Properties of the
y (MRSxy) is defined as the D maximum P2
Indifference Curves
amount of y the consumer is willing to give Price
Price
Y Y Y
CommoditY Y
Commodity Y
Commodity Y
B
B
A B
A A
0 0
Commodity X X Commodity X X 0 Commodity X X
Diagram 2.17
Consumption Analysis 45
Pric
ep=1
Pric
Price
Price
p
d d1 ep<1
S
D
D d1 d Segment O
Lower ep=0
O Q
Q2 Q1 O Q1 Q
X 0 M
O consumer
Q Q1 is to stay on the same level of At the point of2 intersection,
X
Quantity
C=B X
Quantity Demanded X Quantity
on IC1 Demanded
0
satisfaction.
Quantity (a necessary consequence
Demanded and C=A on IC2. So A=B
of theDiagram
non satiety Diagram
IC and2.14
2.13postulate). Diagram 2.8 whereas, A is in upper B is on
The curves that do not have negative lower IC. This is not possible.
slopes such as those shown in diagram 2.17 4. Indifference curves do not touch
cannot be indifference curves, in all three the horizontal or vertical axis.
cases combination B is clearly preferable Y
Y
to combination A.
Y Y
R ep=α
2. Indifference
P0 Curves are convex to A
e =1
the origin
CommoditY Y
D Upper
ep>1
CommoditY Y
Segment
Indifference
P1 curves are not only
Price
Q ep=1
Price
IC1 2.15
B IC
0 Commodity X Price line
0 or Budget line B
X Commodity X X
Consumption Analysis 47
Consumption Analysis 48
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear. In
this several work sheets for Economics are given, Open the worksheet
named “Inverse Relation Between Price and Consumer’s Surplus”
• This work sheet is to give an Idea about the Consumer’s Surplus
and an Inverse relation. In this worksheet Green coloured triangle
is the Consumer’s Surplus. The vertical line shows the price and the
Horizontal line shows the Quantity.
• Move the point C so that the triangle area is increased when the
price is decreased and the triangle area is decreased when the price
increases. This is called the Inverse relation between the price and
Consumer’s Surplus.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
Consumption Analysis 49
1. Pick the odd one out 6. Gossen’s first law is known as.
a. Luxuries a. Law of equi-marginal utility.
b. Comforts b. Law of diminishing marginal
c. Necessaries utility
5. When marginal utility reaches zero, 10. Indifference curve approach is based
the total utility will be on
a. Minimum a. Ordinal approach
b. Maximum b. Cardinal approach
c. Zero c. Subjective approach
d. Negative d. Psychological approach
Consumption Analysis 50
Consumption Analysis 51
1 2 3 4 5 6 7 8 9 10
d a c a b b a b d a
11 12 13 14 15 16 17 18 19 20
d b a d c d a a a d
27. Describe the feature of human wants. 31. Distinguish between extension and
contraction of demand.
28. Mention the relationship between
marginal utility and total utility. 32. What are the properties of indifference
curves?
29. Explain the concept of consumer’s
equilibrium with a diagram. 33. Briefly explain the concept of
consumer’s equilibrium.
30. Explain the theory of “consumer’s
surplus” .
34. Explain the law of demand and its 36. Explain the law of Equi-marginal
exceptions. utility.
35. Elucidate the law of diminishing 37. What are the methods of measuring
marginal utility with diagram. Elasticity of demand?
Consumption Analysis 52
References
Consumption Analysis 53
3 Production Analysis
Learning Objectives
Production Analysis 54
Production Analysis 56
Production Analysis 57
Production Analysis 58
It is the result of the total product divided The Law of Variable Proportions is
by the total units of the input employed. explained with the help of the following
In other words, it refers to the output per schedule and diagram:
unit of the input. In table 3.1, units of variable factor (labour)
Mathematically, AP = TP/N are employed along with other fixed factors
of production. The table illustrates that there
Where,
AP= Average Product Y
Stage II
TP= Total Product 18 Stage III
TPL 16 TPL
14
N= Total units of inputs employed APL 12 Stage I A
10
MPL 8
Marginal Product ( MP) 6
4
It is the addition or the increment made to 2 APL
0
the total product when one more unit of the -2 1 2 3 4 5 6 7 x
Production Analysis 59
are three stages of production. Though total tendency of total product to increase
product increases steadily at first instant, at an increasing rate stops at the point A
constant at the maximum point and then and it begins to increase at a decreasing
diminishes, it is always positive for ever. rate. This point is known as ‘Point of
While total product increases, marginal Inflexion’.
product increases up to a point and then
decreases. Total product increases up to Stage II
the point where the marginal product is
In the second stage, MPL decreases up
zero. When total product tends to diminish
to sixth unit of labour where MPL curve
marginal product becomes negative.
intersects the X-axis. At fourth unit of
In diagram 3.1, the number of labor MPL = APL. After this, MPL curve
workers is measured on X axis while is lower than the APL. TPL increases at a
TPL, APL and MPL are denoted on decreasing rate.
Y axis. The diagram explains the three
stages of production as given in the above
Stage III
table.
Third stage of production shows that the
Stage I sixth unit of labour is marked by negative
MPL, the APL continues to fall but remains
In the first stage MPL increases up to
positive. After the sixth unit, TPL declines
third labourer and it is higher than the
with the employment of more units of
average product, so that total product
variable factor, labour.
is increasing at an increasing rate. The
Production Analysis 60
Production Analysis 61
4 c
q=6
2 b q=3
1 a q=1
0 1 2 4 8
Labour
Diagram 3.2
Production Analysis 64
30 Y
Capital
22
A
16 K5
B
Capital
12 K4
10 IQ=400 C
K3
D
K2
6 8 10 IQ
0 2 4 X
Labour
0 L2 L3 L4 L5 X
Diagram 3.3 Labour
Diagram 3.5
Production Analysis 65
Y Y
Capital
Capital
Capital
Isoquant curve IQ4
IQ3
IQ2
30 IQ1
Capital
Capital
Capital
22 0 0 0
X X X
16 Labour Labour Labour 400 Unit
12 300 Unit
10 IQ=400 200 Unit
Diagram 3.6 100 Unit
0 2 4 6 8 10 Y X
Labour
Labour
Diagram 3.4
Diagram 3.3
unit of labour goes on decreasing when upper iso-quant curve implies the use
the iso-quant is convex to the origin. of more factors than the lower isoquant
3. Non inter-section of Iso-quant curve.
curves.
Y Y
IQ2 IQ1 IQ3
Y
IQ1
Capital
A
Capital
c
Capital
A
c 300 Units
300 Units 300 Unit
B
B 100 Units 100 Unit
100 Units
0 Labour X 0 X
Labour
Labour X
Diagram 3.7 Diagram 3.8
Diagram 3.7
For instance, point A lie on the iso-
quants IQ1 and IQ2. But the point C The arrow in the figure shows
shows a higher output and the point an increase in the output with a right
B shows a lower level of output IQ1. and upward shift of an iso-quant
If C=A, B=A, then C=B. But C>B curve.
which is illogical. 5. Iso-quant curve does not touch ES>1
Y Y
4. An upper iso-quant curve represents either X axis or
S Y axis.
C
a higher level of output. 5 No iso-quant curve
a touches the X axis or A
Higher IQ s show higher outputs Y axis because in IQ1, only capital is used,
Price
4 b
and lower IQs show lower outputs, for and in IQ2 only labour is used.
3 c
Price
o B D
Production Analysis 66
2 d
Y
1 e
E Chapter-03.indd 66 22-10-2018 13:08:36
C
Y Suppose that a producer has a
IQ1 IQ3
C total budget of ₹120 and for producing a
certain level of output, he has to spend
this amount on two factors Labour (L)
Capital
C
combinations of inputs which shows the 2 Iso-cost line
same amount of cost. The iso-cost line gives D
1
information on factor prices and financial E
resources of the firm. It is otherwise called
0 2 4 6 8 10 12 X
as “iso-price line” or “iso-income line”
Labour
or “iso-expenditure line” or “total outlay
curve”. Diagram 3.10
Production Analysis 67
0 Symbolically, 0
At point of tangency, the iso-quant
Labour
X X X
4KLabour
+ 0L= ₹.120 curve must be convex to the origin or
Diagram 3.7
3K + 3L= ₹.120 MRTSLk must be declining.
Diagram 3.6
2K + 6L= ₹.120
When the outlay and prices of two factors,
1K + 9L= ₹.120, and namely, labour and capital are given,
0K + 12L= ₹.120. producers attain equilibrium (or least cost
Thus, all the combinations combination of factors is attained by the
A, B, C, D and E cost the firm) where the iso-cost line is tangent to
an iso-product curve. It is illustrated in
same total expenditure.
the following Diagram 3.11.
From the figure 3.10, it is shown that the
costs to be incurred on capital and labour Y
are represented by the triangle OAE. The
Units of a capital
B P3
line AE is called as Iso-cost line. H
C P2
P1 K
Isocost line
3.10
D P
N E
E
Producer’ s Equilibrium R S IQ(500 Units)
2 4 6 8 10 12 X
O M L L1 L2 L3 X
Labour
Producer equilibrium implies the situation Units of labour
Diagram 3.10
where producer maximizes his output. It Diagram 3.11
is also known as optimum combination
of the factors of production. In short, the
In the above figure, profit of the firm (or
producer manufactures a given amount
the producer) is maximised at the point of
of output with ‘least cost combination of
equilibrium E.
factors’, with his given budget.
At the point of equilibrium, the
Optimum Combination of slope of the iso cost line is equal to the
Factors implies either slope of iso product curve (or the MRTS
of labour for capital is equal to the price
there is output maximisation for given
ratio of the two factors)
inputs or
Hence, it can be stated as follows.
there is cost minimisation for the
given output. PL
MRTS L ,K = =10/30=1/3=0.333
PK
C ond itions for P rod ucer
E q uilibrium At point E, the firm employs OM units of
labour and ON units of capital. In other
The two conditions that are to be fulfilled for
words, it obtains least cost combination or
the attainment of producer equilibrium are:
optimum combination of the two factors
The iso-cost line must be tangent to to produce the level of output denoted by
iso-quant curve. the iso-quant IQ.
Production Analysis 68
Production Analysis 69
2
tend to retain their produce for
d
future sale and so supply in present
1 e market is reduced.
S 5. Technology
0 20 40 60 80 100 X With advancement in technology,
Commodity x production level improves, average cost
Diagram 3.12 declines and as a result supply level
increases.
Production Analysis 71
Price
Price
o B D x o B D x o B D x
Supply Supply Supply
ES=0 s4 ES=α
Y Y
C
C
A s5
A
Price
Price
o B D x o B D x
Supply Supply
Diagram 3.13
Production Analysis 72
Production Analysis 74
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear.
Open the worksheet named “Law of Variable Proportions”
• In the Right side of the work sheet Total Product, Marginal Product
and Average Product are given and in the left side Respective graph
is shown. Analyse the data and the graphs drawn and the points.
• vAnalyse the change in MPL and click the check boxes, STAGE-
I,STAGE-II and STAGE-III so that Each stage appears in different
colours. Now analyse TPL and APL in each stage and compare what
is given in the text book lesson.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
Production Analysis 75
Production Analysis 76
Production Analysis 77
Part-A Answers
1 2 3 4 5 6 7 8 9 10
d C d c c b c b c d
11 12 13 14 15 16 17 18 19 20
d C a b a a c b b c
Production Analysis 78
35. Examine the Law of Variable Proportions with the help of a diagram.
36. List out the properties of iso-quants with the help of diagrams.
ACTIVITY
1. Visit a market and write a report on the factors that influence
the quantity of supply of a commodity of your locality.
2. Visit a factory and show how the four factors of production are
effectively employed to produce the product in your locality.
