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Table of Contents
ECONOMICS
Page
Chapter Contents Month
No.
Chapter......1 Introduction to Micro Economics 1 June
VI
CH A P TER
1 Introduction to
Micro Economics
Learning Objectives
Introduction to Micro-Economics 1
The term or word ‘Economics’ comes from A science grows stage by stage,
the Ancient Greek oikonomikos (oikos and at every stage, its newer definition
means “households”; and, Nemein means emerges and a concept associated with it
“management”, “custom” or “law”). Thus, receives some special emphasis. However,
the term ‘Economics’ means ‘management the study of a subject is made possible
of households’. The subject was earlier when it possesses its clear cut definition
known as ‘Political Economy’, is renamed and boundary.
as ‘Economics’, in the late 19th century by Four definitions, each referring to
Alfred Marshall. particular stage of the growth of the subject
of Economics, are presented here. They are:
01. Smith’s Wealth Definition,
1.3 representing the Classical era;
Economics: Its Nature 02. Marshall’s Welfare Definition,
representing the Neo-Classical era;
The nature of a subject refers to its 03. Robbins’ Scarcity Definition,
contents and how and why they find representing the New Age; and,
a place in the subject. This nature is
04. Samuelson’s Growth Definition,
understood by studying the various
representing the Modern Age.
definitions given by the notable
economists. The existence of multiplicity
of the definitions makes some scholars 1.3.1 W
ealth Definition:
comment that a search for a clear definition Adam Smith
of Economics is an exercise in futility. (The classical era)
J. M. Keynes, for example, observes that
Adam Smith (1723-
“Political Economy is said to have strangled
1790), in his book “An
itself with definitions”. Their presence
Inquiry into Nature and
makes studying a subject interesting, Causes of Wealth of
exciting, enjoyable, or worthwhile. In fact, Nations” (1776) defines
their presence in a social science subject “Economics as the
is a clear sign of the growth of the science. science of wealth”. He
It indicates that there exists freedom for explains how a nation’s wealth is created
people associated with such as science and increased. He considers that the
to formulate fresh definitions. These individual in the society wants to promote
associates appreciate and make use of the his own gain and in this process, he is
opportunity afforded to them and come guided and led by an “invisible hand”. He
up with a plethora of definitions saying: states that every man is motivated by his
‘The more, the merrier’. Each definition self interest. This means that each person
represents a unique generalisation. A wide works for his own good.
Introduction to Micro-Economics 2
Smith favours the introduction attainment and with the use of the material
of “division of labour” to increase the requisites of well-being. Thus, it is on one side
quantum of output. Severe competition a study of wealth; and on the other, and more
in factories and society helps in bettering important side, a part of the study of man.”
the product. Supply force is very active The important features of
and a commodity is made available to Marshall’s definition are:
the consumers at the lowest price.
a. Economics does not treat wealth as
the be-all and end-all of economic
The publication of Adam Smith’s activities. Man promotes primarily
“The Wealth of Nations” in 1776, has welfare and not wealth.
been described as “the effective birth b. The science of Economics contains
of economics as a separate discipline”. the concerns of ordinary people who
are moved by love and not merely
guided or directed by the desire to get
Criticism
maximum monetary benefit.
For Smith, Economics consists of ‘wealth- c. Economics is a social science. It studies
getting’ activities and ‘wealth-spending’ people in the society who influence
activities. An undue emphasis is given to one another.
material wealth. Wealth is treated to be
an end in itself. This view leads him to Criticism
ignore human welfare as an essential part
of Economics. Smith gives his definition a. Marshall regards only material things.
when religious and spiritual values are He does not consider immaterial
held high. Ruskin and Carlyle regards things, such as the services of a doctor,
Economics as a ‘dismal science’, as it a teacher and so on. They also promote
teaches selfishness which is against ethics. people’s welfare.
b. In the theory of wages, Marshall ignores
the amount of money that goes as
1.3.2 W
elfare Definition: reward for the services of ‘immaterial’
Alfred Marshall services.
(The Neo- classical era)
c. Marshall’s definition is based on the
Alfred Marshall concept of welfare. But it is not clearly
(1842-1924) in his defined. Welfare varies from person
book “Principles of to person, country to country and one
Economics” (1890) period to another. Marshall clearly
defines Economics thus: distinguishes between those things
“Political Economy” or that are capable of promoting welfare
Economics is a study of of people and those things that are not.
mankind in the ordinary business of life; it Things like liquor that are not capable
examines that part of individual and social of promoting welfare but command
action which is most closely connected with the
Introduction to Micro-Economics 3
human wants. The method of getting co-relationship between cause and effect.
more is resorted to, rather than the Scientific laws derived are tested through
method of wanting less. experiments; and future predictions
Economics is concerned with activities are made. These laws are universally
of human being only. Human beings applicable and accepted. Economists like
are related to one another and the Robbins, Jordon and Robertson argue
actions of one member affect those that Economics is a science like Physics,
of the other members in the society. Chemistry etc., since, it has several similar
Hence, Economics is called a Human characteristics. Economics examines the
Science or Social Science. relationships between the causes and the
effects of the problems. Hence, it is rightly
The activities of rational or normal
considered as both an art and a science. In
human beings are the subject-matter
fact, art and science are complementary to
of Economics.
each other.
All human activities related to wealth
constitute the subject-matter of
Economics. Thus, human activities 1.4.3 E
conomics: Positive
not related to wealth (non-economic Science and Normative
activities) are not treated in Economics. Science
For example, playing cricket for
Positive science deals with what it is, means,
pleasure, mother’s child care.
it analyses a problem on the basis of facts and
examines its causes. For example, at the time
It is customary to clarify whether
of a price increase, its causes are analysed.
Economics is an art or a science; and if it
is a science, to observe its specific features.
Positive Normative
1.4.2 Economics is an Art and is,was,will be ought to, should
i. Economics as an Art
Can be Cannot be
Art is the practical application of proved proved
Positive Economics
a. An increase in money supply implies a
price-rise in an economy.
b. As the irrigation facilities and application
of chemical fertilizers expand, the Goods (also called ‘products’, ‘commodities’,
production of food-grains increases. ‘things’ etc)
c. An increase in the birth rate and a a. as material things, they are tangible;
decrease in the death rate reflect the b. have physical dimensions, i.e., their
rate of growth of population. physical attributes can be preserved
over time;
Normative Economics
c. exist independently of their owner;
a. Inflation is better than deflation. d. are owned by some persons;
b. More production of luxury goods is not e. are transferable;
good for a less-developed country.
f. have value-in exchange;
c. Inequalities in the distribution of wealth
and incomes should be reduced.
Kinds of Goods (and Services)
a. Free and Economic goods
1.5 Free goods are available in nature and in
Basic Concepts in abundance. Man does not need to incur
Economics any expenditure to own or use them. For
example air, and sun shine. Water was also
Like other sciences, Economics also an example in the past, but at present it has
has concepts to explain its theories. A exchange value. So it is not a free good.
complete and clear grasp of their meaning
Introduction to Micro-Economics 7
Introduction to Micro-Economics 8
Services
Along with goods, services are produced
and consumed. They are generally, possess
the following:
Intangible: Intangible things are
not physical objects but exist in
connection to other things, for
example, brand image, goodwill etc.
But today, the intangible things are
converted and stored into tangible
items such as recording a music piece
into a pen-drive. They are marketed as
a good.
Heterogeneous: Services vary across
b. Characteristics of Utility
regions or cultural backgrounds. They
can be grouped on the basis of quality 1. Utility is psychological. It depends
as inventories like assets. For example, A sick person derives utility from
it is useless to possess a ticket for a taking a medicine, but definitely, it
cricket-match once the match is over. is not providing pleasure;
It cannot be stored and it has no value- 4. Utility is personal and relative. An
in-exchange. individual obtains varied utility
from one and the same good in
different situations and places;
1.5.2 Utility
5. Utility is the function of the
a. Meaning intensity of human want. An
individual consumer faces a
‘Utility’ means ‘usefulness’. In
tendency of diminishing utility;
Economics, utility is the want-
satisfying power of a commodity 6. Utility is a subjective concept it
or a service. It is in the goods and cannot be measured objectively and
services for an individual consumer it cannot be measured numerically;
at a particular time and at a particular 7. Utility has no ethical or moral
place. significance. For example, a cook
Introduction to Micro-Economics 9
1.5.7 Equilibrium
1.5.8 Income
a. Stable Equilibrium Income represents the amount of
Prof. Stigler states that “equilibrium monetary or other returns, either earned
Growth of resources
A resource is in equilibrium when It is the purchasing power of income which
it gets fully employed and gets its is based on the rate of inflation.
maximum payment. Where, static
equilibrium is based on given and
constant
0 prices, quantities, E E1income,
1.6
X
Goods-X
technology, population etc. Economics: Its
Diagram 1.3 Methods, Facts,
Theories and Laws
Y
Market 1.6.1 M
ethods of Economics:
S
D Deduction and Induction
E Like any other science, Economics
price
1.6.2 E
conomics: Facts, Importance of Micro
Theories Economics
Using the methods, the economist To understand the operation of an
observes facts, such as, changes in the price economy
of a commodity. Similarly, the quantity To provide tools for economic
demanded of that commodity also varies. policies
And he observes these movements and
To examine the condition of
comes up with a theory that these two
economic welfare
movements are inversely related, i.e.,
when the price increases, the quantity Efficient utilization of resources
demanded of that commodity decreases Useful in international trade
and vice versa. Thus, he formulates his Useful in decision making
theory of demand.
Optimal resource allocation
He tests his theory by collecting Basis for prediction
further facts and when his theory stands the
Price determination
test of time and obtains universal acceptance,
the theory is raised to the status of a law.
A physical scientist carrying out
controlled experiments in his laboratory can
1.6.3 Nature of Economic Laws test the scientific laws very easily by changing
A Law expresses a causal relation between the conditions obtaining there. Changes
two or more than two phenomena. in Economics science cannot be brought
Marshall states that the Economic laws about easily. As a result, prediction regarding
are statement of tendencies, and those human behaviour is likely to go wrong. There
social laws, which relate to those branches are exceptions to the Law of Demand. Thus,
of conduct in which the strength of economic laws are not inviodable.
the motives chiefly concerned can be As unpredictability is invariably
measured by money price. associated with the economic laws. Marshall
In natural sciences, a definite result compares them to the laws of tides. Just as it
is expected to follow from a particular cannot be predicted and said with certainty
cause. In Economic science, the laws that a high tide would follow a low tide,
function with cause and effect. The unpredictability prevails in Economics.
consequences predicted by the data, Human behaviour is volatile. Economic
necessarily and invariably follow. laws are not assertive but they are indicative.
However, Economic laws are not The Law of Demand, for example, states that
as precise and certain as the laws in the other things remaining the same, the quantity
physical sciences. Marshall holds the demanded of a commodity increases, as its
opinion that there are no laws of economics price decreases and vice versa.
which can be compared for precision with The use of the assumption ‘other
the law of gravitation. things remaining the same’ (ceteris
Introduction to Micro-Economics 13
Introduction to Micro-Economics 15
Introduction to Micro-Economics 17
UNIT 1
Production possibilities
production possibilities are being shown
schedule
as point P1 P2 P3 P4 P5 & P6.
Production Quantity No of car
possibilities of food production
Y production Y
Production Possibilities Curve
in tonsCurve
Production Possibilities
A1
I 0 25
25 A
Goods-Y
Growth of resources
No of Cars
II 100 23
20
15 III 200 20
10 IV 300 15
5
V 400 8
0 0 E E1 X
100 VI200 300 400 500 500 X 0 Goods-X
Food Production
Diagram 1.3
Diagram
Diagram 1.21.2
This schedule suggests that if all resources
are thrown into the production of food,
a maximum of 500 tons of food can be Food
Y
production
Wants
produced, given the existing technology. If we assume thatMarket
innumerable production
S
If on the other hand, all resources are possibilities
D exist between any two-
Consumption Efforts
instead used for producing cars, 25 cars production possibilities
E
schedule, we
can be produced. In between these two get the production possibility curve P1
price
economy can produce, with the help of resources between the goods for the higher
given resources and the techniques of income group and the lower income
production. Points outside the production group and the goods for the defense and
possibility (e.g. point p) are unattainable the civilians. Since PPC is the locus of the
as society’s resources of production are combination of the goods the problem of
not sufficient to give output beyond choice will not arises when we choose any
the curve. Points lying inside the curve point on PPC.
like P₇ are attainable by the society but (ii) The Notion of Scarcity
at these points resources production
We can explain the notion of scarcity
are not fully employed. For example,
with the help of PPC. We know that every
if society is producing at point P 4 then
society possesses only a specific amount of
it can increased the production of food
resources, which can produce only limited
keeping the no of cars constant or it can
amount of output even with the help of
increase the production of cars keeping
best technology, economic scarcity of best
the food grain output constant or it can
fact of life. The production possibility
increased the output of both the goods
curve reflects the constraints imposed by
simultaneously.
the element of economic scarcity.
Shift of production possibility curve
(iii) Solution of central problems
The PPC shifts upward or downward due to:
The central problems of an economy can
1. The change in the supply of be explained with the help of PPC. The
productive resources and solution of problem of what to produce
2. The change in the state of technology. involves the decision regarding the choice
The production capacity of an economy of location on the production possibility
grows overtime through increase in curves. A production combination
resource supplies and improvement of represented by any point inside the
technology. This enables PPC to shift PPC indicates that the economy is using
upward from AE to A1E1 as shown in figure inefficient methods of production and
below. This outward shift of the PPC is the inefficient combination of resources.
basic feature of economic growth.
1.11 Conclusion
Uses of production possibility
This chapter has given a broad overview
curve
of economics. Moreover the present
Through the device of PPC can be used certain common characteristics of
for many analytical purposes. We shall economics definitions of Wealth,
discuss below some of its popular uses. Welfare, Scarcity & Growth free essential
(i) The problem of choice questions an economy must solve; what to
produce, how to produce and for whom
The problem of choice arise because of
to produce and also looked at division of
the given limited resources and unlimited
economics, distinguishing between Micro
wants, may relate to the allocation of
and Macroeconomics. It has introduced
Introduction to Micro-Economics 19
Introduction to Micro-Economics 20
MODEL QUESTIONS
2.
The basic problem studied in 6. The equilibrium price is the price at
Economics is which
a. Unlimited wants a. Everything is sold
b. Unlimited means b. Buyers spend their money
c. Scarcity c. Quantity demanded equals
d. Strategy to meet all our wants quantity supplied
d. Excess demand is zero
3. Microeconomics is concerned with
a. The economy as a whole 7. Author of “An Inquiry into the Nature
and Causes of Wealth of Nations”
b. Different sectors of an economy
a. Alfred Marshall
c. The study of individual economic
units behaviour b. Adam Smith
4.
Which of the following is a 8. “Economics studies human behaviour
microeconomics statement? as a relationship between ends and
a. The real domestic output increased scarce means which have alternative
by 2.5 percent last year. uses” is the definition of economics of
Introduction to Micro-Economics 21
Introduction to Micro-Economics 22
Answers Part-A
1 2 3 4 5 6 7 8 9 10
c c c c d c b a b d
11 12 13 14 15 16 17 18 19 20
b d d a a a d c b a
21. What is meant by Economics? 25. Name any two types of utility.
28. Explain the scarcity definition of 31. What are the different features of
Economics and assess it. services?
29. What are the crucial decisions involved 32. What are the important features of utility?
in ‘what to produce?’
33. Distinguish between microeconomics
30. Explain different types of economic and macroeconomics.
activities.
34. Compare positive economics and
normative economics.
Introduction to Micro-Economics 23
35.
Compare and contrast various 37. Elaborate the nature and scope of
definitions of Economics. Economics.
36. Explain various Steps of Deductive 38. Explain basic problems of the economy
and Inductive methods. with the help of production possibility
curve.
ACTIVITY
Meet ten of your class-mates and prepare a Report on the
advantages of studying Economics.
References
Introduction to Micro-Economics 24
CH A P TER
2 Consumption Analysis
Learning Objectives
2.1 2.2
Introduction Human Wants
Consumption Analysis 26
Definition Illustration
Marshall states the law as, “the additional The law can be explained with a simple
benefit which a person derives from a illustration. Suppose a consumer wants to
given increase of his stock of a thing, consume 7 apples one after another. The
diminishes with every increase in the utility from the first apple is 20. But the
stock that he already has”. utility from the second apple will be less
than that of the first (say 15), the third less
Assumptions than that of the second (say 10) and so
1. Utility can be measured by cardinal on. Finally, the utility from the fifth apple
numbers such as 1, 2, 3 and so on. becomes zero and the utilities from sixth
and seventh apples are negative (or disutility
2. The marginal utility of money of the
or disliking). This tendency is called the
consumer remains constant.
Consumption Analysis 27
“The Law of Diminishing Marginal Utility’. In Table 2.1, we find that the total utility
This is illustrated in table 2.1. goes on increasing but at a diminishing rate.
Table 2.1 The Law of On the other hand, marginal utility goes
Diminishing Marginal Utility on diminishing. When marginal utility
becomes zero, the total utility is maximum
Units of Total Marginal
and when marginal utility becomes
Apple Utility Utility
negative, the total utility diminishes.
1 20 20
2 35 15 (35-20) Criticism
3 45 10 (45-35) 1. Utility cannot be measured
4 50 5 (50-45) numerically, because utility is
5 50 0 (50-50) subjective.
6 45 -5 (45-50) 2. This law is based on the unrealistic
assumptions.
7 35 -10(35-45)
3. This law is not applicable to
indivisible commodities.
Y Y
Y
Q Exceptions to the Law
50 M P
4. Music and
A1 Poetry and 5. Readings
TU / MU
30 B1
MU of Apple
B TU
20
ImportanceA3or Application of
10
C the Law of DMU
1 2 3 4 5 6 7 X
0
Units 1. The Law of DMU is one of the
Zero Utility
Negative Utility
MU fundamental
A A2 laws Nof consumption.
X 0 B2 B1
Diagram 2.1
It has applications
Units of Apple in several fields of Units of O
study.
Diagram 2.2
Consumption Analysis 28
2. This law is the basis for other Equilibrium”, “Gossen Second Law” and
consumption laws such as Law of “The Law of Maximum Satisfaction”.
Demand, Elasticity of Demand,
Consumer’s Surplus and the Law of Definition
Substitution etc. Marshall states the law as, “If a person has
3. The Finance Minister taxes a more- a thing which he can put to several uses, he
moneyed person more and a less- will distribute it among these uses in such a
moneyed person less. When a way that it has the same marginal utility in
person’s income rises, the tax-rate all. For, if it had a greater marginal utility
rises because the MU of money in one use than another he would gain by
to him falls with every rise in his taking away some of it from the second use
income. Thus, the Law of DMU is the and applying it to first”.
basis for progressive taxation.
Assumptions
4. This law emphasises an equitable
distribution of wealth. The MU of 1. The consumer is rational in the
money to the more-moneyed is low. sense that he wants to get maximum
Hence, redistribution of income satisfaction.
from rich to poor is justified. 2. The utility of each commodity is
5. Adam Smith explains the famous measurable in cardinal numbers.
“diamond-water paradox”. Diamond 3. The marginal utility of money
is scarce, hence, its MU is high and remains constant.
its price is high, even though it is 4. The income of the consumer is given.
not very much needed. Water is 5. There is perfect competition in the
abundant, hence, its MU is low and market
its price is low, even though it is very
6. The prices of the commodities are given.
much essential.
7. The law of diminishing marginal
utility operates.
2.6
Explanation
The Law of
The law can be explained with the help of
Equi-Marginal Utility
an example. Suppose a consumer wants to
spend his limited income on Apple and
The law of diminishing marginal utility
Orange. He is said to be in equilibrium,
is applicable only to the want of a single
only when he gets maximum satisfaction
commodity. But in reality, wants are
with his limited income. Therefore, he
unlimited and these wants are to be
will be in equilibrium, when,
satisfied. Hence, to analyze such a situation,
the law of diminishing marginal utility Marginal utility of Apple
is extended and is called “Law of Equi- Price of Apple
Marginal Utility”. It is also called the “Law Marginal utility of Orange
K
of Substitution”, “The Law of Consumers Price of Orange
Consumption Analysis 29
Y Y
M P
MUm of Orange
B3
A1 B1
MUm of Apple
A3
0 A A2 N X 0 B2 B1 Q X
Units of Apple Units of Orange
Diagram 2.2
Substitution”. Eg. For Apple 50/25; for this entire income (i.e., ₹14) on Apple and
Orange 20/4. In such situation, spending Orange. The price of an Apple is ₹2 and the
more money on orange is wiser. price of an Orange is ₹1. This law can be
illustrated with the help of Table 2.2
Illustration
This Law can be illustrated with the help of If the consumer wants to attain
table 2.2. Let us assume that the consumer maximum utility, he should buy 5 units of
has a given income of ₹14. He wants to spend
Consumption Analysis 30
apples and 4 units of oranges, so that he rather than go without the thing, over that
can get (88+54) 142 units. which he actually does pay is the economic
MUA MUo 10 5 measure of this surplus satisfaction. This
Here = ie, = =5 may be called consumer’s surplus”.
PA PO 2 1
A2 A3 and B2 B3 lines have not been
Assumptions
used for explanation.
1. Marshall assumed that utility can be
Diagrammatic Illustration measured.
In diagram 2.2, X axis represents the 2. The marginal utilities of money of
amount of money spent and Y axis the consumer remain constant.
represents the marginal utility of Apple 3. There are no substitutes for the
and Orange respectively. If the consumer commodity in question.
spends ₹10 on Apple and ₹4 on Orange, 4. The taste, income and character of
the marginal utilities of both are equal the consumer do not change.
i.e.,AA 1=BB 1 (5=5). Hence, he gets
5. Utility of one commodity does
maximum utility.
not depend upon the other
Criticisms commodities.
Consumption Analysis 31
UNIT 2
Potential Price (Marginal = Potential Price –
Units of commodity (Apple) Price
Utility) Actual Price
1 6 2 6-2=4
2 5 2 5-2=3
3 4 2 4 - 2= 2
4 3 2 3-2=1
5 2 2 2-2=0
Total 20 10 10
where, Y
Y
TU = Total Utility, P = Price and
Y
D 5
Q= Quantity of the commodity
P 4
The Consumer’s Surplus
B3 measurement of consumer’s
MU of Apple
Price
Price (in ₹)
B1
In Table 2.3 the consumer is willing C
2
P
to pay rupees 6, 5, 4, 3 and 2 for purchasing D1 1
the successive units of apples. Hence, he
is willing to pay (Potential Price Total 0
Utility) ₹20 for apples. But, he actually 0 Q X
N X pays
0 ₹10 B2 (₹2 Q
B1 x 5)) for getting 5 apples.
X Quantity Demanded
Hence, Units of Orange Diagram 2.3
DiagramConsumer’s
2.2 Surplus = Total Utility (Actual
Price x units of
Commodity) Hence, actual price is OPCQ (OP x OQ).
Potential Price (Total Utility) is ODCQ.
= TU – (P x Q)
Therefore,
= 20 –(2 x 5)
Consumer’ Surplus = ODCQ – OPCQ
= 20-10 = 10. = 20-10 = 10
The concept of Consumer’s Surplus = PDC (the shaded area) Y
can also be explained
d' d with the help of a d d'
Y
diagram. Criticism
Y
1. Utility cannot be measured, because
In the diagram 2.3, X axis shows the utility is
B A A subjective.
B
amount P1 demanded and Y axis represents P
Price
P1
2. Marginal utility of money does not
the price. DD1 shows the utility which
Price
remain constant.
Price
Chapter-02.indd 32
Diagram 2.8 20-02-2020 11:46:23
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2.8 Definitions
Law of Demand The Law of Demand says as “the quantity
demanded increases with a fall in price
Demand is essential for the creation, survival and diminishes with a rise in price”.
and profitability of a firm. “Demand in –Marshall
economics is the desire to possess something “The Law of Demand states that people will
and the willingness and the ability to pay a buy more at lower price and buy less at higher
certain price in order to possess it”. prices, other things remaining the same”.
