Economics Notes Important Questions Definitions

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Easy Economics Notes

Basic Concepts in Economics
towards
the
satisfaction
of
e.
directed
co
m
1) Production: Any economic activity
re
human wants is known as production. The

of
goods
necessary
for
the
and
in
ef
production
services
existence
of
is
an
llo
nl
economy. The level of production in any
.a
economy is the best measure of its
performance,
living
standards
of
its
people and the extent of technological

development and growth. It includes both
the manufacturing of material goods as
well as the provision of services. The
production of electrical and electronic
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goods, automobiles etc and the work of

teachers, doctors, lawyers etc are all
production in the economic sense.
co
m
2) Consumption: The act of satisfying

ones wants is called consumption. Goods
e.
and services are produced only because
ef
re
human wants need to be satisfied. No one
in
will produce if there is no consumption.

the
levels
llo
reflects
nl
The quality and quantity of consumption

of
income
and
Investment:
Investment
is
the
3)
.a
employment in an economy.
addition made to the existing total stock

of
capital.
The
amount
to
make
investment is coming from saving and

this saving is the unspent income. Income
comes from employment. An economy

can grow only if it saves something from
its present consumption and invests it
co
m
again in the production process. It adds to

the productive capacity of an economy.
is
called
re
wants
goods
in
ef
human
e.
4) Goods: Anything that can satisfy
in
economics. While services also satisfy
nl
human wants, the difference is that goods
llo
are tangible and visible but services are
.a
intangible and invisible. Goods can be of
various types. They can be free goods or
economic goods, transferable, private or

public and so on.
Utility: The want satisfying capacity of a
commodity is called its utility or the
power of a commodity to satisfy human

wants is called utility. Utility is subjective
that is it does not lie in the good but is a
good
changes
with
co
m
function of the consumers mind. Utility of

the
change
in
e.
conditions and circumstances. There are
re
three main forms of utility-form utility,
in
ef
place utility and time utility.
nl
Value: The commodity which has utility
llo
and possesses the condition of scarcity
.a
and transferability, then it has value. For
example air has utility but it is abundant
and a free resource, it has no value in

economic sense. Likewise rotten eggs are
scarce and transferable but possess no
utility, they also dont have value. A
television since it possesses utility and is

scarce as well as transferable has value.
Price: Value of a commodity expressed in
co
m
terms of money is called price. In modern

times, goods are exchanged for money;
re
e.
the value of a commodity is its price.
ef
Wealth: Anything that has value is called
in
wealth. In economics; wealth does not
llo
nl
only refer to money, but to all goods that
.a
have value. Wealth includes material
wealth and human wealth (education,
health, knowledge etc)

Income: The amount of money which
wealth yields is known as income. Thus,
wealth is a stock concept while income is
a flow concept. That is wealth is valued at
a particular point of time and income is

measured
over
period
of
time
particularly a year.
co
m
Gross Domestic Product (GDP)
When we take the sum total of values of

without
adding
ef
country,
re
e.
output of goods and services in the

net
factor
in
incomes received from abroad, the figure
llo
nl
so obtained is called Gross Domestic
.a
Product (GDP).
GDP = C+I+G
GNP may be defined as the aggregate

market value of all final goods and
services produced during a given year.
The concept of final goods and services

stands for finished goods and services,
ready for consumption of households and
finished
goods
co
m
firms, and exclude raw materials, semiand
such
other
e.
intermediary products. More clearly, all

and
all
government
in
ef
expenditure,
re
sales to households, business investment
nl
expenditures are obviously regarded as
llo
final goods. In an open economy (an
.a
economy which has economic relationship
with the rest of the world in the form of
trade,
remittances,
investment
etc-all
economies are open economies), GNP

may be obtained by adding up:
1)
The value of all consumption goods
which are currently produced

2)
The value of all capital goods
co
m
produced which is defined as Gross

Investment. Gross Investment, in the
e.
real sense, here implies the increase
re
in inventories plus gross products of
in
ef
buildings and equipments. It, thus,

the
nl
includes
provision
for
the
llo
consumption of capital assets, i.e.,
.a
depreciation
or
replacement
3)
allowances.
The value of government services
which
are
measured
in
terms
of
governmental expenditure on various

goods
and
services
for
rendering
certain services to the benefit of the

entire community.
4)
The value of net exports, viz, the
co
m
difference between total exports and

total imports of the nation. This value
e.
may be positive or negative.
The net amount earned abroad.

represents
the
difference
in
ef
This
re
5)
from
llo
nationals
nl
between the income received by the

abroad
minus
the
.a
income remitted by the foreigners
working in India.
GNP at market price, thus, represents:

GNP= C+I+G+(X-M)+(R-P),
Where,
C stands for consumption goods,
I stands for capital goods/ or gross

investment,
G stands for government services,
co
m
X stands for exports,
e.
M stands for imports,
re
R stands for income receipts from abroad,
in
income
remitted
by
.a
foreigners.
for
nl
stands
llo
ef
and
The Sectors of the Economy
The economic activities of an economy is

classified mainly into three primary sector
economic
activities
(agriculture
and
allied), secondary sector (manufacturing,

construction etc) and service sector or

tertiary sector activities (transport and
communication
etc).The
Ministry
of
co
m
Statistics and Programme Implementation

(MOSP), Government of India has been
e.
publishing National Accounts Statistics
re
annually classifying the Indian economy
in
ef
into three sectors and re-classifying the
nl
sectors into various sub sectors. In this

forestry
.a
agriculture,
llo
classification primary sector

and
includes
logging
and
fishing. The secondary sector includes
manufacturing
(registered
and
un-
registered manufacturing), construction,

electricity, gas and water supply. Tertiary
sector
or
service
sector
includes
transport, storage and communication,

railway, trade, hotels and restaurants,

banking
and
ownership
insurance,
of
dwellings
real
and
estate,
business
services.
In
co
m
services, public administration and other

Indian
economy
the
e.
contribution of primary sector is less than
re
20 per cent and the agriculture share in
in
ef
national GDP is reducing even though 58

in
agriculture
llo
engaged
nl
per cent of Indias labour force still

and
allied
.a
activities. This is a serious issue in the
rural life of India. The agrarian sector has
been facing serious crisis and to a greater

extent it is structural and institutional.
The area under irrigation has been almost
constant
for
declining
capital
the
last
several
expenditure
years,
by
the
public
sector
in
infrastructural
agriculture,
facilities,
lack
of
declining
institutional credit to agriculture etc all
co
m
these are burning issues of Indias farm

sector. Sharp decline of agriculture in
e.
value-added terms to GDP, increasing
re
amenities in urban India and not much in
in
ef
rural India where more than 70 per cent
nl
of the population lives etc are some
llo
disturbing facts to those who hold Indian
.a
Economic Miracle theory. We have good
demographic advantage, vast agricultural
land and in this land we can cultivate all

most all crops sufficiently to meet the
requirements of our growing population.
But now the present situations of India
like poor state of our education, public
health, agriculture and rural economy,

poor amenities in rural areas and urban
slums, poor public delivery systems, high
co
m
poverty ratio, still high illiteracy rate,

malnutrition and high infant mortality rate
burning
issues
be
addressed
ef
re
urgently.
to
e.
are
in
At the national level the contribution of
nl
manufacturing sector is around 18 per
llo
cent and it is almost constant for the last
.a
so many years. But in Kerala it is around
10 per cent and in Kerala we have a
stagnant
manufacturing
sector.
The
contribution of service sector to the

national economy is nearly 60 per cent.
There are serious disparities in the growth
rates of agriculture, manufacturing and

service sectors of the Indian economy.
Functions of Money
co
m
The functions of money can be classified
e.
as follows.
function
of
ef
basic
money
in
an
in
The
re
1) Money as a medium of exchange
Money
llo
exchange.
nl
economy is to act as a medium of

has
general
.a
acceptability and purchasing power so it
can act as a medium of exchange. When
money is transacted, purchasing power is

transacted from one person to another. In
earlier periods we had been following
barter
system.
Barter
system
means
exchanging goods for goods. But most of

the time, for such exchange to take place,

there must occur a double coincidence of
wants. That is each party to the exchange
co
m
must have precisely what the other party

requires, and in an appropriate quantity
has
medium
facilitated
of
exchange
nl
greatly.
Money as a Unit of Account.
llo
2)
common
in
exchange
re
as
ef
money
e.
and at the time required. The use of
.a
Money customarily serves as a common
unit of account or measure of value in
terms of which the values of all goods and

services
are
expressed.
This
makes
possible meaninigful accounting systems

by adding up the values of a wide variety
of goods and services whose physical

quantities are measured in different units
3) Money as a Standard of Differed
co
m
Payment
Money also serves as a standard or unit in

which
deferred
e.
of
or
future
re
terms
of
interest,
in
payments
ef
payments are stated. This applies to

rents,
salaries;
llo
nl
pensions etc.Large fluctuations in the
.a
value of money (inflation or deflation)

but
also
poor
standard
of
value,
make money not only a poor measure of

deferred payment. This is because the
value of money is not something intrinsic
to it, but a social phenomenon. This
makes monetary management for the
stable
value
of
money
socially
very
important.
3)
Money as a Store of Value
co
m
Money also serves as a store of value i.e.,

members of the public can hold their
in
the
form
of
money.
e.
wealth
This
ef
re
function is derived from the use of money
in
as a medium of exchange in a two-fold

exchange
barter
decomposes
transaction
into
two
.a
single
of
llo
medium
nl
manner. First, the use of money as a
separate transactions of purchase and
sale.
Significance of Money in Modern

Economic Life
Money occupies a central position in our

modern economy. Money is everywhere
and
for
everything
in
the
modern
religion
of
the
day
in
co
m
economic life. Money has become the

the
ordinary
e.
business of life. Every branch of economic
re
activity in a money economy is basically
in
ef
different from what it would have been in

reaching
.a
economic
effect
llo
far
nl
a barter economy. Money has created a

on
activities;
all
facets
of
consumption,
production, exchange and distribution, as
also on public finance and economic

welfare.
Money and Consumption
Money enables a consumer to generalize

his
purchasing
power.
It
gives
him
command over a wide variety of goods. It
co
m
enables him to canalize his purchasing

power and get what he wants. In fact, it is
e.
money through its immense purchasing
re
power that makes a consumer sovereign
in
ef
in a capitalist economy. The consumers
nl
sovereignty can be expressed through

spending.
llo
money
Money
provides
.a
freedom of choice of consumption. Money

the
price
mechanism
help
and
consumer to allocate his income over

goods in such a way so that he derives
maximum
satisfaction
consumption.
from
his
Money and Production

The introduction of money has made
present day mass production possible.
co
m
Without money, production on a large

scale would be impossible. The benefits of
re
e.
money in production are as follows
of
labour
ef
Money has made extreme division

possible.
in
1)
Intensive
llo
nl
specialization is necessary for large
.a
scale production.
Money is the very essential for
2)
modern enterprise. Entrepreneurs are

concerned,
while
planning
their
production activities, with the cost of

production and selling prices together
with the resulting profit, all calculated

in terms of money.
The
use
producer
to
organization
of
money
enables
concentrate
of
on
a
the
co
m
3)
the
production
e.
process. Money provides a basis for
re
supporting more complex methods of
in
ef
organizing production.
Money has facilitated borrowing
nl
4)
llo
and lending and these are essential in
.a
present day production. Credit is the
5)
main pillar of modern business.

Money
is
the
most
liquid
and
general form of capital which is highly

mobile between different regions and
industries.
6)
Money
helps
the
producer
to
discover through the price mechanism

what buyers want and how much they
co
m
want, so that he can produce and

supply accordingly. In fact, money has
e.
changed the basic characteristics of
re
production.
in
ef
Money and Exchange.
nl
Money overcomes the difficulties of a
llo
barter system of exchange. In a money
.a
economy; it is simple matter to ascertain
the market price in terms of monetary
units. Money facilitates trade by serving

as a medium of exchange. Thus, rapid
exchange in a modern economic system
is possible because of money. Money is
the
basis
of
the
pricing
mechanism
through which economic activities are
Money and Distribution.
co
m
adjusted.
Money eases the process of distribution of

which
are
all
ef
profits
re
e.
factors rewards like wages, interests and

measured
and
in
distributed in terms of money. It is with
llo
nl
the help of money that the shares of

factors
of
production
are
.a
different
properly adjusted. Accounting, receiving
and storing of its share of income by any

factor-unit in kind is most inconvenient.
Here money comes to the rescue.
Money and Public Finance
In a modern economy, government plays

a
very
important
role.
Government
receives income in the form of taxes,
co
m
fees, prices of public utility services, etc

and uses this income for administrative
e.
and developmental purposes. But the
re
great magnitude of public revenues and
in
ef
public expenditure in a modern state
nl
would become impossible without money.

fiscal
and
.a
borrowing
llo
Further,
devices
deficit
like
public
financing
for
economic development can be adopted
only in a monetary economy.

