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PRINCIPLE
OF ECONOMIC (POE)
CLASS XI
TABLE
OF CONTENTS
CHP NO
|
TOPICS
|
PAGE NO
|
1
|
Basic Concept & Definitions
|
3-10
|
2
|
Land
|
11-12
|
3
|
Capital
|
13-14
|
4
|
Labour
|
15-20
|
5
|
Marginal Utility and
Price
|
20
|
6
|
Theories of Population
|
21-26
|
7
|
Law of Demand
|
27-29
|
8
|
Elasticity of
Demand
|
30-36
|
9
|
Law of Returns
|
36-38
|
10
|
Barter
System
|
38-40
|
11
|
Money
|
41-43
|
12
|
National Income
|
44-48
|
13
|
Recardian Theory of Rent
|
48-50
|
Basics
of Economics
Concept
As
a matter of fact a man is born with wants, which are always unlimited. Human
beings always try to satisfy his wants i.e. satisfaction of wants becomes a
prime objective of his life. In order to satisfy his wants, a man has to work.
Since most of the wants are mainly related to the materialistic well being of a
person’s state of life, therefore the work that he doses gives him a material
reward.
Economics deals with all those efforts or activities human being for bringing welfare in his life and for satisfying his wants performs them. The basic objective for the performance of such activities to achieve satisfaction and the driving force working behind it is to earn money it is to earn money i.e. to receive income.
In the light of above forts we can define in very simple words,” economics as: all the activities performed by man to earn income and it on achieving satisfaction of his wants are called economic activities or simply economics”
From the above definition, we get a specific definition in which economics moves i.e
Economics deals with all those efforts or activities human being for bringing welfare in his life and for satisfying his wants performs them. The basic objective for the performance of such activities to achieve satisfaction and the driving force working behind it is to earn money it is to earn money i.e. to receive income.
In the light of above forts we can define in very simple words,” economics as: all the activities performed by man to earn income and it on achieving satisfaction of his wants are called economic activities or simply economics”
From the above definition, we get a specific definition in which economics moves i.e
·
It
deals only with economic activities,
·
It
deals only with human activities and
·
It
takes in to part the people who are social and normal.
Origin
of the word Economics
According
to economists, the word ‘economics’ has been derived from the word ‘Political
Economy’ which consist of three Latin words:
Polis which means state.
Plika which means domestic or related home.
Nama which means principles.
i.e. it means those principles which are adopted in a home to bring a balance between income and expenditure that can be applied to a state for the sake of balance. Most economist vise of the vices state that the Economics has been derived from the Greek word “OIKONOMOS”.
Polis which means state.
Plika which means domestic or related home.
Nama which means principles.
i.e. it means those principles which are adopted in a home to bring a balance between income and expenditure that can be applied to a state for the sake of balance. Most economist vise of the vices state that the Economics has been derived from the Greek word “OIKONOMOS”.
Early Definitions of Economics
The
classical school of thought i.e. Adam Smith, N.W Senior, Hills, Malthus and
Ricardo have defined economics as,
“Economics is the science of wealth”
In the words of Adam Smith,
“Science, which enquires the nature and cause of the wealth of nations”
Waller defined economics as,
“Economics is that body of knowledge which relates to wealth.”
In the words of Mills,
“Economics to the science of wealth in relation to mass.”
In short, the classical school of thought emphasized purely wealth. So we can say that
“Economics studies the production, consumption, exchange and distribution of wealth.”
“Economics is the science of wealth”
In the words of Adam Smith,
“Science, which enquires the nature and cause of the wealth of nations”
Waller defined economics as,
“Economics is that body of knowledge which relates to wealth.”
In the words of Mills,
“Economics to the science of wealth in relation to mass.”
In short, the classical school of thought emphasized purely wealth. So we can say that
“Economics studies the production, consumption, exchange and distribution of wealth.”
Smith’s Definition of Economics
“Science which enquires the nature and cause of the wealth of nations.”
CRITICISM
Actually speaking the definition given by Adam Smith had been boldly criticized on the following grounds:
1. One Sided Definition
It was the one sided definition because of only wealth had been taken in to consideration while “humans” were neglected who are equally important in the discussion of economics.
2. Emphasis on Wealth
According to this definition, wealth was given to much concentration on wealth that destined man selfish and illustrious. Therefore the social reformers raised voices against this definition.
3. End Or Mean
Wealth was taken as end by itself and not a mean to an end. This concept is wrong because wealth is the source of satisfaction and satisfaction by itself. It is a mean not an end while it is for man and man is not for wealth.
4. Narrow Sense of Wealth
The term wealth was interpreted in a very narrow sense. Wealth meant something tangible, visible and concrete object, which is capable of satisfying human, needs thus all the intangible goods and services which provide to human being were completely ignored.
Actually speaking the definition given by Adam Smith had been boldly criticized on the following grounds:
1. One Sided Definition
It was the one sided definition because of only wealth had been taken in to consideration while “humans” were neglected who are equally important in the discussion of economics.
2. Emphasis on Wealth
According to this definition, wealth was given to much concentration on wealth that destined man selfish and illustrious. Therefore the social reformers raised voices against this definition.
3. End Or Mean
Wealth was taken as end by itself and not a mean to an end. This concept is wrong because wealth is the source of satisfaction and satisfaction by itself. It is a mean not an end while it is for man and man is not for wealth.
4. Narrow Sense of Wealth
The term wealth was interpreted in a very narrow sense. Wealth meant something tangible, visible and concrete object, which is capable of satisfying human, needs thus all the intangible goods and services which provide to human being were completely ignored.
5.
Limited the Scope
According to the classical definition, “Science of wealth” was regarded as a subject matter of economics had been left out from its study. Only the people engaged in production and consumption were studied under this definition.
According to the classical definition, “Science of wealth” was regarded as a subject matter of economics had been left out from its study. Only the people engaged in production and consumption were studied under this definition.
Marshal’s
Definition of Economics
Marshal’s
Definition of Economics
The new classical definition or Marshal’s definition of economics says that:
“A study of man kind in the ordinary business of life. It examines the part of individual and social action which is most closely connected with the attainment and use of material requisites of well being”
In simple words, he said
“Economics is a link between wealth and welfare”
This definition has generally regarded economics as
“Science of material welfare”
Generally this definition is considered to be the finest of all since it encircles man’s activities performed by him for earning and spending of his income.
ATTRIBUTES OF THE DEFINITION
Marshal’s definition of economics contains the following attributes:
1. Study of Mankind
According to this definition economics is the study of human beings. It emphasizes on man. It excludes the study of plants animals and beasts. But it does not study the activities of all human beings. Despite it studies only the activities of real, social and normal man.
2. Material Welfare
According to this definition, wealth is achieved for material welfare. Material welfare refers to the economic prosperity and well being which is achieved through earning of wealth. Of course, the aim of a man’s life is to attain the welfare, which is possible through wealth.
3. Economic Aspect of Life
In the light of this definition economics studies only the economic aspect of life and leaves out the other aspects of social, religious, political etc. economic aspect relates to how a man earns his income and how he spends it.
4. Studies of Physical Activities
According to this definition, economics studies only material activities such as that of carpenters, masons etc. The activities of teachers, doctors engineers i.e. services have been neglected.
5. Economics is a Social Science
Economics is a social science and not one which studies isolated individuals. In economics we study persons living in a society, influencing other people and being influenced by them.
The new classical definition or Marshal’s definition of economics says that:
“A study of man kind in the ordinary business of life. It examines the part of individual and social action which is most closely connected with the attainment and use of material requisites of well being”
In simple words, he said
“Economics is a link between wealth and welfare”
This definition has generally regarded economics as
“Science of material welfare”
Generally this definition is considered to be the finest of all since it encircles man’s activities performed by him for earning and spending of his income.
ATTRIBUTES OF THE DEFINITION
Marshal’s definition of economics contains the following attributes:
1. Study of Mankind
According to this definition economics is the study of human beings. It emphasizes on man. It excludes the study of plants animals and beasts. But it does not study the activities of all human beings. Despite it studies only the activities of real, social and normal man.
2. Material Welfare
According to this definition, wealth is achieved for material welfare. Material welfare refers to the economic prosperity and well being which is achieved through earning of wealth. Of course, the aim of a man’s life is to attain the welfare, which is possible through wealth.
3. Economic Aspect of Life
In the light of this definition economics studies only the economic aspect of life and leaves out the other aspects of social, religious, political etc. economic aspect relates to how a man earns his income and how he spends it.
4. Studies of Physical Activities
According to this definition, economics studies only material activities such as that of carpenters, masons etc. The activities of teachers, doctors engineers i.e. services have been neglected.
5. Economics is a Social Science
Economics is a social science and not one which studies isolated individuals. In economics we study persons living in a society, influencing other people and being influenced by them.
CRITICISM
OF THE DEFINITION
Prof. Lionel Robbins criticized strongly Marshals definition of economics. He pointed the following defects in the definition:
Prof. Lionel Robbins criticized strongly Marshals definition of economics. He pointed the following defects in the definition:
1.Narrow
Concept of the Subject
Since marshal concentrated mainly on material welfare as a result of the material goods therefore according to marshal’s definition only those activities, which produce material goods, are studied in economics and the service sector of the business has been entirely neglected. This proved to be a major criticized part of the definition.
Since marshal concentrated mainly on material welfare as a result of the material goods therefore according to marshal’s definition only those activities, which produce material goods, are studied in economics and the service sector of the business has been entirely neglected. This proved to be a major criticized part of the definition.
2.
It is Classificatory
Marshal’s definition is classificatory. It has classified economic phenomenon in to material and non-material. The definition however recognizes only the satisfaction of material needs in to the subject of economics.
Marshal’s definition is classificatory. It has classified economic phenomenon in to material and non-material. The definition however recognizes only the satisfaction of material needs in to the subject of economics.
3.
Ambiguity in Definition
The distinction made in this definition between ordinary business of life and extra ordinary is not clear.
The distinction made in this definition between ordinary business of life and extra ordinary is not clear.
4.
Welfare cannot be measured
Welfare is a state of mind and is unquantifiable i.e. it cannot be quantitatively measured. The correct amount of welfare cannot be measured and the satisfaction derived from the purchases or performance or activities cannot be calculated in exact figures. Only the assumption can be made. For instance if two friends purchase the same commodity, it would almost be impossible to identify, measure or even assume that how much welfare they are going to gain through their purchases.
Welfare is a state of mind and is unquantifiable i.e. it cannot be quantitatively measured. The correct amount of welfare cannot be measured and the satisfaction derived from the purchases or performance or activities cannot be calculated in exact figures. Only the assumption can be made. For instance if two friends purchase the same commodity, it would almost be impossible to identify, measure or even assume that how much welfare they are going to gain through their purchases.
5.
Economics is not Purely a Social Science
Marshals have defined economics as a social science. According to him that all men being members of the society is the concern of the subject but a man living in jungle does not fall within its orbits. But Robbins argued that economics studies all human beings whether or not they are members of society. Thus it is better to call economics as “human science”.
6. Objection on Welfare
The objection is not merely to the word material but also to welfare. If economics is made to welfare rather than wealth it gives rise to anomalies e.g. Intoxicants come under wealth but their use is not conducive to human welfare. There are on the other hand, many things like love and affection, which are highly conducive to welfare but are not regarded as wealth. In deed about welfare vary from time to time, person-to-person and place-to-place.
Marshals have defined economics as a social science. According to him that all men being members of the society is the concern of the subject but a man living in jungle does not fall within its orbits. But Robbins argued that economics studies all human beings whether or not they are members of society. Thus it is better to call economics as “human science”.
6. Objection on Welfare
The objection is not merely to the word material but also to welfare. If economics is made to welfare rather than wealth it gives rise to anomalies e.g. Intoxicants come under wealth but their use is not conducive to human welfare. There are on the other hand, many things like love and affection, which are highly conducive to welfare but are not regarded as wealth. In deed about welfare vary from time to time, person-to-person and place-to-place.
Robbins
Definition of Economics
Prof.
Lionel Robbins gave his definition of economics in his book” Nature and
significance of Economic Science” in the year 1932 .He defined economics as,
“Economics is the science that studies human behavior as a relationship between ends and scarce means which have alternative uses.”
Robbins definition is based on:
1.Multiplicity of wants.
2.Scarcity of means
In other words, Robbins definition says that:
1.The ends are unlimited,
2.The means to achieve those ends are limited, and
3.The means are capable of alternative uses.
“Economics is the science that studies human behavior as a relationship between ends and scarce means which have alternative uses.”
Robbins definition is based on:
1.Multiplicity of wants.
2.Scarcity of means
In other words, Robbins definition says that:
1.The ends are unlimited,
2.The means to achieve those ends are limited, and
3.The means are capable of alternative uses.
ATTRIBUTES
OF THE DEFINITION
Followings
are some of the attributes of Robbins definition:
1. Multiplicity of Ends
As a matter of fact, never come to an end. They are always unlimited. As soon as one want is satisfied, another comes forward. Thus it is the unlimitedness of a person wants that never stops him from working and keeps him engaged in the work of earning money for the satisfaction of his wants.
2. Scarcity of Means
It refers to the limited resources due to which economic problems arise. But if the resources were unlimited, then consequently there would have no economic problems and all the wants would have been satisfied. But it should be noted that the means are scare with respect to their demand.
3. Selection / Urgency of Wants
It is obvious that some of the wants are more urgent for us as compared to others. Naturally, we go to satisfy our urgent needs / wants first and then the remaining ones. If all the wants are same there would be no urgency to fulfill then and hence no economic problem would arise.
4. Alternative Uses
According to the Robbins definition all the scars means are capable of alternative uses i.e. they can be put to a number of uses e.g water can be used for drinking as well as for cooking. The main problem arises that where the utilization should be made first.
5. Human Science
Robbins in his definition has broadened the scope of economics. According to him economics is the study of human behavior as a whole both with in and out side the society. It does not restrict the subject matter within specific limits.
1. Multiplicity of Ends
As a matter of fact, never come to an end. They are always unlimited. As soon as one want is satisfied, another comes forward. Thus it is the unlimitedness of a person wants that never stops him from working and keeps him engaged in the work of earning money for the satisfaction of his wants.
2. Scarcity of Means
It refers to the limited resources due to which economic problems arise. But if the resources were unlimited, then consequently there would have no economic problems and all the wants would have been satisfied. But it should be noted that the means are scare with respect to their demand.
3. Selection / Urgency of Wants
It is obvious that some of the wants are more urgent for us as compared to others. Naturally, we go to satisfy our urgent needs / wants first and then the remaining ones. If all the wants are same there would be no urgency to fulfill then and hence no economic problem would arise.
4. Alternative Uses
According to the Robbins definition all the scars means are capable of alternative uses i.e. they can be put to a number of uses e.g water can be used for drinking as well as for cooking. The main problem arises that where the utilization should be made first.
5. Human Science
Robbins in his definition has broadened the scope of economics. According to him economics is the study of human behavior as a whole both with in and out side the society. It does not restrict the subject matter within specific limits.
CRITICISM
OF THE DEFINITON
Robin’s definition also faces criticism from many economists. Some of the criticizing points areas follows:
1. Economics as a Positive Science
According to Robins, economics discovers only the facts that give rise to certain problems and does not give suggestions as to how to deal with human behavior that varies from man to man and from time to time. So it is not a physical science, which deals with matter and energy and remains unchanged at any place. Economics is therefore not a physical science. It discovers both causes / efforts and suggestions.
2. Human Touch Missing
In Robbins definition the human touch is entirely missing. It does not take in to account the systematic thinking, human sympathy, imagination and the variety of human life.
3. Abstract and Complex
Robbins has made economics more abstract and complex and hence difficult. This distracts from its utility for the common man. Utilities of economics lie in being a concrete and realistic study.
4. Macro Concept
Another criticism on Robbins definition is that it ignores the macro aspect. It has ignored the issues like employment, national income from its boundaries.
5. Does not Covers Economics of Growth
The economic growth theory or economic development theory has been overlooked in Robbins definition. Economics of growth explains how an economy grows and the factors, which bring about an increase in national income and productivity of the economy. Robbins takes the resources as given and discusses only their allocation.
Robin’s definition also faces criticism from many economists. Some of the criticizing points areas follows:
1. Economics as a Positive Science
According to Robins, economics discovers only the facts that give rise to certain problems and does not give suggestions as to how to deal with human behavior that varies from man to man and from time to time. So it is not a physical science, which deals with matter and energy and remains unchanged at any place. Economics is therefore not a physical science. It discovers both causes / efforts and suggestions.
2. Human Touch Missing
In Robbins definition the human touch is entirely missing. It does not take in to account the systematic thinking, human sympathy, imagination and the variety of human life.
3. Abstract and Complex
Robbins has made economics more abstract and complex and hence difficult. This distracts from its utility for the common man. Utilities of economics lie in being a concrete and realistic study.
4. Macro Concept
Another criticism on Robbins definition is that it ignores the macro aspect. It has ignored the issues like employment, national income from its boundaries.
5. Does not Covers Economics of Growth
The economic growth theory or economic development theory has been overlooked in Robbins definition. Economics of growth explains how an economy grows and the factors, which bring about an increase in national income and productivity of the economy. Robbins takes the resources as given and discusses only their allocation.
Comparison of Marshall’s and Robbins Definitions of Economics
After
comparing the two definitions of economics given by two eminent economists the
following differentiating points have come forward:
Marshal was of the view that economics is a study of mans action in the ordinary business of life. In other words he wants to study economics, all those activities which are directly related to wealth. Robbins on the other hand regards economics as the study of economic aspect of all human activities. Marshal’s definition is quite materialistic .he has restricted economics to a study of human behavior related to wealth. Robbins on the other hand takes in to account the human behavior related to scarce means.
Marshal’s definition is classificatory. It classifies human activities in to economic activities and non-economic activities. Robbins definition on the other hand is analytical.
Marshal’s definition includes the economic activities of only those persons who member of society. Robbins definition includes the activities of social human beings only as far as they are concerned with wealth. Robbins definition is study of every human behavior, which is related to scare means.
Scope of Economics
The scope of a subject refers to the fields they actually cover. The scope of economics can be finely understood if we classify it into heads viz:
1.Subject matter
2.Nature
3.Limitations
These headings are discussed as under:
Marshal was of the view that economics is a study of mans action in the ordinary business of life. In other words he wants to study economics, all those activities which are directly related to wealth. Robbins on the other hand regards economics as the study of economic aspect of all human activities. Marshal’s definition is quite materialistic .he has restricted economics to a study of human behavior related to wealth. Robbins on the other hand takes in to account the human behavior related to scarce means.
Marshal’s definition is classificatory. It classifies human activities in to economic activities and non-economic activities. Robbins definition on the other hand is analytical.
Marshal’s definition includes the economic activities of only those persons who member of society. Robbins definition includes the activities of social human beings only as far as they are concerned with wealth. Robbins definition is study of every human behavior, which is related to scare means.
Scope of Economics
The scope of a subject refers to the fields they actually cover. The scope of economics can be finely understood if we classify it into heads viz:
1.Subject matter
2.Nature
3.Limitations
These headings are discussed as under:
Subject
Matter
It can be further studied as:
According to Adam Smith
The classical economist Adam Smith considered wealth as the subject matter of economics. According to him economics deals with the activities of man in earning his income me and spending it among different objects in order to obtain the maximum benefit for satisfaction of his wants.
According to Marshal
The neo classical economist Alfred Marshal regarded material welfare it be the subject matter of economics. According to him the activities of man kind as a social being and in the ordinary business of life which are related to the attainment of economic well being through the use of the material requisite are considered to be the subject matter of economics.
According to Robbins
According to Robbins those activities, which originate because of the imbalance relation between human wants and available resources constitute the subject matter of economics.
According to Keynes
Keynes is of the view that economics problems constitute the subject matter of economics.
Nature of Economics
The nature of economics includes study or discussion that weather economics is arts or science?
Economics as a Science
Most of the economists regard economics as a science because it is a body of knowledge, which deals facts and rules and studies their cause with their effect. Now economics as a science generally studied two heads:
Economics as a Positive Science
Most of the English economists regard economics as a positive science because it examines the relationship between causes and effect. It studies economic problems, which are existing and effect directly human life.
Economics as a Normative Science
Some economists think that economics is a normative science. It tells that weather a particular thing is describable or not. The aim of economics is to promote human welfare so it studies the factors relating to what out to be.
Economics is an Art
Economics not only studies how economic problems arise but it also recommends positive measures to end these problems. The purpose of economics is to promote welfare and satisfaction and thus it outlines the guidelines to achieve these objectives.
Limitations of Economics
Economics has some limitations, which are as follow:
1. Economics does not study all human activities. It is limited only to those activities, which are related to wealth.
2. Economics studies only the human activities. It does not study the activities of other creatures.
3. Economics studies the activities of normal real and social man. The activities of insane, drunkards etc are not studied under economics.
Un-Employment can be Eradicated
Economics can help to reduce unemployment through division of labor large-scale production etc.
Distribution of Money
Economics teaches equal distribution of money among all the people to discriminate the difference of rich and poor through laws of taxation etc.
Utility to Individual
It can be studied as:
1. Utility to Producers
The study of economics is of great importance to the capitalitists. It can help them to achieve cooperation of the working classes, utilize the available resources and factors of production to their best out put and maximum profit. Buying and selling principles, supply consumption, demand determination etc are to be solved though economics.
2. Utility to Consumers
Economics offers practical guidance to the consumers. It suggest them the principle by which he can drive maximum satisfaction and benefits out of his limited income it helps him to divide his income successfully between the expenditure of necessities, comfort and luxuries.
3. Utility to Laborer
The study of economics is also useful for the laborers. It encourages him to claim appropriate return for his work.
It can be further studied as:
According to Adam Smith
The classical economist Adam Smith considered wealth as the subject matter of economics. According to him economics deals with the activities of man in earning his income me and spending it among different objects in order to obtain the maximum benefit for satisfaction of his wants.
According to Marshal
The neo classical economist Alfred Marshal regarded material welfare it be the subject matter of economics. According to him the activities of man kind as a social being and in the ordinary business of life which are related to the attainment of economic well being through the use of the material requisite are considered to be the subject matter of economics.
According to Robbins
According to Robbins those activities, which originate because of the imbalance relation between human wants and available resources constitute the subject matter of economics.
According to Keynes
Keynes is of the view that economics problems constitute the subject matter of economics.
Nature of Economics
The nature of economics includes study or discussion that weather economics is arts or science?
Economics as a Science
Most of the economists regard economics as a science because it is a body of knowledge, which deals facts and rules and studies their cause with their effect. Now economics as a science generally studied two heads:
Economics as a Positive Science
Most of the English economists regard economics as a positive science because it examines the relationship between causes and effect. It studies economic problems, which are existing and effect directly human life.
Economics as a Normative Science
Some economists think that economics is a normative science. It tells that weather a particular thing is describable or not. The aim of economics is to promote human welfare so it studies the factors relating to what out to be.
Economics is an Art
Economics not only studies how economic problems arise but it also recommends positive measures to end these problems. The purpose of economics is to promote welfare and satisfaction and thus it outlines the guidelines to achieve these objectives.
