Q#20: Define National Income.

Explain the Circular Flow of national Income with the

help of diagram.

Introduction:

Different economists have defined national income in different words prominent of

them are Alfred Marshall, Pigou, Fisher, Campbell, Kuznat, Samuelson and Ackley.

According to Campbell:“Total market value of all final goods and services produced
in a country during one year is called National Income”.

According to Ackley: “National Income is nothing more than the sum of all
individual incomes”.

Concept of National Income:

Following are the concepts of National Income, GNP, NNP, GDP, NDP, NI, PI, and DPI.

Methods of measurement:

The following are the methods of measurement

Productive method
Income method.
Expenditure method.
Circular Flow:

If we observe the National Income, we came to know that N.I. circulates between two
sectors in different forms. These sectors are(i) household. (ii) Firms. The
circulation of National Income between these two sectors is called circular flow of
national income.

Circular flow of N.I. may be explained with the help of following diagram.

Services of Goods

Upper half

Services

Household Firms

Reward

Lower half

Prices of Goods
The diagram shows that on one side National Income moves from Household towards
firms in the form of their services. On the other side in return it moves from
firms toward household in the form of rewards of factors as shown by inner circle
in the above diagram.

The production made by the firms is offered for sale to factors(household) in

return household give price of goods to firms as shown by the outer circle of the
in the above diagram .

This movement of national income from household to firms and from firms to
household in different forms is known as circular flow of national income.

The above diagram shows two types of flow of National Income.

(i) Real flow.

(ii) Monetary Flow.

Real Flow:

Upper half of diagram is showing real flow of goods and services from one sector to
other.

Monetary Flow:The lower half of the diagram is showing monetary flow of national
income in the form of reward of factors and price of goods.
2 Q # 21: Define tax. Discuss various cannot of taxation?

TAX:

Tax is a compulsory contribution levied by the state on its individuals to meet the
development and non-development expenditures.

“Tax is compulsory contribution by the people to the public treasury to meet the
general expenditure of the government.”

Cannons of Taxation:

The qualities that a good tax should possess are described as cannons of taxation.
Adam Smith has stated four cannons of taxation on the administrative side of public
finance. According to him, a good tax is one which contains

1. The cannon of equality

2. The cannon of certainly

3. The cannon of convenience

4. The cannon of economy

1. The cannon equality:

This is the most important principal of taxation. It means that there should be
justice. The burden of tax should be equal on every tax-payer. Equal burden does
not mean that the amount of this tax is equal. It means that there should be equal
sacrifice and everyone should pay tax according to his ability. Rich should pay
more than the poor.

2.The cannon of certainty:

This cannon implies that the tax which each individual is bound to pay should be
certain and not arbitrary. The time of payment, the mode of payment, the amount to
be paid should clear so that he may adjust his expenditures accordingly.

3.The cannon of convenience:

According to this canon, there should be appropriate timings of tax collection.

Method of recording payments should also be easy and convenient to the tax payers.
For example, if the tax can be paid through cheque, it will be convenient. If the
taxpayer has to go to an office many times, it will be inconvenient.

4. The cannon of economy:

If the cost of collection of a tax is small, it is called economical. If there is a

tax in which taxpayers have to large amounts but only a small amount goes to the
government treasury due to heavy salaries of staff, then tax is not economical. The
cost of tax collection should be the minimum.

Others cannons of taxation:

5. Cannon of productivity:

The cannon of productivity implies that a tax should bring sufficient revenue to
the government. A few taxes bringing large revenue are better than many taxes each
bringing very small sum.

6. Cannon of Elasticity:

Cannon of elasticity states that the amount collected should increase or decrease
according to the needs of the government. In Pakistan, income tax and custom duty
are elastic because a little increase in their rates can bring in large amount of
additional revenue.

7. Cannon of Simplicity:

The tax structure should be simple so that the people can easily known who has to
pay the tax and how much. The taxpayer should be able to calculate the amount of
tax and pay it conveniently.

8. Cannon of Diversity:

A single tax is not desirable. There should be various types of taxes, o that all
classes of people have to pay some amount. In this way, all people can contribute
to the state revenue.

9. Harmless for Economics Incentives:

The nature and rate of tax should be such that it does not have bad effects on
people’s incentives for economic efforts.