–J. Harvey - Samuelson
D 2.8.4 Determinants of
represents the Pprice of the commodity.
3
DD is the demand curve, which has a Demand
negative slope i.e., slope downward from 1. Changes in Tastes and Fashions: The
D
left to right which
O indicates that when demand for some goods and services
Q X
X
nded Consumption Analysis
Quantity Demanded
34
.9 Diagram 2.10
Chapter-02.indd 34 20-02-2020 11:46:24
Y
www.tntextbooks.in Q
50
40
TU / MU
30
is very susceptible to changes in tends to decrease B the demand TU
20
tastes and fashions (if other things remain constant).
10
2. Changes in Weather: An unusually C
Price
periods of boom and prosperity, the E
Price
P3
P1
demand for all commodities tends
to increase. On the contrary, during D
times of depression there is a general
O Q1 Q2 X
slackening of demand. O
Quantity
7. Advertisement: In advanced
capitalistic countries advertising is a Diagram 2.6
powerful instrument increasing the
In the diagram 2.6, DD is the demand
demand in the market.
curve which slopes upwards from left to
8. Changes in Income: An increase right. It shows that when price is OP1,
in family income may increase the OQ1 is the demand and when the price
demand for durables like video risesYto OP2, demand also extends to OQ2. Y
recorders and refrigerators. Equal e >1 D
distribution of income enables poor P1
P1
Reasons for Exceptional
2.8.6
to get more income. As a result P2
Demand Curve
consumption level increases. D P2
Giffen Paradox: The Giffen good or
Price
1.
Price
Price
C
Price
E
Price
gives P3
P1 social distinction or prestige.
For example, diamonds.
D D
3. Ignorance: Sometimes, the quality of
the O
commodity isQjudged Q2 by it’s
X price. O Q1 Q2 Q3
1
X
ConsumersQuantity
think that the product is
Quantity
superior if the price is high. As such
Diagram 2.6 Diagram 2.7
they buy more at a higher price.
4. Speculative effect: If the price of the to OP1 (movement from A to B) quantity
commodity is increasing then the demanded decreases to OQ1.
consumers will buy more of it because
of the expectation that it will increase 2.8.9 Shift in the Demand
Y
still
Y further. Eg stock markets. Curve
e >1 D e <1
5. Fear of shortage: During times of A shift
P1 in the demand curve occurs with a
P1
emergency or war, people may expect change in the value of a variable other than
P2
shortage of a commodity and D so buy its price
P2 in the general demand function.
more. An increase or decrease in demand due to
Price
Price
Commodity Y
Diagram 2.17
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Y
Y
d'' d d d''
d d d d' d Y
Y d' d Y d
Y Y
Y Y
B A A B
B A A B P
Price
P1 B A P1 A B P
Price
P1 P1 P
Price
P1 P1
Price
Price
Price
Price
Price
Price
d d''
d d
d d'
D d'' d O
D d d O
D d' d O
O O
X O Q2 Q1 X O Q1 Q2 Q
X O Q2 Q1 X O Q1 Q2 X
X Q2 QuantityQDemanded X Q1 Q2 X
Quantity
1
Demanded Quantity Demanded X
Quantity Demanded Quantity Demanded
Quantity Demanded
Diagram
Diagram 2.8
Diagram
Diagram 2.82.82.8
‘Extension’ and ‘Contraction’ of demand follow a change in price. Increases and
decreases in demand take place when price remains the same and the other factors bring
about demand changes.
Y
Y
Y Y
Y
Y R ep=α
2.9 R
R ep=α
ep=α
P0
e =1 P0
Elasticity
P0 Dof Demand
D e =1
e =1 Upper
D Upper ep>1
P1 Upper Segment ep>1
P1 Segment
ep>1 Q
Price
P Segment ep=1
Price
Price
1
Q ep=1p
Price
A
CommoditY Y
oditYYY
CommoditY Y
demand
CommoditY
Comm
C A IC2
“Elastic” when the quantity
C
C
A demanded
A
IC2
IC2
increases by a large amount due toB a little IC
IC11 IC
B IC1 IC
fall in the
0 price and decreases by a large
B
0
IC
X 0 Commodity
Commodity X
X X 0 Commodity X
B
B X
X
XX X 0 Commodity X X
X 0 Commodity XB X
X
Consumption Analysis 37 Commodity X
Diagram 2.18 Diagram
Diagram 2.19
Diagram
Diagram 2.18 2.18 Diagram 2.19 2.19
Pr
D1 1
D
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0 1 2 3 4 5 X
X Quantity Demanded (in units)
d
2.9.2 Levels or Diagram
Degrees2.4 of Price D
Elasticity of Demand Y Ep = o
Price
demand, which refers to the degree of
responsiveness of demand to the change in P3
Ep = P1
Diagram 2.10
P2
Price
P D
i.e. quantity OQ remains unchanged
Price
P D P3
Price
Budget Line
www.tntextbooks.in
Price
P1 R1
D D
O Q1 Q2 X O Q0 Q1
X
Quantity Demanded Quantity Demanded
Diagram 2.12 Diagram 2.13
Shape of the
Numerical Value Terminology Description
Demand curve
ep = ∞ Perfectly Change in demand is infinite at a Horizontal
elastic given price
ep = 1 Unitary % Q % P Rectangular
elastic Hyperbola
Consumption Analysis 40
Consumption Analysis 41
Consumer’s Surplus 4 1
D(A)
Table 2.6 Total Outlay Method3 L
Price
Price (in ₹)
O
lower segment 2 4 6 8 1
Price
A B higher price.
D
segments of the line to thePright and to
Price
P1 P3
the left of the particular point. 2. Production: Producers generally
Price
ep>1
Segment helps the Rgovernment in formulating
ORANGE
3
Price
Q ep=1
p tax
2
policies.S For example, for
ep<1
S imposing tax on aTcommodity.
1
Lower Segment ep=0 6. Nationalization: The ICconcept
0
of elasticity of3 demand enables
0 M X 1 2 X 0
Quantity
the government
APPLE to decide over
Diagram 2.14 nationalization
Diagramof2.15
industries.
Consumption Analysis 42
Y
Chapter-02.indd 42 Y Y
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A A
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Assumptions
1. The consumer is rational and his aim
is to derive maximum satisfaction.
2. Utility cannot be cardinally
measured, but can be ranked or
compared or ordered by ordinal
F.W.EdgeWorth (English Economist) number such as I, II, III and so on.
and Vilfredo Pareto (Italian Economist)
3. The Indifference Curve Approach is
criticised the Cardinal Utility Approach.
based on the concept “Diminishing
They assumed that utility cannot be
Marginal Rate of Substitution”.
measured absolutely, but can be compared
or ranked or ordered by ordinal numbers 4. The consumer is consistent.
such as I, II, III and so on. Edgeworth first This assumption is called as the
developed a more scientific approach to assumption of transitivity. If the
the study of consumer behaviour, known consumer prefers combination A to
as “Indifference Curve Approach” in1881. B and B to C, then he should prefer
In 1906, Vilfredo Pareto modified the A to C. If A>B and B>C, then A>C.
“Edgeworth Approach”. Again J.R.Hicks and
R.G.D.Allen refined the Indifference Curve An Indifference Schedule
Approach in 1934. Later, in 1939 J.R.Hicks An indifference schedule may be defined
in his book “ Value and Capital” gave a final as a schedule of various combinations
shape to this “Indifference Curve Analysis”. of two commodities which will give the
same level of satisfaction. In other words,
Indifference Schedule is a table which
The theory of indifference curve was
shows the different combination of two
given by J R Hicks and RJD Allen, ‘A
goods that gives equal satisfaction to the
reconsideration of the theory of value’,
consumer.
Economics in 1934.
Consumption Analysis 43
O X O 6 8 10 X O
D
P3
2.12
2.11 An Indifference Map
An Indifference Curve D
O
Q One can draw
X several indifference
X
Quantity Demanded curves each representing an indifference
Quantity Demanded
Y IC
schedule. Hence, an Indifference Map is a
Diagram 2.9 R Diagram 2.10
20 family or collection or set of indifference
curves corresponding to different levels
S
of satisfaction. The Indifference Map is
ORANGE
15
R
ORANGE
3
Different combinations of two
2 S
commodities (as foundT
in Indifference
IC3
Schedule) can be presented in a diagram.
1 IC2
IC
Then consumer gets different points IC1
0
X and when 1such2 points
3 are connected,
X 0 X
APPLE
a curve is obtained. The said curve is APPLE
Diagram 2.15
called as “Indifference Curve”. Therefore, Diagram 2.16
Consumption Analysis 44
Price
E
Price
P3
P1
In D
the diagram 2.16, the indifference Since y decrease as X increases, the
D
Curves IC1, IC2 and IC3 represent the change in Y is negative i.e., –Δy, so the
Indifference
O Map,QUpper
1
Q2 IC representing
X equation
O is Q1 Q2 Q3 X
higher levelQuantity
of satisfaction compared to ∆Y
Quantity
MRS =− and
lower IC. xy
∆X
Diagram 2.6 Diagram 2.7
Marginal Rate of Substitution However, as with price elasticity of
The shape of an indifference curve provides demand the convention is to ignore the
useful information about preferences. minus sign in
Indifference curve replaces the concept ∆Y
MRSx y =
isMRS
of marginal utility with the concept of the Y ∆X
Y
marginal rate of substitution.
e >1 D e <1
According to Leftwich “The P
2.14
P1 1
marginal
P2 rate of substitution of X for
Properties of the
Y (MRSxy) is defined as the D maximum P2
Indifference Curves
amount of Y the consumer is willing to give Price
Price
Y Y Y
CommoditY Y
Commodity Y
Commodity Y
B
B
A B
A A
0 0
Commodity X X Commodity X X 0 Commodity X X
Diagram 2.17
Consumption Analysis 45
Pr
Price
Price
Q ep=1
Price
Price
www.tntextbooks.in p
d d' ep<1
S
D
D d' d Segment O
Lower ep=0
O Q
Q2 Q1 O Q1 Q
X X 0 M
O consumer
Q Q1 is to stay on the same level of At the point of2 intersection,
X
Quantity
C=B X
Quantity Demanded X Quantity
on IC1 Demanded
0
satisfaction.
Quantity (a necessary consequence
Demanded and C=A on IC 2. So A=B
of theDiagram
non satiety Diagram
IC and2.14
2.13postulate). Diagram 2.8 whereas, A is in upper B is on
The curves that do not have negative lower IC. This is not possible.
slopes such as those shown in diagram 2.17 4. Indifference curves do not touch
cannot be indifference curves, in all three the horizontal or vertical axis.
cases combination B is clearly preferable Y
Y
to combination A.
Y Y
R ep=α
2. Indifference
P0 Curves are convex to A
e =1
the origin
CommoditY Y
D Upper
ep>1
CommoditY Y
Segment
Indifference
P1 curves are not only
Price
Q ep=1
Price
IC1 2.15
B IC
0 Commodity X Price line
0 or Budget line B
X X Commodity X X
Consumer Equilibrium
GLOSSARY
The consumer reaches equilibrium at the
point where the budget line is tangent on Consumption: The use of goods and
the indifference curve. services for satisfying
one’s wants.
Y
A
Demand: Demand is desire
backed by sufficient
purchasing power and
willingness to spend
N T on it.
Tea
Consumption Analysis 47
Consumption Analysis 48
ICT CORNER
Inverse Relation Between Price and Consumer’s Surplus
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear. In
this several work sheets for Economics are given, Open the worksheet
named “Inverse Relation Between Price and Consumer’s Surplus”
• This work sheet is to give an Idea about the Consumer’s Surplus
and an Inverse relation. In this worksheet Green coloured triangle
is the Consumer’s Surplus. The vertical line shows the price and the
Horizontal line shows the Quantity.
• Move the point C so that the triangle area is increased when the
price is decreased and the triangle area is decreased when the price
increases. This is called the Inverse relation between the price and
Consumer’s Surplus.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
Consumption Analysis 49
MODEL QUESTIONS
1. Pick the odd one out 6. Gossen’s first law is known as.
a. Luxuries a. Law of equi-marginal utility.
b. Comforts b. Law of diminishing marginal
c. Necessaries utility
5. When marginal utility reaches zero, 10. Indifference curve approach is based
the total utility will be on
a. Minimum a. Ordinal approach
b. Maximum b. Cardinal approach
c. Zero c. Subjective approach
d. Negative d. Psychological approach
Consumption Analysis 50
11. The concept of elasticity of demand 16. Indifference curve was first introduced
was introduced by by
a. Ferguson a. Hicks
b. Keynes b. Allen
c. Adam Smith c. Keynes
d. Marshall d. Edgeworth
Consumption Analysis 51
Answers (Part- A)
1 2 3 4 5 6 7 8 9 10
d a c a b b a b d a
11 12 13 14 15 16 17 18 19 20
d b a d c d a a a d
Part-B
Answer the following questions in one or two sentences.
28. Describe the feature of human wants. 32. Distinguish between extension and
contraction of demand.
29. Mention the relationship between
marginal utility and total utility. 33. What are the properties of indifference
curves?
30. Explain the concept of consumer’s
equilibrium with a diagram. 34.
Briefly explain the concept of
consumer’s equilibrium.
31. Explain the theory of “consumer’s
surplus” .
35. Explain the law of demand and its 37. Explain the law of Equi-marginal
exceptions. utility.
36. Elucidate the law of diminishing 38. What are the methods of measuring
marginal utility with diagram. Elasticity of demand?
Consumption Analysis 52
ACTIVITY
1. Prepare a budget line on the basis of your family income to
purchase any two commodities.
2. Visit a vegetable market in your locality and write a report about
the level of price and demand for a particular commodity over
a period of time.
References
Consumption Analysis 53
CH A P TER
3 Production Analysis
Learning Objectives
Production Analysis 54
3.2
Features of the Factors of
Production
Production Analysis 56
Production Analysis 57
the factors involved in the process of The short-run is the period where
production. some inputs are variable, while others are
Risk-taking and Uncertainty-bearing: fixed. Another feature is that firms do not
There are risk-taking and uncertainty- enter into the industry and existing firms
bearing obstacles. Risks may be insured may not leave the industry.
but uncertainties cannot be insured. Long run, on the other hand, is the
They reduce the profit. period featured by the entry of new firms
to the industry and the exit of existing
3.3 firms from the industry.
Production Function In general, Production function
may be classified into two
Production function refers to the Short-run Production Function as
relationship among units of the factors illustrated by the Law of Variable
of production (inputs) and the resultant Proportions.
quantity of a good produced (output).
Long-run Production Function as
According to George J. Stigler, explained by the Laws of Returns to Scale.
“Production function
is the relationship
between inputs of 3.4
productive services Law of Variable
per unit of time and Proportions
outputs of product per
unit of time.” The law states that if all other factors are fixed
Production and one input is varied in the short run, the
function may be total output will increase at an increasing
expressed as: Q = f (N, L, K, T) Where, rate at first instance, be constant at a point
Q = Quantity of output, N = Land; L = and then eventually decrease. Marginal
Labour; K = Capital; and T = Technology. product will become negative at last.
Depending on the efficiency of the According to G.Stigler, “As equal
producer, this production function varies. increments of one input are added, the
The function implies that the level inputs of other productive services being
of output (Q) depends on the quantities of held constant, beyond a certain point,
different inputs (N, L, K, T) available to the resulting increments of product will
the firm. decrease, i.e., the marginal product will
Short-run Production and Long diminish”.
run Production
Assumptions
In Micro economics, the distinction
between long run and short run is made on the The Law of Variable Proportions is based
basis of fixed inputs that inhibit the production. on the following assumptions.
Production Analysis 58
Only one factor is variable while to the change in the units of the input. It is
others are held constant. expressed as
All units of the variable factor are
homogeneous. MP=ΔTP/ΔN
It is the result of the total product divided The Law of Variable Proportions is
by the total units of the input employed. explained with the help of the following
In other words, it refers to the output per schedule and diagram:
unit of the input. In table 3.1, units of variable factor (labour)
Mathematically, AP = TP/N are employed along with other fixed factors
of production. The table illustrates that there
Where,
AP= Average Product Y
TP= Total Product 18
TPL 16 TPL
14 Stage I Stage III
N= Total units of inputs employed
Output
APL 12 A
10
MPL 8
Marginal Product (MP) 6
4
It is the addition or the increment made to 2 APL
0
the total product when one more unit of the -2 1 2 3 4 5 6 7 x
L
Production Analysis 59
1 2 2 2
2 6 4 3 I
3 12 6 4
4 16 4 4
5 18 2 3.6 II
6 18 0 3
7 16 -2 2.28 III
are three stages of production. Though total tendency of total product to increase
product increases steadily at first instant, at an increasing rate stops at the point A
constant at the maximum point and then and it begins to increase at a decreasing
diminishes, it is always positive for ever. rate. This point is known as ‘Point of
While total product increases, marginal Inflexion’.
product increases up to a point and then
decreases. Total product increases up to Stage II
the point where the marginal product is
In the second stage, MPL decreases up
zero. When total product tends to diminish
to sixth unit of labour where MPL curve
marginal product becomes negative.
intersects the X-axis. At fourth unit of
In diagram 3.1, the number of labor MPL = APL. After this, MPL curve
workers is measured on X axis while is lower than the APL. TPL increases at a
TPL, APL and MPL are denoted on decreasing rate.
Y axis. The diagram explains the three
stages of production as given in the above
Stage III
table.
Third stage of production shows that the
Stage I sixth unit of labour is marked by negative
MPL, the APL continues to fall but remains
In the first stage MPL increases up to
positive. After the sixth unit, TPL declines
third labourer and it is higher than the
with the employment of more units of
average product, so that total product
variable factor, labour.
is increasing at an increasing rate. The
Production Analysis 60
In the long- run, there is no fixed In this case if all inputs are increased
factor; all factors are variable. The by one percent, output increase by
laws of returns to scale explain the more than one percent.
relationship between output and the (2) Constant Returns to Scale:
scale of inputs in the long-run when In this case if all inputs are increased
all the inputs are increased in the same by one percent, output increases
proportion. exactly by one percent.
(3) Diminishing Returns to Scale:
Assumptions
In this case if all inputs are increased
Laws of Returns to Scale are based on the by one percent, output increases by
following assumptions. less than one percent.
All the factors of production (such as
land, labour and capital) are variable
but organization is fixed. Diagrammatic Illustration
There is no change in technology. The three laws of returns to scale can be
There is perfect competition in the explained with the help of the diagram
market. below.
Outputs or returns are measured in In the diagram 3.2, the movement
physical quantities. from point a to point b represents
Production Analysis 61
d
K, Unit of capital
8
q=8
4 c
q=6
2 b q=3
1 a q=1
0 1 2 4 8
Labour
Diagram 3.2
iso-quant curves. The two words ‘Iso’ Iso-quants are based on the
and ‘quant’ are derived from the Greek following assumptions.
language, meaning ‘equal’ and ‘quantity’
1. It is assumed that only two factors
respectively. In our presentation only two
are used to produce a commodity.
factors, labour and capital are used.
2. Factors of production can be divided
In Economics, an iso-quant is a into small parts.
curve drawn by joining the combinations
3. Technique of production is constant.
of changing the quantities of two or more
inputs which give the same level of output. 4. The substitution between the two
Isoquants are similar to indifference factors is technically possible. That
curves. is, production function is of ‘variable
proportion’ type rather than fixed
An iso-quant curve can be defined
proportion.
as the locus of points representing various
combinations of two inputs capital and 5. Under the given technique, factors
labour yielding the same output. The iso- of production can be used with
quant is also called as the “Equal Product maximum efficiency.
Curve” or the “Product Indifference
Curve” Iso-quant Schedule
Let us suppose that there are two
3.8.1 Definition of Iso-quant factors namely., labour and capital. An
According to Ferguson, “An iso-quant is Iso-quant schedule shows the different
a curve showing all possible combinations combinations of these two inputs that
of inputs physically capable of producing a yield the same level of output. It is given
given level of output” below.
Production Analysis 64
3.8.4 Properties of Iso-quant
Y
Iso-quant curve Curve
30 Y
Capital
22
A
16 K4
B
Capital
12 K3
10 IQ=400 C
K2
D
K1
6 8 10 IQ
0 2 4 X
Labour
0 L4 L3 L2 L1 X
Diagram 3.3 Labour
Diagram 3.5
Production Analysis 65
Y Y
Capital
Capital
Capital
Isoquant curve IQ4
IQ3
IQ2
30 IQ1
Capital
Capital
Capital
22 0 0 0
X X X
16 Labour Labour Labour 400 Unit
12 300 Unit
10 IQ=400 200 Unit
Diagram 3.6 100 Unit
0 2 4 6 8 10 Y X
Labour
Labour
Diagram 3.4
Diagram 3.3
unit of labour goes on decreasing when upper iso-quant curve implies the use
the iso-quant is convex to the origin. of more factors than the lower isoquant
3. Non inter-section of Iso-quant curve.
curves.
Y Y
IQ2 IQ1 IQ3
Y
IQ1
Capital
A
Capital
c
Capital
A
c 300 Units
300 Units 300 Unit
B
B 100 Units 100 Unit
100 Units
0 Labour X 0 X
Labour
Labour X
Diagram 3.7 Diagram 3.8
Diagram 3.7
For instance, point A lie on the iso-
quants IQ1 and IQ2. But the point C The arrow in the figure shows
shows a higher output and the point an increase in the output with a right
B shows a lower level of output IQ1. and upward shift of an iso-quant
If C=A, B=A, then C=B. But C>B curve.
which is illogical. 5. Iso-quant curve does not touch ES>1
Y Y
4. An upper iso-quant curve represents either X axis or
S Y axis.
C
a higher level of output. 5 No iso-quant curve
a touches the X axis or A
Higher IQ 2 show higher outputs Y axis because in IQ1, only capital is used,
Price
4 b
and lower IQ1 show lower outputs, for and in IQ2 only labour is used.
3 c
Price
o B D
Production Analysis 66
2 d
Y
1 e
E Chapter-03.indd 66 20-02-2020 11:48:12
C
R IQ(500 Units) S
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C
combinations of inputs which shows the 2 Iso-cost line
same amount of cost. The iso-cost line gives D
1
information on factor prices and financial E
resources of the firm. It is otherwise called
0 2 4 6 8 10 12 X
as “iso-price line” or “iso-income line”
Labour
or “iso-expenditure line” or “total outlay
curve”. Diagram 3.10
Production Analysis 67
0 Symbolically, 0
At point of tangency, the iso-quant
Labour
X X X
4KLabour
+ 0L= ₹.120 curve must be convex to the origin or
Diagram 3.7
3K + 3L= ₹.120 MRTSLk must be declining.
Diagram 3.6
2K + 6L= ₹.120
When the outlay and prices of two factors,
1K + 9L= ₹.120, and namely, labour and capital are given,
0K + 12L= ₹.120. producers attain equilibrium (or least cost
Thus, all the combinations combination of factors is attained by the
A, B, C, D and E cost the firm) where the iso-cost line is tangent to
an iso-product curve. It is illustrated in
same total expenditure.
the following Diagram 3.11.
From the figure 3.10, it is shown that the
costs to be incurred on capital and labour Y
are represented by the triangle OAE. The
Units of a capital
B P3
line AE is called as Iso-cost line. H
C P2
P1 K
Isocost line
3.10
D P
N E
E
Producer’s Equilibrium R S IQ(500 Units)
2 4 6 8 10 12 X
O M L L1 L2 L3 X
Labour
Producer equilibrium implies the situation Units of labour
Diagram 3.10
where producer maximizes his output. It Diagram 3.11
is also known as optimum combination
of the factors of production. In short, the
In the above figure, profit of the firm (or
producer manufactures a given amount
the producer) is maximised at the point of
of output with ‘least cost combination of
equilibrium E.
factors’, with his given budget.