Limitations of Economics
Economics has some limitations, which are as follow:
1. Economics does not study all human activities. It is limited only to those activities, which are related to wealth.
2. Economics studies only the human activities. It does not study the activities of other creatures.
3. Economics studies the activities of normal real and social man. The activities of insane, drunkards etc are not studied under economics.
Un-Employment can be Eradicated
Economics can help to reduce unemployment through division of labor large-scale production etc.
Distribution of Money
Economics teaches equal distribution of money among all the people to discriminate the difference of rich and poor through laws of taxation etc.
Utility to Individual
It can be studied as:
1. Utility to Producers
The study of economics is of great importance to the capitalitists. It can help them to achieve cooperation of the working classes, utilize the available resources and factors of production to their best out put and maximum profit. Buying and selling principles, supply consumption, demand determination etc are to be solved though economics.
2. Utility to Consumers
Economics offers practical guidance to the consumers. It suggest them the principle by which he can drive maximum satisfaction and benefits out of his limited income it helps him to divide his income successfully between the expenditure of necessities, comfort and luxuries.
3. Utility to Laborer
The study of economics is also useful for the laborers. It encourages him to claim appropriate return for his work.
LAND
Meaning of Land
Very
simply we can say that all what is given by nature for the use of mankind is
called land.
Marshal defines land as,
“By land is not merely meant land in the strict sense of word but whole of the materials and forces which nature gives freely for mans aid in land and water in air light or heat.”
In the light of above definition land is not only a piece of land as we generally understand nether it includes mineral wealth surface of ground, fishes, air, sunlight, oceans, streams, fertility of soil, rainfall etc. In short we can say that whatever we find below and above the surface of earth and seas, comes within the category of land it is a free gift of nature. The tern land is one of the broodiest terms that are used in economics.
Marshal defines land as,
“By land is not merely meant land in the strict sense of word but whole of the materials and forces which nature gives freely for mans aid in land and water in air light or heat.”
In the light of above definition land is not only a piece of land as we generally understand nether it includes mineral wealth surface of ground, fishes, air, sunlight, oceans, streams, fertility of soil, rainfall etc. In short we can say that whatever we find below and above the surface of earth and seas, comes within the category of land it is a free gift of nature. The tern land is one of the broodiest terms that are used in economics.
Characteristics of Land
Some
of the important characteristics of land are as follows:
1. It is Fixed in Quantity
One of the most important features of land is that it is fixed in quantity neither it can be decreased nor increased since it is a nature’s gift its quantity is naturally fixed. Humans do not have the power that can help them in changing the quantity of the gift of nature. Due to this the productive activities get restricted or limited to the particular size of land. It can be said that the extant of production largely depend upon the availability of land.
2. Land is an Indispensable Factor
Land is the most essential factor of production. Without land no business or productivity can even be initiated. Since land does not merely mean an estate, it also includes air, water, light etc. which are indispensable factors to produce something. Therefore it is rightly said, “No land no production”.
3. Land is Passive in Nature
Land is passive factor of production i.e. it cannot produce anything by itself. It needs something to activate its productive capacity. Efforts have to be made effectively so that full utilization of this factor can be obtained. A number of other sources and elements are properly applied to get efficient production.
4. Land is Immobile
Land cannot move. It is immobile in nature and is a non-portable commodity. It cannot be transferred from its place to a new one even if the conditions are more favorable to increase its capacities. It remained fixed on a particular location and its position cannot be changed.
5. Fertility of Land Differs
An important characteristic of land is that all lands differ from each other In terms of their fertility. They all are not equally alike. As a result one cannot expect to get same quantity or quality or production from different pieces of lands. Equal and identical production may not be achieved on different lands at the same time. Although artificial measures are available but they only help to activate the fertility but are incapable of making the lands equal in production.
6. Land is Indestructible
Since land is a gift of man cannot destroy nature and it. It is a gift from the nature to humans for satisfying and fulfilling his needs and wants. It is not a result of his efforts and sacrifices.
7. Its Value is Different
The value of land to great extant depends on its fertility and location. Higher the fertility higher the value, lower the fertility lower the value. Similarly a land near to market may have higher value as compared to the land located away from the market.
1. It is Fixed in Quantity
One of the most important features of land is that it is fixed in quantity neither it can be decreased nor increased since it is a nature’s gift its quantity is naturally fixed. Humans do not have the power that can help them in changing the quantity of the gift of nature. Due to this the productive activities get restricted or limited to the particular size of land. It can be said that the extant of production largely depend upon the availability of land.
2. Land is an Indispensable Factor
Land is the most essential factor of production. Without land no business or productivity can even be initiated. Since land does not merely mean an estate, it also includes air, water, light etc. which are indispensable factors to produce something. Therefore it is rightly said, “No land no production”.
3. Land is Passive in Nature
Land is passive factor of production i.e. it cannot produce anything by itself. It needs something to activate its productive capacity. Efforts have to be made effectively so that full utilization of this factor can be obtained. A number of other sources and elements are properly applied to get efficient production.
4. Land is Immobile
Land cannot move. It is immobile in nature and is a non-portable commodity. It cannot be transferred from its place to a new one even if the conditions are more favorable to increase its capacities. It remained fixed on a particular location and its position cannot be changed.
5. Fertility of Land Differs
An important characteristic of land is that all lands differ from each other In terms of their fertility. They all are not equally alike. As a result one cannot expect to get same quantity or quality or production from different pieces of lands. Equal and identical production may not be achieved on different lands at the same time. Although artificial measures are available but they only help to activate the fertility but are incapable of making the lands equal in production.
6. Land is Indestructible
Since land is a gift of man cannot destroy nature and it. It is a gift from the nature to humans for satisfying and fulfilling his needs and wants. It is not a result of his efforts and sacrifices.
7. Its Value is Different
The value of land to great extant depends on its fertility and location. Higher the fertility higher the value, lower the fertility lower the value. Similarly a land near to market may have higher value as compared to the land located away from the market.
Capital
Definition
Money is something, which has general acceptability in the settlement of debt, or in transfer of ownership of goods and services in a country. The value of exchange of every thing in a country is expressed in terms of money.
Mr. Robertson defines money in the following words
“Money is a commodity which is widely accepted in payment of goods or in discharge of other kinds of business obligation”.
An English economist Mr. Hawtrey observes that
“Money is one of those concepts which are definable primarily by the use or the purpose which they serve”.
In the words of Goh Cole,
“Money is purchasing power some thing that buys things”
According to Ely,
“Any thing that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts”.
One
of the simplest definitions of money is given by Mr. Walker who says that
“Money is what money does”.
“Money is what money does”.
In
the light of the above definitions, it can be said that
“Any thing that is generally accepted as a means of exchange and at the same time acts as a measures and a store of value”.
“Any thing that is generally accepted as a means of exchange and at the same time acts as a measures and a store of value”.
Capital and Wealth
Capital
means wealth in ordinary sense. But in economics both are treated and defined
differently from each other. Capital is defined as
“The part of wealth of individual or communities other then land which is used or intended to be used for further production of wealth.”
In other words,
“Capital is that wealth other then land which aids in the production of further wealth or which yields an income.”
Where as wealth is defined as,
“All those goods which possess utility and have value in exchange are called wealth.”
In other words,
“Economic goods are called wealth”
Thus capital includes all the goods that are used for further production for yielding income while wealth includes that can be exchanged for certain value.
“The part of wealth of individual or communities other then land which is used or intended to be used for further production of wealth.”
In other words,
“Capital is that wealth other then land which aids in the production of further wealth or which yields an income.”
Where as wealth is defined as,
“All those goods which possess utility and have value in exchange are called wealth.”
In other words,
“Economic goods are called wealth”
Thus capital includes all the goods that are used for further production for yielding income while wealth includes that can be exchanged for certain value.
Formation of Capital
Capital
is the produce means of production and it comes in to existence when wealth is
used for further production. The formation of capital depends upon:
1. Ability to Save and Invest
Ability of saving and investing of the people largely depends upon the excess of income over expenditures. Taking the people as a society it can be said that the ability to save and invest of a nation depends or is determined by excess production over consumption there will be no saving .In terns this saving becomes a part of capital formation.
2. Willingness to Save and Invest
Willingness to save of the people depends upon the consideration. This consideration may either be subjective or objective. Subjective consideration or personal factors include the factors, which are associated with the individual who save. This consideration include the following:
(i) Foresightedness
People save a certain portion of their money by way of foresightedness. They save for rainy days or to meet social obligations like education and marriages of their children in later part of their lives.
1. Ability to Save and Invest
Ability of saving and investing of the people largely depends upon the excess of income over expenditures. Taking the people as a society it can be said that the ability to save and invest of a nation depends or is determined by excess production over consumption there will be no saving .In terns this saving becomes a part of capital formation.
2. Willingness to Save and Invest
Willingness to save of the people depends upon the consideration. This consideration may either be subjective or objective. Subjective consideration or personal factors include the factors, which are associated with the individual who save. This consideration include the following:
(i) Foresightedness
People save a certain portion of their money by way of foresightedness. They save for rainy days or to meet social obligations like education and marriages of their children in later part of their lives.
(ii)
Social and Political Consideration
It refers to that part that people save in order to have a prestige in the eyes of others. A wealthy man is given much respect in the society and therefore people save to become wealthy and gain social prestige.
(iii) Economic Consideration
Economic consideration refers to the idea of receiving income from saving. People save to make further earnings. Entrepreneurs making saving in order to use it for further expansion of their wealth or to covet the gap between receipts and expenditure on the course of their business.
3. Mobilization of Savings
The next step is the formation of capital is that savings must be mobilized and transferred to the people who require them for investment in the capital market funds are supplied by individuals, investors, banks, investment trusts, insurance, companies, finance corporations, government etc. if the rate of capital market is to be stopped up the development of capital market is very necessary.
4. Investment of Saving in Real Capital
For saving to result in capital formation they must be invested. There must be number of honest and dynamic entrepreneurs in the country who should make investment of the savings. They will make investment if there is sufficient inducement to invest, which depends on the marginal efficiency of capital i.e. the prospective rate of profit on one land and the rate of interest on the other.
It refers to that part that people save in order to have a prestige in the eyes of others. A wealthy man is given much respect in the society and therefore people save to become wealthy and gain social prestige.
(iii) Economic Consideration
Economic consideration refers to the idea of receiving income from saving. People save to make further earnings. Entrepreneurs making saving in order to use it for further expansion of their wealth or to covet the gap between receipts and expenditure on the course of their business.
3. Mobilization of Savings
The next step is the formation of capital is that savings must be mobilized and transferred to the people who require them for investment in the capital market funds are supplied by individuals, investors, banks, investment trusts, insurance, companies, finance corporations, government etc. if the rate of capital market is to be stopped up the development of capital market is very necessary.
4. Investment of Saving in Real Capital
For saving to result in capital formation they must be invested. There must be number of honest and dynamic entrepreneurs in the country who should make investment of the savings. They will make investment if there is sufficient inducement to invest, which depends on the marginal efficiency of capital i.e. the prospective rate of profit on one land and the rate of interest on the other.
Importance of Capital
Pakistan
is one of the less advanced countries of the world. We use very little capital
in production as compared to advanced and developed countries. There fore of
our working force is engaged in agriculture. In most cases capital consist if a
few cattle and a few wooden tools and a cart in some cases. Some expensive
forms of capital; are also being supplied by the government in certain parts of
the country and some other facilities are also being provided e.g. irrigation
canals railways and roods etc. The government also owns some powerhouses. As a
result n new industries are springing up which use modern method. Hence we have
factories and machines at work. But still their importance in the economy is
yet quite small. If we want to develop ourselves economically we must increase
our capital supply. Without adequate capital to call ourselves a developed
nation would become a mere dream. Nowadays the key to success economically and
industrially is the supply of capital. We can take the example of Korea Japan
China America Germany etc. They are not born established nations. They have
relied on themselves conduced the people to save and made efficient use of
capital. Very simply we can say that in to days age and era of technology and
industry a country like Pakistan has to rely heavily on capital formation and
hence the capital.
Labour
Characteristics of Labour
Characteristics of Labour
Some
of the characteristics of labour are as follows:
1.
Labour is In-separable Form of Labourer
A Labourer cannot work without his labour. Whatever he performs is a result of his mental and physical exertion. Both cannot be separated from each other. The main driving force of a labourer is his labour. It may not happen that a labourer remains at home and ask his labour to go for work. It is covert i.e. it is present within a human being.
2. Labour is Indispensable for Production
As a matter of fact production is not possible without labour. In other words production is the aftermath of labour. Labour is necessary to activate production process. Every aspect of production ranging from purchase of raw material to final distribution in the market entirely depends upon labour. As a general rule, “efficient labour gives efficient production.”
A Labourer cannot work without his labour. Whatever he performs is a result of his mental and physical exertion. Both cannot be separated from each other. The main driving force of a labourer is his labour. It may not happen that a labourer remains at home and ask his labour to go for work. It is covert i.e. it is present within a human being.
2. Labour is Indispensable for Production
As a matter of fact production is not possible without labour. In other words production is the aftermath of labour. Labour is necessary to activate production process. Every aspect of production ranging from purchase of raw material to final distribution in the market entirely depends upon labour. As a general rule, “efficient labour gives efficient production.”
3.
Labour is perishable
A very important characteristic of labour is that it is perishable by natural law. It perishes with the passage of time. Since labour is present within a human being, therefore end of a laboures life means an end of labour as well. A loss of labour means loss forever.
A very important characteristic of labour is that it is perishable by natural law. It perishes with the passage of time. Since labour is present within a human being, therefore end of a laboures life means an end of labour as well. A loss of labour means loss forever.
4.
Labour is an Active Factor of Production
Labour gives production itself. Nothing has to apply to start work except labour itself gives the performance and thus activates the production process. A noteworthy feature of this characteristic is that other factors of production cannot produce any thing without aid of labour.
Labour gives production itself. Nothing has to apply to start work except labour itself gives the performance and thus activates the production process. A noteworthy feature of this characteristic is that other factors of production cannot produce any thing without aid of labour.
5.
Labour Sells his Service not Himself
Labour falls within the category of service industry. It is an intangible product of labourer for which he is free to sell it to anyone he likes. The place where he is free to sell it to any one he likes. The place where he works and the people, who hire him, actually hire the labour service not him.
Labour falls within the category of service industry. It is an intangible product of labourer for which he is free to sell it to anyone he likes. The place where he is free to sell it to any one he likes. The place where he works and the people, who hire him, actually hire the labour service not him.
6.
Labour is Both Means and Ends of Production
Labour is not only meant for producing. They are fully entitled to use what ever they have produced. Being human being the labour works for the satisfaction of their wants and their labour act as the means to achieve their ends i.e. their satisfaction.
7. Labour is mobile
Avery important characteristic of labour is that it is mobile in nature. It may be shifted from one place to another whenever and wherever it is needed. But how ever the laborers when get set at the particular working place not very easily move from there because they may be fully satisfied working there.
Labour is not only meant for producing. They are fully entitled to use what ever they have produced. Being human being the labour works for the satisfaction of their wants and their labour act as the means to achieve their ends i.e. their satisfaction.
7. Labour is mobile
Avery important characteristic of labour is that it is mobile in nature. It may be shifted from one place to another whenever and wherever it is needed. But how ever the laborers when get set at the particular working place not very easily move from there because they may be fully satisfied working there.
8.
Labour cannot be Calculated
The amount of labour spent on a particular work cannot be calculated. It is almost impossible even to assume that how many units of labour are required to perform a particular work. Labour therefore is an immeasurable factor of production.
9. Labours Differ in Efficiency
Alls the laboures are not alike there ability to do a work i.e. the labour differ from each other. A labour having high mental and physical capabilities to do a work differs from that having low physical and mental capabilities. This efficiency depends on a number of factors.
The amount of labour spent on a particular work cannot be calculated. It is almost impossible even to assume that how many units of labour are required to perform a particular work. Labour therefore is an immeasurable factor of production.
9. Labours Differ in Efficiency
Alls the laboures are not alike there ability to do a work i.e. the labour differ from each other. A labour having high mental and physical capabilities to do a work differs from that having low physical and mental capabilities. This efficiency depends on a number of factors.
Efficiency of Labour
In
very simple words efficiency of labour mean productive capacity. The capacity
of a worker to work more or less in a given period of time is called his
efficiency. Marshal defines efficiency as
“At a particular time the ability of a labourer to do better or much better and more work is deemed as the efficiency of labour.”
Efficiency of labour is a comparative concept. It compares the two or more workers. For example if a carpenter can make three chairs a day and another can make only one chair a day then this Implies that the efficiency of labour of the first worker is three times more than of the second. All the labours performing the same work turnout with different qualities in the same time depending upon their efficiency .All the laboures may not give similar output on a given period of time due to a difference their efficiency. Generally it depends upon the following factors:
“At a particular time the ability of a labourer to do better or much better and more work is deemed as the efficiency of labour.”
Efficiency of labour is a comparative concept. It compares the two or more workers. For example if a carpenter can make three chairs a day and another can make only one chair a day then this Implies that the efficiency of labour of the first worker is three times more than of the second. All the labours performing the same work turnout with different qualities in the same time depending upon their efficiency .All the laboures may not give similar output on a given period of time due to a difference their efficiency. Generally it depends upon the following factors:
·
Personal
qualities of labourer.
·
Atmosphere
of a country
·
Atmosphere
of the working place
·
Ability
of the organizer
·
Miscellaneous.
Factors
Determining Efficiency of Labour
Some
of the factors upon which the efficiency of labourer depend are follows:
1. Personal Characteristics of Labourer
The efficiency of labour depends to a great extant on its race and heredity. The workers belonging to certain races inherit efficiency and are used to such conditions, which belong to their work.
Some races are better endowed with physical and mental capacity than others. Every individual inherits some qualities from her racial stock to which he belongs.
2. Power to Work
A worker needs to possess good and sound health in order to be efficient in his work. He must be intellectual and intelligent. Intelligence and intellect makes a man clear in his thoughts quicker in action and thus incenses his efficiency.
3. Education
Education increases the efficiency of labour. It helps him to perform his duty with more intelligence. Skilled and trained workers prove to be more efficient then the untrained ones. The technical fitness depends upon the opportunities for training of labour.
4. Moral Qualities
Efficiency also depends how much the worker is morally fit. Honesty sincerity soberness and willingness increases the efficiency. The moral fitness depends on the attributes of characters.
5. Climate and physical conditions
The climate and physical conditions of a country affects the workers efficiency. In some countries the extreme conditions of weather restrict the workers to work efficiently. It does not allow the workers to work to there least and thus their efficiency and productivity both fall down. Mild and moderate climate conditions are considered ideal for production.
6. Fair and Prompt Payment
A worker will obviously be instructed in those industries where higher wages are available to him. A well-paid worker is contended and thus puts his heart in his work especially if he is promptly and punctually paid.
7. Nature of Work
Efficiency of labour is also affected by the nature of work. Where the work is monotonous the labourer ceases to take interest in his work. Similarly every work cannot be done with same technique. It depends upon the nature of work that how to perform it. Some works require more efficiency and skill on the part of workers and thus the productive capacity of the workers is increased.
8. Conditions of Work
The working conditions also play an important role in the efficiency of labour. Good lighting, ventilations, sanitations, artistic structure of the building, clean and quite atmosphere have a substantial bearing on the efficiency of workers.
9. Labour Legislations and Social Security
The workers need social security. They want to protect themselves through labour laws. The countries where there are good labour laws the workers or laborers find themselves more secure and hence have high efficiency to work. For getting good production the management must formulate such policies and rules that may give the workers the freedom to work. The countries where the labour legislation is absent their efficiency is very low.
10. Hope for Future Prospects
Labour desire to work in those firms where chances of promotion are available. Workers who have no hopeful prospects even a t good reputation lose to take interest in their work.
1. Personal Characteristics of Labourer
The efficiency of labour depends to a great extant on its race and heredity. The workers belonging to certain races inherit efficiency and are used to such conditions, which belong to their work.
Some races are better endowed with physical and mental capacity than others. Every individual inherits some qualities from her racial stock to which he belongs.
2. Power to Work
A worker needs to possess good and sound health in order to be efficient in his work. He must be intellectual and intelligent. Intelligence and intellect makes a man clear in his thoughts quicker in action and thus incenses his efficiency.
3. Education
Education increases the efficiency of labour. It helps him to perform his duty with more intelligence. Skilled and trained workers prove to be more efficient then the untrained ones. The technical fitness depends upon the opportunities for training of labour.
4. Moral Qualities
Efficiency also depends how much the worker is morally fit. Honesty sincerity soberness and willingness increases the efficiency. The moral fitness depends on the attributes of characters.
5. Climate and physical conditions
The climate and physical conditions of a country affects the workers efficiency. In some countries the extreme conditions of weather restrict the workers to work efficiently. It does not allow the workers to work to there least and thus their efficiency and productivity both fall down. Mild and moderate climate conditions are considered ideal for production.
6. Fair and Prompt Payment
A worker will obviously be instructed in those industries where higher wages are available to him. A well-paid worker is contended and thus puts his heart in his work especially if he is promptly and punctually paid.
7. Nature of Work
Efficiency of labour is also affected by the nature of work. Where the work is monotonous the labourer ceases to take interest in his work. Similarly every work cannot be done with same technique. It depends upon the nature of work that how to perform it. Some works require more efficiency and skill on the part of workers and thus the productive capacity of the workers is increased.
8. Conditions of Work
The working conditions also play an important role in the efficiency of labour. Good lighting, ventilations, sanitations, artistic structure of the building, clean and quite atmosphere have a substantial bearing on the efficiency of workers.
9. Labour Legislations and Social Security
The workers need social security. They want to protect themselves through labour laws. The countries where there are good labour laws the workers or laborers find themselves more secure and hence have high efficiency to work. For getting good production the management must formulate such policies and rules that may give the workers the freedom to work. The countries where the labour legislation is absent their efficiency is very low.
10. Hope for Future Prospects
Labour desire to work in those firms where chances of promotion are available. Workers who have no hopeful prospects even a t good reputation lose to take interest in their work.
11.
Division of Labour
Division of labour greatly influences its efficiency. When a whole task is split up into various parts and different parts are entrusted to different workers such workers become expert on performing their respective duties.
12. Efficiency of Organizer
Efficiency of labour also depends upon the ability of the organizer. The manner in which he makes the labour work his behavior his management his choice of machines and raw material introduction of labour organizations and the way he employs his men affect the efficiency of labourer.
Division of labour greatly influences its efficiency. When a whole task is split up into various parts and different parts are entrusted to different workers such workers become expert on performing their respective duties.
12. Efficiency of Organizer
Efficiency of labour also depends upon the ability of the organizer. The manner in which he makes the labour work his behavior his management his choice of machines and raw material introduction of labour organizations and the way he employs his men affect the efficiency of labourer.
Division
of Labour
Definition
The splitting of the production process on to its components process is known as division of labour. Each process is entrusted into a separate set of workers so that all of them co-operate to produce a single product. Division of labour is the result of specialization. Different workers who are assigned specific operation are specialized and skilled in their work.
Division of labour today is an important characteristic of the system of production. Infect there is hardly any producing unit of respectable size which does not organize production on the basis of division of labour.