10. Cannon of Uniformity:The tax system should be uniform and not arbitrary. For
example, if people of Lahore have to pay higher rate of income tax then the people
of other major cities, the tax will not be uniform.
3 Q # 13: Define monopoly; explain how price and output is determined under
monopoly?

Monopoly is a market situation in which there is a single producer or seller of a

commodity in market there is no close substitution of that commodity in the market.
No other firm is allowed to enter into the market. The firm is price maker not a
price taker.

Characteristics:

There is a single producer or seller in market

There is no close substitution in market.
There is no competition in the market.
No other firm is allowed to enter into the market.
The firm represents s industry in the market.
The firm is price maker not a price taker.
Determination of Output:

Following are the different methods of output.

TR and TC method
MC and MR method.
TR and TC method:

The output at which there is maximum difference between total cost and total
revenue will be the best output. So ‘OQ’ is the best output.

Marginal cost and marginal revenue method:

According to this method following are the conditions of equilibrium.

MC = MR

MC should cut MR from below.

According to above diagram point ‘E’ fulfills both conditions therefore OQ is the
output.

Determination of price:

Average Revenue(AR) represents price, therefore, according to previous diagram at

OQ is output.

AR = E1Q or Price = E!Q

Therefore, E1Q will be the price or OP1 will be the price

Cases of short run equilibrium:

Following are the different short run equilibrium cases.

Super normal profit

Normal profit

Loss minimizing.

Super normal profit:

At that equilibrium a firm earns super normal profit

Where AR>AC OR TR>TC which is shown in the following diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the
best output. At this point

AR = E1Q AC = E2Q AR > AC

TR = OP1E1Q TC = OP2E2Q TR > TC

Therefore super normal profit = P1E1E2P2 as shown by shaded area in the diagram.

Normal profit:

A firm earns normal profit at the equilibrium where

AR=AC and TR=TC, it may be explained with the help of diagram

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the
best output. At this point

AR = E1Q AC = E1Q AR = AC

TR = OP1E1Q TC = O1PE1Q TR = TC

Therefore firm is earning normal profit.

Loss minimizing:

A firm suffers minimum loss at that equilibrium where AR

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the
best output. At this point

AR = E2Q AC = E1Q AR < AC

TR = OP2E2Q TC = OP1E1Q TR < TC

Therefore minimum loss = P1E1E2P2 as shown by shaded area in the diagram.

Long run equilibrium:

In case of monopoly over a period of long time a firm mostly earns super normal
profit. It may be explained with the help of following diagram.
According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the
best output. At this point

LAR = E1Q LAC = E2Q LAR > LAC

LTR = OP1E1Q LTC = OP2E2Q LTR > LTC

Therefore super normal profit = P1E1E2P2 as shown by shaded area in the diagram.
4 Q#:12:Define Perfect Competition and explain How price and output is determined
under a perfect competition?

OR

Q#: Explain equilibrium of a firm under perfect competition?

Perfect Competition:

It is a market situation in which a large no. of small firms produce homogeneous

goods and sell their products in the market at same price. There is free entry and
exit of firms in market. The price is determined in market with equilibrium of
demand and supply of that commodity in market. Every firm is price taker and not
price maker. The transportation cost is almost zero, which does not affect the
market price.

Characteristics:

There is large no. of buyers in the market.

There is large no. of sellers in the market.
There is free entry and exit in the market for firms.
Same price of a commodity prevails in the
The price is determined in market with equilibrium of demand and supply of that
commodity in market.
Every firm is price taker and not price maker
The transportation cost is almost zero, which does not affect the market price
No firm can affect market price by its individual behavior.
Determination of price:

In case of perfect competition price of commodity is determined in market with

equilibrium of demand and supply of commodity in market.

As the price remains same therefore,

Price = AR = MR

Determination of output:

Following are the two different methods for determining output in perfect
competition

Total cost and total revenue method:

The output at which there is maximum difference between total cost and total
revenue will be the best output as shown below.

According to the above diagram OQ is the best output because it gives maximum
difference between TR & TC.
Marginal cost and marginal revenue method:

According to this method following are the conditions of equilibrium.

MC = MR

MC should cut MR from below.

According to above diagram point ‘E’ fulfills both conditions therefore OQ is the
output.