References
Production Analysis 79
Learning Objectives
2 To point out how revenue is realized at the sale of the goods and services
produced at the various types of market.
Y 900
600
Cost
Cost
400
TFC 300
200
0
0 Output X
Diagram 4.1
4.3.12 Variable Cost
These costs vary with the level of output. For instance if TC = Q3 –18Q2 + 91Q +12,
Examples of variable costs are: wages of the fixed cost here is 12. That means, if
temporary workers, cost of raw materials, Q isY zero, the Total cost will be 12, hence Y
fuel cost, electricity charges, etc. Variable fixed
10 cost.
cost is also called as Prime Cost, Special 8
It could be observed that TFC does not
Price
Cost, or Direct Cost. 6
change with output. Even when the output
Price
4
is zero, the fixed cost is ₹.1000. TFC is
2
4.4 a horizontal straight line, parallel
AR to
0 0
X axis. 1 2 3 4 5 6 7 8 9 10 X Y
Short run Cost Curves -2
M
Revenue (TR)
-4 R
-6
4.4.2 Total Variable Cost (TVC)
-8
Total
4.4.1 Total Fixed Cost (TFC) All payments Diagram
to the variable
4.13 factors of
production is called as Total Variable Cost.
Table 4.1 T o t a l F i x e d C o s t Hypothetical TVC is shown in table-4.2 0
Output Total Fixed and Diagram 4.2
(in unit) Cost (in ₹)
0 1000
1 1000 Table 4.2 T o t a l V a r i a b l e C o s t
2 1000 Output Total Variable Cost
3 1000 (in unit) (in ₹)
4 1000 0 0
5 1000 1 200
2 300
All payments for the fixed factors of 3 400
production are known as Total Fixed Cost. 4 600
A hypothetical TFC is shown in table 4.1 5 900
and diagram 4.1
Cost
1300 Cost Cost TFC+TVC 10
Y
TC
In the diagram the TVC is zero when 1900
TVC Y
nothing
Y is produced. As output increases
1600
TVC
900 Yalso increases. TVC curve Y
C/R TC
Cost
1400
slopes upwarde>|1|from left to right. For 1300 1000
75
TR
Price
900 45
e<|1| H
+40091Q B
TFC AR=D 600 500
AR 300 0 M Q
0 MR 400 1 5 333
Profit
200 9 X
9 10 X X 300 N 250
Y 30
200 28 Total Production 200
M 4.4.3 Total Cost Curves 22
Revenue (TR)
R
0 1 2 X of all 3 4 5 012 1 2 3 4 5 0
X
Total Cost means the sum total 0 M X
payments madeOutput
in the production.
TR It is also -2 1 Output
5 9 X
Total
TP
called as Total Cost 4.2
Diagram of Production. Total Diagram 4.3
cost is the summation of Total Fixed Cost Diagram 4.15
0 X
Quantity(Q)
(TFC) and Total Variable Cost (TVC). It is It is to be noted that
written symbolically as 4.14
Diagram
a) The TC curve is obtained by adding
TC = TFC + TVC. For example, TFCC/Rand TVC curves vertically.
Y
when the total fixed cost is ₹ 1000 and Y TC
indicating
75
a straight line. TR
Total cost is = ₹e=1
1200 (₹ 1000 + ₹ 200).
Price
c) TVC
45 starts fromHthe origin and moves
If TFC = 12 ande<|1|
upwards,B as no variable cost is incurred
TVC = Q – 18Q 3 2 AR=D
+ 91Q
AR
0
at0zero
1
M
output. 5 Q
MR
Profit
9 X
0 X X
Y TC = 12 + Q3 – 18Q2 + 91Q d) When TFC and TVC
Totalare added, TC
30
28
Production
N
22
Revenue (TR)
starts
12
from TFC and moves upwards.
0 M
TR -2 1 5 9 X
Total
Diagram 4.15
0 X
Quantity(Q)
Chapter-04.indd 84 11/09/18 3:16 PM
e) TC curve lies above the TVC curve It is to be noted that
f) TVC and TC curves are the same a. AFC declines as output increases, as
shapes but beginning point is different. fixed cost remains constant
b. AFC curve is a downward sloping
4.4.4 Average Fixed Cost throughout its length, never touching
(AFC) X and Y axis. It is asymptotic to both
the axes.
It refers to the fixed cost per unit of output. It
c. The shape of the AFC curve is a
is obtained by dividing the total fixed cost by
rectangular hyperbola.
the quantity of output. AFC = TFC / Q where,
AFC denotes average fixed cost, TFC denotes
total fixed cost and Q denotes quantity of 4.4.5 Average Variable Cost
output. For example, if TFC is 1000 and the (AVC)
quantity of output is 10, the AFC is ₹ 100, Table 4.5 A v e r a g e V a r i a b l e C o st
obtained by dividing ₹ 1000 by 10. TVC is Q TVC AVC
shown in table 4.4 and diagram 4.4.
Table 4.4 A v e r a g e F i x e d C o s t
(in
unit) UNIT-4
(in ₹) TVC/Q
(in ₹)
0 0 0/0 = 0
Q TFC AFC 1 200 200/1 = 200
(in unit) (in ₹) TFC/Q 2 300 300/2 = 150
3 400 400/3 = 133
(in ₹) 4 600 600/4 = 150
UNIT-4
0 1000 1000/0 = ∞ 5 900 900/5 = 180
TC
1 1000 1000/1 = 1000
Y
2 1000 1000/2 = 500
Y Y
3 1000 1000/3 = 333
4 1000 1000/4 = 250 1200
1000
Average fixed cost
Average Cost
TFC
Marginal Cost
TC
650
Y 300 AVC 460
500 Y Y 400
200 380
333
250 1200
200 1000 AFC 100
Average fixed cost
TVC
Average Cost
TFC 0 1 2 3 4 5 X 0 1
Marginal Cost
X 0 A
Quantity produced 1 2 3 4 5 X
650
500
300
QuantityAVC 460
400
380
333 Diagram 4.4 200 Diagram 4.5
250
200 AFC 100
0 1 2 3 4 5 0 1 2 3 4
3 4 5 X
X
It refers
0 to the total variable cost per unit
Quantity produced 1 2 3 4 5 X Outpu
ut of output. It Quantity
is obtained by dividing total
m 4.3 Diagram 4.4 variable cost (TVC) by the quantity of
Diagram 4.5 Diagram
TC
Chapter-04.indd 85 11/09/18 3:16 PM
output (Q). AVC = TVC / Q where, AVC
denotes
Y Average Variable cost, TVC Y Y
denotes total variable cost and Q denotes 1200
ATC
Average Cost
Marginal Cost
Marginal Cost
2, the AVC is ₹ 150, (AVC = 300/2 = 150) A C
650
AVC300is shown in table 4.5 and Diagram
AVC 4.5. 460
300
400 B
If TVC
200
= Q – 18Q + 91Q
3 2
380 200
AFC = Q –18Q + 91
AVC100 2
100
5 X It is to be noted that 0 1 2 3 4 5 X
0 0
1 2 3 4 5 X Output
a) AVC declines initially and then
Quantity
increases with the increase
Diagram 4.5 of output. Diagram 4.6
b) AVC declines up to a point and moves
upwards steeply, due to the law of 1600/4 = 400) If ATC is Q3 – 18Q2
returns. + 91Q +12, then AC = Q2 – 18Q +91
c) AVC curve is a U-shaped curve.
+ 12⁄Q
2. ByATC is derived by adding together
Average Fixed Cost (AFC) and
4.4.6 Average Total Cost (ATC)
Average Variable Cost (AVC) at
or Average Cost (AC)
each level of output. ATC = AFC
It refers to the total cost per unit of output. + AVC. For example, when Q= 2,
It can be obtained in two ways. TFC = 1000, TVC=300; AFC=500;
1. By dividing the firm’s total cost (TC) AVC=150;ATC=650. ATC or AC
by the quantity of output (Q). ATC = is shown in table 4.6 and Diagram
TC / Q. For example, if TC is ₹ 1600 4.6
and quantity of output is Q=4, the It should be noted that
Average Total Cost is ₹ 400. (ATC =
Table 4.6 A v e r a g e T o t a l C o s t o r A v e r a g e C o s t
Q TFC TVC TC ATC AFC AVC ATC
(in (in ₹) (in ₹) (in ₹) (TC/Q) (in ₹) (in ₹) (AFC
unit) TFC (in ₹) +AVC)
+TVC (in ₹)
0 1000 0 1000 1000 /0= ∞ 0 0 0+0=0
1 1000 200 1200 1200 /1= 1200 1000 200 1000+200 =1200
2 1000 300 1300 1300 /2= 650 500 150 500 + 150= 650
3 1000 400 1400 1400 /3= 466 333 133 333 + 133= 466
4 1000 600 1600 1600 /4= 400 250 150 250 + 150= 400
5 1000 900 1900 1900 /5= 380 200 180 200 + 180= 380
300 If TC = Q650
3
–18Q2 + 91Q +12
450
200 2
– 36Q +91
MC = 3Q300
200
100
X
0 0 1 2 3 4 5 X
1 2 3 4 5 X
Quantity Output
Diagram 4.7 Diagram 4.8
Average cost
Marginal Cost
MC Econom
the AC and MC curves as shown in
Cost
300 650
450
200 300
200
100
Min
Y 0 1 2 3 4 5 K x effic
0
1 2 3 4 5
X Y MES
Quantity
X Output Output SAC3
SAC1
Diagram 4.7 1200 Diagram 4.8 Diagram 4.9 SAC2
LAC
MC
AC C
900 Long run average cost (LAC) is equal
Average cost
MC to long run total costs divided by the level
Cost
650 of output.
450
300 LAC = LTC/Q
NAL 200 where, LAC denotes Long-Run Average Cost,
0 1 2 3 4 5 X
K
LTC denotes Long-run Total Cost andx
X Output Output
Q denotes the quantity of output.
Diagram 4.8 Diagram 4.9
The LAC curve is derived from short-
run average cost curves. It is the locus of points
diagram 4.8.
denoting the least cost curve of producing
1. When AC is falling, MC lies the corresponding output. The LAC curve is
below AC. called as ‘Plant Curve’ or ‘Boat shape Curve’ or
2. When AC becomes constant, MC ‘Planning Curve’ or ‘Envelop Curve’.
also becomes equal to it.
3. When AC starts increasing, MC lies A significant recent development in
above the AC. cost theory is that the long-run average
4. MC curve always cuts AC at its cost curve is L- shaped rather than
minimum point from below. U-shaped. The L-shape of the long-run
average cost curve implies that in the
4.5 beginning when output is expanded
through increase in plant size and
Y Long Run Cost Curve:
Y
SAC3
associated variable factors, cost per unit
SAC1
falls rapidly due to economies of scale.
SAC2
1200
LAC
MC
AC Cost Y
In the long run all factors of production
900
Average cost
MC
become variable. The existing size of the
Economies of scale
Cost
Total Revenue
650
450 30
firm can be increased in the case of long
300 Economies of scale
exhausted
25
20
200 15
run. There are neither fixed inputsK nor
AC (Q)
Minimum 10
x efficiency of scale 5
0 1 2 3 4 5 X
X fixed costs
Output in the long run. Output MES Q 0 1 2 3 4
Quantity
5 6
30 behaviour
30 of TR is shown in table 4.9 and
Total Revenue
28
le 25 24
20 diagram
18 4.11. TR can be obtained from
AC (Q) 15 10
10 Demand fuction: If Q = 11–P, TR
5 0 1 2 3 4 5 6 7 8 9 10 X
Q 0 1 2 3 4 5 6 x Output
Quantity
Diagram 4.10 When P = 1, Q = 10Diagram 4.11
28
24
18
TRn denotes total revenue of nth item, TRn-1
denotes Total Revenue of n-1th itemARand
Price
10 5
TR
TRn+1 denotes Total Revenue of n+1thitem.