The splitting of the production process on to its components process is known as division of labour. Each process is entrusted into a separate set of workers so that all of them co-operate to produce a single product. Division of labour is the result of specialization. Different workers who are assigned specific operation are specialized and skilled in their work.
Division of labour today is an important characteristic of the system of production. Infect there is hardly any producing unit of respectable size which does not organize production on the basis of division of labour.
Kinds
of Division of Labour
Following are the types of the division of labour:
Following are the types of the division of labour:
1.
Simple Division Of Labour
It means the division of society in to major sections each specialized in occupations e.g. carpenter weavers blacksmith etc.
It means the division of society in to major sections each specialized in occupations e.g. carpenter weavers blacksmith etc.
2.
Complex Division of Labour:
In this case no groups of workers make a complete article. Instead the making of the article is split up into number of process and sub-process and each is carried out by a separate group of people.
In this case no groups of workers make a complete article. Instead the making of the article is split up into number of process and sub-process and each is carried out by a separate group of people.
3. Irrational or Geographical Division of Labour
This form refers to certain localities cities or towns specializing in the production of a particular commodity. It is also called localization of industries or regional division.
4.
Occupational Division of Labour
It refers to professional division of labour i.e. each and every person be engaged in different office and job. For example some one working as a clerk, other as a manager, a lecturer in a college etc.
It refers to professional division of labour i.e. each and every person be engaged in different office and job. For example some one working as a clerk, other as a manager, a lecturer in a college etc.
Mobility
of Labour
Meaning
The capacity of a worker to move from one place to another is called mobility of labour. E.g. the movement of villagers towards cities for sake of employment, shifting a worker engaged in production to distribution.
The capacity of a worker to move from one place to another is called mobility of labour. E.g. the movement of villagers towards cities for sake of employment, shifting a worker engaged in production to distribution.
Kinds
of Mobility of Labour
Mobility of labour may take any one of the following kinds:
Mobility of labour may take any one of the following kinds:
1.
Geographical Mobility of Labour
The movement of a worker from one locality to another in search of employment is called geographical mobility of labour. E.g. if a worker has moved to Dubai in search of employment it will called geographical mobility.
Geographical mobility is of two types:
(i) National Mobility
If the movement of labour is with in the national boundaries of the country i.e. within the country it will be called national mobility.
(ii) International Mobility
When the movement of labour takes place across international boundaries i.e. out side the country such kind of mobility is called international mobility.
The movement of a worker from one locality to another in search of employment is called geographical mobility of labour. E.g. if a worker has moved to Dubai in search of employment it will called geographical mobility.
Geographical mobility is of two types:
(i) National Mobility
If the movement of labour is with in the national boundaries of the country i.e. within the country it will be called national mobility.
(ii) International Mobility
When the movement of labour takes place across international boundaries i.e. out side the country such kind of mobility is called international mobility.
2.
Occupational Mobility
The change of profession or occupation for the sake of getting better financial reward is called occupational mobility of labour. It is also called professional mobility e.g. if a labour changes his profession and starts a hotel it will be deemed as his professional or occupational mobility. It may be further classified as:
The change of profession or occupation for the sake of getting better financial reward is called occupational mobility of labour. It is also called professional mobility e.g. if a labour changes his profession and starts a hotel it will be deemed as his professional or occupational mobility. It may be further classified as:
3.
Horizontal Mobility of Labour
It is also known as parallel mobility of labour. It means that a worker moves from one employment to another without any change in his grade or salary e.g. a college clerk is transferred to the university office with the same salary and facilities.
It is also known as parallel mobility of labour. It means that a worker moves from one employment to another without any change in his grade or salary e.g. a college clerk is transferred to the university office with the same salary and facilities.
4.
Vertical Mobility of Labour
It refers to that mobility in which a person is transferred from a lower grade to a higher with an increase in his salary and other facilities e.g. an asst marketing manager is promoted as the marketing manager.
It refers to that mobility in which a person is transferred from a lower grade to a higher with an increase in his salary and other facilities e.g. an asst marketing manager is promoted as the marketing manager.
Criticism
One
of the pivoted assumptions of the law is that utility is measurable. In other
words it is assumed that it is possible to express the utility or satisfaction,
which a person desires from a good in qualitative terms. But utility relates to
the state of mind of an individual. Thus it is a subjective term and is capable
of being measured.
The law assumes that margined utility of money is constant. But it is not true. Actually as more and more is spent on the purchase of a commodity and less and less money is left with the purchaser the marginal utility of money goes on increasing. Thus the unit of measurement itself is variable.
The law does not apply to all types of commodities and persons. A drunkard gets more satisfaction on taking successive cups of wine. Greed increases with more money with some people.
The law assumes that margined utility of money is constant. But it is not true. Actually as more and more is spent on the purchase of a commodity and less and less money is left with the purchaser the marginal utility of money goes on increasing. Thus the unit of measurement itself is variable.
The law does not apply to all types of commodities and persons. A drunkard gets more satisfaction on taking successive cups of wine. Greed increases with more money with some people.
Marginal Utility and
Price
Definition of Marginal Utility
Definition
When we pay a certain price for a commodity it can be taken for granted that we think that the satisfaction is at least equal to the price paid. Hence we say they the price paid measures the marginal utility to that marginal utility indicates price. They move together. If the price goes up, the marginal utility also goes up, because now we buy less and vice versa. Marginal utility does not determine or governs price. It simply indicates it.
When we pay a certain price for a commodity it can be taken for granted that we think that the satisfaction is at least equal to the price paid. Hence we say they the price paid measures the marginal utility to that marginal utility indicates price. They move together. If the price goes up, the marginal utility also goes up, because now we buy less and vice versa. Marginal utility does not determine or governs price. It simply indicates it.
Law for Equi-Marginal
Utility
Introduction
The law of Equi marginal utility is also called law of substitution, law of maximum satisfaction or law of indifference.
Statement and Explanation
We all know that our wants are competitive. We have therefore to make a choice between the more urgent and the less urgent wants. When we are more or little less of a commodity it seems that we are trying to balance the marginal utility of the commodity and the money. Every person wants to make the best of his or her resources. This is necessary because resources are scarce in relation to wants. Every consumer aims at getting the maximum possible satisfaction for which he substitutes the more useful for the less useful things. When he does so, the marginal utilities in each direction will be equalized. It is only when marginal utilities have been equalized, through the process of substitution, that we get the maximum satisfaction.
Example
Suppose our hypothetical consumer has a given amount of income to spend and wants to maximize his satisfaction. We further assume that the commodities are subject to law of diminishing utility. He feels that he will aim greater satisfaction if he spends on any other good. Thus he goes on substituting one thing for another until the whole of the money is exhausted. When this is done he has got equi marginal utility. He cannot now increase his total utility by spending more on one thing and less on the other.
The law can be easily understood with the help of a hypothetical example. It is assumed that our consumer has only rupees 8 with which he purchases two comities say apple and bananas.
The law of Equi marginal utility is also called law of substitution, law of maximum satisfaction or law of indifference.
Statement and Explanation
We all know that our wants are competitive. We have therefore to make a choice between the more urgent and the less urgent wants. When we are more or little less of a commodity it seems that we are trying to balance the marginal utility of the commodity and the money. Every person wants to make the best of his or her resources. This is necessary because resources are scarce in relation to wants. Every consumer aims at getting the maximum possible satisfaction for which he substitutes the more useful for the less useful things. When he does so, the marginal utilities in each direction will be equalized. It is only when marginal utilities have been equalized, through the process of substitution, that we get the maximum satisfaction.
Example
Suppose our hypothetical consumer has a given amount of income to spend and wants to maximize his satisfaction. We further assume that the commodities are subject to law of diminishing utility. He feels that he will aim greater satisfaction if he spends on any other good. Thus he goes on substituting one thing for another until the whole of the money is exhausted. When this is done he has got equi marginal utility. He cannot now increase his total utility by spending more on one thing and less on the other.
The law can be easily understood with the help of a hypothetical example. It is assumed that our consumer has only rupees 8 with which he purchases two comities say apple and bananas.
Theories
of Population
Malthusian Theory of
Population
The Malthusian theory
of population was first propounded in 1798 by a British economist Robert
Malthusian. . In his own words the theory can be stated as,
“By nature human food increases in a slow arithmetical ratio: man himself increases in a quick ratio unless wants and vice stop him”
Malthus based his theory on the biological fact that every living organism tends to multiply to an unimaginable extant while on the other hand production of food increases with less than proportionate change. It is subject to law of diminishing returns. According to Malthus population tends to outstrip food supply.
“By nature human food increases in a slow arithmetical ratio: man himself increases in a quick ratio unless wants and vice stop him”
Malthus based his theory on the biological fact that every living organism tends to multiply to an unimaginable extant while on the other hand production of food increases with less than proportionate change. It is subject to law of diminishing returns. According to Malthus population tends to outstrip food supply.
Propositions of the Theory
The theory propounded by Malthus can be reduced to the following four propositions:
1. Food is necessary for the life of a man and therefore exercises a strong check on population. In other words, the size of population is determined by the availability of food.
2. Human population increases faster than food production which tends to out turn the increase in food production.
3. Population always increases when the means of subsistence increase unless prevented by some powerful checks.
4. There are two types of checks that can keep population on a level with the means of subsistence. They are preventive and positive checks.
Means of Subsistence
According to the first proposition, the population of a country is limited by means of subsistence i.e. the population is determined by the availability of food. The greater the food production, the greater would be the population and vice versa.
Growth or Population
Outruns Food Production
According to Malthus, there is no limit to the fertility of man. Man multiplies itself at an enormous rate. But the power of land to produce food is limited. It means that the production of land increases at a lesser rate as compared to production of man. Thus, the continued growth of the population would result in a decrease in output per worker and a decline in the amount of food available per person.
Population Increases When the Means Increase
According to third preposition as the food supply in a country increases, the member of children per family also increases. It, therefore, would result in an increased demand for food and their food per person will diminish. Thus, according to Malthus, the standard of living of the people cannot rise permanently.
According to Malthus, there is no limit to the fertility of man. Man multiplies itself at an enormous rate. But the power of land to produce food is limited. It means that the production of land increases at a lesser rate as compared to production of man. Thus, the continued growth of the population would result in a decrease in output per worker and a decline in the amount of food available per person.
Population Increases When the Means Increase
According to third preposition as the food supply in a country increases, the member of children per family also increases. It, therefore, would result in an increased demand for food and their food per person will diminish. Thus, according to Malthus, the standard of living of the people cannot rise permanently.
Checks
According to Malthus, contain positive and preventive checks can control the population. Preventive checks are those that are applied by man and includes measures for bring down the birth rate. The positive checks on the other hand exercise their influence on the growth of population by increasing death rates. They are applied by nature. Epidemics, wars and famines are some examples of positive checks.
Optimum Or Modern Theory Of Population
According to the theory, given a certain amount of resources, the state of technical know-how and a certain stock of capital, a country must have a certain size of population at which the real income (goods and services) per capital is the highest. This size of population is called optimum population. In other words, optimum population refers to a size of population at which the real income per capital is the maximum. If population exceeds the optimum size, it is said to be over populated. Such a condition develops in a country. When it’s available resources are fully exhausted and there exists no chance of their further exploitation. It is necessary at this stage that the country must practice preventive checks and to escape from the misery of positive checks.
According to this theory, there are three phases population in a country viz.
(a) Under Population
A condition at which real per capital income rises with a rise in the size of population.
(b) Optimum Population
A situation at which real income per capital is the highest.
(c) Over Population
From under and optimum population, a country moves, unless preventive checks are applied, to the level of over population, at which the real income per capital diminishes.
According to Malthus, contain positive and preventive checks can control the population. Preventive checks are those that are applied by man and includes measures for bring down the birth rate. The positive checks on the other hand exercise their influence on the growth of population by increasing death rates. They are applied by nature. Epidemics, wars and famines are some examples of positive checks.
Optimum Or Modern Theory Of Population
According to the theory, given a certain amount of resources, the state of technical know-how and a certain stock of capital, a country must have a certain size of population at which the real income (goods and services) per capital is the highest. This size of population is called optimum population. In other words, optimum population refers to a size of population at which the real income per capital is the maximum. If population exceeds the optimum size, it is said to be over populated. Such a condition develops in a country. When it’s available resources are fully exhausted and there exists no chance of their further exploitation. It is necessary at this stage that the country must practice preventive checks and to escape from the misery of positive checks.
According to this theory, there are three phases population in a country viz.
(a) Under Population
A condition at which real per capital income rises with a rise in the size of population.
(b) Optimum Population
A situation at which real income per capital is the highest.
(c) Over Population
From under and optimum population, a country moves, unless preventive checks are applied, to the level of over population, at which the real income per capital diminishes.
Economics
of Scale
Professor Marshall his
divided the economics arising from an increase in the scale of production of
any kind of goods in the broad classes.
I. Internal Economies:
As a firm increases its scale of production, the firm enjoys several economies named as internal
economies. Basically, internal economies are those which are special to each firm. For example, one firm will enjoy the advantage of good management; the other may have the advantage of specialization in the techniques of production and so on.
“Internal economies are
those which are open to a single factory, or a single firm independently of the
action of other firms. These result from an increase in the scale of output of
a firm and cannot be achieved unless output increases.” Cairncross
The outcomes of the
expansion of a particular firm cutting down the production costs and securing
increasing returns is called Internal Economics for that firm are not shared by
other firms and only a particular business man or firm enjoys the benefits.
There can be many casual economics for a firm when it expands itself. Some of
them may be:
·
Benefit of expert
services
·
Benefit of
construction
·
Benefit of use of
latest machinery
·
Benefit of use of
division of labour.
Prof. Koutsoyannis has divided
the internal economies into two parts:
A. Real Economies
B. Pecuniary Economies
A.
Real Economies:
Real economies are those
which are associated with the reduction of physical quantity of inputs, raw
materials, various types of labour and capital etc.
These economies are of the following types:
1. Technical Economies:
Technical economies have
their influence on the size of the firm. Generally, these economies accrue to
large firms which enjoy higher efficiency from capital goods or machinery.
Bigger firms having more resources at their disposal are able to install the
most suitable machinery.
Therefore, a firm
producing on large scale can enjoy economies by the use of superior techniques.
Technical economies are of three kinds:
(i) Economies of Dimension:
(ii) Economies of Linked
Process:
(iii) Economies of the Use
of By-Products:
2. Marketing Economies:
When the scale of
production of a firm is increased, it enjoys numerous selling or marketing
economies. In the marketing economies, we include advertisement economies,
opening up of show rooms, appointment of sole distributors etc. Moreover, a
large firm can conduct its own research to effect improvement in the quality of
the product and to reduce the cost of production. The other economies of scale are
advertising economies, economies from special arrangements with exclusive
dealers. In this way, all these acts lead to economies of large scale
production.
3. Labour Economies:
As the scale of production
is expanded their accrue many labour economies, like new inventions,
specialization, time saving production etc. A large firm employs large number
of workers. Each worker is given the kind of job he is fit for. The personnel
.officer evaluates the working efficiency of the labour if possible. Workers are
skilled in their operations which save production, time and simultaneously
encourage new ideas.
4. Managerial Economies:
Managerial economies refer
to production in managerial costs and proper management of large scale firm.
Under this, work is divided and subdivided into different departments. Each
department is headed by an expert who keeps a vigil on the minute details of
his department. A small firm cannot afford this specialisation. Experts are
able to reduce the costs of production under their supervision. These also
arise due to specialization of management and mechanisation of managerial
functions.
5. Economies of Transport and Storage:
A firm producing on large
scale enjoys the economies of transport and storage. A big firm can have its
own means of transportation to carry finished as well as raw material from one
place to another. Moreover, big firms also enjoy the economies of storage
facilities. The big firm also has its own storage and go down facilities.
Therefore, these firms can store their products when prices are unfavorable in
the market.
B.
Pecuniary Economies:
Pecuniary economies are
those which can be had after paying less prices for the factors used in the
process of production and distribution. Big firms can get raw material at the
low price because they buy the same in the large bulk. In the same way, they
enjoy a lot of concessions in bank borrowing and advertisements.
These economies occur to a large firm in the following:
(i) The firms producing output on a large scale purchase raw material in bulk quantity. As a result of this, the firms get a special discount from suppliers. This is a monetary gain to the firms.
(ii) The large-scale firms are offered loans by the banks at a low interest rate and other favorable terms.
(iii) The large-scale firms are offered concessional transportation facilities by the transport companies because of the large-scale transportation handling.
(iv) The large-scale firms advertise their products on large scales and they are offered advertising facilities at lower prices by advertising firms and newspapers.
II. External Economies:
External economies refer to all those benefits which accrue to all the firms operating in a given industry. Generally, these economies accrue due to the expansion of industry and other facilities expanded by the Government. According to Cairncross, “External economies are those benefits which are shared in by a number of firms or industries when the scale of production in any industry increases.” Moreover, the simplest case of an external economy arises when the scale of production function of a firm contains as an implicit variable the output of the industry. A good example is that of coal mines in a locality.
The outcomes of the
general development of an industry either in a particular locality or a country
are called external economics of scale. These economics do not depend upon the
organizing capacity of particular business man, rather they are available to
all the businessman alike. They depend on external condition and independent of
any individual business or establishment and of it’s resource. Some examples
are
·
Benefits of low
freight rates
·
Benefits of banking
facilities
·
Benefits of power
development
Prof. Cairncross has divided the external economies into the following parts as:
1. Economies of Concentration:
As the number of firms in
an area increases each firm enjoys some benefits like, transport and
communication, availability of raw materials, research and invention etc.
Further, financial assistance from banks and non-bank institutions easily
accrue to firm.
We can, therefore, conclude that concentration of industries lead to economies of concentration.
We can, therefore, conclude that concentration of industries lead to economies of concentration.
2.
Economies of Information:
When the number of firms
in an industry expands they become mutually dependent on each other. In other
words, they do not feel the need of independent research on individual basis.
Many scientific and trade journals are published. These journals provide
information to all the firms which relates to new markets, sources of raw
materials, latest techniques of production etc.
3.
Economies of Disintegration:
As an industry develops,
all the firms engaged in it decide to divide and sub-divide the process of
production among themselves. Each firm specializes in its own process. For
instance, in case of moped industry, some firms specialize in rims, hubs and
still others in chains, pedals, tires etc. It is of two types-horizontal
disintegration and vertical disintegration.
In case of horizontal
disintegration each firm in the industry tries to specialize in one particular
item whereas, under vertical disintegration every firm endeavors to specialize
in different types of items. Material of one firm may be available and useable
as raw materials in the other firms. Thus, wastes are converted into
by-products.
The selling firms reduce
their costs of production by realizing something for their wastes. The buying
firms gain by getting other firms’ wastes as raw materials at cheaper rates. As
a result of this, the average cost of production declines.
Significance of Economies of Scale:
The significance of economies
of scale is discussed as under:
(a). Nature of the Industry:
The foremost significance
of economies of scale is that it plays an important role in determining the
nature of the industry i.e. increasing cost industry, constant cost industry or
decreasing cost industry.
(b). Analysis
of Cost of Production:
When an industry expands
in response to an increase in demand for its products, it experiences some
external economies as well as some external diseconomies. The external
economies tend to reduce the costs of production and thereby causing an upward
shift in the long period average cost curve, whereas the external diseconomies
tend to raise the costs and thereby causing an upward shift in the long period
average cost curve. If external diseconomies outweigh the external economies,
that is, when there are net external diseconomies, the industry would be an
Increasing cost industry.
Law
of Demand
Introduction of Law of
Demand
Demand depends on
price. Demand is always at a price. At different prices different quantitities
will be purchased. The law of demand states:
“Demand varies inversely with price not necessarily proportionally, it means that when price falls demand rises and vice versa.
It can also be stated in these words:
“A rise in the price of a commodity or service is followed by a reduction in demand and a fall in price is followed by increase in demand if conditions of demand remain constant.”
It can also be written in the words of S.T. Thomas as:
“At any given time the demand for the commodity or service at the prevailing price is greater than it would be at a higher price and less than it would be at higher price and less than it would be at lower price.”
There are several factors that cause change in demand e.g. changes in weather, fashion, taste, change in population etc.
“Demand varies inversely with price not necessarily proportionally, it means that when price falls demand rises and vice versa.
It can also be stated in these words:
“A rise in the price of a commodity or service is followed by a reduction in demand and a fall in price is followed by increase in demand if conditions of demand remain constant.”
It can also be written in the words of S.T. Thomas as:
“At any given time the demand for the commodity or service at the prevailing price is greater than it would be at a higher price and less than it would be at higher price and less than it would be at lower price.”
There are several factors that cause change in demand e.g. changes in weather, fashion, taste, change in population etc.
Demand Schedule
Demand schedule is simply a statement in the form of a table given against each price the quantity of the commodity that will be demanded for a given period of time.
The individual demand schedule is not of very great importance. It shows only the demands of an individual. Putting down against price the total quantity of commodity, which will be disposed off in the market, can prepare the market demand schedule.
Demand schedule is simply a statement in the form of a table given against each price the quantity of the commodity that will be demanded for a given period of time.
The individual demand schedule is not of very great importance. It shows only the demands of an individual. Putting down against price the total quantity of commodity, which will be disposed off in the market, can prepare the market demand schedule.
Demand for Jeans
|
|
Quantity
|
Price
|
100
|
0
|
80
|
10
|
60
|
20
|
40
|
30
|
20
|
40
|
0
|
50
|
Explanation
Above you see an
example of a demand schedule. It shows us how many units (quantity) of a
good will be demanded at a given price. The above schedule gives us a
linear demand curve, because for every $10 the price goes up, quantity goes
down by 20. We can use this schedule to plot the following points on a
graph.
Demand Curve
Demand curve is a geometrical presentation of the demand schedule. Demand schedule is a table and demand curve is based on this table. Thus one represents the other. The above schedule can be stated in terms of demand curve as:
Demand curve is a geometrical presentation of the demand schedule. Demand schedule is a table and demand curve is based on this table. Thus one represents the other. The above schedule can be stated in terms of demand curve as:
Explanation:
That is pretty much it for the demand curve. Remember that
the difference between the demand schedule and the demand curve is just how it
is presented to you, either in a table or graphical form. The important
thing to remember is that demand curves slope down (likewise supply curves
slope up). A good trick for remembering this is that demand starts with
the letter D, and so does the word down. So D is for demand, and D is
also for down! I know it seems simple, but in the heat of the exam they
might get confusing, but knowing this little trick will help you out because it
is so easy!
Changes in Demand
According to the law of demand the demand for a product increases due to change in its price. But there are certain other reasons that influence the demand. Some of them are as follows:
1. Changes in the Taste and Fashion
The changes in the taste and fashion influence the demand to a great extant. Actually a human being psychologically want continuous change in his life style so that he get maximum satisfaction .To achieve his state of satisfaction he do not consider whatever the price of commodity he has to pay. Even if the price is high and the commodity is in high fashion or matches exactly his taste he will ultimately go for purchasing it.
2. Change in climatic conditions
The climatic conditions tend to increase or decrease the demand for a product. In winter there a great demand for warm clothing and in summer there a demand for electric fans and cold rinks and the marketers do not usually charge , less prices in these seasons in order to sell their products.