At the point of equilibrium, the
Optimum Combination of slope of the iso cost line is equal to the
Factors implies either slope of iso product curve (or the MRTS
of labour for capital is equal to the price
there is output maximisation for given
ratio of the two factors)
inputs or
Hence, it can be stated as follows.
there is cost minimisation for the
given output. PL
MRTS L ,K = =10/30=1/3=0.333
PK
Conditions for Producer’s
Equilibrium At point E, the firm employs OM units of
labour and ON units of capital. In other
The two conditions that are to be fulfilled for
words, it obtains least cost combination or
the attainment of producer equilibrium are:
optimum combination of the two factors
The iso-cost line must be tangent to to produce the level of output denoted by
iso-quant curve. the iso-quant IQ.
Production Analysis 68
Production Analysis 69
labour and capital. Production takes place expectations and so on. Mathematically
only when both factors are employed. the supply function is
Labour contributes three-fourth of
Qs = f (Px, Pr, Pf, T, O, E )
production and capital contributes
one-fourth of production. Where Qs = Quantity supplied of x
The elasticity of substitution between commodity
the factors is equal to one. Px = Price of x Commodity
Pr = Price of related goods
3.12
Pf = Price of factors of production
Law of Supply
T = Technology
Law of Supply is associated with O = Objective of the producer
production analysis. It explains the E = Expected Price of the commodity.
positive relationship between the price
of a commodity and the supply of that Assumptions
commodity. For example, if the price of
cloth increases, the supply of cloth will also Law of Supply is based on the following
increase. This is due to the fact that when assumptions.
price rises, it is profitable to increase the There is no change in the prices of
production and hence supply increases. factors of production
There is no change in price of capital
Law of Supply describes a direct goods
relation between price of a good and Natural resources and their availability
the supply of that good. remain the same
Prices of substitutes are constant
There is no change in technology
Definition
Climate remains unchanged
The Law of Supply can be stated as: Political situations remain unchanged
“Other things remaining the same, if the There is no change in tax policy
price of a commodity increases its quantity
supplied increases and if the price of a Explanation
commodity decreases, quantity supplied Suppose that the supply function is
also decreases”.
Qs = f(P) or Q = 20P
3.12.1 Supply Function P is an independent variable. When its value
changes, new values of Qs can be calculated.
The supply of a commodity depends on
the factors such as price of commodity,
Supply Schedule
price of labour, price of capital, the
state of technology, number of firms, A supply schedule shows the different
prices of related goods, and future price quantities of supply at different prices.
Production Analysis 70
This information is given in the supply on the Y axis. The points such as a, b, c,
schedule given below. d and e on the supply curve SS’, represent
various quantities at different prices.
Table 3.4 Price and Supply
3.12.3 Factors determining
Price (P) Supply (Qs) supply
1 20
1. Price of the commodity
2 40
Qs = 20P Higher the price larger the supply.
3 60
Price is the incentive for the
4 80 producers and sellers to supply more.
5 100 2. Price of other commodities
The supply of a commodity
depends not only upon its price
3.12.2 Supply Curve but also price of other commodities.
For instance if the price of commercial
A supply curve represents the data given crops like cotton rise, this may
in the supply schedule. As the price of result in reduction in cultivation
the commodity increases, the quantum of food crops like paddy and so its
supplied of the commodity also increases. supply.
Thus the supply curve has a positive slope
3. Price of factors
from left to right. (see diagram 3.12.)
When the input prices go up, this
Y results in rise in cost and so supply
S will be affected.
5 e 4. Price expectations
4 d The expectation over future prices
determines present supply. If a rise in
3 c price is anticipated in future, sellers
Price
2
tend to retain their produce for
b
future sale and so supply in present
1 a market is reduced.
S 5. Technology
0 20 40 60 80 100 X With advancement in technology,
Commodity x production level improves, average cost
Diagram 3.12 declines and as a result supply level
increases.
Production Analysis 71
Price
Price
o B D x o B D x o B D x
Supply Supply Supply
ES=0 s4 ES=α
Y Y
C
A s5
A
Price
Price
o D x o B D x
Supply Supply
Diagram 3.13
Production Analysis 72
The co-efficient of elastic supply is they get a high price. Once they get
greater than 1(Es > 1). One percent higher price, larger supply is possible.
change in the price of a commodity The elasticity of supply of durable
causes more than one per cent change in goods is high. But perishables are to
the quantity supplied of the commodity. be sold immediately. So perishables
2. Unitary elastic supply (see Diagram have low elasticity of supply.
3.13) 2. Cost of production
The coefficient of elastic supply is When production is subject to either
equal to 1 (Es = 1). One percent change constant or increasing returns,
in the price of a commodity causes an additional production and therefore
equal ( one per cent) change in the increased supply is possible. So
quantity supplied of the commodity. elasticity of supply is greater. Under
3. Relatively inelastic supply diminishing returns, increase in
(see Diagram 3.13) output leads to high cost. So elasticity
of supply is less.
The coefficient of elasticity is less
than one (Es < 1). One percent change 3. Technical condition
in the price of a commodity causes a In large scale production with huge
less than one per cent change in the capital investment, supply cannot be
quantity supplied of the commodity. adjusted easily. So elasticity of supply
4. Perfectly inelastic supply (see is lesser. Where capital equipment
Diagram 3.13) is less and technology simple, the
supply is more elastic.
The coefficient of elasticity is equal
to zero (Es = 0). One percent change 4. Time factor
in the price of a commodity causes During very short period when
no change in the quantity supplied of supply cannot be adjusted, elasticity
the commodity. of demand is very low. In short
5. Perfectly elastic supply (see Diagram period, variable factors can be added
3.13) and so supply can be adjusted to
some extent. So elasticity of supply
The coefficient of elasticity of supply
is more. In long period, even the
is infinity. (E s = α ). One percent
fixed factors can be added and hence
change in the price of a commodity
supply is highly elastic.
causes an infinite change in the
quantity supplied of the commodity.
3.13
Conclusion
3.12.6 Factors governing
elasticity of supply
Production takes place with the view to
1. Nature of the commodity fulfilling the demands of the consumers. Today
Durable goods can be stored for a long consumption expands in a variety of ways.
time. So, the producers can wait until Hence, production has to necessarily expand
Production Analysis 73
Production Analysis 74
ICT CORNER
LAW OF VARIABLE PROPORTION
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear.
Open the worksheet named “Law of Variable Proportions”
• In the Right side of the work sheet Total Product, Marginal Product
and Average Product are given and in the left side Respective graph
is shown. Analyse the data and the graphs drawn and the points.
• vAnalyse the change in MPL and click the check boxes, STAGE-
I,STAGE-II and STAGE-III so that Each stage appears in different
colours. Now analyse TPL and APL in each stage and compare what
is given in the text book lesson.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
Production Analysis 75
MODEL QUESTIONS
Production Analysis 76
10. An Iso-quant curve is also known as 16. Modern economists have propounded
a. Inelastic Supply Curve the law of
b. Inelastic Demand Curve a. Increasing returns
c. Equi-marginal Utility b. decreasing returns
d. Equal Product Curve c. Constant returns
11. Mention the economies reaped from d. variable proportions.
inside the firm
a. financial 17. Producer’s equilibrium is achieved at
b. technical the point where:
c. managerial a. Marginal rate of technical
d. all of the above substitution(MRTS) is greater than
the price ratio
12. Cobb-Douglas production function
assumes b. MRTS is lesser than the price
ratio
a. Increasing returns to scale
b. Diminishing returns to scale c. MRTS and price ratio are equal to
each other
c. Constant returns to scale
d. All of the above d. The slopes of isoquant and isocost
lines are different.
13. Name the returns to scale when the
output increases by more than 5%, for
a 5% increase in the inputs, 18. The relationship between the price
of a commodity and the supply of
a. Increasing returns to scale
commodity is
b. decreasing returns to scale
a. Negative
c. Constant returns to scale
b. Positive
d. All of the above
c. Zero
14. Which of the following is not a
characteristic of land? d. Increase
a. Its limited supply. 19. If average product is decreasing, then
b. It is mobile marginal product
c. Heterogeneous a. must be greater than average
d. Gift of Nature product
15. Product obtained from additional b. must be less than average product
factors of production is termed as
c. must be increasing
a. Marginal product
d. both a and c
b. Total product
c. Average product
d. Annual product
Production Analysis 77
20.
A production function measures
the relation between
a. input prices and output prices c. the quantity of inputs and the
b. input prices and the quantity of output quantity of output.
d. the quantity of inputs and input
prices.
Part-A Answers
1 2 3 4 5 6 7 8 9 10
d C d c c b c b c d
11 12 13 14 15 16 17 18 19 20
d C a b a a c b b c
Part-B
Answer the following questions in one or
two sentences.
21. Classify the factors of production.
22. Define Labour.
23. State the production function.
24. Define Marginal Product of a factor.
25. What is Iso-cost line?
26. What are the conditions for producer’s equilibrium?
27. What are the reasons for upward sloping supply curve?
Production Analysis 78
35. Examine the Law of Variable Proportions with the help of a diagram.
36. List out the properties of iso-quants with the help of diagrams.
ACTIVITY
1. Visit a market and write a report on the factors that influence
the quantity of supply of a commodity of your locality.
2. Visit a factory and show how the four factors of production are
effectively employed to produce the product in your locality.
References
Production Analysis 79
CH A P TER
Learning Objectives
2 To point out how revenue is realized at the sale of the goods and services
produced at the various types of market.
Y 900
600
Cost
Cost
400
1000 TFC 300
200
0
0 Output X
Diagram 4.1
4.3.12 Variable Cost
These costs vary with the level of output. For instance if TC = Q3 –18Q2 + 91Q +12,
Examples of variable costs are: wages of the fixed cost here is 12. That means, if
temporary workers, cost of raw materials, Q isY zero, the Total cost will be 12, hence Y
fuel cost, electricity charges, etc. Variable fixed
10 cost.
cost is also called as Prime Cost, Special 8
It could be observed that TFC does not
Price
Cost, or Direct Cost. 6
change with output. Even when the output
Price
4
is zero, the fixed cost is ₹.1000. TFC is
2
4.4 a horizontal straight line, ARparallel to
0 0
X axis. 1 2 3 4 5 6 7 8 9 10 X Y
Short run Cost Curves -2
Revenue (TR)
-4
MR
-6
4.4.2 Total Variable Cost (TVC)
-8
Total
4.4.1 Total Fixed Cost (TFC) All payments Diagram
to the variable
4.13 factors of
production is called as Total Variable Cost.
Table 4.1 Total Fixed Cost Hypothetical TVC is shown in table-4.2 0
Output Total Fixed and Diagram 4.2
(in unit) Cost (in ₹)
0 1000
1 1000 Table 4.2 Total Variable Cost
2 1000 Output Total Variable Cost
3 1000 (in unit) (in ₹)
4 1000 0 0
5 1000 1 200
2 300
All payments for the fixed factors of 3 400
production are known as Total Fixed Cost. 4 600
A hypothetical TFC is shown in table 4.1 5 900
and diagram 4.1
Y
TC
19004.3 Total Cost Curves
Table
TVC Y
Y
Output1600 Total Total Total Cost
900 (in unit)1400Fixed Variable (TC)
Cost
1300 Cost Cost TFC+TVC 10
Y
TC
In the diagram the TVC is zero when 1900
TVC Y
nothing
Y is produced. As output increases
1600
TVC
900 Yalso increases. TVC curve Y
C/R TC
Cost
1400
slopes upwarde>|1|from left to right. For 1300 1000
75
TR
Price
900 45
e<|1| H
+40091Q B
TFC AR=D 600 500
R 300 0 M Q
0 MR 400 1 5 333
Profit
200 9 X
9 10 X X 300 N 250
Y 30
200 28 Total Production 200
4.4.3 Total Cost Curves 22
Revenue (TR)
0 1 2 X of all 3 4 5 012 1 2 3 4 5 0
X
Total Cost means the sum total 0 M X
payments madeOutput
in the production.
TR It is also -2 1 Output
5 9 X
Total
TP
called as Total Cost 4.2
Diagram of Production. Total Diagram 4.3
cost is the summation of Total Fixed Cost Diagram 4.15
0 X
Quantity(Q)
(TFC) and Total Variable Cost (TVC). It is It is to be noted that
written symbolically as 4.14
Diagram
a) The TC curve is obtained by adding
TC = TFC + TVC. For example, TFCC/Rand TVC curves vertically.
Y
when the total fixed cost is ₹ 1000 and Y TC
indicating
75
a straight line. TR
Total cost is = ₹e=1
1200 (₹ 1000 + ₹ 200).
Price
c) TVC
45 starts fromHthe origin and moves
If TFC = 12 ande<|1|
upwards,B as no variable cost is incurred
TVC = Q – 18Q 3 2 AR=D
+ 91Q
0
at0zero
1
M
output. 5 Q
MR
Profit
9 X
0 X X
Y TC = 12 + Q3 – 18Q2 + 91Q d) When TFC and TVC
Totalare added, TC
30
28
Production
N
22
Revenue (TR)
starts
12
from TFC and moves upwards.
0 M
TR -2 1 5 9 X
Total
Diagram 4.15
0 X
Quantity(Q)
Chapter-04.indd 84 06-02-2020 16:17:01
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UNIT-4
0 1000 1000/0 = ∞ 5 900 900/5 = 180
TC
1 1000 1000/1 = 1000
Y2 1000 1000/2 = 500
Y Y
3 1000 1000/3 = 333
4 1000 1000/4 = 250 1200
Average Variable Cost
1000
Average fixed cost
Average Cost
TFC TC 200
650
150
500 Y
Y Y
466
400
100 380
333
1200
Average Variable Cost
250
200 1000 AFC 50
Average fixed cost
TVC
AVC
Average Cost
TFC 0 1 2 3 4 5 X 200 0 1
X 0 A
Quantity produced 150
1 2 3 4 5 X
650
500 Quantity 466
400
380
333 Diagram 4.4 100 Diagram 4.5
250
200 AFC 50
0 1 2 3 4 5 0 1 2 3 4
3 4 5 X
X
It refers
0 to the total variable cost per unit
Quantity produced 1 2 3 4 5 X Outpu
ut of output. It Quantity
is obtained by dividing total
m 4.3 Diagram 4.4 variable cost (TVC) by the quantity of
Diagram 4.5 Diagram
TC
Chapter-04.indd 85 06-02-2020 16:17:01
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Average Cost
Marginal Cost
200
2, the AVC is ₹ 150, (AVC = 300/2 = 150) A C
650
AVC150is shown in table 4.5 and Diagram 4.5. 466
300
400 B
If TVC
100
= Q3 – 18Q2 + 91Q 380 200
AFC = Q –18Q + 91
AVC 50 2
100
X It is to be noted that 0 1 2 3 4 5 X
0 0
1 2 3 4 5 X Output
a) AVC declines initially and then
Quantity
increases with the increase
Diagram 4.5 of output. Diagram 4.6
b) AVC declines up to a point and moves
upwards steeply, due to the law of 1600/4 = 400) If ATC is Q3 – 18Q2
returns. + 91Q +12, then AC = Q2 – 18Q +91
c) AVC curve is a U-shaped curve.
+ 12/Q
2. ByATC is derived by adding together
Average Fixed Cost (AFC) and
4.4.6 Average Total Cost (ATC)
or Average Cost (AC) Average Variable Cost (AVC) at
each level of output. ATC = AFC
It refers to the total cost per unit of output. + AVC. For example, when Q= 2,
It can be obtained in two ways. TFC = 1000, TVC=300; AFC=500;
1. By dividing the firm’s total cost (TC) AVC=150;ATC=650. ATC or AC
by the quantity of output (Q). ATC = is shown in table 4.6 and Diagram
TC / Q. For example, if TC is ₹ 1600 4.6
and quantity of output is Q=4, the It should be noted that
Average Total Cost is ₹ 400. (ATC =
a) ATC curve is also a ‘U’ shaped curve. by producing one extra unit of output.
b) Initially the ATC declines, reaches a Marginal cost is important for deciding
minimum when the plant is operated whether any additional output can be
optimally, and rises beyond the produced or not. MC = ∆TC / ∆Q where
optimum output. MC denotes Marginal Cost, ∆TC denotes
change in total cost and ∆Q denotes change
c) The ‘U’ shape of the AC reflects the
in total quantity. For example, a firm
law of the variable proportions.
produces 4 units of output and the Total
cost is ₹ 1600. When the firm produces
4.4.7 Marginal Cost (MC)
one more unit (4 +1 = 5 units) of output
at the total cost of ₹ 1900, the marginal
Table 4.7 Marginal Cost cost is ₹ 300.
Q TC MC MC = ₹ 1900 – ₹ 1600 = ₹ 300.
(in unit) (in ₹) (in ₹)
0 1000 -- The other method of estimating MC is :
1 1200 1200 - 1000 = 200 MCn=TCn –TCn-1
2 1300 1300 - 1200 = 100
where, ‘MC’ denotes Marginal Cost,
3 1400 1400 - 1300 = 100
‘TC n’ denotes Total cost of ‘n’th item,
4 1600 1600 - 1400 = 200
TCn-1 denotes Total Cost of ‘n-1’ th item.
5 1900 1900- 1600 = 300
For example,
when TC4 = ₹.1600, TC(4-1)=₹1400
It is the cost of the last single unit
and then MC= ₹200, (MC=1600-1400)
produced. It is defined as the change in
total costs resulting from producing one MC schedule is shown in Table 4.7
extra unit of output. In other words, it and MC Curve is shown in diagram 4.7.
is the addition made to the total cost It is to be noted that
a) MC falls at first due to more efficient
use of variable
Y factors.
Y Y
b) MC curve increases after the lowest
ATC 1200
point and it slopes upward.
MC
c) MC cure AC
900 is a U-shaped curve.
Average cost
Marginal Cost
300 If TC = Q650
3
–18Q2 + 91Q +12
450
200 2
– 36Q +91
MC = 3Q300
200
100
X
0 0 1 2 3 4 5 X
1 2 3 4 5 X
Quantity Output
Diagram 4.7 Diagram 4.8
Average cost
Marginal Cost
MC Econom
the AC and MC curves as shown in
Cost
300 650
450
200 300
200
100
Min
Y 0 1 2 3 4 5 K x effic
0
1 2 3 4 5
X Y MES
Quantity
X Output Output SAC3
SAC1
Diagram 4.7 1200 Diagram 4.8 Diagram 4.9 SAC2
LAC
MC
AC C
900 Long run average cost (LAC) is equal
Average cost
MC to long run total costs divided by the level
Cost
650 of output.
450
300 LAC = LTC/Q
NAL 200 where, LAC denotes Long-Run Average Cost,
0 1 2 3 4 5 X
K
LTC denotes Long-run Total Cost andx
X Output Output
Q denotes the quantity of output.
Diagram 4.8 Diagram 4.9
The LAC curve is derived from short-
run average cost curves. It is the locus of points
diagram 4.8.
denoting the least cost curve of producing
1. When AC is falling, MC lies the corresponding output. The LAC curve is
below AC. called as ‘Plant Curve’ or ‘Boat shape Curve’ or
2. When AC becomes constant, MC ‘Planning Curve’ or ‘Envelop Curve’.
also becomes equal to it.
3. When AC starts increasing, MC lies A significant recent development in
above the AC. cost theory is that the long-run average
4. MC curve always cuts AC at its cost curve is L- shaped rather than
minimum point from below. U-shaped. The L-shape of the long-run
average cost curve implies that in the
4.5 beginning when output is expanded
through increase in plant size and
Y Long Run Cost Curve:
Y
SAC3
associated variable factors, cost per unit
SAC1
falls rapidly due to economies of scale.
SAC2
1200
LAC
MC
AC Cost Y
In the long run all factors of production
900
Average cost
MC
become variable. The existing size of the
Economies of scale
Cost
Total Revenue
650
450 30
firm can be increased in the case of long
300 Economies of scale
exhausted
25
20
200 15
run. There are neither fixed inputsK nor
AC (Q)
Minimum 10
x efficiency of scale 5
0 1 2 3 4 5 X
X fixed costs
Output in the long run. Output MES Q 0 1 2 3 4
Quantity
5 6
30 behaviour
30 of TR is shown in table 4.9 and
Total Revenue
28
le 25 24
20 diagram
18 4.11. TR can be obtained from
AC (Q) 15 10
10 Demand fuction: If Q = 11–P, TR
5 0 1 2 3 4 5 6 7 8 9 10 X
Q 0 1 2 3 4 5 6 x Output
Quantity
Diagram 4.10 When P = 1, Q = 10Diagram 4.11
28
24
18
TRn denotes total revenue of nth item, TRn-1
AR /MR
denotes Total Revenue of n-1th item and
Price
10 5
TR
TRn+1 denotes Total Revenue of n+1thitem.
0 1 2 3 4 5 6 7 8 9 10 X
x Output
If TR0= PQ
1 2MR3 = ∆TR/∆Q
4 5 6 = P,
X
Output
Diagram 4.11 which is equal to AR.
Diagram 4.12
TR = PQ = 1 × 10 = 10 4.6.2 Relationship between
When P = 3, Q = 8, TR = 24 AR and MR Curves
Price
6
Table 4.10
Price
4
TR, AR, MR - Constant price
2
Quantity Price Total Average Marginal AR
0
Sold (P) Revenue Revenue Revenue 1 2 3 4 5 6 7 8 9 10 X Y
-2
(Q) (TR) (AR) (MR)
Revenue (TR)
-4
MR
₹ ₹ ₹ ₹
-6
1 5 5 5 5 -8
Total
2 5 10 5 5 Diagram 4.13
3 5 15 5 5
4 5 20 5 5
5 5 25 5 5 Table 4.11
6 5 30 5 5 AR, TR, MR at declining price
Price (P)/
Quantity Total Marginal
Y Average
Sold Revenue Revenue
Revenue
AR /MR (TR) (MR)
(Q) (AR)
Price
5 ₹ ₹
TR ₹
9 10 X
1 10 10 -
0 1 2 3 4 5 6 X
Output 2 9 18 8
Diagram 4.12 3 8 24 6
4 7 28 4
Declining AR and MR (at 5 6 30 2
Declining Price) 6 5 30 0
When a firm sells large quantities at lower 7 4 28 -2
prices both AR and MR will fall but the 8 3 24 -4
fall in MR will be more steeper than the 9 2 18 -6
fall in the AR. 10 1 10 -8
Y
4.6.4
TR, AR, MR and Y Y
10 Elasticity of Demand e>|1|
Price
The6 relationship among AR, MR and e=1
45
elasticity of demand (e) is stated as follows. e<|1|
Price
4
2 e = AR/AR – MRAR AR=D 0
0 0 MR
Profit
The relationship
1 2 3 4 between
5 6 7 the
8 9 AR10 curve
X Y
X 30
-2 28
and MR curve depends upon the elasticity 22
Revenue (TR)
-4
MR
of AR
-6
curve (AR = DD = Price). 12
0
When price elasticity of demand is
a. -8 TR -2
Total
Diagram
greater than one, MR4.13 is positive and
TR is increasing.
0 X
b. When price elasticity of demand is less Quantity(Q)
than one, MR is negative and TR is Diagram 4.14
decreasing.
c. When price elasticity of demand is
equal to one, MR is equal to zero and At the output range of
TR is maximum and constant. 5 to 6 units, the price
It is to be noted that, the output range of 1 elasticity of demand is
to 5 units, the price elasticity of demand is equal to one. Hence, TR
greater than one according to total outlay is maximum and MR
method. Hence, TR is increasing and MR equals to zero.
is positive. At the output range of 6 units to 10
units, the price elasticity of demand is less
Table 4.12 TR, AR, MR & Elasticity than unity. Hence, TR is decreasing and
MR is negative.
Quan- Price TR AR MR Elasticity
tity (Q) (P)
1 10 10 10 10 4.7
2 9 18 9 8 Conclusion
3 8 24 8 6 e>1
4 7 28 7 4 This Chapter has analysed the behaviour of
5 6 30 6 2 Cost Curves and revenue curves under two
6 5 30 5 0 e=1 situations and the relationship among price
7 4 28 4 -2 elasticity of demand , TR, AR and MR.
8 3 24 3 -4
9 2 18 2 -6 e<1
10 1 10 1 -8
11 0 0 0 -10
ICT CORNER
Cost and Revenue Analysis ANALYSIS: REVENUE ANALYSIS
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear.
