oNOl (nor 23 POR 2 YEAR ( ACCORDING 10 THE NEW PATTERN )wenn egosChapter 1 - INTRODUCTION TO ECNOMICS Definition Of Economic By Different Economists: In the words of Adam Smith: “Economics is a science of wealth” Walter defined economics as: “Economics is that body of knowledge which related to wealth.” In the words of Mills: “Economics is the science of wealth in relation to mass”. In short, the classical school of thought emphasized purely wealth. So we can say that, “Economies studies the production, consumption, exchange and distribution of wealth.” Robbins Definition of Economics Prof. Lionel Robbins gave his definition of economics in his book” Nature and significance of Economic Science” in the year 1932 .He defined economics as, “Economics is the science that studies human behavior as a relationship bet- ween ends and scarce means which have alternative uses.” Robbins definition is based on: 1, Multiplicity of wants. 2.Scarcity of means In other words, Robbins definition says that: 1.The ends are unlimited, 2.The means to achieve those ends are limited, and able of alternative uses.Chapter 1 - INTRODUCTION TO ECNOMICS ATTRIBUTES OF THE DEFINITION Followings are some of the attributes of Robbins definition: 1. Multiplicity of Ends: As a matter of fact, never come to an end, They are always unlimited. As soon as one want is satisfied, another comes forward. Thus it is the unlimitedness of a person wants that never stops him from working and keeps him engaged in the work of earning money for the satisfaction of his wants. 2. Scarcity of Means: It refers to the limited resourees due to which economic problems arise. But if the resources were unlimited, then consequently there would have no eco- * nomic problems and all the wants would have been satisfied. But it should be noted that the means are scare with respect to their demand. 3. Selection / Urgency of Wants: It is obvious that some of the wants are more urgent for us as compared to others. Naturally, we go to satisfy our urgent needs / wants first and then the remaining ones. If all the wants are same there would be no urgency to fulfill then and hence no economic problem would arise. 4. Alternative Uses: According to the Robbins definition all the scars means are capable of altern- ative uses i.e. they can be put to a number of uses e.g. water can be used for drinking as well as for cooking. The main problem arises that where the utili- zation should be made first. 5. Human Science: Robbins in his definition has broadened the scope of economics. According to him economics is the study of human behavior as a whole both with in and out side the society. It does not restrict the subject matter within specificChapter 1 - INTRODUCTION TO ECNOMICS CRITICISM OF THE DEFINATON Robin's definition also faces criticism from many economists. Some of the cri- ticizing points areas follows: 1. Economics as a Positive Science: According to Robins, economics discovers only the facts that give rise to cer- tain problems and does not give suggestions as to how to deal with human behavior that varies from man to man and from time to time. So it is not a physical science, which deals with matter and energy and remains unchange: at any place, Economies is therefore not a physical science. It discovers both causes / efforts and suggestions. ® 2. Human Touch Missing: In Robbins definition the human touch is entirely missing. It does not take in to account the systematic thinking, human sympathy, imagination and the variety of human life. 3. Abstract and Complex: Robbins has made economics more abstract and complex and hence difficult. This distracts from its utility for the common man, Utilities of economies lie in being a concrete and realistic study. 4. Macro Concept: Another criticism on Robbins definition is that it ignores the macro aspect. It has ignored the issues like employment, national income from its boundaries. 5. Does not Covers Economics of Growth: The economic growth theory or economic development theory has been over- looked in Robbins definition, Economics of growth explains how an economy grows and the factors, which bring about an increase in national income and productivity of the economy. Robbins takes the resources as given and discu- sses only their allocation.Chapter 1 - INTRODUCTION TO ECNOMICS Smith's Definition of Economics “Science which enquires the nature and cause of the wealth of nations.” CRITISM Actually speaking the definition given by Adam Smith had been boldly criti- cized on the following grounds: |1. One Sided Definition: It was the one sided definition because of only wealth had been taken in to consideration while “humans” were neglected who are equally important in the discussion of economics. 2, Emphasis on Wealth: ' According to this definition, wealth was given to much concentration on wealth that destined man selfish and illustrious. Therefore the social refor- mers raised voices against this definition. 3. End Or Mean: ealth was taken as end by itself and not a mean to an end. This concept is wrong because wealth is the source of satisfaction and satisfaction by itself. It is a mean not an end while it is for man and man is not for wealth. 