3. Change in Population
A change in the composition of the population will also affect demand. Influx of new people will create a demand for the good; they are in the habit of consuming. If the population of a country is rising, the overall demands of the people increase even at the same high price.
4. Change in the Amount of Money
Inflation also has a significant bearing on the demands of the people. When there is inflation it causes a great deal in demand, which leads to an increase in prices. Similarly if the amount of money is decreased the demand goes down even if there is no change in its price.
5. Change in Methods of Production
Changes in techniques and in the use of factors will affect the demand pattern of those factors as in the case of capital equipment and labour or chemicals.
Changes in Demand
According to the law of demand the demand for a product increases due to change in its price. But there are certain other reasons that influence the demand. Some of them are as follows:
1. Changes in the Taste and Fashion
The changes in the taste and fashion influence the demand to a great extant. Actually a human being psychologically want continuous change in his life style so that he get maximum satisfaction .To achieve his state of satisfaction he do not consider whatever the price of commodity he has to pay. Even if the price is high and the commodity is in high fashion or matches exactly his taste he will ultimately go for purchasing it.
2. Change in climatic conditions
The climatic conditions tend to increase or decrease the demand for a product. In winter there a great demand for warm clothing and in summer there a demand for electric fans and cold rinks and the marketers do not usually charge , less prices in these seasons in order to sell their products.
3. Change in Population
A change in the composition of the population will also affect demand. Influx of new people will create a demand for the good; they are in the habit of consuming. If the population of a country is rising, the overall demands of the people increase even at the same high price.
4. Change in the Amount of Money
Inflation also has a significant bearing on the demands of the people. When there is inflation it causes a great deal in demand, which leads to an increase in prices. Similarly if the amount of money is decreased the demand goes down even if there is no change in its price.
5. Change in Methods of Production
Changes in techniques and in the use of factors will affect the demand pattern of those factors as in the case of capital equipment and labour or chemicals.
6. Changes in the
Price of the Substitutes
If the prices of the substitutes are varied their demand will directly be affected. If the price of any commodity whose substitute is also available in the market is decreased its demand will be increased whereas the demand for its substitute despite of unaltered price will fall down.
7. Changes in the Wealth Distribution
The distribution of wealth also affect the demand for a product. If the wealth is distributed evenly the goods demanded by people they have acquired more wealth will increase and demand of the people who have lost wealth will decrease.
8. Anticipated Political or Price Change
Sometime norms and general speculation about tax changes war etc or of future shortages or abundance causes the present pattern of demand to change.
9. Changes in Conditions of Trade
The conditions of trade are closely related with the demand of the product. Demand for everything is greater in a boom though the prices are rising. Opposite is the case when there is depression.
If the prices of the substitutes are varied their demand will directly be affected. If the price of any commodity whose substitute is also available in the market is decreased its demand will be increased whereas the demand for its substitute despite of unaltered price will fall down.
7. Changes in the Wealth Distribution
The distribution of wealth also affect the demand for a product. If the wealth is distributed evenly the goods demanded by people they have acquired more wealth will increase and demand of the people who have lost wealth will decrease.
8. Anticipated Political or Price Change
Sometime norms and general speculation about tax changes war etc or of future shortages or abundance causes the present pattern of demand to change.
9. Changes in Conditions of Trade
The conditions of trade are closely related with the demand of the product. Demand for everything is greater in a boom though the prices are rising. Opposite is the case when there is depression.
Elasticity
of Demand
Meaning
There is a close connection between the quantity of a commodity purchased and its price. Changes in price are bound to affect the purchasers. The law of demand only indicates the direction of change in the quantity demanded as a result of change in prices. It does not tell the amount or the extant by which the demand will change in response to changes in prices. The concept which measures the responsiveness of quantities demanded to price changes is the elasticity of demand.
The term elasticity expresses the degree of correlation between demand and price. It is a result at which the quantity demanded varies with change in price. It may be defined as
“ The degree of responses (in the form of variations in the quantity demanded) to changes in price.
To be more exact we can say that “the elasticity of demand is a measure of the relative change in amount purchased n response to a relative change in price n a given demand curve.”
There is a close connection between the quantity of a commodity purchased and its price. Changes in price are bound to affect the purchasers. The law of demand only indicates the direction of change in the quantity demanded as a result of change in prices. It does not tell the amount or the extant by which the demand will change in response to changes in prices. The concept which measures the responsiveness of quantities demanded to price changes is the elasticity of demand.
The term elasticity expresses the degree of correlation between demand and price. It is a result at which the quantity demanded varies with change in price. It may be defined as
“ The degree of responses (in the form of variations in the quantity demanded) to changes in price.
To be more exact we can say that “the elasticity of demand is a measure of the relative change in amount purchased n response to a relative change in price n a given demand curve.”
Kinds
There are various kinds of elasticity of demand:
1. Price elasticity
2. Income elasticity
3. Cross elasticity
4. Substitution elasticity
1. Price Elasticity:
Elasticity of demand refers to price elasticity
of demand. It is the degree of responsiveness of quantity demanded of a
commodity due to change in price, other things remaining the same.
For better understanding the concepts of elastic and inelastic demand, the price elasticity of demand has been divided into five types, which are shown in Figure-1:
For better understanding the concepts of elastic and inelastic demand, the price elasticity of demand has been divided into five types, which are shown in Figure-1:
1. Perfectly Elastic Demand:
When a small change in
price of a product causes a major change in its demand, it is said to be
perfectly elastic demand. In perfectly elastic demand, a small rise in price
results in fall in demand to zero, while a small fall in price causes increase
in demand to infinity. In such a case, the demand is perfectly elastic.
The degree of elasticity of demand helps in defining the
shape and slope of a demand curve. Therefore, the elasticity of demand can be
determined by the slope of the demand curve. Flatter the slope of the demand
curve, higher the elasticity of demand.
In perfectly elastic demand, the demand curve is represented as a horizontal straight line, which is shown in Figure-2:
In perfectly elastic demand, the demand curve is represented as a horizontal straight line, which is shown in Figure-2:
2. Perfectly Inelastic Demand:
A perfectly inelastic
demand is one when there is no change produced in the demand of a product with
change in its price. The numerical value for perfectly inelastic demand is zero
(ep=0).
In case of perfectly inelastic
demand, demand curve is represented as a straight vertical line.
3. Relatively Elastic Demand:
Relatively elastic
demand refers to the demand when the proportionate change produced in demand is
greater than the proportionate change in price of a product. The numerical
value of relatively elastic demand ranges between one to infinity.
Mathematically,
relatively elastic demand is known as more than unit elastic demand (ep>1). For example, if the price of a product
increases by 20% and the demand of the product decreases by 25%, then the
demand would be relatively elastic.
The
demand curve of relatively elastic demand is gradually sloping, as shown in
Figure-4:
4. Relatively Inelastic Demand:
Relatively inelastic
demand is one when the percentage change produced in demand is less than the
percentage change in the price of a product. For example, if the price of a
product increases by 30% and the demand for the product decreases only by 10%,
then the demand would be called relatively inelastic. The numerical value of
relatively elastic demand ranges between zero to one (ep<1). Marshall has termed relatively inelastic
demand as elasticity being less than unity.
The demand curve of relatively
inelastic demand is rapidly sloping, as shown in Figure-5:
5. Unitary Elastic Demand:
When the proportionate change in demand
produces the same change in the price of the product, the demand is referred as
unitary elastic demand. The numerical value for unitary elastic demand is equal
to one (ep=1).
The demand curve for unitary
elastic demand is represented as a rectangular hyperbola, as shown in Figure-6:
2. Income Elasticity
In economics, income elasticity of demand measures the responsiveness of the quantity demanded for a good or service to a change in the income of the people demanding the good. It is calculated as the ratio of the percentage change in quantity demanded to the percentage change in income. For example, if in response to a 10% increase in income, the quantity demanded for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2.0
There are five possible income demand curves:
1. High income elasticity of demand:
In this case increase in income is accompanied by relatively larger increase in quantity demanded.
In this case increase in income is accompanied by relatively larger increase in quantity demanded.
2. Unitary income elasticity of demand:
In this case increase in income is accompanied by same proportionate increase in quantity demanded.
In this case increase in income is accompanied by same proportionate increase in quantity demanded.
3. Low income elasticity of demand:
In this case increase in income is accompanied by less than proportionate increase in quantity demanded.
In this case increase in income is accompanied by less than proportionate increase in quantity demanded.
4. Zero income elasticity of demand:
This shows that quantity bought is constant regardless of changes in income.
This shows that quantity bought is constant regardless of changes in income.
5. Negative income elasticity of demand:
In this case increase in income is accompanied by decrease in quantity demanded
In this case increase in income is accompanied by decrease in quantity demanded
3. Cross Elasticity
In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good. It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the demand for new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be: cross body.20%/10%. A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two substitute products. Assume products A and B are complements, meaning that an increase in the price for A accompanies a decrease in the quantity demanded for B. Therefore, if the price of product B decreases, the demand curve for product A shifts to the right reflecting an increase in A's demand, resulting in a negative value for the cross elasticity of demand. The exact opposite reasoning holds for substitutes.
In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good. It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the demand for new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be: cross body.20%/10%. A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two substitute products. Assume products A and B are complements, meaning that an increase in the price for A accompanies a decrease in the quantity demanded for B. Therefore, if the price of product B decreases, the demand curve for product A shifts to the right reflecting an increase in A's demand, resulting in a negative value for the cross elasticity of demand. The exact opposite reasoning holds for substitutes.
Measurements of
Elasticity
The practical purposes, it is not enough to know whether the demand is elastic or inelastic. It is more useful to find out to what extent it is so. For that purpose it is essential to measure elasticity.
Three methods are generally used for measurement of elasticity, which are explained below:
1. Total Outlay Method
In this method, we compare the total outlay of the purchases (or total revenue from the point of view of the seller) before and after the variations in the price. It may be expressed as:
Unity: It is unity, when even though the price has changed, the total amount spent or total revenue remains the same.
Greater than Unity
When with the fall in the price the total amount spent or total revenue increases on the total amount spent (total revenue) decreases when the price rise it is said to be greater than unity .
Less than Unity
Elasticity between two prices is considered to be less than unity when the total amount spent (total revenue) decreases with the rise n the price and decreases with a fall in the price.
Though this method is dimple it suffers from a serious drawback. It simply classifies the price elasticity in three categories and does not assist in measuring it in numerical terms.
2. Proportional Method
In this method we compare the percentage change in price with the percentage change in demand. The elasticity is the ratio of the percentage change in the quantity demanded to the percentage change in the price charged. Its formula is:
Elasticity of Demand = Propotionate Change in amount Demanded / Propotionate Change in Price
3. Geometrical Method
We can better understand with the help of the figure:
In the figure DD’ is the demanded curve which is a straight line. Here the demand is represented by the fraction distance from D’ to a point on the curve divided by the distance from the other to that point. Thus elasticity of demand on the points P1, P2 and P3 is.
If the curve is not a straight line the above formula can be used by drawing a tangent at a point where the elasticity is to be measured.
The practical purposes, it is not enough to know whether the demand is elastic or inelastic. It is more useful to find out to what extent it is so. For that purpose it is essential to measure elasticity.
Three methods are generally used for measurement of elasticity, which are explained below:
1. Total Outlay Method
In this method, we compare the total outlay of the purchases (or total revenue from the point of view of the seller) before and after the variations in the price. It may be expressed as:
Unity: It is unity, when even though the price has changed, the total amount spent or total revenue remains the same.
Greater than Unity
When with the fall in the price the total amount spent or total revenue increases on the total amount spent (total revenue) decreases when the price rise it is said to be greater than unity .
Less than Unity
Elasticity between two prices is considered to be less than unity when the total amount spent (total revenue) decreases with the rise n the price and decreases with a fall in the price.
Though this method is dimple it suffers from a serious drawback. It simply classifies the price elasticity in three categories and does not assist in measuring it in numerical terms.
2. Proportional Method
In this method we compare the percentage change in price with the percentage change in demand. The elasticity is the ratio of the percentage change in the quantity demanded to the percentage change in the price charged. Its formula is:
Elasticity of Demand = Propotionate Change in amount Demanded / Propotionate Change in Price
3. Geometrical Method
We can better understand with the help of the figure:
In the figure DD’ is the demanded curve which is a straight line. Here the demand is represented by the fraction distance from D’ to a point on the curve divided by the distance from the other to that point. Thus elasticity of demand on the points P1, P2 and P3 is.
If the curve is not a straight line the above formula can be used by drawing a tangent at a point where the elasticity is to be measured.
Difference between
Point and Arc Elasticity of Demand
When
calculating elasticity of demand there are two possible ways.
1.
Point elasticity of
demand takes the elasticity of demand at a particular point on a curve (or
between two points)
2.
Arc elasticity
measures elasticity at the midpoint between the two selected points:
Formula for point elasticity of demand is:
PED =
% Δ Q / Q
————-
% Δ P / P
————-
% Δ P / P
To get more precision, you can use calculus
and measure an infinitesimal change in Q and Price ( where ð = very small
change) This is the slope of the demand curve at that particular point in time.
Arc Elasticity
Arc elasticity measures the mid point between
the two selected points:
Point elasticity A
to B
·
Quantity increase from 200 to 300 = 100/200 = 50%
·
Price falls from 4 to 3 = 1/4 = -25%
·
Therefore PED = 50/ -25 = – 2.0
Mid Point (Arc) Elasticity
A to B
·
Mid point of Q = (200+300) / 2 = 250
·
Mid Point of P = (3+4) / 2 = 3.5
·
Q % = (100/250) = 40%
·
P % = 1/3.5 = 28.57
·
PED = 40/-28.57 = – 1.4
(or ( 3.5/250) * 100/1 = – 1.4)
Law Of Returns
Law of Diminishing Returns
Introduction
In some cases the return due to each successive additional unit, the production goes on diminishing. It is known as Diminishing Returns and is further explained by the Law of Diminishing Returns.
Explanation
This law is one of the most fundamental law of Economics. Usually it is related with agriculture and was also first enumerated by a Scottish Farmer.
Usually an increase in any of the factor of production results in an increase in production but this change is a proportionate change. It means that if the quantity of land and labour is doubled, although there will be an increase in the production but it will not be doubled. And that is what Law of Diminishing Returns states. In the words of Marshall:
“An increase in the capital and labour applies in the cultivation of land causes in general a less than propotionate change or increase in the amount of production raised. Unless it happens to coincide with an improvement in the art of agriculture.”
In some cases the return due to each successive additional unit, the production goes on diminishing. It is known as Diminishing Returns and is further explained by the Law of Diminishing Returns.
Explanation
This law is one of the most fundamental law of Economics. Usually it is related with agriculture and was also first enumerated by a Scottish Farmer.
Usually an increase in any of the factor of production results in an increase in production but this change is a proportionate change. It means that if the quantity of land and labour is doubled, although there will be an increase in the production but it will not be doubled. And that is what Law of Diminishing Returns states. In the words of Marshall:
“An increase in the capital and labour applies in the cultivation of land causes in general a less than propotionate change or increase in the amount of production raised. Unless it happens to coincide with an improvement in the art of agriculture.”
Law of Increasing Returns
Introduction
In order to increase the production, a producer has to increase the proportion of its fraction of production. However, the returns due to variations in the factors are not fixed. In some cases, return due to each successive unit is increased. This tendency is known as Law of Increasing Returns.
Explanation
This law is mostly found to be operating in manufacturing industries. This law was first propounded by Prof. Marshall, in his words, the law states that:
In order to increase the production, a producer has to increase the proportion of its fraction of production. However, the returns due to variations in the factors are not fixed. In some cases, return due to each successive unit is increased. This tendency is known as Law of Increasing Returns.
Explanation
This law is mostly found to be operating in manufacturing industries. This law was first propounded by Prof. Marshall, in his words, the law states that:
“An increase of labour
and capital leads generally to improved organization, which increases the
efficiency of the work of labour and capital.”
According to this law whenever a new dose of labour and capital is applied it yields increasing returns. Also the cost of production diminishes.
According to this law whenever a new dose of labour and capital is applied it yields increasing returns. Also the cost of production diminishes.
Law of Constant Returns
Introduction
Similarly, in some of the cases, the increase in the productive unit keeps the production constant. This tendency is known as law of Constant Returns.
Explanation
When an increase or decrease in the output of an industry makes not alteration in the cost of production per unit, the law of constant returns is said to operate. In other words when fresh doses of productive resources results in an equal return, it is called constant returns.
The law of constant returns operates in those industries where the cost of raw material and manufacturing cost are half and half. In other words the law operates where man and nature dominate equally. It is also said that a point where the opposite tendencies of diminishing returns and increasing returns are in equilibrium is the Constant Returns.
Examples
Possible examples of industries where the law applies are cane growing and sugar making, Iron-ore mining and steel making, cane growing and iron ore are subject to law of diminishing turns whereas sugar making and steel making to law of increasing turns. In these industries the advantage of increasing returns are neutralized by increasing cost of raw materials.
Similarly, in some of the cases, the increase in the productive unit keeps the production constant. This tendency is known as law of Constant Returns.
Explanation
When an increase or decrease in the output of an industry makes not alteration in the cost of production per unit, the law of constant returns is said to operate. In other words when fresh doses of productive resources results in an equal return, it is called constant returns.
The law of constant returns operates in those industries where the cost of raw material and manufacturing cost are half and half. In other words the law operates where man and nature dominate equally. It is also said that a point where the opposite tendencies of diminishing returns and increasing returns are in equilibrium is the Constant Returns.
Examples
Possible examples of industries where the law applies are cane growing and sugar making, Iron-ore mining and steel making, cane growing and iron ore are subject to law of diminishing turns whereas sugar making and steel making to law of increasing turns. In these industries the advantage of increasing returns are neutralized by increasing cost of raw materials.
Why does Law of Diminishing Returns apply to Agriculture?
The law of diminishing
returns specially applies to agriculture and other extractive industries. One
thing that is common to all these industries is the supremacy of nature. It is
therefore often remarked that the part that nature plays in production
corresponds to diminishing returns and the part which man plays confirms to the
law of increasing returns. The reason is that, nature where it is supreme is
subject to diminishing returns, while industry where man is supreme, is subject
to increasing return. Besides the supremacy of nature, there are several other
reasons why agriculture is subject to the law of diminishing returns.The
agricultural operations are spread out over a wide area, and supervision cannot
be very effective. Scope for the use of specialized machinery is also very limited.
Therefore economics of large scale production cannot be reaped.
Does it apply only to Agriculture?
It is wrong to say that the law only applies to agriculture as agriculture is always subject to diminishing and manufacturing to increasing returns. The application of the law is universal. It applies to industries also. If the industry is expanded too much and becomes unwisely supervision will become tax and the cost will go up. The law of diminishing returns thus sets in. The only difference is that in agriculture it sets in earlier and in industry much later.
Barter
System
Introduction
Barter economy means the exchange of commodities. It consists if a bargain of commodity with the other without the help of another of exchange, such as money. Therefore we can say that buying goods against goods is called barter system.
The barter system can easily be understood with the help of the following example. Suppose Mr. A is a farmer and produces wheat in his fields. When the crop is ready A finds that he can stock as much wheat as his family need for the whole year and still he will have a surplus which he can use for exchange purpose. Now he has to get his plough repaired through a carpenter. After availing the services of the carpenter, Mr. A makes him the payment in the form of wheat in exchange of his services. Again Mr. A wants to purchase cloth and goes to merchant’s shop. Here he exchanges the desired quantity of cloth with surplus wheat. Thus the process will keep on continuing and the needs and wants will be satisfied by making use of any commodity as the medium of exchange.
Defects of Barter System
Following are some of the difficulties of the barter system.
1. Double Coincidence of Wants
Barter requires a double coincidence of wants. If a person for insistence has wheat and wants to exchange it with cotton, he has to find a person possessing cotton and requiring wheat. It was possible only when the people lived in small areas and their wants were too limited.
2. Lack of Common Measures
There was no fixed measure in which two things could be exchanged. It means every one did not derive complete satisfaction out of his deal. The ratios of exchange were fixed accordingly to the necessities and demands of the parties. One party had to suffer under these conditions were each transaction is an isolated transaction.
3. Lack of Divisibility
Another great disadvantage of barter system was the lack of divisibility. Suppose a man possess horse and requires wheat and cotton in exchange but both of these commodities may not be obtained from one man. One person may have wheat another has rice in surplus and both of them want to exchange their commodities with the horse. Now the horse cannot be divided and fence the transaction may not be completed.
4. Lack of Store of Value
Under the barter system wealth consisted of non-durable goods, which are quickly perished or detoriated with the passage of time. There value may not be stored for long period. Hence nobody could think of storing something to provide against future.
Following are some of the difficulties of the barter system.
1. Double Coincidence of Wants
Barter requires a double coincidence of wants. If a person for insistence has wheat and wants to exchange it with cotton, he has to find a person possessing cotton and requiring wheat. It was possible only when the people lived in small areas and their wants were too limited.
2. Lack of Common Measures
There was no fixed measure in which two things could be exchanged. It means every one did not derive complete satisfaction out of his deal. The ratios of exchange were fixed accordingly to the necessities and demands of the parties. One party had to suffer under these conditions were each transaction is an isolated transaction.
3. Lack of Divisibility
Another great disadvantage of barter system was the lack of divisibility. Suppose a man possess horse and requires wheat and cotton in exchange but both of these commodities may not be obtained from one man. One person may have wheat another has rice in surplus and both of them want to exchange their commodities with the horse. Now the horse cannot be divided and fence the transaction may not be completed.
4. Lack of Store of Value
Under the barter system wealth consisted of non-durable goods, which are quickly perished or detoriated with the passage of time. There value may not be stored for long period. Hence nobody could think of storing something to provide against future.
5. Inconvenient Media
of Exchange
Commodities like little wheat or other things alike cannot be easily transported and thus have little value. Therefore under barter system the mediums of exchange were really inconvenient.
Commodities like little wheat or other things alike cannot be easily transported and thus have little value. Therefore under barter system the mediums of exchange were really inconvenient.
How Money Removed The Difficulties of Barter
With the help of money it has now become possible to overcome the inconveniences of barter system.
1. Standard of Value
Under the system of exchange i.e. sales and purchase the value of each commodity is expressed in terms of standard of value such as gold or silver.
2. No need of Double Coincidence
Under monitory economy there is no such need of such two persons whose surplus suits with each other wants.
3. Sub-Division of Articles is Not Necessary
Money has solved the difficult of sub-divisibility of some of the commodities with out any loss. Under this system if any one needs urgent cash and has some valuable he can simply sell it in the market and get the desired money.
4. Store of Value
Money has provided man an opportunity to save money in the form of liquid cash that helps him to preserve his assets for a longer period of time and avoid any unseen stringencies.
5. Large-scale Production
Large scale of production is possible by the use of money, which was not possible under barter economy.
Summing Up
Thus money or sale and purchase system has removed all the difficulties of barter economy.
Money
Definition
“Money is some thing, which has general acceptability in the settlement of debt, or in transfer of ownership of goods and services in a country. The value of exchange of every thing in a country is expressed in terms of money.”
Mr. Robertson defines money in the following words
“Money is a commodity which is widely accepted in payment of goods or in discharge of other kinds of business obligation”.