Open the worksheet named “Revenue Analysis”
• In the Right side of the work sheet two data are given. 1.Total Revenue
for the quantity when Price is constant and 2. Total Revenue for
the quantity when Price is reduced when the quantity is increased.
Analyse the graph drawn on the Left side for constant price. It is a
straight-line graph.
• Now click on the check box , “Show Total Revenue when price is
declining with increase in quantity”. You can see a curve graph.
Now analyse the data values and Graph in each Data and compare
what is given in the text book lesson. You can get similar data from
internet and type in the columns and see the change in graph.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
MODEL QUESTIONS
a. price b. explicit
b. value c. money
c. fixed cost d. implicit
d. cost of production 7. The cost that remains constant at all
2. Cost functions are also known as levels of output is _______ cost.
_______________ function. a. fixed
a. production
b. variable
b. investment
c. real
c. demand
d. social
d. consumption
8. Identify the formula of estimating
3.
Money cost is also known as average variable cost.
____________ cost.
a. TC/Q
a. explicit
b. TVC/Q
b. implicit
c. TFC/Q
c. social
d. real d. TAC/Q
9. The cost incurred by producing one
4. Explicit cost plus implicit cost denote
more unit of output is______cost.
___________ cost.
a. variable
a. social
b. economic b. fixed
c. money c. marginal
d. fixed d. total
5. Explicit costs are termed as 10. The cost that varies with the level of
output is termed as _______ cost.
a. out of pocket expenses
a. money
b. real cost
b. variable cost
c. social cost
c. total cost
d. sunk cost
d. fixed cost
Cost and Revenue Analysis 95
11. Wage is an example for ________ 16. Revenue received from the sale of
cost of the production. products is known as _______ revenue.
a. fixed a. profit
b. variable b. total revenue
c. marginal c. average
d. opportunity d. marginal
12. The cost per unit of output is denoted 17. Revenue received from the sale of
by _________ cost. additional unit is termed as ________
a. average revenue.
b. marginal a. profit
c. variable b. average
d. total c. marginal
d. total
13. Identify the formula of estimating
average cost. 18. Marginal revenue is the addition made
a. AVC/Q to the
b. 175 a. equal to
Part- A Answers
1 2 3 4 5 6 7 8 9 10
d a a b a d a b c b
11 12 13 14 15 16 17 18 19 20
b a b c b b c b a d
Part-B
Answer the following questions in one or
two sentences.
22. Define cost function. 26. Give the definition for ‘Real Cost’.
23. What do you mean by fixed cost? 27. What is meant by Sunk cost?
28. Distinguish between fixed cost and 32. State the relationship between AC and
variable cost. MC.
29. State the differences between money 33. Write a short note on Marginal
cost and real cost. Revenue.
30. Distinguish between explicit cost and 34. Discuss the Long run cost curves with
implicit cost. suitable diagram.
35. If total cost = 10+Q 3, find out AC, 37. Bring out the relationship between AR
AVC, TFC, AFC when Q=5. and MR curves under various price
conditions.
36. Discuss the short run cost curves with
suitable diagram.
ACTIVITY
Visit a small business firm and identify the various items of
expenditure incurred by the firm. Classify the items under fixed
cost and variable cost. Estimate Total Fixed Cost, Total Variable
Cost, Total Cost and Average Fixed Cost, Average Variable Cost
and Average Total Cost.
References
CH A P TER
5 MARKET STRUCTURE
AND PRICING
Learning Objectives
1 To understand the characteristics of markets and how the price and output are
determined under the several types of markets; and,
2 To study the nature of the profit obtained by a firm under different types of
markets
5.1
Introduction
iii. National market arises when products and It occurs when the quantum supplied
services are sold and bought throughout of a product can be increased (or
a country. For example, Nation-wide decreased) to a larger extent. Here
market for tea, coffee, cement, electrical the supply curve is very much elastic.
goods, some printed books etc. Thus, to meet an increase in demand,
8
AR, MR & MC
E Q
5.3.4 On the Basis of 75
TR 7
Competition 45
N
i. Perfect competition market P
ii. Imperfect competition market which
0 1 2 3 4 5 6 7 8 9
comprises monopoly market, X
Output o 1
monopolistic competition market,
duopoly market, oligopoly market etc. Diagram 5.1
Price/ Revenue/cost
Price/Revenue/cost
8 is S fulfilled. Y Thus for
AR, MR & MC
Q condition
D MC Y
7 AC
TR equilibrium E under all market
E 1 12
10 L 10 Profit L 10 Loss
situations the two conditions 8 viz., MC
B
= MR; and
S MCDcuts MR from below.
o 50 o 50 o
8 9 X Output
Market Structure Output
o 1 2 3 4 5 Normal profit Abnormal=2 x 50=100 Los
Q X
Output
Diagram 5.2 Market Diagram 5.3
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is very large, all are engaged in buying and product at a very low cost, to earn super
selling a homogenous product at uniform normal profits. Attracted by such a
price without any artificial restrictions profit, new firms enter into the industry.
and possessing perfect knowledge of the When large number of firms enter, the
market at a time. supply (in comparison to demand)
According to Joan Robinson, would increase, resulting in lower price.
“Perfect competition prevails when the An inefficient producer, who is unable
demand for the output of each producer is to bring down the cost incurs loss.
perfectly elastic”. Disturbed by the loss, the existing
loss-incurring firms quit the market. If
5.5.1 Features of the Perfect it happens, supply will then decrease,
Competition: price will go up. Existing firms could
earn more profit.
a. Large Number of Buyers and Sellers
d. Absence of Transport Cost
‘A large number of buyers’ implies
that each individual buyer buys a very, The prevalence of the uniform price is also
very small quantum of a product as due to the absence of the transport cost.
compared to that found in the market. e. Perfect Mobility of Factors of Production
This means that he (he includes she
The prevalence of the uniform price is also
also) has no power to fix the price of
due to the perfect mobility of the factors of
the product. He is only a price-taker
production. As they enjoy perfect freedom
and not a price-maker.
to move from one place to another and
FINAL
from one occupation to another, the price 100 = 10P; 100/10 = P Qd = demand
gets adjusted. P = 10 P = Price
f. Perfect Knowledge of the Market Qd = 100-5(10) Qs = Supply
All buyers and sellers have a thorough 100-50 = 50
knowledge of the quality of the
Qs = 5(10)=50
product, prevailing price etc.
Therefore 50 = 50
g. No Government Intervention
There is no government regulation
on supply of raw materials, and in the This diagram consists of three panels. The
determination of price etc. equilibrium of an industry is explained
in the first panel. The demand and sup-
5.5.2 Perfect Competition: ply forces of all the firms interact and the
Firm’s Equilibrium in price is fixed as ₹10. The equilibrium of an
unit 5
the Short Run industry is obtained at 50 units of output.
In the short run, at least a few factors In the second part of the diagram,
of production are fixed. The firms under AC curve is lower than the price line. The
Perfect Competition take the price equilibrium condition is achieved where
(10) from the industry and start MC=MR. Its equilibrium quantity sold
adjusting their quantities produced. For is 50. With the prevailing price, ₹10 it
example Qd= 100 – 5P and Qs=5P. experiences super normal profit. AC = ₹8,
At equilibrium Qd=Qs. Therefore 100-5P=5P AR = ₹10.
Y
Price/ Revenue/cost
Price/Revenue/cost
D S Y Y MC
MC
AC AC
E E1 12 R
10 L 10 Profit L 10 Loss
L (AR=MR) 8
8
B E2
S D
o 50 o 50 o 50 x
Output Output Output o
Normal profit Abnormal=2 x 50=100 Loss=2 x 50=100
Q X Qu
Diagram 5.3 Dia
SS – m
arket supply DD – m arket demand
AR – A verage Revenue AC – A
verage Cost
MR – M arginal Revenue MC – M arginal Cost
Y
Its total revenue is 50X10=500. Its Y LMC
total cost is 50X8=400. Therefore, its total
Price/ Revenue/cost
Price/Revenue/cost
Price
firm’s
E1 cost curve 12is aboveR the price line. 12.6
10 Profit L Loss
10condition 8 L (AR=MR)
8 The equilibrium Lis(AR=MR)
achieved
B E 2
D
at point where MR=MC. Its quantity
o sold
50 is 50. With the o prevailing
50 price,
x
it
experiences
Output loss. (AC>AR) Output o 500 x 0
ofit Abnormal=2Its
x 50=100 Loss=2 x 50=100
total revenue is 50X10=500. Its Quantity
total 5.3
Diagram cost is 50X12=600. Therefore, its Diagram 5.4
total loss is 600-500=100.
As profit prevails in the market, also known as planning curve. First, the
new firms will enter the industry, thus firms will earn only normal profit.
increasing the supply of the product. This
Secondly, all the firms in the market
means a decline in the price of the product
are in equilibrium. This means that there
and increase the cost of production. Thus,
should neither be a tendency for the new
the abnormal profit will be wiped out;
firms to enter into the industry nor for any of
loss will be incurred.
the existing firms to exit from the industry.
When loss prevails in the market,
the existing loss making firms will exit the
industry, thus decreasing the supply of the
product. This means a rise in the price of
the product and reduction in the cost of
production. So the loss will vanish; Profit
will emerge. Consequent upon the entry
and exit of new firms into the industry,
firms always earn ‘normal profit’ in the
long run as shown in diagram.
5.5.3 Perfect Competition:
Firm’s Equilibrium in
the Long Run (Normal Long run supply curve is explained
Profit) to determine the long run price after an
increase in demand. The effect of the
In the long run, all the factors are
increase in demand in the short run is
variable.
explained by the movement from point ‘a’
The LAC curve is an envelope to point ‘b’. The price increases from ₹8 to
curve as it contains a few average cost ₹13, and the quantity increases from 600
curves. It is a flatter U shaped one. It is to 800 units. Economic profit of a firm is
ompetition- Examples Long run equilibrium of the firm is The concept of imperfect competition
illustrated in the diagram. Under perfect was propounded in 1933 in England by
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competition, long run equilibrium is only Joan Robinson and in America by E.H.
at minimum point of LAC. At point E, Chamberlin.
LMC = MR = AR = LAC. It is an important market category
In the above diagram (5.4), average where the individual firms exercise their
cost is equal to average revenue. The control over the price.
Indian Railways
equilibrium of the firm finally rests at Definition: Imperfect competition is a
point E where price is 8 and output is 500. competitive market situation where there
(Numbers are hypothetical) At this point, are many sellers, but they are selling
the profit of the firm is only normal. Thus heterogeneous (dissimilar) goods as
condition for long run equilibrium of the opposed to the perfect competitive market
firm is: scenario. As the name suggests, competitive
Price = AR=MR = Minimum AC markets are imperfect in nature.
At the equilibrium point, the SAC>LAC. Description: Imperfect competition is the
Hence, long run equilibrium price is lower real world competition. Today some of
than short run equilibrium price; long run the industries and sellers follow it to earn
equilibrium quantity is larger than short surplus profits. In this market scenario,
run equilibrium quantity.
the seller enjoys the luxury of influencing form of market where there is a single seller
Joan Robinson
the price in order to earn more profits.
1903-1983
selling a particular commodity for which
there are no close substitutes.
If a seller is selling a non-identical good in the
market, then he can raise the prices and earn
profits. High profits attract other sellers to
Oligopoly Market System
5.7.1 Features of Monopoly
pendent suppliers
enter the market and sellers, who are incurring
1. There is a single producer / seller of
ol supply and
nd for the products
mples include airlines,
losses, can very easily exit the market.
Edward Chamberlin
motive and banking
anies a product;
1899 -1967
2. The product of a monopolist is
5.7 unique and has no close substitute;
Monopoly 3. There is strict barrier for entry of
any new firm;
4. The monopolist is a price-maker;
5. The monopolist earns maximum
profit/ abnormal profit.
5.7.4 Price
Y
Discrimination
Y SMC
under monopoly Y
MC
AC A discriminating monopoly is a single
Q SAC
12.6 D/AR
R=MR) T vice versa D/AR
x
There are three types of price discrimination.
0 3 x 0
M
Quantity (i) Personal – Different prices xare
Quantity
Diagram 5.6 charged for different individuals (for
Diagram 5.7
example, the railways give tickets
at concessional rate to the ‘senior
as more units of output are sold, the MR citizens’ for the same journey).
lies below the AR curve (MR<AR).
(ii) Geographical - Different prices are
The monopolist will continue to charged at different places for the
sell his product as long as his MR>MC. same product (for example, a book
He attains equilibrium at the sold within India at a price is sold in
level of output when its MC is equal to a foreign country at lower price). On
MR. Beyond this point, the producer their basis, China drops its goods in
will experience loss and hence will stop selling. Indian market. As a result, watch and
toys industries closed down their
From this diagram, till he sells
business.
3 units output, MR is equal to MC. The
(iii) On the basis of Use - Different prices
monopoly firm will be in equilibrium at
the level of output where MR is equal to are charged according to the use
MC. The price is 23. of a product (for example, lower
rates are charged by Tamil Nadu
To checkup how much profit the Electricity Board for domestic
monopolist is making at the equilibrium uses of electricity and higher rates
output, the average revenue curves and the are charged for commercial and
average cost curves are used. At equilibrium industrial uses).
level of output, (3) is the average revenue is
23 and the average cost is 12.67, therefore
(23-12.67 = 10.33) is the profit per unit. 5.7.5 Degrees of Price
Total profit = (Average Revenue – Average Discrimination
Cost) X Total output Price discrimination has become
= (23 – 12.67) × 3 widespread in almost all monopoly
markets. According to A.C.Pigou, there
= 10.33 × 3 = 30.99 are three degrees of price discrimination.
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Under monopolistic competition, different
firms produce different varieties of the
product and sell them at different prices.
Each firm under monopolistic competition
seeks to achieve equilibrium as regards
1. Price and output, 2. Product adjustment
2. Firms under monopolistic and 3. selling cost adjustment.
competition are price makers. They
Short-run equilibrium:
set their own prices.
How does a monopolistically competitive
3. Firms produce differentiated
firm achieve price-output level
products. It is the key element of
equilibrium? The profit maximisation is
monopolistic competition.
achieved when MC=MR.
4. There is a free entry and exit of firms.
‘OM’ is the equilibrium output. ‘OP’
5. Firms compete with each other by is the equilibrium price. The total revenue
incurring selling cost or expenditure is ‘OMQP’. And the total cost is ‘OMRS’.
on sales promotion of their products. Therefore, total profit is ‘PQRS’. This is super
6. Non – price competition is an essential normal profit under short-run.
part of monopolistic competition. But under differing revenue and
7. A firm can follow an independent cost conditions, the monopolistically
price policy. competitive firms may incur loss.
As shown in the diagram, the AR and MR
5.8.2 Price and Output curves are fairly elastic. The equilibrium
Determination under
Monopolistic Competition
Y Y SMC
Y
The firm under monopolistic
MC competition
AC
achieves its equilibrium when it’s MC = Q SAC K
Q P AR, AC, MR & MC
MR,23and when its MC curve cuts its MR
AR, AC, MR & MC
C PROFIT R P
curve from below. If MC is less than MR, S
the 14
sellers will find it profitable to expand E
Price
0 M F x
Y Y AC
MC AC Quantity MC
Diagram 5.9
K L
SAC substitutesK are available. Hence,
L the firms
AR, AC, MR & MC
5.10.1 Features of
however, assume that his rival is unaffected Oligopoly
by what he does, in that case he takes only his
own direct influence Competition-
on the price. Examples 1. Few large firms
Monopolistic
Very few big firms own the major control
of the whole market by producing major
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5.9.1 Characteristics of
portion of the market demand.
Duopoly
2. Interdependence among firms
1. Each seller is fully aware of his rival’s
The price and quality decisions of a
motive and actions.
particular firm are dependent on the
2. Both sellers may collude (they agree price and quality decisions of the rival
on all matters regarding the sale of firms.
the commodity).
3. Group behaviuor
3. They may enter into cut-throat
The firms under oligopoly realise the
competition.
importance of mutual co-operation.
4. There is no product differentiation.
4. Advertisement cost
5. They fix the price for their product with
The oligopolist could raise sales
a view to maximising their profit.
either by advertising or improving
5.10 the quality of the product.
5. Nature of product
Oligopoly
Perfect oligopoly means homogeneous
products and imperfect oligopoly
Oligopoly is a market situation in which
deals with heterogeneous products.
there are a few firms selling homogeneous or
differentiated products. Examples are oil and 6. Price rigidity
gas. It is difficult to pinpoint the number of It implies that prices are difficult to
firms in ‘competition among the few.’ With be changed. The oligopolistic firms
only a few firms in the market, the action of do not change their prices due to the
one firm is likely to affect the others. fear of rivals’ reaction.
5.11
Comparison among the Features of Various Markets
Number of
1 Innumerable Only One Large
Producers/Sellers
Unique
Nature of the Homogeneous Differentiated Product
2 (No close
Product Perfect Substitute (close substitutes)
substitute)
Some control
3 Control over Price Price-Taker Price-Maker depending on branded
loyalty
Barriers to
4 Entry / Exit Free Free
entry
Abnormal profit /
Abnormal profit in
loss in short-run, Monopoly
5 Profit short-run, Normal
Normal profit in Profit
profit in long run
long-run
Less
compared
8 Quantity Very large Substantial
to perfect
competition
5.12
Conclusion
Different forms and characteristics of different Marginal cost Addition made to total
markets have been studied in this chapter costs already incurred by producing one
Market, in general is divided into perfect more unit of the commodity.
market and imperfect market. Imperfect
market consists of Monopoly, Monopolistic Marginal revenue Addition made to total
Competition, Duopoly, Monopsony etc. In revenue already incurred by selling one
the long-run, firms earn normal profit. Under more unit of the commodity.
imperfect market, the sellers would manage
to reap larger profits depending upon the
Monopolist A single-seller who controls
degree of monopoly power.
entire or major part of output, which has
no close substitutes.
Glossary
Equilibrium A situation or a state at
Price-maker The power in the firm to set
which a firm seeks to rest.
the price for goods in the market.
ICT CORNER
MARKET EQUILIBRIUM
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear.
In this several work sheets for Economics are given, Open the
worksheet named “Market Equilibrium”
• There are two equations 1. Quantity on Demand (QD) and 2.
Quantity Supplied (QS). Both the equations are drawn in the graph
as straight line. Observe both the lines intersect at a point E.
• That intersection point is called ‘Market Equilibrium’. At that point
both QD and QS are Equal. Thus, Market equilibrium is obtained
when Demand and Supply are equal. Now you change the Supply
function by moving the slider “b”. Observe the Equilibrium changes
as the supply changes. Now Analyse the Market structure required.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
MODEL QUESTIONS
11. Group equilibrium is analysed in 16. The average revenue curve under
……. monopolistic competition will be……
a. Monopolistic competition a. Perfectly inelastic
b. Monopoly b. Perfectly elastic
c. Duopoly c. Relatively elastic
d. Pure competition d. Unitary elastic
12. In monopolistic competition, the 17. Under perfect competition, the shape
essential feature is ..… of demand curve of a firm is...............
a. Same product a. Vertical
b. selling cost b. Horizontal
c. Single seller c. Negatively sloped
d. Single buyer d. Positively sloped
13. Monopolistic competition is a form of 18. In which market form, does absence
.……. of competition prevail?
a. Oligopoly a. Perfect competition
b. Duopoly b. Monopoly
c. Imperfect competition c. Duopoly
d. Monopoly d. Oligopoly
14. Price leadership is the attribute of 19. Which of the following involves
………… maximum exploitation of consumers?
a. Perfect competition a. Perfect competition
b. Monopoly b. Monopoly
c. Oligopoly c. Monopolistic competition
d. Monopolistic competition d. Oligopoly
15. Price discrimination will always lead 20. An example of selling cost is …
to…………. a. Raw material cost
a. Increase in output b. Transport cost
b. Increase in profit c. Advertisement cost
c. Different prices d. Purchasing cost
d. b and c
Part-A Answers
1 2 3 4 5 6 7 8 9 10
a a c c d c a b c d
11 12 13 14 15 16 17 18 19 20
a b c c d c b b b c
Part-B
Answer the following questions in one or
two sentences.
21. Define Market.
22. Who is price-taker?
23. Point out the essential features of pure competition.
24. What is selling cost?
25. Draw demand curve of a firm for the following:
a) Perfect Competition b) Monopoly
26. Mention any two types of price discrimination
27. Define “Excess capacity”.
36. How price and output are determined under the perfect competition?
39. Explain price and output determined under monopolistic competition with help of
diagram.
MARKET STRUCTURE AND PRICING 119
ACTIVITY-1
Divide the class into five groups. Assign each group a market structure;
for first group perfect competition, second group monopoly,
third group oligopoly, forth group duopoly and for fifth group
monopolistic competition. Now each student is to identify a business
or organization or seller that operate in that market structure. Ask
each student to prepare a brief description of the following.
1. Name of the market structure
2. Business name
3. Industry
4. Identify the conditions of market structure
5. What are prices of a particular product, whether same price or
different price?.
6. Is there non-price competition?
ACTIVITY-2
Find out the number of firms in Tamil Nadu or India which are
producing/selling TV and Mobile phones.
References
1. Roger Leroy Miller “ Economics today The Micro view “ , Addition Wesley , 15th
edition, 2010 .
2. Irvin B. Tucker, “ Economics for Today “, South Western Cengage learning, 6th
edition, 2010.
3. K.K. Dewett, M.H. Navalur, “ Modern Economic Theory “ , S. Chand, 23rd edition, 2010.
4. H.L. Ahuja, “ Principles of Micro Economics “, Publisher S. Chand , 22nd edition, 2016.
5. Sankaran, “ Micro Economics “,
6. Micro Economics (Principles, Applications and tools) by-Arthur O’ Sullivan,
Steven Sheffrin, Stephen Perez, Pearson
Websites
1. www.economicsconcepts.com
2. www.microeconomicsnotes.com
3. www.economicsdiscussion.net
CH A P TER
6 Distribution
Analysis
Learning Objectives
2 To enable the students to understand the theories of rent, wages, interest and
profit.
6.1 6.2
Introduction Meaning of Distribution
Assumptions
Personal Distribution
This theory is based on the following
Personal Distribution is the distribution assumptions:
of national income among the individuals.
1. All the factors of production are
homogenous.
2. Factors of production can be
substituted for each other.
3. There is perfect competition both in
the factor market and product market.
4. There is perfect mobility of factors
of production.
5. There is full employment of factors.
6. This theory is applicable only in the
long-run.
7. The entrepreneurs aim at profit
Functional Distribution
maximization.
Functional Distribution means the 8. There is no government intervention
distribution of income among the four in fixing the price of a factor.
factors of production namely land, labour,
9. There is no technological change.
capital and organisation for their services
in production process. Explanation of the Theory
According to the Marginal Productivity
6.4 Theory of Distribution, the price or the
reward for any factor of production is
Marginal Productivity
equal to the marginal productivity of that
Theory of Distribution
factor. In short, each factor is rewarded
according to its marginal productivity.
Introduction
Marginal Productivity Theory of Marginal Product
distribution was developed by Clark, The Marginal product of a factor of
Wickseed and Walras. This theory production means the addition made
explains how the prices of various factors to the total product by employment of
of production are determined. This an additional unit of that factor. The
theory explains how rent, wages, interest Marginal Product may be expressed as
and profit are determined. This theory is MPP, VMP and MRP.
Distribution Analysis 122
1. Marginal Physical Product (MPP) the point, the marginal revenue product
The Marginal Physical Product of a is less than the price of the factor. Hence,
factor is the increment in the total employer will suffer loss when he uses more
product obtained by the employment of the factor. Therefore, the conclusion is
of an additional unit of that factor. that the employer will adjust the price of
the factor of production so as to equalize
2. Value of Marginal Product (VMP)
the marginal revenue product of that factor.
The Value of Marginal Product is
obtained by multiplying the Marginal In short, the Marginal Productivity
Physical Product of the factor by the Theory of Distribution states that
price of product. a) The price of a factor of production
Symbolically depends upon its productivity.
b) The price of a factor is determined by
VMP = MPP x Price and will be equal to marginal revenue
product of that factor.