4, Narrow Sense of Wealth: The term wealth was interpreted in a very narrow sense. Wealth meant some- thing tangible, visible and concrete object, which is capable of satisfying human, needs thus all the intangible goods and services which provide to human being were completely ignored. 5, Limited the Seope: According to the classical definition, “Science of wealth” was regarded as a subject matter of economics had been left out from its study. Only the people engaged in production and consumption were studied under this definition.Chapter 1 - INTRODUCTION TO ECNOMICS Marshal's Definition of Economics The new classical definition or Marshal's definition of economics says that: “A study of man kind in the ordinary business of life. It examines the part of individual and social action which is most closely connected with the attainment and use of material requisites of well being” In simple words, he said “Economics is a link between wealth and welfare” This definition has generally regarded economics as “Science of material welfare” Generally this definition is considered to be the finest of all since it encircles man’s activities performed by him for earning and spending of his income. ATTRIBUTES OF THE DEFINITION Marshal's definition of economics contains the following attributes: | 1. Study of Mankind: According to this definition economics is the study of human beings. It emp- hasizes on man. It excludes the study of plants animals and beasts. But it does not study the activities of all human beings. Despite it studies only the activi- ties of real, social and normal man. 2, Material Welfare: According to this definition, wealth is achieved for material welfare. Material welfare refers to the economic prosperity and well being which is achieved through earning of wealth, Of course, the aim of a man's life is to attain the welfare, which is possible through wealth.Chapter 1 - INTRODUCTION TO ECNOMICS 8. Economic Aspect of Life: In the light of this definition economics studies only the economic aspect of life and leaves out the other aspects of social, religious, political etc. economic| aspect relates to how a man earns his income and how he spends it. 4, Studies of Physical Activities: According to this definition, economics studies only material activities such as that of carpenters, masons etc. The activities of teachers, doctors engineers i.e. services have been neglected. 5. Economies is a Social Science: Economics is a social science and not one which studies isolated individuals. In economics we study persons living in a society, influencing other people and being influenced by them. CRITICISM OF THE DEFINITION Prof. Lionel Robbins criticized strongly Marshals definition of economics. He pointed the following defects in the definition: 1. Narrow Concept of the Subject: Since marshal concentrated mainly on material welfare as a result of the material goods therefore according to marshal’s definition only those activi- ties, which produce material goods, are studied in economics and the service sector of the business has been entirely neglected. This proved to be a major criticized part of the definition. 2. It is Classificatory: Marshal's definition is classificatory. It has classified economic phenomenon in to material and non-material, The definition how ever recognizes only the satisfaction of material needs in to the subject of economics.Chapter 1 - INTRODUCTION TO ECNOMICS 3, Ambiguity in Definition: The distinction made in this definition between ordinary business of life and extra ordinary is not clear. 4, Welfare cannot be measured: Welfare is a state of mind and is unquantifiable i.e. it cannot be quantitatively measured. The correct amount of welfare cannot be measured and the satisf- action derived from the purchases or performance or activities cannot be calculated in exact figures. Only the assumption can be made. For instance if two friends purchase the same commodity, it would almost be impossible to identify, measure or even assume that how much welfare they are going to gain through their purchases. 5. Economics is not Purely a Social Science: Marshals have defined economics as a social science. According to him that all men being members of the society is the concern of the subject but a man living in jungle does not fall within its orbits, But Robbins argued that econo- mics studies all human beings whether or not they are members of society. Thus it is better to call economics as “human science”. 