In recent times, the fiscal policy of a
government
importance
acquired
in
economic
very
life,
great
since
economic
activities
can
be
regulated
through budgetary operations that are

facilitated by the institutions of money.
co
m
Money, thus, plays an important role in

the shaping of the economic life of a
the
growth
re
made
of
economic
ef
has
e.
country. The growth of money economy
enterprise
or
nl
free
in
liberalism and, hence, of the present day

capitalists
system
llo
possible. In fact the pattern of economic
.a
life has changed in accordance with the
changes in the economic progress. For
better performance of an economy, a

countrys monetary system should be
operated in such a manner as to maintain
high levels of employment and avoidance

of business fluctuations.
co
m
Inflation
e.
Inflation is commonly understood as a

in
the
price
ef
increase
re
situation of substantial and rapid general

level
and
nl
in
consequent fall the value of money over a
llo
period of time. Inflation means persistent
.a
rise in the general level of prices. Inflation
is a long term operating dynamic process.
By and large, inflation is also a monetary

phenomenon. It is usually characterized
by an overflow of money and credit. In
fact, the root cause of inflation is the
expansion of money supply beyond the
normal
absorbing
capacity
of
the
economy.The behaviour of general prices

is measured through price indices.The
co
m
trend of price indices reveals the course

of inflation or deflation in the economy.
e.
Crowther defines inflation as a state in
re
which the value of money is falling,ie.,
in
ef
prices are rising. Professor Samuelson
nl
defines Inflation occurs when the general
.a
llo
level of prices and costs is rising.
INFLATION
Inflation is commonly understood as a

situation of substantial and rapid general
increase
in
the
price
level
and
co
m
consequent fall the value of money over a

period of time. Inflation means persistent
e.
rise in the general level of prices. Inflation
re
is a long term operating dynamic process.
in
ef
By and large, inflation is also a monetary
nl
phenomenon. It is usually characterized
llo
by an overflow of money and credit. In
.a
fact, the root cause of inflation is the
expansion of money supply beyond the
normal
absorbing
capacity
of
the
economy.The behaviour of general prices

is measured through price indices.The
trend of price indices reveals the course
of inflation or deflation in the economy.
Crowther defines inflation as a state in

which the value of money is falling,ie.,
prices are rising. Professor Samuelson
co
m
defines Inflation occurs when the general
ef
Types of Inflation.
re
e.
level of prices and costs is rising.
inflation
llo
classified
nl
in
On different grounds, economists have

into
various
.a
types.According to the rate inflation there
1)
are four types of inflation.

Moderate Inflation
2)
Running Inflation
3)
Galloping Inflation
4)
Hyper Inflation
Moderate inflation is a mild and tolerable

form of inflation. It occurs when prices are
rising slowly. When the rate of inflation is
co
m
less than 10 per cent annually, or it is a

single digit annual inflation rate, it is
e.
considered to be moderate inflation in the
re
present day economy. It does not disrupt
in
ef
the economic balance. It is regarded as
nl
stable inflation in which the relative
llo
prices do not get far out of line.
.a
When the movement of price accelerates
rapidly,
running
inflation
emerges.
Running inflation may record more than

100 per cent rise in prices over a decade.
Thus, when prices rise by more than 10
per cent a year, running inflation occurs.
When prices are rising at double or triple

digit rates of 20,100 or 200 per cent a
year, the situation may be described as
really
serious
co
m
galloping inflation. Galloping inflation is

problem.
It
causes
e.
economic distortions and disturbances.
ef
re
In the case of hyper inflation prices rise is
in
very severe. It is over 1000 per cent per
nl
year.There is at least a 50 per cent price

130
.a
about
per
cent
times.Hyper
to
llo
rise in a month, so that in a year it rises
inflation is a monetary disease.
Two Types of Inflation on the Basis of

Cause of Origin: They are Demand Pull
Inflation and Cost Push Inflation.
Demand Pull Inflation: According to the

theory,
prices
rise
co
m
demand-pull
in
response to an excess of aggregate
re
e.
demand over existing supply of goods
ef
and services. It is also called excessinflation,
nl
of
excess
demand
llo
theories
in
demand inflation. In the excess-demand
excess
in
.a
means aggregate real demand for output

of
maximum
feasible,
or
potential, or full employment, output (at

the going price level). The demand-pull
theorists point out that inflation (demandpull) might be caused, in the first place,
by an increase in the quantity of money.
Demand-pull or just demand inflation may

be defined as a situation where the total
monetary demand persistently exceeds
co
m
total supply of real goods and services at

current prices, so that prices are pulled
the
aggregate
demand
re
of
e.
upwards by the continuous upward shift

function.
in
ef
Causes of Demand-pull inflation are

Increase in Public Expenditure 2)
nl
4)
llo
Increase in Investment 3) Increase in
.a
money supply.
COST PUSH INFLATION
Cost push inflation or cost inflation is

induced by the wage-inflation process.
This is especially true for a Country like

India, where labour intensive techniques
are commonly used. Theories of cost-
co
m
push inflation (also called sellers or

mark-up inflation) came to be put forward
the
mid-1950s.They
e.
after
appeared
re
largely in refutation of the demand-pull
in
ef
theories of inflation and three important
nl
common ingredients of such theories are
llo
1) that the upward push in costs is
.a
autonomous of the demand conditions in
the concerned market 2) that the push
forces operate through some important

cost component such as wages, profits
(mark up), or materials cost. Accordingly,
cost-push inflation can have the forms of
wage-push inflation, profit-push inflation,
material-cost push inflation, or inflation of

a mixed variety in which several push
factors reinforce each other and that the
co
m
increase in costs is passed on to buyers of

goods in the form of higher prices, and
e.
not absorbed by producers. Thus, a rise
re
in wages leads to a rise in the total cost

in
in
ef
of production and a consequent rise

based on
llo
prices are
nl
the price level, because fundamentally,

costs.It has been
.a
said that a rise in wages causing arise in
prices may , in turn , generate an
inflationary spiral because an increase

would motivate the workers to demand
more wages.
(Graphs of demand pull and cost

push inflation)
e.
co
m
Causes of Inflation
Over- Expansion of Money Supply:
re
1)
in
ef
Many a times a remarkable degree of
nl
correlation between the increase in
llo
money and rise in the price level may

should
maintain
balance
RBI)
.a
be observed. The Central Bank (Indias
between money supply and production

and supply of goods and services in
the economy. Money supply exceeds
the availability of goods and services
in the economy, it would lead to

inflation.
2)
Increase in Population: Increase in
co
m
population leads to increased demand

for goods and services. If supply of
are
short,
e.
commodities
increased
re
demand will lead to increase in price
in
ef
and inflation.
Expansion of Bank Credit: Rapid

of
llo
expansion
nl
3)
bank
credit
is
also
.a
responsible for the inflationary trend
4)
in a country.
Deficit Financing: Deficit financing
means spending more than revenue.

In
this
case
government
of
India
accepts more amount of money from

the Reserve Bank India (RBI) to spend
for undertaking public projects and

only the government of India can
practice deficit financing in India. The
co
m
high doses of deficit financing which

may cause reckless spending, may
e.
also contribute to the growth of the
re
inflationary spiral in a country.

High Indirect Taxes: Incidence of
in
ef
5)
nl
high commodity taxation. Prices tend
llo
to rise on account of high excise
.a
duties imposed by the Government on
6)
raw materials and essentials.

Black
Money:
It
is
widely
condemned that black money in the

hands
of
tax
evaders
and
black
marketers as an important source of

inflation in a country. Black money
encourages
lavish
spending,
which
causes excess demand and a rise in

prices.
Poor Performance of Farm Sector: If
co
m
7)
agricultural
production
especially
e.
foodgrains production is very low, it
re
would lead to shortage of foodgrains,
in
ef
will lead to inflation.
High Administrative Pricing
nl
8)
llo
Other reasons are capital bottleneck,
.a
entrepreneurial
bottlenecks,
infrastructural bottlenecks and foreign
exchange bottlenecks.
EFFECTS OF INFLATION
1)
Effects of Inflation on Business
Community: Inflation is welcomed by

entrepreneurs
and
businessmen
co
m
because they stand to profit by rising

prices. They find that the value of their
e.
inventories and stock of goods is rising
re
in money terms. They also find that
in
ef
prices are rising faster than the costs
nl
of production, so that their profit is
llo
greatly enhanced.
Fixed Income Groups: Inflation hits
.a
2)
wage-earners and salaried people very
hard. Although wage- earners, by the

grace of trade unions, can chase
galloping prices, they seldom win the
race. Since wages do not rise at the
same rate and at the same time as the
general price level, the cost of living

index rises, and the real income of the
wage earner decreases.
Farmers:
Farmers
usually
gain
co
m
3)
during inflation, because they can get
e.
better prices for their harvest during

Those
ef
Investors:
who
invest
in
in
4)
re
inflation.
bonds,
llo
securities,
nl
debentures and fixed-interest bearing
.a
inflation.
However,
benefit
lose
during
investors
because
in
more
equities
etc,
dividend is yielded on account of high

profit made by joint-stock companies
during inflation.
5)
Inflation will lead to deterioration of
gross
domestic
savings
and
less
capital formation in the economy and

less long term economic growth rate
co
m
of the economy.
MEASURES TO CONTROL INFLATION
re
e.
The measures to control inflation can be
is
in
primarily
llo
Inflation
nl
Fiscal Measures.
ef
broadly divided into TWO- Monetary and
.a
phenomenan.Hence,
the
monetary
most
logical
flow
solution to check inflation is to check the

money
supply
by
devising
appropriate monetary policy and carefully

implementing monetary measures. The
Central banks monetary management
methods,
devices
for
decreasing
or
increasing the supply of money and credit

for monetary stability is called monetary
policy. Monetary policy is a policy of
co
m
money supply influencing the quantity,

cost and availability of money supply.
e.
Central Banks generally use the three
in
ef
re
quantitative measures namely:
Bank Rate Policy
2)
Open Market Operations
3)
Variable Reserve Ratio
.a
llo
nl
1)
1)
Bank Rate Policy: Bank rate is the
rate at which Central Bank lends loans

and advances to commercial banks.
When bank rates are hiked by the
Central bank as a follow up of this

increased
bank
rate,
commercial
banks hike the rate of interest. Bank

inflation
co
m
rate is hiked during the period of

to
reduce
money
(deflation)
central
re
prices
e.
supply.During the period of falling

banks
in
ef
reduces bank rate to increase money
nl
supply.As follow up, commercial banks
llo
reduce rate of interest.At a low rate of
.a
interest,
investors
find
it
much
attractive to borrow money and make
investment.
2)
Open
market
Operations:
Open
market Operation means open buying

and selling of government securities
by the Central Bank for the Central
Government. In India the term opens

market
operations
purchase
and
stands
sale
of
for
the
government
co
m
securities by the RBI from/to the public

and banks on its own account. In its
e.
capacity as the governments banker
re
and as the manager of public debt, the
in
ef
RBI buys all the unsold stock of new
nl
government loans at the end of the
llo
subscription
period
and
thereafter
.a
keeps them on sale in the market on
its own account. Such purchases of
government securities by the RBI are

not genuine market purchases but
constitute
only
an
internal
arrangement between the government

and
the
RBI
whereby
the
new
government loans are sold not directly

by the government but through the
RBI as its agent.
Variable Reserve Ratio: Under the
co
m
3)
existing law enacted in 1956, RBI is

impose
Reserve
Ratio
re
Cash
to
e.
empowered
statutorily
(CRR)
on
in
ef
commercial banks anywhere between
nl
3 per cent and 15 per cent of the net
llo
demand and time liabilities. It is the
.a
authority of the RBI to vary the
minimum
variable
CRR
reserve
which
ratio
makes
a
tool
the
of
monetary control. It may be noted that

the RBI pays interest to banks on the
additional required reserves over the
minimum CRR of 3 per cent.
Fiscal Policy
Fiscal
policy
is
the
policy
of
the
government
co
m
government implementing through the

treasuries.
Fiscal
policy
financing.
subsidies
Inflation
in
deficit
borrowing,
ef
expenditure,
re
e.
intervention areas are taxation, public

means
and
a
llo
nl
general rise in prices. To control inflation
.a
policy should be directed to reduce the
price level and control excess money
supply. First measure is reducing indirect

taxes. High indirect taxes lead to increase
in the prices of goods and services. So to
reduce the prices of goods and services
widely used by common people and
intermediate goods, the indirect taxes

should
be
reduced.
Increased
public
expenditure leads to increase in the level
co
m
of economic activities and more income

to people.It also leads to increase in
e.
money supply.So during the period of
re
inflation, we should reduce excess public
.a
Deflation
llo
nl
in
ef
spending/public expenditure.
Deflation is just opposite of inflation. It is
essentially a matter of falling prices.

