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IV
Jawaharlal Nehru St. Stephen University Ravenshaw
University, Delhi College, Delhi of Bombay University, Cuttack
Gokhale Institute of
Madras School
IIT Kanpur BITS –Pilani Economics & Politics,
of Economics
Pune
www.jnu.ac.in www.mse.ac.in www.bits-pilani.ac.in www.gipe.ac.in
Indian Statistical
Presidency Symbiosis School of
IIT Madras Institute, Kolkata
College, Kolkata Economics
Bangalore
https://www.iitm.ac.in www.presiuniv.ac.in www. isical.ac.in www.sse.ac.in
For world recognised institution in the field of economics, everybody wishes to join London School of Economics
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• Indian Civil Services • Indian Economic Services • Reserve Bank of India • National Sample Survey
• Ministry of Economic Affairs • Planning Board • Planning Commission (State & Central)
• National Council for Applied Economic Research and • National Institute of Public Finance and Policy.
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Economics Employment Opportunities
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V
Government
Banking and Finance Education and Communications Business
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ECONOMICS
VI
CHAP TER
1 Introduction To
Micro-Economics
LEARNING OBJECTIVES
Introduction To Micro-Economics 1
1.2 variety of definitions paves the way to
arrive a near-complete agreement on the
(FRQRPLFV0HDQLQJ
subject-matter of Economics.
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;
(FRQRPLFV,WV1DWXUH 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 :
HDOWK'H¿QLWLRQ
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
Smith favours the introduction action which is most closely connected with the
of “division of labour” to increase the attainment and with the use of the material
quantum of output. Severe competition requisites of well-being. Thus, it is on one side
in factories and society helps in a study of wealth; and on the other, and more
bettering the product. Supply force is important side, a part of the study of man.”
very active and a commodity is made The important features of
available to the consumers at the lowest Marshall’s definition are:
price.
a. Economics does not treat wealth as
the be-all and end-all of economic
The publication of Adam Smith’s activities. Man promotes primarily
“The Wealth of Nations” in 1776, has welfare and not wealth.
been described as “the effective birth b. The science of Economics contains
of economics as a separate discipline”. the concerns of ordinary people who
are moved by love and not merely
guided or directed by the desire to get
Criticism
maximum monetary benefit.
For Smith, Economics consists of ‘wealth- c. Economics is a social science. It studies
getting’ activities and ‘wealth-spending’ people in the society who influence
activities. An undue emphasis is given to one another.
material wealth. Wealth is treated to be
an end in itself. This view leads him to Criticism
ignore human welfare as an essential part
of Economics. Smith gives his definition a. Marshall regards only material things.
when religious and spiritual values are He does not consider immaterial
held high. Ruskin and Carlyle regard things, such as the services of a doctor,
Economics as a ‘dismal science’, “pig a teacher and so on. They also promote
science” etc. as it teaches selfishness which people’s welfare.
is against ethics. b. In the theory of wages, Marshall ignores
the amount of money that goes as
reward for the services of ‘immaterial’
1.3.2 :
HOIDUH'H¿QLWLRQ services.
Alfred Marshall
c. Marshall’s definition is based on the
Alfred Marshall concept of welfare. But it is not clearly
(1842-1924) in his defined. Welfare varies from person
book “Principles of to person, country to country and one
Economics” (1890) period to another. Marshall clearly
defines Economics thus: distinguishes between those things
“Political Economy” or that are capable of promoting welfare
Economics is a study of of people and those things that are not.
mankind in the ordinary business of life; it Things like liquor that are not capable
examines that part of individual and social of promoting welfare but command
Introduction To Micro-Economics 3
a price, come under the purview of Economics, according to Robbins, is a
Economics. science of choice.
d. However, welfare means happiness or
comfortable living conditions of an Criticism
individual or group of people. The a. Robbins does not make any distinction
welfare of an individual or nation is between goods conducive to human
dependent not only on the stock of welfare and goods that are not. In
wealth possessed but also on political, the production of rice and alcoholic
social and cultural activities of the drink, scarce resources are used.
nation. But the production of rice promotes
human welfare, while that of alcoholic
1.3.3 6
FDUFLW\'H¿QLWLRQ drinks does not. However, Robbins
Lionel Robbins concludes that Economics is neutral
between ends.
Lionel Robbins
b. Economics deals not only with the
published a book “An
micro-economic aspects of resource-
Essay on the Nature
allocation and the determination
and Significance of
of the price of a commodity, but
Economic Science” in
also with the macro-economic
1932. According to
aspects like how national income
him, “Economics is a
is generated. But, Robbins reduces
science which studies human behaviour
Economics merely to theory of
as a relationship between ends and
resource allocation.
scarce means which have alternative
uses”. c. Robbins’ definition does not cover
the theory of economic growth and
The major features of Robbins’
development.
definition are:
a. Ends refer to human wants. Human
beings have unlimited number of 1.3.4 *
URZWK'H¿QLWLRQ
wants. Samuelson
b. On the other hand, resources or means Paul Samuelson
that go to satisfy the unlimited human defines Economics as
wants are limited or scarce in supply. “the study of how men
The scarcity of a commodity is to and society choose,
be considered only in relation to its with or without the use
demand. of money, to employ
c. Further, the scarce means are capable scarce productive
of having alternative uses. Hence, an resources which could have alternative uses,
individual grades his wants and satisfies to produce various commodities over time,
first his most urgent want. Thus, and distribute them for consumption, now
Introduction To Micro-Economics 4
and in the future among various people and
1.4.1 (
FRQRPLFV,WV6XEMHFW
groups of society”.
Matter
The major implications of this
definition are as follows:
Introduction To Micro-Economics 5
human wants. The method of getting co-relationship between cause and effect.
more is resorted to, rather than the Scientific laws derived are tested through
method of wanting less. experiments; and future predictions
Economics is concerned with activities are made. These laws are universally
of human being only. Human beings applicable and accepted. Economists like
are related to one another and the Robbins, Jordon and Robertson argue
actions of one member affect those that Economics is a science like Physics,
of the other members in the society. Chemistry etc., since, it has several similar
Hence, Economics is called a Human characteristics. Economics examines the
Science or Social Science. relationships between the causes and the
effects of the problems. Hence, it is rightly
The activities of rational or normal
considered as both an art and a science. In
human beings are the subject-matter
fact, art and science are complementary to
of Economics.
each other.
All human activities related to wealth
constitute the subject-matter of
Economics. Thus, human activities 1.4.3 (
FRQRPLFV3RVLWLYH
not related to wealth (non-economic 6FLHQFHDQG1RUPDWLYH
activities) are not treated in Economics. Science
For example, playing cricket for
Positive science deals with what it is, means,
pleasure, mother’s child care.
it analyses a problem on the basis of facts and
examines its causes. For example, at the time
It is customary to clarify whether
of a price increase, its causes are analysed.
Economics is an art or a science; and if it
is a science, to observe its specific features.
Positive Normative
1.4.2 Economics is an Art and is,was,will be ought to, should
i. Economics as an Art
Can be Cannot be
Art is the practical application of proved proved
Positive Economics
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 Economics
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.
i nds of Goods (and Services)
K
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 To Micro-Economics 7
Milton Friedman, a Nobel laureate, Capital-goods (also called
popularises a saying: “There is no such producer’s goods) don’t directly satisfy the
thing as a free lunch”. He means that it is consumer wants. They help to produce
impossible to get something for nothing. consumer goods. For example, machines
Even those offered ‘free’ always costs a do not directly satisfy the consumers, but
person or the society as a whole. Its cost, in factories, the manufacturers need them.
however, is hidden. It is an externality.
Someone can benefit from an externality or
from a public good, but someone-else has
to pay the cost of producing these benefits.
In Economics, it refers to ‘opportunity cost’.
Introduction To Micro-Economics 8
Services
Along with goods, services are produced
and consumed. They are generally, possess
the following:
Intangible: Intangible things are
not physical objects but exist in
connection to other things, for
example, brand image, goodwill etc.
But today, the intangible things are
converted and stored into tangible
items such as recording a music piece
into a pen-drive. They are marketed as
a good.
Heterogeneous: Services vary across
b. Characteristics of Utility
regions or cultural backgrounds. They
can be grouped on the basis of quality 1. Utility is psychological. It depends
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
derives utility from a knife using 6. Knowledge Utility: It is the utility
which he cuts some vegetables; and, derived by having knowledge of a
a killer wants to stab his enemy particular thing. Advertisement
by that knife. In Economics, a serves as a source of information
commodity has utility, if it satisfies on an object.
a human want;
d. Measurability of Utility
c. Types of Utility Wants of a person are satisfied by the act
The following are the types of utility of consumption. The consumer derives
utility, measured in terms of ‘Utils’.
1. Form Utility: An individual
An ‘Util’ is a unit of measurement of
consumer obtains utility from a
utility. An individual pays a price for
good or service only when it is
the unit of the good, equal to the utility
available in a particular form. Raw
derived. Marshall states that utility
materials in their original form may
can be measured indirectly using the
not possess utility for a consumer.
‘measuring rod of money’.
But in their changed forms as they
become finished products, they
provide utility to him. For example, 1.5.3 Price
cotton as a raw material may not Price is the value of the good expressed in
possess utility for a consumer; but terms of money. Price of a good is fixed
as it gets a new form as a cloth, it by the forces of demand for and supply
yields the consumer utility. of the good. Price determines what goods
2. Time Utility: A sick man derives are to be produced and in what quantities.
time utility from blood not at the It also decides how the goods are to be
time of its donation, but only at the produced.
operation-time, i.e., when it is used.
3. Place Utility: A student derives 1.5.4 Market
place utility from a book not at the
Generally, market means a place where
place of its publication (production
commodities are bought and sold.
centre) but only at the place of his
education (consumption centre). But, in Economics, it represents
where buyers and sellers enter into an
4. Service Utility: An individual
exchange of goods and services over a
consumer derives service utility from
price.
a service made available at the time
when he most needs it. For example,
clients obtain service utility from 1.5.5 Cost
their lawyers, patients derive service Cost refers to the expenses incurred to
utility from the doctors and so on. produce or acquire a given quantum of a
5. Possession Utility: When a student good. Together with revenue, it determines
buys a book or dictionary from a the profit gained or the loss incurred by a
book seller, then only it gives utility. firm.
Introduction To Micro-Economics 10
b. Particular Equilibrium and General
1.5.6 5HYHQXH
Equilibrium
Revenue is income obtained from the sale An equilibrium, when it pertains to a
of goods and services. Total Revenue (TR) single variable, may be called particular
represents the money obtained from equilibrium.
the sale of all the units of a good. Thus,
TR = P × Q, where TR is Total Revenue; An equilibrium, on the other
P is the price per unit of the good; and, hand, when it relates to numerous
Q is the Total Quantity of the goods sold. variables or even the economy as a whole,
may be called general equilibrium.
1.5.7 (TXLOLEULXP'LDJUDP
1.5.8 Income
a. Stable Equilibrium Income represents the amount of
Prof. Stigler states that “equilibrium monetary or other returns, either earned
is a position from which there is no or unearned small or big, accruing
net tendency to move”. Its absence over a period of time to an economic
is referred to as disequilibrium. unit. Nominal income refers to income,
Consumer’s equilibrium occurs expressed in terms of money. It is termed
when he gets maximum satisfaction. as the money income.
The equilibrium of the Producer Real income is the amount of goods
occurs when he gets maximum that can be purchased with money as income.
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 prices, quantities, income, 1.6
technology, population etc. (FRQRPLFV,WV
Methods, Facts,
Theories and Laws
Y
Market 1.6.1 0
HWKRGVRI(FRQRPLFV
S
Deduction and Induction
D
E Like any other science, Economics
price
Introduction To Micro-Economics 15
1.8.3 International Economics 1.8.7 (
QYLURQPHQWDO
In the modern world, no country can Economics
grow in isolation. Every country is having Depletion of natural resources stock and
links with the other countries through pollution result from rapid economic
foreign capital, investment (foreign direct development. Hence the need for the study of
investment) and international trade. Environmental Economics which analyses
the inter relationship between economy and
1.8.4 Public Economics environment. Environmental Economics
is a study of inter disciplinary tools for
Public finance is concerned with
the problems of ecology, economy and
the income or revenue raising and
environment.
expenditure incurring activities of the
public authorities and with the adjustment
of the one with the other. The scope of 1.9
Public Finance covers Public expenditure, Basic Economic
Public revenue, Public debt and financial Problems
administration.