6. Objection on Welfare: The objection is not merely to the word material but also to welfare. If econo- mics is made to welfare rather than wealth it gives rise to anomalies e.g. Into- xicants come under wealth but their use is not conducive to human welfare. There are on the other hand, many things like love and affection, which are highly conducive to welfare but are not regarded as wealth, In deed about welfare vary from time to time, person-to-person and place-to-place. SCOPE OF ECONOMICS The scope of a subject refers to the fields they actually cover. The scope of economics can be finely understood if we classify it into heads viz:Chapter 1 - INTRODUCTION TO ECNOMICS 1,Subject matter 2.Nature 3.Limitations These headings are discussed as under: Subject Matter: It can be further studied as: According to Adam Smith: The classical economist Adam Smith considered wealth as the subject matter of economics. According to him economics deals with the activities of man in earning his income me and spending it among different objects in order to obtain the maximum benefit for satisfaction of his wants. According to Marshal: The neo classical economist Alfred Marshal regarded material welfare it be the subject matter of economics. According to him the activities of man kind as a social being and in the ordinary business of life which are related to the attainment of economic well being through the use of the material requisite are considered to be the subject matter of economics. According to Robbins: According to Robbins those activities, which originate because of the imbal- ance relation between human wants and available resources constitute the subject matter of economics. According to Keynes: Keynes is of the view that economics problems constitute the subject matterChapter 1 - INTRODUCTION TO ECNOMICS Nature of Economics: The nature of economics includes study or discussion that weather economics is arts or science? Economics as a Science: Most of the economists regard economics as a science because it is a body of knowledge, which deals facts and rules and studies their cause? with their ‘effect. Now economics as a science generally studied two heads: Economics as a Positive Science: Most of the English economists regard economics as a positive science because it examines the relationship between causes and effect. It studies economic problems, which are existing and effect directly human life. Economics as a Normative Science: Some economists think that economics is a normative science. It tells that weather a particular thing is describable or not. The aim of economics is to promote human welfare so it studies the factors relating to what out to be. Economics is an Art: Economics not only studies how economic problems arise but it also recomm- ends positive measures to end these problems. The purpose of economics is to promote welfare and satisfaction and thus it outlines the guidelines to achieve these objectives, Limitations of Economies: Economics has some limitations, which are as follow: 1, Economics does not study all human activities. It is limited only to those activities, which are related to wealth, 2, Economies studies only the human activities, It does not study the activities of other creatures. ‘eh at: to a) EET | les i mich ee eeChapter 1 - INTRODUCTION TO ECNOMICS 3. Economies studies the activities of normal real and social man. The activit- ies of insane, drunkards etc are not studied under economics. Un-Employment can be Eradicated: Economics can help to reduce unemployment through di scale production etc. on of labor large- Distribution of Money: Economics teaches equal distribution of money among all the people to discr- iminate the difference of rich and poor through laws of taxation ete. Utility to Individual: Ti can be studied as: 1. Utility to Producers: The study of economics is of great importance to the eapitalitists. It can help them to achieve cooperation of the working classes, utilize the available reso- urces and factors of production to their best out put and maximum profit. Buying and selling principles, supply consumption, demand determination etc are to be solved though economics. 2, Utility to Consumers: Economics offers practical guidance to the consumers. It suggest them the principle by which he can drive maximum satisfaction and benefits out of his limited income it helps him to divide his income successfully between the ex- penditure of necessasities, comfort and luxuries. 3. Utility to Laborer: The study of economics is also useful for the laborers. It encourages him to claim appropriate return for his work. ‘hat: to) ET | len i takChapter 1 - INTRODUCTION TO ECNOMICS MICRO ECONOMICS The word “micro” means a millionth part. when we speak of micro-economics or the micro approach, what we mean is that it is some small or component of the whole economy that we are analyzing. For example, behavior or that of an individual firm or what happened in any particular industry. In micro econ- omics what we study is that price of a particular product or of a particular factor of production and not the general price level in the country. Micro-economics theory studies the behavior of individual decision-making units such as consumer, resources owner and business firms. In micro economics we study following issues. 1, Individual consumer's behavior 2, One product's price. 3. One individual consumer's demand and his income. 4, Study of individual firm's location, cost, revenue, and profit. 