Deflation is that state of falling prices
when the output of work by productive
agents
increases
relatively
to
money
income. Deflation arises when the total

expenditure of the community is not

equal to the value of output at existing
prices. Consequently, the value of money
is
condition
co
m
goes up, and prices fall. In short, deflation

of
falling
prices,
e.
accompanied by the decreasing level of
ef
re
employment, output and income.
in
Definitions of Economics
llo
nl
The book of Adam Smith An Enquiry into
.a
the Nature and Causes of Wealth of
Nations popularly known as Wealth of
Nations, published in the year 1776, laid

the strong foundation for the growth of
Economics. So Adam Smith is rightly
called the Father of Economics and
pioneer of Classical Economics. Although
there is a plethora of definitions, there is

no concensus among economists about a
precise definition of economics.
co
m
Stock Exchange: Stock exchange is a

place where second-hand securities are
and
sold.Stock
exchange
e.
bought
is
ef
re
essential for industrial development and a
in
developed stock exchange is one of the
nl
features of a developed industrialized
.a
llo
country.
Wealth Definition
The early classical economists defined

economics mainly as a study of wealth.To
his famous treatise, Adma Smith gave the
suggestive tittle An Enquiry into the
Nature and Causes of Wealth of Nations.

It means economics investigates into the
nature
of
wealth
and
the
laws
distribution.
of
The
co
m
production
and
atmosphere of the Industrial Revolution

by
unprecedented
e.
marked
material
re
prosperity and accumulation of wealth
in
ef
should naturally justify the scope which
nl
these economists assigned to economics.
.a
llo
Criticism of wealth Definition

Too much Emphasis on wealth :
1)
Literary writers and religious leaders

strongly voiced their protest against
the study of economics because of its
too much attachment to wealth.Adam
Smith treated economics as political
economy and therefore emphasized

the
importance
of wealth
from
national angle
Restricted Meaning of Wealth: The
co
m
2)
classical definition considered wealth
e.
as, material goods only, like table,

of
drivers,
in
ef
services
etc.Non-material
re
radio,furniture
nl
singers,teachers,professors etc are not

denotes
.a
wealth
llo
taken as wealth.But in modern days

both
goods
and
services, material wealth and human
wealth.
3)
Concept
of
Economic
Man:
Classical wealth definition was based

mainly upon the assumption of an
economic
man
who
had
no
consideration
sympathy,
words,
for
love,
patriotism
an
etc.In
other
economic
man
give
attention
to
was
to
co
m
supposed
affection,
economic activities only.But in reality
e.
human behaviour cannot be properly
re
understood and analysed unless the
No
Mention
llo
4)
nl
weightage.
in
ef
other motives are also given due

of
mans
Welfare:
.a
Wealth definition explains the wealth-
getting and spending activities of man
It pays no attention to the equity

principle
which
is
of
paramount
importance to maximize the welfare of

the society.
5)
Economic
Problem:
definition is silent over

economic
problem
Wealth
the basic
of
meeting
co
m
unlimited wants with scarce means.In

other words, the central problem of
e.
economics is not at all touched by
in
ef
re
wealth definition.
llo
nl
Welfare Definition
.a
Adam Smiths wealth definition made

a
was
to
Marshall
economics
economist
ridicule,
dismal
the
science.Alfred
first
rescue
neo-classical
economics
condemnation
misunderstanding.
So
Marshall
from
and
gave
welfare definition to economics in his

classic work Principles of Economics,

published in 1890.His definition shifted
the emphasis from wealth to human
co
m
welfare. According to him wealth is simply

a means to and an end in all activities,
e.
the end being human welfare.
ef
re
Marshall defines economics is a study of
in
man kind in the ordinary business of life;
nl
it examines that part of individual and
llo
social action which is almost closely
.a
connected with the attainment and with
the use of the material well being. He
adds that economics is on the one side a

study of wealth; and the other and more
important side, a part of the study of
man.
That
is
Marshall
gave
primary
importance
to
man
and
secondary
importance to wealth.
Criticism of Welfare Definition
Material and Non-Material Welfare:
co
m
1)
Lionel Robbins begins his attack by

narrow
down
ef
not
re
e.
pointing out that economists should

the
scope
of
in
economics by confining their attention

services
.a
The
llo
nl
to the study of material welfare alone.
singers,
of
lawyers
teachers,
etc.
do
actors,
promote
welfare and such welfare may be

termed as non-material welfare. The
above mentioned services have much
economic significance because they
are scarce in relation in relation to

demand and possess value.
2)
Objection
to
material:
Robbins
co
m
objects not only to the word material

but also to the very idea of welfare.
neo-classical
economics
economists,
e.
the
is
concerned
re
For
with
the
in
ef
causes of material welfare. According
.a
welfare.
which
llo
activities
nl
to Robbins, there are certain material

The
do
not
promote
manufacturers
of
intoxicants such as wine and opium
are certainly economic activities. But

they are not conducive to human
welfare.
3)
Welfare cannot be measured: The
neo-classical
economistss
idea
of
welfare is based on cardinal utility. But

utility is a psychological entity which
cannot be measured. It varies from
co
m
person to person, place to place and

time to time. Therefore, the concept of
Robbins
ef
is
in
Economics
disputed
nl
4)
re
elusive in character.
e.
welfare based on measurable utility is

Social
the
Science:
Marshallian
llo
conception of economics as a social
.a
science.The study of man as they live
and move and think in the ordinary
business of life.According to Marshall,

the activities of an individual living in
seclusion like a Himalayan Sadhu or
Robinson Crusoe fall outside the orbit
of economics.Robbins on the other
hand regards economics as a human

science.The
central
problem
in
economics, according to Robbins is the
co
m
allocation of scarce means among
e.
alternative ends.
ef
re
Scarcity Definition
in
After rejecting the materialist definition of
llo
nl
Marshall,Lionel Robbins formulated his

The
Nature
.a
own conception of economics in his book

and
Significance
of
Economic Science published in 1932. In

the words of Lionel Robbins, Economics
is
the
science
which
studies
human
behaviour as a relationship between ends

and scarce means which have alternative
uses. He deduced his definition from our

fundamental
characteristics
of
human
existence.
Unlimited Wants: Ends refers to
co
m
1)
human wants which are boundless but

resources
available
e.
the
to
satisfy
ef
re
these wants are limited. Some wants
in
are inborn but others are acquired

customs
nl
through
and
conventions.
llo
When one want is satisfied another

Scarcity of Means: The resources
2)
.a
crops up.
(time or money) at the disposal of a

person to satisfy his wants are limited.
The external world does not offer full
opportunities
for
their
complete
achievement. If things are available in

abundance just like free goods, the
economic problem will not arise.
Alternative Uses of Scarce Means:
Economic
co
m
3)
resources
are
not
only
e.
scarce but are also versatile. If the
re
resources cannot be put to alternative
in
ef
uses, the question of choice will not

or
for
llo
crops
nl
arise. We may use land for raising

building
houses.
We
.a
cannot do both. If we choose one
4)
thing, we must give up others.

The Economic Problem: When the
means at the disposal of a person are

limited and the resources can be put
to several uses and when wants can
be graded on the basis of intensity,
the behaviour necessarily takes the

form of choice. Thus the choosing of
one is at the cost of another. In order
co
m
to make choice scientific, some form

of pricing process is inevitable.
is
based
re
definition
on
two
ef
Robbins
e.
Criticism of Scarcity Definition
in
foundation stones-multiplicities of wants
llo
nl
and scarcity of means.

Economics
.a
1)
According
to
of
Abundance:
Robbins,
economic
problem arises due to scarcity. But

economic problems may also arise due
to plenty rather than scarcity as had
happened during the great depression
of
1930s.Professor
John
Kenneth
Galbraith,
noted
American
economist in his book, The Affluent

Society, states that scarcity is not a
in
America.
So
that
the
co
m
problem
conventional scarcity idea has only

Not Applicable to Underdeveloped
re
2)
e.
little relevance.
solution
to
nl
no
in
ef
Countries: Robbins definition provides

the
problems
of
of
.a
feature
llo
underdeveloped countries. A peculiar

many
under
developed
countries is that the resources are not
scarce, but they are either under

utilized, or unutilized. Robbins simply
assumes the resources as given and
analysed
their
alternatives uses.
allocation
among
Growth Definition
Economics has now become a fastly
co
m
growing discipline in the field of social

science and its scope and significance
re
e.
have widened from mere a value theory
ef
or a theory of resource allocation. The
in
credit for revolutionizing the study of
llo
nl
economics surely goes to Lord JM Keynes.
.a
Keynes defined economics as the study of
the administration of scarce resources
and the determinants of income and

employment.
Professor Paul.A Samuelson has given a
definition based on Growth aspects which
is
known
as
the
Growth
Definition.
Economics is the study of how people

and society end up choosing, with or
without the use of money, to employ
co
m
scarce productive resources that could

have alternative uses to produce various
and
distribute
e.
commodities
them
for
re
consumption, now or in the future, among
in
ef
various persons or groups in society.
nl
Economics analyses the costs and the
llo
benefits of improving patterns of resource
.a
use.
Firstly, it is applicable even in a barter
economy where money measurement is

not possible.
Secondly, the inclusion of time element
makes the scope of economics dynamic.
Thirdly,
this
definition
possesses
universality in its application. Thus we

may conclude that though in a sense it is
improvement
co
m
similar to Robbins definition, it is an

over
Robbins
ef
re
e.
definition.
scarcity
curve
of
llo
concept
was
.a
The
nl
in
Production Possibility Curve

production
introduced
by
possibility
Professor
Samuelson.The set of problems facing in
every economic system can be clearly

analysed with the tool of production
possibility
curve.
Human
wants
are
unlimited and the economic resources to

satisfy these unlimited human wants are
scarce or limited. Therefore, the every

society faced with the basic problem of
choosing
allocating
among
its
alternative
scarce
uses.
co
m
resources
and
Production Possibility Curve shows the
e.
menu of choice along which a society can
re
choose to substitute one good for another
in
ef
assuming a given state of technology and
.a
concepts:
curve
llo
possibility
nl
given total resources. The production

scarcity,
illustrates
choice
three
and
opportunity cost.
Modern economy produces thousands of

products, and therefore choices before us
are complex. In order to reduce the
problem to its simplest form we consider
the economy in which two goods butter

and
guns
are
produced
with
the
available resources and technology.
the following Assumptions:
Only two goods x (butter) and y
re
e.
1)
co
m
Production Possibility Curve is based on
full
employment
of
llo
resources.
is
in
There
nl
2)
ef
(guns) are produced in the economy.
The resources are fixed in quantity.
.a
3)
But they can be re-allocated from the
production of one commodity to that

of another.
4)
The state of technology is given
and constant.
5)
The time period is short
Law of Supply
The
law
of
supply
states
that
the
co
m
functional relationship between price and

the quantity offered for sale. The law of
re
e.
supply states, other things remaining
ef
same, the higher the price, the greater
in
will be the willingness of sellers to make a
llo
nl
product available. At higher prices, more
.a
sellers are interested in producing the
product, and each existing seller wants to
sell more.The opposite holds good when

prices decline.
Factors Determining the Supply of a
Commodity
The supply of a commodity depends upon

the following factors.
1)
Different
firms
may
may
be
co
m
follow different objectives.Some firms

interested
in
maximizing
e.
profit, while others may be interested

or revenue maximization or
ef
re
in sales
supplied
nl
commodity
etc.The
in
satisfying
amount
is
of
often
llo
influenced by the objectives of the

sales
maximization
.a
firm.Normally,
firms output will be greater than the
profit maximization firms output.
2)
State
of
Technology:
Technical improvements reduce the

costs of production enbling a shifting a
shifting of the supply curve to the

right.Similarly,
obstacles
in
the
existing technology increases costs of

a shift in the
co
m
production, forcing
supply curve to the left. A constant
re
at the existing level.
e.
state of technology keeps the supply