3. Marginal Revenue Product (MRP)
c) Under certain conditions, the price of a
The Marginal Revenue Product of a
factor will be equal to both the average
factor is the increment in the total
and marginal products of that factor.
revenue which is obtained by the
employment of an additional unit of
The Marginal Productivity Theory
that factor.
of Distribution can be represented
MRP = MPP x MR diagrammatically as follows:
Q
depends upon its productivity. The greater P
MFC = AFC
Product
will be its reward. If the price of a factor
Product
ARP
of production is less than its marginal
revenue product, the employer will use MRP S
more of this factor, because his profit will
be increased.
O N X
O
When more of a factor is employed, Factor Units
its marginal revenue product diminishes. Diagram 6.1
But the employer will gain by using
additional units of the factor until the
marginal revenue product of the factor The diagram 6.1 refers to the factor pricing
is equal to its price. The employer’s profit under perfect competition in the factor
will be maximum at this point. Beyond market. X axis represents factor units
Distribution Analysis 123
and Y axis represents the factor price and In diagram 6.2 the factor pricing under
revenue product. MRP is the Marginal imperfect competition is represented. AFC
Revenue Product Curve and ARP is the is Average Factor Cost curve. It represents
Average Revenue Product curve. AFC is the price paid to the factors. It increases
the Average Factor Cost curve and MFC as the number of factors demanded by the
is the Marginal Factor Cost curve. AFC is employer increases. As AFC rises, MFC
horizontal under perfect competition and lies above AFC. It represents the marginal
MFC coincides with it. cost paid to the factors. At the point Q,
When there is perfect competition in MFC = MRP, where the employer attains
the factor market, the firm is in equilibrium his maximum profit and so he stops
(i.e., earning maximum profits) only when employment of the factors at the point.
But the average cost paid is NRSO and the
final
MFC = MRP. Hence, in the diagram, the firm
reaches equilibrium at point Q by employing average revenue obtained is NQ or OP.
ON units of factors and paying OP price (NQ) Total revenue obtained is NQPO. Therefore,
where MFC = MRP. At the point Q, MRP = exploitation per unit of factor is RQ. But the
ARP. The price paid to the factor (NQ) is also total number of factors is ON. Thus, the total
equal to marginal revenue product (NQ) exploitation of factor by the employer is RQ
and average revenue product (NQ). This X SR = “PQRS” (shaded area). Thus, under
means that there is no exploitation of factors imperfect competition, factor is exploited at
under perfect competition. Beyond the point the equilibrium position.
UNIT 6
Q, no employer will employ factors, because
Criticism
after that point, the price paid to the factor
is more than marginal revenue product and This theory is subject to a few criticisms
average revenue product. 1. In reality, the factors of production
are not homogenous.
Marginal Productivity Theory 2. In practice, factors cannot be
under Imperfect Competition substituted for each other.
3. This theory is applicable only in the
long–run. It cannot be applied in the Y
Y MFC short-run.
Y
40 Economic Rent
Yield Per Acre (in Bags)
C = AFC
Rate of Interest
Q
6.5
Factor Price and Revenue
AFC
P 30
Rent R’
Product
No Rent
ARP 20
Land
S 10 R
MRP R ARP 6.5.1 Meaning
MRP Rent is the price or reward given for the
0 A B C X
X
O N
use of landVarious
or house or a
Grades of Landmachine to 0
X
Factor Units the owner. But, in Economics, “Rent” or De
Diagram 6.2 “Economic Rent” refers
Diagram 6.3 to that part of
Y
growing
Y
population. For the same amount
MFC
labour and capital employed in ‘A’ grade Y
land, the yield perQ acre on ‘B’ grade land 40 Economic Rent
Rate of Interest
Factor Price and Revenue
AFC
is 30 bags
P of paddy. The surplus of 10 30
R’
Product
-Alfred Marshall
6.7
Theories of Wages
Criticisms
The reward for capital investment
1. This theory does not explain the role is interest.
of trade unions can secure higher
wage for workers.
2. Demand side of labour in the
determination of wages needs to be 6.8.1 Meaning
considered.
Interest is the reward paid by the borrower
to the lender for the use of capital.
6.7.5 Marginal Productivity
Theory of Wage
“Interest is the price paid for the use
The application of general theory of of capital in any market”
distribution to wage fixation is the -ALFRED MARSHALL
marginal productivity theory of wages.
According to this theory, wages are
determined by the marginal productivity
of labour and equal to it at the point of 6.8.2 Kinds of Interest
equilibrium. Gross Interest
Under perfect competition wage is Gross interest is the total interest amount
paid equal to marginal product of labour received by creditors from debtors.
(wage = MPL) But in real world where
Gross Interest = (Net Interest) + (reward
there is imperfect competition, there is
for inconvenience) + (insurance against
exploitation of labour and wage is less
risk of non-repayment) + (payment for
than MPL.
service of debt management)
Criticism
6.9 Theories of Interest 1. According to this theory, saving involves
suffering. But savings may not always
involve suffering to some rich people.
Rich people have money for which they
do not get interest. Hoarding of money
is to quench the thirst for liquidity.
Rate of Interest
I P
H C factors like savings and investment
LD
X with monetary factors like bank
d 0 M’ M X 0
credit and liquidityM2
preference. X
Demand for Loanable Funds and Demand for Money and
Supply of Loanable Funds Supply of Money
Diagram 6.4 Liquidity
6.9.4 Keynes’ Diagram 6.5
Preference Theory of
In Diagram 6.4, X axis represents the Interest or The Monetary
demand for and supply of loanable funds Theory of Interest
and Y axis represents the rate of interest. The Keynes propounded the
LS curve represents the total supply curve Liquidity Preference
of loanable funds. This is obtained by the Theory of Interest in
summation of the Saving Curve (S), Bank his famous book, “The
credit curve (BC), Dishoarding curve (DH) General Theory of
and Disinvestment curve (DI). The LD curve Employment, Interest
represents the total demand for loanable and Money” in 1936. J.M. Keynes
According to Keynes, interest is purely a The amount saved under this motive
monetary phenomenon because the rate depends on the level of income. Mt
of interest is calculated in terms of money. and Y are positively associated. (Say
To him, “interest is the reward for parting Mt = 0.125Y; that means if income
with liquidity for a specified period of is ₹ 1000, demand for transaction
time”. motive is ₹ 125)
According to Keynes, there are three The speculative motive relates to the
desire of the people to hold cash in
order to take advantage of market
movements regarding the future
changes in the price of bonds and
securities in the capital market.
The amount saved for this motive
depends on the rate of interest. Ms
= f (i). There is inverse relation
between liquidity preference and
rate of interest (Say Ms = 450-100i).
Rate of Interest
of a country. The total supply of money
E1
I1 of coins, currency
consists notes and bank
deposits
I
(Say M = E200). I2 E2
P1
E4
P I4
P
Equilibrium between Demand
and 0Supply of Money
M2 X 0 M3 M2 M4 X
The equilibrium
Demandbetween liquidity
for Money and preference Demand for Money and
Supply of Money
and demand for money determine the Supply of Money
Diagram
rate of interest. 6.5
In short-run, the supply of Diagram 6.6
money is assumed to be constant (₹ 200).
LP is the liquidity preference Curve =0.125Y+0.125Y+(450-100i). Total
(demand curve). M2 M2 shows the supply supply of money=₹ -200. Mt and Mp are
curve of money to satisfy speculative influenced by Y. Hence for the sake of
motive. Both curves intersect at the easy understanding, Ms alone can be
point E, which is the equilibrium point. considered Demand for money=supply
Hence, the rate of interest is T. If liquidity of money at equilibrium point:450-
preference increases from LP to L1P1 the 100i=200;450-200=100i;250=100i;
supply of money remains constant, the i=250/100=2.5.This is equilibrium interest
rate of interest would increase from OI In reality, interest rate is also influenced
to OI1. Numerical examples given above by national income and commodity sector
can also be used for better understanding. equilibrium.However, they are not included
Total demand for money=Mt+Mp+Ms here for making the understanding easier.
Suppose LP remains constant. If the supply
Y
M2 of money Yis OM2, the M3 interest
M2 isMOI2 and if the
4
L1 supply of moneyLis reduced from OM2 to OM3,
L the interestI would increase
E3
from OI2 to OI3. If the
3
supply of money is increased from OM2 to OM4,
Rate of Interest
Rate of Interest
LS
E1 the interest would decrease from OI2 to OI4.
I1
I E2
E
I P1 Criticism
2
E4
P
1. ThisI4 theory does not explain the P
LD existence of different interest rates
X 0 M2 X prevailing
0 inM3the market
M2 M4at the sameX
nd Demand for Money and time. Demand for Money and
Supply of Money Supply of Money
2. It explains interest rate only in the
Diagram 6.5 Diagram 6.6
short-run.
Distribution Analysis 135
3. Wages – Wages are the reward for labour. 8. Money wage – Money wage is the
4. Interest – Interest is the price paid remuneration received by a labourer
for the use of capital. in terms of money.
5. Profit – Profit is the reward for 9. Real wage – Real wage is the
organisation or entrepreneurship. purchasing power of the money
wages in terms of goods and
6. Quasi-Rent – Quasi-Rent is the
services.
surplus earned by man-made
appliances and instruments of 10. Loanable fund – Loanable fund is
production in the short-period. that part of capital meant for loan.
7. Transfer earnings – Transfer earnings 11. Innovation – Invention put into
refer to minimum payment payable to commercial practice.
a factor to retain it in its present use.
MODEL QUESTIONS
PART – A
Part- A Answers
1 2 3 4 5 6 7 8 9 10
a b c d a d b b b c
11 12 13 14 15 16 17 18 19 20
b a b b b b a a b d
28. What are the motives of demand for 29. List out the kinds of wages.
money?
30. Distinguish between rent and quasi-rent.
32. State the Dynamic Theory of Profit. 34. Write a note on Risk-bearing Theory
of Profit.
35. Explain the Marginal Productivity 37. Elucidate the Loanable Funds Theory
Theory of Distribution. of Interest.
36. Illustrate the Ricardian Theory of 38. Explain the Keynesian Theory of
Rent. Interest.
ACTIVITY
Visit any manufacturing unit (factory) and collect information
about factors of production (land, labour, capital and organisation)
and compare their remunerations.
Students may be asked to meet the stakeholders in the
factory.
Entrepreneur.
Manager or Managing Director.
Employees.
References
1. Dewett, K.M. and Navalur, M.H. (2016), “Modern Economic Theory”, S. Chand
and Company Pvt. Ltd., New Delhi.
2. Jhingan, M.L. ( ), Micro Economic Theory,
3. Ahuja, H.L. (2016), “Principle of Microeconomics”, S.Chand and Company Pvt.
Ltd., New Delhi.
4. Karl, E. Case, Raw C. Fair and Sharon Oster (2014), “Principle of Economics”,
Pearson, Darling Kindersley (India), Pvt. Ltd., New Delhi, Douglas C.
5. Alfred W. Stonier and Hague (2008), “A Text Book of Economic Theory”,
Pearson, Dorling Kindersley (India), Pvt Ltd., New Delhi.
CH A P TER
7 Indian Economy
Learning Objectives
10000
8000 Economy
6000
4000
2000
7.3.1 Strengths of Indian
Economy
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di
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Un
ite
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Diagram 7.1
1. India has a mixed economy
Indian economy is the Seventh largest
economy of the world. Being one of Indian economy is a typical example
the top listed countries. In terms of of mixed economy. This means both
industrialization and economic growth, private and public sectors co-exist and
India holds a robust position with an function smoothly. On one side, some
average growth rate of 7% (approximately). of the fundamental and heavy industrial
Even though the rate of growth has units are being operated under the public
been sustainable and comparatively stable, sector,while, due to the liberalization of
there are still signs of backwardness. the economy, the private sector has gained
3. An emerging market
China 738.5
India has emerged as vibrant economy India 462.1
Indonesia
has attracted significant foreign capital
132.7
Japan 118.4
through FDI and FII.India has a high
potential for prospective growth. This also
Diagram 7.2
makes it an emerging market for the world.
The service sector, contributes a lion’s share
4. Emerging Economy of the GDP in India. There has been a high
rise growth in the technical sectors like
WORLD NATION IN G-20 Information Technology, BPO etc. These
1. Argentina 11. Italy sectors have contributed to the growth
2. Australia 12. Japan
of the economy. These emerging service
3. Brazil 13. Mexico
sectors have helped the country go global
4. Canada 14. Russia
and helped in spreading its branches around
5. China 15. Saudi Arabia
6. European Union
the world.
16. South Africa
7. France 17. South Korea
8. Germany 18. Turkey 7. Large Domestic consumption
9. India 19. United Kingdom
With the faster growth rate in the economy
10. Indonesia 20. United States
the standard of living has improved a lot.
Indian Economy 145
This in turn has resulted in rapid increase The human capital of India is young. This
in domestic consumption in the country. means that India is a pride owner of the
The standard of living has considerably maximum percentage of youth. The young
improved and life style has changed. population is not only motivated but
skilled and trained enough to maximize
the growth. Thus human capital plays
8. Rapid growth of Urban areas
a key role in maximizing the growth
Urbanization is a key ingredient of the prospects in the country. Also, this has
growth of any economy. There has been a invited foreign investments to the country
rapid growth of urban areas in India after and outsourcing opportunities too.
independence. Improved connectivity in
transport and communication, education
and health have speeded up the pace of 7.3.2 Weakness of Indian
urbanization. Economy
1. Large Population
9. Stable macro economy
India stands second in terms of size of
The Indian economy has been projected population next to China and our country
and considered as one of the most stable is likely to overtake china in near future.
economies of the world. The current Population growth rate of India is very
year’s Economic survey represents the high and this is always a hurdle to growth
Indian economy to be a “heaven of rate. The population growth rate in India
macroeconomic stability, resilience and is as high as 1.7 per 1000.The annual
optimism. According to the Economic addition of population equals the total
Survey for the year 201415, 8%plus population of Australia.
GDP growth rate has been predicted, with
actual growth turning out to be a little 2. Inequality and poverty
less (7.6%). This is a clear indication of a
There exists a huge economic disparity in
stable macroeconomic growth.
the Indian economy. The proportion of
income and assets owned by top 10% of
10. Demographic dividend Indians goes on increasing. This has led to
an increase in the poverty level in the society
232 million Armenia and still a higher percentage of individuals
Youth population of India is nearly equal the total
population of 18 West Asian countries in 2011
Azerbaijan
Bahrain are living Below Poverty Line (BPL). As a
Cyprus
Georgia result of unequal distribution of the rich
Iraq
Israel becomes richer and poor becomes poorer.
Jordan
Kuwait
Youth West Asian Lebanon
Population countries Oman 3. Increasing Prices of
Qatar
= Saudi Arabia Essential Goods
State of Palestine
Syrian Arab Republic
Turkey Even though there has been a constant
United Arab Emirates
Yemen growth in the GDP and growth
The negative growth during has declined from 27.4 in 1951 to 7.1 in 2011.
1911-21 was due to rapid and frequent However, from the data it is clear that the fall
occurrence of epidemics like cholera, in birth rates is less than that of death rates.
plague and influenza and also famines. Kerala has the lowest birth rate (14.7)
The year 1921 is known as the ‘Year of and Uttar Pradesh has the highest birth rate
Great Divide’ for India’s population as (29.5). West Bengal has the lowest death
population starts increasing. rate (6.3) and Orissa (9.2) has the highest.
During 1951, population growth Among States, Bihar has the highest decadal
rate has come down from 1.33% to 1.25%. (2001-11) growth rate of population, while
Hence it is known as ‘Year of Small divide’. Kerala has the lowest growth rate. The four
In 1961, population of India states Bihar, Madhya Pradesh, Rajasthan
started increasing at the rate of 1.96% and Uttar Pradesh called BIMARU states
i.e, 2%. Hence 1961 is known as ‘Year of have very high population.
Population Explosion’. In the year 2001,
the Population of India crossed one billion c. Density of population
(100 crore) mark. It refers to the average number of persons
The 2011 census reveals growth of residing per square kilometre. It represents
youth population which is described as the man- land ratio. As the total land area
‘demographic transition’. remains the same, an increase in population
causes density of population to rise.
b. Birth rate and death rate
Density of population
Crude Birth rate: It refers to the number
Total population
of births per thousand of population. =
Land area of the region
Crude Death rate: It refers to the number
of deaths per thousand of population. Table 7.3 Density of population
Crude birth and death rates of India Year Density of population
during various years. (No. of persons per sq. km)
Table 7.2 1951 117
Birth rate and death rate 2001 325
Year C.B.R C.D.R. 2011 382
1951 39.9 27.4 (Source: Registrar General of India)
West Bengal, Bihar and Uttar Pradesh have expectancy is high when death rate is low
density higher than the India’s average and / or instances of early death are low.
density. Bihar is the most densely populated
state in the country with 1,102 persons Table 7.5 Life Expectancy
living per sq.km followed by West Bengal Year Male Female Overall
with 880. Arunachal Pradesh has low
density of population of only 17 persons. 1951 32.5 31.7 32.1
1991 58.6 59.0 58.7
d. Sex ratio 2001 61.6 63.3 62.5
It refers to the number of females per 2011 62.6 64.2 63.5
1,000 males. It is an important indicator (Source: Registrar General of India)
to measure the extent of prevailing equity
between males and females at a given During 1901 – 11, life expectancy was
point of time. just 23 years. It increased to 63.5 years
in 2011. A considerable fall in death rate
Table 7.4 Sex Ratio is responsible for improvement in the
Census year Sex ratio life expectancy at birth. However the life
(Number of females per expectancy in India is very low compared
1000 males) to that of developed countries.
1951 946
f. Literacy ratio
2001 933
It refers to the number of literates as a
2011 940 percentage of the total population. In
(Source: Registrar General of India) 1951, only one-fourth of the males and
one-twelfth of the females were literates.
In India, the sex ratio is more favourable to Thus, on an average, only one-sixth of the
males than to females. In Kerala, the adult people of the country were literates. In
sex ratio is 1084 as in 2011. The recent 2011, 82% of males and 65.5% of females
census (2011) shows that there has been a were literates giving an overall literacy
marginal increase in sex ratio. Haryana has rate of 74.04% (2011). When compared
the lowest sex ratio of 877 (2011) among to other developed countries and even Sri
other states, while Kerala provides better Lanka this rate is very low.
status to women as compared to other
States with 1084 females per 1000 males Table 7.6 Literacy ratio
Census Literate Males Females
e. Life expectancy at birth
year persons
It refers to the mean expectation of life at 1951 18.3 27.2 8.9
birth. Life expectancy has improved over
2001 64.8 75.3 53.7
the years. Life expectancy is low when
death rate is high and / or instances of early 2011 74.04 82.1 65.5
death are high. On the other hand, life (Source: Registrar General of India)
Kerala has the highest literacy ratio (94%), According to Agricultural Census,
Mizoram (91.3%),followed by Goa (88.7%), the area operated by large holdings (10
Himachal Pradesh (82.8%), Maharastra hectares and above) has declined and area
(82.3%),Sikkim (81.4%), and Tamil Nadu operated under marginal holdings (less
(80.1%). Bihar has the lowest literacy ratio than one hectare) has increased. This
(61.8%) in 2011. indicates that land is being fragmented
and become ineconomic.
7.4
Natural Resources
7.4.2 Forest Resources
Any stock or reserve that can be drawn India’s forest cover in 2007 is 69.09 million
from nature is a Natural Resource. The hectare which constitutes 21.02 per cent of the
major natural resources are - land, forest, total geographical area. Of this, 8.35 million
water, mineral and energy. India is rich hectare is very dense forest, 31.90 million
in natural resources, but majority of the hectare is moderately dense forest and the rest
Indians are poor. Nature has provided 28.84 million hectare is open forest.
with diverse climate, several rivers for
irrigation and power generation, rich 7.4.3 Important Mineral
minerals, rich forest and diverse soil. Resources
a. Iron-Ore
Types of Natural resources India possesses high quality iron-ore in
(a) Renewable Resources: Resources
abundance. The total reserves of iron-ore
that can be regenerated in a in the country are about 14.630 million
given span of time. E.g. forests, tonnes of haematite and 10,619 million
wildlife, wind, biomass, tidal, tonnes of magnetite. Hematite iron is
hydro energies etc. mainly found in Chattisgarh, Jharkhand,
Odisha, Goa and Karnataka.The major
(b) Non-Renewable Resources:
deposit of magnetite iron is available at
Resources that cannot be
western coast of Karnataka. Some deposits
regenerated. E.g. Fossil fuels-
of iron ore are also found in Kerala, Tamil
coal, petroleum, minerals, etc.
Nadu and Andhra Pradesh.
Indian Railways Provide Wi-Fi These are the kind of energy source
Facility First in India is Bangalore which can be renewed or reused again
Railway Station and again. These kinds of materials
do not exhaust or literally speaking
these are available in abundant or
infinite quantity. Example for this
Air India and Indian Airlines were kind include
merged on August 27, 2007 to from Solar energy
1.
National Aviation Company of India
2. Wind energy
Ltd. (NACIL)
3. Tidal energy
4. Geothermal energy
practice, unani or galenic herbal care, support of life. Since rain provides food,
homeopathy, allopathy, yoga, and many it forms the basis for stable economic life.
more. Each different healthcare form has Agriculture which is the most fundamental
its own treatment system and practice economic activity depends on rain,”It is rain
patterns. The medical practicing in India that both ruins and aids the ruined to rise”.
needs a proper licensing from the Ministry
of Health. All medical systems are now a. Factors of Production
under one ministry viz AYUSH.
Thiruvalluvar has made many passing
references about the factors of production
b. Health Care Services in India: viz., Land, Labour, Capital, Organisation,
The health care services in India are mainly Time, Technology etc. He says, “Unfailing
the responsibility of the Ministry of Health. harvest, competent body of men, group of
State wise, health status is better in Kerala men, whose wealth knows no diminution, are
as compared to other States. Compared to the components of an economy”.(Kural 61)
other developed countries, India’s health
status is not satisfactory. India’s health b. Agriculture
status is poor compared to Sri Lanka.
According to Thiruvalluvar, agriculture is the
most fundamental economic activity. They
7.8 are the axle-pin of the world, for on their
prosperity revolves prosperity of other sectors
Contributions of Indian of the economy, “The ploughmen alone”, he
Economic Thinkers says “live as the freemen of the soil; the rest
are mere slaves that follow on their toil”(Kural
7.8.1 Thiruvalluvar 1032). Valluvar believes that agriculture is
superior to all other occupation.
The economic ideas of
Thiruvalluvar are found
c. Public Finance
in his immortal work,
Thirukkural, a book Thiruvalluvar has elaborately explained
of ethics. Even though Public Finance under the headings Public
scholars differ widely Revenue, Financial Administration and
over the estimation of the Public expenditure. He has stated these
period of Thiruvalluvar, it is generally believed as 1) Creation of revenue, 2) Collection
that, he belongs to the Sangam age in Tamil of revenue, 3) Management of revenue
Nadu around third century A.D. Thiruvalluvar’s 4) Public expenditure
work is marked by pragmatic idealism.
A large part of Valluvar’s economic d. Public Expenditure
ideas are found in the second part of Valluvar has recommended a balanced budget.