5, Remuneration of individual factors of productions. MACRO ECONOMICS Macro-economics is concerned with aggregate and averages of the entire eco- nomy. Such as national income, aggregate output, total employment, total consumption, saving and investment, aggregate demand, aggregate supply. general level of prices, ete. In other words, in micro-economics, we study how these aggregates and averages of the economy asa whole are determined and what causes fluctuations in them. Maero-economics deals also with how an economy grows. In other words, it analyses the chief determinants of economics development and various stages and processes of economics growth. This part of economics theory has been largely developed in the last two-three decades,Chapter 1 - INTRODUCTION TO ECNOMICS NEEDS FOR INTEGRATING FOR BOTH MICRO AND MACRO ECONOMICS Or BLENDING MICRO AND MACRO ECONIMICS It may be emphasized that neither of the two approaches outlined above can alone adequately help us in analyzing the working of the economic system. What is true of the parts may not be true of the whole and what is true of the whole may not apply to the parts. It is very essential therefore to integrate the two approaches. Now to apply the macro-approach to such individuals industries would obviou- sly be wrong; and it would be equally wrong to apply the micro-analysis of these industries of the economic system as a whole. What is needed is a proper integration of the macro and micro approaches to such problems. Which have no microelements involved and few micro problems that are without micro aspects.Chapter 2 - THEORY OF DEMAND DEMAND: Demand is the power to purchase a product coupled with willingness to pur- chase it. Ifa consumer holds only one of them, demand doest not exist. Explanation: If a poor man wants to purchase a ear then it is not demand because he has wishes to purchase but not power. Similarly a rich man could purchase cycle; it is also not a demand, because he has power but not wish. LAW OF DEMAND The law of demand states that; “If other things remain constant, when the price of good increases, its demand decreases and when the price of good de- creases its demand increases.” In short, there is an inverse or negative relationship between price and the quantity demanded.” Table Showing Law Of Demand: Price Per Kg (Wheat) Quantity Demanded 1 40 2 30 3 20 4 10Chapter 2 - THEORY OF DEMAND Increase In Demana a 4@}—-+- 2 ig eee 2 7— 1 bie Decrease = i In Demand a I | Pe ih--+-4-+4- o i0 20 36 40 SO Ouantity Demanded Of Wheat Explanation: From the above schedule and graph. it is clear that, there is an inverse rela- tionship between price and quantity demanded because whenever prices of wheat are increased, demand of wheat is going to decrease. As we have seen in above graph when price was “1” the demand of wheat was “4 kg” and when price reached at “4” than its demand was “10kg”, so demand is going to be decreased when price increases,Chapter 2 - THEORY OF DEMAND ASSUMPTION OR LIMITATION OF THE LAW OF DEMAND 1. Income Remains Constant: The income of the consumer must remain constant for the law of demand to hold. If there is a change in his income the result may not be in accordance with the Law of demand. 2. Taste, Habits And Fashion Should Not Change: It is also assumed that taste of the consumer remains unchanged if there is a change in consumer taste along with changes in price the law of demand may not hold. "3. Price Substitute Goods Should Remain Constant; To hold the law of the demand, it is assumed that, the prices of substitute and complements should remains constant. 4. No Change In Future Expectation: The consumer's products expectations regarding the future behavior of the market should not change. If the expectations change, the law of demand may not hold. 5. Weather Should Remain Constant: During winter season, utility of woolen clothes goes up; even though they might be very expensive its mean that weather should remains constant to ful. filling the law of demand. 6. Population Growth: If number of consumers is greater, demand for goods and services will incre- ase and is number of consumer is less in number, demand will decrease. So to hold the law of demand population should remain constant.Chapter 2 - THEORY OF DEMAND EXTENSION AND CONTRACTION OF DEMAND (Change In Quantity Demanded) Extension and contraction of demand occurs to change in the price of the respective commodities. “Extension” means that there is an increase in the quantity of the good purchased due to a fall in its price. “Contraction” means that there is decrease in demand of the good due to the rise in its price. Price Of Good Quantity Demanded SRs 10 Rs 10Rs 5Rs Extension Price us Keon traction 7 Quantity Demanded Kg ‘hat: to) ET | len i takChapter 2 - THEORY OF DEMAND RISE AND FALL IN DEMAND (Change In Demand) When change in demand occurred by other factors than price will be called as rise and fall in demand. Those factors may be change in income, fashion, population, etc. Following changes are explained as under: + Rise In Demand: When price of any commodity not change, but unity of demand change, means increases, that will be called as “Rise in demand”. Schedule Showing “ Rise In Demand” : Price ‘Guantity Demanded Rs, 10 Per Kg 100 Kg Rs. 10 Per Kg 200 Kg Rs. 10 Per Kg 300 Kg, Rs. 10 PerKg 400 Kg Rs. 10 Per Kg 300 Kg Quautity Demanded Kg ‘hat: to) ET | len i takChapter 2 - THEORY OF DEMAND + Fall In Demand: When price of any commodity remain unchanged, but quantity of demand decreases, so this change in demand is known as fall in demand. Schedule Showing “ Fall In Demand” : Price Quantity Demanded Rs. 10 Per K; 400 Kg Rs. 10 Per Kg 300 Kg Rs, 10 PerKg 200 Kg Rs. 10 PerKg 100 Kg Rs. 10 PerKg. 