0 1 2 3 4 5 6 7 8 9 10 X
x Output
If TR0= PQ
1 2MR3 = dTR/dQ
4 5 6 = P,X
Output
Diagram 4.11 which is equal to AR.
Diagram 4.12
Price
6
Table 4.10
Price
4
T R , A R , M R - C o n s t a n t p r ic e
2
Quantity Price Total Average Marginal AR
0
Sold (P) Revenue Revenue Revenue 1 2 3 4 5 6 7 8 9 10 X Y
-2
(Q) (TR) (AR) (MR) M
Revenue (TR)
-4 R
₹ ₹ ₹ ₹
-6
1 5 5 5 5 -8
Total
2 5 10 5 5 Diagram 4.13
3 5 15 5 5
4 5 20 5 5
5 5 25 5 5 Table 4.11
6 5 30 5 5 A R , T R , M R a t d e c lin in g p r ic e
Price (P)/
Quantity Total Marginal
Y Average
Sold Revenue Revenue
Revenue
AR (TR) (MR)
(Q) (AR)
Price
5 ₹ ₹
TR ₹
9 10 X
1 10 10 -
0 1 2 3 4 5 6 X
Output 2 9 18 8
Diagram 4.12 3 8 24 6
4 7 28 4
Declining AR and MR (at 5 6 30 2
Declining Price) 6 5 30 0
When a firm sells large quantities at lower 7 4 28 -2
prices both AR and MR will fall but the 8 3 24 -4
fall in MR will be more steeper than the 9 2 18 -6
fall in the AR. 10 1 10 -8
Y
4.6.4 TR, AR, MR and Y Y
10 Elasticity of Demand e>|1|
Price
The6 relationship among AR, MR and e=1
45
elasticity of demand (e) is stated as follows. e<|1|
Price
4
2 e = AR/AR – MR AR
AR=D 0
0 0 MR
Profit
The relationship
1 2 3 4 5 6 7 8 9 10 curve
between the AR X Y
X 30
-2 28
and MR curve depends upon the
M elasticity 22
Revenue (TR)
-4 R
of AR
-6
curve (AR = DD = Price). 12
0
When price elasticity of demand is
a. -8 TR -2
Total
Diagram
greater than one, MR4.13 is positive and
TR is increasing.
0 X
b. When price elasticity of demand is less Quantity(Q)
than one, MR is negative and TR is Diagram 4.14
decreasing.
c. When price elasticity of demand is
equal to one, MR is equal to zero and At the output range of
TR is maximum and constant. 5 to 6 units, the price
It is to be noted that, a the output range of elasticity of demand is
1 to 5 units, the price elasticity of demand equal to one. Hence, TR
is greater than one according to total is maximum and MR
outlay method. Hence, TR is increasing equals to zero.
and MR is positive. At the output range of 6 units to 10
units, the price elasticity of demand is less
Table 4.12 T R , A R , M R & E l a s t i c i t y than unity. Hence, TR is decreasing and
MR is negative.
Quan- Price TR AR MR Elasticity
tity (Q) (P)
0 11 0 11 - 4.7
1 10 10 10 10 Conclusion
2 9 18 9 8
e>1
3 8 24 8 6 This Chapter has analysed the behaviour of
4 7 28 7 4 Cost Curves and revenue curves under two
5 6 30 6 2 situations and the relationship among price
6 5 30 5 0 e=1 elasticity of demand , TR, AR and MR.
7 4 28 4 -2
8 3 24 3 -4
9 2 18 2 -6 e<1
10 1 10 1 -8
11 0 0 0 -10
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear.
Open the worksheet named “Revenue Analysis”
• In the Right side of the work sheet two data are given. 1.Total Revenue
for the quantity when Price is constant and 2. Total Revenue for
the quantity when Price is reduced when the quantity is increased.
Analyse the graph drawn on the Left side for constant price. It is a
straight-line graph.
• Now click on the check box , “Show Total Revenue when price is
declining with increase in quantity”. You can see a curve graph.
Now analyse the data values and Graph in each Data and compare
what is given in the text book lesson. You can get similar data from
internet and type in the columns and see the change in graph.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
a. price b. explicit
b. value c. money
c. fixed cost d. implicit
d. cost of production 7. The cost that remains constant at all
2. Cost functions are derived from levels of output is _______ cost.
_______________ function. a. fixed
a. production
b. variable
b. investment
c. real
c. demand
d. social
d. consumption
8. Identify the formula of estimating
3. Money cost is also known as average variable cost.
____________ cost.
a. TC/Q
a. explicit
b. TVC/Q
b. implicit
c. TFC/Q
c. social
d. real d. TAC/Q
9. The cost incurred by producing one
4. Explicit cost plus implicit cost denote
more unit of output is______cost.
___________ cost.
a. variable
a. social
b. economic b. fixed
c. money c. marginal
d. fixed d. total
5. Explicit costs are termed as 10. The cost that varies with the level of
output is termed as _______ cost.
a. out of pocket expenses
a. money
b. real cost
b. variable cost
c. social cost
c. total cost
d. sunk cost
d. fixed cost
Cost and Revenue Analysis 95
12. The cost per unit of output is denoted 17. Revenue received from the sale of
by _________ cost. additional unit is termed as ________
a. average revenue.
b. marginal a. profit
c. variable b. average
d. total c. marginal
d. total
13. Identify the formula of estimating
average cost. 18. Marginal revenue is the addition made
a. AVC/Q to the
b. 175 a. equal to
1 2 3 4 5 6 7 8 9 10
d a a b a d a b c b
11 12 13 14 15 16 17 18 19 20
b a b c b b c b a d
22. Define cost function. 26. Give the definition for ‘Real Cost’.
23. What do you mean by fixed cost? 27. What is meant by Sunk cost?
28. Distinguish between fixed cost and 32. State the relationship between AC and
variable cost. MC.
29. State the differences between money 33. Write a short note on Marginal
cost and real cost. Revenue.
30. Distinguish between explicit cost and 34. Discuss the Long run cost curves with
implicit cost. suitable diagram.
35. If total cost = 10+Q 3, find out AC, 37. Bring out the relationship between AR
AVC, TFC, AFC when Q=5. and MR curves under various price
conditions.
36. Discuss the short run cost curves with
suitable diagram.
References
5 MARK ET STRUCTURE
AND PRICING
Learning Objectives
1 To understand the characteristics of markets and how the price and output are
determined under the several types of markets; and,
2 To study the nature of the profit obtained by a firm under different types of
markets
5.1
Introduction
iii. National market arises when products and It occurs when the quantum supplied
services are sold and bought throughout of a product can be increased (or
a country. For example, Nation-wide decreased) to a larger extent. Here
market for tea, coffee, cement, electrical the supply curve is very much elastic.
goods, some printed books etc. Thus, to meet an increase in demand,
8
AR, MR & MC
E Q
5 .3 .4 O n the Basis of 75
TR 7
C ompetition 45
N
i. Perfect competition market P
ii. Imperfect competition market which
0 1 2 3 4 5 6 7 8 9
comprises monopoly market, X
Output o 1
monopolistic competition market,
duopoly market, oligopoly market etc. Diagram 5.1
Q condition
D MC Y
Revenue/cost
7 AC
TR equilibrium E under all market
E 1 12
10 L 10Profit L 10 Loss
situations the two conditions 8 viz., MC
B
= MR; and
S MCDcuts MR from below.
o 100 o 50 o
8 9 X Output
Market Structure Output
o 1 2 3 4 5 Normal profit Abnormal=2 x 50=100 Los
Q X
Output
Diagram 5.2 Market Diagram 5.3
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is very large, all are engaged in buying and product at a very low cost, to earn super
selling a homogenous product at uniform normal profits. Attracted by such a
price without any artificial restrictions profit, new firms enter into the industry.
and possessing perfect knowledge of the When large number of firms enter, the
market at a time. supply (in comparison to demand)
According to Joan Robinson, would increase, resulting in lower price.
“Perfect competition prevails when the An inefficient producer, who is unable
demand for the output of each producer is to bring down the cost incurs loss.
perfectly elastic”. Disturbed by the loss, the existing
loss-incurring firms quit the market. If
5.5.1 Features of the Perfect it happens, supply will then decrease,
Competition: price will go up. Existing firms could
earn more profit.
a. Large Number of Buyers and Sellers
d . Absence Of Transport Cost
‘A large number of buyers’ implies
that each individual buyer buys a very, The prevalence of the uniform price is also
very small quantum of a product as due to the absence of the transport cost.
compared to that found in the market. e. Perfect Mobility of Factors of Production
This means that he (he includes she
The prevalence of the uniform price is also
also) has no power to fix the price of
due to the perfect mobility of the factors of
the product. He is only a price-taker
production. As they enjoy perfect freedom
and not a price-maker.
to move from one place to another and
unit 5
the Short Run industry is obtained at 50 units of output.
In the short run, at least a few factors In the second part of the diagram,
of production are fixed. The firms under AC curve is lower than the price line. The
Perfect Competition take the price equilibrium condition is achieved where
(10) from the industry and start MC=MR. Its equilibrium quantity sold
adjusting their quantities produced. For is 50. With the prevailing price, ₹10 it
example Qd= 100 – 5P and Qs=5P. experiences super normal profit. AC = ₹8,
At equilibrium Qd=Qs. Therefore 100-5P=5P AR = ₹10.
AC AC
E E1 12 R
10 L 10Profit L 10 Loss
L (AR=MR) 8
8
B E2
S D
o 100 o 50 o 50 x
Output Output Output o
Normal profit Abnormal=2 x 50=100 Loss=2 x 50=100
Q X Qu
Diagram 5.3 Dia
AR, MR
AC AC 14
E
Price
firm’s
E1 cost curve 12is aboveR the price line. 12.6
10Profit L Loss
10condition 8 L (AR=MR)
8 The equilibrium Lis(AR=MR)
achieved
B E 2
D
at point where MR=MC. Its quantity
o sold
50 is 50. With the o prevailing
50 price,
x
it
experiences
Output loss. (AC>AR) Output o 500 x 0
ofit Abnormal=2Its
x 50=100 Loss=2 x 50=100
total revenue is 50X10=500. Its Quantity
total 5.3
Diagram cost is 50X12=600. Therefore, its Diagram 5.4
total loss is 600-500=100.
As profit prevails in the market, also known as planning curve. First, the
new firms will enter the industry, thus firms will earn only normal profit.
increasing the supply of the product. This
Secondly, all the firms in the market
means a decline in the price of the product
are in equilibrium. This means that there
and increase the cost of production. Thus,
should neither be a tendency for the new
the abnormal profit will be wiped out;
firms to enter into the industry nor for any of
loss will be incurved.
the existing firms to exit from the industry.
When loss prevails in the market,
the existing loss making firms will exit the
industry, thus decreasing the supply of the
product. This means a rise in the price of
the product and reduction in the cost of
production. So the loss will vanish; Profit
will emerge. Consequent upon the entry
and exit of new firms into the industry,
firms always earn ‘normal profit’ in the
long run as shown in diagram.
ompetition- Examples Long run equilibrium of the firm is The concept of imperfect competition
illustrated in the diagram. Under perfect was propounded in 1933 in England by
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competition, long run equilibrium is only Joan Robinson and in America by E.H.
at minimum point of LAC. At point E, Chamberlin.
LMC = MR = AR = LAC. It is an important market category
In the above diagram (5.4), average where the individual firms exercise their
cost is equal to average revenue. The control over the price.
Indian Railways
equilibrium of the firm finally rests at Definition: Imperfect competition is a
point E where price is 8 and output is 500. competitive market situation where there
(Numbers are hypothetical) At this point, are many sellers, but they are selling
the profit of the firm is only normal. Thus heterogeneous (dissimilar) goods as
condition for long run equilibrium of the opposed to the perfect competitive market
firm is: scenario. As the name suggests, competitive
Price = AR=MR = Minimum AC markets are imperfect in nature.