“Money is some thing, which has general acceptability in the settlement of debt, or in transfer of ownership of goods and services in a country. The value of exchange of every thing in a country is expressed in terms of money.”
Mr. Robertson defines money in the following words
“Money is a commodity which is widely accepted in payment of goods or in discharge of other kinds of business obligation”.
An English economist
Mr. Hawtrey observes that
“Money is one of those concepts which are definable primarily by the use or the purpose which they serve”.
In the words of Goh Cole,
“Money is purchasing power some thing that buys things”
According to Ely,
“Any thing that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts”.
One of the simplest definitions of money is given by Mr. Walker who says that
“Money is what money does”.
In the light of the above definitions, it can be said that
“Any thing that is generally accepted as a means of exchange and at the same time acts as a measures and a store of value”.
“Money is one of those concepts which are definable primarily by the use or the purpose which they serve”.
In the words of Goh Cole,
“Money is purchasing power some thing that buys things”
According to Ely,
“Any thing that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts”.
One of the simplest definitions of money is given by Mr. Walker who says that
“Money is what money does”.
In the light of the above definitions, it can be said that
“Any thing that is generally accepted as a means of exchange and at the same time acts as a measures and a store of value”.
Functions of Money
Money is said to
perform the following functions
1. It serves as a medium of exchange.
2. It is used as a store of value.
3. It acts as an instrument of deferred payment.
4. It is a measure of value.
These are further discussed below
1. Medium of Exchange
The most general function of money is that it serves as a medium of exchange. The ownership in goods and services is exchanged through it. Money is accepted in exchange of goods and services and property rights simply because in its turn money can be exchanged for them at such places and times the possessor wishes. It means any thing can be brought and sold through it. Money acquires the capacity of serving as a medium of exchange also because of legal sanctions behind it and as such it is generally accepted in the settlements of debts or any financial transaction.
1. It serves as a medium of exchange.
2. It is used as a store of value.
3. It acts as an instrument of deferred payment.
4. It is a measure of value.
These are further discussed below
1. Medium of Exchange
The most general function of money is that it serves as a medium of exchange. The ownership in goods and services is exchanged through it. Money is accepted in exchange of goods and services and property rights simply because in its turn money can be exchanged for them at such places and times the possessor wishes. It means any thing can be brought and sold through it. Money acquires the capacity of serving as a medium of exchange also because of legal sanctions behind it and as such it is generally accepted in the settlements of debts or any financial transaction.
2. Measure of value
Money is used as a measure of value in the sense that the value of every thing is demanded in terms of money. As a measure of value money not only facilitates business transactions but is also useful transacting the sale and purchase if immovable properties buying at distant places. Money as a measure of value is also helpful in asserting the financial worth or stability of a business unit or an industrial concern which is possible from the study of their balance sheets containing the value of their assets and liabilities in terms of money. In simple words we can say that function of money as a measure of value helps us almost in every aspect of our daily life.
3. Store of Value
Another function of money is that it serves as a store of value. We can keep our assets in liquid form so that they can be used any time we feel of doing so. A unique feature of our daily life is that the flow of income does not correspond with the expenditure. The income in the majority of cases does not come to us with the same intervals as we have to make payments and consequently their adjustment would have been difficult but money, serving as a store of value makes a happy adjustment possible between the flow of income and expenditure intervals. Due to its value payments for the future can be made.
4. Instrument of Deferred Payment
Money also acts as an instrument of differed payment, which means that transactions requiring deferred payment are made possible through it. It so happens because the value of money having legal sanction behind, is more stable in comparison to other goods the value of which are liable to great fluctuation under the influence of their demand and supply position. The value of money being stable the parties in transaction are assured of getting the same value even after some time if the payments are made in terms of money. It means that money serving as an instrument of deferred payment facilitates credit transactions. Similarly for the same it encourages lending and borrowing which stimulate saving and investment and ultimately accelerates the economic growth of a country.
5. Transfer of Value
Money has simplified the process of transfer of value from one place to another with out losing its worth. Money is readily accepted by all without any difficulty. It is even possible to transfer a billion of rupees from one place to another.
Money is used as a measure of value in the sense that the value of every thing is demanded in terms of money. As a measure of value money not only facilitates business transactions but is also useful transacting the sale and purchase if immovable properties buying at distant places. Money as a measure of value is also helpful in asserting the financial worth or stability of a business unit or an industrial concern which is possible from the study of their balance sheets containing the value of their assets and liabilities in terms of money. In simple words we can say that function of money as a measure of value helps us almost in every aspect of our daily life.
3. Store of Value
Another function of money is that it serves as a store of value. We can keep our assets in liquid form so that they can be used any time we feel of doing so. A unique feature of our daily life is that the flow of income does not correspond with the expenditure. The income in the majority of cases does not come to us with the same intervals as we have to make payments and consequently their adjustment would have been difficult but money, serving as a store of value makes a happy adjustment possible between the flow of income and expenditure intervals. Due to its value payments for the future can be made.
4. Instrument of Deferred Payment
Money also acts as an instrument of differed payment, which means that transactions requiring deferred payment are made possible through it. It so happens because the value of money having legal sanction behind, is more stable in comparison to other goods the value of which are liable to great fluctuation under the influence of their demand and supply position. The value of money being stable the parties in transaction are assured of getting the same value even after some time if the payments are made in terms of money. It means that money serving as an instrument of deferred payment facilitates credit transactions. Similarly for the same it encourages lending and borrowing which stimulate saving and investment and ultimately accelerates the economic growth of a country.
5. Transfer of Value
Money has simplified the process of transfer of value from one place to another with out losing its worth. Money is readily accepted by all without any difficulty. It is even possible to transfer a billion of rupees from one place to another.
Types of Money
Generally the
classification of money is based on the material that is being used for the
purpose. According to the material used, the money can be classified as:
1. Metallic Money
The currency in use or to be used when is made of some metal; it is known as metallic money. The metallic money usually consist of coins made up of gold, silver, copper, bronze etc. a characteristic of these coins is that they are properly shaped and stamped by the central issuing authority to prevent any misuse. In today’s modern age of business the coins are Marley used and issued. The metallic money is further classified as:
(i)Full Bodied Coin
(ii)Token Coins
2. Paper Money
Paper money may be of following types
(i) Representative Paper Money
When the paper money is backed by an exactly equal amount of in gold or silver kept in reserve by the issuing authority it is known as representative money. Such notes could be exchanged for coins when needed and did nothing more then to represent coins.
(ii) Convertible Paper Money
The currency notes which can be exchanged for full bodied or standard coins is called convertible money. Its value is backed by a proportionate reserve of some precious metal and the confidence in the word of eh issuing authority. It is also called fiduciary money.
(iii) Inconvertible Paper Money
The currency notes that cannot be converted in full-bodied coins. The issuing authority gives no promise for its conversion. It can also be called fiat money.
1. Metallic Money
The currency in use or to be used when is made of some metal; it is known as metallic money. The metallic money usually consist of coins made up of gold, silver, copper, bronze etc. a characteristic of these coins is that they are properly shaped and stamped by the central issuing authority to prevent any misuse. In today’s modern age of business the coins are Marley used and issued. The metallic money is further classified as:
(i)Full Bodied Coin
(ii)Token Coins
2. Paper Money
Paper money may be of following types
(i) Representative Paper Money
When the paper money is backed by an exactly equal amount of in gold or silver kept in reserve by the issuing authority it is known as representative money. Such notes could be exchanged for coins when needed and did nothing more then to represent coins.
(ii) Convertible Paper Money
The currency notes which can be exchanged for full bodied or standard coins is called convertible money. Its value is backed by a proportionate reserve of some precious metal and the confidence in the word of eh issuing authority. It is also called fiduciary money.
(iii) Inconvertible Paper Money
The currency notes that cannot be converted in full-bodied coins. The issuing authority gives no promise for its conversion. It can also be called fiat money.
Advantages of Paper
Money
Following are some advantages of the paper money
1. Economical
Currency notes are cheapest media of exchange. Paper money practically costs nothing to the government. It does not need to spend anything on the purchase of gold for minting coins. Certain other expenditure or losses associated with metallic coins are also avoided.
2. Convenient
Paper money is the most convenient mean of money. A large amount can be carried conveniently in the pocket with out any body knowing about it. It possessed in very large measure the quality of portability, which a money material should have.
3. Homogenous
Among the coins there are good and bad coins. But currency notes are all exactly similar. It is therefore the substitute medium of exchange.
4. Stability
The value of money can be kept stable by properly regulating its issue. Managed proper currency method is therefore adopted by many countries.
5. Cheap Remittance
Money in the form of currency notes can be cheaply remitted from one place to another in an insured cover.
6. Elasticity
Paper money is absolutely elastic. Its quantity can be increased or decreased at the will of the currency authority. Thus paper money can better meet the requirements of trade and industry.
7. Advantages to the Banks
Paper money is of great advantage to the banks. They can keep their cash reserves against liabilities in this form, for currency notes are full legal tender.
Following are some advantages of the paper money
1. Economical
Currency notes are cheapest media of exchange. Paper money practically costs nothing to the government. It does not need to spend anything on the purchase of gold for minting coins. Certain other expenditure or losses associated with metallic coins are also avoided.
2. Convenient
Paper money is the most convenient mean of money. A large amount can be carried conveniently in the pocket with out any body knowing about it. It possessed in very large measure the quality of portability, which a money material should have.
3. Homogenous
Among the coins there are good and bad coins. But currency notes are all exactly similar. It is therefore the substitute medium of exchange.
4. Stability
The value of money can be kept stable by properly regulating its issue. Managed proper currency method is therefore adopted by many countries.
5. Cheap Remittance
Money in the form of currency notes can be cheaply remitted from one place to another in an insured cover.
6. Elasticity
Paper money is absolutely elastic. Its quantity can be increased or decreased at the will of the currency authority. Thus paper money can better meet the requirements of trade and industry.
7. Advantages to the Banks
Paper money is of great advantage to the banks. They can keep their cash reserves against liabilities in this form, for currency notes are full legal tender.
Disadvantages of Paper
Money
Its disadvantages are as follows
1. No Value outside the Country
Paper money is of no value outside the country where it is issued. Gold and silver coins were accepted even by foreigners as they had no intrinsic value.
2. Risk of Damage
There is always a possibility of damage to the paper. Fire may burn it, water may tear it etc.
3. Danger of Over Issue
A serious drawback in paper currency is the ease with which it can be issued. There is always a danger of its over issue when the government is in financial difficulties. Once this course is adapted the momentum leads to further notes printing until it losses all the value. This over issue of notes is called over inflation.
4. Price Increase
Some times especially when the money loses its value there is always an increase in the price of goods. As a result, labours and other people with fixed income suffer greatly. The whole public feels the pinch.
5. Effect on Business
During the days of monetary stringencies in a monetary economy, the business activities are affected very badly. The indirect result of price increase, shortage of currency etc, result in a fall of exports and a rise in imports. It leads to the export of gold from the country, which is not a desirable thing. Its balance of payments gets unfavorable.
Its disadvantages are as follows
1. No Value outside the Country
Paper money is of no value outside the country where it is issued. Gold and silver coins were accepted even by foreigners as they had no intrinsic value.
2. Risk of Damage
There is always a possibility of damage to the paper. Fire may burn it, water may tear it etc.
3. Danger of Over Issue
A serious drawback in paper currency is the ease with which it can be issued. There is always a danger of its over issue when the government is in financial difficulties. Once this course is adapted the momentum leads to further notes printing until it losses all the value. This over issue of notes is called over inflation.
4. Price Increase
Some times especially when the money loses its value there is always an increase in the price of goods. As a result, labours and other people with fixed income suffer greatly. The whole public feels the pinch.
5. Effect on Business
During the days of monetary stringencies in a monetary economy, the business activities are affected very badly. The indirect result of price increase, shortage of currency etc, result in a fall of exports and a rise in imports. It leads to the export of gold from the country, which is not a desirable thing. Its balance of payments gets unfavorable.
3. Bank or Credit Money
Bank money consist of demand deposit, which is drawn by cheques. A deposit is like any other medium of exchange and being payable, on demand, serves as a standard of value or unit of an account as it is convertible into standard of value i.e. money or crash at fixed terms.
In the words of J.M.
Keynes.
“Bank money is simply an acknowledgment of a private debt expressed in the money of account which is used by passing from one hand to another as an alternative of money to settle transactions.”
“Bank money is simply an acknowledgment of a private debt expressed in the money of account which is used by passing from one hand to another as an alternative of money to settle transactions.”
Value of Money
The value of money
refers to the purchasing power of one unit of money in terms of goods and
services. It indicates the quantity of goods and services that can be had in
exchange of one unit of money. If the value of money is studied in relation to
the home market, it is called internal value as against external value, which
gives the value of money in terms of foreign currency.
Value of Money and Price Level
The price level of a country refers to the value of goods and services in terms of money. It means that value of money is expressed in terms of money. As for example, one unit of money supposes fetches 3 seers of wheat and value of 3 seers of wheat is one unit of money. Suppose the value of money rises and its one unit now fetches 5 seers of wheat. It means that the value of wheat has come down and now 5 seers of wheat will fetch one unit of money, which previously only did 3 seers.
From the above example it is evident that value of money is followed by the fall in price level and vice versa. In other words rise in price level makes the value of money fall and the same quantity of money can be had with more units of money. The above fact can also be interpreted as an increase in the quantity of money brings a corresponding fall in the value of money and the fluctuations in the value of money occurs due to a change in the quantity of money. This relationship between value of money and its quantity is explained by quantity theory of money.
Value of Money and Price Level
The price level of a country refers to the value of goods and services in terms of money. It means that value of money is expressed in terms of money. As for example, one unit of money supposes fetches 3 seers of wheat and value of 3 seers of wheat is one unit of money. Suppose the value of money rises and its one unit now fetches 5 seers of wheat. It means that the value of wheat has come down and now 5 seers of wheat will fetch one unit of money, which previously only did 3 seers.
From the above example it is evident that value of money is followed by the fall in price level and vice versa. In other words rise in price level makes the value of money fall and the same quantity of money can be had with more units of money. The above fact can also be interpreted as an increase in the quantity of money brings a corresponding fall in the value of money and the fluctuations in the value of money occurs due to a change in the quantity of money. This relationship between value of money and its quantity is explained by quantity theory of money.
Quantity
Theory of Money
Theory
The quantity of money states that other things remaining the same, the value of money falls in proportion to increase in the quantity of money in circulation. It mans that in the case, when the quantity of money increases by 25%, the value of money falls by 25%. Thus the quantity of money and its value of money are inversely related.
Explanation
The value of money like any other commodity is determined by its demand and supply. Thus the quantity theory of money can be explained under these two heads.
1. As Regards Demand of Money
Demand of money according to Fisher is the derived demand i.e. not for direct consumption. Money being a medium of exchange is demanded for the purchasing of goods and services. Demand for money therefore depends upon the demand for goods and services.
2. As Regards Supply of Money
According to Fisher supply of money is represented by the total expenditure made by the people calculated during a given period of time. The total expenditure made by the people is calculated by multiplying the total quantity of legal tender money by its velocity plus the bank money (cheque, drafts etc) multiplied by its velocity. Velocity of money means the number of hands that one unit of money changes during a given period of time.
Criticism
The quantity theory of money is theoretically convincing but practically it is consider as a misleading one.
1. The very assumption in the theory that other things remaining same are incorrect. Fisher assumed money as independent variable where as credit (M’) is a function of business activity i.e. the turnover. It means the turnover increases, the supply of bank or credit also increases and consequently money is not an independent variable.
2. Velocity of money and bank money has been assumed is assumed in this theory to be constant where as they are not so because they depend upon business activity which is never constant.
3. The theory fails to explain as to why during depression the increase in supply of money does not bring a corresponding increase in the price level.
4. According to quantity theory high price is the effect of increase in supply of money which is not always true. Scarcity of goods caused by a fall in production or increase in production with respect to an increase in population also raises the price level.
5. It is argued that Fisher’s equation is only valid in a static economy. The economy becomes static beyond full employment level because the physical production does not increase in such a situation. the extra money if introduced in such a stage of economy is not absorbed by increased quantity of output and consequently the price level is directly affected. This shows that Fisher equation in a dynamic economy is of no use.
The quantity of money states that other things remaining the same, the value of money falls in proportion to increase in the quantity of money in circulation. It mans that in the case, when the quantity of money increases by 25%, the value of money falls by 25%. Thus the quantity of money and its value of money are inversely related.
Explanation
The value of money like any other commodity is determined by its demand and supply. Thus the quantity theory of money can be explained under these two heads.
1. As Regards Demand of Money
Demand of money according to Fisher is the derived demand i.e. not for direct consumption. Money being a medium of exchange is demanded for the purchasing of goods and services. Demand for money therefore depends upon the demand for goods and services.
2. As Regards Supply of Money
According to Fisher supply of money is represented by the total expenditure made by the people calculated during a given period of time. The total expenditure made by the people is calculated by multiplying the total quantity of legal tender money by its velocity plus the bank money (cheque, drafts etc) multiplied by its velocity. Velocity of money means the number of hands that one unit of money changes during a given period of time.
Criticism
The quantity theory of money is theoretically convincing but practically it is consider as a misleading one.
1. The very assumption in the theory that other things remaining same are incorrect. Fisher assumed money as independent variable where as credit (M’) is a function of business activity i.e. the turnover. It means the turnover increases, the supply of bank or credit also increases and consequently money is not an independent variable.
2. Velocity of money and bank money has been assumed is assumed in this theory to be constant where as they are not so because they depend upon business activity which is never constant.
3. The theory fails to explain as to why during depression the increase in supply of money does not bring a corresponding increase in the price level.
4. According to quantity theory high price is the effect of increase in supply of money which is not always true. Scarcity of goods caused by a fall in production or increase in production with respect to an increase in population also raises the price level.
5. It is argued that Fisher’s equation is only valid in a static economy. The economy becomes static beyond full employment level because the physical production does not increase in such a situation. the extra money if introduced in such a stage of economy is not absorbed by increased quantity of output and consequently the price level is directly affected. This shows that Fisher equation in a dynamic economy is of no use.
National
Income
Definition
The term national income has been differently defined by different authors. A very simple definition of national income can be given as :
“The National Income for any period consists of the money value of the goods and services becoming available for consumption during the period.”
National income in the words of Pigou is:
“That part of objective income of the community including income derived from abroad which can be measured in money.”
It is the aggregate factor of income i.e. earnings of labour and property which arises from the current production of goods and services by the nation’s economy.
The term national income has been differently defined by different authors. A very simple definition of national income can be given as :
“The National Income for any period consists of the money value of the goods and services becoming available for consumption during the period.”
National income in the words of Pigou is:
“That part of objective income of the community including income derived from abroad which can be measured in money.”
It is the aggregate factor of income i.e. earnings of labour and property which arises from the current production of goods and services by the nation’s economy.
Concepts of National
Income
The various concepts of national income are given below:
1. Gross National Product (G.N.P)
Gross national product is defined as
“ The total market value of all final goods and services produced in a year”
Two things are important with respect to this definition:
Firstly, it measures the market value of amount output. Therefore it is a monetary measure.
Secondly, for calculating national product accurately all goods and services produced during a year must be counted only once.
G.N.P generally includes the following.
(i) Agricultural Product
In agricultural product wheat, rice, cotton, tobacco, jute all types of vegetables pulses, fruits etc are included.
(ii) Industrial Product
By industrial products we mean all types of machineries, means of transportation, furniture, electronic items and other electric equipments.
(iii) Mineral Product
It includes coal, iron, petroleum, natural gas, salts and other materials like gold silver etc.
Since, G.N.P deals in market prices these market prices may be obtained by adding up:
Equalization of G.N.P can be written as:
G.N.P = CONSUMER GOODS + CAPITAL GOODS + DEPRECIATION + INDIRECT TAXES
2.Gross domestic product (GDP)
It is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly) of time. Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons. Nominal GDP per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing differences in living standards between different nations.
The various concepts of national income are given below:
1. Gross National Product (G.N.P)
Gross national product is defined as
“ The total market value of all final goods and services produced in a year”
Two things are important with respect to this definition:
Firstly, it measures the market value of amount output. Therefore it is a monetary measure.
Secondly, for calculating national product accurately all goods and services produced during a year must be counted only once.
G.N.P generally includes the following.
(i) Agricultural Product
In agricultural product wheat, rice, cotton, tobacco, jute all types of vegetables pulses, fruits etc are included.
(ii) Industrial Product
By industrial products we mean all types of machineries, means of transportation, furniture, electronic items and other electric equipments.
(iii) Mineral Product
It includes coal, iron, petroleum, natural gas, salts and other materials like gold silver etc.
Since, G.N.P deals in market prices these market prices may be obtained by adding up:
Equalization of G.N.P can be written as:
G.N.P = CONSUMER GOODS + CAPITAL GOODS + DEPRECIATION + INDIRECT TAXES
2.Gross domestic product (GDP)
It is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly) of time. Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons. Nominal GDP per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing differences in living standards between different nations.
3. Net National
Product (N.N.P)
During a year the production of gross nation al product some capital goods are consumed i.e. the plants, machinery, and other equipments are brought in use. The se capital goods due to utilization in the production expire its value, commodity known as depreciation allowances are deducted from the gross national product (G.N.P) we get the net national product (N.N.P). Its equation can be given as:
N.N.P = G.N.P – DEPRECIATION
Thus the definition of the N.N.P can be properly written as, “The market value of final goods and services after deducting the depreciation charges is called net national product.
4. Personal Income (P.I)
The some of all incomes actually received by all individuals or households during a given financial year is called personal income. Personal income is different from national income for the simple reason that some incomes such as social security contribution cooperate income taxes and distributed profits which are included in national income are not actually received by the house holds. The equation of personal income thus can be written as:
PERSONAL INCOME (P.I)= NATIONAL INCOME – SOCIAL SECURITY CONTRIBUTION – COOPERATE INCOME TAX – UNDISTRIBUTED PROFITS
5. Disposable Income (D.I)
After payment of personal taxes like income tax, property tax etc. What party of personal income is left for others consumption is called disposable personal income. Its equation is:
DISPOSIBALE INCOME = PERSONAL INCOME – PERSONAL TAXES
During a year the production of gross nation al product some capital goods are consumed i.e. the plants, machinery, and other equipments are brought in use. The se capital goods due to utilization in the production expire its value, commodity known as depreciation allowances are deducted from the gross national product (G.N.P) we get the net national product (N.N.P). Its equation can be given as:
N.N.P = G.N.P – DEPRECIATION
Thus the definition of the N.N.P can be properly written as, “The market value of final goods and services after deducting the depreciation charges is called net national product.