Political
Disturbances:
in
ef
3)
nl
Political disturbances may destabilize
llo
trade and thus create a scarcity for
.a
certain kinds of goofs

Government Policy: Any
4)
change in governments policy would

affect
the
production
sector
and
thereby the supply of goods and

services
in
the
market.
The
government policy related to tax and

subsidy will have serious impact on

the production and supply of goods
co
m
and services in the market.
re
e.
Law of Demand
in
ef
Meaning of Demand
nl
Demand is essential for the Creation,
llo
Survival and Profitability of a firm. It is
.a
essential to distinguish between demand
and desire. A beggars demand for a
Maruti car is only s desire and does not

constitute
demand.
miser
may
possess enough money but he may not

be willing to spend it. In this case also
desire
will
not
be
called
demand.
Therefore, demand is not merely a wish

or desire but an effective demand, this is,
desire backed by purchasing power and
Demand
has
co
m
willingness to buy.
the
following
re
e.
characteristics
Four
Price: Demand is always related to
ef
1)
in
price. It is meaningless to say that
llo
nl
demand for refrigerator in the market
.a
is one thousand. The person must
state the price at which the consumer
is prepared to purchase the said

quantity of the commodity.
2)
Time:
Demand
always
means
demand per unit of time, per day, per

week, per month or per year.
3)
Market: demand is always related
to the market. Market here simply

refers to the contact between buyers
co
m
and sellers. There is no need for a

definite geographical area.
Amount:
Demand
is
e.
4)
always
purchase.
ef
to
It
is
not
an
in
willing
re
specific quantity which a consumer is
nl
approximation, but is to be expressed
.a
llo
numerically.
list
Demand Schedule: A demand schedule is

of
prices
and
corresponding
quantities. Since the demand schedule

obeys the law of demand, price and
quantity demanded vary inversely The
following
is
the
hypothetical
demand
schedule of an individual.
co
m
Types of Demand: There are three kinds
re
e.
of demand,
Price Demand
2)
Income Demand
3)
Cross Demand
1)
Price Demand: Price demand refers
.a
llo
nl
in
ef
1)
to
the
various
quantities
of
commodity that a consumer would

purchase at a given time in the market
at various hypothetical prices.
2)
Income Demand: Income refers to
the various quantities of a commodity

that a consumer would purchase at a
co
m
given time in a market at various

levels of income.
Cross Demand: The relationship
e.
3)
re
between the prices of a substitute or

and
the
quantity
in
ef
complements
nl
purchased of a related commodity is
of
Law
.a
llo
called cross demand.
relationship
Demand:
between
The
the
inverse
price
of
commodity and its quantity demanded

per unit of time is referred to as the law
of
demand.
In
the
words
of
Prof.
Samuelson, Law of demand states that

people will buy more at lower prices and
buy less at higher prices, other things
things
being
equal
co
m
remaining the same. The phrase other

is
an
important
e.
qualification; when we say other things
.a
income.
change
nl
No
No
2)
in
the
consumers
llo
1)
in
ef
re
being equal we assume;
change
in
the
prices
of
substitutes and complements

3)
No change in consumers taste and
preferences
4)
No new substitutes
have been discovered

for the goods
5)
People do not feel that the present
fall in price is a preclude to a further

decline in prices.
The commodity in question is not
co
m
6)
e.
one which has a prestige value.
to D.S Watson a change in
llo
According
nl
in
ef
re
Determinants of Demand
.a
demand is caused by changes in income
. tastes and prices of substitutes and
complements.The various determinants

of demand are listed as follows.
1)
Changes in Tastes and Fashions:
The demand for some goods and

services is very susceptible to changes
co
m
in tastes and fashions.If a commodity

becomes more fashionable a larger
e.
quantity of it may be bought at the old
re
price or even at a slightly higher

ladies to
in
ef
price. The fashion among
nl
keep their hair long or short brings

changes in demand for their
llo
about
.a
hair-pins, hair-nets etc. Similarly if
tastes have deteriorated for a product,
less of it will be deamanded without

any rise in its price.
2)
Changes in Weather : An unusually
dry summer results in a decrease in

the
demand
for
umbrellas.The
demand curve in such a case shifts to

the left.
3)
Channges
in
Income
and
co
m
Distribution of income: An increase in

family income increases the demand
e.
for durables like video recorders and
re
refrigerators.The demand curve then
in
ef
shift to the right., More over, if income
nl
in a country is evenly redistributed by
llo
taking the rich and transferring it to
.a
raise the income of the poor, it may

the
demand
for
goods
increase
consumed by the poor people.
4)
Changes
Expectations
in
also
expectations:
bring
about
change in demand.Rumours that the

government is going to levy fresh
taxes on a particular good may push

the in favour of purchasing more of
that commodity alone.
Changes in Savings: Savings and
co
m
5)
demand are inversely related.If the

the
amount
re
high
e.
marginal propensity to save becomes

available
for
in
ef
consumption will become less. The
nl
demand will therefore decrease.

State of Trade Activity: During the
llo
6)
.a
periods of boom and prosperity, the
demand for all commodities tends to
increase.
On
the
contrary,
during
times of depression there is a general

slackening of demand.
7)
Change
in
Real
Income:
As
money income increases, real income

also increases. If the income goes to

the rich, demand does not increase as
much
as
it
increases
when
such
co
m
income benefits go to the poor.The

simple reason is that the marginal
e.
propensity to consume of the rich is
re
less than that of the poor.
Consumer Credit Policy: With a
in
ef
8)
nl
liberalization in the credit policy of the
llo
banks or the hire purchase system
VCRs,Cars,
houses
etc
will
for
.a
adopted by companies, the demand
increase.
9)
Advertisement:
In
advanced
capitalist countries advertising is a

powerful
instrument
demand in the market.

affecting
the
10) Taxation and subsidy: If fresh taxes

are levied or the existing rates of
taxation
on
commodities
increased,
their
prices
are
up.The
co
m
go
demand for such commodities will

the other
e.
decrease. On
hands, if
re
rebates and subsidies are given as in
in
ef
the case of consumer products during

seasons,
llo
increase.
nl
festival
.a
11) Change
in
the
demand
will
the
value
of
money:During times of inflation, the
prices will rise. Therefore, consumers

will have to
so
that
their expenditure pattern
the
demand
for
certain
products will have to be reduced and

for others stimulated.
12)
Change in Population:The demand
for goods and services depend on

population.As
population
increases
co
m
demand increases and vice versa.
economic
terminology
ef
In
re
e.
MEANING OF PRODUCTION
production
in
implies creation of utility for sales. The
llo
nl
act of utility creation is possible by

inputs
into
output.
.a
transforming
According to Prof.Hicks, production is
any activity directed to the satisfaction of

the peoples wants
through exchange.
Production is an activity of converting

inputs into out put with the help of
technology or mode of production. In
production process we use four factors of

production ie; land, labour,capital and
organization.For engaging in economic
co
m
activity, these factors would get rewards.

Land or building would get rent as its
salary,capital
would
get
wage
get
profit
and
e.
would
re
reward,labour
llo
nl
in
ef
organizer would get profit as the reward.
.a
Knowledge is the only instrument of
production
that
is
not
subject
to
diminishing returns J.M.Clark, 1957
The production function shows only the

physical relationship between inputs and
output,
but
says
nothing
about
the
optimal combination of inputs.

Two things must be noted when we
1)
It
must
be
co
m
discuss production function.
considered
ef
time.
It is determined by the state of
in
2)
of
re
e.
reference to a particular period
with
llo
nl
technology.Any change in technology

output, even when the
.a
may alter
quantities inputs remain fixed.
Law of Returns to Scale

The law of returns to scale examines the
relationship between output and the scale
of inputs in the long-run when all the
inputs
are
increased
in
the
same
proportion.
is
based
on
the
following
factors
are
variable
but
the
.a
1)All
llo
nl
in
ef
assumptions
e.
law
re
This
co
m
Assumptions
enterprise is fixed.
2) There is no change in technology

3) Perfect competition prevails in the
market.
4) Returns are measured in physical

terms.
co
m
Three Phases of the Law of Returns to
e.
Scale.
re
First phase is increasing returns to scale
in
ef
Second phase is constant returns to scale
nl
Third phase is diminishing returns to
.a
llo
scale.
Depending on whether the proportionate
change in output exceeds, equals or

decrease in proportionate to the change
in both the inputs, the production
is
classified as increasing returns to scale,
constant retuns to scale and decreasing
Increasing Returns to Scale
co
m
returns to scale.
re
in
ef
the following reasons.
e.
Increasing returns to scale arises due to
Dimentional
nl
a)
economies
flowing
.a
llo
economies,2)
from indivisibility 3)Economies of
specialization
4)
Technical
economies,
3)
Managerial
economies,
6)
Marketing
economies
Marshall
exlains
increasing
increasing
returns in terms of increased efficiency

of labour and capital in the improved
co
m
organization with the expanding scale of

output and employment of factor unit.It
to
organization
as
the
in the
earlier
stages
of
of
llo
nl
in
ef
production.
economy
e.
referred
re
is
.a
Constant Returns to Scale: As a firm
continues to expand, it gradually exhaust
the economies, internal and external,

which enabled the operation of increasing
returns
to
scale.
In
this
stage,
the
economies and diseconomies of scale are

exactly in balance over a particular range
of output. In the case of constant returns

to scale increases in all the inputs cause
proportionate increases in output.
co
m
A production function showing constant

retuns to scale is often called Linear and
production
re
Cobb-Douglas
ef
Degree.The
function
in
first
e.
Homogeneous or Homogeneous of the

evolved
by
the
nl
American economists Cobb and Douglas
.a
function.
llo
is a linear and homogeneous production
Diminishing Returns to Scale

When
expand
constant
business
even
beyond
returns,
firm
stage
continues
the
point
comes
to
of
when
diminishing returns to scale set in. There

are decreasing returns to scale when the
percentage increase in output is less than
co
m
the percentage increase in iutput. As the

size of the firm expands, managerial
decreases.Another
responsible
for
e.
efficieny
re
diminishing
factor
retuns
to
natural
resources,
nl
the
in
ef
scale in the limitation of exhaustibility of

for
example,
llo
doubling of coal-mining plants may not
.a
double the coal output, because of limited
availability of coal deposits or due to
difficult accessibility to coal deposits.
The Law of Variable proportions OR

Law of Diminishing Returns
The law of variable proportions is one of

the basic laws in economics. The law of
proportions
is
the
modern
co
m
variable
version of the law of diminishing returns.

the
re
between
fixed
and
ef
relationship
e.
This law states that a technical physical
in
variable factors of production in the short
nl
run. Here it is assumed that only one
llo
factor of production is a variable factor

other
factors
are
assumed
to
.a
while
remain fixed. As we increase the quantity
of the variable factor while keeping other

factors
constant,
the
output
of
the
variable factor may increase more than

proportionately in the initial stages of
production, but eventually it will not

increase
even
Marshall,
proportionately.
neo-classical
Alfred
economist,
co
m
considered the law of diminishing returns
re
e.
in relation to agriculture only.
ef
The law of variable proportions has been
in
defined in the following way; As the
llo
nl
proportion of one factor in a combination

marginal
the
.a
of factors is increased, after a point, first

and
then
the
average
product of that factor will diminish.
Assumptions of the Law
The law of variable proportions is valid

when the following conditions are fulfilled.
1)
The state of technology
2)
co
m
is given below
Only one factor is varied
e.
and all other factors remain fixed.