Thirukkural, the porutpal. It deals with “ It is not a great misfortune for a state if its
wealth. Thiruvalluvar is a fundamental revenues are limited, provided the expenditure
thinker. He believes that rains are the basic is kept within bounds.” He has given certain
guidelines for a budgetary policy. “Budget for a 3) good crop 4) prosperity and happiness
surplus, if possible, balances the budget at other and 5) full security for the people.
times, but never budget for a deficit.” Valluvar
advocates the following main items of public 7.8.2 Mahatma Gandhi
expenditure: 1) Defence 2) Public Works and
3) Social Services. Gandhian Economics is
based on ethical foundations.
e. External Assistance In 1921, Gandhi wrote,
“Economics that hurts the
Valluvar was against seeking external
moral well-being of an
assistance. According to Kural No. 739,
individual or a nation is immoral, and
countries taking external assistance are not
therefore, sinful.” Again in 1924, he repeated
to be considered as countries at all. In other
the same belief: “that economy is untrue
words, he advocated a self-sufficient economy.
which ignores or disregards moral values”.
economic growth on a self- accelerating M.Sc degree in 1921. And his thesis“
growth. Nehru carried through this basic The Problem of the Rupee” was accepted
strategy of planned development. Nehru’s for the award of the D.Sc degree by the
contribution to the advancement of science, London School of Economics in 1923. It is
research, technology and industrial a miracle that RBI was conceptualized as
development cannot be forgotten. It was per the guidelines presented by Ambedkar
during his period, many IITs and Research in his book, “The Problem of the Rupee;Its
Institutions were established. He always origin and its solution”. The main economic
insited on “scientific temper”. ideas of Ambedkar may be studied under
four broad headings:
c. Democratic Socialism 1. Financial Economics
Socialism is another contribution of Nehru Much of the work done by Ambedkar
to India. He put the country on the road during his stay abroad mostly
towards a socialistic pattern of society. But during the period 1913-1923, was
Nehru’s socialism is democratic socialism. in the field of Finance Economics.
Ambedkar divided the evolution of
7.8.4 B. R. Ambedkar provisional finance into three stages:
(i). Budget by Assignment (1871-72
B. R. Ambedkar (1891- to 1876-77); (ii) Budget by Assigned
1956) was a versatile Revenue (1877-78 to 1881-82); and
personality. He was (iii) Budget by Shared Revenues
the architect of the (1882-83 to 1920-1921).
Indian Constitution, 2. Agricultural Economics
a custodian of social In 1918, Ambedkar published a paper
justice and a champion “Small Holding in India and their
of socialism and state Remedies”. Citing Adam Smith’s ‘Wealth
planning. Ambedkar’s of Nations”, he made a fine distinction
writings included between “Consolidation of Holdings”
“Ancient Indian Commerce” (a thesis and “Enlargement of Holdings”.
submitted to the Columbia University for the
3. Economics of Caste
award of the Master of Arts Degree in 1915),
‘National Dividend of India: A Historical Ambedkar believed that caste was an
and Analytical Study (a thesis for which he obstacle to social mobility. It resulted
was awarded Ph.D). His thesis was published in social stratification. He was of
as ‘The Evolution of Provincial Finance the firm view that individuals must
in British India: A Study of the Provincial be free to change their occupations.
Decentralization of Imperial Finance”. Moreover, the caste system caused
social tensions. The caste system
Ambedkar’s thesis on “Provincial
has resulted in the absence of social
Decentralization of Imperial Finance
democracy in India as distinct from
in British India” was accepted for the
political democracy.
their own development with a more and drew attention to the incidence of
meaningful participation by people. absolute and relative deprivation.
6. Investment, Income and Multiplier 2. Poverty and Inequality
Rao’s examination of the “interrelation Sen has carried out massive work
between investment, income and on poverty and inequality in
multiplier in an under developed India. Sen’s major point has been
economy” (1952) was his major that the distribution of income/
contribution to macroeconomic consumption among the persons
theory. As a thinker, teacher, below the poverty line is to be taken
economic adviser and direct policy into account.
maker, V.K.R.V. Rao followed the 3. The Concept of Capability
footsteps of his great teacher, John
The concept of capabilities developed
Maynard Keynes.
by Sen has been cited as a better
7. Institution Builder index of wellbeing than commodities
He founded three national level or utilities. Capability, as defined
research institutes namely Delhi by Sen, is the ability to transform
School of Economics, Institute of Rawlsian primary goods to the
Economic Growth (both at Delhi) achievement of wellbeing.
and Institute for Social and Economic 4. Entitlement
Change (Bangalore)
Sen has included the concept of
entitlement items like nutrition,
food, medical and health care,
7.8.7 Amartya Kumar Sen
employment, security of food
The Nobel citation supply in times of famine etc. He
refers to Sen’s considered famine as arising out of
contributions to the failure of establishing a system of
social choice theory, entitlements.
development 5. Choice of Technique
economics, study on poverty and famines Sen’s ‘Choice of Technique ‘ was a
and concept of entitlements and capability research work where he argued that in
development (1998). a labour surplus economy, generation
1. Poverty and Famines of employment cannot be increased
Sen's Poverty and Famines: An Essay at the initial stage by the adaptation
on Entitlement and Deprivation” of capital- intensive technique.
(1981) is both a theoretical and an Conclusively, Amartyasen, more
applied work. In the book, several than just an economist, is an ethical
famines have been studied in the philosopher. He is a lover of freedom
working of a general theoretical and a humanist. He has focused on the
framework from an original angle. He poor, viewing them not as objects of
examined various meanings of poverty pity requiring charitable hand–outs,
Indian Economy 160
MODEL QUESTIONS
11. The number of births per thousand 16. Ambedkar the problem studied by in
population is called as the context of Indian Economy is …….
a. Crude death rate a. Small land holdings and their
b. Mortality rate remedies
14. Who among the following propagated 19. Amartya Kumara Sen received the
Gandhian Ecomomic thinkings. Nobel prize in Economics in the year
a. Jawaharlar Nehru a. 1998
b. VKRV Rao b. 2000
c. JC Kumarappa c. 2008
d. A.K.Sen d. 2010
15. The advocate of democratic socialism 20. Thiruvalluvar economic ideas mainly
was dealt with
a. Jawaharlal Nehru a. Wealth
b. P.C. Mahalanobis b. Poverty is the curse in the society
c. Dr. Rajendra Prasad c. Agriculture
d. Indira Gandhi d. All of them
Part- A - Answers
1 2 3 4 5 6 7 8 9 10
a b c b b a b b b a
11 12 13 14 15 16 17 18 19 20
d c b c a b b a a d
Part-B
Answer the following questions in one or two sentences.
21. Write the meaning of Economic 25. Give the meaning of non-renewable
Growth. energy.
22. State any two features of developed 26. Give a short note on Sen’s ‘Choice of
economy. Technique’.
23. Write the short note on natural 27. List out the reasons for low per capita
resources. income as given by V.K.R.V. Rao.
35. Explain the strong features of Indian 37. Bring out Jawharlal Nehru’s contribution
economy to the idea of economic development.
36. Write the importance of mineral 38. Write a brief note on the Gandhian
resources in India. economic ideas.
ACTIVITY
1. Visit a village nearby you and find out the number households
living without basic facilities
References
Indian
1. Ramesh
Economy
Singh-by
- Indian
RameshEconomy
Singh 5th edition - McGraw Hill Publication
Gaurav
Indian
2. datt &-Datt
Economy Aswani Mahajan - Datt & Sundharam Indian Economy 72nd edition
& Sundharam
- S.Chand
India’s Publication
Reforms: How They Produced Inclusive GrowthBy Jagdish Bhagwati; Arvind
Panagariya
3. Jagdish Bhagwati; Arvind Panagariya - India’s Reforms: How They Produced
Inclusive
Reforms Growth Transformation in IndiaBy Jagdish Bhagwati; Arvind Panagariya
and Economic
4. Jagdish
India: Bhagwati;GiantBy
The Emerging Arvind Arvind
Panagariya - Reforms and Economic Transformation in
Panagariya
India
http://www.economicsdiscussion.net/indian-economy/top-11-features-of-a-
5. Arvind Panagariya - India: The Emerging Giant
developing-economy/18987
http://www.economicsdiscussion.net/indian-economy/top-11-features-of-a-
developing-economy/18987
CH A P TER
Learning Objectives
(c)
Who is responsible for paying the
land revenue to the government.
8.3.1 Zamindari System or
8.2.4 Decline of Indian the Land lord-Tenant
Handicrafts System
The Indian handicrafts products had This system was created by the British East
a worldwide market. Indian exports India Company, when in 1793, LordCornwallis
consisted chiefly of hand weaved introduced ‘Permanent Settlement Act’.
cotton and silk fabrics, calicoes, Under this system the landlords or the
artistic wares, wood carving etc. Zamindars were declared as the owners of
Indian Economy 168
the land and they were responsible to pay the (a) Industrial growth during the 19th
land revenue to the government. The share century
of the government in total rent collected was During the 19th century, British investors
fixed at 10/11th, the balance going to the started to pioneer industrial enterprises in
Zamindars as remuneration. India as they had experiences of running
industries at home. British enterprises also
8.3.2 Mahalwari System or received maximum state support. Although
Communal System of the Britishers initiated industrialisation
Farming process in the 19th century, they were
primarily interested in making profit and
After introduction of this system, it was
not in accelerating the economic growth
later extended to Madhya Pradesh and
in India. At the end of 19th century,
Punjab. The ownership of the land was
there were about 36 jute mills, 194 cotton
maintained by the collective body usually
mills and a good number of plantation
the villagers which served as a unit of
industries. The production of coal had
management. They distributed land
risen to over 6 million tonnes per annum.
among the peasants and collected revenue
from them and pay it to the state.
(b) Industrial progress during the 20th
century
8.3.3 Ryotwari System or During the first part of 20th century,
the Owner-Cultivator Swadeshi movement stimulated the
System industrialisation process in India. The
This system was initially introduced existing industries and new industries
in Tamil Nadu and later extended to had maintained a slow but steady growth
Maharashtra,Gujarat, Assam, Coorg, East till the outbreak of the First World War
Punjab and Madhya Pradesh. Under this in 1914.By this time more than 70 cotton
system the ownership rights of use and mills and 30 jute mills were set up. Coal
control of land were held by the tiller himself. production was doubled. The foundation
There was the direct relationship between of iron and steel industry was laid. Railway
owners and tillers. This system was the least network was extended.
oppressive system before Independence. During the period 1924-39, various
major industries like iron and steel, cotton
textiles, jute, matches, sugar, paper and
8.4 pulp industry etc. were brought under
Process of Industrial protection scheme. This led to rapid
Transition and Colonial expansion of protected industries in India.
Capitalism These protected industries captured the
entire Indian market and eliminated
This process of industrial transition in foreign competition totally.
India during the British period can be Thus in the early part, British rule
broadly classified into two as given below: tried to transform the Indian economy as
Indian Economy 169
8.6.2 Industrial Policy
The term Green Revolution refers to the
Resolution 1956
technological breakthrough in agricultural
1. The Industrial Policy of 1956 sought practices. During 1960’s the traditional
to give a dominant role to public agricultural practices were gradually
sector. At the same time, it assured a
fair treatment to the private sector.
2. The Government would support and
encourage cottage and small scale
enterprises by restricting volume of
ranks number one in the raw jute zz The paper industry in India is
and jute goods production and ranked among the 15 top global
number two in export of jute goods paper industries.
in the world.
7. Silk industry
3. Cotton and textile industry zz India is the second-largest(first
being China) country in the world
zz Oldest industry of India, and
in producing natural silk. At
employs largest number of workers.
present, India produces about 16%
zz It is the largest organised and broad- silk of the world.
based industry which accounts for
zz India enjoys the distinction of being
4% of GDP, 20% of manufacturing
the only country producing all the
value-added and one third of total
five known commercial varieties of
export earnings.
silk viz Mulberry, Tropical Tussar,
zz The first Indian modernised cotton Oak Tussar, Eri and Muga.
cloth mill was established in 1818
at Fort Gloaster near Calcutta. But 8. Petroleum and natural gas
this mill was not successful. The zz First successful Oilwell was dug in
second mill named “Mumbai’s India in 1889 at Digboi, Assam.
Spinning and Weaving Co.” was zz At present a number of regions with
established in 1854 at Bombay by oil reserves have been identified and
KGN Daber. oil is being extracted in these regions
b. Small Service Industries: The Bank etc. However, the government keeps
investment in equipment is more reducing the stake in PSU banks as and
than ₹10 lakhs but does not exceed when they sell shares. So, to that extent they
₹2 crores. can also become minority shareholders in
c. Medium Service Enterprises: The these banks. This is in accordance with the
investment in equipment is more privatization policy.
than ₹2 crores but does not exceed
₹5 crores. Private Sector Banks
In these banks, most of the equity is
owned by private bodies, corporations,
8.11 institutions or individuals rather
Public Sector and than government. These banks are
Private sector managed and controlled by private
banks promoters.
Of the total banking industry in India,
Public Sector Banks public sector banks constitute 72.9% share
Public sector bank is a bank in which the while the rest is covered by private players.
government holds a major portion of the In terms of the number of banks, there are
shares. Say for example, SBI is public sector 27 public sector banks and 22 private sector
bank, the government holding in this banks.As part of its differentiated banking
bank is 58.60%. Similarly PNB is a public regime, RBI, the apex banking body,
sector bank, the government holds a stake has given license to Payments Bank and
of 58.87%. Usually, in public sector banks, Small Finance Banks (SFBs). This is an
government holdings are more than 50 attempt to boost the government’s Financial
percent. Public sector banks are classified Inclusion drive. (But, there may be other
into two categories: 1. Nationalised Banks problems).
2. State Bank and its Associates. As a result, Airtel Payments Bank
In case of nationalized banks, the and Paytm Payments Bank Limited have
government controls and regulates the come up. How far these banks would help
functioning of the banking entity.Some the poor people is not known.
examples are SBI, PNB, BOB, OBC,Allahabad
Nationalization
4. Nationalisation of banks was required Its main focus was on the agricultural
to reduce the regional imbalances development of the country.
where the banking facilities were not This plan was successful and achieved
available. the GDP growth rate of 3.6% (more
5. Before Independence, the numbers than its target)
of banks were certainly inadequate.
After nationalization, new bank Second Five Year Plan
branches were opened in both rural (1956-1961)
and urban areas. It was based on the P.C. Mahalanobis
6. Banks created credit facilities mainly Model.
to the agriculture sector and its allied Its main focus was on the industrial
activities after nationalization. development of the country.
This plan was successful and achieved
After New Economic Policy 1991, the
the growth rate of 4.1%
Indian banking industry has been facing
the new horizons of competitions,
Third Five Year Plan
efficiency and productivity. With all these
(1961-1966)
developments people in villages and slums
depend largely on local money lenders for This plan was called ‘GadgilYojana’ also.
their credit need. This is unfortunate. The main target of this plan was to
make the economy independent and
to reach self propelled position or take
8.13 off.
Performance of India’s Due to Indo -China war, this plan could
Five Year Plans not achieve its growth target of 5.6%
This plan failed and could achieve For the first time, due to the pressure
growth rate of 3.3% only, against the from private sector the private sector
target of 5.7%. got the priority over public sector.
Its growth target was 5.0% but it
Fifth Five Year Plan achieved 6.0%.
(1974-1979)
Annual Plans
In this plan top priority was given to
agriculture, next came industry and Eighth five year Plan could not take place
mines. due to volatile political situation at the
Overall this plan was successful, centre. So two annual programmes are
which achieved the growth rate of formed in 1990-91& 1991-92.
4.8% against the target of 4.4%.
Eighth Five Year Plan
The draft of this plan was prepared
(1992-1997)
and launched by D.P. Dhar. This plan
was terminated in 1978. In this plan the top priority was
given to development of the human
Rolling Plan resources i.e. employment, education
and public health.
This plan was started with an annual plan
During this plan, New Economic
for 1978-79 and as a continuation of the
Policy of India was introduced.
terminated fifth year plan.
This plan was successful and got
annual growth rate of 6.8% against the
Sixth Five Year Plan target of 5.6%.
(1980-1985)
The basic objective of this plan was Ninth Five Year Plan
poverty eradication and technological (1997-2002)
self reliance. Poverty eradication The main focus of this plan was
(GARIBI-HATAO) was the motto. “growth with justice and equity”.
It was based on investment yojana. This plan failed to achieve the growth
Its growth target was 5.2% but it target of 7% and Indian economy grew
achieved 5.7%. only at the rate of 5.6%.
Objectives of this plan included the This plan aimed to double the per capita
establishment of the self sufficient income of India in the next 10 years.
economy and opportunities for It aimed to reduce the poverty ratio to
productive employment. 15% by 2012.
MODEL QUESTIONS
d. Noorjakhan a. 1956
b. 1991
3. The power for governance of India
c. 1948
was transferred from the East India
d. 2000
Company (EIC) to the British crown in
7. The objective of the Industrial Policy
a. 1758 1956 was ……..
b. 1858 a. Develop heavy industries
8. The industry which was de-reserved 13. In the first five year plan, The top
in 1993 ? priority was given to ……. Sector.
a. Railways a. Service
b. Mining of copper and zinc b. Industrial
c. Atomic energy c. Agriculture
d. Atomic minerals d. Bank
9. The father of Green Revolution in 14. Tenth Five year plan period was…….
India was ………… a. 1992-1997
a. M.S. Swaminathan b. 2002-2007
b. Gandhi c. 2007-2012
c. Visweswaraiah d. 1997-2002
d. N.R. Viswanathan 15. According to HDR (2016), India
ranked …… out of 188 countries.
10. How many commercial banks were
nationalised in 1969 ? a. 130 b. 131
a. 10 c. 135 d. 145
d. 16 a. 1989-1991
b. 1990-1992
11. The main objective of nationalisation
of banks was ……. c. 2000-2001
d. 1981-1983
a. Private social welfare
b. Social welfare 17. The Oldest large scale industry in
India
c. To earn
a. cotton b. jute
d. Industries monopoly
c. steel d. cement
12. The Planning Commission was setup
18. Human development index (HDI) was
in the year …..
developed by
a. 1950
a. Jawaharlal Nehru
b. 1955
b. M.K. Gandhi
c. 1960
c. Amartiya Sen
d. 1952
d. Tagore
Part-A Answers
1 2 3 4 5 6 7 8 9 10
a c b c a c a b a c
11 12 13 14 15 16 17 18 19 20
b a c b b b a c d c
Part-B
Answer the following questions in one or two
sentences.
21. What are the Phases of colonial 24. List out the weaknesses on Green
exploitation of India? Revolution.
22. Name out the different types of 25. What are the objectives of Tenth five
land tenure existed in India before year plan ?
Independence.
26. What is the difference between HDI
23. State the features that distinguish a and PQLI ?
land tenure system from other system.
27. Mention the indicators which are used
to calculate HDI.
28. Explain about the Period of Merchant 31. State the reasons for nationalization of
Capital. commercial banks.
29. The Handicrafts declined in India in 32. Write any three objectives of Industrial
British Period. Why? Policy 1991.
30. Elucidate the different types of land 33. Give a note on Twelfth Five Year Plan.
tenure system in colonial India.
34. What is PQLI ?
36. Explain the role of SSIs in economic 38. Describe the performance of 12th five
developmet? year plan in India.
ACTIVITY
1. To know the value of freedom, students can collect pictures
of places like Jalian Walapak, Meerut, Thandi and photos of
freedom fighters.
2. Display the demonstration effect of present Indians in culture,
dressing and life style to emphasize the Swadhesi.
References
Websites
www.gatewayforindia.com/history/eastindiacompanybefore1857
www.threecolonialportcitiesinindia/geographicalreviewvol.78.issue.1 pg:32-47.-
M.Kosambi, 1978.
www.planningcommission.nic.in
https://www.scribd.com/doc/18643336/characteristics-of-indian-economy-pre-
colonial-and-colonial
https://en.wikipedia.org/wiki/Economy_of_India
CH A P TER
9 Development
Experiences in India
Learning Objective
9.1
Introduction
twin problems of rampant poverty and
At the time of Independence in 1947, widespread unemployment, both resulting
India was a typically backward economy. in low standard of living.
Owing to poor technological and The year 1991 is an important landmark in
scientific capabilities, industrialization the economic history of post-independent
was limited and lop-sided. Agricultural India. The country went through a severe
sector exhibited features of feudal and economic crisis in the form of serious Balance
semi-feudal institutions, resulting into of Payments problem. Indian economy
low productivity. Means of transport and responded to the crisis by introducing a set
communications were underdeveloped. of policies known as Structural Reforms.
Educational and health facilities were These policies were aimed at correcting the
grossly inadequate and social security weaknesses and rigidities in the various
measures were virtually non-existent. sectors of the economy such as Industry,
In brief, the country suffered from the Trade, Fiscal and Agriculture.
9.2
Meaning of Liberalization,
• Expansion of • Cut throat
Privatization and Market Competition
• International • Increase in
Cooperation Inequalities
7.4
7.1
Important Initiatives by
7.1 7.0 7.0 7.0
5.6 6.4 the Government towards
3.0
3.3 3.2 Industrial Policy
2.6
9.6
Industrial Sector Reforms
productivity and there was a shift towards about 25% to 30% of production. Besides,
cash crop cultivation. Moreover, agricultural quality of a sizable quantity of produce
indebtedness pushed several farming also deteriorates by the time it reaches the
households into poverty and some of them consumer. Most of the problems relating to
resorted to extreme measures like suicides. the marketing of fruits and vegetables can
be traced to their perishability. Perishability
9.7.1 Crop Insurance is responsible for high marketing costs,
market gluts, price fluctuations and other
Agriculture in India is highly prone
similar problems. In order to overcome this
to risks like droughts and floods. It is
constraint, the Government of India and
necessary to protect the farmers from
the Ministry of Agriculture promulgated
natural calamities and ensure their
an order known as “Cold Storage Order,
credit eligibility for the next season. For
1964” under Section 3 of the Essential
this purpose, the Government of India
Commodities Act, 1955. However, the cold
introduced many agricultural schemes
storage facility is still very poor and highly
throughout the country.
inadequate.
MODEL QUESTIONS
11.
Financial Sector reforms mainly 16. The Raja Chelliah Committee on
related to _______________ Trade Policy Reforms suggested the
a. Insurance Sector peak rate on import duties at
b. 1991 a. 18%
c. 1995 b. 24%
d. 2000 c. 28%
d. 32%
15. The farmers have access to credit
under Kisan credit card scheme 20. The transfer of ownership from public
through the following except sector to private sector is known as
a. co-operative banks _____.
b. RRBs a. Globalization
Part-A Answers
1 2 3 4 5 6 7 8 9 10
d b c c a c a b d d
11 12 13 14 15 16 17 18 19 20
c a d b d b c a c c
Part-B A
nswer the following questions in one or two
sentences.
21.
Why was structural reform 25.
Write three policy initiative
implemented in Indian Economy? introduced in 1991 – 92 to correct the
fiscal imbalance.
22. State the reasons for implementing
LPG. 26. State the meaning of Special Economic
Zones.
23. State the meaning of Privatization.
27. State the various components of
24. Define disinvestment
Central government schemes under
post - harvest measures.
28. How do you justify the merits of 31. Give short note on Cold storage.
Privatisation?
32. Mention the functions of APMC.
29. What are the measures taken towards
33. List out the features of new trade
Globalization?
policy.
30. Write a note on Foreign investment
34. What is GST? Write its advantages.
policy?
35. Discuss the important initiatives taken 37. Describe the salient features of EXIM
by the Government of India towards policy (2015 – 2020)
Industrial Policy.
36.
Explain the objectives and
characteristics of SEZs.
ACTIVITY
1. Collect various bills from the neighbouring store and find out
the Nature of Product sold and GST rate
References
CH A P TER
10 Rural Economy
Learning Objectives
2 To bring into the light the problems of rural villages and to familiarise the
initiatives undertaken.
10.1
Introduction
Micro Finance
In 2009-10, the number of new SHGs
Micro finance, also known as micro credit, having credit-linked with banks
is a financial service that offers loans, was 1.59 million and a bank loan of
savings and insurance to entrepreneurs ₹14,453 Crores was disbursed to these
and small business owners who do not SHGs. Further, the number of SHGs
have access to traditional sources of which maintained savings accounts
capital, like banks or investors. The goal of with banks at the end of March 2010
micro financing is to provide individuals was 6.95 million.
with money to invest in themselves or
their business. Microfinance is available
through micro finance institutions, which they lend small amounts to their members
range from small nonprofit organizations for interest. Based on their performance,
to larger banks. In India, Non Government they are linked with the bank for further
Organizations (NGOs) play a pivotal role in assistance under SHG Bank Linked
the development of micro finance service. Programme (SBLP) started in 1992. It is a
Microfinance industry in India have grown holistic programme of micro-enterprises
vastly in the last two decades. In 2009, the covering all aspects of self-employment,
total number of micro finance institutions organization of the rural poor into
in India was around 150 (Tripathi, 2014). self Help groups and their capacity
building, planning of activity clusters,
Self-Help Groups (SHGs) infrastructure build up, technology, credit
and marketing.