If resources are abundant and wants are
1.8.5 '
HYHORSPHQWDO so few, then there would be no economic
Economics problem. But this situation can never
exist. Resources are always scarce and
The countries have been classified our wants are numerous. Hence in every
into developed, developing and under society certain choices have to be made.
developed on the criteria of per capita
income, Human Development Index
and Happiness Index. The Development
Economics deals with features of developed
nations, obstacles for development,
Economic and Non-economic factors
influencing development, various growth
models and strategies.
Introduction To Micro-Economics 16
a. Whether to produce more of food, a minimum amount of consumption be
clothing and housing or to have more ensured for everyone in the society. Due
luxury goods to the scarcity of resources, a society
b. Whether to have more agricultural faces the compulsion of making choice
goods or to have industrial goods and among alternatives. It faces the problem
services of allocating the scare resources to the
production of different possible goods and
c. Whether to use more resources in
services and of distributing the produced
education and health or to use more
goods and services among individuals
resources in military services
within the economy.
d. Whether to have more consumption
goods or to have investment goods
e. Whether to spend more on basic 1.10
education or higher education
Production
3RVVLELOLW\&XUYH
Introduction To Micro-Economics 17
YResources of production are fully
mobile.
YLThe factors of production are given
in quantity and quality
YLLThe low of diminishing returns
operates in production.
Every production possibility curve is
based upon these assumptions. If some of
these assumptions changes or neglected,
then it affects the nature of production
possibility curve.
To draw this curve we take the help of We can obtain a production possibility
production possibilities schedule, as curve by drawing production possibilities
shown below. schedule graphically. The quantity of food
is shown on x-axis and the number of
cars is shown on y-axis, the different six
Production possibilities
production possibilities are being shown
schedule
as point P1 P2 P3 P4 P5 & P6
Production Quantity No of car
possibilities of food production Food production
production If we assume that innumerable production
in tons possibilities exist between any two-
I 0 25 production possibilities schedule, we
II 100 23 get the production possibility curve P1
III 200 20 to p6. This shows the locus of points of
IV 300 15 the different possibilities of production
V 400 8 of two commodities, which a firm or an
economy can produce, with the help of
VI 500 0
given resources and the techniques of
production. Points outside the production
This schedule suggests that if all resources possibility (e.g. point p) are unattainable
are thrown into the production of food, as society’s resources of production are
a maximum of 500 tons of food can be not sufficient to give output beyond
produced, given the existing technology. the curve. Points lying inside the curve
If on the other hand, all resources are like p1 are attainable by the society but
instead used for producing cars, 25 cars at these points resources production
can be produced. In between these two are not fully employed. For example, if
extreme possibilities exist. If we are society is producing at point p7 then it
willing to give up some food, we can have can increased the production of food
some cars. keeping the no of cars constant or it can
Introduction To Micro-Economics 18
increase the production of cars keeping resources between the goods for the higher
the food grain output constant or it can income group and the lower income
increased the output of both the goods group and the goods for the defense and
simultaneously. the civilians. Since PPC is the locus of the
Shift of production possibility curve combination of the goods the problem of
choice will not arises when we choose any
The PPC shifts upward or downward due to: point on PPC.
1. The change in the supply of (ii) The Notion of Scarcity
productive resources and
We can explain the notion of scarcity
2. The change in the state of technology. with the help of PPC. We know that every
The production capacity of an economy society possesses only a specific amount of
grows overtime through increase in resources, which can produce only limited
resource supplies and improvement of amount of output even with the help of
technology. This enables PPC to shift best technology, Economic scarcity of
upward from AE to A1E1 as shown in best fact of life. The production possibility
figure below. This outward shift of the PPC curve reflects the constraints imposed by
is the basic feature of economic growth. the element of economic scarcity.
(iii) Solution of central problems
Uses of production possibility
The central problems of an economy can
curve
be explained with the help of PPC. The
Through the device of PPC can be used solution of problem of what to produce
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
carves. 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 problem of choice arise because of
to produce and also looked at division of
the given limited resources and unlimited
economics, distinguishing between Micro
wants, may relate to the allocation of
and Macroeconomics. It has introduced
Introduction To Micro-Economics 19
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
02'(/48(67,216
Introduction To Micro-Economics 21
9. Who is the Father of Economics? c. Economics is the study of material
a. Max Muller welfare
Introduction To Micro-Economics 22
18. Who has given scarcity definition of b. Inductive method
economics? c. Positive economics
a. Adam Smith d. Normative economics
b. Marshall
20. Total revenue is equal to total output
c. Robbins sold multiplied by
d. Robertson a. Price
19. The process of reasoning from b. Total cost
particular to general is c. Marginal revenue
a. Deductive method d. Marginal cost
Answers Part-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
Part-B $QVZHUWKHIROORZLQJTXHVWLRQVLQRQHRU
two sentences.
21. What is meant by Economics? 25. Name any two types of utility.
Part C $QVZHUWKHIROORZLQJTXHVWLRQVLQRQHSDUDJUDSK
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
Part D $QVZHUWKHIROORZLQJTXHVWLRQVLQDERXWDSDJH
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
CHAP TER
2 Consumption Analysis
LEARNING OBJECTIVES
2.1 2.2
Introduction Human Wants
Consumption Analysis 26
Luxuries 3. The consumer should be a rational
consumer and his aim is to attain
Goods which are not very essential but
maximum satisfaction with
are very costly are known as “Luxuries”.
minimum expenditure.
Example: Jewelry, Diamonds and Cars.
However, for people with higher income 4. The units of the commodity consumed
they may look necessaries or comforts. must be reasonable in size.
5. The commodity consumed should
be homogeneous or uniform in
character like weight, quality, taste,
2.5
colour etc.
Cardinal Utility
6. The consumption of goods must take
Analysis
place continuously at a given period
of time.
7. There should be no change in the
2.5.1 The Law of Diminishing
Marginal Utility (DMU) taste, habits, preferences, fashions,
income and character of the
consumer during the process of
Introduction consumption.
H.H.Gossen, an Austrian Economist was
the first to formulate this law in Economics Explanation
in 1854. Therefore, Jevons called this law The Law of Diminishing Marginal Utility
as “Gossen’s First Law of Consumption”. states that if a consumer continues to
But credit goes to Marshall, because he consume more and more units of the same
perfected this law on the basis of Cardinal commodity, its marginal utility diminishes.
Analysis. This law is based on the This means that the more we have of a thing,
characteristics of human wants, i.e., wants the less is the satisfaction or utility that we
are satiable. derive from the additional unit of it.
'H¿QLWLRQ 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
“The Law of Diminishing Marginal Utility’. In Table 2.1, we find that the total utility
This is illustrated in table 2.1. goes on increasing but at a diminishing rate.
Table 2.1 The Law of On the other hand, marginal utility goes
Diminishing Marginal Utility on diminishing. When marginal utility
becomes zero, the total utility is maximum
Units of Total Marginal
and when marginal utility becomes
Apple Utility Utility
negative, the total utility diminishes.
1 20 20
2 35 15 (35-20) Criticisms
3 45 10 (45-35) 1. Utility cannot be measured
4 50 5 (50-45) numerically, because utility is
5 50 0 (50-50) subjective.
6 45 -5 (45-50) 2. This law is based on the unrealistic
assumptions.
7 35 -10(35-45)
3. This law is not applicable to
indivisible commodities.
Y
Q Exceptions to the Law
50
40 1. Hobbies 2. Drunkards 3. Misers
TU / MU
30
4. Music and Poetry and 5. Readings
B TU
20
Importance or Application of
10
C the Law 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 laws of consumption.
Diagram 2.1
It has applications in several fields of
study.
Consumption Analysis 28
2. This law is the basis for other Equilibrium”, “Gossen Second Law” and
consumption laws such as Law of “The Law of Maximum Satisfaction”.
Demand, Elasticity of Demand,
Consumer’s Surplus and the Law of 'H¿QLWLRQ
Substitution etc. Marshall states the law as, “If a person has
3. The Finance Minister taxes a more- a thing which he can put to several uses, he
moneyed person more and a less- will distribute it among these uses in such a
moneyed person less. When a way that it has the same marginal utility in
person’s income rises, the tax-rate all. For, if it had a greater marginal utility
rises because the MU of money in one use than another he would gain by
to him falls with every rise in his taking away some of it from the second use
income. Thus, the Law of DMU is the and applying it to first”.
basis for progressive taxation.
Assumptions
4. This law emphasises an equitable
1. The consumer is rational in the
distribution of wealth. The MU of
money to the more-moneyed is low. sense that he wants to get maximum
Hence, redistribution of income satisfaction.
from rich to poor is justified. 2. The utility of each commodity is
5. Adam Smith explains the famous measurable in cardinal numbers.
“diamond-water paradox”. Diamond 3. The marginal utility of money
is scarce, hence, its MU is high and remains constant.
its price is high, even though it is 4. The income of the consumer is given.
not very much needed. Water is 5. There is perfect competition in the
abundant, hence, its MU is low and market
its price is low, even though it is very
6. The prices of the commodities are given.
much essential.
7. The law of diminishing marginal
utility operates.
2.6
Explanation
The Law of
The law can be explained with the help of
Equi-Marginal Utility
an example. Suppose a consumer wants to
spend his limited income on Apple and
The law of diminishing marginal utility
Orange. He is said to be in equilibrium,
is applicable only to the want of a single
only when he gets maximum satisfaction
commodity. But in reality, wants are
with his limited income. Therefore, he
unlimited and these wants are to be
will be in equilibrium, when,
satisfied. Hence, to analyze such a situation,
the law of diminishing marginal utility Marginal utility of Apple
is extended and is called “Law of Equi- Price of Apple
Marginal Utility”. It is also called the “Law Marginal utility of Orange
K
of Substitution”, “The Law of Consumers Price of Orange
Consumption Analysis 29
MUA MUO In views of this equilibrium, this Law is also
i.e.,= PA PO K Eg. 50⁄10= 20⁄4=5 called the “Law of Consumers Equilibrium”.
MUA MUo
In case is less than
Marginal utility of Apple PA PO
Price of Apple he would transfer the money from Apple
Marginal utility of Orange to Orange till it is equal. This process
m
Price of Orange of substitution gives him maximum
satisfaction both from Apple and Orange.
K- Constant Marginal Utility of Money Hence, this Law is also called “Law of
Y Y
M P
B3
MU of Apple
A1 B1
MU of Apple
A3
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 has a given income of ₹11. He wants to
Orange 20⁄4. In such situation, spending spend this entire income (i.e., ₹11) on
more money on orange is wiser. Apple and Orange. The price of an Apple
and the price of an Orange is ₹1 each.
Illustration If the consumer wants to attain
This Law can be illustrated with the help of maximum utility, he should buy 6 units
table 2.2. Let us assume that the consumer of apples and 5 units of oranges, so that
Consumption Analysis 30
he can get (92+58) 150 units. No other person would be willing to pay a thing
combination of Apple and Orange can rather than go without the thing, over that
give higher than 150 utilities. which he actually does pay is the economic
MUA MUo 4 4 measure of this surplus satisfaction. This
Here = ie, may be called consumer’s surplus”.
PA PO 1 1
A2 A3 and B2 B3 lines have not been
Assumptions
used for explanation.
1. Marshall assumed that utility can be
Diagrammatic Illustration measured.