4. Personal Income (P.I)
The some of all incomes actually received by all individuals or households during a given financial year is called personal income. Personal income is different from national income for the simple reason that some incomes such as social security contribution cooperate income taxes and distributed profits which are included in national income are not actually received by the house holds. The equation of personal income thus can be written as:
PERSONAL INCOME (P.I)= NATIONAL INCOME – SOCIAL SECURITY CONTRIBUTION – COOPERATE INCOME TAX – UNDISTRIBUTED PROFITS
5. Disposable Income (D.I)
After payment of personal taxes like income tax, property tax etc. What party of personal income is left for others consumption is called disposable personal income. Its equation is:
DISPOSIBALE INCOME = PERSONAL INCOME – PERSONAL TAXES
Methods of Calculating
National Income
To calculate national
income the following three methods are generally used:
1. Net output Method or Production Method
For calculating national income under this method the net output or the production of various commodities is estimated and evaluated at the market prices. For this purpose we take two steps,
Firstly we estimate the monetary value of the commodities that are produced internally .The production or output of different sections of the economy i.e. agricultural, manufacturing, trade, commerce, transport etc is analyzed after deducting the depreciation charges.
Secondly; we consider the foreign business transactions that were performed during the financial year. In this regards in this regard we only consider the difference between exports and imports.
These two aggregate are then summoned up to get the gross domestic product which in turn is deducted from the total revenue earned to arrive at national income. In very simple words the contribution, which each enterprise makes to total output, is equal to its total revenue minus what is paid out to other enterprises and the depreciation of equipment used in the process of production. The production method is the most direct method for calculating national income. It s equation can be written as:
NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES
2. Income Method
Under this method the various factors of production are classified in a few broad categories. The incomes of various and sectors are obtained from there financial statements. Under this method the national income is also estimated by summing up the income that arrives to the factors of production provided by the national residents. Thus the rate at which the national income is distributed among the various factors of production is estimated. This method of calculating national income is quite complex. Usually the undeveloped countries where most of the people are not directly covered by direct taxation. Equation wise the method can represent national income as:
NATIONAL INCOMER = RENTAL INCOME + WAGES + INTEREST + PROFIT
1. Net output Method or Production Method
For calculating national income under this method the net output or the production of various commodities is estimated and evaluated at the market prices. For this purpose we take two steps,
Firstly we estimate the monetary value of the commodities that are produced internally .The production or output of different sections of the economy i.e. agricultural, manufacturing, trade, commerce, transport etc is analyzed after deducting the depreciation charges.
Secondly; we consider the foreign business transactions that were performed during the financial year. In this regards in this regard we only consider the difference between exports and imports.
These two aggregate are then summoned up to get the gross domestic product which in turn is deducted from the total revenue earned to arrive at national income. In very simple words the contribution, which each enterprise makes to total output, is equal to its total revenue minus what is paid out to other enterprises and the depreciation of equipment used in the process of production. The production method is the most direct method for calculating national income. It s equation can be written as:
NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES
2. Income Method
Under this method the various factors of production are classified in a few broad categories. The incomes of various and sectors are obtained from there financial statements. Under this method the national income is also estimated by summing up the income that arrives to the factors of production provided by the national residents. Thus the rate at which the national income is distributed among the various factors of production is estimated. This method of calculating national income is quite complex. Usually the undeveloped countries where most of the people are not directly covered by direct taxation. Equation wise the method can represent national income as:
NATIONAL INCOMER = RENTAL INCOME + WAGES + INTEREST + PROFIT
3. Expenditure or
outlay Method
This method gives national income by adding up all public and private expenditures made on goods and services during a year. It is obtained by:
This method gives national income by adding up all public and private expenditures made on goods and services during a year. It is obtained by:
·
Personal consumption
expenditure of goods and services.
·
Gross domestic private
investment.
·
Government purchase of
goods and services.
·
Net Foreign
investment.
It must however be
recognized that it is the final expenditure only which must be counted and not
the immediate expenditure.
Difficulties faced while Calculating National Income
Some of the problems or the difficulties that are usually faced while calculating national income are as follows.
1. Problem of Definition
One of the greatest difficulties while calculating national income is that what should be included and what excluded with respect to the goods and services produced. As a general rule only those goods and services which are bought and sold i.e. enter into exchange must be only considered. For example the service of parents towards their children is not a part of national income on the ground that there is no investment of there market value. But allowances are made for some non-exchangeable goods and services e.g. the national product include the estimated value of food consume on farms. This creates a problem.
2. Calculation of Depreciation
Another problem is the calculation of depreciation. The main reason behind it is that both the amount and the composition of jour capital change from time to time. There are no standard or concept rules of depreciation that can be applied. Since depreciation is an estimate so correct deduction can be made until and unless these accurate depreciation estimates are not deducted from the estimate of net national product the net national income is bound to wrong.
3. Treatment of the Government
Government expenditures:
1. Defiance and administration expenditure.
2. Social welfare expenditure.
3. Payment of interest on national debts
4. Miscellaneous development expenditure.
The real problem that is faced relates to which of the above should be included in the national income.
4. Income from Foreign Firms
One of the major problem relates to the fact that weather the income arising from the activities of the foreign firms operating in a country should be included in the countries national income or not .With the growing trend of doing business globally has increased this problem to a great extant. However the I.M.F has given the viewpoint that the production and income of these foreign forms should go to the owning country while there profit must be credited to the parent concern.
5. Danger of Double Counting
Proper care is required for calculating national income so that double counting may not take place. This problem usually arises in those countries where proper documentation or statistics are not available.
6. Value of Inventories
Since it is not easy to calculate the value of raw materials, semi finished and finished goods in the custody of producers there fore it creates problems.
Importance of National
Income Computation in Modern Economic Analysis
The computation of national income is one of the very important statistics for a country. IT has several important uses and therefore there is a great need for there regular preparation. The following are some of the important uses of national income statistics:
Level of Economic Welfare
The national income estimate reveals the overall performance of the country during a given financial year. With the help of this statistics the per capita income i.e. the income earned by every individual is calculated. It is obtained by dividing the total national income by the total population. With this we come to the level of economic welfare in terms of its standard of living.
Rate of Economic Growth
With the help of national income statistics we can know weather the economy is growing or declining. In simple words it helps us to know the conditions of a country economy. If the national income is growing over a period of year it means that the economy is growing and if the national income has reduced as compares to the previous it reveals that the economy is detraining. Similarly the growing per capita income shows an increasing standard o living of the people which is a positive sign of a nations growth and vice versa.
Distribution of Wealth
One of the most important objectives that is achieved after calculating national income is to check its distribution among different categories of income such as wages, profits, rents and interest. It helps to understand that how well the income is distributed among the various factors of the economy and their distribution among the people as well.
Ease in Planning
Since the national income estimates also contain the figures of saving, consumption and investment in the economy so it proves to be a valuable guide to economic policy relating to planning and active government intervention in the economy. The estimates are used as a data for future planning also.
Formation of Budget
Budget is an effective tool for planning and control. It is prepared in the light of the information regarding consumption, saving, and investment which are all provided by the national income estimates. Further we can asses and evaluate the achievements or otherwise of the development targets laid down in the plans from the changes in national income and its various components.
Conclusion
Thus we may conclude that national income statistics chart the movement of a country from depression to prosperity its rate of economic growth and its standard of living in comparison with rest of the world
The computation of national income is one of the very important statistics for a country. IT has several important uses and therefore there is a great need for there regular preparation. The following are some of the important uses of national income statistics:
Level of Economic Welfare
The national income estimate reveals the overall performance of the country during a given financial year. With the help of this statistics the per capita income i.e. the income earned by every individual is calculated. It is obtained by dividing the total national income by the total population. With this we come to the level of economic welfare in terms of its standard of living.
Rate of Economic Growth
With the help of national income statistics we can know weather the economy is growing or declining. In simple words it helps us to know the conditions of a country economy. If the national income is growing over a period of year it means that the economy is growing and if the national income has reduced as compares to the previous it reveals that the economy is detraining. Similarly the growing per capita income shows an increasing standard o living of the people which is a positive sign of a nations growth and vice versa.
Distribution of Wealth
One of the most important objectives that is achieved after calculating national income is to check its distribution among different categories of income such as wages, profits, rents and interest. It helps to understand that how well the income is distributed among the various factors of the economy and their distribution among the people as well.
Ease in Planning
Since the national income estimates also contain the figures of saving, consumption and investment in the economy so it proves to be a valuable guide to economic policy relating to planning and active government intervention in the economy. The estimates are used as a data for future planning also.
Formation of Budget
Budget is an effective tool for planning and control. It is prepared in the light of the information regarding consumption, saving, and investment which are all provided by the national income estimates. Further we can asses and evaluate the achievements or otherwise of the development targets laid down in the plans from the changes in national income and its various components.
Conclusion
Thus we may conclude that national income statistics chart the movement of a country from depression to prosperity its rate of economic growth and its standard of living in comparison with rest of the world
Recardian Theory of Rent
The British economist
Devid Recardo propounded the theory of rent a
century ago.
Assumptions
The Recardian
theory of rent is based on the following assumptions.
1. Rent is paid to the landlord for the use of
original and the indestructible power of land.
2. Rent is a differential return due to the differences in the fertility of land as well as their locations. The more fertile land the higher will be its rent and vice versa.
3. The Recardian theory depends on the historical order of cultivation i.e. the more fertile land is cultivated first and such rent does not pay rent in the beginning but as but as other grades of land come under cultivation it begins to pay the rent.
4. The land on which the cost of production is equal to the amount it produces is a no rent land or marginal land.
2. Rent is a differential return due to the differences in the fertility of land as well as their locations. The more fertile land the higher will be its rent and vice versa.
3. The Recardian theory depends on the historical order of cultivation i.e. the more fertile land is cultivated first and such rent does not pay rent in the beginning but as but as other grades of land come under cultivation it begins to pay the rent.
4. The land on which the cost of production is equal to the amount it produces is a no rent land or marginal land.
Theory
The Recardian
theory of rent can be stated as.
“Rent is that portion of the produce of
earth which is paid to the land lord for the use of original and indestructible
power of soil”
Economic rent according to Ricardo is the true
surplus left after the expenses of cultivation as represented by payment to
labour, capital and enterprise.
Criticism
Recardian
theory of rent has been criticized on the following grounds.
1. Ricardo’s statement that the properties of soil
are indestructible is wrong. The fertility of land often gets exhausted when it
is continuously used. However it can be increased by using artificial manures
but such fertility is considered to be temporary.
2. Statement of the theory that the superior land is
cultivated first is not always true. Actually in general the order of
cultivation is not the same as the theory says since a cultivates that land first
which is near to him.
3. Ricardo assumes that the no rent land exists in a
country is also not applicable everywhere. This concept of no rent land is
merely imaginary and theoretical.
Difference
Between Micro and Macro Economics
What’s the difference between micro and macro economics? These two
economic disciplines can see confusing at first glance, but once you learn
their focus it’s easy to differentiate microeconomic issues and questions from
macroeconomic ones.
In this blog post, you’ll learn the difference between micro and macro
economics, as well as specific examples of micro and macro economic problems.
Read on to learn the basics of microeconomic and macroeconomic thought, study
and analysis.
Do you want to learn about micro and macro economics in greater detail?
Enroll in our Micro & Macro Economics course to learn the specifics of economics,
from basic principles of supply and demand the characteristics of the business
cycle.
Microeconomics vs. macroeconomics
The difference between micro and macro economics is simple.
Microeconomics is the study of economics at an individual, group or company
level. Macroeconomics, on the other hand, is the study of a national economy as
a whole.
Microeconomics focuses on issues that affect individuals and companies.
This could mean studying the supply and demand for a specific product, the production
that an individual or business is capable of, or the effects of regulations on
a business.
Macroeconomics focuses on issues that affect the economy as a whole. Some
of the most common focuses of macroeconomics include unemployment rates, the
gross domestic product of an economy, and the effects of exports and imports.
Does this make sense? While both fields of economics often use the same
principles and formulas to solve problems, microeconomics is the study of
economics at a far smaller scale, while macroeconomics is the study of
large-scale economic issues.
Both fields of economics are interdependent
At first glance, micro and macro economics might seem completely
different from one another. In reality, these two economic fields are
remarkably similar, and the issues they study often overlap significantly.
For example, a common focus of macroeconomics is inflation and the cost
of living for a specific economy. Inflation is caused by a variety of factors,
ranging from low interest rates to expansion of the money supply.
While this might seem like a purely macroeconomic field of study, it’s
actually one that’s very important in microeconomics. Since inflation raises
the price of goods, services and commodities, it has serious effects for
individuals and businesses.
On a microeconomic level, this has several effects. Businesses are forced
to raise their prices in response to the increased cost of materials. They also
need to pay their employees more over the long term to account for the higher
cost of living.
This is just one example of a macroeconomic phenomenon – in this case,
inflation and a rising cost of living – affecting a microeconomic one. Other
macroeconomic decisions, such as the creation of a minimum wage or tariffs for
certain goods and materials, have significant microeconomic effects.
Do you want to gain a detailed understanding of macroeconomics? Enroll in
our Economics Without Borders course to learn how currencies, central banks
and a wide variety of other factors affect national and global economies.
Examples of microeconomic issues
Microeconomics seeks to solve problems on a small
level. Some economics like to describe microeconomics as the study of economics
and behavior from the bottom up, since it’s focused on the effects of low-level
decisions on the economy.
An example of a microeconomic issue could be the effects of raising wages
within a business. If a large business raises its wages by 10 percent across
the board, what is the effect of this policy on the pricing of its products
going to be?
Since the cost of producing products has increased, the price of these
products for consumers is likely to follow suit. Likewise, what will happen if
a company raises wages for its most productive employees but fires its least
productive workers?
These are the type of questions microeconomics aims to solve.
Microeconomics is also useful for studying the effects of your own decisions.
One of the most common principles in microeconomics is opportunity cost.
Opportunity cost is the value of making one decision over another. A
decision that involves economy cost is the choice of one meal instead of
another: by choosing a certain food, you miss out on the benefits offered by
another.
Choices involving opportunity cost could relate to your career. By
choosing one job over another, you may gain opportunities but lose others. In
addition to factors like supply and demand, opportunity cost is one of the
principles of microeconomics.
Learn more about opportunity cost, including several examples of the
opportunity cost of career choices and buying decisions, in our blog post on
the opportunity cost formula.
Due to the narrow focus of macroeconomics, it’s an incredibly valuable
skillset for making decisions in your own life. Learn more about intelligent
decision making in our Cognitive Biases: Learn to
Master Decision Making course.
Examples of macroeconomic issues
While microeconomics focuses on the effects a
certain decision has on individuals and businesses, macroeconomics looks at the
bigger picture. In macroeconomics, a common issue is the effects of certain
policies on the national or regional economy.
For example, while a microeconomist might study the effects of low
interest rates on individual borrowers, a macroeconomist would observe the
effects that low interest rates have on the national housing market or the
unemployment rate.
Another common focus of macroeconomics is the way taxes affect the
economics of a nation. A macroeconomist would look at the effects of a decrease
in income taxes using measures like GDP and national income, rather than
individual factors.
Do you want to learn more about macroeconomics? Discover how interest
rates and trade policy affects the national economy by enrolling in our 21st century economics course, How The Economy Really Works.
The importance of a balanced economics education
Microeconomics and macroeconomics have a lot in common, and the skills
used to solve small-scale economic issues are often identical to those used to
find solutions to large-scale economic problems.
Learn the impact of economic variables on small firms, individuals,
households and the economy as a whole in our Micro & Macro Economics course. Designed for new economics students,
this in-depth course is an excellent introduction to macro and micro economics.
Factors of Production
The
factors of production are resources that are the building blocks of the
economy; they are what people use to produce goods and services. Economists
divide the factors of production into four categories: land, labor, capital,
and entrepreneurship.
The first factor of production is land, but this includes any natural resource used to produce goods and services. This includes not just land, but anything that comes from the land. Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. Land resources are the raw materials in the production process. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resources is called rent.
The second factor of production is labor. Labor is the effort that people contribute to the production of goods and services. Labor resources include the work done by the waiter who brings your food at a local restaurant as well as the engineer who designed the bus that transports you to school. It includes an artist's creation of a painting as well as the work of the pilot flying the airplane overhead. If you have ever been paid for a job, you have contributed labor resources to the production of goods or services. The income earned by labor resources is called wages and is the largest source of income for most people.
The third factor of production is capital. Think of capital as the machinery, tools and buildings humans use to produce goods and services. Some common examples of capital include hammers, forklifts, conveyer belts, computers, and delivery vans. Capital differs based on the worker and the type of work being done. For example, a doctor may use a stethoscope and an examination room to provide medical services. Your teacher may use textbooks, desks, and a whiteboard to produce education services. The income earned by owners of capital resources is interest.
The fourth factor of production is entrepreneurship. An entrepreneur is a person who combines the other factors of production - land, labor, and capital - to earn a profit. The most successful entrepreneurs are innovators who find new ways produce goods and services or who develop new goods and services to bring to market. Without the entrepreneur combining land, labor, and capital in new ways, many of the innovations we see around us would not exist. Think of the entrepreneurship of Henry Ford or Bill Gates. Entrepreneurs are a vital engine of economic growth helping to build some of the largest firms in the world as well as some of the small businesses in your neighborhood. Entrepreneurs thrive in economies where they have the freedom to start businesses and buy resources freely. The payment to entrepreneurship is profit.
You will notice that I did not include money as a factor of production. You might ask, isn't money a type of capital? Money is not capital as economists define capital because it is not a productive resource. While money can be used to buy capital, it is the capital good (things such as machinery and tools) that is used to produce goods and services. When was the last time you saw a carpenter pounding a nail with a five dollar bill or a warehouse foreman lifting a pallet with a 20 dollar bill? Money merely facilitates trade, but it is not in itself a productive resource.
Remember, goods and services are scarce because the factors of production used to produce them are scarce. In case you have forgotten, scarcity is described as limited quantities of resources to meet unlimited wants. Consider a pair of denim blue jeans. The denim is made of cotton, grown on the land. The land and water used to grow the cotton is limited and could have been used to grow a variety of different crops. The workers who cut and sewed the denim in the factory are limited labor resources who could have been producing other goods or services in the economy. The machines and the factory used to produce the jeans are limited capital resources that could have been used to produce other goods. This scarcity of resources means that producing some goods and services leaves other goods and services unproduced.
It's time to test your knowledge with a little game I like to call, Name That Resource. I will say the name of an item and you will identify it as one of the four possible resources that form the factors of production: land, labor, capital, or entrepreneurship.
The first factor of production is land, but this includes any natural resource used to produce goods and services. This includes not just land, but anything that comes from the land. Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. Land resources are the raw materials in the production process. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resources is called rent.
The second factor of production is labor. Labor is the effort that people contribute to the production of goods and services. Labor resources include the work done by the waiter who brings your food at a local restaurant as well as the engineer who designed the bus that transports you to school. It includes an artist's creation of a painting as well as the work of the pilot flying the airplane overhead. If you have ever been paid for a job, you have contributed labor resources to the production of goods or services. The income earned by labor resources is called wages and is the largest source of income for most people.
The third factor of production is capital. Think of capital as the machinery, tools and buildings humans use to produce goods and services. Some common examples of capital include hammers, forklifts, conveyer belts, computers, and delivery vans. Capital differs based on the worker and the type of work being done. For example, a doctor may use a stethoscope and an examination room to provide medical services. Your teacher may use textbooks, desks, and a whiteboard to produce education services. The income earned by owners of capital resources is interest.
The fourth factor of production is entrepreneurship. An entrepreneur is a person who combines the other factors of production - land, labor, and capital - to earn a profit. The most successful entrepreneurs are innovators who find new ways produce goods and services or who develop new goods and services to bring to market. Without the entrepreneur combining land, labor, and capital in new ways, many of the innovations we see around us would not exist. Think of the entrepreneurship of Henry Ford or Bill Gates. Entrepreneurs are a vital engine of economic growth helping to build some of the largest firms in the world as well as some of the small businesses in your neighborhood. Entrepreneurs thrive in economies where they have the freedom to start businesses and buy resources freely. The payment to entrepreneurship is profit.
You will notice that I did not include money as a factor of production. You might ask, isn't money a type of capital? Money is not capital as economists define capital because it is not a productive resource. While money can be used to buy capital, it is the capital good (things such as machinery and tools) that is used to produce goods and services. When was the last time you saw a carpenter pounding a nail with a five dollar bill or a warehouse foreman lifting a pallet with a 20 dollar bill? Money merely facilitates trade, but it is not in itself a productive resource.
Remember, goods and services are scarce because the factors of production used to produce them are scarce. In case you have forgotten, scarcity is described as limited quantities of resources to meet unlimited wants. Consider a pair of denim blue jeans. The denim is made of cotton, grown on the land. The land and water used to grow the cotton is limited and could have been used to grow a variety of different crops. The workers who cut and sewed the denim in the factory are limited labor resources who could have been producing other goods or services in the economy. The machines and the factory used to produce the jeans are limited capital resources that could have been used to produce other goods. This scarcity of resources means that producing some goods and services leaves other goods and services unproduced.
It's time to test your knowledge with a little game I like to call, Name That Resource. I will say the name of an item and you will identify it as one of the four possible resources that form the factors of production: land, labor, capital, or entrepreneurship.
- Coal... land
- Forklift... capital
- Factory... capital
- Oil... land
- Michael Dell... entrepreneur
It's time to wrap things up, but before we go, always
remember that the four factors of production - land, labor, capital, and
entrepreneurship - are scarce resources that form the building blocks of the
economy.
Law of supply
It is observed in
markets that when more price of commodities are offered to sellers. They
increase the quantity supplied of these commodities and when the level of
prices decreases, the sellers decrease the quantity supplied. This behavior of
seller is called law of supply.
Definition
"Other things
remaining the same, if the price of a commodity increases its quantity supplied
increases and if the price of a commodity decreases, quantity supplied also
decreases".
There exists a direct
and positive relationship between price and quantity supplied of a commodity.
The functional relationship between quantity supplied and the price of a
commodity can be expressed as:
Qs =
f(P)
Where Qs =
quantity supplied
P = price of commodity
Assumptions
The assumptions of the
law of supply are as under:
No
change in cost of production
It assumed that there
is no change in cost of production because of the profit decreases with the
increase in cost of production and it causes the decrease in supply. If price
of a commodity decreases and cost of production also decreases, at the same
time, the quantity supplied does not decrease and profit remains constant.
No
change in technology
It is also assumed that
technique of production does not change. If better methods of production are
invented, profit increases at the previous price. The sellers increase supply
and law of supply does not operate.
No
change in climate
It is also assumed that
there is no change in climatic situation. For example, at any place flood or
earth quake occurred. The supply of goods decreases at that place at previously
prevailing price.
No
change in prices of substitutes
If the prices of
substitutes of a commodity fall then the tendency of consumers diverts to
substitutes therefore, the supply of a commodity falls without any change in
price.
No
change in natural resources
If the quantity of
natural resources (minerals, gas, coal, oil etc) increases, the cost of
production decreases. It causes to increase in quantity supplied.
No
change in price of capital goods
The capital goods are
raw material, machinery, tools etc. The cost of production increases due to
increase in prices of capital goods. It can lead to decrease in quantity
supplied.
No
change in political situation
The amount of
investment is affected by the change in political situation of a country. The
production of goods decreases due to decrease in investment.
No
change in tax policy
It is also assumed that
the taxation policy of government does not change. The increase in taxes
effects the investment and production and supply of goods decreases.
Explanation
The slope of the supply
function i.e. ΔQ/ΔP is positive. Regarding the assumptions, the standard supply
function is written as Qs = - c + d P
Where c and d are parameters
while P and Qs are independent and dependent variables,
respectively. The positive sign represents direct relationship between P and Qs.