The fixed factor and the
ef
re
3)
in
variable factor are combined together
nl
in variable proportions in the process
llo
of production.
The units of the variable
.a
4)
5)
factor are homogeneous

short run.
The law operates in the
Total Product (TP) : Total Product is the

amount of output produced from land
with
the
given
number
product
(AP):
of
labourers
e.
The
average
re
Average
co
m
employed.
ef
product of labourer is the total product
in
(TP) divided by the number of labourers
Product
(MP):
Marginal
.a
llo
nl
employed AP =TP/No.
The
marginal
product is the change in the total product

due to change in labour.
DIAGRAM
supply
e.
of
states
re
law
that
the
ef
The
co
m
Law of Supply
in
functional relationship between price and
nl
the quantity offered for sale. The law of
.a
llo
supply is a hypothesis that states, other
things remaining same,, the higher the
price, the greater will be the willingness
of sellers to make a product available. At

higher prices, more sellers are interested
in
producing
the
product,
and
each
existing seller wants to sell more.The

opposite holds good when prices decline.
The law of supply can be explained with
schedule
relationship
between
represents
the
Supply
re
Schedule:
ef
Supply
e.
co
m
the help of a schedule and a curve.
nl
in
prices and the quantities that the firms
.a
llo
are willing to produce and supply.
SUPPLY SCHEDULE
SUPPLY CURVE
MARKET SUPPLY CURVE
co
m
MARKET SUPPLY SCHEDULE
ef
re
e.
ECONOMIC REFORMS
llo
nl
in
NEW ECONOMIC REFORMS OF 1991
.a
Changing Global Scenario
Several
major
economic
and
political
changes occurred during the 1970s and

1980s, which affected the developing
countries and paved the way for the
implementation
Structural
of
Adjustment
IMF-sponsored
Policies
(New
Economic Policy) in India in 1991. This

was due to a combination of factors such
as stagnant agriculture, low levels of
growth
inadequate
and
capital
diversification,
co
m
industrial
formation,
adverse
e.
terms of trade in international markets,
re
limits to domestic resource mobilization
in
ef
due to a fairly narrow tax-base, loss
nl
making public sector enterprises, over
llo
regulated and controlled economy, poor
.a
industrial productivity, huge amount of
fiscal deficit, huge amount of public debt,
poor
rating
of
Indian
economy
by
international agencies, foreign exchange

crisis etc.
New Economic Policy of 1991 includes

globalization,
liberalization
and
privatization (Disinvestment)
Globalization means flow capital
co
m
1)
(finance in the form of foreign direct
e.
investment (FDI) and foreign portfolio
ef
re
investment (FPI), technology, human
in
resource, goods and service among

like
llo
assets
nl
countries. FDI is investment in real

automobile,
consumer
.a
goods production, service sectors like
insurance,
telecommunication,
air
transport etc.
2)
Liberalisation means freeing the
economic activities and business from
unnecessary bureaucratic and other

controls imposed by the governments.
3)
Privatisation
or
Disinvestment:
enterprises
private
opening
operating
sectors
the
for
ef
government
and
e.
industrialists
to
re
sector
co
m
Selling the government owned public
in
Policy
government
includes
expenditure,
.a
reduction
Economic
nl
New
llo
The
in
private investment.
opening of the economy to trade and
foreign investment, adjustment of the

exchange rate from fixed exchange rate
system to flexible exchange rate system,
deregulation in most markets and the
removal of restrictions on entry, on exit,

on capacity and on pricing.
Immediate consequences of economic
(a)
an
increase
internal
competition
e.
external
in
co
m
liberalization that are to focus on are

and
and
(b)
ef
re
structural change induced by changes
llo
nl
in
in relative prices in the economy.
.a
The Major areas of
New Economic
1)
Policy 1991 are

Fiscal policy reforms
2)
Monetary policy reform
3)
Pricing policy reform
4)
External policy reform
5)
Industrial policy reform
Foreign investment policy reform
7)
Trade policy reform
8)
Public sector policy reform
co
m
6)
The principal reforms initiated in the

on
most
goods
re
tariffs
e.
year 1991 included; reduction in import

other
than
in
ef
consumer goods, removal of quantitative
nl
restrictions and liberal terms of entry for
llo
foreign investors. Indias simple average
.a
tariff rate was reduced from 128% in
1991 to about 32.3% in 2001-02. Quotas
and non-tariff barriers were also reduced..

To restore Macro economic stability, the
reforms package of structural adjustment
policies are aimed at freeing markets by
dismantling controls on production, prices
and trade and reducing intervention in

the economy. The need to control the
fiscal deficit led to policies to curb public
co
m
expenditure and these cuts were mainly

on social sector expenditure and on
directly
affected
the
re
which
e.
production and consumption subsidies,

living
in
ef
standards of the economically vulnerable
nl
sections of the population. Privatisation,

main
of
recommended
the
economic
by
the
reforms
features
.a
the
llo
Liberalisation and export-promotion were
international institutions for the problems

facing by the developing countries .At the
same time, the role of the state in
advanced industrial economies was not
shrinking
as
expected,
but
growing
despite the ideological bias in favour of a

rolled back state. The share of national
income spends by government, which
30%
in
the
rich
industrial
co
m
averaged
countries in 1960 increased to 42.5% by
e.
1980 and 45% by 1990.The experiences
re
of countries, which have undergone these

outcome
nl
expected
in
ef
reforms, have in most cases not led to the

but
have
infact
llo
worsened the state of their economies. In
.a
India, the New Economic Policy (NEP) is a
set of policy (ies) and administrative
procedures introduced in July 1991 to

bring about changes in the economic
direction of the country.
Industrial
Policy
Resolution
1991
(IPR-1991)
Industrial Policy
co
m
The regulatory policy framework which

acted as a barrier to entry and growth by
was
sought
e.
entrepreneur
to
be
re
the
ef
basically changed by the Industrial Policy
in
announced in July 1991.The measures

reforms
were
as
under:
.a
economic
llo
nl
introduced in this area along with other
Industrial licensing has been abolished for

except
for a
list
of 15
all projects
industries related to security, strategic or

environmental concerns and certain items
of luxury consumption that have a high
proportion
of
imported
inputs.
The
exemption from licensing also applies to

the expansion of existing units.
co
m
Industrial licensing was abolished for

related
to
security,
re
industries
e.
all projects except for a list of 15
certain
in
and
ef
strategic or environmental concerns

that
of
had
luxury
a
high
llo
nl
consumption
items
The
.a
proportion of imported inputs.

Monopolies
and
Restrictive
Trade Practices (MRTP) Act applied in

a manner which eliminated the need
to seek prior government approval
for
expansion
of
present
undertakings and establishment of

new
undertakings
by
large
companies.
The set of activities henceforth
co
m
reserved for the public sector was

much narrower than before, and
e.
there would be no ban on the

reserved
re
remaining
areas
being
nl
in
ef
opened up to the private sector.
.a
llo
Foreign Investment Policy

Industrial
The
increased
1991
opportunities
also
for
provided
Policy
foreign investment with a view to take

advantage
of
technology
transfer,
marketing expertise and introduction of

modern managerial techniques. It was
also intended to promote a much

needed
shift
external
in
the
private
composition
capital
flows.
of
The
co
m
following measures were announced in

this regard:
e.
Automatic approval would be given
ef
re
for direct foreign investment upto 51
in
per cent foreign equity ownership in
nl
a wide range of industries. Earlier, all

investment
was
generally
.a
llo
foreign
limited to 40 per cent.
To provide access to international

markets,
major
foreign
equity
holdings upto 51 per cent equity

would
be
allowed
for
trading
companies
primarily
engaged
in
would
be
export activities.
Automatic
for
foreign
technology
co
m
given
permission
agreements for royalty payments
e.
upto 5 per cent of domestic sales or
re
8 per cent of export sales or for

approval
nl
Automatic
in
ef
lumpsum payments of Rs.10 million.

for
all
other
llo
royalty payments will also be given if
.a
the projects can generate internally
the foreign exchange required.
Abolished MRTP Act and FERA and

instead of FERA, FEMA Act was
passed in the Parliament.
The threshold (Minimum) asset limit
for companies under MRTP Act was
raised from Rs.20 crores to Rs.100

Crores.
co
m
Public Sector Policy
The Government was of the view that
re
e.
public sector had not generated internal
ef
surpluses on a large scale. On account of
in
its inadequate exposure to competition;
llo
nl
the public sector was subject to a high
.a
cost structure. To provide a solution to

problems
the
of
the
public
sector,
Government decided to adopt a new

approach, the key elements of which
were:
The existing portfolio of public sector
investment would be reviewed with a
greater sense of realism to avoid

areas
where
social
considerations
were not paramount or where the
co
m
private sector would be more efficient.

Enterprises in areas where continued
e.
public sector involvement was judged

degree
of
llo
Budgetary
nl
autonomy.
managerial
in
ef
greater
re
appropriate would be provided a much
would
be
to
public
progressively
.a
enterprises
support
reduced
To provide further market discipline

for
public
enterprises,
competition
from the private sector would be

encouraged and part of the equity in
selected
enterprises
would
be
disinvested; and
sick
Chronically
public
enterprises
co
m
would not be allowed to incur heavy
e.
losses.
ef
re
As a follow up of this policy, several
in
measures were taken:
llo
nl
The number of industries reserved for
.a
the public sector was reduced from 17
to 8. Even in these areas, private

participation
was
allowed
sector
selectively. Joint ventures with foreign

companies would be encouraged.
Public
enterprises
that
were
chronically sick and unlikely to be

turned around would be referred to

the Board for Industrial and Financial
Reconstruction (BIFR) for rehabilitation
co
m
or restructuring.
The existing system of monitoring
enterprises
e.
public
through
re
Memorandum of Understanding (MOU)

strengthened
with
primary
in
ef
was
llo
return.
nl
emphasis on profitability and rate of
.a
Initiated the disinvestment of public
sector enterprises.
Global Financial meltdown in 2008

In the western capitalists economies and
the
economies
closely
linked
to
the
United States economies were negatively

affected by this financial crisis of 2008.
That
is
all
the
economies
having
co
m
economic relationship with each other

were affected by this financial crisis of
e.
2008 so it is called a global financial
re
crisis. Capitalism is a system of economic

featured
by
the
private
in
ef
organization
nl
ownership and the use for private profit of
llo
man-made and nature-made capital. It is
.a
clear that under capitalism all means of
production
mines,
such
as
transport,
farms,
factories,
communication,
education etc are owned and controlled

by private individuals and firms. Private
initiatives and ideas are promoted and
respected highly and there is personal

freedom and liberty.
The
co
m
global financial crisis of 2008 is an

extreme manifestation of the crisis in the
of
freedom
enjoyed
by
the
ef
misuse
re
e.
capitalism due to wrong practice and
in
financial institutions in the United States
llo
nl
of America. Indian economy was more
.a
integrated to the global economy after
the introduction of the New Economic
Policy (NEP) of 1991. This encouraged
more integration of the Indian economy

with the global economy.But in the Indian
banking system, nearly 90 per cent of the
banking institutions are in the public
sector and our financial sectors are well

regulated by the Reserve bank of India
(RBI).
So
this
financial
management
co
m
system, to a greater extent insulated

Indian economy from the global financial
re
e.
crisis.
ef
The Major Reasons for the Global
nl
in
Financial Crisis are

Consumption
of
.a
driver
llo
1)
was
seen
economic
as
growth
the
and
prosperity and debt to facilitate such
consumption was consequently seen

as a good thing. This had led to the
rather
vendor
extreme
financing
situation
(i.e.,
in
which
lending
of
money by producers to consumers for

purchasing products they produce) of

the US by the developing nations was
seen as a necessary business practice.
The sub-Prime Crisis Sub-Prime
co
m
2)
Lending is the latest chapter in the

of
the
economics
e.
story
of
greed
which
the
USs
entire
architecture
the
ef
in
in
process
re
wrapped as modern economics, a
nl
financial
llo
government and the Federal Reserve
.a
System (the Central Bank of the US
like Indias RBI) is involved. The sub-
prime crisis is now presented as the

villain of US economy as also the
global
lending
economic
refers
to
scene.
loans
Sub-prime
given
to
persons who, in simple terms, are unfit

to borrow. That is, no lender will part

with
his
own
money
to
such
borrower. Two reasons are there. First,
co
m
such lending was popularised from the