At the equilibrium point, the SAC>LAC. Description: Imperfect competition is the
Hence, long run equilibrium price is lower real world competition. Today some of
than short run equilibrium price; long run the industries and sellers follow it to earn
equilibrium quantity is larger than short surplus profits. In this market scenario,
run equilibrium quantity.
12.6 D/AR
R=MR) T vice versa D/AR
x
There are three types of price discrimination.
0 3 x 0 M
Quantity i Personal – Quantity
Different prices xare
Diagram 5.6 charged for different individuals (for
Diagram 5.7
example, the railways give tickets
at concessional rate to the ‘senior
as more units of output are sold, the MR citizens’ for the same journey).
lies below the AR curve (MR<AR).
ii Geographical - Different prices are
The monopolist will continue to charged at different places for the
sell his product as long as his MR>MC. same product (for example, a book
He attains equilibrium at the sold within India at a price is sold in
level of output when its MC is equal to a foreign country at lower price). On
MR. Beyond this point, the producer their basis, China drops its goods in
will experience loss and hence will stop selling. Indian market. As a result, watch and
toys industries closed down their
From this diagram, till he sells
business.
3 units output, MR is equal to MC. The
iii On the basis of Use - Different prices
monopoly firm will be in equilibrium at
the level of output where MR is equal to are charged according to the use
MC. The price is 23. of a product (for example, lower
rates are charged by Tamil Nadu
To checkup how much profit the Electricity Board for domestic
monopolist is making at the equilibrium uses of electricity and higher rates
output, the average revenue curves and the are charged for commercial and
average cost curves are used. At equilibrium industrial uses).
level of output, (3) is the average revenue is
23 and the average cost is 12.67, therefore
(23-12.67 = 10.33) is the profit per unit. 5.7.5 Degrees of Price
Total profit = (Average Revenue – Average Discrimination
Cost) X Total output Price discrimination has become
= (23 – 12.67) × 3 widespread in almost all monopoly
markets. According to A.C.Pigou, there
= 10.33 × 3 = 30.99 are three degrees of price discrimination.
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Under monopolistic competition, different
firms produce different varieties of the
product and sell them at different prices.
Each firm under monopolistic competition
seeks to achieve equilibrium as regards
1. Price and output, 2. Product adjustment
1. There are large number of buyers and 3. selling cost adjustment.
and many sellers.
Short-run equilibrium:
2. Firms under monopolistic
competition are price makers. They How does a monopolistically competitive
set their own prices. firm achieve price-output level
3. Firms produce differentiated equilibrium? The profit maximisation is
products. It is the key element of achieved when MC=MR.
monopolistic competition. ‘OM’ is the equilibrium output. ‘OP’
4. There is a free entry and exit of firms. is the equilibrium price. The total revenue
is ‘OMQP’. And the total cost is ‘OMRS’.
5. Firms compete with each other by
Therefore, total profit is ‘PQRS’. This is super
incurring selling cost or expenditure
normal profit under short-run.
on sales promotion of their products.
6. Non – price competition is an essential But under differing revenue and
part of monopolistic competition. cost conditions, the monopolistically
competitive firms many incur loss.
7. A firm can follow an independent
price policy. As shown in the diagram, the AR and MR
curves are fairly elastic. The equilibrium
5.8.2 Price and Output
Determination under Y SMC
Y Y
Monopolistic
MC Competition
AC
The firm under monopolistic competition Q SAC AR, AC, MR & MC
K
Q P
23
achieves its equilibrium when it’s MC = MR,
AR, AC, MR & MC
C PROFIT R P
and when its MC curve cuts its MR curve S
0 M F x
Quantity
Diagram 5.9 AC
Y Y MC
MC AC
MF = Unused capacity
K L
SAC substitutes are available.
L Hence, the firms
AR, AC, MR & MC
Q K
P AR, AC, MR & MC
will earnPROFIT
only normal profit.
P
Q
In the diagram equilibrium is achieved
E D/AR E D/AR
D/AR at point ‘E’. The equilibrium output is ‘OM’
and the equilibrium price is ‘OP’. The average
MR
revenue at the equilibrium output is ‘MQ’ and
MR MR
the average cost is also ‘MQ’. Thus, in the long
0 run under
M x 0 monopolistic M
competition,
F x
there is
x Quantity equilibrium when Quantity
AR=AC and MC=MR. It
Diagram 5.8 means that a firm earns normal
Diagram 5.9 profit. AR is
tangent to the Long Run Average Cost (LAC)
curve at point ‘Q’.
Long-Run Equilibrium of the
Firm and the Group Equilibrium The only one condition : MC = MR.
In the short run a firm under for equilibrium in the
monopolistic competition may earn super short run
normal profit or incur loss. But in the The two conditions : MC = MR
long run, the entry of the new firms in the for equilibrium in the and AC =
industry will wipe out the super normal long run AR.
profit earned by the existing firms. The
entry of new firms and exit of loss making
firms will result in normal profit for the 5.8.3 W astes of Monopolistic
firms in the industry. Competition
In the long run AR curve is Generally there are five kinds of wastages
more elastic or flatter, because plenty of under monopolistic competition.
5.10.1 Features of
however, assume that his rival is unaffected Oligopoly
by what he does, in that case he takes only his
own direct influence Competition-
on the price. Examples 1. Few large firms
Monopolistic
Very few big firms own the major control
5.9.1 Characteristics of of the whole market by producing major
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Number of
1 In numerable Only One Large
Producers/Sellers
Unique
Nature of the Homogeneous Differentiated Product
2 (No close
Product Perfect Substitute (close substitutes)
substitute)
Some control
3 Control over Price Price-Taker Price-Maker depending on branded
loyalty
Barriers to
4 Entry / Exit Free Free
entry
Abnormal profit
Abnormal profit in
in short-run, Monopoly
5 Profit short-run, Normal
Normal profit in Profit
profit in long run
long-run
Less
compared
8 Quantity Very large Substantial
to perfect
competition
Different forms and characteristics of different Marginal cost Addition made to total
markets have been studied in this chapter costs already incurred by producing one
Market, in general is divided into perfect more unit of the commodity.
market and imperfect market. Imperfect
market consists of Monopoly, Monopolistic Marginal revenue Addition made to total
Competition, Duopoly, Monopsony etc. In revenue already incurred by selling one
the long-run, firms earn normal profit. Under more unit of the commodity.
imperfect market, the sellers would manage
to reap larger profits depending upon the
Monopolist A single-seller who controls
degree of monopoly power.
entire or major part of output, which has
no close substitutes.
Glossary
Equilibrium A situation or a state at
Price-maker The power in the firm to set
which a firm seeks to rest.
the price for goods in the market.
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear.
In this several work sheets for Economics are given, Open the
worksheet named “Market Equilibrium”
• There are two equations 1. Quantity on Demand QD and 2. Quantity
Supplied QS. Both the equations are drawn in the graph as straight
line. Observe both the lines intersect at a point E.
• That intersection point is called ‘Market Equilibrium’. At that point
both QD and QS are Equal. Thus, Market equilibrium is obtained
when Demand and Supply are equal. Now you change the Supply
function by moving the slider “b”. Observe the Equilibrium changes
as the supply changes. Now Analysis the Market structure required.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
12. In monopolistic competition, the 17. Under perfect competition, the shape
essential feature is ..… of demand curve of a firm is...............
a. Same product a. Vertical
b. selling cost b. Horizontal
c. Single seller c. Negatively sloped
d. Single buyer d. Positively sloped
13. Monopolistic competition is a form of 18. In which market form, does absence
.……. of competition prevail?
a. Oligopoly a. Perfect competition
b. Duopoly b. Monopoly
c. Imperfect competition c. Duopoly
d. Monopoly d. Oligopoly
14. Price leadership is the attribute of 19. Which of the following involves
………… maximum exploitation of consumers?
a. Perfect competition a. Perfect competition
b. Monopoly b. Monopoly
c. Oligopoly c. Monopolistic competition
d. Monopolistic competition d. Oligopoly
15. Price discrimination will always lead 20. An example of selling cost is …
to…………. a. Raw material cost
a. Increase in output b. Transport cost
b. Increase in profit c. Advertisement cost
c. Different prices d. Purchasing cost
d. b and c
1 2 3 4 5 6 7 8 9 10
a a c c d c a b c d
11 12 13 14 15 16 17 18 19 20
a b c c d c b b b c
36. How price and output are determined under the perfect competition?
39. Explain price and output determined under monopolistic competition with help of
diagram.
MARKE T STRUCTURE AND PRICING 119
ACTIVITY-2
Find out the number of firms in Tamil Nadu or India which are
producing/selling TV and Mobile phones.
References
1. Roger Leroy Miller “ Economics today The Micro view “ , Addition Wesley , 15th
edition, 2010 .
2. Irvin B. Tucker, “ Economics for Today “, South Western Cengage learning, 6th
edition, 2010.
3. K.K. Dewett, M.H. Navalur, “ Modern Economic Theory “ , S. Chand, 23rd edition, 2010.
4. H.L. Ahuja, “ Principles of Micro Economics “, Publisher S. Chand , 22nd edition, 2016.
5. Shankaran, “ Micro Economics “,
6. Micro Economics (Principles, Applications and tools) by-Arthur O’ Sullivan,
Steven Sheffrin, Stephen Perez, Pearson
W ebsites
1. www.economicsconcepts.com
2. www.microeconomicsnotes.com
3. www.economicsdiscussion.net
6 Distribution
Analysis
Learning Objectives
2 To enable the students to understand the theories of rent, wages, interest and
profit.
6.1 6.2
Introduction Meaning of Distribution
Assumptions
Personal Distribution
This theory is based on the following
Personal Distribution is the distribution assumptions:
of national income among the individuals.
1. All the factors of production are
homogenous.
2. Factors of production can be
substituted for each other.
3. There is perfect competition both in
the factor market and product market.
4. There is perfect mobility of factors
of production.
5. There is full employment of factors.
6. This theory is applicable only in the
long-run.
7. The entrepreneurs aim at profit
Functional Distribution
maximization.
Functional Distribution means the 8. There is no government intervention
distribution of income among the four in fixing the price of a factor.
factors of production namely land, labour,
9. There is no technological change.
capital and organisation for their services
in production process. Explanation of the Theory
According to the Marginal Productivity
6.4 Theory of Distribution, the price or the
reward for any factor of production is
Marginal Productivity
equal to the marginal productivity of that
Theory of Distribution
factor. In short, each factor is rewarded
according to its marginal productivity.
Introduction
Marginal Productivity Theory of Marginal Product
distribution was developed by Clark, The Marginal product of a factor of
Wickseed and Walras. This theory production means the addition made
explains how the prices of various factors to the total product by employment of
of production are determined. This an additional unit of that factor. The
theory explains how rent, wages, interest Marginal Product may be expressed as
and profit are determined. This theory is MPP, VMP and MRP.
Distribution Analysis 122
Q
depends upon its productivity. The greater P
MFC = AFC
Product
will be its reward. If the price of a factor
Product
ARP
of production is less than its marginal
revenue product, the employer will use MRP S
more of this factor, because his profit will
be increased.
O N X
O
When more of a factor is employed, Factor Units
its marginal revenue product diminishes. Diagram 6.1
But the employer will gain by using
additional units of the factor until the
marginal revenue product of the factor The diagram 6.1 refers to the factor pricing
is equal to its price. The employer’s profit under perfect competition in the factor
will be maximum at this point. Beyond market. X axis represents factor units
Distribution Analysis 123
final
MFC = MRP. Hence, in the diagram, the firm
reaches equilibrium at point Q by employing average revenue obtained is NQ or OP.