In diagram 2.3, X axis represents the 2. The marginal utilities of money of
amount of money spent and Y axis the consumer remain constant.
represents the marginal utilities of Apple 3. There are no substitutes for the
and Orange respectively. If the consumer commodity in question.
spends ₹6 on Apple and ₹5 on Orange, 4. The taste, income and character of
the marginal utilities of both are equal the consumer do not change.
i.e.,AA 1=BB 1 (4=4). Hence, he gets
5. Utility of one commodity does
maximum utility.
not depend upon the other
Criticisms commodities.
where, Y
The Law of Demand was first stated by The law of demand explains the relationship
Augustin Cournot in 1838. Later it was between the price of a commodity and the
refined and elaborated by Alfred Marshall. quantity demanded of it. This law states
Consumption Analysis 33
price falls, the demand expands and when
price rises, the demand contracts.
E
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.
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, OQ1
in family income may increase the
is the demand and when the price rises to
demand for durables like video
OP2, demand also extends to OQ2.
recorders and refrigerators. Equal
distribution of income enables poor
to get more income. As a result 2.8.6 Reasons for Exceptional
consumption level increases. Demand Curve
9. Change in Population: The demand 1. Giffen Paradox: The Giffen good or
for goods depends on the size of inferior good is an exception to the
population. An increase in population law of demand. When the price of an
tends to increase the demand for inferior good falls, the poor will buy
goods and a decrease in population less and vice versa.
Consumption Analysis 35
2. Veblen or Demonstration effect: Contraction of Demand”. In other words,
Veblen has explained the exceptional buying more at a lower price and less at a
demand curve through his doctrine higher price is known as “Extension and
of conspicuous consumption. Rich Contraction of Demand”.
people buy certain goods because it
gives social distinction or prestige. 2.8.8 Movement along
For example, diamonds. Demand Curve
3. Ignorance: Sometimes, the quality of
the commodity is judged by it’s price. D
Consumers think that the product is Y
Price
4. Speculative effect: If the price of the
P3
commodity is increasing then the
consumers will buy more of it because
D
of the expectation that it will increase
still further. Eg stock markets. O Q1 Q2 Q3 X
5. Fear of shortage: During times of Quantity
emergency or war, people may expect Diagram 2.7
shortage of a commodity and so buy
more. In the diagram 2.7, at point A, the price
OP 2 and quantity demanded is OQ 2.
2.8.7 Extension and When price falls to OP3 (movement along
Contraction of Demand the demand curve A to C) the quantity
demanded increases to OQ3. If price rises
The changes in the quantity demanded
to OP1 (movement from A to B) quantity
for a commodity due to the change in
demanded decreases to OQ1.
its price alone are called “Extension and
d’ d d d’
Y Y
B A A B
P1 P1
Price
Price
d d’
d’ d
O O
Q2 Q1 X Q1 Q2 X
Quantity Demanded Quantity Demanded
Diagram 2.8
Consumption Analysis 36
2.8.9 Shift in the Demand change in quantity demanded due to a
Curve given change in price.
A shift in the demand curve occurs with a “Elasticity of demand is, therefore,
change in the value of a variable other than a technical term used by the Economists
its price in the general demand function. to describe the degree of responsiveness
An increase or decrease in demand due to of the Quantity demand for a commodity
changes in conditions of demand is shown to a change in its price”.
by way of shifts in the demand curve.
- Stonier And Hague
On the left hand side of the diagram
2.8, the original demand curve is d1d1, the Elastic demand or More Elastic
price is OP1 and the quantity demanded is demand
OQ1. Due to change in the conditions of
demand (change in income, taste or change
in prices of substitutes and /or complements)
the quantity demanded decreases from OQ1
to OQ2. This is shown in the demand curve
to the left. The new demand curve is d1d1.
This is called decrease in demand.
On the right hand side of the diagram 2.8,
the original price is OP1 and the quantity
demanded is OQ1 . Due to changes in
other conditions, the quantity purchased
has increased to OQ2 . Thus the demand Demand for a commodity is said to be
curve shifts to the right d1d1. This is called “Elastic” when the quantity demanded
increase in demand. increases by a large amount due to a little
‘Extension’ and ‘Contraction’ of fall in the price and decreases by a large
demand follow a change in price. Increases amount due a little rise in the price. To be
and decreases in demand take place when more scientific, Elastic demand is called
price remains the same and the other as “More Elastic Demand”.
factors bring about demand changes.
2.9.1 Types of Elasticity of
Demand
2.9
Elasticity of Demand
Consumption Analysis 37
Price Elasticity of Demand Proportionate change in Quantity
Price elasticity of demand is commonly Demand for a product
EY
known as elasticity of demand. This is nate change
Proportion
because price is the most influential in Income
factor affecting demand. “Elasticity of
demand measures the responsiveness of For most of the goods, the income
the quantity demanded to changes in the elasticity of demand is greater than
price”. one indicating that with the change
1. Price Elasticity of Demand: The in income the demand will also
price elasticity of demand, change and that too in the same
commonly known as the elasticity of direction, i.e. more income means
demand refers to the responsiveness more demand and vice-versa.
and sensitiveness of demand for a 3. Cross Elasticity of Demand: The
product to the changes in its price. cross elasticity of demand refers to
In other words, the price elasticity of the percentage change in quantity
demand is equal to demanded for one commodity as a
result of a small change in the price
Proportionate change in
of another commodity. This type
Quantity Demanded of elasticity usually arises in the
Ep
Proportionate change case of the interrelated goods such
in Price as substitutes and complementary
goods. The cross elasticity of demand
Numerically, for goods X and Y can be expressed as:
Consumption Analysis 38
2.9.2 Levels or Degrees of Price
Elasticity of Demand Y Ep = o
D
Price
demand, which refers to the degree of P2
responsiveness of demand to the change in P3
the price of the commodity.
1. Perfectly Elastic Demand (Ep = ∞): D
O
Q X
Y Quantity Demanded
Ep =
8
Diagram 2.10
P
irrespective of change in the price.,
i.e. quantity OQ remains unchanged
at different prices, P1, P2, and P3.
O X 3. Relatively Elastic Demand (Ep>1):
Quantity Demanded
Diagram 2.9
Y
Ep >1
The demand is said to be perfectly P1
elastic when a slight change in P2
the price of a commodity causes D
Price
Price
P1
P1 R1
P2 D
Price
O Q0 Q1
D X
Quantity Demanded
Diagram 2.13
O Q0 Q1 X
Quantity Demanded
elastic when the proportionate
Diagram 2.12
change in the price of a product
is less than the proportionate change results in the same propionate
in the price, the demand is said to be change in the quantity demanded.
relatively inelastic. It is also called Here the shape of the demand curve
as the elasticity less than unity. Here is a rectangular hyperbola, which
the demand curve is steeply sloping, shows that area under the curve is
which shows that the change in equal to one.
the quantity from OQ0 to OQ1 is Here OP0 R0Q0 = OP1 R1Q1
Consumption Analysis 40
2.9.3. Determinants of Here, a rise in the price of lubricating
Elasticity of Demand oil may not reduce the demand for
lubricating oil. Hence, the complementary
There are many factors that determine
good, here, lubricating oil, will be price
the degree of price elasticity of demand.
inelastic.
Some of them are described below:
e) Time: In the long run, the price
a) Availability of Substitutes:
elasticity of demand for many goods
If close substitutes are available for a will be larger. This is so because, in
product, then the demand for that product the long run many substitutes can be
tends to be very elastic. If the price of discovered or invented. Therefore,
that product increases, buyers will buy its the demand is generally more elastic
substitutes; hence fall in its demand will in the long run, than in the short
be very large. Hence, price elasticity will run. In the short run bringing out
be larger. Eg. Vegetables. new substitutes is difficult.
For salt no close substitutes are available.
Hence even if price of salt increases the 2.9.4 Measurement of
fall in demand may be zero or less. Hence Elasticity of Demand
salt is price inelastic.
There are three methods of measuring
b) Proportion of consumer’s income price elasticity of demand.
spent’ if smaller proportion of
1. The Percentage Method
consumer’s income is spent on
particular commodity say X, price
ep =
Q P
´
elasticity of demand for X will be P Q
smaller. Take for example salt, people
spend very small proportion of their It is also known as ratio method,
income on salt. Hence, salt will have when we measure the ratio as:
small elasticity of demand, or inelastic. Q where,
ep =
c) Number of uses of commodity: P
2.10
If a commodity is used for greater number %Q= percentage change in demand
of uses, its price elasticity will also be
larger. For example, milk is used as butter %P = Percentage change in price
milk, curd, ghee and for making ice cream 2. Total Outlay Method
etc. Hence, even the small fall in the price Marshall suggested that the simplest
of milk, will tempt the consumers to use way to decide whether demand is
more milk for many purposes. Hence milk elastic or inelastic is to examine the
has greater price elasticity of demand. change in total outlay of the consumer
d) Complementarity between goods: or total revenue of the firm.
For example, along with petrol, lubricating Total Revenue = ( Price x Quantity Sold)
oil is also used for running automobiles. TR = (P x Q)
Consumption Analysis 41
Table 2.6 Total Outlay Method L
ep =
Price Q u a n t i t y Total Elasticity
Demanded Outlay U
Where ‘ep’ stands for point elasticity, ‘L’
150 3 450 e>1 stands for the lower segment and ‘U’ for
125 4 500 e=1 the upper segment.
100 5 500 e <1
75 6 450 2.9.5 Importance of Elasticity
of Demand
Where there is inverse relation between
Price and Total Outlay, demand is elastic. The concept of elasticity of demand is of
Direct relation means inelastic. Elasticity is much practical importance.
unity when Total Outlay is constant. 1. Price fixation: Each seller under
3. Point or Geometrical Elasticity monopoly and imperfect competition
has to take into account elasticity
When the demand curve is a straight
of demand while fixing the price
line, it is said to be linear. Graphically,
for his product. If the demand for
the point elasticity of a linear demand
the product is inelastic, he can fix a
curve is shown by the ratio of the
higher price.
segments of the line to the right and to
the left of the particular point. 2. Production: Producers generally
decide their production level on the
Lower segment of the basis of demand for the product.
demand curve 3. Distribution: Elasticity of demand
Point below the given point also helps in the determination of
Elasticity
Upper segment of rewards for factors of production.
the demand curve 4. International trade: Elasticity of
above the given point demand helps in finding out the
terms of trade between two countries.
Terms of trade depends upon the
Y elasticity of demand for the goods of
R ep=α the two countries.
5. Public finance: Elasticity of demand
Upper
Segment ep>1 helps the government in formulating
Price
Consumption Analysis 42
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
4. The consumer is consistent.
or ranked or ordered by ordinal numbers
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
Table 2.7: Indifference Schedule an indifference curve is the locus of
all combinations of commodities from
Apple Oranges
which the consumer derives the same
1 20
level of satisfaction. It is also called “Iso-
2 15
Utility Curve” or” Equal Satisfaction
3 12
Curve”. Indifference Curve is illustrated
4 10
in diagram 2.15. X axis represents apple
5 9
and Y axis represents orange. Point ‘R’
Table has five combinations of two represents combination of 1 apple and 20
commodities Apple and Orange. Each of oranges, at ‘S’ 2 apples and 15 oranges and
these combinations give the consumer at ’T’ 3 apples and 12 oranges. Similarly
the same level of satisfaction without UKV points are obtained. These five
discrimination. In the schedule, the points give the same level of satisfaction.
combinations are arranged in such a way The consumer will be neither better off
that the consumer is indifferent among nor worse off in choosing any one of
the combinations. Hence, this schedule these points. When one joins all these five
is called as, “Indifference Schedule”. He points (RS, T) U and V one can get the
will neither be better off nor worse off Indifference Curve ‘IC’.
whichever combination he chooses.
2.12
2.11 An Indifference Map
An Indifference Curve
One can draw several indifference
Y IC
curves each representing an indifference
schedule. Hence, an Indifference Map is a
R
20 family or collection or set of indifference
curves corresponding to different levels
ORANGE
S
15 of satisfaction. The Indifference Map is
12 T illustrated in Diagram 2.16.
10 U
V
9
IC
1 2 3 4 5
X Y
APPLE
Diagram 2.15
ORANGE
Consumption Analysis 44
In the diagram 2.16, the indifference Since y decrease as x increases, the
Curves IC1, IC2 and IC3 represent the change in y is negative i.e., -Δy, so the
Indifference Map, Upper IC representing equation is
higher level of satisfaction compared to Y
lower IC. MRSxy and
X
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
MRSxy
of marginal utility with the concept of the X
marginal rate of substitution.