The main objective of this programme is to
bring the beneficiaries above the poverty
line by providing income generating
assets to them through bank credit and
government subsidy. NABARD estimates
masses of the Indian poor continue to especially the vulnerable groups. NRHM
fight hopeless and constantly losing the seeks to provide equitable, affordable and
battle for survival and health. Indian quality health care to the rural population,
rural people are suffering with various especially the vulnerable groups.
epidemics such as small pox, cholera, NRHM focuses on Reproductive,
malaria, typhoid, dengue, chicken guniya, Maternal, Newborn, Child Health and
etc. This is mainly due to lack of medical Adolescent (RMNCH+A) Services.
facilities, deep ignorance and poverty. The emphasis here is on strategies for
Indian Constitution clearly lays down improving maternal and child health
that “States shall regard the rising of the through a continuum of care and the life
level of nutrition and standard of living cycle approach.
of its people and improvement of public
health as among its primary duties”.
To meet this constitutional directive. 10.11
Several programmes for nutrition have
Rural Infrastructure
been implemented. These include
Supplementary Feeding Programmes
including Mid Term Meal Programme, Rural Housing
Nutrition Education through Printed House is one of the basic needs of every
Media and Television and Compulsory family. Provision of better housing facilities
Fortification of Common Salt with Iodine. increases the productivity of labour. The
Still in terms of health standard, Sri Lanka housing problem is getting aggravated due to
is better than India, and in india, Kerala is rapid adoptation of nuclear families. Housing
better than Tamil Nadu. does not mean provision of house alone but
also proper water supply, good sanitation,
proper disposal of sewage etc. The problem
National Rural Health Mission of housing can be tackled by the development
The National Rural Health Mission of low cost technology in house construction,
(NRHM) was launched on 12th April provision of adequate housing finance and
2005, to provide accessible, affordable and provision of land sites to landless workers in
quality health care to the rural population, rural areas.
Rural Economics 218
As per the NSSO data, 38 per cent of the farmers to bring their produce to the
the households lived in with one room while urban markets and to have access to distant
another 36 per cent lived with two rooms. markets and other services.
10.13
Slater Villages: Gilbert Slater, the first Conclusion
professor of economics at Madras
University, published his book, Crucial steps to strengthening the rural
Some South Indian Villages, in 1918 economy are already being taken through
following a survey of some villages various policies. These steps include
like Vadamalaipuram (Ramnad), investments in areas ranging from health,
Gangaikondan (Tirunelveli), information technology, education,
Palakkuurichi (Tanjore) and Dusi infrastructure and small business. The
(North Arcot) in Tamil Nadu by his Administration is committed to building
students. It was subsequently done by on these unprecedented measures in the
different groups of researchers in the months and years to come. PURA (Provision
1930s, 1950s, 1960s, and two of the of Urban facilities for Rural Areas) needs
villages only in the early 21st century. to be given due emphasis, without which
The resurveys became an important Indian villages cannot prosper.
historical record. They provided a
baseline for several later revisits to Glossary
his villages, and have inspired many
successors. Much of our knowledge Rural Economics Application of
of rural change depends on Economic Principles
these studies. in rural areas.
Population Number of persons
Density living per sq.km
or per sq. mile.
1. Efforts need to be made to raise farm Unemployment Situation of people
and non-farm rural real incomes. with willingness
2. Investment in basic infra-structure and ability to work
and social services need to be but not getting
increased. employed.
MODEL QUESTIONS
1. Which is considered as the basic unit 3. Identify the feature of rural economy.
for rural areas? a. Dependence on agriculture
a. Panchayat b. High population density
b. Village c. Low level of population
c. Town d. Low level of inequality
d. Municipality
4.
What percentage of the total
2. Which feature is identified with rural population live in rural area, as per
areas? 2011 censes?
a. Low population density a. 40
b. High population density b. 50
c. Low natural resources c. 60
d. Low human resources d. 70
5. How do you term people employed in 10. Indicate the cause for rural poverty.
excess over and above the requirements? a. Lack of non-farm employment
a. Unemployment b. High employment
b. Underemployment or c. Low inflation rate
Disguised Unemployment
d. High investment.
c. Full employment
10. Indicate the cause for rural poverty.
d. Self-employment
a. Lack of non-farm employment
6. What is the term used to denote the
b. High employment
coexistence of two different features
in an economy? c. Low inflation rate
15.
Identify the cause for rural 18. Identify the year in which National
indebtedness in India. Rural Health Mission was launched.
a. Poverty a. 2000 b. 2005
b. High population c. 2010 d. 2015
c. High productivity 19. Identify the advantages of rural roads.
d. Full employment a. Rural marketing
16. In which year, Regional Rural Banks b. Rural employment
came into existence? c. Rural development
a. 1965 b. 1970 d. All the above
c. 1975 d. 1980
20. “ An Indian farmer is born in debt, lives
17. Identify the year of launch of MUDRA in debt, dies in debt and bequeaths
Bank? debt”-who said this?
a. 1995 b. 2000 a. Adam Smith
c. 2010 d. 2015 b. Gandhi
c. Amartya Sen
d. Sir Malcolm Darling
Answers Part - A
1 2 3 4 5 6 7 8 9 10
b a a c b c d b d a
11 12 13 14 15 16 17 18 19 20
b c b d a c d b d d
22.
What do you mean by Rural 27. What do you mean by Micro Finance?
Development?
28. State any two causes of housing
23. Rural Poverty – Define. problem in rural areas.
25.
What is meant by Disguised 30. State any two factors hindering Rural
Unemployment? Electrification in India.
Part - C A
nswer the following questions in about a paragraph
each
31.
State the importance of Rural 34. What are the remedial measures for
Development. Rural Unemployment?
32.
Explain the causes for Rural 35. Write a note on Regional Rural Banks.
Backwardness.
36. Mention the features of SHGs.
33. Enumerate the remedial measures to
37. List out the objectives of MUDRA
Rural Poverty.
Bank.
39.
Discuss the problems of Rural
Economy.
ACTIVITY
References
CH A P TER
Learning Objectives
NAGAPATTINAM
}
11.2 11.3
Highlights of Tamil Nadu Performance of Tamil Nadu
Economy Economy
Growth of SGDP in Tamil Nadu has Some of the States like Gujarat and
been among the fastest in India since Maharashtra seem to perform well in some
2005. of the economic indicators. Kerala tops in
Poverty reduction in Tamil Nadu has literacy, IMR and MMR. In recent years Tamil
been faster than that in many other Nadu’s performance is outstanding and far
States. ahead of all other states in the spheres of health,
higher education, growth of MSMEs, poverty
Tamil Nadu contains a smaller
alleviation and employment generation.
proportion of India’s poor population.
Tamil Nadu is the second largest
contributor to India’s GDP. Tamil Nadu is placed third in health
Tamil Nadu ranks 3rd in Human index
Development Index (source: UNDP- The Tamil Nadu state has come third
2015) after Kerala and Punjab in a health
Tamil Nadu ranks 3rd in terms of index report. The neo natal mortality
invested capital (₹2.92 lakh crore) and rate is 14 lower than that of many other
value of total industrial output (₹6.19 states and that the under 5 mortality has
lakh crore). dropped from 21 in 2014 to 20 in 2015
Tamil Nadu ranks first among the - Healthy States, Progressive India
states in terms of number of factories Report, (2018) –NITI AAYOG
with 17% share and industrial workers
(16% share) of the country.
The reasons for the relative success
Tamil Nadu is placed third in health
of Tamil Nadu lie in extending social
index as per the NITI AAYOG report.
policies to cover most of the population.
Tamil Nadu has a highest Gross For instance the Public Distribution
Enrolment Ratio in higher education. System, midday meals and public health
Tamil Nadu has the largest number of infrastructure have near universal coverage.
engineering colleges
Tamil Nadu has emerged as a major 11.4
hub for renewable energy.
Natural Resource
Tamil Nadu has highest credit Deposit
Ratio in commercial and Cooperative
banks. 11.4.1 Water Resources
Has highest ranks first on investment
Tamil Nadu is not endowed with rich
proposals filed by MSMEs.
natural resources compared to other
North East monsoon is the major source of with Thermal power plants, Fertilizer and
rainfall followed by South West monsoon. Carbonisation plants. Magnesite mining
There are 17 river basins in Tamil Nadu. is at Salem from which mining of Bauxite
The main rivers are Palar, Cheyyar, ores are carried out at Yercaud and this
Ponnaiyar, Cauvery, Bhavani, Vaigai, region is also rich in Iron Ore at Kanjamalai.
Chittar, Tamiraparani, Vellar, Noyyal Molybdenum is found in Karadikuttam in
Siruvani, Gundar, Vaipar, Valparai etc. Madurai district.
Wells are the largest source of irrigation
in Tamil Nadu (56%). Table 11.2 Mineral Resources
Mineral Reserve National
Table 11.1 Water Resources (Tonnes) Share
Source of Numbers Lignite 30,275,000 87%
Irrigation Vermiculite 2,000,000 66%
Reservoirs 81 Garnet 23,000,000 42%
Canals 2239 Zircon 8,000,000 38%
Tanks 41262 Graphite 2,000,000 33%
Tube Wells 3,20,707 Ilmenite 98,000,000 28%
Open Wells 14,92,359 Rutile 5,000,000 27%
Source: Tamil Nadu Government Season & Monazite 2,000,000 25%
Crop Report 2012-13
Magnesite 73,000,000 17%
(Source: Department. of Geology and
11.4.2 Mineral Resources Mining)
Tamil Nadu has a few mining projects based
11.5
on Titanium, Lignite, Magnesite, Graphite,
Limestone, Granite and Bauxite. The first one 11.5.Population
is the Neyveli Lignite Corporation that has
led development of large industrial complex Tamil Nadu stands sixth in population
around Neyveli in Cuddalore district with 7.21 crore against India’s 121 crore as
Tamil Nadu Economy 228
per 2011 census. However, Tamil Nadu’s 995 which is far better compared to most
population is higher than that of several of the States and all India level. Tamil Nadu
countries according to UN Report. stands third next only to Kerala state and
Puduchery Union Territory in sex ratio.
Table 11.3 Population
Table 11.4 H
ealth and Social
State / Country Population Indicators
(in Crore)
Sl. Indicator Tamil India
Tamil Nadu 7.2 No Nadu
U.K. 6.5
1 IMR 17 34
France 6.5
2 MMR 79 159
Italy 5.9
3 Life Expectancy
South Africa 5.6
Total 70.6 67.9
Spain 4.7
Male 68.6 66.4
Sri Lanka 2.1 Female 72.7 69.6
(Source: Projections published by the United
Nations in the 2017 Revision of World
4 Literacy Rate
Population Prospects.) Total 80.33 % 74.04 %
Male 86.81 % 82.14 %
11.5.1 Density Female 73.86 % 65.46 %
The density of population which measures 5 Sex Ratio 995 940
population per sq.km is 555 in 2011
against 480 in 2001. Tamil Nadu ranks 12th
in density among the Indian States and
11.5.4 Infant Mortality Rate
382 is the national average.
(mortality before
completing 1 year)
11.5.2 Urbanisation
Tamil Nadu is well ahead of national
Tamil Nadu is one of the most urbanized average and other states in IMR. According
state with 48.4% of urban population to NITI AAYOG, the IMR is 17 (per
against 31.5% for India as a whole. 1000) for Tamil Nadu which is just half of
The State accounts for 9.61% of total national average of 34 as on 2016.
urbanites in India against 6% share of
total population.
11.5.5 Maternal Mortality
Sex ratio (Number of
11.5.3 Rate (MMR) (Mother’s
female per 1000 males) death at the time of
delivery per 1 lakh)
Balanced sex ratio implies improvement in
quality of life of female population. The sex Tamil Nadu has a good record of
ratio in Tamil Nadu is nearing balance with controlling MMR, ranking third with
11.6
ross State Domestic
G
Product (GSDP)
The Per capita income of Tamil Nadu crops is 27.1%. Among the food crops
among the southern States is given below: paddy takes a major share. Among the
non-food crops, groundnut and coconut
Table 11.7 Per capita take a major share.
Income (2015-16) Net sown area has been gradually
State PI (₹) declining; and, rural land, labour and
capital are moving towards urban projects.
Tamil Nadu 1,57,116
As a result, villages are emptied and cities
Kerala 1,55,516 are over-crowded and congested, leading
Karnataka 1,46,416 to spatially unbalanced bulging.
Telangana 1,58,360
Andhra Pradesh 1,37,000 11.7.1 Foodgrain Production
(Source: Reserve Bank of India, New Delhi.
February 2017.)
11.7
Agriculture
AMBUR : Leather
VANIYAMBADI : Leather
SALEM : Powerlooms, Home textiles, Steel, Sago
Karur is known for its bus body mill capacity is in Tamil Nadu. The western
building which contributes 80% of part of Tamil Nadu comprising Coimbatore,
South Indian bus body building. TNPL Tirupur, Erode, Dindigul and Karur has the
is the Asia›s largest ecofriendly paper majority of spinning mills manufacturing
mill. Salem is called as steel city and has cotton/polyester/blended yarn and silk
many sago producing units and mineral yarn used by garment units in Tamil Nadu,
wealth. Sivakasi is the leader in printing, Maharastra etc. Yarn is also exported to
fireworks, safety matches production China, Bangladesh etc. Tirupur known as
in India. It contributes to 80% of India’s “Knitting City” is the exporter of garments
total safety matches production and 90% worth USD 3 Billion. Karur is the major
of India’s total fireworks production. home for textile manufacturing (Curtain
Thoothukudi is the gateway of Tamil cloth, bed linens, kitchen linens, toilet
Nadu. It is a major chemical producer linens, table linens, wall hangings etc.) and
next only to Chennai. export hub in India. Erode is the main cloth
market in South India for both retail and
wholesale ready-mades.
11.8.1 Textiles
11.8.2 Leather
Tamil Nadu accounts for 30 per cent of
leather exports and about 70 per cent of
leather production in the country. Hundreds
of leather and tannery industries are located
around Vellore, Dindigul and Erode. Every
year the State hosts the India International
Leather Fair in Chennai.
11.8.3 Electronics
Tamil Nadu is the largest textile hub of Chennai has emerged as EMS Hub of India.
India. Tamil Nadu is known as the “Yarn Many multi – national companies have
Bowl” of the country accounting for 41% chosen Chennai as their South Asian
of India’s cotton yarn production. The manufacturing hub.
textile industry plays a significant role in
the Indian economy by providing direct
employment to an estimated 35 million 11.8.4 Automotives
people, and thereby contributing 4% of Chennai nicknamed as “The Detroit of
GDP and 35% of gross export earnings. Asia”is home to a large number of auto
The textile sector contributes to 14% of component industries. Tamil Nadu has
the manufacturing sector. From spinning 28% share each in automotive and auto
to garment manufacturing, entire textile components industries, 19% in the trucks
production chain facilities are in Tamil segment and 18% each in passenger cars
Nadu. About half of India’s total spinning and two wheelers.
Tamil Nadu Economy 234
the country for developing solar power Credit Deposit Ratio of 119.15% in the
projects. country whereas this ratio is 77.5% at the
national level.
11.9.5 Wind Energy
11.10.2 Education
Tamil Nadu has the highest installed wind
energy capacity in India. The State has very a. School Education
high quality of off shore wind energy potential Tamil Nadu is grouped among high Net
off the Tirunelveli coast and southern Enrolement Ratio (NER) States. According
Thoothukudi and Rameswaram coast. to NITI Aayog 2015-16 NER at primary
level in Tamil Nadu is 89.24% which is
11.10 higher than that of Kerala (79.94%) and
national average 74.74%. The all India
SERVICES average is 43% and the world average is
59%.
Banking, insurance, energy, transport and
communication fall under tertiary sector Table 11.15 Tamil Nadu’s
primary education statistics
i.e., services.
2016-17
higher GER is thanks to the distribution 24.8%. Both Karnataka & Kerala together
of free food,cloth, footwear, laptop and accounted for more than 60% of the total
scholarship. educational loan amount by Private Banks.
a. Road c. Air
There are 28 national highways in the Tamil Nadu has four major international
State, covering a total distance of airports. Chennai International Airport
5,036 km. The State has a total road length is currently the third largest airport in
of 167,000 km, of which 60,628 km are India after Mumbai and Delhi. Other
maintained by Highways Department. It international airports in Tamil Nadu include
ranks second in India with a share of over Coimbatore International Airport, Madurai
20% in total road projects under operation International Airport and Tiruchirapalli
in the public-private partnership (PPP) International Airport. It also has domestic
model. airports at Tuticorin, Salem, and Madurai.
which connect several parts of the country.
Increased industrial activity has given rise
b. Rail
to an increase in passenger traffic as well as
freight movement which has been growing
at over 18 per cent per year.
d. Ports
handles all the coal and ore traffic in Tamil and foreign tourists. Tourism in Tamil
Nadu. Nadu is promoted by Tamil Nadu Tourism
Development Corporation (TTDC), a
Government of Tamil Nadu undertaking.
11.11
The State currently ranks the highest
Tourism among Indian States with about 25 crore
arrivals (in 2013). The annual growth
Tamil Nadu has since ancient past been rate of this industry stood at 16 per cent.
a hub for tourism. In recent years, the Approximately 28 lakh foreign and 11
state has emerged as one of the leading crore domestic tourists visit the State.
tourist destinations for both domestic
Percentage
most other States in the country. After
2005, Tamil Nadu was among India’s
fastest growing states, with growth being
driven mainly by services.
Year
34 33 32
Percentage
32
29
21 20 19
17 17
12 12
BH OD AS MP UP KA WB NL MH GJ MG TN
States
Appendix-I
Population Growth in Tami Nadu: At a Glance (2011 Census)
• Total Population 72138958
• Male 36158871
• Female 35980087
• Crude birth rate (per thousand) 15.7
• Crude death rate (per thousand) 7.4
• Growth Rate (per thousand) 8.3
• Districts with Highest Population (Chennai, Kancheepuram, Vellore and
Thiruvallur)
• Districts with Lowest Population (Perambalur, The Nilgiris, Ariyalur and
Theni)
• Population Density (per sq km): 555 (2011), 480 (2001)
• Maximum Density Chennai (26903);
Kanyakumari (1106)
• Minimum Density The Nilgiris (288);
Thiruchirappalli (602)
• Sex Ratio (per 1000 males) 995 females (2011)
987 females (2001)
• District with Highest Sex Ratio The Nilgiris (1041 females)
Thanjavur (1031 females)
Nagapattinam (1025 females)
• District with Lowest Sex Ratio Theni (900 females)
Dharmapuri (946 females)
• Child Sex Ratio (0-6 age group) 946 female children (2011)
942 female children (2001)
• District with Highest Child Sex Ratio The Nilgiris (985), Kanyakumari (964)
• District with Lowest Child Sex Ratio Cuddalore (896); Ariyalur (897)
• Literacy Rate 80.33% (2011)
73.45% (2001)
• Male Literacy 86.81% (2011)
82.33% (2001)
• Female Literacy 73.86% (2011)
64.55% (2001)
• District with Highest Literacy Kanyakumari (92.14%); Chennai 90.33%)
• District with Lowest Literacy Dharmapuri(64.71%; Ariyalur (71.99%)
MODEL QUESTIONS
1. In health index, Tamil Nadu is ahead of 4. The main source of irrigation in Tamil
a) Kerala Nadu is
b) Punjab a) river
b) tank
c) Gujarat
c) well
d) all the above
d) canals
2. In sex ratio, Tamil Nadu ranks
5.
Knitted garment production is
a) first concentrated in
b) second a) Coimbatore
c) third b) Tiruppur
d) fourth c) Erode
d) Karur
3. Tamil Nadu is rich in
6. Which of the following is wrongly
a) Forest resource matched?
b) human resource a) Gateway of Tamil Nadu –
c) mineral resource Thoothukudi
d) all the above b) Home textile city - Erode
c) Steel city - Salem
d) Pump city - Coimbatore
8. Tamil Nadu Economy 244
7. Which of the following cities does not 12. Which district in TN has the highest
have international airport? sex ratio?
a) Madurai a) Nagapattinam
b) Tiruchirappalli b) Nilgiris
c) Paramakudi c) Tiruchirappalli
d) Coimbatore d) Thanjavur
8. TN tops in the production of the 13. Which district has the lowest child sex
following crops except ratio?
a) Banana a) Madurai
b) Coconut b) Theni
c) plantation crops c) Ariyalur
d) cardamom d) Cuddalore
9. Largest area of land is used in the 14. Which Union Territory has the highest
cultivation of sex ratio?
a) Paddy a) Chandigarh
b) sugarcane b) Pondicherry
c) Groundnut c) Lakshadeep
d) Coconut d) Andaman Nicobar
b) fourth a) agriculture
c) sixth b) industry
d) eighth c) mining
d) services
11. In investment proposals filed by
MSMEs, TN ranks 16. In human development index, TN is
a) I ranked
b) II a) Second
c) III b) fourth
d) IV c) sixth
d) seventh
b) Madurai a) third
c) Tuticorin b) fourth
d) Pudukkottai c) first
d) second
18. The TICEL park is
a) Rubber Park 20. The Headquarters of Southern Railway
is at
b) Textile park
a) Tiruchirappalli
c) Food park
b) Chennai
d) Bio park
c) Madurai
d) Coimbatore.
Answers Part-A
1 2 3 4 5 6 7 8 9 10
c c b c b b c d a d
11 12 13 14 15 16 17 18 19 20
a b c b d d c d a b
Part-B
Answer the following questions in one or two
sentences.
21. State any two districts with favourable 24. What are major ports in Tamil Nadu?
sex ratio. Indicate the ratios.
25. What is heritage tourism?
22. Define GSDP.
26. What are the nuclear power plants in
23. Mention any four food crops which Tamil Nadu?
are favourable to Tamil Nadu.
27. Define Micro industry
28. Write a note on mineral resources in 31. Compare productivity of any two food
Tamil Nadu. crops between Tamil Nadu and India.
29. Explain GSDP in Tamil Nadu. 32. Explain the prospect for development
of tourism.
30.
Describe development of textile
industry in Tamil Nadu.
Tamil Nadu Economy 246
33. What are the renewable sources of 34. Describe the performance of Tamil
power in Tamil Nadu? Nadu economy in health.
35. Describe the qualitative aspects of 37. Explain the public transport system in
population. Tamil Nadu.
ACTIVITY
1. Visit your near by village and make a spot study about crops
production, source of irrigation and living condition of farmers.
References
CH A P TER
12 Mathematical Methods
for Economics
Learning Objectives
12.1.2 Mathematics in 12.2
Economics
Functions
Sir William Petty
declared that he wanted
to reduce political and 12.2.1 Definition
economic matters in A function is a mathematical relationship
terms of number, weight in which the values of a dependent
and measure. He was the variable are determined by the values of
first one to use Sir William Petty one or more independent variables.
mathematics in 1623-1687 Functions with a single
economics. The first independent variable are called Simple
known writer to apply mathematical method Univariate functions. There is a one to one
to economic problems was Giovanni Ceva correspondence. Functions,with more
(1711), an Italian. than one independent variable, are called
Multivariate functions. The independent
12.1.3 Uses of Mathematical variable is often designated by X. The
Methods in Economics dependent variable is often designated
1. Mathematical Methods help to by Y. For example, Y is function of X
present the economic problems in a which means Y depends on X or the value
more precise form. of Y is determined by the value of X.
Mathematically one can write Y = f(X).
2. Mathematical Methods help to
explain economic concepts.
3. Mathematical Methods help to 12.2.2 Linear Equation
use a large number of variables in A statement of relationship between two
economic analyses. quantities is called an equation. In an equation,
4. Mathematical Methods help to if the largest power of the independent
quantify the impact or effect of any variable is one, then it is called as Linear
economic activity implemented by Equation. Such equations when graphed give
Government or anybody. There are straight lines. For example Y = 100-10X.
of course many other uses.
For a straight line, there are two
Think and Do variables namely X and Y. X is called
independent variable and Y is called
Who is the father of
dependent variable.