50 Kg 100 Ouantity Demanded Kg (taal SR ee i. len im tak:Chapter 2 - THEORY OF DEMAND ELASTICITY OF DEMAND. The law of demand state that as the price of a certain good goes up, its quantity demanded decreases with other factors remaining the same. One short coming of this statement is that it does not explain that how much of an increase or decrease in quantity demanded occurs due to a change in price. The elasticity of demand occurs due to a change in price. The elasticity of demand explains the percentage change in quantity demanded in response to change in price. There are various kinds of elasticity of demand: 1. Price elasticity 2. Income ela: 3. Cross elasticity 4. Substitution elasticity PRICE ELASTICITY OF DEMAND: “It is the degree of responsiveness in the quantity demand of product to a change in its price.” Price elasticity of demand can be measured with the help of any of the wollo- wing three methods: + Total Outlay method + Percentage method + Geometric method + TOTAL OUTLAY METHOD: “In this method, we compare the total outlay of the consumer before and after variation in price.” Here Elasticity of demand is expressed in three ways: a) Unity b) Greater than unity c) Less than uni aChapter 2 - THEORY OF DEMAND a) Elasticity Equal To Unity: Ifthe quantity demanded of a product changes due to a change in price and the total outlay of the consumer remains constant then the elasticity of demand will be equal to unity. hb) Elasticity More Than Unity: If the quantity demanded of a product rises due to a change in price and the total outlay of the consumer increases then the elasticity of demand will be more than unity. ¢) Elasticity Less Than Unity: Ifa fall in the price results in the quantity demanded for the product to incr- ease and the total outlay of the consumer to fall, elasticity of demand would be less than unity. +* PERCENTAGE METHOD; The previous method gives only a rough measure of elasticity of demand. But with the percentage method we are able to be more precise as to how much elastic the demand is: This method is applies in two cases: a) Point elasticity of demand b) Arc elasticity of demand a) Point Elasticity Of Demand: When elasticity of demand is measured for a very small change in price. ie. i Percentage change in Qty Demand Ed= AQ P Percentage change in Price eae] fl te CL ‘hat | eeChapter 2 - THEORY OF DEMAND b) Are Ela: y Of Demand: When elasticity of demand is to be measured for a significant change in price. Percentage change in Qty Demand Percentage change in Price Q1- Qo P1+ Po Ed= x Ql+Qo Pl-P + GEOMETRIC METHOD: This method enables us to measure elasticity of demand at any point on the demand curve. In the above diagram we have purposely derived a demand curve at which the tangent (MN) indicates that elasticity o demand =1 at point A. If the point were to be lower then elasticity of demand will be <1 and if the point were to be anv where between MA, then elasticity will be > 1. Demand ‘hat: to) ET | len i takChapter 2 - THEORY OF DEMAND INCOME ELASTICTY OD DEMAND If other things remain constant, elasticity of demand regarding income is the degree of change in the quantity demanded of a product in response to change in income. Formula: Percentage change in Qty Demand Ed= Percentage change in Price AQ Y Ed=___ x aY Q Income elasticity of demand may effect in two ways. + Normal Goods: In the case of normal goods, when income increases the quantity demanded also increases. Hence, it will result in positive elasticity of demand. + Inferior Goods: In the case of inferior goods, when income increases quantity demanded falls because people will now have the purchasing power to buy better goods. Hence, it will result in negative income elasticity of demand. CROSS ELASTICTY OF DEMAND Cross elasticity of demand may be defined as: “The degree of responsiveness of demanded for a commodity to change in price of related goods.” These related goods can either be substitute of the said product or there may be complem to the product concerned. i ee eo; 0 0U™t~<“‘(;t;S:*:*:s”:SChapter 3 THEORY OF SUPPLY SUPPLY: “Any commodity which is brought for sale in the market in a certain price, in a certain quantity and for a certain time period, is called SUPPLY” LAW OF SUPPLY: The law of supply states that: “If other factors remaining constant, when the price of a commodity increases, its quantities supplied increases and when the price of a commodity decreases, its quantity supplied also decreases.” So, there is a positive and direct relationship between price and supply. Qs = f (p). (Supply is the function of Price) Schedule Price (Rs.) Quantity