According to Leftwich “The 2.14
marginal rate of substitution of x for y
Properties of the
(MRSxy) is defined as the maximum amount
Indifference Curves
of y the consumer is willing to give up for
getting an additional unit of x and still
remaining on the same indifference curve”. Indifference curves are subjective and
unique to each person. Nevertheless they
have in common the following properties:
2.13
1. Indifference curve must have
Diminishing Marginal Rate negative slope
of Substitution An indifference curve has a negative
slope, which denotes that if the quantity
It explains the concepts of diminishing of commodity (y) decreases, the quantity
marginal rate of substitution. of the other (x) must increase, if the
Y Y Y
CommoditY Y
Commodity Y
Commodity Y
B
B
A B
A A
0 X 0
Commodity X Commodity X X 0 Commodity X X
Diagram 2.17
Consumption Analysis 45
consumer is to stay on the same level of At the point of intersection, C=B on
satisfaction. (a necessary consequence IC1 and C=A on IC2. So A=B whereas,
of the non satiety postulate). A is in upper IC and B is on lower IC.
The curves that do not have negative 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
to combination A. Y
2. Indifference Curves are convex to A
the origin
CommoditY Y
Indifference curves are not only
negatively sloped, but are also
convex to the origin. The convexity
of the indifference curves implies
that not only the two commodities
IC
are substitutes for each other but
0 B
also the fact that the marginal rate Commodity X X
of substitution (MRS) between the
Diagram 2.19
goods decreases as a consumer
moves along an indifference curve.
If they touch the axis, it violates the
3. Indifference curve cannot intersect basic assumption that the consumer
purchases two commodities in a
Y combination. Purchasing only one
commodity means monomania
CommoditY Y
IC1 2.15
B
0 Commodity X Price line or Budget line
X
0 Commodity X B X
2.17
Diagram 2.20
Conclusion
line is a downward sloping straight line
connecting X axis and Y axis as follows. An understanding of consumer behaviour
OA – income, OA/OB price of X good. is an important part of comprehending
The budget line is the line joining various the allocation of resources by individuals.
combinations of the two goods which the Consumption decisions are made based
consumer can buy at given prices and income. upon a logical process of valuing utility,
price and income alternatives. Demand
analysis enables the producers to
2.16 understand consumer behaviour and take
Consumer Equilibrium proper decisions accordingly.
N T on it.
Needs: It is defined as goods
IC4
IC3 or services that are
IC2 required. This would
IC1
include the needs for
0 M B X food, clothing, shelter
Coffee and health care.
Diagram
Diagram2.21
2.21
Consumption Analysis 47
Utility: Utility is the capacity of Indifference A set of indifference
a commodity to satisfy Map: curves upper ICs
human wants. denoting higher and
Marginal Marginal utility is the lower ICs lesser level
utility: utility derived from of satisfaction.
the last or Marginal Price line or The line joining various
unit of consumption. Budget line: combination of the
Elasticity of The Elasticity of two goods which the
Demand: Demand refers to consumer can buy
the rate of change in at given prices and
demand due to a given income.
change in price. Consumer’s It refers to a situation
Consumer’s The difference Equilibrium: under which a consumer
Surplus: between the potential spends his entire income
price and actual price. on purchase of a goods
Indifference ICs means all those in such a manner that
Curves: combinations of any it gives him maximum
two goods which give satisfaction and he has
equal satisfaction to the no tendency to change
consumer. it.
Consumption Analysis 48
ICT CORNER
Inverse Relation Between Price and Consumer’s Surplus
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
02'(/48(67,216
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
11. The concept of elasticity of demand 16. Indifference curve was first introduced
was introduced by by
a. Ferguson a. Hicks
b. Keynes b. Allen
c. Adam Smith c. Keynes
d. Marshall d. Edgeworth
Consumption Analysis 51
Answers (Part- A)
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
$&7,9,7<
1. Prepare a budget line on the basis of your family income to
purchase any two commodities.
2. Visit a vegetable market in your locality and write a report about
the level of price and demand for a particular commodity over
a period of time.
References
Consumption Analysis 53
CHAP TER
3 Production Analysis
LEARNING OBJECTIVES
Production Analysis 54
3.2
Features of the Factors of
Production
3.2.3 Capital
Production Analysis 57
the factors involved in the process of The short-run is the period where
production. some inputs are variable, while others are
Risk-taking and Uncertainty-bearing: fixed. Another feature is that firms do not
There are risk-taking and uncertainty- enter into the industry and existing firms
bearing obstacles. Risks may be insured may not leave the industry.
but uncertainties cannot be insured. Long run, on the other hand, is the
They reduce the profit. period featured by the entry of new firms
to the industry and the exit of existing
3.3 firms from the industry.
Production Function In general, Production function
may be classified into two
Production function refers to the Short-run Production Function as
relationship among units of the factors illustrated by the Law of Variable
of production (inputs) and the resultant Proportions.
quantity of a good produced (output).
Long-run Production Function as
According to George J. Stigler, explained by the Laws of Returns to Scale.
“Production function
is the relationship
between inputs of 3.4
productive services Law of Variable
per unit of time and Proportions
outputs of product per
unit of time.” The law states that if all other factors are fixed
Production and one input is varied in the short run, the
function may be total output will increase at an increasing
expressed as: Q = f (N, L, K, T) Where, rate at first instance, be constant at a point
Q = Quantity of output, N = Land; L = and then eventually decrease. Marginal
Labour; K = Capital; and T = Technology. product will become negative at last.
Depending on the efficiency of the According to G.Stigler, “As equal
producer, this production function varies. increments of one input are added, the
The function implies that the level inputs of other productive services being
of output (Q) depends on the quantities of held constant, beyond a certain point,
different inputs (N, L, K, T) available to the resulting increments of product will
the firm. decrease, i.e., the marginal product will
Short-run Production and Long diminish”.
run Production
Assumptions
In Micro economics, the distinction
between long run and short run is made on the The Law of Variable Proportions is based
basis of fixed inputs that inhibit the production. on the following assumptions.
Production Analysis 58
Only one factor is variable while to the change in the units of the input. It is
others are held constant. expressed as
All units of the variable factor are
homogeneous. MP=ΔTP/ΔN
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
16 TPLL
TP
TPL 14 Stage I
N= Total units of inputs employed MPL 12
APL 10
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 x
MPLL
MP
variable input is employed. In other words, it Unit of
OfVariable
Variable Factor
Factor
is the ratio of the change in the total product Diagram 3.1
Production Analysis 59
Table 3.1 Stages of Production
Units of variable Total Product Marginal Product Average Product Stages
factor (L) (TPL) (MPL) (APL)
1 2 2 2
2 6 4 3 I
3 12 6 4
4 16 4 4
5 18 2 3.6 II
6 18 0 3
7 16 -2 2.28 III
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
Relationship among Total, Average and Marginal Products
In the long- run, there is no fixed In this case if all inputs are increased
factor; all factors are variable. The by one per cent, output increase by
laws of returns to scale explain the more than one per cent.
relationship between output and the (2) Constant Returns to Scale:
scale of inputs in the long-run when In this case if all inputs are increased
all the inputs are increased in the same by one per cen, output increases
proportion. exactly by one per cent.
(3) Diminishing Returns to Scale:
Assumptions
In this case if all inputs are increased
Laws of Returns to Scale are based on the by one per cent, output increases by
following assumptions. less than one per cent.
All the factors of production (such as
land, labour and capital) are variable
but organization is fixed. Diagrammatic Illustration
There is no change in technology. The three laws of returns to scale can be
There is perfect competition in the explained with the help of the diagram
market. below.
Outputs or returns are measured in In the diagram 3.2, the movement
physical quantities. from point a to point b represents
Production Analysis 61
K, Unit of capital
d
8
q=8
4 c
q=6
2 b q=3
1 a q=1
1 2 4 8
Labour
Diagram 3.2
Production Analysis 64
3.8.4 Properties of Iso-quant
Y
Iso-quant curve Curve
30 Y
Capital
22
A
16 K5
Capital
12 B
K4
10 IQ=400 C
K3
D
K2
0 2 4 6 8 10 Y
Labour
L2 L3 L5 X
Diagram 3.3 Labour
Diagram 3.5
Production Analysis 65
MARGINAL RATE OF TECHNICAL SUBSTITUTION
Y
Capital Diminishing MRTS Y Constant MRTS Y Increasing MRTS
0 0 0
X X X
Labour
Diagram 3.6
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
IQ3
IQ1
Capital
A
Capital
c
300 Units
300 Unit
B
100 Units 100 Unit
X Labour X
Labour
Diagram 3.7 Diagram 3.8
Production Analysis 66
Y Suppose that a producer has a
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
Symbolically, At point of tangency, the iso-quant
4K + 0L= ₹.120 curve must be convex to the origin or
3K + 3L= ₹.120 MRTSLk must be declining.
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
line AE is called as Iso-cost line. P3
N
P2
P1
3.10 P
N E
Producer’s Equilibrium R S IQ(500 Units)
O M L L1 L2 L3 X
Producer equilibrium implies the situation Units of labour
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
Conditions for Producer
Equilibrium 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
The other points such as H, K, R and The Cobb-Douglas production
S lie on higher iso cost lines indicating that function can be expressed as follows.
a larger outlay is required, which exceeds
the financial resources of the firm. Q = AL α Kß
Where, Q = output; A = positive constant;
K = capital; L = Labor α and β are positive
3.11
fractions showing, the elasticity coefficients
Cobb-Douglas Production of outputs for the inputs labor and capital,
Function respectively.
Production Analysis 69
labour and capital. Production takes Qs = f (Px, Pr, Pf, T, O, E )
place only when both factors are
employed. Where Qs = Quantity supplied of x
commodity
Labour contributes three-fourth of
production and capital contributes Px = Price of x Commodity
one-fourth of production.
Pr = Price of related goods
The elasticity of substitution between
the factors is equal to one. Pf = Price of factors of production
T = Technology
3.12
O = Objective of the producer
Law of Supply
E = Expected Price of the commodity.
Law of Supply is associated with
production analysis. It explains the Assumptions
positive relationship between the price Law of Supply is based on the following
of a commodity and the supply of that assumptions.
commodity. For example, if the price of
cloth increases, the supply of cloth will also There is no change in the prices of
increase. This is due to the fact that when factors of production
Law of Supply describes a direct
price rises, it is profitable to increase the There is no change in price of capital
relation between price of a good and
production and hence supply increases. goods
the supply of that good.
Natural resources and their availability
remain the same
'H¿QLWLRQ Prices of substitutes are constant
The Law of Supply can be stated as: There is no change in technology
“Other things remaining the same, if the Climate remains unchanged
price of a commodity increases its quantity Political situations remain unchanged
supplied increases and if the price of a There is no change in tax policy
commodity decreases, quantity supplied
also decreases”. Explanation
Suppose that the supply function is
3.12.1 Supply Function
Qs = f(P) or Q = 20P
The supply of a commodity depends on
the factors such as price of commodity, P is an independent variable. When its value
price of labour, price of capital, the changes, new values of Qs can be calculated.
state of technology, number of firms,
prices of related goods, and future price Supply Schedule
expectations and so on. Mathematically A supply schedule shows the different
the supply function is quantities of supply at different prices.
Production Analysis 70
This information is given in the supply on the Y axis. The points such as e, d, c,
schedule given below. b and a on the supply curve SS’, represent
various quantities at different prices.
Table 3.4 Price and Supply
3.12.3 Factors determining
Price (P) Supply (Qs) supply
1 20
1. Price of the commodity
2 40
Qs = 20P Higher the price larger the supply.
3 60
Price is the incentive for the
4 80 producers and sellers to supply more.