Cases of short run Equilibrium:

There are four cases of short run equilibrium

Super normal profit (AR>AC or TR>TC)

Normal Profit (AR=AC or TR=TC)
Loss minimizing (AR
Shut down point (AR
Super normal profit (AR>AC or TR>TC):

At that equilibrium of a firm earns super normal profit where AR>AC & TR>TC

It may be explained with the help of following diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the
best output. At this point

AR = EQ AC = E1Q AR > AC

TR = OPEQ TC = OP1E1Q TR > TC

Therefore super normal profit = PEE1P1 as shown by shaded area in the diagram.

Normal Profit (AR=AC & TR=TC):

At that equilibrium a firm earns normal profit. It may be explained with the help
of diagram.

According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the
best output. At this point

AR = EQ AC = EQ AR = AC

TR = OPEQ TC = OPEQ TR = TC

Loss minimizing (AR

At this point a firm suffers minimum loss; it may be explained with the help of
following diagram.
According to the above diagram, ‘E’ is the equilibrium point; therefore ‘OQ’ is the
best output. At this point

AR = EQ AC = E1Q AR < AC

TR = OPEQ TC = OP1E1Q TR < TC

Therefore minimum loss = PEE1P1 as shown by shaded area in the diagram.

Shut down point (AR

At this equilibrium a firm found at shut down point. It may be explained with the
help of following diagram.

According to the above diagram,

AR = EQ AC = E1Q AR < AC

TR = OPEQ TC = OP1E1Q TR < TC

Therefore firm is at shut down point, the loss = PEE1P1 as shown by shaded area in
the diagram.

Long run Equilibrium:

Over a long period of time number of firms, size of firms and method of production
can be changed, therefore every firm can earn only normal profit. It may be
explained with the help of diagram.

According to the above diagram,

LAR = EQ LAC = EQ LAR = LAC

LTR = OPEQ LTC = OPEQ LTR = LTC

5 Q # 10:State and explain the law of returns with the help of schedule and
diagram and also give its application?

INTRODUCTION:

In economic activities the course of production usually passes through three

different stages, new classic economists have defined or discussed these stages in
the form of three different laws.

Law of increasing Returns

Law of Diminishing Returns
Law of Constant Returns

LAW OF RETURNS:

Different economists have defined the law of returns in different words. But
prominent of them are Benham, Champan & Marshall.

DEFINITION:

In the course of production if more and more units are applied of variable factors
keeping other factor constant at first marginal production increase because of
improvement in the combination of variable factors after reaching to a maximum
point it remains constant because of optimum combination of variable factors. If
still more units are applied then marginal production tends to decline because of
appearance of defective Combination of factors. The increasing tendency shows law
of increasing return, constant tendency shows law of constant return and the
diminishing tendency of marginal production show Law of Diminishing Returns.

Explanation with the help of schedule and diagram:

The Law of returns may be explained with the help of schedule of diagram.

Schedule:

Units of fixed factors

Units of variable factors

Total production

Marginal production

5 acres

10

10

5 acres

30

20

5 acres

60

30

5 acres

90

30
5 acres

110

20

5 acres

120

10

Diagram:

According to the above schedule and diagram in first three units marginal
production increasing which show law of increasing return from 3rd to 4th units
marginal production remain constant which shows law of constant return and from
unit 4th to onward marginal production decreases which is representing the “Law of
Diminishing Returns”.

ASSUMPTIONS:

At least one factor of production should be kept fixed/constant.

At least one factor of production should be kept variable.
All the units of variable factor are assumed homogenous.
Methods of production should be same.
There is short period of time under consideration.
Equal reward should be gives to each unit of variable factor.
There should be equal working period for each unit of variable factor.
There is a scope of improvement in the combination of variable factor.
APPLICATION:

According to neo classical economists the law of increasing return is applicable to

industry sector. Law of decreasing return applicable on agriculture sector and law
of constant return is applicable on both sectors.

CONCLUSION:

According to same modern economists infact increasing, Diminishing and constant

returns are different phases of universal Law of variable production.

As on the application of more and more units of variable factor, if the Combination
get improved, marginal production increases.