ON units of factors and paying OP price (NQ) Total revenue obtained is NQPO. Therefore,
where MFC = MRP. At the point Q, MRP = exploitation per unit of factor is RQ. But the
ARP. The price paid to the factor (NQ) is also total number of factors is ON. Thus, the total
equal to marginal revenue product (NQ) exploitation of factor by the employer is RQ
and average revenue product (NQ). This X SR = “PQRS” (shaded area). Thus, under
means that there is no exploitation of factors imperfect competition, factor is exploited at
under perfect competition. Beyond the point the equilibrium position.
UNIT 6
Q, no employer will employ factors, because
Criticisms
after that point, the price paid to the factor
is more than marginal revenue product and This theory is subject to a few criticisms
average revenue product. 1. In reality, the factors of production
are not homogenous.
Marginal Productivity Theory 2. In practice, factors cannot be
under Imperfect Competition substituted for each other.
3. This theory is applicable only in the
long–run. It cannot be applied in the Y
Y MFC short-run.
Y
40 Economic Rent
Yield Per Acre (in Bags)
C = AFC
Rate of Interest
Q
6.5
Factor Price and Revenue
AFC
P 30
Rent R’
Product
No Rent
ARP 20
Land
S 10 Meaning R
MRP R ARP 6.5.1
MRP Rent is the price or reward given for the
0 A B C X
X
O N
use of landVarious
or house or a
Grades of Landmachine to 0
X
Factor Units the owner. But, in Economics, “Rent” or De
Diagram 6.2 “Economic Rent” refers
Diagram 6.3 to that part of
Rate of Interest
Factor Price and Revenue
AFC
is 30 bags
P of paddy. The surplus of 10 30
R’
Product
-Alfred Marshall
6.7
Theories of Wages
Criticisms
The reward for capital investment
1. This theory does not explain the role is interest.
of trade unions can secure higher
wage for workers.
2. Demand side of labour in the
determination of wages needs to be 6.8.1 Meaning
considered.
Interest is the reward paid by the borrower
to the lender for the use of capital.
6.7.5 Marginal Productivity
Theory of Wage
“Interest is the price paid for the use
The application of general theory of of capital in any market”
distribution to wage fixation is the -ALFRED MARSHALL
marginal productivity theory of wages.
According to the theory wages are
determined by the marginal productivity
of labour and equal to it at the point of 6.8.2 Kinds of Interest
equilibrium. G ross Interest
Under perfect competition wage is Gross interest is the total interest amount
paid equal to marginal product of labour received by creditors from debtors.
(wage = MPL) But in real world where
Gross Interest = (Net Interest) + (reward
there is imperfect competition, there is
for inconvenience) + (insurance against
exploitation of labour and wage is less
risk of non-repayment) + (payment for
than MPL.
service of debt management)
Rate of Interest
I P
H C factors like savings and investment
LD
X with monetary factors like bank
d 0 M’ M X 0
credit and liquidityM2
preference. X
Demand for Loanable Funds and Demand for Money and
Supply of Loanable Funds Supply of Money
Diagram 6.4 6.9.4 Keynes’ Diagram
Liquidity6.5
Preference Theory of
In Diagram 6.4, X axis represents the Interest or The Monetary
demand for and supply of loanable funds Theory of Interest
and Y axis represents the rate of interest. The Keynes propounded the
LS curve represents the total supply curve Liquidity Preference
of loanable funds. This is obtained by the Theory of Interest in
summation of the Saving Curve (S), Bank his famous book, “The
credit curve (BC), Dishoarding curve (DH) General Theory of
and Disinvestment curve (DI). The LD curve Employment, Interest
represents the total demand for loanable and Money” in 1936. J.M. Keynes
According to Keynes, there are three The speculative motive relates to the
desire of the people to hold cash in
order to take advantage of market
movements regarding the future
changes in the price of bonds and
securities in the capital market.
The amount saved for this motive
depends on the rate of interest. Ms
= f (i). There is inverse relation
between liquidity preference and
rate of interest (Say Ms = 450-100i).
Rate of Interest
of a country. The total supply of money
E1
I1 of coins, currency
consists notes and bank
deposits
I
(Say M = E200). I2 E2
P1
E4
P I4
P
Equilibrium between Demand
and 0Supply of Money
M2 X 0 M3 M2 M4 X
The equilibrium
Demandbetween liquidity
for Money and preference Demand for Money and
Supply of Money
and demand for money determine the Supply of Money
Diagram
rate of interest. 6.5
In short-run, the supply of Diagram 6.6
money is assumed to be constant (₹ 200).
LP is the liquidity preference Curve =0.125Y+0.125Y+(450-100i). Total
(demand curve). M2 M2 shows the supply supply of money=₹ 200. Mt and Mp are
curve of money to satisfy speculative influenced by Y. Hence for the sake of
motive. Both curves intersect at the point easy understanding, Ms alone can be
E, which is the equilibrium point. Hence, considered Demand for money=supply
the rate of interest is 2.5. If liquidity of money at equilibrium point:450-
preference increases from LP to L1P1 the 100i=200;450-200=100i;250=100i;
supply of money remains constant, the i=250/100=2.5.This is equilibrium interest
rate of interest would increase from OI In reality, interest rate is also influenced
to OI1. Numerical examples given above by national income and commodity sector
can also be used for better understanding. equilibrium.However, they are not included
Total demand for money=Mt+Mp+Ms here for making the understanding easier.
Suppose LP remains constant. If the supply
Y
M2 of money Yis OM2, the M3 interest
M2 isMOI2 and if the
4
L1 supply of moneyLis reduced from OM2 to OM3,
L the interestI would increase
E3
from OI2 to OI3. If the
3
supply of money is increased from OM2 to OM4,
Rate of Interest
Rate of Interest
LS
E1 the interest would decrease from OI2 to OI4.
I1
I E2
E
I P1 Criticisms
2
E4
P
1. ThisI4 theory does not explain the P
LD existence of different interest rates
X 0 M2 X prevailing
0 inM3the market
M2 M4at the sameX
nd Demand for Money and time. Demand for Money and
Supply of Money Supply of Money
2. It explains interest rate only in the
Diagram 6.5 Diagram 6.6
short-run.
Distribution Analysis 135
MODEL QUESTIONS
PART – A
Part- A Answers
1 2 3 4 5 6 7 8 9 10
a b c d a d b b b c
11 12 13 14 15 16 17 18 19 20
b a b b b b a a b d
28. What are the motives of demand for 29. List out the kinds of wages.
money?
30. Distinguish between rent and quasi-rent.
32. State the Dynamic Theory of Profit. 34. Write a note on Risk-bearing Theory
of Profit.
35. Explain the Marginal Productivity 37. Elucidate the Loanable Funds Theory
Theory of Distribution. of Interest.
36. Illustrate the Ricardian Theory of 38. Explain the Keynesian Theory of
Rent. Interest.
ACTIVITY
Visit any manufacturing unit (factory) and collect information
about factors of production (land, labour, capital and organisation)
and compare their remunerations.
Students may be asked to meet the stakeholders in the
factory.
Entrepreneur.
Manager or Managing Director.
Employees.
References
1. Dewett, K.M. and Navalur, M.H. (2016), “Modern Economic Theory”, S. Chand
and Company Pvt. Ltd., New Delhi.
2. Jhingan, M.L. ( ), Micro Economic Theory,
3. Ahuja, H.L. (2016), “Principle of Microeconomics”, S.Chand and Company Pvt.
Ltd., New Delhi.
4. Karl, E. Case, Raw C. Fair and Sharon Oster (2014), “Principle of Economics”,
Pearson, Darling Kindersley (India), Pvt. Ltd., New Delhi, Douglas C.
5. Alfred W. Stonier and Hague (2008), “A Text Book of Economic Theory”,
Pearson, Dorling Kindersley (India), Pvt Ltd., New Delhi.
7 Indian Economy
Learning Objectives
10000
8000 Economy
6000
4000
2000
7.3.1 Strengths of Indian
Economy
m
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a
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ly
il
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na
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az
di
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i
Ch
ng
Ja
Ca
Br
Fr
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Diagram 7.1
1. I ndia has a mix ed economy
Indian economy is the Seventh largest
economy of the world. Being one of Indian economy is a typical example
the top listed countries. In terms of of mixed economy. This means both
industrialization and economic growth, private and public sectors co-exist and
India holds a robust position with an function smoothly. On one side, some
average growth rate of 7% (approximately). of the fundamental and heavy industrial
Even though the rate of growth has units are being operated under the public
been sustainable and comparatively stable, sector,while, due to the liberalization of
there are still signs of backwardness. the economy, the private sector has gained
Any stock or reserve that can be drawn India’s forest cover in 2007 is 69.09 million
from nature is a Natural Resource. The hectare which constitutes 21.02 per cent of the
major natural resources are - land, forest, total geographical area. Of this, 8.35 million
water, mineral and energy. India is rich hectare is very dense forest, 31.90 million
in natural resources, but majority of the hectare is moderately dense forest and the rest
Indians are poor. Nature has provided 28.84 million hectare is open forest.
with diverse climate, several rivers for
irrigation and power generation, rich 7.4.3 Important Mineral
minerals, rich forest and diverse soil. Resources
a. I ron- O re
Types of Natural resources India possesses high quality iron-ore in
abundance. The total reserves of iron-ore
(a) Renewable Resources: Resources
in the country are about 14.630 million
that can be regenerated in a
tonnes of haematite and 10,619 million
given span of time. E.g. forests,
tonnes of magnetite. Hematite iron is
wildlife, wind, biomass, tidal,
mainly found in Chattisgarh, Jharkhand,
hydro energies etc.
Odisha, Goa and Karnataka.The major
(b) Non-Renewable Resources: deposit of magnetite iron is available at
Resources that cannot be western coast of Karnataka. Some deposits
regenerated. E.g. Fossil fuels- of iron ore are also found in Kerala, Tamil
coal, petroleum, minerals, etc. Nadu and Andhra Pradesh.
Indian Railways Provide Wi-Fi These are the kind of energy source
Facility First in India is Bangalore which can be renewed or reused again
Railway Station and again. These kinds of materials
do not exhaust or literally speaking
these are available in abundant or
infinite quantity. Example for this
Air India and Indian Airlines were kind include
merged on August 27, 2007 to from 1. Solar energy
National Aviation Company of India
2. Wind energy
Ltd. (NACIL)
3. Tidal energy
4. Geothermal energy
14. Who among the following propagated 19. Amartya Kumara Sen received the
Gandhian Ecomomic thinkings. Nobel prize in Economics in the year
a. Jawaharlar Nehru a. 1998
b. VKRV Rao b. 2000
c. JC Kumarappa c. 2008
d. A.K.Sen d. 2010
15. The advocate of democratic socialism 20. Thiruvalluvar economic ideas mainly
was dealt with
a. Jawaharlal Nehru a. Wealth
b. P.C. Mahalanobis b. Poverty is the curse in the society
c. Dr. Rajendra Prasad c. Agriculture
d. Indira Gandhi d. All of them
1 2 3 4 5 6 7 8 9 10
a b c b b a b b b a
11 12 13 14 15 16 17 18 19 20
d c b c a b b a a d
II. Answer the following question in one 24. Point out any any one feature of Indian
or two. Economy
21. Write the meaning of Economic 25. Give the meaning of non-renewable
Growth energy
22. State any two features of developed 26. Give a short note on Sen’s ‘Choice of
economy Technique’.
23. Write the short note on natural 27. List out the reasons for low per capita
resources income as given by V.K.R.V. Rao.
35. Explain strong features Indian 37. Bring out Jawharlal Nehru’s contribution
economy to the idea of economic development.
36. Write the importance of mineral 38. Write a brief note on the Gandhian
resources in India. economic ideas.