White House to ordinary American
e.
homes as achieving a noble purpose
re
to induce Americans to borrow and

of
the
nl
part
in
ef
shop for their country. That is, it was

patriotic
duty
the
.a
shop.
llo
Americans as a whole to borrow and
The Major Features of the Present Global
Financial Crisis are

1) The Current US recession is much
deeper than in 1991 or 2001.
2) Yet Asias growth will slow by less than

in the previous US recessions. It is now
less dependent on US demand.
Asia
is
led
by
India
and
China
co
m
3)
increasingly becoming important as the
e.
engines of global growth.
re
4) This global financial crisis is the
in
ef
beginning of the end for the dollar as the
nl
main reserve currency
llo
5) The USA has been borrowing $ 3 billion
.a
every day to fund its spending
6) The USAS national debt is more than
$10 trillion, which is more than 80 per

cent of its national income.
7) The budget deficit is skyrocketing; it is
expected to reach mote than 10 per cent
soon.
8) The federal deficit as percentage of

GDP is now expected to reach more than
10 per cent.
co
m
9) Unlike the Great Depression of the

1930s, the current crisis of the West is
e.
not just an economic crisis. It has a
re
dimension of demography and conflict.o
in
ef
it. Demographic, because Europe is slowly
nl
fading away from the global map. It used
llo
to have more than 20 per cent of the
.a
global population during the First World
War, and now has less than 11 per cent. It
is expected to shrink to three per cent in

as many decades. The reproductive rate
in many European countries is less than
1.5 whereas the stable one is 2.1. In the
case of US, the crisis is more severe due

to its declining savings rate.
10) The personal saving as a percentage
co
m
of disposable income has now become
e.
negative.
re
The debt ridden financial institutions like
in
ef
Lehman Brothers assets were $ 690
nl
billion and capital was $ 22 billion.
llo
Lehman filed for the biggest bankruptcy
.a
in American history. Merrill Lynch assets
were $ 1020 billion and capital was $ 32
billion, Freddie Macs assets were $ 794

and capital was $ 27 billion, Fannie Mae
assets were $880 billion and capital was $
44 billion, Bear Stearnss was $ 400
billion and capital was $ 11 billion. The
allegations that ratings are not forward

looking has been proved right in more
than one occasion in the current financial
co
m
crisis. Many repackaged sub-prime loans

were rated high by global credit rating
down
graded
only
e.
agencies,
after
re
accelerated defaults and stoppage in
in
ef
trading. Ratings are not sancrosanct and
nl
lenders need to form own view about the

worthiness
llo
credit
of
borrowers,
.a
independent of any external ratings.
Conclusions
Asia is more important than the US as a

driver of global economic growth. Thanks
to the vigour of Asia and other emerging
economies, a US recession need not drag
the
whole
world
into
recession.
prolonged downturn in the US, while

emerging economies continue to grow
rapidly will reinforce the shift in global
co
m
power from the old industrial world to the

new emerging markets. In future the
e.
world economy will be steered not by the
re
US and Europe, but increasingly by India
in
ef
and China. As Maharishi Aurobindo says:
nl
India shall arise upon the ruins of the
llo
West. He says by the year 2011 the
.a
Western countries will fall and India will
rise. The question is, are we getting ready
to create a new world order?

Keynesian Theory
Keyness
Theory
and
Underdeveloped Countries.
Lord John Maynard Keynes wrote the
co
m
General Theory of Employment, Interest

and Money as a solution to the problem of
unemployment
faced
by
e.
periodic
the
great
depression
in
during
ef
re
developed industrial nations of the West

of
the
nl
thirties. Keynesian theory singles out
llo
deficiency of effective demand as the
.a
major cause of unemployment and low
level of income in industrial economy
operations under a laissez faire system.

Deficiency
prominent
of
effective
feature
demand
of
is
economies
undergoing depression and in order to
improve the level of effective demand in

an economy. Keynes suggested policy
measures
like
cheap
money
policy,
spending,
deficit
co
m
governments compensatory investment

financing
and
other
e.
fiscal methods. In essence, therefore,
re
Keynesian economics turn out to be
in
ef
economics of depression applicable to
nl
developed countries. Its applicability in

quote
Joan
.a
To
llo
underdeveloped countries is very limited.
Keyness
little to say directly, to the
theory has
Robinson:
underdeveloped
countries,
for
it
was
framed entirely in the context of an

advanced industrial economy, with highly
developed financial institutions and a
sophisticated business class.
Though
Keynesian
Economics
has
revolutionized modern economic thinking,

it has inherent weaknesses:
It is fundamentally a capitalistic
theory.
It
co
m
1)
basically
examines
the
e.
determinants of employment in a free
ef
re
enterprise economy. Though Keynes
in
suggests government intervention and

with
the
llo
deal
nl
controlled capitalism his theory fails to

socialist
economic
.a
system. In communism, Keynes is as
2)
Ricardo.
Keynesian economics is, by and
large, characterized as depressionary

economics. It was the outcome of the
Great Depression of the Thirties. It
suggested policy measures like deficit

financing to solve the problem of
unemployment
in
depressionary
co
m
phase of the capitalist economy. In the

era of inflationary situation, the theory
e.
has not much validity.
Keyness theory deals with short-
re
3)
in
ef
run phenomena only. It pays little
nl
attention to the long-run problems of a
llo
dynamic economy.
Keynesian theory is not strictly
.a
4)
applicable
countries.
to
Keynes
underdeveloped
deals
with
the
problem of cyclical unemployment.

Underdeveloped countries have the
problem of chronic unemployment and
disguised
unemployment.
Keynes
encouraged spending and condemned

savings.But; poor countries need curbs
on spending and increase in savings
co
m
for capital formation and wide-scale

investment to break the vicious circle
e.
of poverty. In short, Keyness theory is
ef
in
Keynes claimed.
re
not really general in application as

One dangerous practice is that the
nl
5)
llo
solution to global economic crisis and
.a
depression in advanced capitalism was
sought to be applied for solving the
economic
crisis
of
less
developed
countries. In fact in the west there are

arguments
against
Keyness
economics that it is not Keynesian

economics but the Second World war
revived
the
world
economy.
Keynesian revolution succeeded the

industrial
revolution
as
an
adhoc
depression
in
Britain
co
m
theory of countering the industrial

during
the
e.
thirties, just before the Second World
at
llo
Cambridge
in
Robertson
development.
Dennis
ef
of
the
nl
theory
re
War, became the all-encompassing

out
set
lecturers,
of
his
delivered
.a
between 1945-46 to 1956-57, warned
the under graduate students about the
controversial
nature
of
Keyness
General Theory and to supplement its

readings by critical writings on the
same.
6)
Laws of economics are relative and
valid for particular situations in the

economic history of a nation. To the
economists,
the
economic
co
m
British
forces generated by the industrial

in
that
country
e.
revolution
was
ef
formulated.
What
was
in
accordingly
re
universal and economic laws were
world,
llo
entire
nl
good for Britain was good for the
.a
differences
in
irrespective
of
socio-economic
conditions. But great personalities like
Arnold Toynbee argued against this

dominant view and the need for region
specific models of development. His
dream of this way of study never
materialized because of his premature
death and lack of followers. Adam

Smith advocated free trade at a time
when British manufacturing industries,
the
increased
their
textile
mills
had
co
m
particularly
capacity
through
e.
various practical innovations. Trying to
re
universalize economic laws has been
in
ef
one of the greatest disservices to the
nl
science of economics. The attempt by
llo
the third world countries to formulate
.a
their development plans on the basis
of these economic laws has created
serious imbalances in their economy

and
has
kept
them
perpetually
indebted, leading to erosion of their

economic independence.
7)
Lord John Maynard Keynes (J.M.
Keynes) was a great advocate of easy

money policy and abundance of credit
prescriptions
co
m
for economic prosperity. Keynesian

failed
in
developing
e.
countries due to inelastic nature of

D.Robertsons
ef
found
ideas
in
Keynes
re
agriculture sector and high inflation.
academically
llo
An
nl
inconvenient and chose to ignore it.

and
theoretically
.a
sound thesis will not shy away from an

debate.
The
relation
academic
between agriculture and industry does

not form a part of the theoretical
frame work of the General Theory of
Keynes. Keynes was highly intolerant
of his critics and he had high hope in
capitalism
and
he
could
avoid
economists jumped into Marxist band

Indian
influenced
because
planning
by
of
was
Keynesian
over
school
co
m
wagon.
the
economic
experts
e.
trained in British Universities or Anglo-
re
Saxon schools. In India Dr.B.S.Minhas
in
ef
resigned from Planning Commission
nl
protesting against high inflationary
llo
practice (Keynesian model of deficit
.a
financing).But
one
world
or
from
the
Planning
academic
no
Commission came to his support. It is

of importance to note that deficit
financing
started
with
the
recommendation of the IMF in its

report in 1953.N.Kaldor says that the
deficit financing imply a corresponding

increase in privately owned wealth.
co
m
Conclusion
Although the policy measures suggested

to
the
ef
suitable
re
e.
by the Keynesian theory may not be

problems
of
in
underdeveloped countries, it does not
llo
nl
mean that Keynesian economics has no
.a
significance.
methodology
Indeed,
of
thinking
Keynesian
in
macro-
economic terms is very essential and

appropriate in understanding the major
problems
of
any
economy,
whether
developed or developing. However, in

view of the changing institutional set-up
of the developing economies during the

process of planning and socio-economic
reforms, Keynesian tools have to be
Consumer
e.
Moving
Goods
re
Faster
co
m
adopted with suitable modifications.
nl
in
ef
(FMCG)
llo
Indian FMCG sector is the fourth-largest
.a
sector in the country, with a current
turnover of over US$ 28 billion (Rs.
113,000 crore), including tobacco. Most

large FMCG categories managed to grow
in the healthy double digits in 2008 in
India. Breaking down the sales growth
into categories, detergents, which saw
sales value expand by over 25 per cent in

2008, were among the fastest growing
categories. Soaps and shampoos grew by
such
as
packaged
tea
co
m
about 16 per cent each and beverages

and
coffee
e.
expanded 13-16 per cent, according to
re
industry estimates. Categories such as
in
ef
toothpaste and confectionery managed
nl
lower growth of 14-15 per cent in the
llo
same period. Sales growth for the 15
.a
large listed FMCG companies actually
accelerated from 14.5 per cent in the last
two financial years to 20 per cent in the

first
nine
months
of
2008-09.High
penetration categories like soaps and

detergents reported flat volumes due to
sharp
price
increases
and
weight
reduction.
co
m
The FMCG market shifts from a period of

relatively effortless growth to a more
re
e.
challenging environment. The companies
slows
changed
in
scenario.
overseas
As
markets,
llo
growth
the
in
with
nl
deal
ef
are making tactical and strategic shifts to
.a
companies are likely to proceed with
caution on acquisitions and refocus on

growth
that
is
mainly
organic
driven.
Indian Automobile Industry
India-
automobile
industry
passenger
of
cars,multi-utility
vehicles,commercial
wheelers
consists
and
liberalization
vehicles,two
three
in
wheelers.After
1991,
co
m
The
there
is
e.
progressive growth in the number of

a
few
manufacturers.At
ef
of
in
monopoly
re
manufacturers, thus replacing the earlier
nl
present, there are 15 manufacturers of

manufacturers
.a
llo
passenger cars and multi-utility vehicles,

of
commercial
vehicles,14 manufacturers of two/three
wheelers.The Indian automobile industry

has come a long way since in the first car
ran on the streets of Bombay (now
Mumbai) in 1898. The initial years of the
industry
were
characterized
by
unfavorable government policies. The real

big change as we see in the industry
today, started to take place with the
co
m
liberalization policies that the government

initiated in the 1991. The liberalization
economy
and
the
re
Indian
e.
policies had a salutary impact on the

automobile
in
ef
industry in particular. The automobile
nl
industry in the country is one of the key
llo
sectors of the economy in terms of the
.a
employment opportunities. The industry
directly employs close to around 0.2
million people and indirectly employs

around 10 million people. The prospects
of the industry also has a bearing on the
auto-component industry which is also a
major
sector
in
the
Indian
economy
directly employing 0.25 million people.