Supplied 4Rs 40 SRs, 80 12 Rs. 120 16 Rs. 160 Explanation: From the above table we know that as , we increased the price out supply also increased, that is when price was “4” it supply was “40” as we increased the price resulted its supply was also increased when price reached at 16 then the quantity of supply touched at 160. The above graph represent the positive relation between price and supply because both are directly proportional. When the price of a particular comm- odity increases, its quantity supply also increase and the curve will move fro left to right upward. ‘hat | eeChapter 3 THEORY OF SUPPLY Increase, Price (Rs) eo 120 Onantity Supplied ASSUMPTION OF THE LAW OF SUPPLY 1, Constant Cost Of Production: For the explanation of the law of supply, the cost of production is assumed to remain constant. If the cost of production sere to fall, the supply would incre- ase even though there is not change in price and the Law of supply does not hold. 2, Constant Price Of Capital Goods: Capital goods are used to produce more goods. Examples of such goods are machinery, agricultural equipment ete. If the prices of capital goods falls, the cost of production would also fall, this will result in an increase in supply. 3. Constant Technology: For example in the agricultural sector, electrical machines have introduced to obtain more output this results in the reduced cost of production as less money is used to pay for labor, hence, price falls where as. with the use of modern t, supply increases and thus Las of sCHAPTER 4- CONSUMPTION AND CONSUMER BEHAVIOUR UTILTIY “Utility is defined as the satisfaction which is derived from the consumption of some goods or services.” VARIOUS CONCEPTS OF UTILITY + Initial Utility: Initial utility is the satisfaction which obtain from the consumption of the first unit of commodity, For example when a person consumed first unit of apple then he obtains utility is called initial utility. + Positive Utility: en the level of satisfaction increases unit of commodity that situation of utility is ealled positive utility. + Zero Utility: en a consumer does not obtain utility from the consumption of commodity is called zero utility. + Negative Utility: When the consumption of commodity gives harm instead of utility in consume: is called negative utility. + Marginal Utility: It is the amount of added utility obtained from one unit increases in consum- ption marginal utility means the quantity of satisfaction which is obtained from the consumption of additional unit of commodity. + Total Utility: Ti is utility which is obtained from the consumption of all units of commodity. Where marginal utility is zero, total utility will be maximum.CHAPTER 4- CONSUMPTION AND CONSUMER BEHAVIOUR LAW OF DIMINISHING MARGINAL UTILITY This law describes a familiar and fundamental tendency of human behavior. “The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in the stocks that he already has”. This law based upon two facts 1. Total wants ofa man are unlimited but each single want can be satisfied. As aman gets more and more of a commodity the desire of his want for that good goes on failing. A point is reached when consumer no longer want any more units of that good. -2. Different goods are not perfect substitutes for each other in the satisfaction| of various particular wants, As such marginal utility will decline as the cons- umer gets additional units of a specific good. Schedule Showing Law Of Diminishing Marginal Utility: Units Of Apples Total Utility Marginal Utility Consumed 1 10 18 24 28 30 30 28CHAPTER 4- CONSUMPTION AND CONSUMER BEHAVIOUR Explanation of the Law: Suppose a man is very thirsty. He goes to market and buy a glass of sweet water. The glass of water gives him immense pleasure or say first glass of water is great utility for him. If he takes second glass utility is than first one. And if he increases the glass of water will reach at the stage where he feel negative increase or say utility is declined. Simply we say in a given span of time the more use of product the lesser will be the utility. Dramatically Representation: Marginal UrilityCHAPTER 4- CONSUMPTION AND CONSUMER BEHAVIOUR ‘The above graph is negative, because there is an inverse relation between consumption and marginal utility. Assumption Of The Law: Assumption of law of diminishing utility are: 1. Rational behavior of consumer 2. Constant marginal utility of money 3. Diminishing marginal utility 4, Utility is additive 5. Consumption to be continuous 6. Suitable quantity of a commodity 7. Characteristics of the consumer does not change 8. No change of fashion, customer, tastes 9. No change in the price of commodityChapter 5 - Laws Of Return Laws of Return There are three laws of returns known to economists: 1, law of Increasing return 2, Law of Diminishing return 3, Law Of Constant Return Law Of Increasing Return: Ti is defined as: “ Other things remain the same, if an increase of a variable factor (labor and capital) on fixed factor (land) output will increase. This tendency in produc- tion is known as law of increasing returns”. Explanation Of Law By