References
Indian
1. Ramesh
Economy
Singh-by
- Indian
RameshEconomy
Singh 5th edition - McGraw Hill Publication
Indian
2. Gaurav
Economy
datt &-Datt
Aswani Mahajan - Datt & Sundharam Indian Economy 72nd edition
& Sundharam
- S.Chand
India’s Publication
Reforms: How They Produced Inclusive GrowthBy Jagdish Bhagwati; Arvind
Panagariya
3. Jagdish Bhagwati; Arvind Panagariya - India’s Reforms: How They Produced
Inclusive
Reforms Growth Transformation in IndiaBy Jagdish Bhagwati; Arvind Panagariya
and Economic
4. Jagdish
India: Bhagwati;GiantBy
The Emerging Arvind Arvind
Panagariya - Reforms and Economic Transformation in
Panagariya
India
http://www.economicsdiscussion.net/indian-economy/top-11-features-of-a-
5. Arvind Panagariya - India: The Emerging Giant
developing-economy/18987
http://www.economicsdiscussion.net/indian-economy/top-11-features-of-a-
developing-economy/18987
Learning Objectives
Nationalization
Objectives of this plan included the This plan aimed to double the per capita
establishment of the self sufficient income of India in the next 10 years.
economy and opportunities for It aimed to reduce the poverty ratio to
productive employment. 15% by 2012.
MODEL QUESTIONS
d. Noorjakhan a. 1956
b. 1991
3. The power for governance of India
c. 1948
was transferred from the East India
d. 2000
Company (EIC) to the British crown in
7. The objective of the Industrial Policy
a. 1758 1956 was ……..
b. 1858 a. Develop heavy industries
9. The father of Green Revolution in 14. Tenth Five year plan period was…….
India was ………… a. 1992-1997
a. M.S. Swaminathan b. 2002-2007
b. Gandhi c. 2007-2012
c. Visweswaraiah d. 1997-2002
d. N.R. Viswanathan 15. According to HDR (2016), India
ranked …… out of 188 countries.
10. How many commercial banks were
nationalised in 1969 ? a. 130 b. 131
a. 10 c. 135 d. 145
d. 16 a. 1989-1991
b. 1990-1992
11. The main objective of nationalisation
of banks was ……. c. 2000-2001
d. 1981-1983
a. Private social welfare
b. Social welfare 17. The Oldest large scale industry in
India
c. To earn
a. cotton
d. Industries monopoly
b. jute
12. The Planning Commission was setup c. steel
in the year …..
d. cement
a. 1950
18. The 14 banks were nationalized in the
b. 1955
year
c. 1960
a. 1935 b. 1956
d. 1952
c. 1969 d. 1959
Part-A Answers
1 2 3 4 5 6 7 8 9 10
a c b c a c a b a c
11 12 13 14 15 16 17 18 19 20
b a c b b b a c d c
21. What are the Phases of colonial 24. List out the weaknesses on Green
exploitation of India? Revolution.
22. Name out the different types of 25. What are the objectives of Tenth five
land tenure existed in India before year plan ?
Independence.
26. What is the difference between HDI
23. State the features that distinguish a and PQLI ?
land tenure system from other system.
27. Mention the indicators which are used
to calculate HDI.
28. Explain about the Period of Merchant 31. State the reasons for nationalization of
Capital. commercial banks.
29. The Handicrafts declined in India in 32. Write any three objectives of Industrial
British Period. Why? Policy 1991.
30. Elucidate the different types of land 33. Give a note on Twelfth Five Year Plan.
tenure system in colonial India.
34. What is PQLI ?
35. Discuss about the Indian economy 37. Explain the objectives of
during British Period. nationalization of commercial banks.
36. Explain the role of SSIs in economic 38. Describe the performance of 12th five
developmet? year plan in India.
ACTIVITY
1. To know the value of freedom, students can collect pictures
of places like Jalian Walapak, Meerut, Thandi and photos of
freedom fighters.
2. Display the demonstration effect of present Indians in culture,
dressing and life style to emphasize the Swadhesi.
References
Websites
www.gatewayforindia.com/history/eastindiacompanybefore1857
www.threecolonialportcitiesinindia/geographicalreviewvol.78.issue.1 pg:32-47.-
M.Kosambi, 1978.
www.planningcommission.nic.in
https://www.scribd.com/doc/18643336/characteristics-of-indian-economy-pre-
colonial-and-colonial
https://en.wikipedia.org/wiki/Economy_of_India
9 Development
Experiences in India
Learning Objective
9.1
Introduction
twin problems of rampant poverty and
At the time of Independence in 1947, widespread unemployment, both resulting
India was a typically backward economy. in low standard of living.
Owing to poor technological and The year 1991 is an important landmark in
scientific capabilities, industrialization the economic history of post-independent
was limited and lop-sided. Agricultural India. The country went through a severe
sector exhibited features of feudal and economic crisis in the form of serious Balance
semi-feudal institutions, resulting into of Payments problem. Indian economy
low productivity. Means of transport and responded to the crisis by introducing a set
communications were underdeveloped. of policies known as Structural Reforms.
Educational and health facilities were These policies were aimed at correcting the
grossly inadequate and social security weaknesses and rigidities in the various
measures were virtually non-existent. sectors of the economy such as Industry,
In brief, the country suffered from the Trade, Fiscal and Agriculture.
• International • Increase in
Cooperation Inequalities
7.4
7.1
Important Initiatives by
7.1 7.0 7.0 7.0
5.6 6.4 the G overnment towards
3.0
3.3 3.2 Industrial Policy
2.6
9.6
Industrial Sector Reforms
b. 1991 a. 18%
c. 1995 b. 24%
d. 2000 c. 28%
d. 32%
15. The farmers have access to credit
under Kisan credit card scheme 20. The transfer of ownership from public
through the following except sector to private sector is known as
a. co-operative banks _____.
b. RRBs a. Globalization
1 2 3 4 5 6 7 8 9 10
d b c c a c a b d d
11 12 13 14 15 16 17 18 19 20
c a d b a b c a c c
21. Why was structural reform 25. Write three policy initiative
implemented in Indian Economy? introduced in 1991 – 92 to correct the
fiscal imbalance.
22. State the reasons for implementing
LPG. 26. State the meaning of Special Economic
Zones.
23. State the meaning of Privatization.
27. State the various components of
24. Define disinvestment
Central sector schemes under
post - harvest measures.
28. How do you justify the merits of 31. Give short note on Cold storage.
Privatisation?
32. Mention the functions of APMC.
29. What are the measures taken towards
33. List out the features of new trade
Globalization?
policy.
30. Write a note on Foreign investment
34. What is GST? Write its advantages.
policy?
35. Discuss the important initiatives taken 37. Describe the salient features of EXIM
by the Government of India towards policy (2015 – 2020)
Industrial Policy.
References
10 Rural Economy
Learning Objectives
2 To bring into the light the problems of rural villages and to familiarise the
initiatives undertaken.
10.1
Introduction
Agriculture
Rural areas are facing number of problems Related
Problems
10.13
Slater Villages: Gilbert Slater, the first Conclusion
professor of economics at Madras
University, published his book, Crucial steps to strengthening the rural
Some South Indian Villages, in 1918 economy are already being taken through
following a survey of some villages various policies. These steps include
like Vadamalaipuram (Ramnad), investments in areas ranging from health,
Gangaikondan (Tirunelveli), information technology, education,
Palakkuurichi (Tanjore) and Dusi infrastructure and small business. The
(North Arcot) in Tamil Nadu by his Administration is committed to building
students. It was subsequently done by on these unprecedented measures in the
different groups of researchers in the months and years to come. PURA (Provision
1930s, 1950s, 1960s, and two of the of Urban facilities for Rural Areas) needs
villages only in the early 21st century. to be given due emphasis, without which
The resurveys became an important Indian villages cannot prosper.
historical record. They provided a
baseline for several later revisits to Glossary
his villages, and have inspired many
successors. Much of our knowledge Rural Economics Application of
of rural change depends on Economic Principles
these studies. in rural areas.
Population Number of persons
Density living per sq.km
or per sq. mile.
1. Efforts need to be made to raise farm Unemployment Situation of people
and non-farm rural real incomes. with willingness
2. Investment in basic infra-structure and ability to work
and social services need to be but not getting
increased. employed.
MODEL QUESTIONS
1. Which is considered as the basic unit 3. Identify the feature of rural economy.
for rural areas? a. Dependence on agriculture
a. Panchayat b. High population density
b. Village c. Low level of population
c. Town d. Low level of inequality
d. Municipality
4. What percentage of the total
2. Which feature is identified with rural population live in rural area, as per
areas? 2011 censes?
a. Low population density a. 40
b. High population density b. 50
c. Low natural resources c. 60
d. Low human resources d. 70
Answers Part - A
1 2 3 4 5 6 7 8 9 10
b a a c b c d b d a
11 12 13 14 15 16 17 18 19 20
b c b d a c d b d d
22. What do you mean by Rural 27. What do you mean by Micro Finance?
Development?
28. State any two causes of housing
23. Rural Poverty – Define. problem in rural areas.
25. What is meant by Disguised 30. State any two factors hindering Rural
Unemployment? Electrification in India.
31. State the importance of Rural 34. What are the remedial measures for
Development. Rural Unemployment?
32. Explain the causes for Rural 35. Write a note on Regional Rural Banks.
Backwardness.
36. Mention the features of SHGs.
33. Enumerate the remedial measures to
37. List out the objectives of MUDRA
Rural Poverty.
Bank.
38. ‘The features of Rural Economy are 40. Analyse the causes for Rural
peculiar’- Argue. Indebtedness.
ACTIVITY
References
Learning Objectives
Growth of SGDP in Tamil Nadu has Some of the States like Gujarat and
been among the fastest in India since Maharashtra seem to perform well in some
2005. of the economic indicators. Kerala tops in
Poverty reduction in Tamil Nadu has literacy, IMR and MMR. In recent years Tamil
been faster than that in many other Nadu’s performance is outstanding and far
States. ahead of all other states in the spheres of health,
higher education, growth of MSMEs, poverty
Tamil Nadu contains a smaller
alleviation and employment generation.
proportion of India’s poor population.
Tamil Nadu is the second largest
contributor to India’s GDP. Tamil Nadu is placed third in health
Tamil Nadu ranks 3rd in Human index
Development Index (source: UNDP- The Tamil Nadu state has come third
2015) after Kerala and Punjab in a health
Tamil Nadu ranks 3rd in terms of index report. The neo natal mortality
invested capital (₹2.92 lakh crore) and rate is 14 lower than that of many other
value of total industrial output (₹6.19 states and that the under 5 mortality has
lakh crore). dropped from 21 in 2014 to 20 in 2015
Tamil Nadu ranks first among the - Healthy States, Progressive India
states in terms of number of factories Report, (2018) –NITI AAYOG
with 17% share and industrial workers
(16% share) of the country.
The reasons for the relative success
Tamil Nadu is placed third in health
of Tamil Nadu lie in extending social
index as per the NITI AAYOG report.
policies to cover most of the population.
Tamil Nadu has a highest Gross For instance the Public Distribution
Enrolment Ratio in higher education. System, midday meals and public health
Tamil Nadu has the largest number of infrastructure have near universal coverage.
engineering colleges
Tamil Nadu has emerged as a major 11.4
hub for renewable energy.
Natural Resource
Tamil Nadu has highest credit Deposit
Ratio in commercial and Cooperative
banks. 11.4.1 Water Resources
Has highest ranks first on investment
Tamil Nadu is not endowed with rich
proposals filed by MSMEs.
natural resources compared to other
North East monsoon is the major source of with Thermal power plants, Fertilizer and
rainfall followed by South West monsoon. Carbonisation plants. Magnesite mining
There are 17 river basins in Tamil Nadu. is at Salem from which mining of Bauxite
The main rivers are Palar, Cheyyar, ores are carried out at Yercaud and this
Ponnaiyar, Cauvery, Bhavani, Vaigai, region is also rich in Iron Ore at Kanjamalai.