The
Indian
automotive
component
industry is dominated by around 500
co
m
players which account for more than 85%

of the production. The turnover of this
per
annum
from
re
28.05%
e.
industry has been growing at a mammoth

2002-03
in
ef
onwards. Global as well as local forces
nl
have affected the Indian auto industry,
llo
leading to a rapid transformation over the
.a
last decade or so. After the end of
licensing era in early 1990s, the industry
has witnessed rapid growth in volumes

and
capacity.
Investment,
100%
Foreign
absence
of
Direct
much
government regulations, manufacturing

and
imports
free
from
licensing
&
approvals
in
the
automobile
sector
coupled with customs tariff for a u t o

components reducing to 12.5% resulted
co
m
in increased number of multinationals

establishing their bases in India and with
industry
is
poised
re
automobile
e.
export markets looking up, the Indian

for
in
ef
phenomenal growth. India has made a
nl
mark in the global automobile industry;

in
the
.a
market
llo
India is the second largest two-wheeler

world,
Fourth
largest
commercial vehicle market in the world,
Eleventh largest passenger car market in

the world, Fifth-largest bus and truck
market
in
the
world
(by
volume).
Envisaged to be the seventh largest

automobile market by 2016 and world's
third largest by 2030 (behind only China

and the US).
ef
re
e.
co
m
ENVIRONMENT AND DEVELOPMENT
llo
nl
in
ENVIRONMENT
.a
The environment can be defined as ones

The
welfare
of
the
surroundings.
community depends on the availability of

goods
and
the
availability
of
goods
depends on the availability of resources

that come from environment.
Economic Growth and Environment
Soon
after
Independence,
the
Government of India adopted a policy of

rapid
economic
development
through
resources.
Government
has
Unfortunately
allowed
e.
natural
co
m
extensive and intensive exploitation of

the
landlords,
re
private contractors, mine owners and

and
water
llo
forests,
literally
loot
and
destroy
resources
and
mineral
nl
lands,
in
ef
industrialists to encroach upon public
.a
wealth. While economic development has
enriched a small group of people-namely,
the rich landlords in the villages, the

small
and
large
industrialists,
the
contractors,
the
smugglers,
the
bureaucrats
and
the
politicians-
environmental degradation which is the

direct
result
of
development
suffering
this
has
and
economic
led
to
tremendous
misery
to
millions
craftmen
and
co
m
tribals,traditional
of
fisherfolk.It has been responsible for the
e.
steady growth in the number of landless
in
ef
re
labourers migration to cities.
llo
nl
Poverty
.a
A major issue is the removal of mass
poverty. Indian economy indicates a very
high proportion of people below the

poverty line. Poverty is defined on the
basis
of
requirements,
norms
i.e.,
of
2400
nutritional
calories
per
person per day for rural areas and 2100

calories for the urban areas. According to

Planning Commission estimates in 19992000 nearly 260 million people (26 per
co
m
cent of the population) were living below

poverty line. Out of this 193 million in
e.
rural areas and 67 million in urban areas.

and
ef
reduction
eventually
the
in
Rapid
re
The burden of poverty is very massive.
nl
elimination of poverty is, there fore, the
llo
most important issue of development.
.a
The prevalence of mass poverty which is
the cause as well as consequence of their
low level of development. Poverty is the

result
of
resource
low
economic
(education
and
and
human
other
professional skills) base of the poor who

own a very small portion of the total
assets in the form of land, capital, house

property etc. The low resource base of
the poor also inhibits them from giving
co
m
education and training to their children.

This enables them to earn very low and
wages
and
thus
e.
meager
perpetuate
re
poverty. In other words, inequality in the

of
unequal
nl
cause
in
ef
distribution of assets is the principal

distribution
of
llo
opportunities on the other.
.a
Environment Economy Interaction

include
human
resources,
Resources
financial resources and natural resources

like
land,
forests,,
water,
marine
fisheries,
resources,
minerals,
climate,
rainfall and topography. Natural resources

determine the course of development of a

country. While some natural resources
such as land, water, fisheries and forest
co
m
are renewable others like mineral and

mineral oils are exhaustible and can be
e.
used only once. The principal objective of
re
resource development is to maximize
in
ef
gross domestic output (GDP) or national

be
optimum
llo
should
nl
production and for this purpose there

utilization
of
.a
resources not only in the short period but,
in a sustained manner, over the long
period.
But the exploitation of natural resources

should not result in the disturbance of
ecological
balace.The
unintended
side
effects of economic development have to

be avoided or controlled They include
mismanagement
of
natural
resources,
co
m
large scale deforestation, the unplanned

discharge of residues and wastes, the
etc.
Deforestation
re
slums
e.
handling of toxic chemicals, growth of

is
directly
in
ef
responsible for greater frequency and
nl
intensity of floods, soil erosion, heavy
llo
dams built at enormous expense and
.a
changes in climate conditions. It has also
caused increased suffering to the landless
labourers and marginal and small farmers

who have steadily lost their traditional
sources of fuel wood and fodder for their
cattle. Loss of fuel wood, in turn, has led
to the use of cowdung as fuel, resulting in

loss of precious organic manure.
co
m
Environmental Issues
e.
1) Deforestation
ef
re
2) Pollution
.a
llo
nl
in
3)Ground Depletion
4)Climate Change
Climate is weather conditions of a place

or
area,
conditions
of
temperature,
rainfall,
wind,
etc.
The
saying
goes,
climate is what you expect; weather is

what
you
get.
The
word
climate
co
m
describes the general average pattern of

the weather in a place over a period of
e.
years. Climatologists generally consider
re
30 years as the time needed to assess

Change is a
characteristic
nl
fundamental
in
ef
the climate of a place.
of
the
llo
environment. Earths climate is a result of
.a
complex interactions between the sun ,

,
oceans
land
and
atmosphere
biosphere. Relatively small changes in

climate could have a major effect on our
resources like food , energy and water.
The factors that influence global climate
are the aamount of solar energy the earth
receives, the condition of the atmosphere

, the shape and rotation of the earth , and
the currents and other processes of the
co
m
ocean. The scientific evidence suggest

that the earths climate is changing . The
e.
atmosphere is warming and this trend will
re
continue. By the year 2050, scientists
in
ef
predict that the world will be warmer by
nl
an average of between 1.5degree Celsius
llo
and 4.5 degree Celsius. A TASK Group set
.a
up by WHO had warned that climate
change may have serious impact on
human health.
5)Green House Effect.
A glass house used for raising delicate

plants is called green house. A green
house has higher temperature inside than
co
m
outside though the interior receives less

radiation. This is called green house
e.
effect. The factors that contribute to its
re
effects are; i) glass walls ii) high carbon
in
ef
dioxide content iii) high water vapour
nl
content of air in the green house. They let
llo
the short wave radiations pass through
.a
them but prevent passage of long wave
radiation emitted by the earths surface.
This makes inside of the green house

warmer
than
outside.
As
the
suns
radiation enters the atmosphere, some of

it is reflected by the clouds and other
particles and the rest reaches the earth.
Part of the radiation reaching the earth is

reflected by the earths surface while the
rest is absorbed. During this process
co
m
these gases in the atmosphere called

green house gases obstruct the shape of
e.
heat from the earth into space while
re
allowing radiation from the sun to the
in
ef
earth. Without green house effect it is not
nl
possible to sustain life on the plant as the
llo
average temperature of the earth would
Celsius.
.a
be 18 degree celsius than 15degree
The atmospheric gases which are
permeable to short wave solar radiation

but are strong absorber of long wave
relations emitted from the surface of
earth are called green house gases. They

include
i) Carbon dioxide
co
m
ii)Methane
ef
re
iv) Chlorofluro Carbons
e.
iii)Nitrous Oxide
in
v)Hydrofluro carbon gases
llo
nl
vi)Perfluro carbons
.a
vii)Sulphur hexafluoride
viii) Ozone
ix) Carbon monoxide
The green house gases added to the

atmosphere
by
human
activities
can
significantly affect the amount of heat

trapped in the atmosphere over time and
leads
for
global
warming
which
had
co
m
adverse effect on human life. The Inter

Governmental Panel on Climate Change
e.
(IPCC) periodically makes an assessment
re
of the atmospheric abundance of green
in
ef
house gases and its possible impact on
.a
llo
nl
climate and related issues.
6)Global Warming
Global warming is an increase in the

earths temperature due to the use of
fossil fuels and other industrial professes
leading to a build up of green house
gases in the atmosphere. Air pollution

traps
more
heat
in
the
atmosphere
rendering the earth warmer. This effect is
co
m
called global warming.
in
ef
re
e.
Causes of Global Warming
nl
The main cause of global warming is

methane,
.a
dioxide,
llo
green house effect. These include carbon

nitrous
oxide
clorofluro carbons and ozone. Human
activities during the last few decades of

industrialization and population growth
have polluted the atmosphere that it has
begun to effect the climate. By burning
large amount of fossil fuels we release
huge quanities of carbon dioxide into the

atmosphere. Currently, deforestation also
releases carbon trapped in the tissues of
co
m
the trees. Natural process like volcanic

eruptions and earth quake induced fires
contribute
to
carbon
e.
also
dioxide
re
emissions. The Inter governmental Panel
in
ef
on Climate Change held earlier in 2007
nl
found that man made additions to the
llo
global atmospheric carbon dioxide were
.a
indeed responsible for warming .
Effects of Global Warming

i) Climate Effects
a) There will be a
warming of the earths surface and
lower atmosphere and a cooling of

atmosphere.
b) The warming trend over
co
m
the earths surface is varied , warming in

the tropics is lesser than the global
e.
mean by about 2-3 degree celcius
ef
re
depending on seasonal changeswhich in
in
other latitude the average warming
nl
might amount for 5-10 degree Celsius
.a
llo
increase in temperature.
C) precipitation patterns
Some areas
will
will be changed.
become wetter and some areas dryer.

d)Seasonal patterns will
change
due
to
the
changing
temperature and prcepitation matters.

of
e) Soil moisture regions will

be changed due to the changes in
co
m
evaporation and precipitation.
f) With the increase in cloud
re
e.
cover over Eurasia in summer, which

and
increase
in
surface
ef
will enhance the solar heating of the

the
land-sea
llo
nl
temperature contrast,tropical mansoon
.a
will be driven with more severity and
intensity.
g) Wind direction and wind

stress over the sea surface will be
changed,which will alter ocean cirrents
and cause changes in nutrient mixing

zones and productivity of the oceans.
e.
co
m
7)Rise in Sea Level
sea
level
due
ef
in
to
thermal
in
rise
re
The global warming also contributes to
nl
expansion of ocean and melting of
llo
glaciers and Greenland ice sheets.The
.a
level of sea has been rising by 1 to 2
mm per year during the 20th century.A
rise of even half a metre in sea level

would
affect
human
population,one-
third of which lives within 60 km of a

coast line.Many important birds and
fishes inhabiting in coastal salt marshes
and estuaries will become extinct die to

inundation of their breeding ground.
co
m
The direct effects of rise in sea
recession
increased tidal
range
and
and
nl
in
2)
shorelines
ef
wetlands,
of
re
1)
e.
are:
level
an
increase
.a
3)
llo
estuarine salt-front instruction, and

in
salt-water
contamination of coastal fresh-water
aquifers.
Thus a rise in sea level will have a

negative impact on human settlements,
tourism,
fisheries,
agriculture,
water
suppliers and coastal ecosystems.
e.
co
m
Impacts on Forests
re
Forests are highly sensitive to climate

and
conservation
nl
forested
in
ef
change and upto one third of currently

of
forest
llo
inhabitats in a rapidly warming world will
.a
present us with new challenges.
Effects
on
distribution
range
of
species
Each plant and animal species occurs

within
specific
range
of
temperature.The global warming will shift
pattern
of
and
latitudinal
organisms.
distribution
Rapid
e.
attitudinal
co
m
the temperature range,which would affect

rise
in
re
temperature may cause large scale death
in
ef
of many trees, as they are sensitive to
nl
temperature stress and many species
.a
llo
may disappear.
Effects on human settlements and

society
Population would be displaced by the

inundation
of
low-lying
coastal
plains,deltas, and islands in the next

century if efforts to reduce greenhouse
gas accumulation in the atmosphere were
co
m
unsuccessful.
warming
will
ef
Global
re
e.
Effects on Food Production
reduce
crop
nl
in
production due to increased incidence of
llo
plant disease and pests, explosive growth
.a
of weeds and enhanced bastal rate of
respiration of plants. Global warming
could
produce
colder
temperature
in
Russia and northern Europe resulting in

the reduction of crop yields.
Effects on health
As the earth becomes warmer, the floods

in
carried
and
other
ef
mosquitoes
disease
e.
diseases,infectious
water-borne
re
increase
co
m
and droughts become more frequent,

by
disease
in
vectors.Temperature change may have
llo
nl
an impact on several major categories of

including
cardiovascular,
.a
diseases
cerebrovascular, and respiratory disease.
Solutions for global Warming
The following are some of the suggested

solutions to prevent global warming
a)
Reduction in the use of fossil fuels.
b)
Shifting
renewable
energy
co
m
to
resources that do not emit GHGs.