5 100 2. Price of other commodities
The supply of a commodity
depends not only upon its price
3.12.2 Supply Curve but also price of other commodities.
For instance if the price of commercial
A supply curve represents the data given crops like cotton rise, this may
in the supply schedule. As the price of result in reduction in cultivation
the commodity increases, the quantum of food crops like paddy and so its
supplied of the commodity also increases. supply.
Thus the supply curve has a positive slope
3. Price of factors
from left to right. (see diagram 3.12.)
When the input prices go up, this
Y results in rise in cost and so supply
S will be affected.
5 a 4. Price expectations
4 b The expectation over future prices
determines present supply. If a rise in
Price
Production Analysis 71
role in determining production
3.12.4 Elasticity of Supply
level.
7. Discovery of new raw materials Elasticity of supply may be defined as the
degree of responsiveness of change in supply
The discovery of new raw materials
to change in price on the part of sellers.
which are cheaper and of high
quality tends to increase supply of It is mathematically expressed as:
the product.
Elasticity = proportionate change in
8. Taxes and subsidies
of supply supply / proportionate
Subsidies for inputs, credit, power change in price
etc. encourage the producers to
produce more. Withdrawal of such es=(ΔQs/Qs) / (ΔP/P); es = ΔQs / ΔP × P/Qs
incentives will hamper production. Where Q s represents the supply, P
Taxes both direct and indirect kill represents price, Δ denotes a change.
the ability and willingness to produce
more.
3.12.5 Types of Elasticity of
9. Objective of the firm Supply
When the goal of the firm is sales There are five types of elasticity of supply.
maximisation or improving market
share, the supply of the product is 1. Relatively elastic supply (see
likely to be higher. Diagram 3.13)
o B D x o B D x o B D x
Supply
ES=0 s4 ES=α
Y Y
C
C
A s5
A
o B D x o B D x
Diagram 3.13
Production Analysis 72
The co-efficient of elastic supply is they get a high price. Once they get
greater than 1(Es > 1). One percent higher price, larger supply is possible.
change in the price of a commodity The elasticity of supply of durable
causes more than one per cent change in goods is high. But perishables are to
the quantity supplied of the commodity. be sold immediately. So perishables
2. Unitary elastic supply (see Diagram have low elasticity of supply.
3.13) 2. Cost of production
The coefficient of elastic supply is When production is subject to either
equal to 1 (Es = 1). One percent change constant or increasing returns,
in the price of a commodity causes an additional production and therefore
equal ( one per cent) change in the increased supply is possible. So
quantity supplied of the commodity. elasticity of supply is greater. Under
3. Relatively inelastic supply (see diminishing returns, increase in
Diagram 3.13) output leads to high cost. So elasticity
of supply is less.
The coefficient of elasticity is less
than one (Es < 1). One percent change 3. Technical condition
in the price of a commodity causes a In large scale production with huge
less than one per cent change in the capital investment, supply cannot be
quantity supplied of the commodity. adjusted easily. So elasticity of supply
4. Perfectly inelastic supply (see is lesser. Where capital equipment
Diagram 3.13) is less and technology simple, the
supply is more elastic.
The coefficient of elasticity is equal
to zero (Es = 0). One percent change 4. Time factor
in the price of a commodity causes During very short period when
no change in the quantity supplied of supply cannot be adjusted, elasticity
the commodity. of demand is very low. In short
5. Perfectly elastic supply (see Diagram period, variable factors can be added
3.13) and so supply can be adjusted to
some extent. So elasticity of supply
The coefficient of elasticity of supply
is more. In long period, even the
is infinity. (Es = D ). One percent
fixed factors can be added and hence
change in the price of a commodity
supply is highly elastic.
causes an infinite change in the
quantity supplied of the commodity.
3.13
Conclusion
3.12.6 Factors governing
elasticity of supply
Production takes place with the view to
1. Nature of the commodity fulfilling the demands of the consumers. Today
Durable goods can be stored for a long consumption expands in a variety of ways.
time. So, the producers can wait until Hence, production has to necessarily expand
Production Analysis 73
in size and improve in quality. Production Supply: The quantity of output
should also help in the determination of the which producers are willing and
price of the factors so that the amount of the able to offer to the market at various
income generated be appropriately spent on prices.
the factors of production. Elasticity of Supply: Responsiveness
of the quantity supplied of a good to a
Glossary change in its price.
Production: An activity that Iso-quant: All the combination of two
transforms input into output. inputs which are capable of producing
Factors of Production: Four factors same level of output.
are Land, Labour, Capital and Iso-cost: All combination of two
Organisation. Factor services are used inputs showsthat a firm can purchase
in the process of production. with the same amount of money.
Land: All gifts of Nature. Short-run Production Function:
Labour: Physical or mental effort Relationship between inputs and
of human being in the process of output, when there is at least one fixed
production. factor in the production process.
Production Analysis 74
ICT CORNER
LAW OF VARIABLE PROPORTION
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
MODEL QUESTIONS
Production Analysis 76
10. An Iso-quant curve is also known as 16. Modern economists have propounded
a. Inelastic Supply Curve the law of
b. Inelastic Demand Curve a. Increasing returns
c. Equi-marginal Utility b. decreasing returns
d. Equal Product Curve c. Constant returns
11. Mention the economies reaped from d. variable proportions.
inside the firm
a. financial 17. Producer’s equilibrium is achieved at
b. technical the point where:
c. managerial a. Marginal rate of technical
d. all of the above substitution(MRTS) is greater than
the price ratio
12. Cobb-Douglas production function
assumes b. MRTS is lesser than the price
ratio
a. Increasing returns to scale
b. Diminishing returns to scale c. MRTS and price ratio are equal to
each other
c. Constant returns to scale
d. All of the above d. The slopes of isoquant and isocost
lines are different.
13. Name the returns to scale when the
output increases by more than 5%, for
a 5% increase in the inputs, 18. The relationship between the price
of a commodity and the supply of
a. Increasing returns to scale
commodity is
b. decreasing returns to scale
a. Negative
c. Constant returns to scale
b. Positive
d. All of the above
c. Zero
14. Which of the following is not a
characteristic of land? d. Increase
a. Its limited supply. 19. If average product is decreasing, then
b. It is mobile marginal product
c. Heterogeneous a. must be grater than average
d. Gift of Nature product
15. Product obtained from additional b. must be less than average product
factors of production is termed as
c. must be increasing
a. Marginal product
d. both a and c
b. Total product
c. Average product
d. Annual product
Production Analysis 77
20. A production function measures
the relation between
c. the quantity of inputs and the
a. input prices and output prices quantity of output.
b. input prices and the quantity of output d. the quantity of inputs and input
prices.
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
27. What are the reasons for upward sloping supply curve?
32. Bring out the Relationship among Total, Average and Marginal Products.
Production Analysis 78
Part D Answer the following questions in about a page
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
CHAP TER
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.
Cost
TFC
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 is zero, the Total cost will be 12, hence
fuel cost, electricity charges, etc. Variable fixed cost.
cost is also called as Prime Cost, Special It could be observed that TFC does not
Cost, or Direct Cost. change with output. Even when the output
is zero, the fixed cost is ₹.1000. TFC is
4.4 a horizontal straight line, parallel to
X axis.
Short run Cost Curves
(in ₹) (in ₹)
400 0 1000 0 1000
300 1 1000 200 1200
200
2 1000 300 1300
3 1000 400 1400
0 1 2 3 4 5 X
4 1000 600 1600
Output
5 1000 900 1900
Diagram 4.2
Y
TC
In the diagram the TVC is zero when 1900
nothing is produced. As output increases
1600
TVC also increases. TVC curve
Cost
1400
slopes upward from left to right. For 1300
1200 TVC
instance in TC = Q 3 – 18Q 2 + 91Q
1000 TFC
+12, variable cost, TVC = Q3 – 18Q2 900
+ 91Q
600
400
300
200
4.4.3 Total Cost Curves
Total Cost means the sum total of all 0 1 2 3 4 5 X
payments made in the production. It is also Output
called as Total Cost of Production. Total Diagram 4.3
cost is the summation of Total Fixed Cost
(TFC) and Total Variable Cost (TVC). It is It is to be noted that
written symbolically as
a) The TC curve is obtained by adding
TC = TFC + TVC. For example, TFC and TVC curves vertically.
when the total fixed cost is ₹ 1000 and
b) TFC curve remains parallel to x axis,
the total variable cost is ₹ 200 then
indicating a straight line.
the Total cost is = ₹ 1200 (₹ 1000 +
₹ 200). c) TVC starts from the origin and moves
upwards, as no variable cost is incurred
If TFC = 12 and
at zero output.
TVC = Q3 – 18Q2 + 91Q
d) When TFC and TVC are added, TC
3 2
TC = 12 + Q – 18Q + 91Q starts from TFC and moves upwards.
Y 300 AVC
200
1000
Average fixed cost
100
0
1 2 3 4 5 X
500 Quantity
333 Diagram 4.5
250
200 AFC
0 1 2 3 4 5 X
It refers to the total variable cost per unit
Quantity produced
of output. It is obtained by dividing total
Diagram 4.4 variable cost (TVC) by the quantity of
Average Cost
2, the AVC is ₹ 150, (AVC = 300/2 = 150) A C
650
AVC is shown in table 4.5 and Diagram 4.5. 460
400 B
If TVC = Q3 – 18Q2 + 91Q 380
AVC = Q2 –18Q + 91
It is to be noted that 0 1 2 3 4 5 X
Output
a) AVC declines initially and then
increases with the increase 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 =
Average cost
the AC and MC curves as shown in
diagram 4.8.
Y AC K x
1200 Output
MC
Diagram 4.9
900
Long run average cost (LAC) is equal
650 to long run total costs divided by the level
Cost
of output.
450
LAC = LTC/Q
300
200 where, LAC denotes Long-Run Average Cost,
0 1 2 3 4 5 X LTC denotes Long-run Total Cost and
Output
Q denotes the quantity of output.
Diagram 4.8
The LAC curve is derived from short-
run average cost curves. It is the locus of points
1. When AC is falling, MC lies denoting the least cost curve of producing
below AC. the corresponding output. The LAC curve is
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
above the AC. A significant recent development in
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
Long Run Cost Curve: through increase in plant size and
associated variable factors, cost per unit
falls rapidly due to economies of scale.
In the long run all factors of production
become variable. The existing size of the
firm can be increased in the case of long
run. There are neither fixed inputs nor
fixed costs in the long run.
30
28
24
18
TRn denotes total revenue of nth item, TRn-1
10 denotes Total Revenue of n-1th item and
TR
TRn+1 denotes Total Revenue of n+1thitem.
0 1 2 3 4 5 6 7 8 9 10 X
Output
If TR = PQ MR = dTR/dQ = P,
Diagram 4.11 which is equal to AR.
Price
4
TR, AR, MR - Constant price
2
Quantity Price Total Average Marginal AR
0
Sold (P) Revenue Revenue Revenue 1 2 3 4 5 6 7 8 9 10 X
-2
(Q) (TR) (AR) (MR) -4 M
R
₹ ₹ ₹ ₹
-6
1 5 5 5 5 -8
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 AR, TR, MR at declining price
Price (P)/
Quantity Total Marginal
Y Average
Sold Revenue Revenue
Revenue
AR (TR) (MR)
(AR)
Price
5 (Q) ₹ ₹
₹
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
Price
The relationship among AR, MR and e=-1
MR = AR ( e-1/e) AR=D
0 MR
The relationship between the AR curve Y
X
and MR curve depends upon the elasticity
Revenue (TR)
of AR curve (AR = DD = Price).
a. When price elasticity of demand is
Total
TR
greater than one, MR 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 TR, AR, MR & Elasticity 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 behavior 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
Total Cost The sum of total fixed Marginal The additional revenue
cost and total variable Revenue obtained by selling one
costs. more unit of output.