On the other hand, if the Combination gets defective, marginal production decrease
either the sector is industrial or it is agriculture.
6 In economic activities the course of production usually passes through three
different stages, new classic economists have defined or discussed these stages in
the form of three different laws.
1. Law of increasing Returns

2. Law of Diminishing Returns

3. Law of Constant Returns

LAW OF INCREASING RETURNS:

Different economists have defined the law of increasing returns in different words.
But prominent of them are Benham, Champan & Marshall.

STATEMENT:

“In the process of production if more and more units are applied of variable
factors keeping other factors constant, at first marginal production increase
(because of improvement in the combination of variable factors).This increasing
tendency of marginal production per unit of variable factor is known as “Law of
Increasing Returns”.

Explanation with the help of schedule and diagram:

The Law of Increasing returns may be explained with the help of following schedule
& diagram.

SCHEDULE:

Units of fixed factors

Units of variable factors

Total production

Marginal production

5 acres

10

10

5 acres

30

20

5 acres

60

30
5 acres

90

30

5 acres

110

20

5 acres

120

10

DIAGRAM:

According to the above schedule & diagram, the first three units Marginal
Production Increases which is representing “Law of Increasing Returns”.

ASSUMPTIONS:

At least one factor of production should be kept fixed/constant.

At least one factor of production should be kept variable.
All the units of variable factor are assumed homogenous.
Methods of production should be same.
There is short period under consideration.
Equal reward should be gives to each unit of variable factor.
There should be equal working period for each unit of variable factor.
There is scope of improvement in the combination of factor.
APPLICATION:

According to neo classical economists, the law of increasing return is mostly

applicable in industrial sector. Following are the main reasons for its application
in industrial sector.

Industrial production is taken in covered places.

It is easier to supervise industrial production.
Industrial production is mostly durable in nature.
Industrial production is quite certain in nature.
Industrial production is not much effected negatively by natural climates.
It is easier and cheaper industrial production.
Some specific natural time is not required for industrial production. ( It does not
grow but is obtained).
There bargaining power is strong for industrial goods.
CONCLUSION:

According to same modern economists infact increasing, Diminishing and constant

returns are different phases of universal Law of variable production.

As on the application of more and more units of variable factor, if the Combination
get improved, marginal production increases.

On the other hand, if the Combination gets defective, marginal production decrease
either the sector is industrial or it is agriculture.
7 Q # 7: define elasticity of demand and also discuss methods of measurement of
elasticity of demand?

Introduction

The concept of elasticity of demand was given by neo-classical economists.

Different economist have defined it in different words. Prominent of them are
Marshall, Stonier and Hague etc.

Definition:

According to Stonier and Hague.

“Elasticity of demand is a technical term used by economists to describe the degree

of responsiveness of demand for a good to a change in its price”.

Simple definition:

“The degree of responsiveness of demand of a good due to change in its price is

called Elasticity of Demand”.

Some goods have more elastic demand while some other have less elastic demand.

Methods of measurement Arc Elasticity

1. Total Expenditure Method:

(i) Negative relationship between price and total expenditure indicates more
elastic.(Ed>1)

PRICE

QUANTITY DEMANDED

TOTAL EXPENDITURE

12
The above schedule is showing negative relationship between price and total
expenditure which is representing more elastic demand.

In the above diagram horizontal tendency of demand curve is representing more

elastic demand.

(ii) Positive relationship between price and total expenditure indicates less
elastic demand.(Ed<1).

PRICE

QUANTITY DEMANDED

TOTAL EXPENDITURE

The above schedule is showing positive relationship between price and total
expenditure which is representing less elastic demand

In the above diagram vertical tendency of demand curve is representing less elastic
demand.

(iii) If the price changes but the total expenditure remain same then elasticity of
demand become equal to unity.(Ed=1)

PRICE

QUANTITY DEMANDED

TOTAL EXPENDITURE

4
8

The above schedule is showing that price is changing but total expenditure remains
same, which indicates that elasticity of demand is equal to unity.

The above diagram is also representing elasticity of demand is equal to one.

2. Formula Method:

Prof. Alten has given following formula for the measurement of elasticity.

Example:

PRICE

QTY DEMAND

Po 4

Qo 2

P1 2

Q1 3

= -1/5 * 6/2 =-3/5 < 1

Demand is less elastic

Measurement of Point Elasticity

3. Percentage method:

Prof. Flex has given following formula for the measurement of elasticity of demand.