Chittar, Tamiraparani, Vellar, Noyyal Molybdenum is found in Karadikuttam in
Siruvani, Gundar, Vaipar, Valparai etc. Madurai district.
Wells are the largest source of irrigation
in Tamil Nadu (56%). Table 11.2 Mineral Resources
Mineral Reserve National
Table 11.1 Water Resources (Tonnes) Share
Source of Numbers Lignite 30,275,000 87%
Irrigation Vermiculite 2,000,000 66%
Reservoirs 81 Garnet 23,000,000 42%
Canals 2239 Zircon 8,000,000 38%
Tanks 41262 Graphite 2,000,000 33%
Tube Wells 3,20,707 Ilmenite 98,000,000 28%
Open Wells 14,92,359 Rutile 5,000,000 27%
Source: Tamil Nadu Government Season & Monazite 2,000,000 25%
Crop Report 2012-13
Magnesite 73,000,000 17%
(Source: Department. of Geology and
11.4.2 Mineral Resources Mining)
Tamil Nadu has a few mining projects based
11.5
on Titanium, Lignite, Magnesite, Graphite,
Limestone, Granite and Bauxite. The first one 11.5.Population
is the Neyveli Lignite Corporation that has
led development of large industrial complex Tamil Nadu stands sixth in population
around Neyveli in Cuddalore district with 7.21 crore against India’s 121 crore as
Tamil Nadu Economy 228
11.6
G ross State Domestic
Product (G SDP)
11.7
Agriculture
AMBUR : Leather
VANIYAMBADI : Leather
SALEM : Powerlooms, Home textiles, Steel, Sago
11.8.2 Leather
Tamil Nadu accounts for 30 per cent of
leather exports and about 70 per cent of
leather production in the country. Hundreds
of leather and tannery industries are located
around Vellore, Dindigul and Erode. Every
year the State hosts the India International
Leather Fair in Chennai.
11.8.3 Electronics
Tamil Nadu is the largest textile hub of Chennai has emerged as EMS Hub of India.
India. Tamil Nadu is known as the “Yarn Many multi – national companies have
Bowl” of the country accounting for 41% chosen Chennai as their South Asian
of India’s cotton yarn production. The manufacturing hub.
textile industry plays a significant role in
the Indian economy by providing direct
employment to an estimated 35 million 11.8.4 Automotives
people, and thereby contributing 4% of Chennai nicknamed as “The Detroit of
GDP and 35% of gross export earnings. Asia”is home to a large number of auto
The textile sector contributes to 14% of component industries. Tamil Nadu has
the manufacturing sector. From spinning 28% share each in automotive and auto
to garment manufacturing, entire textile components industries, 19% in the trucks
production chain facilities are in Tamil segment and 18% each in passenger cars
Nadu. About half of India’s total spinning and two wheelers.
Tamil Nadu Economy 234
d. P orts
Percentage
most other States in the country. After
2005, Tamil Nadu was among India’s
fastest growing states, with growth being
driven mainly by services.
Year
34 33 32
Percentage
32
29
21 20 19
17 17
12 12
BH OD AS MP UP KA WB NL MH GJ MG TN
States
MODEL QUESTIONS
1. In health index, Tamil Nadu is ahead of 4. The main source of irrigation in Tamil
a) Kerala Nadu is
b) Punjab a) river
b) tank
c) Gujarat
c) well
d) all the above
d) canals
2. In sex ratio, Tamil Nadu ranks
5. Knitted garment production is
a) first concentrated in
b) second a) Coimbatore
c) third b) Tiruppur
d) fourth c) Erode
d) Karur
3. Tamil Nadu is rich in
6. Which of the following is wrongly
a) Forest resource matched?
b) human resource a) Gateway of Tamil Nadu –
c) mineral resource Thoothukudi
d) all the above b) Home textile city - Erode
c) Steel city - Salem
d) Pump city - Coimbatore
8. Tamil Nadu Economy 244
8. TN tops in the production of the 13. Which district has the lowest child sex
following crops except ratio?
a) Banana a) Madurai
b) Coconut b) Theni
c) plantation crops c) Ariyalur
d) cardamom d) Cuddalore
9. Largest area of land is used in the 14. Which Union Territory has the highest
cultivation of sex ratio?
a) Paddy a) Chandigarh
b) sugarcane b) Pondicherry
c) Groundnut c) Lakshadeep
d) Coconut d) Andaman Nicobar
b) fourth a) agriculture
c) sixth b) industry
d) eighth c) mining
d) services
11. In investment proposals filed by
MSMEs, TN ranks 16. In human development index, TN is
a) I ranked
b) II a) Second
c) III b) fourth
d) IV c) sixth
d) seventh
b) Madurai a) third
c) Tuticorin b) fourth
d) Pudukkottai c) first
d) second
18. The TICEL park is
a) Rubber Park 20. The Headquarters of Southern Railway
is at
b) Textile park
a) Tiruchirappalli
c) Food park
b) Chennai
d) Bio park
c) Madurai
d) Coimbatore.
Answers Part-A
1 2 3 4 5 6 7 8 9 10
c c b c b b c d a d
11 12 13 14 15 16 17 18 19 20
a b c b d d c d a b
21. State any two districts with favourable 24. What are major ports in Tamil Nadu?
sex ratio. Indicate the ratios.
25. What is heritage tourism?
22. Define GSDP.
26. What are the nuclear power plants in
23. Mention any four food crops which Tamil Nadu?
are favourable to Tamil Nadu.
27. Define Micro industry
28. Write a note on mineral resources in 31. Compare productivity of any two food
Tamil Nadu. crops between Tamil Nadu and India.
29. Explain GSDP in Tamil Nadu. 32. Explain the prospect for development
of tourism.
30. Describe development of textile
industry in Tamil Nadu.
Tamil Nadu Economy 246
35. Describe the qualitative aspects of 37. Explain the public transport system in
population. Tamil Nadu.
ACTIVITY
1. Visit your near by village and make a spot study about crops
production, source of irrigation and living condition of farmers.
References
12 Mathematical Methods
for Economics
Learning Objectives
Example 12.1 6
4
Find the equation of a straight line which
passes through two points (2, 2) and (4, −8) 2
Price
Price
Price
55
Price
Price
44
Price
11 33
22 2.5
2.5
(12,0)
(12,0) 11
00
22 44 66 88 1010 1212 XX
00 55 1010 1515 2020 xx 00
QuantityDemanded
Quantity Demanded
QuantitySupplied
Quantity Supplied
Diagram12.2
Diagram 12.2 Diagram12.3
12.3
Diagram
Price-quantity relationship is negative in supply function can be obtained from the
demand function. Qd = 12−5 X †or Qd = statement that supply increases 10 units
12−5 P . If P = 2, Qd = 2. for each one rupee rise in price, that is
YY
When P assumes 0, only 12 alone (10, 6) & (20, 7).
remains in the equation. This is called
Intercept or Constant, = 0 and Qd = 12.
if surplus
Consumer’s
Consumer’s Psurplus When p = 5, supply is zero. When p = 6,
In Marshallian supply is 10 and so on. When p is less than
,P ) analysis,money
Price
Price
(X0,P
BB (X 0 0)0
P0
P0
terms measured in Y-axis and physical 5, say 4, supply is -10, which is possible
Demand
units are measured in X-axis.
Demand curve
Accordingly,
curve
in mathematics. But it is meaningless
price is measured in Y-axis and quantity in Economics. Normally supply curve
demanded is measured in X-axis originates from zero, noting that when
0 0 price is zero, supply is also zero.
XX0 0 xx
Demand
Demand
Example: 12.2 Diagram
Diagram12.8
12.8
Find the supply function of a commodity The equation of the straight line
such that the quantity supplied is zero, joining two data points (10, 6) and (20, 7)
when the price is ₹5 or below and the is given as
supply (quantity) increases continuously The equation of the straight line is
at the constant rate of 10 units for each
y − y1 x − x1
one rupee rise when the price is above ₹5. =
y2 − y1 x2 − x1
X = −50 + 10Y Y
10
Considering X as quantity supplied and Y
as price (p) 7.5 D
S
Then X = 10p − 50 (or) 5
Price
X = −50 + 10 p E
2.5
If Price = 0; Q = −50
If Q = 0; P = 5 0 25 50 75 100 x
Note: The coefficient of ‘p’ is − in demand Demand/Supply
Hence at Solution:
P = 10, Qd = 50, Qs = 50. Equation of demand function joining two
Quantity demanded is equal to supply at data points (100, 1) and (50, 2) are (x1, y1)
50 units when price is ₹10 and (x2, y2) respectively.
Example: 12.4
Y
The market demand curve is given by D = 4
50 − 5P. Find the maximum price beyond
3
which nobody will buy the commodity.
Price
Y 2
20
S
1
15
E
Price
0 x y − y1 x − x1
25 50 75 100
=
Quantity Demanded y2 − y1 x2 − x1
Diagram 12.6 y − 1 x − 100
=
2 − 1 50 − 100
Solution:
y − 1 x − 100
=
Given 1 −50
Qd = 50 − 5P −50 (y − 1) = 1 (x − 100)
5P = 50 − Qd −50y + 50 = x − 100
−50y + 50 + 100 = x
5P = 50 when Qd is zero.
−50y + 150 = x
50
P= x = 150 − 50y
5
Hence the demand function is
P = 10 When P = 10, Demand is 0
Hence P = 10, which is the maximum Qd = 150 – 50P and Slope m = – 50
price beyond which nobody will demand
the commodity. Think and Do for
Water Management in
Example: 12.5 your area
The demand for milk is given by Try to find the demand function
for water in your street and the
Price (Y) 1 2 3
daily total demand for water in
Demand (X) 100 50 0 litre for all purposes.
Example: 12.6
1 3 5
Find the value of the determinant for the
6 2 4 is a square matrix of order
7 8 9 3 4
matrix A=
3 x 3,then 10 −2
1 3 5 Solution:
6 2 4 is a determinant. 3 4
Given matrix A = then, the
7 8 9 10 −2
Determinant
2 3
is a square matrix of order 2 x 2, then 3 4
5 7 A= = 3 ( −2 ) − 10(4)
10 −2
2 3
is a determinant. = − 6 − 40 = − 46 is the value of the
5 7
determinant.
a11 a12 a13
In general, if A = a21 a22 a23 is a matrix Example: 12.7
a
31 a32 a33 Find the value of the determinant of the
then, matrix
∆x ∆y ∆z ∆y =
1 1
= 14 − 3 = 11
x= , y= , z=
∆ ∆ ∆ 3 14
7 1 1 x1 0
Answer checking:
10 2 1 x2 8
Substituting in equation the values of x 6 3 2 x3 7
and y,
4 + 3(-1) = 1, 7 −1 −1
∆ = 10 −2 +1
3(4) – 2(-1)= 14
6 3 −2
12.4.1 Meaning
Solution:
12.4.2 Some Standard Forms Given y = 6x3
of Differentiation dy
Slope =
dx
(Constant, addition and subtraction
only) dy
= 6 ( 3) x3−1 = 18x2 for any value of x.
dx
d(c)
1. = 0 where C is a constant. Example: 12.14
dx
What is the slope of the function y = 5x4
(Read differentiation of ‘C’ with when x = 10?
respect to ‘x’ is)
Solution:
n
d(x )
2. = nx n−1 Given function y = 5x4
dx
dy
Slope = †
d(x ) dx
3. = 1x1−1 = 1x 0 = 1
dx dy
= 5 ( 4 ) x 4−1
dx
d (u + v) du dv = 20x3
4. = +
dx dx dx When x = 10, then slope = 20 (10)3
d (u − v) du dv = 20,000,
5. = −
dx dx dx Therefore Slope is 20,000.