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
11. Wage is an example for ________ 16. Revenue received from the sale of
cost of the production. products is known as _______ revenue.
a. fixed a. profit
b. variable b. total revenue
c. marginal c. average
d. opportunity d. marginal
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+Q3, 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 MARKET 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,
E Q
5.3.4 On the Basis of 75
TR
Competition 45
N
i. Perfect competition market P
Market Structure
o 1 2 3 4 5 Q X
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
B E2
S D
o 500 o 50 o 50 x
Output Output Output
Normal profit Abnormal=2 x 50=100 Loss=2 x 50=100
Diagram 5.3
AR, MR
firm’s cost curve is above the price line. E
50 D/AR
T
To checkup how much profit the
10 monopolist is making at the equilibrium
MR output, the average revenue curves and the
average cost curves are used. At equilibrium
0 3 x level of output is 3; the average revenue is
Quantity
88 and the average cost is 50. Therefore
Diagram 5.6
(88-50 =38) is the profit per unit.
Total profit = (Average Revenue – Average
as more units of output are sold, the MR Cost) X Total output
lies below the AR curve (MR<AR).
= (88 – 50) X3
The monopolist will continue to
= 38X3=114.
sell his product as long as his MR>MC.
He attains equilibrium at the
5.7.4 Price Discrimination
level of output when its MC is equal to
under monopoly
MR. Beyond this point, the producer
will experience loss and hence will stop selling. A discriminating monopoly is a single
entity that charges different prices for
Let us take the following hypothetical
different consumers. Higher price will be
example of Total Revenue Function and
charged for price inelastic consumers and
Total cost function.
vice versa
TR=100Q-4Q2 and
TC=Q3 - 18Q2 + 91Q +12.
Types of Price Discrimination
Therefore AR= 100 - 4Q;
There are three types of price discrimination.
MR=100 - 8Q;
AC= Q2- 18Q + 91 + 12/Q; L Personal – Different prices are
Toothpaste
Toothpaste
Toothpaste
The firm under monopolistic competition
achieves its equilibrium when it’s MC = MR,
and when its MC curve cuts its MR curve
from below. If MC is less than MR, the sellers
will find it profitable to expand their output.
R
4. There is a free entry and exit of firms. S
K L
normal profit or incur loss. But in the
AR, AC, MR & MC
Q
P long run, the entry of the new firms in the
industry will wipe out the super normal
E D/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
MR
firms in the industry.
0 M x In the long run AR curve is
Quantity more elastic or flatter, because plenty of
Diagram 5.8 substitutes are available. Hence, the firms
will earn only normal profit.
As shown in the diagram, the AR and MR
curves are fairly elastic. The equilibrium
situation occurs at point ‘E’, where MC = The only one condition : MC = MR.
MR and MC cuts MR from below. for equilibrium in the
The equilibrium output is OM and short run
the equilibrium price is OP. The two conditions : MC = MR
for equilibrium in the and AC =
The total revenue of the firm is
long run AR.
‘OMQP’ and the total cost of the firm is
‘OMLK’ and thus the total loss is ‘PQLK’.
This firm incurs loss in the short run.
In the diagram equilibrium is achieved
at point ‘E’. The equilibrium output is ‘OM’
Long-Run Equilibrium of the and the equilibrium price is ‘OP’. The average
Firm and the Group Equilibrium revenue at the equilibrium output is ‘MQ’ and
In the short run a firm under the average cost is also ‘MQ’. Thus, in the long
monopolistic competition may earn super run under monopolistic competition, there is
MARKET STRUCTURE AND PRICING 111
equilibrium when AR=AC and MC=MR. It 4. Too Many Varieties of Goods:
means that a firm earns normal profit. AR is Introducing too many varieties of a
tangent to the Long Run Average Cost (LAC) good is another waste of monopolistic
curve at point ‘Q’. competition. The goods differ in size,
shape, style and colour. A reasonable
number of varieties would be sufficient.
5.8.3 Wastes of Monopolistic Cost per unit can also be reduced,
Competition if only a few varieties are produced
Generally there are five kinds of wastages in larger quantity Instead of larger
under monopolistic competition. varieties with small quantity.
1. Idle Capacity: Unutilized capacity is 5. Inefficient Firms: Under monopolistic
the difference between the optimum competition, inefficient firms charge
output that can be produced and the prices higher than their marginal cost.
actual output produced by the firm. Such type of inefficient firms should
In the long run, a monopolistic firm be kept out of the industry. But, the
produces delibourately output which buyers’ preference for such products
is less than the optimum output mostly due to emotions. enables the
that is the output corresponding to inefficient firms to continue to exist.
the minimum average cost. This is Efficient firms cannot drive out the
done so mainly to create artificial inefficient firms because sometimes
and raise price. This leads to excess the Efficient firms may not be
capacity which is actually a waste able to Spend money on attractive
in monopolistic competition. advertisement to lure the buyers. In
In diagram 5.8., MF quantity of reality, the consumers are mostly
emotional rather than rational, as
output refers to unused capacity. If
stated by Richard Theiler, the Nobel
OF is produced, the society will get
prize winner for the year 2017.Rational
larger quantity with lower price. decision are made by mind; emotional
2. Unemployment: Under monopolistic decisions are made by heart.
competition, the firms produce less
than optimum output. As a result,
the productive capacity is not used Monopsony
to the fullest extent. This will lead to
Monopsony is a market structure in
unemployment of human resources also.
which there is only one buyer of a good
3. Advertisement: There is a lot of waste or service. If there is only one customer
in competitive advertisements under for a certain good, that customer has
monopolistic competition. The wasteful monopsony power in the market for
and competitive advertisements lead that good. Monopsony is analogous to
to high cost to consumers. It is also monopoly, but monopsony has market
claimed that advertisements cheat the power on the demand side rather than
consumers by giving false. information on the supply side.
about the product.
MARKET STRUCTURE AND PRICING 112
Oligopoly Market System
Bilateral Monopoly: -Independent suppliers
control supply and
demand for the products
Bilateral monopoly refers to a market -Examples include airlines,
automotive and banking
situation in which a single producer companies
(monopolist) of a product faces a single
buyer (monopsonist) of that product.
5.9
gas. It is difficult to pinpoint the number of
Duopoly firms in ‘competition among the few.’ With
only a few firms in the market, the action of
Duopoly is a special case of the theory of one firm is likely to affect the others.
oligopoly in which there are only two sellers.
Both the sellers are completely independent 5.10.1 Features of
and no agreement exists between them. Even Oligopoly
though they are independent, a change in the
1. Few large firms
price and output of one will affect the other,
and may set a chain of reactions. A seller may, Very few big firms own the major control
however, assume that his rival is unaffected of the whole market by producing major
by what he does, in that case he takes only his portion of the market demand.
own direct influence on the price. 2. Interdependence among firms
The price and quality decisions of a
5.9.1 Characteristics of particular firm are dependent on the
Duopoly price and quality decisions of the rival
1. Each seller is fully aware of his rival’s firms.
motive and actions. 3. Group behaviuor
2. Both sellers may collude (they agree The firms under oligopoly realise the
on all matters regarding the sale of importance of mutual co-operation.
the commodity). 4. Advertisement cost
3. They may enter into cut-throat The oligopolist could raise sales
competition. either by advertising or improving
4. There is no product differentiation. the quality of the product.
5. They fix the price for their product with 5. Nature of product
a view to maximising their profit. Perfect oligopoly means homogeneous
products and imperfect oligopoly
5.10 deals with heterogeneous products.
Oligopoly 6. Price rigidity
It implies that prices are difficult to
Oligopoly is a market situation in which be changed. The oligopolistic firms
there are a few firms selling homogeneous or do not change their prices due to the
differentiated products. Examples are oil and fear of rivals’ reaction.
MARKET STRUCTURE AND PRICING 113
5.11
Comparison among the Features of Various Markets
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
b 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
39. Explain price and output determined under monopolistic competition with help of
diagram.
MARKET STRUCTURE AND PRICING 119
ACTIVITY-1
Divide the class into five groups. Assign each group a market structure;
for first group perfect competition, second group monopoly,
third group oligopoly, forth group duopoly and for fifth group
monopolistic competition. Now each student is to identify a business
or organization or seller that orperate in that market structure. Ask
each student to prepare a brief description of the following.
1. Name of the market structure
2. Business name
3. Industry
4. Identify the conditions of market structure
5. What are prices of a particular product, whether same price or
different price?.
6. Is there non-price competition?
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
Websites
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
1. Marginal Physical Product (MPP) the point, the marginal revenue product
The Marginal Physical Product of a is less than the price of the factor. Hence,
factor is the increment in the total employer will suffer loss when he uses more
product obtained by the employment of the factor. Therefore, the conclusion is
of an additional unit of that factor. that the employer will so adjust the price of
the factor of production so as to equalize
2. Value of Marginal Product (VMP)
the marginal revenue product of that factor.
The Value of Marginal Product is
obtained by multiplying the Marginal In short, the Marginal Productivity
Physical Product of the factor by the Theory of Distribution states that
price of product. a) The price of a factor of production
Symbolically depends upon its productivity.
b) The price of a factor is determined by
VMP = MPP x Price and will be equal to marginal revenue
product of that factor.
3. Marginal Revenue Product (MRP)
c) Under certain conditions, the price of a
The Marginal Revenue Product of a
factor will be equal to both the average
factor is the increment in the total
and marginal products of that factor.
revenue which is obtained by the
employment of an additional unit of
The Marginal Productivity Theory
that factor.
of Distribution can be represented
MRP = MPP x MR diagrammatically as follows:
Q
depends upon its productivity. The greater P
MFC = AFC
the productivity of a factor, the higher
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
more of this factor, because his profit will
be increased.
O N X
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
and Y axis represents the factor price and In diagram 6.2 the factor pricing under
revenue product. MRP is the Marginal imperfect competition is represented. AFC
Revenue Product Curve and ARP is the is Average Factor Cost curve. It represents
Average Revenue Product curve. AFC is the price paid to the factors. It increases
the Average Factor Cost curve and MFC as the number of factors demanded by the
is the Marginal Factor Cost curve. AFC is employer increases. As AFC rises, MFC
horizontal under perfect competition and lies above AFC. It represents the marginal
MFC coincides with it. cost paid to the factors. At the point Q,
When there is perfect competition in MFC = MRP, where the employer attains
the factor market, the firm is in equilibrium his maximum profit and so he stops
(i.e., earning maximum profits) only when employment of the factors at the point.
MFC = MRP. Hence, in the diagram, the firm But the average cost paid is NRSO and the
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.
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 MFC short-run.
Q
6.5
Factor Price and Revenue
AFC
P
Rent
Product
S
R ARP 6.5.1 Meaning
MRP Rent is the price or reward given for the
O N
use of land or house or a machine to
X
Factor Units the owner. But, in Economics, “Rent” or
Diagram 6.2 “Economic Rent” refers to that part of
-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. Gross 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)
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
consists of coins, currency notes and bank
deposits (Say M = 200). L2 E2
E4
L4
P
Equilibrium between Demand
and Supply of Money
0 M3 M2 M4 X
The equilibrium between liquidity preference Demand for Money and
and demand for money determine the Supply of Money
rate of interest. 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 is OM2, the interest is OI2 and if the
L1 supply of money is reduced from OM2 to OM3,
L the interest would increase from OI2 to OI3. If the
Rate of Interest
E
I P1 Criticisms
P
1. This theory does not explain the
existence of different interest rates
0 M2 X prevailing in the market at the same
Demand for Money and time.
Supply of Money
2. It explains interest rate only in the
Diagram 6.5
short-run.
Distribution Analysis 135
6.10 Here cost implies explicit costs only
(Normally economic cost, social cost and
3UR¿W
environmental cost are not considered
by the Accountants in India).
The entrepreneur coordinates all the other
b. Net Profit or Pure Profit or Economic
three factors (land, labour and capital) of
profit or True profit
production. Entrepreneur is rewarded for
his srvices in the form of profit. Net or pure or economic or true profit
is the residual left with entrepreneur
after deducting from Gross profit the
6.10.1 0HDQLQJRI3UR¿W
remuneration for the self-owned factors of
Profit is a return to the entrepreneur for the production, which are called implicit cost.
use of his entrepreneurial ability. It is the
net income of the organizer. In other words, Net Profit = Gross Profit-
profit is the amount left with the entrepreneur Implicit costs
after he has payments made for all the other c. Normal Profit
factors (land, labour and capital) used by
It refers to the minimum expected
him in the production process. However,
return to stay in business.
there are other versions also.
d. Super Normal Profit
Super normal profits are over and
6.10.2 .LQGVRI3UR¿W
above the normal profit.