Ed =

Percentage change in demand

Percentage change in Price

EXAMPLE:

Suppose 10% change in price of a commodity result 20% change in its demand.

Ed= 20%/10%

2>1
Demand is more elastic.

4. Formula Method:

Elastic of demand between two closer point is measured with the help of following
formula.

Ed = q / p * p / q

PRICE

QTY DEMAND

3.7

2.8

Here: P = 4 q = 2

P = 0.3 q = 0.8

Ed = q / p * p / q

=0.8/0.3 * 4/2 = 16/3 = 5.3>1 more elastic

Demand is more elastic.

Geometrical Method:

Elasticity of demand at a particular point is measured with the help of geometrical

method.

Ed at point E = Lower Segment/ Upper segment

Explain the concepts of Arc Elasticity of demand and Point Elasticity of demand?
also give method of their measurement?

Arc Elasticity of demand

“The elasticity of demand between two distinct points existing on a demand curve is
called Arc elasticity of demand”

Point Elasticity of demand

“Two closer points existing on a demand curve is also known as Point elasticity of
demand”.

Define Income Elasticity of demand (EY) and Cross elasticity of demand (Ec). And
also discuss their methods of measurement?

Income Elasticity of Demand

“The degree of responsiveness of demand of a good due to change in income of

consumer is called Income Elasticity of Demand”.

Formula:

Ey = q / y * y/q

Example:

Qd

100
10

180

15

Y = 100 q = 10

Y = 80 q = 5

Putting the value

Ey = 5/80 * 100/10 = 5/8< 1

Demand is Less Elastic .

Cross Elasticity of Demand (Ec)

“The degree of responsiveness of demand of a good (a) due to change in price of

some other good (b)”.

Formula:

Ec = qa/ Pb * Pb/qa

Example:

Pb

Qa

10

16

12

Qa = 7 qa = 5

Pb = 6 Pb = 10

Putting the values

7/6 * 10/5 =70/30 = 2.3>1

Demand is more Elastic

8 Q# 6: Define Demand, Explain the Law of Demand with the help of schedule and
diagram?

Demand:

In the ordinary language, the desire of a commodity is considered as demand but in

economics only that desire of commodity is considered as demand which is backed by
purchasing power.

Demand = Desire + Purchasing Power

As demand is effected by price therefore, we may define demand in following words:

Definition:

“Different amounts of a commodity which a consumer is willing to purchase at

various level of price”

Law of Demand:

The law of demand in fact shows the negative relationship between price and
quantity demanded

Definition:

“If other things do not change then the demand of a good decreases with every
increase in its price and the demand of a good increases with the decrease in its
price”.

It may be explained with the help of following schedule and diagram.

SCHEDULE:

PRICE

QTY DEMAND

30

20

10

DIAGRAM:

D
6

Price

D
O 10 20 30 X

Quantity demanded

Explanation:

According to above schedule and diagram, with the increases in price, demand is
decreasing and with the decrease in price demand is increasing, which is
representing the law of demand.

Assumptions:

Following are the assumptions of the law of demand:

1. No change in income:

In the law of demand, it is assumed that the income of the consumer should remain
constant because the change in income of the consumer may also effect the demand of
commodity.

2. No Change in population:

In the law of demand it is also assumed that the population should remain constant,
as the demand of a commodity may change due to change in population.

3. No change in Buyer’s taste:

It is also assumed that the buyers taste should remain constant, as the change in
taste may also effect the demand, positively or negatively.

4. No change in fashion:

It is also assumed that there should be no change in fashion.

5. No change in price of substitutes:

In the law of demand it is also assumed that prices of substitutes should remain
constant, as it may effect the demand.

6. No change in Law and orders:

In the law of demand it is also assumed that there should be no change in law and
order situation.

7. No change in quantity of money:

In the law of demand it is also assumed that quantity of money should remain
constant.

Exceptions/Limitations:

1.Giffens Goods:

The law of demand is not applicable for Giffen’s goods because the demand for
Giffen’s goods decreases as their price decreases, in this situation people can
have choice to use better thing.

2.Life saving drugs:

The law of demand is not applicable for the consumption of life saving drugs.