Schedule: Variable Factor Total Return (kg) Marginal Return (kg) i 100 100 220 120 360 140 520 160 700 180 860 160Chapter 5 - Laws Of Return 180 Increasing os Renn Al 140 a 120 A 190 Marginai Return € rf £ « # 6 Units Of Labor & Capitat In the above diagram marginal return is measured on y-axis while no. of labor of variable factor on x-axis. Marginal return is increasing from 1 labor to 5th labor. Marginal return curve shows increasing return because this curve is upward slopping from left to right. Law Of Constant Return: It is defined as: “Other things remain the same, if an increase of variable factor on fixed factor, output will increase in the same proportion of every variable factor. Means Marginal Return will remain unchanged”,Explanation Of Law By Schedule: Chapter 5 - Laws Of Return Variable Factor Total Return (kg) Marginal Return (kg) 1 100 100 2 220 100 3 360 100 4 520 100 3 700 100 6 860 100 Marginal Return be S s 3 4 Units Of Labor & Capital In the above diagram marginal return is measured on y-axis while no. of labor of variable factor on x-axis. As the no. of labors is increased marginal return is increased but in the same proportionate, shows marginal return. hea me etekChapter 5 - Laws Of Return Law Of Diminishing Marginal Return Marshall stated the law of diminishing marginal returns in the following words: “An increase in capital and labor applied in the cultivation of land causes in general less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the art of agriculture”. Explanation Of Law By Schedule: Variable Factor Total Return (kg) Marginal Return (kg) 1 200 200 2 380. 180 3 340 160 4 680 140 5 800 120 From the above table we can find out that when the farmer applies first unit of capital and labor the production is 200 kg. And after that he applies 2nd, 3rd, 4th, and 5th unit similarly. The 2nd columm of total return is showing increasing trend as 380, 540, 680, and 600 respectively. While 3rd column of marginal return diminishing as the number of labor and capital increased. After applying 3rd unit marginal return is decreased again from 180kg to 160kg and so on.Chapter 5 - Laws Of Return Diminishing ‘y Retin 200 180 ths 160 140 ‘a 120 Marginal Return 100 @ f PD ae a Bes Units Of Labor & Capital In the above diagram marginal return is measured on y-axis while no. of labor of variable factor on x-axis. The downward sloping curve represent the law of diminishing marginal return. ‘hat: to) ET | len i takChapter 6 — PERFECT COMPETITION PERFECT COMPETITION: Perfect competition describes a market structure whose assumptions are ex- tremely strong and highly unlikely to exist in most real-time and real-world markets. The reality is that most markets are imperfectly competitive. Conditions/ Assumptions/ Features/ Characteristics Of Perfect Competition Perfect competition is said to exist when the following conditions are satisfied. + Number Of Sellers And Buyers Is Very Large: ‘The first condition is that there should be operating in market, a large number of sellers and buyers. |» Products are homogenous: The second condition ensures that all firms producing goods which are accep- ted by consumer or buyers as homogenous or identical. + Perfect Knowledge About Market: Another assumption of Perfect competition is that the purchaser and sellers should be fully aware of the price that are being offered and accepted. + Free Entry Or Exit: The fourth condition of Perfect competition requires that there must be abso- lute freedom for the entry of exit of the firms, in the long-run. + Mobilizes Of Factor Of Production: Perfect mobility of factor of production is essential in order to enable the firms to adjust their supply to demand. + No Externalities: No externalities arising from production and/ or consumption which lie outsid the market. i a ‘hat | ee mtalChapter 6 — PERFECT COMPETITION EQUILIBRIUM OF FIRM A firm is in equilibrium position when it is earning maximum money profit by using its maximum capacity. Equilibrium Of Firm In Short-Run Under Perfect Competition Short run is a period in which variable factors like labor can be altered while fixed factor can not be changed. In short run two costs exist, that is variable and fixed cost. A firm faces three different types of situations in short-run under perfect com- petition. SUPER NORMAL PROFIT/ ABNORMAL PROFIT: In the condition of super normal profit average total cost ATC is lower than the market prices and the gap between ATC and market price represent profit area. Super normal profit can be explained with the help of diagram. = = = <= 3 S Output M ‘hat: to) ET | len i takChapter 6— PERFECT COMPETITION In the above diagram x-axis represent the total output of the firm while reve- nue and cost are marked on y-axis. We can extract the following from the dia- gram: + OM = Output of firm + OP = Price per unit received by selling the units. + OT = Cost per unit + OTQM =Total cost + OPEM = Total revenue + Profit = Total revenue - Total cost + Profit = OPEM-OTQM Profit Area = TPEQ Point “E” showing the equilibrium point where MC cuts marginal revenue an average cost curve