I. Monopoly Profit: Profit earned by
the firm because of its monopoly Super Normal = Actual profit-
control. Profit Normal profit
II. Windfall Profit: Some times, profit
arises due to changes in price level. 6.11
Profit is due to unforeseen factors.
7KHRULHVRI3UR¿W
III. Profit as functional reward: Just
like rent, wage and interest, profit is
earned by the entrepreneur for his
entrepreneurial function.
6.10.3. &RQFHSWVRI3UR¿W
a. Gross Profit
Gross Profit is the surplus which accrues
to a firm when it subtracts its Total
Expenditure from its Total Revenue.
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
a
an
te
ce
n
d
a
a
do
ly
il
in
pa
na
sta
rm
az
di
an
Ita
Ch
ng
Ja
Ca
Br
Fr
Ge
d
In
Ki
ite
d
Un
ite
Un
Diagram 7.1
1. India has a mixed 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
3. An emerging market
India has emerged as vibrant economy
sustaining stable GDP growth rate even
in the midst of global downtrend. This
has attracted significant foreign capital
through FDI and FII.India has a high
potential for prospective growth. This also
Diagram 7.2
makes it an emerging market for the world.
The service sector, contributes a lion’s share
4. Emerging Economy of the GDP in India. There has been a high
rise growth in the technical sectors like
WORLD NATION IN G-20 Information Technology, BPO etc. These
1. Argentina 11. Italy sectors have contributed to the growth
2. Australia 12. Japan
of the economy. These emerging service
3. Brazil 13. Mexico
sectors have helped the country go global
4. Canada 14. Russia
and helped in spreading its branches around
5. China 15. Saudi Arabia
6. European Union
the world.
16. South Africa
7. France 17. South Korea
8. Germany 18. Turkey 7. Large Domestic consumption
9. India 19. United Kingdom
With the faster growth rate in the economy
10. Indonesia 20. United States
the standard of living has improved a lot.
Indian Economy 145
This in turn has resulted in rapid increase The human capital of India is young. This
in domestic consumption in the country. means that India is a pride owner of the
The standard of living has considerably maximum percentage of youth. The young
improved and life style has changed. population is not only motivated but
skilled and trained enough to maximize
the growth. Thus human capital plays
8. Rapid growth of Urban areas
a key role in maximizing the growth
Urbanization is a key ingredient of the prospects in the country. Also, this has
growth of any economy. There has been a invited foreign investments to the country
rapid growth of urban areas in India after and outsourcing opportunities too.
independence. Improved connectivity in
transport and communication, education
and health have speeded up the pace of 7.3.2 Weakness of Indian
urbanization. Economy
1. Large Population
9. Stable macro economy
India stands secondin terms of size of
The Indian economy has been projected population next to China and our country
and considered as one of the most stable is likely to overtake china in near future.
economies of the world. The current Population growth rate of India is very
year’s Economic survey represents the high and this is always a hurdle to growth
Indian economy to be a “heaven of rate. The population growth rate in India
macroeconomic stability, resilience and is as high as 1.7 per 1000.The annual
optimism. According to the Economic addition of population equals the total
Survey for the year 2014-15, 8%-plus population of Australia.
GDP growth rate has been predicted, with
actual growth turning out to be a little 2. Inequality and poverty
less (7.6%). This is a clear indication of a
There exists a huge economic disparity in
stable macroeconomic growth.
the Indian economy. The proportion of
income and assets owned by top 10% of
10. Demographic dividend Indians goes on increasing. This has led to
an increase in the poverty level in the society
and still a higher percentage of individuals
are living Below Poverty Line (BPL). As a
result of unequal distribution of the rich
becomes richer and poor becomes poorer.
3. Increasing Prices of
Essential Goods
Even though there has been a constant
growth in the GDP and growth
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. Iron-Ore
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 haematiteand 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
Ramesh Singh 5th edition - McGraw Hill Publication
Economy
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
3. Jagdish Bhagwati; Arvind Panagariya - India’s Reforms: How They Produced
Panagariya
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 featuresthat 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 125 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.
9.3
Arguments in favour of
The triple pillars of New Economic Policy LPG
are Liberalization, Privatization and
Globalization (LPG) a. Liberalization was necessitated
Liberalization: Liberalization refers to because various licensing policies were
removal of relaxation of governmental said to be deterring the growth of the
restrictions in all stages in industry. economy.
Delicensing, decontrol, deregulation, b. Privatization was necessitated because
subsidies (incentives) and greater role for of the belief that the private sector was
financial institutions are the various facets not given enough opportunities to
of liberalization. earn more money.
Privatization: Privatization means
c. Globalization was necessitated
transfer of ownership and management of
because today a developed country
enterprises from public sector to private
can grow without the help of the under
sector. Denationalization, disinvestment
developed countries. Natural and
and opening exclusive public sector
human resources of the developing
enterprises to private sector are the
countries are exploited by the
gateways to privatization.
developed countries and the developing
Globalization: Globalization refers to economies are used as market for
the integration of the domestic (Indian) the finished goods of the developed
economy with the rest of the world. Import countries. The surplus capital of the
developed countries are invested in
Development Experiences in India 190
backward economies. Obsolute and 2. There was a rapid industrialization.
outdated technologies of the developed 3. The pattern of consumption started
countries can be easily sold to poor improving (or deteriorating).
under developed countries. Ultimately,
4. Infrastructure facilities such as
the rich countries can grow further at
express highways, metro rails, flyovers
the cost of developing economies.
and airports started expanding
(but the local people were thrown
9.4 away).
Arguments against LPG
The benefits of this growth in some sectors
have not reached the marginalized sections
a. Liberalization measures, when
of the community. Moreover, the process
effectively enforced, favour an
of development has generated serious
unrestricted entry of foreign
social, economic, political, demographic
companies in the domestic economy.
and ecological issues and challenges.
Such an entry prevents the growth of
Development brings benefits, but which
the local manufacturers.
section gets this benefit depends on socio-
b. Privatization measures favour the economic structure of the society.
continuance of the monopoly power.
Despite all these initiatives in the
Only the powerful people can sustain in
Indian economy, a large section of the
business markets. Social justice cannot
people of India continue to face basic
be easily established and maintained.
economic problems such as poverty,
As a result, the disparities tend to widen
unemployment, discrimination, social
among people and among regions.
exclusion, deprivation, poor healthcare,
c. As globalization measures tend to rising inflation, agricultural stagnation,
integrate all economies of the world food insecurity and labour migration.
and bringing them all under one However, for these problems, Government
umbrella; they pave the way for policies alone cannot be blamed. As
redistribution of economic power at new institutional economists suggest,
the world level. Only the already well- the values, believes, norms etc. of the
developed countries are favoured in individuals also matter.
this process and the welfare of the less-
developed countries will be neglected.
The economic crisis of the developed Disinvestment
countries are easily spread to the
Disinvestment means selling of
developing economies through trade.
government securities of Public
The following are the major changes Sector Undertakings (PSUs) to other
after 1991: PSUs or private sectors or banks.
This process has not been fully
1. Foreign exchange reserves started
implemented.
rising.
Important Initiatives by
the Government towards
Industrial Policy
The policy has brought changes in the
following aspects of industrial regulation:
1. Industrial delicensing
According to International Monetary 2. Dereservation of the industrial sector
Fund, World Economic Outlook 3. Public sector policy (dereservation
(Ocoter-2016), GDP (nominal) of and reform of PSEs)
India in 2016 at current prices was
4. Abolition of MRTP Act
$2,251 billion. India contributed 2.99%
5. Foreign investment policy and
of total world’s GDP in exchange rate
basis. India shared 17.5 percent of the foreign technology policy.
total world population and 2.4 percent
of the world surface area. India was Before 1991 After 1991
now 7th largest economy of the world Industrial
in 2016. Deregulation
India was at 3rd position after China Industrial
L
all comm icensingfor
Licensing restricted to
odities alcohol, drugs etc.,
and Japan among Asian countries. Private secto
r not allowed Only defense,energy,railway for public
India shared 8.50% of total Asia’s GDP in many indu
stries sector-large scale privatization,
disinvestment
Controls
(nominal) in 2016. and distri
on price fix
bution
ation Market allowed to
determine prices
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 Economics
LEARNING OBJECTIVES
2 To bring into the light the problems of rural villages and to familiarise the
initiatives undertaken.
10.1
Introduction
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
1. VTake a case of a village where you or nearby you live.
Collect the basic information such as, geographical area,
boundary areas, population, number of houses, area under
cultivation, major crops cultivated, type of infrastructure
etc., with the collected information, prepare a report about
the village.
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 3 rd 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 (Rs.2.92 lakh crore) and rate is 14 lower than that of many other
value of total industrial output (Rs.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 Dharmapuri, and
Siruvani, Gundar, Vaipar, Valparai etc. is the only source in the country.
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
per 2011 census. However, Tamil Nadu’s ratio in Tamil Nadu is nearing balance with
population is higher than that of several 995 which is far better compared to most
countries according to UN Report. of the States and all India level. Tamil Nadu
stands third next only to Kerala state and
Table 11.3 Population Puduchery Union Territory in sex ratio.
Balanced sex ratio implies improvement in Tamil Nadu has a good record of
quality of life of female population. The sex controlling MMR, ranking third with
11.6
Gross State Domestic
Product (GSDP)
11.7
Agriculture
RANIPET : Leather
AMBUR : Leather
VANIYAMBADI : Leather
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
The town of Sivakasi is a leader in the
11.8.5 Cement Industry
areas of printing, fireworks, and safety
Tamil Nadu ranks third in cement production matches. It was fondly called as “Little
in India (First Andhra Pradesh, Second Japan” by Jawaharlal Nehru. It contributes
Rajasthan). Among 10 largest cement to 80% of India’s fireworks production.
companies in India as on 2018, Ramco Cement Sivakasi provides over 60% of India’s total
and India Cement find prominent place. And offset printing solutions.
also Tamil Nadu stands second in number of
cement plants with 21 units against 35 units in
11.8.7 Other Industries
Andhra Pradesh.
One of the global electrical equipment
public sector companies viz BHEL has
11.8.6 Fire works
manufacturing plants at Tiruchirappalli and
Ranipet. The Tamil Nadu State Government
owns the Tamil Nadu Newsprint and
Papers (TNPL), the world’s biggest bagasse-
based paper mill in Karur. Tamil Nadu
is a leading producer of cement in India
and with manufacturing units located at
Ariyalur, Virudhunagar, Coimbatore and
Tirunelveli. The region around Salem is
rich in mineral ores. The country’s largest
steel public sector undertaking, SAIL has a
steel plant in Salem.
d. Ports
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
Percentage
32 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
7. Which of the following cities does not 12. Which district in TN has the highest
have international airport? sex ratio?
a) Madurai a) Nagapattinam
b) Tiruchirappalli b) Nilgiris
c) Paramakudi c) Tiruchy
d) Coimbatore d) Thanjavur
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 favorable 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
33. What are the renewable sources of 34. Describe the performance of Tamil
power in Tamil Nadu? Nadu economy in health.