3.Prestigious Goods:

The law of demand is not applicable for the use of prestigious goods like diamond.

4.Very high prices products:

It is also observed that the law of demand is not applicable for high prices
products, because the demand for those products does not change, as their price
changes.

5. Acute shortage:

The law of demand is not applicable, in case of acute shortage of commodities or

due to the situation of war, which disturbs peace and security.
9 Q #5:State & explain the Law of Equi-marginal utility also give its exceptions
and practical importance.?

Introduction:

The law of Equi-marginal utility is the second fundamental law of consumption of

wealth given by Neo-classical Economists. Different Economists have defined it in
different words Prominent of them are Marshall and Lipsy.

According to the Lipsy:

“The household maximizing the utility, will so allocate the expenditure between
commodities that the utility of last penny spent on each item become equal”.

According to Law:

If units of money are applied on different commodities in such a way that marginal
utility of each item become equal, then total maximizes.

Example:

Suppose a consumer wants to apply five units of money on mangoes and apples to
maximize total utility. He also knows marginal utility of both commodities as shown
in the following schedule.

Schedule:

Units of Money

Marginal Utility of Mangoes

Marginal Utility of Apples

30

25

25

20

20

15

15

10

10

According to the above schedule, if a consumer applies three units of money on

mangoes and two units on apples, then the marginal utility of both commodities
becomes equal, therefore total utility maximizes as:

30+25+20+25+20=120 max

If consumer applies two units of money on mangoes and three on apples, then
marginal utility of both become unequal, therefore total utility does not remain
maximum

30+25+25+20+15=115 not maximum

Diagram:

According to the above diagram and schedule. If three units of money are applied on
mangoes and two on apples, then marginal utility of both becomes equal and total
utility maximum. But if third is removed from mangoes and applied on apples then MU
of both become unequal. Therefore, TU cannot remain maximum, as the loss of utility
will be greater then the gain of utility as shown in the diagram.

Equation of Consumer Equilibrium:

Realizing the importance of prices Neo-Classic economists have given the following
equation for consumer equilibrium
Consumer Equilibrium = MUa/Pa = MUb/Pb=--------------=MUn/Pn

C.E = 12/4 = 24/8 =------------------= 60/20

C.E = 3 = 3 = -----------------= 3

ASSUMPTIONS:

Limited Units Of Money:

The law assumes that the consumer applies limited units of money.

Rationality:

The law also assumes that the consumer behaves rationally to maximize his
satisfaction.

Divisible Goods:

In the law it is assumed that the things which a consumer consumes are divisible
into small units like sugar, salt.

Diminishing Marginal Utility:

As a consumer applies more and more units of a commodity, its marginal utility
decreases.

Constant Price:

The law assumes that the price of the commodities remain constant either the
consumer buys lesser quantity or greater of the commodity.

Choice To Use:

Consumer has the choice to use more than one commodities.

LIMITATIONS:

Measurement Of Utility:

Utility is mental state, which cannot be measured numerically; therefore, it is

difficult to equalize marginal utility of different commodities numerically.

Indivisible Goods:

The law is also not applicable for those goods, which are indivisible like tube
light, fan, shoe etc.

Custom and Fashion:

Sometimes, people purchase goods just for fashion or custom and do not care to
maximize total utility.

Small Purchase:

Mostly the law holds only in the big purchase while it is not applicable in small
purchase because we do not care for small purchases.
Ignorance of Consumer:

Sometimes a consumer cannot be benefited from the law due to ignorance of prices,
substitutes and quality of goods.

Durable Goods:

The law is also not applicable for the use of durable goods because it is not
possible to find their exact utility.

PRACTICAL APPLICATION:

The law of substitution is the other name of the law of equi-marginal utility. It
is applicable to various economic problems.

Importance for Consumers:

The law is important for consumers because by applying this law a consumer tries to
equalize marginal utility for the maximization of total utility.

Importance for Producers:

The law of substitution is also helpful for producers, as by applying this law the
maximum output by using their limited resources.

Importance for Finance Minister:

The law is helpful for finance minister to collect required revenue through taxes
with minimum disturbance.

Welfare of the State:

The law of substitution is also helpful for the government to provide maximum
welfare to its citizens by applying its income in different sectors according to
their relative importance and their share in productivity.
10