from below. We can say that in this condition (TR > TC) total revenue is greater than total cost. CONDITION OF LOSSES: Under the condition of loss, the average total cost ATC is greater than market price and gap between ATC and market price represents losses. The position of firm's loss can be illustrated with the help of diagram. Cost / Revemite Output ‘hat | eeChapter 6— PERFECT COMPETITION In the above diagram x-axis represent the total output of the firm while reve- nue and cost are marked on y-axis. We can extract the following from the dia- gram: + OM = Output of firm + OP = Price per unit received by selling the units. + OT = Cost per unit + OTQM =Total cost + OPEM = Total revenue + Profit = Total cost -Total revenue + Profit = OTQM-OPEM Profit Area = PTQE Point “E” showing the equilibrium point where MC cuts marginal revenue ani average cost curve from below. We can say that in this condition (TC > TR) total cost is greater than total revenue. NO PROFIT/ NO LOSS OR NORMAL PROFIT In this condition firm gets normal profit or no profit no loss or at break even point. Because firm's total cost is equals to firm's total revenue. We can explain this condition with the help of diagram. mc / are ss “SS AR- MR-Price Cost Revenue oO @utput A ‘hat | eeChapter 6— PERFECT COMPETITION In the above diagram x-axis represent the total output of the firm while reve- nue and cost are marked on y-axis. We can extract the following from the dia- gram: + OM = Output of firm + OP = Price per/ Cost per unit. + OPEM = Total revenue/ Total cost Total cost = Total revenue Or No Profit No Loss Point “E”, showing the equilibrium point where marginal cost cuts marginal revenue from below. Equilibrium Of Firm In Long-Run Under Perfect Competition In long-run all cost are variable. Because in long run firm can change their fixed factors like land and labor, Under perfect competition, long-run equilib- rium occurs when economic profit are zero. Tn an industry with economic losses some firms will exit. As those firms leave, the market price rises. At zero economic profit firm will stop exiting from market. Long run equilibrium of firm can be explained by the following diagram: 3 y s c- AP Ben Pedee Cost Revenate > - oa Ouspur ‘eh at: to a) EET | les i mich ee eeChapter 6— PERFECT COMPETITION At price P1 firm is earning super normal profit. New firms will enter in the market and supply will increase therefore prices will decrease and super normal profit will also come down. At price P2 firm is earning zero profit or normal profit where its marginal cost (MIC) marginal revenue (MR) average cost (AC) are equal. New firms will not enter in the market and existing firms will not leave. ‘At price P3 where price is low, firm is running into losses, Some firms will exit from the market and supply will decrease and price will increase. So in the long run equilibrium occurs when economic profit are zero or where marginal cost equals to marginal revenue and average cost. MONOPOLY The single supplier of a good, service or resource that has no close substitute. Monopoly arises existence of barriers preventing the entry of new firm. EQUILIBRIUM OF FIRM UNDER MONOPOLY A firm is in equilibrium position when it is earning maximum money profit. The condition of equilibrium is: MR = MC Marginal revenue = Marginal cost Short-Run Equilibrium Under Monopoly: It is generally a wrong concept that monopoly firm in every situation of market earned Super normal profit. Practically a monopoly firm faces three types of situation: + Super Normal Profit (TR > TC) + Normal Profit (TR = TC) + Losses (TR Total Cost + OM = Output of the firm Super normal profit = TR - TC + OPSM = Total revenue 'TPSQ = Profit area + OTQM = Total cost ‘hat | eeChapter 6— PERFECT COMPETITION NO PROFIT/ NO LOSS OR NORMAL PROFIT In short run the monopoly firm also faces the normal profit situation which can easily explained by the diagram. F e ATC Cost, Revenue o| Oupur x ‘MR At a point where firm total revenue is equal to total cost firm is achieving normal profit. In other words in this situation firm just covering all it's lost. In diagram the distance OM show equilibrium production and MS show aver- age revenue and average cost. Now: * The area of rectangle OPSM = TR = Total Revenue « The area of rectangle OPSM = TC = Total Cost Because a single rectangle show the total cost and total revenue so, TR=TCChapter 6— PERFECT COMPETITION CONDITION OF LOSSES: In short run the monopoly firm faces the situation of losses which can easily explained by diagram. Cost’ Revennie | Output Mt x Nae In diagram on x-axis the quantity produced and on Y axis revenue and cost curves are measured. The AR & MR curve show average and marginal reve- nue respectively. AC and MC are average and marginal cost curves of a firm respectively. At point E, MR = MC and condition of equilibrium is fulfilling. From equilibrium point E, a perpendicular is drawn which cuts x-axis , and + OP = Price per unit + OT= Cost per unit Total Revenue < Total Cost + OM = Output of the firm PTSQ = Profit area + OPSM = Total revenue + OTQM = Total cost ‘hat | ee mtal