The supply function is
expressed with the help of following example: Qs = - 2 + 2 P
By assuming different
values of P, we can calculate the different values of Qs as
shown below.
Price (P)
|
Quantity supplied Qs
|
0
|
-2
|
1
|
-0
|
2
|
2
|
3
|
4
|
4
|
6
|
5
|
8
|
As we assumed the
different values of 'P' from zero to 5, then the calculated values of Qs
increases from - 2 to 8.
The quantity supplied
is expressed on X-axis while price is measured on Y-axis. The law of supply can
be illustrated through the supply schedule as shown in the above supply curve
SS'. By plotting the various combinations of price and quantity supplied, we get
different points S, M, N, Q, R and T. by joining these points, we get our
desired supply curve SS', having positive slope as shown in the above figure.
Causes
of positive slope of supply curve
Following are the
causes of positive slope of supply curve.
Profit
When the price of a
commodity increases, the seller increases the quantity supplied. The profit of
seller increases and the aim of seller is to profit maximization.
Cost
of production
The cost of production
increases due to increase in quantity supplied. It is necessary to increases
price to maintain or increase the level of profit. Therefore, there is a direct
relationship between price and quantity supplied.
Future
Expectations
If there is a tendency
of increasing prices at present period, the sellers increase quantity supplied
for the lust of profit. It may be expectations in future to decrease prices.
Now they want to maximize their profit due to good present circumstances.
Variable
Costs and Fixed Costs
All the costs faced by companies can
be broken into two main categories: fixed costs and variable costs.
Fixed costs are costs that are
independent of output. These remain constant throughout the relevant range and
are usually considered sunk for the relevant range (not relevant to output decisions).
Fixed costs often include rent, buildings, machinery, etc.
Variable costs are costs that vary
with output. Generally variable costs increase at a constant rate relative to
labor and capital. Variable costs may include wages, utilities, materials used
in production, etc.
In
accounting they also often refer to mixed costs. These are simply costs that
are part fixed and part variable. An example could be electricity--electricity
usage may increase with production but if nothing is produced a factory still
may require a certain amount of power just to maintain itself.
Changes in Demand and
Quantity Demanded
In
economics the terms change in quantity demanded and change in demand are two
different concepts.
Change
in quantity demanded refers to change in the quantity purchased due to increase
or decrease in the price of a product.
In such
a case, it is incorrect to say increase or decrease in demand rather it is
increase or decrease in the quantity demanded.
On the
other hand, change in demand refers to increase or decrease in demand of a
product due to various determinants of demand, while keeping price at constant.
Changes
in quantity demanded can be measured by the movement of demand curve, while
changes in demand are measured by shifts in demand curve. The terms, change in
quantity demanded refers to expansion or contraction of demand, while change in
demand means increase or decrease in demand.
1. Expansion and Contraction of Demand:
The variations in the
quantities demanded of a product with change in its price, while other factors
are at constant, are termed as expansion or contraction of demand. Expansion of
demand refers to the period when quantity demanded is more because of the fall
in prices of a product. However, contraction of demand takes place when the
quantity demanded is less due to rise in the price o a product.
2. Increase and Decrease in Demand:
Increase and decrease
in demand are referred to change in demand due to changes in various other
factors such as change in income, distribution of income, change in consumer’s
tastes and preferences, change in the price of related goods, while Price
factor is kept constant Increase in demand refers to the rise in demand of a
product at a given price.
On the other hand,
decrease in demand refers to the fall in demand of a product at a given price.
For example, essential goods, such as salt would be consumed in equal quantity,
irrespective of increase or decrease in its price. Therefore, increase in
demand implies that there is an increase in demand for a product at any price.
Similarly, decrease in demand can also be referred as same quantity demanded at
lower price, as the quantity demanded at higher price
Law of Diminishing Marginal
Utility (Explained With Diagram)
According
to the Law of Diminishing Marginal Utility, marginal utility of a good
diminishes as an individual consumes more units of a good. In other words, as a
consumer takes more units of a good, the extra utility or satisfaction that he
derives from an extra unit of the good goes on falling.
It
should be carefully noted that is the marginal utility and not the total
utility than declines with the increase in the consumption of a good. The law
of diminishing marginal utility means that the total utility increases but at a
decreasing rate.
Marshall who was the famous
exponent of the marginal utility analysis has stated the law of diminishing
marginal utility as follows:
“The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has.”
This law is based upon two
important facts. Firstly, while the total wants of a man are virtually
unlimited, each single want is satiable. Therefore, as an individual consumes
more and more units of goods, intensity of his want for the goods goes on
falling and a point is reached where the individual no longer wants any more
units of the goods. That is, when saturation point is reached, marginal utility
of goods becomes zero. Zero marginal utility of goods implies that the
individual has all that he wants of the goods in question.
The second fact on which
the law of diminishing marginal utility is based is that the different goods
are not perfect substitutes for each other in the satisfaction of various
particular wants. When an individual consumes more and more units of a goods,
the intensity of particular want for the goods diminishes but if the units of
that goods could be devoted to the satisfaction of other wants and yield as
much satisfaction as they did initially in the satisfaction of the first want,
marginal utility of the good would not have diminished.
It is obvious from the
above that the law of diminishing marginal utility describes a familiar and
fundamental tendency of human nature. This law has been arrived at by
introspection and by observing how people behave.
Table 2 Diminishing Marginal
Utility:
Cups of Tea
|
Total Utility
|
Marginal utility
|
Consumed per day
|
(units)
|
(units)
|
1
|
12
|
12
|
2
|
22
|
10
|
3
|
30
|
8
|
4
|
36
|
6
|
5
|
40
|
4
|
6
|
41
|
1
|
7
|
39
|
– 2
|
8
|
34
|
– 5
|
Consider
Table 2 in which we have presented the total and marginal utilities derived by
a person from cups of tea consumed per day. When one cup of tea is taken per
day, the total utility derived by the person is 12 units. And because this is
the first cup its marginal utility is also 12.
With
the consumption of 2nd cup per day, the total utility rises to 22 but marginal
utility falls to 10. It will be seen from the table that as the consumption of
tea increases to six cups per day, marginal utility from the additional cups
goes on diminishing (i.e., the total utility goes on increasing at a
diminishing rate).
However,
when the cups of tea consumed per day increase to seven, then instead of giving
positive marginal utility, the seventh cup gives negative marginal utility
equal to -2. This is because too many cups of tea consumed per day (say more
than six for a particular individual) may cause him acidity and gas trouble.
Thus, the extra cups of tea beyond six to the individual in question give him
disutility rather than positive satisfaction.
We have
graphically represented the data of the above table in Figure 3. We have
constructed rectangles representing the total utility obtained from various numbers
of cups of tea consumed per day. As will be seen in the Figure, the length of
the rectangle goes on increasing up to the sixth cup of tea and beyond that
length of the rectangle declines, indicating thereby that up to the sixth cup
of tea total utility obtained from the increasing cups of tea goes on
increasing whereas beyond the 6th cup, total utility declines. In other words,
marginal utility of the additional cups up to the 6th cup is positive, whereas
beyond the sixth cup marginal utility is negative.
The
marginal utility obtained by the consumer from additional cups of tea as he
increases the consumption of tea has been shaded. A glance at the Figure 3 will
show that this shaded area goes on declining which shows that marginal utility
from the additional cups of tea is diminishing. We have joined the various
rectangles by a smooth curve which is the curve of total utility which rises Up
to a point and then declines due to negative marginal utility.
Moreover,
the shaded areas of the rectangles representing marginal utility of the various
cups of tea have also been shown separately in the figure given below. We have
joined the shaded rectangles by a smooth curve which is the curve of marginal
utility. As will be seen, this marginal utility curve goes on declining
throughout and even falls below the x-axis. Portion below the x-axis indicates
the negative marginal utility.
This
downward-sloping marginal utility curve has an important implication for
consumer’s behavior regarding demand for goods. We shall explain how the demand
curve is derived from marginal utility curve. The main reason why the demand
curves for good slope downward is the fact of diminishing marginal utility.
The
significance of the diminishing marginal utility of a good for the theory of demand
is that the quantity demanded of a good rises as the price falls and vice
versa. Thus, it is because of the diminishing marginal utility that the demand
curve slopes downward.
Distinguish between
marginal and average costs
·
The marginal cost is the cost of producing one more unit of a
good.
·
Marginal cost includes all of the costs that vary with the level
of production. For example, if a company needs to build a new factory in order
to produce more goods, the cost of building the factory is a marginal cost.
·
Economists analyze both short run and long run average cost.
Short run average costs vary in relation to the quantity of goods being
produced. Long run average cost includes the variation of quantities used for
all inputs necessary for production.
·
When the average cost declines, the marginal cost is less than
the average cost. When the average cost increases, the marginal cost is greater
than the average cost. When the average cost stays the same (is at a minimum or
maximum), the marginal cost equals the average cost.
·
marginal cost: The increase in cost
that accompanies a unit increase in output; the partial derivative of the cost
function with respect to output. Additional cost associated with producing one
more unit of output.
·
average cost: In economics, average
cost or unit cost is equal to total cost divided by the number of goods
produced.
Marginal Cost
In
economics, marginal cost is the change in the total cost when the quantity
produced changes by one unit. It is the cost of producing one more unit of a
good. Marginal cost includes all of the costs that vary with the level of
production. For example, if a company needs to build a new factory in order to
produce more goods, the cost of building the factory is a marginal cost. The
amount of marginal cost varies according to the volume of the good being
produced. Economic factors that impact the marginal cost include information
asymmetries, positive and negative externalities, transaction costs, and price
discrimination. Marginal cost is not related to fixed costs. An example of
calculating marginal cost is: the production of one pair of shoes is $30. The
total cost for making two pairs of shoes is $40. The marginal cost of producing
the second pair of shoes is $10.
Average Cost
The
average cost is the total cost divided by the number of goods produced. It is
also equal to the sum of average variable costs and average fixed costs.
Average cost can be influenced by the time period for production (increasing
production may be expensive or impossible in the short run). Average costs are
the driving factor of supply and demand within a market. Economists analyze
both short run and long run average cost. Short run average costs vary in
relation to the quantity of goods being produced. Long run average cost
includes the variation of quantities used for all inputs necessary for
production.
Difference between Supply
and Stock
October 2, 2016
Supply and stocks are the
terms used in the context of microeconomics and many people get confused and
consider it as one and the same thing, however, both supply and stock are
different from each other, let’s look at the difference between supply and
stock-
1. While
supply refers to the quantity which the seller is prepared to sell in the
market at given price at any point of time while stock refers to total
available quantity with the seller at any given point of time.
2. An
example of stock will suppose as a human we have 24 hours which is fixed and it
can be considered as stock and out of those 24 hours an individual is willing
to supply 4 hours at $20 for a particular task and at $25 an individual is
willing to supply 6 hours for a particular task. Hence supply keeps fluctuating
depending on the price while stock is fixed.
3. Supply
can be increased and decreased depending on the price prevailing in the market
while stock at a particular point of time is fixed and it cannot be increased
or decreased, in simple words supply is dependent on the price while the stock
is not dependent on the price.
4. Supply
can be equal to or less than stock but it cannot be greater than stock as in
the above example no matter what price is the market willing to pay you cannot
increase the working hours beyond the 24 hours stock.
5. Another
example of stock and supply will be suppose a television manufacturer has 20000
television stock, out of which the manufacturer supplies only 2000 television
at prevailing market price. Hence remaining 18000 units will be called stock
and 2000 units will be called as supply.
As one can see from the above
that supply and stock are very important terms when it comes to market and
seller and it is the seller who decides whether to supply full stock at current
market price or supply partial stock at current market price.
Difference between Desire & Demand
Desire is lust - wishes - your
personal choice: may be denied.
Demand is imperative - it is what
you command: it must be done.
In economics the term demand is
used slightly differently; it is the idea that there are willing buyers for a
particular good, ready to pay the price required. I ask for a loaf of bread -
that is a request for a good - the baker will be happy to sell me one, which
satisfies my “demand” - UNLESS, of course, he has just sold his last one. Then
he will say, “Sorry, I’ve just sold my last loaf:” and that is the end of your
demand. You still want a loaf, your wife is expecting you to bring one home,
like you promised you would, but the market is depleted. Baker may say, “I have
some buns, very good, fresh baked, would you like some of them ?” - and maybe
you can modify your demand to some buns instead of a loaf - but maybe your wife
will kill you. So, you may take your custom elsewhere, to the next nearest
baker, and ask if he has a loaf of bread: your “demand” remains unsatisfied.
So, legally you may demand that
someone fulfills some contractual promise. Economically demand is a little less
definite, and is a request for a seller to provide some good, for which you
have not yet paid, and thus is not covered by any contract. He gives you the
bread - you now owe him the money. You pay him - the contract is completed:
unless you find a dead mouse in the bread - and demand a new loaf, or your
money back - or he takes another look at the bank note you just gave him, and
says, “Wait a minute, this note is a forgery !” -whereupon you must find more
(and better !) money in your pocket, or give the bread back. So economic “demand”
is an introductory proposal for a sale - in ordinary English usage it is a
requirement to complete an arrangement already agreed - may be negative -
demand that you release my client, for example.
Domestic Trade and
International Trade | Difference
International trade refers to trade between two different countries (such as India and Bangladesh) or one country and the rest of the world (e.g., India and Great Britain, Germany, U.S.A., etc.). The former is called bilateral trade and the latter multilateral trade.
Domestic
trade or internal trade is the trade which takes places between the different
regions of the same country (e.g., the trade between Calcutta and Mumbai or
Calcutta and Chennai, etc.). It is to be noted that there are some points of
similarities between these two kinds of trade.
All
trade, whether domestic or international, arises from specialisation. As one
region of a country brings the goods from other regions to make up the
deficiencies, one country tries to bring goods and services, in which it has
deficiencies, from other countries.
Land,
labour and the other resources used in production are not distributed equally
among the nations of the world. Minerals, for example, such as coal, iron and
gold are found only in certain areas. Similarly, the climatic conditions
essential for the growth of particular commodities (such as cane sugar, rice
and tropical fruit) are found only in certain regions of the world.
Thus
countries are dependent upon one another for supplying their deficiencies in
foods, raw materials and other products. But, countries cannot buy the products
they need from each other without selling certain things in exchange. Thus,
they are dependent upon one another for markets. But there are some points of
distinctions between these two kinds of trade; these call for a separate theory
for international trade.
Trading
between countries differ from domestic (internal) trade, i.e., trade within a
country in different.
The following points may be
noted in this context:
1. Language:
2. Differences Regarding
Mobility of Labour and Capital:
3. Differences in Natural and
Economic Conditions:
4. Differences in Banking
Systems and Economic Policies:
5. Currency:
6. Systems of Payment:
7. Distance:
8. Customs Duties and Import
Quotas:
9. Competition:
10. Local Conditions:
Conclusion:
Owing
to these differences between domestic and international trade, the economists
have built-up a separate theory for international trade known as the principle
of comparative cost (advantage). It must, however, be noted that the
distinction between these two kinds of trade is not absolute but one of degrees.
After all, as all kinds of trade arise from specialisation (regional or
international).
What is the difference between direct and indirect tax?
I only wish that the differentiation of direct
and indirect taxes is as simple as their names. In real world, the taxes are
far more complicated that they appear.
Let us first go for the classical
understanding of direct and indirect taxes.
A. Direct Tax
1. Direct tax is paid directly by
an individual or organization to an imposing entity like government
2. Direct Taxes are based on the ability-to-pay
principle, which means that if you earn more, your rate of tax is
also more.
3. The purpose of Direct Tax is to
redistribute the wealth of a nation (taking from rich, thus making
them poorer)
4. Direct taxes cannot be passed on to
a different person or entity;
5. The individual or organization upon which the tax is
levied is responsible for the fulfillment of the full tax payment.
6. It is considered to be progressive tax since
you taxe depending upon the ability of the taxpayer to pay
B: Indirect Tax
1. An indirect tax is a tax that is
shifted from one taxpayer to another i.e. collected by one person but actually
born by another person
2. An indirect tax is levied on goods or
services, which increases the price of a good or services
3. The tax is actually paid by the end
consumer, by way of a higher retail price.
4. Indirect taxes are levied equally upon
all taxpayers irrespective of their income.
5. Indirect taxes are passed on, as the price of the tax is compensated for
by simply increasing the overall price of the good or service.
6. It is considered to be a regressive
tax since all taxpayers whether rich of poor have to bear the same
burden.
Difference
Between Zakat and Tax
Zakat is related to religious and tax is related to government. In no way Zakat and tax can go together; they are different in many respects. While zakat has a religious sanctity, tax is not like that.
Tax is
collected from all citizens of a country. The government collects tax for the
overall development of the country, On the other hand, Zakat is only imposed on
Muslims.
Zakat is
fixed as per the Holy Quran and cannot be changed by any person. Zakat is a
permanent system whereas tax is not. Zakat is calculated at 2.5 percent of the
annual income of a person or a family. On the contrary, the government has
certain rules and regulations for fixing tax. While there is no change in the
percentage of Zakat given, the government has the right to make changes in the
tax from time to time.
There are
also differences in the sources between Zakat and Tax. While Zakat has fixed
sources, the sources of tax vary according to the needs. Tax comes as direct
and indirect tax. Zakath is given out of the surplus wealth or earnings. There
are certain conditions for giving Zakath and is only distributed to certain
people. Zakath should be given to poor people, to free captives, to those who
are in debt, those employed to collect funds, for Allaah’s Cause and for
wayfarer. Zakath is also given once in every year.
While
Zakat is not that compulsory, tax is compulsory. Every citizen irrespective of
being rich or poor has to pay tax. Unlike Zakat, the government forces tax on
the citizens.
Zakat is a
means of salvation for the persons who pay it.
Inflation
& its Causes
Inflation means there is a
sustained increase in the price level. The main causes of inflation are either
excess aggregate demand (economic growth too fast) or cost push factors (supply-side
factors).
Summary
of Main causes of inflation
4. Rising
wages – higher wages increase firms costs and increase consumers’ disposable
income to spend more.
5. Expectations
of inflation – causes workers to demand wage increases and firms to push up
prices.
1.
Demand-pull inflation
If the economy is at or close
to full employment, then an increase in AD leads to an increase in the price
level. As firms reach full capacity, they respond by putting up prices leading
to inflation. Also, near full employment with labour shortages, workers can get
higher wages which increase their spending power.
2.
Cost-push inflation
If there is an increase in
the costs of firms, then businesses will pass this on to consumers. There will
be a shift to the left in the AS.
Cost-push inflation can be
caused by many factors
1. Rising wages
If trades unions can present
a united front then they can bargain for higher wages. Rising wages are a key
cause of cost push inflation because wages are the most significant cost for
many firms. (higher wages may also contribute to rising demand)
2. Import prices
One-third of all goods are
imported in the UK. If there is a devaluation, then import prices will become
more expensive leading to an increase in inflation. A devaluation /
depreciation means the Pound is worth less. Therefore we have to pay more to
buy the same imported goods.
3. Raw material prices
The best example is the price
of oil. If the oil price increase by 20% then this will have a significant
impact on most goods in the economy and this will lead to cost-push inflation.
E.g., in 1974 there was a spike in the price of oil causing a period of high
inflation around the world.
4. Profit push
inflation
When firms push up prices to
get higher rates of inflation. This is more likely to occur during strong
economic growth.
5. Declining
productivity
If firms become less
productive and allow costs to rise, this invariably leads to higher prices.
6. Higher taxes
If the government put up
taxes, such as VAT and Excise duty, this will lead to higher prices, and
therefore CPI will increase. However, these tax rises are likely to be one-off
increases. There is even a measure of inflation (CPI-CT) which ignores the
effect of temporary tax rises/decreases.
Inflation expectations
Once inflation sets in it is
difficult to reduce inflation. For example, higher prices will cause workers to
demand higher wages causing a wage-price spiral. Therefore, expectations of
inflation are important. If people expect high inflation, it tends to be
self-serving.
The attitude of the monetary
authorities is important; for example, if there was an increase in AD and the
monetary authorities accommodated this by increasing the money supply then
there would be a rise in the price level.
Zakat: Its economic significance
Zakat as an institution plays an important role
in the Islamic economic system. ... Zakat is
collected from the big landlords, capitalists, industrialists and the other
rich persons of society and distributed to the poor and needy.
The advantages and
merits concerning to the financial matters of the Muslims are called economic
advantages. Following are the economic advantages of zakat or Economic benefits
of zakat.
1. Equal Distribution of Wealth
The main problem of
modern economic system is unequal distribution of wealth which is the main
cause of social and economic problem. Islamic economic system solves this
problem with zakat in a good manner. Once government implement zakat, it will
automatically solve the problem of unequal distribution of wealth because the
rich people will give zakat to poor for consumption.
2. Circulation of Wealth
To gain economic
development it is very important that any country’s capital should circulate
instead of accumulation. If capital goes towards accumulation the economic
activities will become slow. Zakat is the best tool to circulate the money in
economy.
3. Economic Stability
Zakat avoids interest
system. When the economy is prosperous the amount of zakat increases among poor.
All these bring a balance in economic condition.
4. Solution for Unemployment
Once Dr. Keynes said,
the basic reason of unemployment is the shortage of an effective demand. It is
zakat through which unemployment decreased by increasing the level of effective
demand. In Islamic economic system unemployment allowance can be given to
unemployment persons.
5. Capital Formation
Some people avoid
using their income. Neither they take benefits of nor is any other person to do
so interest system, an attempt made to decrease their accumulation through
interest. But in Islamic economic system there is no such room for the
circulation of their accumulation except Zakat that discourages the
accumulation of wealth.
6. Important Instrument of Fiscal Policy
There are three basics
of government finance tax, expenditure and national loan. In Islamic economy
zakat is an important essential of government finance.
7. Protection of Needy Persons
There are different
people living in a society, there are some people unable to earn and depend on
other for financial help through zakat. Such can be honorably protected with
necessities of life.
8. Absolute Source of Government income
Islmaic state is a welfare
state that has to fulfill the responsibility of the society. For the
fulfillment of this duty there should be surety of National Income.
9. Increase in Collective Welfare
Another economic
advantages or benefit of Zakat is that It is the most basic source of social
welfare. In Islamic society zakat funds can be utilized in school and hospitals
to help poor. This promotes collective welfare of the society.
MONOPOLY, CHARACTERISTICS:
The four key characteristics of
monopoly are: (1) a single firm selling all output in a market, (2) a unique
product, (3) restrictions on entry into and exit out of the industry, and more
often than not (4) specialized information about production techniques
unavailable to other potential producers.
These four characteristics mean that
a monopoly has extensive
(boarding on complete) market control. Monopoly
controls the selling side of the market. If anyone seeks to acquire the
production sold by the monopoly, then they must buy from the monopoly. This
means that the demand curve facing the
monopoly is the market demand curve. They are one and the same.
The characteristics of monopoly are in direct
contrast to those of perfect competition.
A perfectly competitive industry has a
large number of relatively small firms, each producing identical products.