Economics? Did he use
any of the mathematical When ‘X’ value increases by one
tools in his contributions? unit, then the corresponding change in
If yes, list out. the ‘Y’ value is called as the slope of the
Find out the mathematical line. Slope of the line is obtained by the
tools, which are used by you formula,
in your daily routine life. m = slope (marginal change)
Example 12.1 6
Price
4
Find the equation of a straight line which
passes through two points (2, 2) and (4, -8) 2
Price
Price
Price
55
Price
Price
44
Price
11 33
22 2.5
2.5
(12,0)
(12,0) 11
00
22 44 66 88 1010 1212 XX
00 55 1010 1515 2020 xx 00
QuantityDemanded
Quantity Demanded
QuantitySupplied
Quantity Supplied
Diagram12.2
Diagram 12.2 Diagram12.3
12.3
Diagram
Price-quantity relationship is negative in supply function can be obtained from the
demand function. Qd = 12-5 X � or Qd = statement that supply increases 10 units
12-5 P . If P = 2, Qd = 2. for each one rupee rise in price, that is
YY
When P assumes 0, only 12 alone (10, 6) & (20, 7).
remains in the equation. This is called
Intercept or Constant, = 0 and Qd = 12.
if surplus
Consumer’s
Consumer’s Psurplus When p = 5, supply is zero. When p = 6,
In Marshallian supply is 10 and so on. When p is less than
,P ) analysis,money
Price
Price
(X0,P
BB (X 0 0)0
P0
P0
terms measured in Y-axis and physical 5, say 4, supply is -10, which is possible
Demand
units are measured in X-axis.
Demand curve
Accordingly,
curve
in mathematics. But it is meaningless
price is measured in Y-axis and quantity in Economics. Normally supply curve
demanded is measured in X-axis originates from zero, noting that when
0 0 price is zero, supply is also zero.
XX0 0 xx
Demand
Demand
Example: 12.2 Diagram
Diagram12.8
12.8
Find the supply function of a commodity The equation of the straight line
such that the quantity supplied is zero, joining two data points (10, 6) and (20, 7)
when the price is ₹5 (or below) and the is given as
supply (quantity) increases continuously The equation of the straight line is
at the constant rate of 10 units for each
Y - Y1 X - X1
one rupee rise when the price is above ₹5. =
Y2 - Y1 X 2 - X 1
Demand = Supply
(These are hypothetical examples)
Price
100-10P = 50 + 10 P
100-50 = 20P
50 = 20P
Quantity demanded
50
=P
20
Diagram 12.4 P = 2.5
When P = 2.5, Demand = 100-10 (2.5)
X - 10 = 75
Then Y -6 =
10
When P = 2.5, Supply = 50 +10 (2.5)
10(Y - 6) = X - 10 = 75
10Y - 60 = X - 10
Example: 12.3
10Y - 60 + 10 = X
Find the equilibrium price and quantity
10Y - 50 = X
by using the following demand and
-X = -10Y + 50
supply functions Qd = 100-5P and
Multiplying both sides by minus (-), we get Qs = 5P respectively.
X = -50 + 10Y Y
10
Considering X as quantity supplied and Y
as price (P) 7.5 D
S
Then X = 10P - 50 (or) 5
Price
X = -50 + 10 P E
2.5
If Price = 0; Q = -50
If Q = 0; P = 5 0 25 50 75 100 x
Note: The coefficient of ‘P’ is - in demand Demand/Supply
Hence at Solution:
P = 10, Qd = 50, Qs = 50. Equation of demand function joining two
Quantity demanded is equal to supply at data points (100, 1) and (50, 2) are (x1, y1)
50 units when price is ₹10 and (x2, y2) respectively.
Example: 12.4
Y
The market demand curve is given by D = 4
50 - 5P. Find the maximum price beyond
3
which nobody will buy the commodity.
Price
Y 2
20
S
1
15
E
Price
0 x Y - Y1 X - X1
25 50 75 100
=
Quantity Demanded Y2 - Y1 X 2 - X 1
Diagram 12.6 Y - 1 X - 100
=
2 - 1 50 - 100
Solution:
Y - 1 X - 100
=
Given 1 -50
Qd = 50 - 5P -50 (Y - 1) = 1 (X - 100)
5P = 50 - Qd -50Y + 50 = X - 100
-50Y + 50 + 100 = X
5P = 50 when Qd is zero.
-50Y + 150 = X
50
P= X = 150 - 50Y
5
Hence the demand function is
P = 10 When P = 10, Demand is 0
Hence P = 10, which is the maximum Qd = 150 – 50P and Slope m = – 50
price beyond which nobody will demand
the commodity. Think and Do for
Water Management in
Example: 12.5 your area
The demand for milk is given by Try to find the demand function
for water in your street and the
Price (Y) 1 2 3
daily total demand for water in
Demand (X) 100 50 0 litre for all purposes.
Example: 12.6
1 3 5
Find the value of the determinant for the
6 2 4 is a square matrix of order
7 8 9 3 4
matrix A=
3 x 3,then 10 −2
1 3 5 Solution:
6 2 4 is a determinant. 3 4
Given matrix A = then, the
7 8 9 10 −2
Determinant
2 3
is a square matrix of order 2 x 2, then 3 4
5 7 A= = 3 ( −2 ) − 10(4)
10 −2
2 3
is a determinant. = - 6 - 40 = - 46 is the value of the
5 7
determinant.
a11 a12 a13
In general, if A = a21 a22 a23 is a matrix Example: 12.7
a
31 a32 a33 Find the value of the determinant of the
then, matrix
A = 40
∆x ∆y ∆z ∆y =
1 1
= 14 − 3 = 11
x= , y= , z=
∆ ∆ ∆ 3 14
∆x −44 ∆y 11 Solution:
Hence x = = =4, y= = = −1
∆ −11 ∆ −11 The matrix form of the given equation is
∴ x = 4 and y = −1 written as
7 1 1 x1 0
Answer checking:
10 2 1 x2 8
Substituting in equation the values of x 6 3 2 x3 7
and y,
4 + 3(-1) = 1, 7 −1 −1
∆ = 10 −2 +1
3(4) – 2(-1)= 14
6 3 −2
12.4 1
Key Note
DIFFERENTIAL CALCULUS
If the power of any non-zero real
number is zero, it's value is 1
12.4.1 Meaning x 0 = 1 when x ≠ 0
Solution:
12.4.2 Some Standard Forms Given y = 6x3
of Differentiation dy
Slope =
dx
(Constant, addition and subtraction
only) dy
= 6 ( 3) x3−1 = 18x2 for any value of x.
dx
d(c)
1. = 0 where C is a constant. Example: 12.14
dx
What is the slope of the function y = 5x4
(Read differentiation of ‘C’ with when x = 10?
respect to ‘x’ is)
Solution:
n
d(x )
2. = nx n−1 Given function y = 5x4
dx
dy
Slope = �
d(x ) dx
3. = 1x1−1 = 1x 0 = 1
dx dy
= 5 ( 4 ) x 4−1
dx
d (u + v) du dv = 20x3
4. = +
dx dx dx When x = 10, then slope = 20 (10)3
d (u − v) du dv = 20,000,
5. = −
dx dx dx Therefore Slope is 20,000.
Example: 12.15
12.4.4 Marginal concepts
Differentiate the function Y = 3x2 + 16x3
with respect to x. Marginal concept is concerned with
variations of Y (on the margin of X), that is, it
Solution: is the variation corresponding in Y to a very
small variation in X. (X is the independent
Y = 3x2 + 16x3 variable and Y is the dependent variable)
Differentiating,
dy 12.4.5 Marginal Product
= 3 ( 2 ) x 2−1 + 16 ( 3) x3−1
dx
Marginal product of a factor of production
= 6 x1 + 48 x 2 refers to addition to total product due to
dy the use of an additional unit of a factor.
= 6 x + 48 x 2
dx
MP = d(TP)/dQ = ∆TP/∆Q
Example: 12.16
d (TC )
12.4.7 Marginal Revenue MC (Q) = = 3Q3-1 - 18(2)Q2-1
dQ
Marginal Revenue is the revenue
+ 91(1)Q1-1+0
earned by selling an additional unit of
the product. In other words, Marginal = 3Q2 - 36Q1 + 91Q0 + 0
Revenue is an addition made to the total MC (Q) = 3Q2 - 36Q + 91 (∴Q0 = 1)
revenue by selling one more unit of the When Q = 3
good. MC(Q) = 3(32)-36(3)+91
d (TR ) ∆TR = 3(9)-108+91
MR = or =� = 27-108+91
dQ ∆Q
=118-108
Where ∆TR stands for change in the total =10
revenue, and ∆Q stands for change in output. To find AVC
Example: 12.20
12.4.8 Elasticity of Demand
A manufacturer estimates that, when units
of a commodity are produced each month Elasticity of Demand is the ratio of
the total costs will be TC(Q) = 128 + 60Q the proportionate change in quantity
+ 8Q2 Find the marginal cost, average cost, demanded to the proportionate change in
fixed cost, variable cost, average fixed cost price. In mathematical terms,
and average variable cost. P dx
ed = ( ) ( )
x dp
Solution: In demand function Q = a–bP
Given that TC(Q) = 128 + 60Q + 8Q2 ed = (dQ/dP)(P/Q)
We know TC = Fixed cost + variable Example 12.21
cost 100
If the demand function is x = ,find ed
P
d (TC ) with respect to price at the point where P = 2
MC (Q) =
dQ
Note
= 0 + 60(1)Q1-1 + 8(2)Q2-1
By taking supply function, the
= 0 + 60Q0 + 16Q1(Since, Q0=1) elasticity of supply can be calculated
MC = 60 + 16Q
TC
�
AverageCost =
Q Solution:
128 + 60Q + 8Q 2 Given
=
Q 100
x= = 100 P −1
P
128
AC = + 60 + 8Q dx
Q ∴ = 100(−1)P-1-1
dp
Constant value is known as fixed cost
= 100(−1)P-2
∫ 4 x dx = 4 ∫ x dx
3 3
∫f ( x ) dx = F ( x ) + C
x 3+1
Here the left hand side of the equation is =4 +c
3 +1
read “the integral of f(x) with respect to x4
x” The symbol ∫ is an integral sign, f(x) is =4 +c
4
integrand, C is the constant of integration, 4
= x +c
and F(x)+c is an indefinite integral. It is
so called because, as a function of x, which Example12.23
is here unspecified, it can assume many
∫ (x + x − 1)dx = ∫ x 2dx + ∫ xdx − ∫ dx
2
values.
x 2+1 x1+1
= + −x +c
12.5.2 Meaning 2 +1 1+1
12.5.4 Application of TC = ∫ y � dx + c
fin
Integration = (23 16 x 3x 2 )dx c ,
Example 12.26 where c is a constant
Let the marginal cost function of a firm = ∫ 23dx + ∫16 xdx − ∫3x 2 dx+c
be 100-10x+0.1x2 where x is the output. x2 x3
= 23x+16 3 c
Obtain the total cost function of the firm 2 3
under the assumption that its fixed cost TC = 23x + 8x2 - x3 + c
is ₹500. c = 40 given
Solution ∴TC = 23x+8x2-x3 + 40
TC
MC = 100 - 10x + 0.1 x2 Average cost function =
x
40
TC = 100 10x 0.1x 2 d x = 23 + 8x - x2 +
x
Y
x2 x3 Y
= 100x-10 + 0.1 + c 3 8
2 3 12.5.5 Consumer’s Surplus
7
x3 This2 (2,2)was
theory developed by the Alfred 6
= 100x-5 x + + c
2
(0,5)
30 Marshall. The demand function P(x) 5
Price
Price
x3
0
2 4 P 6= f (x)
8 10 12 X
= − 5x 2 + 100 x + 500 0
30 Consumer Quantity
surplusDemanded
is the difference
between the price one is willing to pay and
Example 12.27 the price that Diagram 12.2paid.
is actually
B (X0,P0)
Given the marginal cost function y = 23 + P0
16x - 3x2 ; c = 40 Demand curve
₹40 is the fixed cost.
We know that 0 X0 x
Demand
Total Cost function = ∫ (Marginal cost
Diagram 12.8
function) dx+c
Mathematical Methods for Economics 263
3
Consumers’ surplus = ( 25 - Q 2 )dQ -
CS = (35-2x-x2)dx-(20×3) (9 X 4) 0
0
3 4
x2 x3 Q3
= 35x − 2 − -60 = 25Q - − 36
2 3 0 3 0
32 33
= 35(3) -2( ) - -60 =[ (25)(4) -
1
(4)3 ] -(0) -36
2 3 3
= 105 -9 -9 - 60
64
= 27 Units. = [100 - ] - (0) -36 = 42.67
3
Producers’ surplus PS
12.5.6 Producer’s surplus 4
(PS) = (9×4) - ( 2Q+1)dQ
xo
PS = Po xo -
0
òo
g (x )d x
4
= 36 - (Q2 +Q)
0
= 36 - (16 + 4) = 16
Mathematical Methods for Economics 264
(iv) New Power Point file will open, and This chapter provide the knowledge of
then type the title and subtitle if necessity of mathematics in economics
wanted. by explaining the application of linear
algebra, calculus and Information
A new slide can be inserted by ‘click’
(v)
Communication and Technology.
on icon ‘new slide’ or using short
Specifically the knowledge of functions,
key ‘Ctrl + M’
matrices , differential calculus, Integral
(vi) We can type the content, insert the calculus ,MS word, MS Excel and Power
table, pictures, movies, sounds, Point Presentation are depicted with
etc., with the content. suitable applications. The activities are
(vii)
Tab ‘Design’ helps to design the also added for students to learn it reality
slides (can select common design for about the use of mathematical methods in
all slides or separate slide for each economics.
slide)
(viii) Click icon slide show, one can run
FORMULAE
slide show either starting from
the first slide or starting from the 1. m= y2-y1/x2-x1 for Slope
current slide. 2. (y-y1) = m (x-x1 ) for straight Line
The power point presentation (PPT) 3. A = a 1(b 2c 3 – b 3c 2) – a 2(b 1c 3-
facilitates the key points to be kept in b 3 c 1 )+a 3 (b 1 c 2 -b 2 c 1 ) for 3x3
memory and understand the particular matrices
topic. Recently, the smart class room
4. Differentiation of constant is
teaching uses the PPT to deliver the
zero
information in an effective way to enhance
the quality of teaching. 5. Differentiation of xn is nx(n-1)
6. ed = Marginal function / Average
function
Think and Do
−P dx
7. ed =
Make a Document with x dp
MS word on “Incredible
x n+1
India”. 8. Integration of x is +Cn
n +1
Prepare an Excel Sheet for
x0
your daily pocket expenses 9. CS= ∫ f ( x )dx − x o po
for each category/item in 0
last month 10. PS = x 0p 0 – integration of
Prepare and present a supply function within limit
“Power Point” for “Day x0
= xo po - ∫ g ( x ) dx
out with your parents” 0
ICT CORNER
Drawing Graphs for the Data Collected
Steps:
• Collection of data of Child population (0-6 years) from 1961 to 2011 in Rural and Urban areas in India.
Let us draw the graph for the data.
• Open Microsoft Excel workbook, Type the X-axis data in the First column and then type respective
data in consecutive columns.
• Now select all the typed data, After selecting the data Click “Insert” to get Charts. select scatter type to
get scroll down menu.
• Select “Scatter with Smooth Lines and Markers” you will get the required graph as shown here.
• By selecting 3 icons on the right side to edit “chart elements” Particularly Check on the boxes Axis
Titles and Chart Title.
• Type x-axis and y-Axis, followed by Chart Title. Click “Legend” to change the position
• Now right click on the graph (a) to copy the graph and Then paste in a word page (or)Select move chart
to move In other excel page, Menu willappear to place it in new sheet.
• Now If you want to change the graph type as bar chart or any other type,click on the graph to select and
then click on any type of graph given in the top menu
URL:
https://youtu.be/Xn7Sd5Uu42A
(or) scan the QR Code
ICT CORNER
Consumer’s and Producer’s Surplus
Steps:
• Open the Browser type the URL given (or) Scan the QR Code.
• GeoGebra Work book called “XI STD ECONOMICS” will appear, Open the worksheet named
“Consumer’s and Producer’s Surplus Ex:12.29”
• Without integration we cannot find the Area under the curve. For Higher studies atleast you should
know what is Integration and why it is needed.
• In the worksheet Green colour is the Demand Curve and Blue colour is the Supply curve. They intersect
at Point A (4,9). In which x axis value 4 is the demand price. If you integrate the Demand curve
between 0 and 4 we get the area as shown. Click “Show Area Integral1” integrating the demand price
between 0 and 4.
• If you click on “Show Area of Rectangle” you can see the area of the rectangle which is obtained by
Multiplying the length 4 and Breadth 9 (Point A(4,9))
• If you subtract: the area under the curve PD -Area of the rectangle you
get the Consumer’s Surplus.
• Click on “Show Area Integral 2” you see Blue colour area which is
obtained by Integrating Supply Price line between 0 and 4. Subtract:
Area of the rectangle – Area under the line PS you get The Producer’s
Surplus. You can change PS line by moving the sliders ‘m’ and ‘c’. you
can see the changes in Consumer’s Surplus and Producer’s Surplus.
URL:
https://ggbm.at/ddY3wkjp
(or) scan the QR Code
MODEL QUESTIONS
1.
Mathematical Economics is the a. Inequality
integration of b. Equality
a. Mathematics and Economics c. Equations
b. Economics and Statistics d. Functions
c. Economics and Equations 6. An incremental change in dependent
d. Graphs and Economics variable with respect to change in
independent variable is known as
2. The construction of demand line or
supply line is the result of using a. Slope b. Intercept
11. State of rest is a point termed as 16. The elasticity of demand is the ratio of
a. Equilibrium a. Marginal demand function and
b. Non-Equilibrium Revenue function
b. Price a. PC alone
Part-A Answers
1 2 3 4 5 6 7 8 9 10
a d b c c a b a d b
11 12 13 14 15 16 17 18 19 20
a b a d c b a d c c
2. Solve for x quantity demanded if 16x − 5. If a firm faces the total cost function
4 = 68 + 7x. (Ans: x is 8 ) TC = 5+ x2 where x is output, what is
TC when x is 10?
3. A firm has the revenue function R =
600q - 0.03q2 and the cost function 6. If TC = 2.5q3− 13q2+ 50q + 12 derive
is C = 150q + 60,000, where q is the the MC function and AC function.
number of units produced. Find AR,
7. What are the steps involved in
AC, MR and MC. (Answersa:AR = 600
executing a MS Excel Sheet?
- 0.03q ; MR = 600 - 0.06 q; AC = 150
+ (60000/q) )
ACTIVITY
1. The petrol consumption of your car is 16 Kilometers per litre.
Let x be the distance you travel in Kilometers and p the price
per litre of petrol in Rupees. Write expressions for demand for
Petrol.
References
GLOSSARY
Accelerator முடுக்கி
Advertising elasticity of demand விளம்பரத் தேவை நெகிழ்ச்சி
Alternative uses மாற்று வழிகள்
Annual plan ஓராண்டுத் திட்டம்
Art கலை
Assumption அனுமானம்
Average cost சராசரி செலவு
Average product சராசரி உற்பத்தி
Barter பண்டமாற்று
Behavioural Economics ப�ோக்கு சார் ப�ொருளியல்
Business வணிகம்
Capability செயலாற்றல்
Capital மூலதனம் (K)
Cardinal Utility Analysis இயல்பெண் பயன்பாட்டு ஆய்வு
Cash Reserve Ratio (CRR) ர�ொக்க இருப்பு வீதம்
Characteristics குணாதிசயங்கள்
Child sex Ratio 6 வயதுக்கு கீழே உள்ள 1000 ஆண் குழந்தைகளுக்கு எத்தனை
பெண்கள் இருக்கிறார்கள் என்பது குழந்தைகளின் பாலின விகிதம்
Classical த�ொன்மை
Coefficient கெழு
Colonial capitalism காலனி ஆதிக்க முதலாளித்துவம்
Concealed unemployment,
Disguised unemployment மறைமுக ேவலையின்மை
Concentration ெசறிவு
Constant Returns to Scale மாறா விகித அளவு
Consumer நுகர்பவர்
Consumer’s Surplus நுகர்வோர் உபரி / நுகர்வோர் எச்சம்
Consumption நுகர்வு (C)
Contraction of demand விலை அதிகரிப்பால் நிகழ்வு தேவைச்சுருக்கம்
Criticism திறனாய்வு
Crop insurance பயிர் காப்பீடு
Cross elasticity of demand குறுக்கு தேவை நெகிழ்ச்சி
Crude Birth rate 1000 நபர்களுக்கு பிறந்த குழந்தைகளின் எண்ணிக்கை
Crude Death Rate 1000 நபர்களுக்கு இறந்தவர்களின் எண்ணிக்கை
Data /Statistics /information புள்ளி விவரங்கள்
Decentralization பரவலாக்கப்படல்
Decrease in demand தேவை குறைதல்
Deductive Method பகுத்தாய்வு முறை
Definition வரையறை / இலக்கணம்
Delicensing உரிமம் விலக்கல்
Demand தேவை
Democracy குடியாட்சி
275
276
277
278
279
280
Economics – XI
List of Authors and Reviewers
Reviewers
Dr. George V. Kallarackal
Dr. L.Venkatachalam
Former HOD, Economics Department
Professor, Madras Institute of Developmental Studies,
CMS College, Kottayam, Kerala
Chennai
Domain Experts
Dr. S. Iyyam Pillai Dr. A.G.Leonard SJ
Former Professor, Dept. of Economics Former Professor, Dept. of Economics
Bharathidasan University, Trichy Loyola College, Chennai
Subject Coordinator
J. Sornalatha
Post Graduate Assistant, Government Muslim Hr. Sec School.
Chennai-600002
Authors
Dr. J. Socrates Dr. K. Sadasivam
Head, Department of Economics Assistant Professor, School of Economics
Manonmaniam Sundaranar University Madurai Kamaraj University, Madurai-625 021
Tirunelveli
Dr. R. Bernadshaw
Dr. M. Chitra Former Professor, Dept. of Economics,
Assistant Professor, School of Economics NMSSVN College, Nagamalai, Madurai
Madurai Kamaraj University, Madurai
Dr. R. Albert Christopher Dhas
Dr. B.P. Chandramohan Associate Professor, Dept. of Economics
Associate Professor, Dept. of Economics, The American College, Madurai
Presidency College, Chennai
Dr. R.Vaheedha Banu
Dr. S. Theenathayalan Assistant Professor
Head, Department of Economics MSS WAKF Board College, Madurai
The Madura College, Madurai
Stephen Elangovan
K. Karnan Post Graduate Assistant
Post Graduate Assistant TVS Matric Higher Secondary School
Government Girls Higher Secondary School Madurai
Thirumangalam, Madurai
B. Shunmugam
K. Alamarselvan Post Graduate Assistant
Post Graduate Assistant Natarajan Dhamayanthi Higher Secondary School,
Government Boys Higher Secondary School, Bhuvanagiri, Cuddalore Nagapattinam
S. Bhuvana
Post Graduate Assistant
SRBAKD Dharma Raja Girls Higher Secondary School, Rajapalayam
Content Readers
Dr. A. Paramasivan Dr. A. Mariyappan
Professor of Economics, The MDT Hindu College, Tirunelveli Assistant Professor, Loyola College, Chennai
ICT Coordinator
D. Vasuraj
Art and Design Team BT Assistant, Pums, Kosapur, Puzhal Block,
Thiruvallur DT
Illustration S. Ganesh
R. Yuvaraj BT Assistant, Pums School, Kilariyam,
Gokulakrishnan Koradacherry Block, Thiruvallur DT
Art Teachers,
Government of Tamil Nadu. QR Code Management Team
Students R. Jaganathan
Government College of Fine Arts, Chennai & Kumbakonam. S.G.T. (SPOC), PUMS Ganesapuram - Polur, Thiruvannamalai Dist.
Layout N. Jagan
Udaya Info B.T. Asst., GBHSS Uthiramerur, Kanchipuram Dist.
281
NOTES
282