∫ 4 x dx = 4 ∫ x dx
3 3
∫f ( x ) dx = F ( x ) + C
x 3+1
Here the left hand side of the equation is =4 +c
3 +1
read “the integral of f(x) with respect to x4
x” The symbol ∫ is an integral sign, f(x) is =4 +c
4
integrand, C is the constant of integration, 4
=x c
and F(x)+c is an indefinite integral. It is
so called because, as a function of x, which Example12.23
is here unspecified, it can assume many
∫ (x + x − 1)dx = ∫ x 2dx + ∫ xdx − ∫ dx
2
values.
x 2+1 x1+1
= + −x +c
12.5.2 Meaning 2 +1 1+1
Price
quantities that the people would buy at
Price
x3 Consumer
0
2
surplus
4 6
is
8
the difference
10 12 X
= − 5x 2 + 100 x + 500 between the price one is willing to pay and 0
30 Quantity Demanded
the price that is actually paid.
Diagram 12.2
Example 12.27 It is represented in the following
diagram.
The marginal cost function for producing
x units is y = 23 + 16x − 3x2 and the total
cost for producing zero unit is ₹40. Obtain Y
the total cost function and the average
cost function.
Consumer’s surplus
Solution:
Price
B (X0,P0)
Given the marginal cost function y = 23 + P0
16x − 3x2 ; C = 40 Demand curve
₹40 is the fixed cost.
We know that 0 X0 x
Demand
Total Cost function = ∫ (Marginal cost
Diagram 12.8
function) dx+C
Mathematical Methods for Economics 263
Solution Q2 + 6Q − 4Q − 24 = 0
P = 35 − 2x − x2 (Q + 6)(Q− 4) = 0
for x = 3 So, Q = 4 or Q = −6. Since Q cannot be
P = 35 − 2(3) −32 equal to −6,
= 35 − 6 − 9 Q=4
P = 20
When Q=4, Pd =25 −42=9;
Therefore,
CS = (Area of the curve below the Ps =2(4) + 1=9
demand curve from 0 to 3) − Area of the 4
CS = (35−2x−x2)dx−(20 3)
4
0
Q3
3 = 25Q - − 36
x2 x3
= 35x − 2 − −60 3 0
2 3 0
1
32 33 =[ (25)(4) − (4)3 ] −(0) −36
= 35(3) −2( ) − −60 3
2 3
64
= 105 −9 −9 − 60 = [100 − ] − (0) −36 = 42.67
3
= 27 Units.
Producers’ surplus Ps
4
12.5.6 Producer’s surplus (Ps) = (9 4) − ( 2Q+1)dQ
0
Example 12.29 4
= 36 - (Q2 +Q)
Given the demand function Pd = 25 − Q 2
0
(iv) New Power Point file will open, and This chapter provide the knowledge of
then type the title and subtitle if necessity of mathematics in economics
wanted. by explaining the application of linear
algebra, calculus and Information
(v) A new slide can be inserted by ‘click’
Communication and Technology.
on icon ‘new slide’ or using short
Specifically the knowledge of functions,
key ‘Ctrl + M’
matrices , differential calculus, Integral
(vi) We can type the content, insert the calculus ,MS word, MS Excel and Power
table, pictures, movies, sounds, Point Presentation are depicted with
etc., with the content. suitable applications. The activities are
(vii) Tab ‘Design’ helps to design the also added for students to learn it reality
slides (can select common design for about the use of mathematical methods in
all slides or separate slide for each economics.
slide)
(viii) Click icon slide show, one can run
FORMULAE
slide show either starting from
the first slide or starting from the 1. m= y2-y1/x2-x1 for Slope
current slide. 2. (y-y1) = m (x-x1 ) for straight Line
The power point presentation (PPT) 3. A = a 1(b 2c 3 – b 3c 2) – a 2(b 1c 3-
facilitates the key points to be kept in b 3 c 1 )+a 3 (b 1 c 2 -b 2 c 1 ) for 3x3
memory and understand the particular matrices
topic. Recently, the smart class room
4. Differentiation of constant is
teaching uses the PPT to deliver the
zero
information in an effective way to enhance
the quality of teaching. 5. Differentiation of xn is nx(n-1)
6. ed = Marginal function / Average
function
Think and Do
P dx
7. ed =
Make a Document with x dp
MS word on “Incredible
xn 1
India”. 8. Integration of x is Cn
n 1
Prepare an Excel Sheet for
x0
your daily pocket expenses 9. CS= ∫ f (x )dx − xo po
for each category/item in 0
last month 10. PS = x 0p 0 – integration of
Prepare and present a supply function within limit
“Power Point” for “Day x0
= xo po - ∫ g ( x ) dx
out with your parents” 0
Steps:
• Collection of data of Child population (0-6 years) from 1961 to 2011 in Rural and Urban areas in India.
Let us draw the graph for the data.
• Open Microsoft Excel workbook, Type the X-axis data in the First column and then type respective
data in consecutive columns.
• Now select all the typed data, After selecting the data Click “Insert” to get Charts. select scatter type to
get scroll down menu.
• Select “Scatter with Smooth Lines and Markers” you will get the required graph as shown here.
• By selecting 3 icons on the right side to edit “chart elements” Particularly Check on the boxes Axis
Titles and Chart Title.
• Type x-axis and y-Axis, followed by Chart Title. Click “Legend” to change the position
• Now right click on the graph (a) to copy the graph and Then paste in a word page (or)Select move chart
to move In other excel page, Menu willappear to place it in new sheet.
• Now If you want to change the graph type as bar chart or any other type,click on the graph to select and
then click on any type of graph given in the top menu
URL:
https://youtu.be/Xn7Sd5Uu42A
(or) scan the QR Code
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear, Open the worksheet named
“Consumer’s and Producer’s Surplus Ex:12.29”
• Without integration we cannot find the Area under the curve. For Higher studies atleast you should
know what is Integration and why it is needed.
• In the worksheet Green colour is the Demand Curve and Blue colour is the Supply curve. They intersect
at Point A (4,9). In which x axis value 4 is the demand price. If you integrate the Demand curve
between 0 and 4 we get the area as shown. Click “Show Area Integral1” integrating the demand price
between 0 and 4.
• If you click on “Show Area of Rectangle” you can see the area of the rectangle which is obtained by
Multiplying the length 4 and Breadth 9 (Point A(4,9))
• If you subtract: the area under the curve PD -Area of the rectangle you
get the Consumer’s Surplus.
• Click on “Show Area Integral 2” you see Blue colour area which is
obtained by Integrating Supply Price line between 0 and 4. Subtract:
Area of the rectangle – Area under the line PS you get The Producer’s
Surplus. You can change PS line by moving the sliders ‘m’ and ‘c’. you
can see the changes in Consumer’s Surplus and Producer’s Surplus.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
b. Price a. PC alone
1 2 3 4 5 6 7 8 9 10
a d b c c a b a d b
11 12 13 14 15 16 17 18 19 20
a b a d c b a d c c
2. Solve for x quantity demanded if 16x − 5. If a firm faces the total cost function
4 = 68 + 7x. (Ans: x is 8 ) TC = 5+ x2 where x is output, what is
TC when x is 10?
3. A firm has the revenue function R =
600q − 0.03q2 and the cost function 6. If TC = 2.5q3− 13q2+ 50q + 12 derive
is C = 150q + 60,000, where q is the the MC function and AC function.
number of units produced. Find AR,
7. What are the steps involved in
AC, MR and MC. (Answersa:AR = 600
executing a MS Excel Sheet?
− 0.03q ; MR = 600 − 0.06 q; AC = 150
+ (60000/q) )
ACTIVITY
1. The petrol consumption of your car is 16 Kilometers per litre.
Let x be the distance you travel in Kilometers and p the price
per litre of petrol in Rupees. Write expressions for demand for
Petrol.
Accelerator முடுக்கி
Advertising elasticity of demand விளம்பரத் தேவை நெகிழ்ச்சி
Alternative uses மாற்று ைழிகள்
Annual plan ஓராண்டுத் திட்டம (1990 -91 மற்றும 1991 -92 ஆகிய)
Art கவை
Assumption அனுமானம
Average cost சராசரி நசைவு
Average product சராசரி உற்்பத்தி
Barter ்பண்்டமாற்று
Behavioural Economics த்பாக்கு சார் ந்பாருளியல்
Business ைணிகம
Capability நசயைாற்்றல்
Capital மூைேனம (K)
Cardinal Utility Analysis இயல்ந்பண் ்பயன்பாடடு ஆய்வு
Cash Reserve Ratio (CRR) நராக்க இருப்பு வீேம
Characteristics குணாதிசயஙகள்
Child sex Ratio 6 ையதுக்கு கீதே உள்ள 1000 ஆண் குேநவேகளுக்கு எத்ேவன
ந்பண்கள் இருக்கி்றார்கள் என்பது குேநவேகளின ்பாலின விகிேம
Classical நோனவம
Coefficient நகழு
Colonial capitalism காைனி ஆதிக்க முேைாளித்துைம
Concealed unemployment,
Disguised unemployment மவ்றமுக தைவையினவம
Concentration நசறிவு
Constant Returns to Scale மா்றா விகிே அளவு
Consumer நுகர்்பைர்
Consumer’s Surplus நுகர்தைார் உ்பரி / நுகர்தைார் எச்சம
Consumption நுகர்வு (C)
Contraction of demand விவை அதிகரிப்்பால் நிகழ்வு தேவைச்சுருக்கம
Criticism தி்றனாய்வு
Crop insurance ்பயிர் காப்பீடு
Cross elasticity of demand குறுக்கு தேவை நெகிழ்ச்சி
Crude Birth rate 1000 ெ்பர்களுக்கு பி்றநே குேநவேகளின எண்ணிக்வக
Crude Death Rate 1000 ெ்பர்களுக்கு இ்றநேைர்களின எண்ணிக்வக
Data /Statistics /information புள்ளி விைரஙகள்
Decentralization ்பரைைாக்கப்்ப்டல்
Decrease in demand தேவை குவ்றேல்
Deductive Method ்பகுத்ோய்வு முவ்ற
Definition ைவரயவ்ற / இைக்கணம
Delicensing உரிமம விைக்கல்
Demand தேவை
Democracy குடியாடசி
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276
277
278
279
280
Reviewers Authors
Dr. L.Venkatachalam Dr. J. Socrates
Professor, Madras Institute of Developmental Studies, Head, Department of Economics
Manonmaniam Sundaranar University
Chennai
Tirunelveli
Dr. George V. Kallarackal Dr. K. Sadasivam
Former HOD, Economics Department Assistant Professor, School of Economics
CMS College, Kottayam, Kerala Madurai Kamaraj University, Madurai-625 021
Dr. M. Chitra
Assistant Professor, School of Economics
Domain Experts Madurai Kamaraj University, Madurai
Dr. S. Iyyam Pillai
Dr. R. Bernadshaw
Former Professor, Dept. of Economics
Former Professor, Dept. of Economics,
Bharathidasan University, Trichy NMSSVN College, Nagamalai, Madurai
Dr. A.G.Leonard SJ Dr. B.P. Chandramohan
Former Professor, Dept. of Economics Associate Professor, Dept. of Economics,
Loyola College, Chennai Presidency College, Chennai
K. Alamarselvan
Post Graduate Assistant
Government Boys Higher Secondary School
Bhuvanagiri, Cuddalore
B. Shunmugam
Post Graduate Assistant
Natarajan Dhamayanthi Higher Secondary School,
Nagapattinam
S. Bhuvana
Post Graduate Assistant
SRBAKD Dharma Raja Girls Higher Secondary School
Rajapalayam
Typist
G. Anitha
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