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 an on the 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
4
1 3
2
(12,0) 1
0
2 4 6 8 10 12 X
0 5 10 15 20 x
Quantity Demanded
Quantity Supplied
Diagram 12.2 Diagram 12.3
X • • 50 • 10Y Y
10
Considering X as quantity supplied and Y
as price (p) 7.5 D
S
Then X • 10p • 50 (or)
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
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
• • 15 • 76 • 21
Key Note
A • 40
If the determinant 0 , then
The value of determinant is 40.
solution does not exist.
x y z 1 1
x , y , z y 14 3 11
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
dy
only) = 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:
d(x n )
2. nx n1 Given function y • 5x4
dx
dy
Slope • •
d(x ) dx
3. 1x11 1x 0 1 dy
dx 5 4 x 41
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 31
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 21 x11
x c
12.5.2 Meaning 2 1 11
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
Mathematically, the consumer’s surplus Assuming pure competition, find (a)
(CS) can be defined as consumers surplus and (b) producers
CS • (Area under the demand surplus. (Pd • Demand price; Ps • Supply
curve from x • 0 to x • x0) • (Area of the price)
rectangle OX0BP0) Solution:
x0
CS • [ p x dx]• x0p0 For market equilibrium, Pd Ps
0
25• Q2 • •2Q• 1
Example:12.28
0 • • 25 • •Q2 • •2Q• 1
If the demand function is P • 35 • 2x • x 2
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
(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. KD •
Make a Document with x dp
MS word on “Incredible
x n1
India”. 8. Integration of xn is C
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
x0
“Power Point” for “Day
g x dx
out with your parents” • xo po - 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 ¯©Ôx
Advertising elasticity of demand NÝHKÚZE[PYFxâÖz
Alternative uses ITä²P>ã
Annual plan <KTÙ©ÚØCÝIä²Ý3xJ
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Average cost @KT@
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Deductive Method H¤ÚETÞ¶¯[L
Definition P[KJ[L4MÔ>DÝ
Delicensing 6
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Demand ZE[P
Democracy ¤}JTØz
275
Demographic dividend IÔ>ãYET[>å2·MÝ
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Determinants ßDÜH[P>ã
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Differential calculus P[>¬Ù>~EÝ
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Diseconomies of Scale zÔ>Gå[I>ã
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Division of labour ZP[MÜH¤Ü®
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Interest rate PØ} EÝĦ
Internal Economies of Scale 2>ÜYHT±NTETKÖzÔ>GÕ>ã
Investment ¯E©
Invisible hand ®MGT>T6Û«@Ô
Involuntary unemployment ZP[MÔ¤ÚEJTKT>4±Û«ÝZP[Mx[CÔ>TE[M
Iso- quants @I2N¶6äHÚÔZ>T©>ã
Labour 6[OÜ®
277
Land Tenure M6[C[I¯[L
Land use pattern MÚ[EHJåH©Ú«ÝEÝ
Law of variable proportions IT²ÝxE[N¶
Laws of Returns to Scale xE2N¶[N¶
Liberalization ETKTNIJITÔ¤Eà
Life Expectancy at Birth PTâFTã8ßHTßÜ®>TMÝ
Linear Equation ZFßZ>TØ©Ö@IåHT©
Liquidity preference ß[I±ÜHÝ
Literacy Ratio YITÚEIÔ>ãYET[>à8µEÜH}Ô>YE
ÛEPß>åxEÝ
Long – run ÙC>TMÝ
Macro – Economics ZH
GÜYHT±JàZH
JàYHT±à
Mahalwari system ¤µ6
[I¯[L4àxKTIÔ¤µÔ>ãMÚ[EßPT>Ý
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Management ZIMTÙ[I
Marginal cost 4²[MÖY@M¶
Marginal product 4²[M6äHÚ
Marginal Rate of substitution 4²[MHØ© EÝ
Marginal Rate of Technical Substitution 4²[MYETà¬ØHÜHØ© EÝ
Marginal utility 4²[MÜHJåHT©
Market 2Õ>T}@Û[E
Material wealth H±ÜYHT±ØY@àPÝ
Maternal Mortality Rate (MMR) I>ÜZH²4LÜ®xEÝ;±MØ@ÝETÞITß>à
I>ÜZH²åZHT«4LÔxåLYHÙ>å8Ù~Ô[>
Matrix / Matrices 2~2~>ã
Merchant Capital P~>ÂMEGÝ
Micro, small and medium Enterprises ¤²z²Iä²ÝF©ÚEK²PGÕ>ã
Micro-Economics ¬ÙYHT±Jà¬Ù~GÜYHT±Jà
Migration ¤}YHJßEà®MÝYHJßEà
Modern age F G°>Ý
Monetary Reforms HDÖß±ÚEÕ>ã
Money Cost HDÖY@M¶
Monopolistic competition ¯ä²
[IÜZHTØ};±YHT±[Nz«ZP²HT©Y@Þ«
HMßäHTß>ã
Monopoly ¯ä²
[I;ZK;±äH[GJTNß
Morbidity Rate 6CàFMå[IxEÝ
MRTP ACT ¯ä²
[IP~>Ô>Ø©ÜHTØ©Ö@ØCÝĐĬīĬĭĬĩĶĞīġ
ĕĢİıįĦĠıĦijĢėįĞġĢēįĞĠıĦĢİĄĆė
Multiplier YH±Ôx
National Income ZEzJP±ITGÝĶ
Nationalization FTØ©[C[IJTÔ¤Eà
Need 6ß[OÔ>2}ÜH[CÚZE[P>ã
Neo – classical ®JIK®P
Net sown Area >K[EÔ>ÜHØCMÝHKÜ®4«YITÚEÝ[EÔ>ÜHØC
MÜHKܮԤÖ@ÝIT>ZPT¤[LPT>ZPT4±Ô¤Ý
NITI Aayog 4ÛJT[PITä²PEä>TGZEzJ2NMTG[MJÚä>TG
ØCÝ
Nominal income/Money income YHJKN¶P±ITGÝHDP±ITGÝ
Non renewable Energy sources ®«ÜÔ>4JMTE@ÔPNÕ>ã
Normative Science YF°[K2Jà
278
Oligopoly zàZMT߯ä²
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Opportunity cost PTÞÜ®ÖY@M¶
Organisation 2[IÜ®
Particular / partial equilibrium EÖ@I[MH¤Ö@I[M
Per capita income E[M EP±ITGÝYITÚEZEzJP±ITGÚ[EYITÚEIÔ>ã
YET[>JTàP¤Ô>x[CÜH«
Perfect Competition [L¶ÜZHTØ}
Perfect competition [L¶ÜZHTØ}
Physical quantity of life index PTâÔ[>ÚEKÔ¤©
Plan Holiday ØC©¯[L¯EàÂå²3Ù©>´Ô¤:ÛETÙ©Ú
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Point of inflexion / point of inflection IT²ÝxEÝIT²xåL®ã
Political Economy 2KzJàYHT±NTETKÝ
Positive Science 4Jà®[K2Jà
Poverty P²[I
Price determination [MßDJÝ[MßITGÝ
Price discrimination [MÜZHEÝ
Price Elasticity of demand [MÚZE[PYFxâÖz
Price line [MÔZ>T©
Prime cost ¯Eå[IÖY@M¶
Privatization EJTßIJITÔ¤Eà
Producer’s Equilibrium 6äHÚJTNß@I[M
Producer’s Surplus 6äHÚJTNß6H
6äHÚJTNß8Ö@Ý
Production Possibility curve 6äHÚPTÞÜ®P[NZ>T©
Production Possibility Frontier 6äHÚPTÞÜ®8à[MÔZ>T©
Production Possibility Schedule 6äHÚPTÞÜ®HØ}Jà
Production 6äHÚ
Public Economics YHT«ÜYHT±Jà
Public Finance YHT«
Public sector enterprises YHT«Ú«[L²PGÕ>ã
Quasi – rent ZHTPTKÝ
Quotation ZIäZ>Tã
Rational H¤Ú«DKPàM
Real Cost 6Ù[IÖY@M¶
Real income 6Ù[IP±ITGÝHDP±ITGÚåPTÕ¤Ý@Ô
Rectangular Hyperbola Y@áP>2HKP[N¶
Redeemable Energy ®«ÜÔ>·}J@ÔPNÕ>ã
Regional development PØCTKZIÝHT©
Rent PTKÝ
Repo rate Repurchase Rate [IJPÕxC±Û«LPÕx>ãYH²Ý¤²xJ>TM
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Reserve Requirements ;«ÔØ©xE2N¶>ãPÕx>ã[PÚ±Ô>ZPÙ}J
[PÜ®>ã
Resources PNÕ>ã
Revenue P±PTÞ
Reverse Repo Rate (RRR) PÕx>ã[IJPÕxCÝ[PڱԤݤ²xJ>TM
[PÜ®>´Ô¤[IJPÕxY>T©ÔxåLPØ} EÝĕĕ!ĕĕĕ
Risk bearing 4CßETÕ¤Eà
Risk 4Cß
279
Rolling Plan ¦OàØCÝ3Ý3Ù©IØ©Ý4ÚØCÝ
F[C¯[Là4±ÛE«
Ryotwari system 6µHPß6
[I¯[L4àMÚ[E6µHPZKMÖ
Y@TÛEÔ>TKKT>4±ÜHTß
Savings Z@Ü®Ė
Scale 2N¶Z>Tà
Scarcity HäLTÔ¤[L2Ü®ZE[P
Scope 8à[M
Secularism IEÖ@Tßå[I
Self – Help Groups ¦J6EÔ¤µÔ>ãYHT«PT>¯EàYHÙ>[NÔ
Y>TÙC[P
Services H~>ãZ@[P>ã
Sex ratio HTGxEÝ3Ù>´Ô¤8ÚE[GYHÙ>ã8åH«
Shift in demand curve ZE[PP[NZ>T©4CÜYHJ߶
Short –run ¤²xJ>TMÝ
Skewed distribution @IIäLHKPà
Slope @T޶
Social Cost @Â>ÖY@M¶
Social Infrastructure @Â>Ô>ØC[IÜ®8>T>àIä²ÝI±Ú«P²PGÕ>ã
Social justice @Â>
Special Economic Zone zLÜ®ÜYHT±NTETKIÙCMÝ
Static equilibrium [MJTG@I[M
Statutory Liquidity Ratio(SLR) @ØCJTGß[I EÝ
Structural unemployment 2[IÜ®@TßZP[Må[I
Sunk cost 2âÚEÜHØCY@M¶Ù©Ý±ÝHÜYHL¯}JTEY@M¶
Super Multiplier [>ÜYH±Ôx
Supply 2Ü®
Tangible YETØ©ÖY@à³ÝYETØ©DKÖ·}J
Tax P
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Theories Z>TØHT©>ã
Total cost YITÚEÖY@M¶
Total product YITÚE6äHÚ
Trade /international trade P~HÝ
Uncertainty [Må[I
Urbanisation F>ßIJITEà
Utility HJåHT©
Util 2M¤
Values IÜ©>ãµJÕ>ã
Value IÜ®
Variable cost IT²ÝY@M¶
Variable IT
Voluntary unemployment ZP[Mx[CÚ«ÝZP[MÔ>ÖY@àMTIà4±ÜH«
Wants ±ÜHÕ>ã
Y intercept Ķ2Ö[@YPØ©Ý4CÝ
280
Economics – XI
List of Authors and Reviewers
J. Sornalatha K. Alamarselvan
Post Graduate Assistant, Government Muslim Hr. Sec School. Post Graduate Assistant
Chennai-600002 Government Boys Higher Secondary School
Bhuvanagiri, Cuddalore
Authors B. Shunmugam
Dr. J. Socrates Post Graduate Assistant
Head, Department of Economics Natarajan Dhamayanthi Higher Secondary School,
Manonmaniam Sundaranar University Nagapattinam
Tirunelveli
S. Bhuvana
Dr. K. Sadasivam Post Graduate Assistant
Assistant Professor, School of Economics SRBAKD Dharma Raja Girls Higher Secondary School
Madurai Kamaraj University, Madurai-625 021 Rajapalayam
Dr. M. Chitra
Assistant Professor, School of Economics
Madurai Kamaraj University, Madurai
ICT Coordinator
D. Vasuraj
Dr. R. Bernadshaw
BT Assistant, Pums, Kosapur, Puzhal Block,
Former Professor, Dept. of Economics,
Thiruvallur DT
NMSSVN College, Nagamalai, Madurai
S. Ganesh
Dr. B.P. Chandramohan
BT Assistant, Pums School, Kilariyam,
Associate Professor, Dept. of Economics,
Koradacherry Block, Thiruvallur DT
Presidency College, Chennai
281