Development
of
for
ef
re
chlorofluorocarbons.
substitutes
e.
c)
Increase of the vegetation cover,
in
d)
nl
particularly forest for photosynthetic
llo
utilization of CO2.
Limiting population
.a
e)
f)Exploring other options to sequester
carbon.
g)
Adopting
technologies
sustainable.
practices
to
make
and
agriculture
h)
Reduce deforestation, adopt better
forest
management
practices
and
undertake afforestation to sequester
co
m
carbons.
i) Reduce deforestation, adopt better
management
practices
e.
forest
and
re
undertake afforestation to sequester
in
ef
carbons.
nl
j) Use fewer automobiles and public
llo
transportation immediate and drastic
.a
reduction of emissions.
SUSTAINABLE DEVELOPMENT
Development should be perceived as a

multi-dimensional process involving the
re-organization
economic
re-orientation
and
social
of
systems.
co
m
entire
and
Development is a continuous process
e.
which has to be extended over a long
re
period to lead a country to a stage of self-
in
ef
sustained growth or to a self-generating

idea
progress.
llo
the
nl
economy. It is an evolutionary product of

Progress
can
be
.a
achieved by generating wealth through
maximization of productivity of labour
and capital.
Friedman defined growth
as an expansion of the systems in one or
more dimensions without change in the
structure and development as also as an

innovative
process
leading
structural
transformation
to
of
the
social
with
change
co
m
systems. For eg; growth can be compared

in
body
whereas
refers
and
mind
to
together.
quantitative
in
Growth
body
re
in
ef
change
e.
development can be compared with the
nl
improvement in the scale of physical
llo
dimension while development signifies
.a
improvement in both physical and non-
physical dimension.
Development is the
conservation and management of the

natural
resources
orientation
of
base
and
technological
the
and
institutional change in such a manner so

as
to
assure
this
attachment
and
continued satisfaction of human needs of
co
m
present and future generations. Such

sustainable development in agriculture,
and
fisheries
e.
forestry
section
re
conservation of land , water, plant and
in
ef
animal genetic resources , technically
nl
appropriate , economically viable and
.a
llo
socially acceptable.
SUSTAINABILITY
The term sustainable
development refers to keeping an effort

going continuously or the ability to last
out and keep from falling. Sustainability
implies that human use of enjoyment of

the worlds natural and cultural resources
should not in, in overall terms , diminish
co
m
or destroy them. Thus sustainability is the

ability of an activity or development to
in
the
long
term
e.
continue
without
ef
llo
nl
in
which sustains it.
re
undermining that part of environment
term
sustainable
development
The
.a
SUSTAINABLE DEVELOPMENT
comes into common usage after the use

by
the
World
commission
on
Environment and Development (WCED)

headed by Dr. Geo Halem Brundland.
Sustainable
Development.Sustainble
development is now widely accepted as

a primary goal economic and social
activity.
Sustainble
that
the
primary
focus
of
co
m
suggest
development
environmental protection efforts on the
e.
international level should be to improve
re
the human condition. It also implies the
in
ef
integration of environmental and social
nl
concerns into all aspects of economic
.a
that
to
attain
development
environmental
protection
sustainable
inorder
states
llo
policy. Principle 4 of the Rio Declaration
constitute
an
integral
part
the
,
shall
of
the
development process and cannot be

considered in isolation from it.Injecting
sustainability concept in developmental
policies has broad implication for macro

and micro economics.Regarding macro
economic policies , the move towards
co
m
sustainable development requires for

example traditional national accounting
ef
re
over all qualities of life.
e.
system be changed to better measure
Equity
and
llo
nl
Responsibility.
in
Intergenerational
.a
Sustainable development as defined in
our common feature is closely associated
with the goal of intergenerational equity.

Sustainable development recognizes each
generations responsibility to be fair to
the
next
generation
by
leaving
an
inheritance of wealth no less than they

themselves have inherited.At a minimum,

meeting
this
goal
may
require
emphasizing the sustainale use of natural
co
m
resource for subsequent generation and

avoiding any environmental damage.
differentiated
e.
but
re
Common
ef
Responsibilities.
nl
in
Sustainable development was common
llo
challenge to all countries but because of

different
.a
the
development
path,
industrialized countries may be asked to
carry more of the immediate burden. The

developed
countries
acknowledged
the
responsibility
environmental
for
for
explicitly
the
the
degradation
central
present
and
its
remediation. To accomplish sustainable

development, a number of areas have to
be organized such as,
co
m
1) Improving energy efficiency
e.
2) Saving forests,
re
3) Safeguarding biodiversity,
water
resource
in
ef
4) Adopting
llo
nl
management,
.a
5) Managing coastal zones and oceans
fisheries.
6) Arresting pollution,
7) Planning cities better,
8) Accomplishing
revolution,
second
green
9) Stabilizing world population, and

10) Stopping
environmentally
destructive subsidies.
for
Sustainable
co
m
Guidelines
e.
Development
re
The following guidelines are suggested
in
ef
for achieving sustainable development:
llo
nl
1) Reduce the input of matter and
.a
energy resource in production process
to prevent excessive depletion and
degradation of planetary resources.

2) Use
energy
more
efficiently
and
economically
3) Shift
from
exhaustible
and
potentially polluting fossil and nuclear

fuels to less harmful renewable wind

energy or solar energy.
4) Avoid wasting non-renewable and
which
co
m
use them no faster than the rate at

renewable
resource
used
and
use
ef
5) Recycle
re
e.
sustainably can be sustained.

the
matter
nl
in
discarded as waste.
.a
resource
efficient
technology,
and
llo
6) Use locally adaptable, ecofriendly
which will use less of resources and
produce minimum wastes.
7) Utilise resources as per carrying

capacity of the environment.
8) Adoption
of
3-R
approach,
ie.,
reduce,reuse,recycle
approach
to
minimize scarce resource use.
co
m
9) Emphasise pollution prevention and

waste reduction instead of pollution
re
e.
clean-up and waste management.
in
highways,
nl
industry
major
etc
llo
dams,
ef
10) Study before the construction of

whether
mining,
they
can
.a
seriously damage ecosystems and bio-
diversity before they are begun.
11) Insist and implement the technique

of
pollution
control
of
toxic
and
hazardous gases in existing industries.

Global Environmental Concerns
1)
Population explosion enhances the
ecological demands which resulting

degradation on natural resouces.
Almost half of the worlds original
co
m
2)
expanse of tropical forests has been
e.
cleared.Within the next 30 to 50 years
re
there may be little of these forests
in
ef
left.
Millions of hectares of grass lands
nl
3)
been
llo
have
overgrazed,
some
.a
especially in Africa and the Middle
4)
East,have been converted to desert.

Between 25 % and 50 % of the
worlds wet lands have been drained,

built upon, or seriously polluted.
5)
An estimated 36,500 species of
plants and animals become extinct

each year, mostly because of human

activities.
6)
About 8.1 million square kilometers
forests,
co
m
of once-productive land (crop land,

grasslands)
have
become
e.
desert in the last 50 years. Each year
re
almost 61,000 square kilometers of
in
ef
new desert are formed.
Top soil is eroding faster than it
nl
7)
llo
forms on about 35 per cent of the
.a
worlds crop land. Crop productivity on
one-third of the earths irrigated crop
land has been reduced by salt build up

in top soil.
8)
Most of the wastes we dump into
the air, water, and land eventually end

up in the oceans. Oil slicks, floating
plastic debris, polluted estuaries and

beaches, and contaminated fish and
shellfish are visible signs that we are
the
oceans
as
largest trash dump.
worlds
In developing countries 61 per cent
e.
9)
the
co
m
using
re
of the people living in rural areas and
in
ef
26 per cent of urban dwellers do not
nl
have access to safe drinking water.
llo
Each year 5 million people die from
.a
preventable water diseases.
10) Water
underground
faster
than
precipitation.
is
withdrawn
reservoirs
it
is
from
(aquifers)
replenished
by
11) In the worlds population more than

one out of every four live in absolute
poverty.
the
surface
co
m
12) It is estimated that 70 per cent of

water
resources
are
e.
polluted and that in large stretches of
re
major rivers, water is not even fit for
in
ef
bathing, leave alone drinking.
nl
13) Environmental pollution although
llo
typically
associated
.a
industrialization,
concern
a
in
great
and
developing
growing
is
with
countries.
14) Use of fertilizers and pesticides

pollute the environment.
15) Over
the
past
few
years
air
pollution has been increasing as a

regional or global problem, not a local

one. Acid rain may fall to earth
thousands of miles away from the
co
m
places of emission of sulphur dioxide

world and nitrogen oxide.Thus the
e.
clouds generated in the developed
re
world may rain in the territory of the
in
ef
developing world.
nl
16) Emissions of carbon dioxide and
llo
other gases into the atmosphere from
.a
fossil fuel burning and other human

may
activities
raise
of
atmosphere
several
temperature
2050.This
the
would
the
average
earths
degrees
disrupt
lower
by
food
production and flood low-lying coastal

cities and croplands.
17) Chlorofluorocarbons
and
halons
released into the lower atmosphere

are drifting into the upper atmosphere
reacting
with
and
gradually
co
m
and
depleting ozone faster than it is being
e.
formed.
re
18) Atmospheric levels of heat-trapping

than
nl
higher
in
ef
carbons dioxide are now 26 per cent

the
pre-industrial
llo
concentration and continue to rise
.a
higher and higher with green house
effect.

Economics Notes Important Questions Definitions

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Economics Notes Important Questions Definitions

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Easy Economics Notes

1) Production: Any economic activity

human wants is known as production. The

economy. The level of production in any

economy is the best measure of its

people and the extent of technological

goods, automobiles etc and the work of

2) Consumption: The act of satisfying

and services are produced only because

human wants need to be satisfied. No one

will produce if there is no consumption.

The quality and quantity of consumption

addition made to the existing total stock

investment is coming from saving and

comes from employment. An economy

again in the production process. It adds to

4) Goods: Anything that can satisfy

economics. While services also satisfy

human wants, the difference is that goods

are tangible and visible but services are

intangible and invisible. Goods can be of

various types. They can be free goods or

economic goods, transferable, private or

power of a commodity to satisfy human

function of the consumers mind. Utility of

conditions and circumstances. There are

three main forms of utility-form utility,

place utility and time utility.

Value: The commodity which has utility

and possesses the condition of scarcity

and transferability, then it has value. For

example air has utility but it is abundant

and a free resource, it has no value in

television since it possesses utility and is

terms of money is called price. In modern

the value of a commodity is its price.

Wealth: Anything that has value is called

wealth. In economics; wealth does not

only refer to money, but to all goods that

have value. Wealth includes material

wealth and human wealth (education,

health, knowledge etc)

a particular point of time and income is

Gross Domestic Product (GDP)

When we take the sum total of values of

output of goods and services in the

incomes received from abroad, the figure

so obtained is called Gross Domestic

GNP may be defined as the aggregate

The concept of final goods and services

firms, and exclude raw materials, semiand

intermediary products. More clearly, all

sales to households, business investment

expenditures are obviously regarded as

final goods. In an open economy (an

economy which has economic relationship

with the rest of the world in the form of

economies are open economies), GNP

The value of all consumption goods

which are currently produced

The value of all capital goods

produced which is defined as Gross

real sense, here implies the increase