Firms can freely move into and out of the industry and share the same information about
prices and production techniques.A monopolized industry, however, tends to fall far short of each perfectly competitive characteristic. There is one firm, not a lot of small firms. There is only one firm in the market because there are no close substitutes, let alone identical products produced by other firms. A monopoly often owes its monopoly status to the fact that other potential producers are prevented from entering the market. No freedom of entry here. Neither is there perfect information. A monopoly firm often has specialized information, such as patents or copyrights, that are not available to other potential producers.
Single
Supplier
The essence of a monopoly is a market
controlled by a single seller. The "mono" part of monopoly means
single. This "mono" term is also the source of such words as
monarch--a single ruler; monochrome--a single color; monk--a solitary religious
figure; monocle--an eyeglass for one eye; and monolith--a single large stone.
The "poly" part of monopoly means to sell. So the word itself,
monopoly, means a single seller.
The single seller, of course, is a direct contrast
to perfect competition, which has a large number of sellers. In fact, perfect
competition could be renamed multipoly or manypoly, to contrast it with
monopoly. The most important aspect of being a single seller is that the
monopoly seller IS the market. The market demand for a good IS the demand for
the output produced by the monopoly. This makes monopoly a price maker, rather
than a price taker.A hypothetical example that can be used to illustrate the features of a monopoly is Feet-First Pharmaceutical. This firm owns the patent to Amblathan-Plus, the only cure for the deadly (but hypothetical) foot ailment known as amblathanitis. As the only producer of Amblathan-Plus, Feet-First Pharmaceutical is a monopoly with extensive market control. The market demand for Amblathan-Plus is THE demand for Amblathan-Plus sold by Feet-First Pharmaceutical.
Unique
Product
To be the only seller of a product,
however, a monopoly must have a unique product. Phil the zucchini grower is the
only producer of Phil's zucchinis. The problem for Phil, however, is that
gadzillions of other firms sell zucchinis that are indistinguishable from those
sold by Phil.
Amblathan-Plus, in contrast, is a unique product.
There are no close substitutes. Feet-First Pharmaceutical holds the exclusive
patent on Amblathan-Plus. No other firm has the legal authority to produced
Amblathan-Plus. And even if they had the legal authority, the secret formula
for producing Amblathan-Plus is sealed away in an airtight vault deep inside
the fortified Feet-First Pharmaceutical headquarters.Of course, other medications exist that might alleviate some of the symptoms of amblathanitis. One ointment temporarily reduces the swelling. Another powder relieves the redness. But nothing else exists to cure amblathanitis completely. A few highly imperfect substitutes exists. But there are no close substitutes for Amblathan-Plus. Feet-First Pharmaceutical has a monopoly because it is the ONLY seller of a UNIQUE product.
Barriers to
Entry and Exit
A monopoly is generally assured of being
the ONLY firm in a market because of assorted barriers to entry. Some of the
key barriers to entry are: (1) government license or franchise,
(2) resource ownership, (3) patents and copyrights, (4) high start-up cost, and
(5) decreasing average total cost.
Feet-First Pharmaceutical has a few these barriers
working in its favor. It has, for example, an exclusive patent on
Amblathan-Plus. The government has decreed that Feet-First Pharmaceutical, and
only Feet-First Pharmaceutical, has the legal authority to produce and sell
Amblathan-Plus.Moreover, the secret ingredient used to produce Amblathan-Plus is obtained from a rare, genetically enhanced, eucalyptus tree grown only on a Brazilian plantation owned by Feet-First Pharmaceutical. Even if another firm knew how to produce Amblathan and had the legal authority to do so, they would lack access to this essential ingredient.
A monopoly might also face barriers to exiting a market. If government deems that the product provided by the monopoly is essential for well-being of the public, then the monopoly might be prevented from leaving the market. Feet-First Pharmaceutical, for example, cannot simply cease the production of Amblathan-Plus. It is essential to the health and welfare of the public.
This barrier to exit is most often applied to public utilities, such as electricity companies, natural gas distribution companies, local telephone companies, and garbage collection companies. These are often deemed essential services that cannot be discontinued without permission from a government regulation authority.
Specialized
Information
Monopoly is commonly characterized by
control of information or production technology not available to others. This
specialized information often comes in the form of legally-established patents,
copyrights, or trademarks. While these create legal barriers to entry they also
indicate that information is not perfectly shared by all. The AT&T
telephone monopoly of the late 1800s and early 1900s was largely due to the
telephone patent. Pharmaceutical companies, like the hypothetical Feet-First Pharmaceutical,
regularly monopolize the market for a specific drug by virtue of a patent.
In addition, a monopoly firm might know something
or have a piece of information that is not available to others. This
"something" may or may not be patented or copyrighted. It could be a
secret recipe or formula. Perhaps it is a unique method of production.One example of specialized information is the special, secret formula for producing Amblathan-Plus that is sealed away in an airtight vault deep inside the fortified Feet-First Pharmaceutical headquarters. No one else has this information.
Perfect Competition: Meaning
and Characteristics of Perfect Competition
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Let us make an in-depth study
of Perfect Competition in a Market:-
1. Meaning and Definition of
Perfect Competition 2. Characteristics of Perfect Competition.
Meaning and Definition of
Perfect Competition:
A
Perfect Competition market is that type of market in which the number of buyers
and sellers is very large, all are engaged in buying and selling a homogeneous
product without any artificial restrictions and possessing perfect knowledge of
the market at a time.
ADVERTISEMENTS:
In
other words it can be said—”A market is said to be perfect when all the
potential buyers and sellers are promptly aware of the prices at which the
transaction take place. Under such conditions the price of the commodity will
tend to be equal everywhere.”
In this connection Mrs. Joan Robinson has
said—”Perfect Competition prevails
when the demand for the output of each producer is perfectly elastic.”
According
to Boulding—”A Perfect Competition market may be defined as a large number of
buyers and sellers all engaged in the purchase and sale of identically similar
commodities, who are in close contact with one another and who buy and sell
freely among themselves.”
Characteristics of Perfect
Competition:
The following characteristics
are essential for the existence of Perfect Competition:
1. Large
Number of Buyers and Sellers:
ADVERTISEMENTS:
The
first condition is that the number of buyers and sellers must be so large that
none of them individually is in a position to influence the price and output of
the industry as a whole. In the market the position of a purchaser or a seller
is just like a drop of water in an ocean.
2. Homogeneity
of the Product:
Each
firm should produce and sell a homogeneous product so that no buyer has any
preference for the product of any individual seller over others. If goods will
be homogeneous then price will also be uniform everywhere.
3. Free
Entry and Exit of Firms:
The
firm should be free to enter or leave the firm. If there is hope of profit the
firm will enter in business and if there is profitability of loss, the firm
will leave the business.
4. Perfect
Knowledge of the Market:
Buyers
and sellers must possess complete knowledge about the prices at which goods are
being bought and sold and of the prices at which others are prepared to buy and
sell. This will help in having uniformity in prices.
5.
Perfect Mobility of the Factors of Production and Goods:
There
should be perfect mobility of goods and factors between industries. Goods
should be free to move to those places where they can fetch the highest price.
6. Absence
of Price Control:
There
should be complete openness in buying and selling of goods. Here prices are
liable to change freely in response to demand and supply conditions.
7. Perfect
Competition among Buyers and Sellers:
In this
purchasers and sellers have got complete freedom for bargaining, no
restrictions in charging more or demanding less, competition feeling must be
present there.
8. Absence
of Transport Cost:
There
must be absence of transport cost. In having less or negligible transport cost
will help complete market in maintaining uniformity in price.
9. One
Price of the Commodity:
There
is always one price of the commodity available in the market.
10. Independent
Relationship between Buyers and Sellers:
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There should not be any attachment
between sellers and purchasers in the market. Here, the seller should not show
prick and choose method in accepting the price of the commodity. If we will see
from the close we will find that in real life “Perfect Competition is a pure myth.”
Equilibrium of the Firm and
Industry
Equilibrium of the Firm:
Equilibrium
indicates a situation in which there is a complete adjustment of the various
forces operating there, and there is no inducement to change.
It is
an ideal state. That is why a consumer is said to be in equilibrium, when he is
deriving maximum satisfaction. Why should he then make any change?
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A firm
is said to be in equilibrium when it has no incentive either to expand or to
contract its output. A firm would not like to change its level of output only
when it is earning maximum money profits. Hence, making a maximum profit or
incurring a minimum loss is an important condition of a firm’s equilibrium. We
shall presently discuss fully the conditions of a firm’s equilibrium.
The
equilibrium of the firm is usually discussed in terms of marginal cost and
marginal revenue. Now, before explaining the conditions of equilibrium of a
firm, it is necessary to describe the concept of marginal revenue and its
relation with average revenue.
Average Revenue and Marginal
Revenue:
Average
revenue must be carefully distinguished from marginal revenue. Average revenue
is the revenue per unit of the commodity sold. It is found by dividing total
revenue by the number of units sold. But, since different units of a commodity
are sold at the same price, in the market, average revenue equals price at
which the commodity is sold. Thus, average revenue means price. It is revenue
for the seller and price for the consumer.
ADVERTISEMENTS:
AR Curve:
It is
the same thing as demand curve. Since the consumer’s demand curve is the
graphic relation between price and amount demanded, it also represents the
average revenue or price at which the various amounts of a commodity are sold,
because the price offered by buyers is the revenue from the seller’s point of
view. Therefore, average revenue curve of the firm is really the same thing as
demand curve of the consumer.
On the
other hand, marginal revenue at any level of firm’s output is the net revenue
earned by selling another (additional) unit of the product. Algebraically, it
is the addition to total revenue earned by selling n units of product instead
of no- 1 units, where n is any given number.
The
word ‘net’ in the first definition is important. If the price of a product
falls when more of it is offered for sale, then that would involve a loss on
the previous units, which were sold at a higher price before and will now be
sold at the reduced price along with the additional one. This loss in the
previous units must be deducted from the revenue earned by the additional unit.
For
example, if a firm is selling 7 units of the output at the price of Rs. 16 per
unit and if it wants to sell 8 units instead of 7. and thereby the price of the
product falls to Rs. 15 per unit, then the marginal revenue will not be equal
to Rs. 15 at which the eighth unit is sold, because seven units which were sold
at the price of Rs. 16 before will also have to be sold at the reduced price of
Rs. 15. That will mean the loss of one rupee on each of the previous 7 units.
The
total loss on the previous units would be equal to Rs. 7. Therefore, this loss
of 7 rupees should be deducted from the price of Rs. 15 of the eighth unit,
while reckoning the marginal revenue. The marginal revenue in this case,
therefore, will be Rs. 15 — Rs. 7 = Rs. 8 and not Rs. 15, which is the average
revenue.
Marginal revenue can also be
directly found by taking out the difference between the total revenue before
and after selling the additional unit as follows:
Total
revenue when 7 units are sold at the price of Rs. 16 = 7 X 16 = Rs. 112.
Total
revenue when 8 units are sold at the price of Rs. 15 = 8 X 15 = Rs. 120.
ADVERTISEMENTS:
Therefore,
Marginal Revenue or the net revenue earned by the 8th unit= 120— 112= Rs. 8.
Thus,
Marginal Revenue of the nth unit
=
difference in total revenue in going from n— 1 units to n units.
= Price
of nth unit minus loss in revenue on previous units resulting from price
reduction.
Generally
speaking, marginal revenue is less than price as indicated by the above
formula. But in perfect competition, when a firm can sell any amount at the
ruling market price, marginal revenue is equal to average revenue, since there
is no loss incurred on the previous units. Hence, under perfect competition, MR
and AR coincide (see Fig. 26.2).
Relationship between Marginal
and Average Revenue:
Let us
consider the relationship between marginal, average and total revenue at
various levels of output more fully with the help of a table given below. This
table represents a situation of a hypothetical firm.
Total, Average and Marginal
Revenue Schedules:
It is
clear from the above table that average revenue and marginal revenue are two
different things and, therefore, should not be confused. Column 2 shows the
Average Revenue, while Column 4 shows the Marginal Revenue. Marginal Revenue
has been derived from the total revenue column of the table. Thus, in going
from two to three units, the marginal revenue is 18 and this is found by
subtracting 42 from 60, and so forth. The Table further shows that when the
average revenue is falling, the marginal revenue is less than the average
revenue.
Shape of AR and MR Curves:
Under Imperfect Competition:
On
converting the above schedules of Average Revenue and Marginal Revenue into
curves, we get two downward sloping curves and find that marginal revenue curve
is below average revenue curve. This is shown in Fig. 26.1. AR is the Average
Revenue Curve and MR. the dotted curve, is the Marginal Revenue Curve. This
divergence between the average revenue and marginal revenue, as shown in the figure,
is actually found when a firm is working under conditions of monopoly or
imperfect competition.
It is
quite obvious that when price is falling, as indicated by the declining AR
curve, the marginal revenue (MR) must always be less than the average revenue
(AR), because a falling price must mean some loss on the sale of additional
supply. That is why MR curve lies below AR curve.
We have
stated above that when average revenue curve falls downward the marginal
revenue curve will lie below it (or to the left of it). Now the question arises
how far to the left it will lie. When both the marginal revenue curve and the
average revenue curve are straight lines and sloping downwards, as shown in the
Fig. 26.1, the marginal revenue curve will bisect any line from AR curve drawn
perpendicular to the Y-axis. That is, if D is any point on the average revenue
curve and if we draw DB a perpendicular from D to the Y-axis, then marginal
revenue curve MR must pass through the middle of this perpendicular, i.e., from
C where BC = CD.
Under Perfect Competition:
In
perfect competition, (Fig. 25.1), the average revenue curve of the firm is a
horizontal straight line. This is so because an individual firm under perfect
competition by its own action cannot influence the price. The seller, under
perfect competition, can sell any amount of the commodity at the ruling market
price. In this case when average revenue curve is a horizontal line, marginal
revenue curve coincides with the average revenue curve.
This is
so because additional units are sold at the same price as before and no loss is
caused on the previous units, which would have resulted if the sale of
additional units had forced the price down. The average revenue and marginal
revenue curves of a firm under perfect competition are shown in Fig. 26.2.
Conditions of Firm’s
Equilibrium:
We are
now in a position to discuss the conditions of equilibrium of the firm. Here we
shall attempt only an analysis of the conditions of firm’s equilibrium in
general and not with reference to any particular market form.
Assumptions:
Before
explaining firm’s equilibrium, we assume that the entrepreneur, i.e., the owner
of the firm, is rational. The rationality on the part of the entrepreneur
implies that he tries to maximize his money profits. This is a fundamental
assumption in theory of production, and without this the equilibrium of the
firm cannot be easily explained. We further assume that the firm produces only
one product.
Our
conditions would, however, remain valid also in the case of a multi-product
firm. But when a firm produces two goods or more, certain other complications
arise, which we wish to avoid at this stage. The equilibrium of the firm can be
explained with the aid of marginal revenue and marginal cost curves.
There are two conditions of a
firm’s equilibrium which we discuss below:
First Condition: Equality of MR
and MC:
A firm will be in equilibrium
when it is earning maximum profits:
It is
obvious that total profits can be increased by expanding output as long as the
addition to revenue resulting from the sale of an extra unit of output is
greater than the addition to cost caused by producing that extra unit. Now the
additions to total revenue and total cost due to an extra unit of output are
nothing else but marginal revenue and marginal cost respectively. Thus, a firm
will go on expanding output as long as marginal revenue exceeds marginal cost
ofproduction.
If at
any output, marginal revenue falls short of marginal cost, i.e., an additional
unit of output adds less to the revenue than to the cost, the firm will
contract output, to avoids a loss and thus increase its profits. The level of
output, where marginal revenue and marginal cost are equal, is the point of
maximum profit.
Before
this point of equality of marginal revenue with marginal cost is reached, the
firm will be increasing its total profits by producing more, as it is adding
more to the revenue than to the cost’. But if production is carried beyond this
point of equality, the profits will start decreasing as the extra revenue will
be smaller than the extra cost of production of a unit of output.
The
whole argument can be explained with the help of Fig. 26.3 in which MC is the
marginal cost curve and MR the marginal revenue curve. AC and AR are the average
cost and average revenue curves respectively. At Output OM, marginal cost
equals marginal revenue. This represents the point of maximum profits, and
hence of equilibrium.
At
outputs smaller than OM, marginal revenue exceeds marginal cost, and hence
there is scope for increasing profits by increasing output. For example, at
output OL, marginal revenue is LG and marginal cost is LH and LG is greater
than LH. It means that by producing the Lth ‘unit, the firm is adding more to
revenue than to its cost and, therefore, it will be profitable for it to
produce the Lth unit.
Similarly,
for every other unit fill the Mth one, the marginal revenue exceeds marginal
cost, and, therefore, the firm can increase its total profits by producing up
to OM output. If the firm stops producing at OL, the units of output which
could have added more money to the firm’s revenue than to its cost would not
have been produced and profits would have been smaller by the area GHE than
they could have been at output OM. Thus, a. firm has an incentive to produce up
to OM level of output.
If the
output is increased beyond OM. marginal cost would- exceed -marginal revenue
and the production of each additional unit beyond OM output would add more 10
costs than to revenue. For example, at ON output, the marginal cost is KN and
marginal revenue is SN, and KN is greater than SN. Thus, production of
additional units beyond OM would involve losses and thus reduce total profits.
Therefore, the firm would not like to produce beyond OM.
Hence,
we conclude that profits are maximum and the firm is in equilibrium when
Marginal Cost = Marginal Revenue. This is, however, only one condition, i.e. it
is a necessary condition but not a sufficient condition.
In Fig.
26.3, total profits earned by the firm in the equilibrium position can be
easily found. At output OM, the average cost is DM, while the average revenue
is QM. Hence, the profit per unit will be equal to QD and the total profits
will be equal to the rectangle QDRT. Second Condition: MC Cutting MR from
Below.
The
second condition of a firm’s equilibrium is that the marginal cost curve must
cut the marginal revenue curve from below. The condition that for a firm to be
in equilibrium marginal cost must equal marginal revenue is no doubt a
necessary condition, but not a sufficient condition of equilibrium. For
attaining equilibrium, a second condition must also be satisfied.
This is
that MC must cut the MR from below at the point of equilibrium. In other words,
beyond the equilibrium output, marginal cost must be greater than marginal
revenue. If this condition is not met, a firm will not be earning maximum
profits, and hence will not be in equilibrium.
In Fig.
26.4, the point P (i.e., at output OM) satisfies this second condition also, as
the MC curve cuts the MR curve from below at P. Beyond the point, P, MC is
greater than MR, and it will clearly be not profitable to expand output beyond
OM.
There
can, however, be cost-revenue situation, which satisfies the first condition of
MC being equal to MR, but does not satisfy the second condition of MC cutting
MR curve from below. This is shown in Fig. 26.4. In this figure, MR is the
straight line marginal revenue curve (as we have already seen, a straight line
marginal revenue curve is actually faced by a firm under perfect competition).
MC represents the marginal cost of the firm. At point T, the two curves
intersect and, therefore, the marginal cost equals marginal revenue. But from
the figure it is clear that at T, marginal cost curve.
MC is
cutting marginal revenue curve MR from above and, therefore, marginal cost is
less than the marginal revenue beyond the point T. Obviously, T cannot be a
position of equilibrium since after T marginal cost is less than marginal
revenue, and it will be profitable for the firm to expand output. At T or at
output ON, the firm instead of making maximum profit is making maximum losses.
At
point P, however, in the same figure marginal cost curve is cutting marginal
revenue curve from below and marginal cost beyond point P is greater than
marginal revenue and, therefore, if the firm expands output beyond P, it will
be adding more to cost than to revenue—clearly an unprofitable move. Hence, in
Fig. 26.4, point P, and not point T, is the profit-maximizing point. In this
equilibrium position, the firm is producing equilibrium output OM.
Thus, we conclude that, for a
firm to be in equilibrium position, two conditions must be satisfied under
perfect competition:
(i) MC
= MR; and
(ii) MC
curve must cut MR curve from below at the equilibrium output.
These
two conditions of equilibrium hold good in the short run as well as in the long
run. Whether the period is short or long, a firm aims at the maximisation of
profits, and the profits are maximised only when the above two conditions are
satisfied. But one difference remains. In the short run, it is the short-run
marginal cost curve, and, in the long run, it is the long-run marginal cost
curve which is relevant for comparing with the marginal revenue curve.
Again,
these two fundamental conditions, of marginal cost being equal to marginal
revenue, and MC curve cutting MR curve from below, are valid whether a firm is
working under perfect competition, monopoly or imperfect competition. The
difference lies only in the shape of the marginal revenue and marginal cost
curves.
Equilibrium of Industry:
Meaning of Equilibrium of
Industry:
The
concept of equilibrium of industry is of great importance in the analysis of
price determination, particularly in product-pricing. An industry is said to be
in equilibrium when there is no tendency for its output to increase or
decrease. Now the output of the industry can vary, firstly by the expansion or
contraction of output by the individual firms, and, secondly, by the entry or
exit of the firms. Thus, an industry would he in equilibrium when neither the
individual firms have incentive to change their output nor is there any
tendency for new firms to enter or the existing firms to leave it.
Conditions of Equilibrium:
The following two conditions
must be satisfied if there is to be the equilibrium of the industry:
(a)
Each and every firm in the industry should be in equilibrium. This will happen
at that output of a firm where marginal cost is equal to marginal revenue and
marginal cost curve cuts the marginal revenue curve from below at the
equilibrium point.
(b) The
second condition is that the industry as a whole should be in equilibrium,
i.e., there should be no tendency for the firms either to move into or out of
the industry. This will happen when all the entrepreneurs, i.e., owners of the
firms of the industry, are earning only ‘normal profits’, that is profits which
are just sufficient to induce them to stay in the industry, and when no
entrepreneur outside the industry thinks that he could earn at least his normal
profits if he were to enter it.
An
industry will be earning normal profit if the price (AR) is equal to average
cost (AC). If the price is higher, then obviously more than normal profits are
being made and new firms will be attracted to the industry. If, on the other
hand, price is less than the average cost, the profits are less than the normal
and some firms will leave the industry. In both these cases, clearly the
industry is not in equilibrium. It will be in equilibrium when AR = AC.
Thus, two conditions are
necessary for equilibrium in industry:
(i) MR
= MC for all firms and
(ii) AR
= AC.
It is
rarely that an industry can attain full equilibrium in the short run because
although the individual firm in the industry may be in equilibrium in the short
run when MR = MC, yet they may be earning supernormal profits, so that there
will be inducement for outside firms to enter the industry. Or possibly, the
firm may be in equilibrium and may yet be incurring losses, so that some of
them would have a tendency to leave the industry.
Hence,
in the short run while all firms in the industry may be in equilibrium, the
industry is most unlikely to be in equilibrium. Rarely will all the individual
firms in the industry are in equilibrium and at the same time make just normal
profits, neither more nor less, in the short run. Only in such rare
circumstances can the industry attain equilibrium in the short run. This sort
of situation is possible only theoretically and has no relevance to the world
of reality.
Hence,
only in the long run can an industry attain equilibrium, since, in the long
run, economic factors can have free and full scope for adjustment. When all the
necessary adjustments have taken place, the industry will be in a state of full
equilibrium’, i.e., all the individual firms in the industry are in equilibrium
and the industry itself is also in equilibriu